SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
to
Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
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MINNESOTA
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41-1613227
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State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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ONE ROCHESTER MEDICAL DRIVE,
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STEWARTVILLE, MN
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55976
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(Address of principal executive offices)
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(Zip Code)
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(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.
þ
Yes
o
No
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller
reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
þ
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Yes
þ
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
11,822,886 Common Shares as of May 8, 2008.
Table of Contents
ROCHESTER MEDICAL CORPORATION
Report on Form 10-Q
for quarter ended
March 31, 2008
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
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September 30,
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2008
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2007
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(unaudited)
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Assets:
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Current assets:
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Cash and cash equivalents
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$
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9,118,124
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$
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6,671,356
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Marketable securities
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26,456,481
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30,465,244
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Accounts receivable, net
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6,854,479
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5,527,518
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Inventories, net
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7,809,858
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7,698,889
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Prepaid expenses and other assets
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704,401
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6,480
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Deferred income tax asset
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1,105,255
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876,032
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Total current assets
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52,048,598
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51,245,519
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Property and equipment:
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Land and buildings
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7,811,363
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7,766,658
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Equipment and fixtures
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15,203,024
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14,622,361
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23,014,387
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22,389,019
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Less accumulated depreciation
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(13,308,329
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)
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(12,709,984
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Total property and equipment
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9,706,058
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9,679,035
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Deferred income tax asset
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787,753
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571,721
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Goodwill
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5,765,200
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5,920,255
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Finite life intangibles, net
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7,426,253
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7,821,562
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Patents, net
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238,342
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257,353
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Total assets
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$
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75,972,204
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$
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75,495,445
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Liabilities and Shareholders’ Equity:
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Current liabilities:
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Accounts payable
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$
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1,913,309
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$
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1,091,874
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Accrued compensation
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752,160
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1,109,533
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Accrued expenses
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108,600
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869,404
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Current maturities of debt
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1,859,770
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1,849,463
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Total current liabilities
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4,633,839
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4,920,274
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Long-term liabilities:
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Long-term debt, less current maturities
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5,487,887
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6,066,246
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Total long-term liabilities
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5,487,887
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6,066,246
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Shareholders’ equity:
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Common stock, no par value:
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Authorized — 40,000,000
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Issued and outstanding shares (11,822,886 — March 31, 2008; 11,690,886 — September 30, 2007)
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51,689,723
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50,150,739
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Retained earnings
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14,069,134
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13,964,438
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Accumulated other comprehensive income
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91,621
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393,748
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Total shareholders’ equity
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65,850,478
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64,508,925
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Total liabilities and shareholders’ equity
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$
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75,972,204
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$
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75,495,445
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Note — The Balance Sheet at September 30, 2007 was derived from the audited financial statements
at that date, but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended
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Six Months Ended
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March 31,
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March 31,
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2008
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2007
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2008
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2007
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Net sales
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$
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9,215,238
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$
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8,346,603
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$
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17,438,526
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$
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15,858,569
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Cost of sales
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4,942,975
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3,919,245
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9,025,460
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7,655,589
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Gross profit
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4,272,263
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4,427,358
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8,413,066
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8,202,980
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Operating expenses:
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Marketing and selling
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2,380,306
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1,520,685
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4,604,671
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2,754,347
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Research and development
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304,257
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240,495
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533,200
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443,265
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General and administrative
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2,016,767
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1,709,553
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3,631,885
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3,758,699
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Total operating expenses
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4,701,330
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3,470,733
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8,769,756
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6,956,311
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Income (loss) from operations
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(429,067
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956,625
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(356,690
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1,246,669
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Other income (expense):
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Interest income
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355,646
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439,503
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808,986
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514,353
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Interest expense
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(128,834
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(153,184
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(278,323
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(312,822
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Other income
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—
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—
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—
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38,605,000
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Net income (loss) before income taxes
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(202,255
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1,242,944
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173,973
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40,053,200
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Income tax expense (benefit)
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(35,397
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199,426
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69,277
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7,543,066
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Net income (loss)
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$
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(166,858
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$
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1,043,518
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$
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104,696
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$
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32,510,134
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Net income (loss) per share — basic
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$
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(0.01
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$
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0.09
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0.01
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$
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2.89
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Net income (loss) per share — diluted
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$
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(0.01
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$
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0.08
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$
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0.01
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$
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2.64
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Weighted average number of common shares
outstanding — basic
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11,822,435
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11,367,295
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11,776,083
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11,233,207
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Weighted average number of common shares
outstanding — diluted
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11,822,435
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12,475,859
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12,557,214
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12,331,312
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The accompanying notes are an integral part of these condensed consolidated financial statements
2
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Six Months Ended
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March 31,
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2008
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2007
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Operating activities:
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Net income
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$
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104,696
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$
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32,510,134
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Adjustments to reconcile net income to net cash (used in) provided by operating activities:
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Depreciation
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601,283
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534,249
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Amortization
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361,924
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358,359
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Stock based compensation
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786,142
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1,461,445
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Deferred income tax
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(374,844
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135,000
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Federal tax benefit of stock options exercised
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99,634
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—
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Changes in operating assets and liabilities:
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Deferred revenue
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—
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(564,286
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Accounts receivable
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(1,390,012
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)
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(155,431
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Inventories
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(154,043
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(1,646,575
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Other current assets
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(326,728
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)
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18,701
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Accounts payable
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829,806
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704,506
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Income tax payable
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(827,465
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3,591,647
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Other current liabilities
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(249,623
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(589,135
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Net cash (used in) provided by operating activities
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(539,230
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36,518,376
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Investing activities:
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Capital expenditures
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(668,278
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(1,092,202
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Patents
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(11,556
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(30,579
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Purchases of marketable securities
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(48,791,975
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)
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(30,075,000
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Sales and maturities of marketable securities
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52,416,875
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—
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Net cash (used in) provided by investing activities
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2,945,066
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(31,197,781
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Financing activities:
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Payments on long-term debt
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(568,053
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)
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(432,445
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)
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Payments on capital leases
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—
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(17,248
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Proceeds from issuance of common stock
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653,208
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2,234,277
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Net cash provided by financing activities
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85,155
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1,784,584
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Effect of exchange rate on cash
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(44,223
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)
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58,397
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Increase in cash and cash equivalents
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2,446,768
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7,163,576
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Cash and cash equivalents at beginning of period
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6,671,356
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2,906,698
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Cash and cash equivalents at end of period
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$
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9,118,124
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$
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10,070,274
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Supplemental Cash Flow Information
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Interest paid
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$
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138,586
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$
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161,968
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Taxes paid
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$
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1,155,209
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$
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3,750,000
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|
The accompanying notes are an integral part of these condensed consolidated financial statements
3
ROCHESTER MEDICAL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2008
Note A — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements which have been derived
from the Company’s audited financial statements and the unaudited March 31, 2008 and 2007 condensed
consolidated financial statements have been prepared 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 Company’s Form 10-K for
the year ended September 30, 2007. 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 and six-month periods ended March
31, 2008 are not necessarily indicative of the results that may be expected for the year ending
September 30, 2008.
Note B — Net Income (Loss) Per Share
Net income (loss) per share is calculated in accordance with Financial Accounting Standards
Board Statement No. 128,
“Earnings Per Share.”
The Company’s basic net income (loss) per share is
computed by dividing net income by the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed by dividing 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.
Net loss per share is computed without consideration for any dilutive securities. A reconciliation
of the numerator and denominator in the basic and diluted net income (loss) per share calculation
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(166,858
|
)
|
|
$
|
1,043,518
|
|
|
$
|
104,696
|
|
|
$
|
32,510,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share-weighted average shares outstanding
|
|
|
11,822,435
|
|
|
|
11,367,295
|
|
|
|
11,776,083
|
|
|
|
11,233,207
|
|
|
Effect of dilutive stock options
|
|
|
—
|
|
|
|
1,108,564
|
|
|
|
781,131
|
|
|
|
1,098,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share-weighted average shares outstanding
|
|
|
11,822,435
|
|
|
|
12,475,859
|
|
|
|
12,557,214
|
|
|
|
12,331,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.09
|
|
|
$
|
0.01
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilute net income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options of 512,000 and 3,000 for the second quarter of fiscal years 2008 and
2007 and 30,000 and 1,000 for the six months ended March 31, 2008 and 2007, respectively, have been
excluded from the diluted net income per share calculation because their exercise prices were
greater than the average market price of the Company’s common stock and their affect would have
been antidilutive. Due to the net loss in the second quarter ended March 31, 2008, diluted shares
were the same as basic shares since the effect of the options would have been anti-dilutive.
4
Note C — Stock Based Compensation
The Company has three stock option plans under which options have been granted to employees,
including officers and directors of the Company, at a price not less than the fair market value of
the Company’s common stock at the date the options were granted. Options under the 1991 Stock
Option Plan are no longer granted because the 10-year granting period has expired. The granting
period for the 2001 Stock Incentive Plan expires in 2011. Under the 1995 Non-Statutory Stock
Option Plan, options also may be granted to certain non-employees at a price not less than the fair
market value of the Company’s common stock at the date the options are granted. Options generally
expire ten years from the date of grant or at an earlier date as determined by the committee of the
Board of Directors of the Company that administers the plans. Options granted under the 1991, 1995
and 2001 Plans generally vest over four years from the date of grant.
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123 (Revised 2004),
“Share-Based Payment”
(“SFAS 123(R)”) which requires all
share-based payments, including grants of stock options, to be recognized in the statement of
operations as an operating expense based on their fair values over the requisite service period.
The Company elected to utilize the modified-prospective transition method as permitted by SFAS
123(R). Under this transition method, the Company’s financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based
compensation expense for the three and six months ended March 31, 2008 and 2007 includes: (a)
compensation expense for all stock-based compensation awards granted prior to, but not yet vested
as of, October 1, 2005, based on grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation;”
and (b) compensation expense
for all stock-based compensation awards granted subsequent to October 1, 2005, based on grant-date
fair value estimated in accordance with the provisions of SFAS 123(R). The Company recorded
approximately $535,000 and $786,000 of related stock-based compensation expense for the quarter and
six months ended March 31, 2008, and approximately $359,000 and $1,461,000 of related stock-based
compensation expense for the quarter and six months ended March 31, 2007. This stock-based
compensation expense reduced both basic and diluted earnings per share by $0.05 and $0.03 for the
three months ended March 31, 2008 and 2007, respectively, and $0.06 and $0.13 for the six months
ended March 31, 2008 and 2007, respectively.
As of March 31, 2008, $2,008,844 of unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of approximately fourteen
months.
Stock Options
In the second quarter of fiscal 2008 and 2007, 204,500 and 30,000 shares were granted
respectively. The Black-Scholes option pricing model was used to estimate the fair value of
stock-based awards with the following weighted average assumptions for the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
54
|
%
|
|
|
53
|
%
|
|
Risk-free interest rate
|
|
|
3.08
|
%
|
|
|
4.50
|
%
|
|
Expected holding period (in years)
|
|
|
8.13
|
|
|
|
6.31
|
|
|
Weighted-average grant-date fair value
|
|
$
|
11.14
|
|
|
$
|
11.96
|
|
The risk-free rate is based on a treasury instrument whose term is consistent with the
expected life of our stock options. The expected volatility, holding period, and forfeitures of
options are based on historical experience.
5
The following table represents stock option activity for the three months ended March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contract Life
|
|
|
Outstanding options at beginning of period
|
|
|
1,646,334
|
|
|
$
|
5.98
|
|
|
|
|
|
|
Granted
|
|
|
204,500
|
|
|
|
11.14
|
|
|
|
|
|
|
Exercised
|
|
|
(1,000
|
)
|
|
|
2.56
|
|
|
|
|
|
|
Canceled
|
|
|
0
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at end of period
|
|
|
1,849,834
|
|
|
$
|
6.55
|
|
|
5.94 Yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options exercisable at end of period
|
|
|
1,381,334
|
|
|
$
|
5.51
|
|
|
4.97 Yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for future stock option grants to employees and directors under existing
plans were 353,500 at March 31, 2008. At March 31, 2008, the aggregate intrinsic value of options
outstanding was $7,950,700, and the aggregate intrinsic value of options exercisable was
$7,017,875. Total intrinsic value of options exercised was $1,015,514
for the six months ended March 31, 2008.
Note D — Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
1,833,803
|
|
|
$
|
1,762,593
|
|
|
Work-in-process
|
|
|
3,260,105
|
|
|
|
3,202,035
|
|
|
Finished goods
|
|
|
2,817,072
|
|
|
|
2,851,288
|
|
|
Reserve for inventory obsolescence
|
|
|
(101,122
|
)
|
|
|
(117,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,809,858
|
|
|
$
|
7,698,889
|
|
|
|
|
|
|
|
|
|
Note E — Marketable Securities
As of March 31, 2008, the Company had $26.5 million invested in marketable securities as a
result of the cash settlements received from lawsuits. The marketable securities primarily consist
of $19 million invested in U.S. treasury bills, $4.8 million invested in a high quality,
investment grade municipal bond issued by the State of New Jersey with a variable interest rate
that matures within the next 12 months, and $3 million invested in mutual funds. The Company is
currently reporting an unrealized loss of $54,563 with respect to the municipal bond because the
secondary market for auction rate securities is currently illiquid, and an unrealized loss of
$399,742 related to the mutual fund as a result of the recent fluctuations in the credit markets
impacting the current market value. The Company considers these unrealized losses temporary as it
has the intent and ability to hold these investments long enough to avoid realizing any significant
losses.
Note F — Income Taxes
The Company records a valuation allowance to reduce the carrying value of its net deferred tax
assets to the amount that is more likely than not to be realized. Prior to fiscal 2005, the
Company recorded a full valuation allowance against its deferred tax assets due to the uncertainty
of the realization and timing of the benefits from those deferred tax assets as the Company had not
achieved a sufficient level of sustained profitability. During 2005, management concluded that the
Company had attained a sufficient level of sustained profitability to allow the valuation allowance
to be reduced to reflect management’s estimate of the amount of deferred tax assets that will be
realized in the near term. Considering projected levels of future income as well as the nature of
the net deferred assets, management reduced the valuation allowance by $454,000 during 2005
resulting in a corresponding income tax benefit in the statement of operations, and management
further reduced the allowance by $777,000 in 2006 to reflect management’s revised and increased
estimates of future taxable income. During 2007, the Company’s earnings were sufficient to
determine all deferred tax assets will be realized and the valuation allowance was therefore
reduced to zero. The Company utilized its
6
entire $21.0 million net operating loss in 2007 which reduced the overall effective state and
federal income tax results. As a result, the Company recorded $8.4 million for income tax expense
in 2007. On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess
the requirements for a valuation allowance. For the quarter ended March 31, 2008, the Company
had an effective income tax rate of approximately 40%. The Company normally expects the effective
tax rate on operating income to be in the range of 34-35%.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109
(“FIN
48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 provides that the
tax effects from an uncertain tax position can be recognized in the Company’s financial statements
only if the position is more likely than not of being sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 were effective as of the beginning of fiscal
2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to
opening retained earnings. The Company adopted FIN 48 in the first quarter of fiscal 2008. There
was no material effect on the consolidated financial statements. As a result, there was no
cumulative effect related to adopting FIN 48.
It is the Company’s practice to recognize penalties and/or interest to income tax matters in
income tax expense. As of October 1, 2007, the Company did not have any accrued interest or
penalties related to FIN 48 adoption as there is no unrecognized tax benefit as of the date of
adoption.
The Company is subject to income tax examinations in the U.S. Federal jurisdiction, as well as
in the UK and various state jurisdictions. The Company is not currently under examination by any
taxing jurisdiction.
Note G — Comprehensive Income
Comprehensive income includes net income and all other nonowner changes in shareholders’
equity during a period. The comprehensive income (loss) for the three and six months ended March
31, 2008 and 2007 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
(166,864
|
)
|
|
$
|
1,043,518
|
|
|
$
|
104,696
|
|
|
$
|
32,510,134
|
|
|
Foreign currency adjustment
|
|
|
321,311
|
|
|
|
(8,181
|
)
|
|
|
81,818
|
|
|
|
197,428
|
|
|
Unrealized (loss) gain on securities held
|
|
|
(267,172
|
)
|
|
|
—
|
|
|
|
(383,945
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(112,725
|
)
|
|
$
|
1,035,337
|
|
|
$
|
(197,431
|
)
|
|
$
|
32,707,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note H — 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 Company’s cost of borrowing at the date of the purchase agreement and the
discount is being amortized over the life of the note. The outstanding balance on the promissory
note at March 31, 2008 was $3,902,643.
In June 2006, the Company entered into a $7,000,000 credit facility with U.S. Bank National
Association. The credit facility consists of a $5,000,000 term loan payable in five years and
accruing interest at a rate equal to 6.83%, and a revolving line of credit of up to $2,000,000,
maturing annually on March 31, with interest payable monthly at a floating rate based on the quoted
one-month LIBOR rate plus 1.60%. The Company has renewed the revolving line of credit through
March 31, 2009. As of March 31, 2008, the Company had no borrowings under the revolving line of
credit and the term loan had an outstanding balance of $3,442,654. The obligations of the Company
are secured by assets of the Company, including accounts receivable, investments, general
intangibles, inventory, and equipment. The term loan agreement and revolving credit agreement
require the Company to comply with certain financial covenants, including a fixed charge coverage
ratio and minimum working capital of $8 million, and restrict certain additional indebtedness and
liens. As of March 31, 2008, the Company was in compliance with the bank covenants.
7
Note I — Litigation Settlements
The Company is a plaintiff in a lawsuit titled Rochester Medical Corporation vs. C.R. Bard,
Inc.; Tyco International (US), Inc.; Tyco Health Care Group, L.P.; Novation LLC; VHA, Inc.;
Premier, Inc.; and Premier Purchasing Partners, in the United States District Court for the Eastern
District of Texas, Civil Action No. 504-CV-060. This suit alleges anti-competitive conduct against
the defendants in the markets for standard and anti-infection Foley catheters as well as urethral
catheters, and seeks an unspecified amount of damages and injunctive and other relief.
On November 20, 2006, the Company announced that it had reached a settlement with Premier,
Inc. and Premier Purchasing Partners, L.P. with respect to the lawsuit. Under the settlement
agreement, Premier paid the Company $8,825,000 (net $5,155,000 after payment of attorneys’ fees and
expenses) and was dismissed from the lawsuit.
On December 14, 2006, the Company announced it had reached a settlement with C.R. Bard, Inc.,
whereby C.R. Bard, Inc. paid the Company $49,000,000 (net $33,450,000 after payment of attorneys’
fees and expenses) and was dismissed from the lawsuit.
On August 6, 2007, the Company announced that it had reached a settlement with Novation LLC
with respect to the lawsuit. Under the settlement agreement, Novation awarded the Company an
Innovative Technology Contract for its urological catheter products and related accessories,
including the Company’s advanced Infection Control catheters, and was dismissed from the lawsuit.
The Innovation Technology Contract has a three-year term from the effective date of September 1,
2007. The litigation continues against Tyco, with a new trial date scheduled for December 2008.
The net proceeds from the settlement payments is recorded in Other Income in the Statement of
Operations for the six month period ended March 31, 2007.
Note J — Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157"
).
SFAS
No. 157 establishes a single authoritative definition of fair value, establishes a framework for
measuring fair value, and expands disclosure requirements pertaining to fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the
impact that this guidance may have on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159
on its consolidated financial position and results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007),
Business Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R), among other things, establishes
principles and requirements for how the acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008, with early adoption prohibited. The Company is required
to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or
after January 1, 2009. This standard will change the Company’s accounting treatment for business
combinations on a prospective basis.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51
(“SFAS
No. 160”). SFAS No. 160
8
establishes accounting and reporting standards for noncontrolling interests in a subsidiary
and for the deconsolidation of a subsidiary. Minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. It also establishes a single
method of accounting for changes in a parent’s ownership interest in a subsidiary and requires
expanded disclosures. SFAS No. 160 is effective for fiscal years beginning on or after December
15, 2008, with early adoption prohibited. The Company does not expect the adoption of SFAS No. 160
will have a material impact on its financial position or results of operations.
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 extended care
and acute care markets. Our products are comprised of our base products, which include our male
external catheters and standard silicone Foley catheters, and our advanced products, which include
our intermittent catheters, our anti-infection Foley catheters and our FemSoft Insert. We market
our products under our Rochester Medical brand, and also supply our products to several large
medical product companies for sale under brands owned by these companies, which are referred to as
private label sales. The primary markets for our products are distributors, extended care
facilities and individual hospitals and healthcare institutions. We sell our products both in the
domestic market and internationally. For fiscal 2008, we intend to increase investment in our
sales and marketing programs, primarily through cash generated from current operations, to support
branded sales growth in the U.S. and Europe.
The following discussion pertains to our results of operations and financial position for the
quarters ended March 31, 2008 and 2007. Results of the periods are not necessarily indicative of
the results to be expected for the complete year. For the second quarter ended March 31, 2008, we
reported a net loss of $0.01 per diluted share, compared to a net income of $0.08 per diluted share
for the same period last year. Loss from operations was $429,000 for the quarter ended March 31,
2008 compared to income from operations of $957,000 for the quarter ended March 31, 2007, while net
loss was $167,000 for the quarter ended March 31, 2008 compared to a net income of $1,044,000 for
the same period last year.
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
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net Sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Cost of Sales
|
|
|
54
|
%
|
|
|
47
|
%
|
|
|
52
|
%
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
46
|
%
|
|
|
53
|
%
|
|
|
48
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and Selling
|
|
|
26
|
%
|
|
|
18
|
%
|
|
|
26
|
%
|
|
|
17
|
%
|
|
Research and Development
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
General and Administrative
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
21
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
51
|
%
|
|
|
41
|
%
|
|
|
50
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
(5
|
)%
|
|
|
12
|
%
|
|
|
(2)
|
%
|
|
|
8
|
%
|
|
Interest Income (Expense), Net
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
|
Other Income,
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
243
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income before taxes
|
|
|
(2
|
)%
|
|
|
15
|
%
|
|
|
1
|
%
|
|
|
252
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income after taxes
|
|
|
(2
|
)%
|
|
|
13
|
%
|
|
|
1
|
%
|
|
|
204
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
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 March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
2,095
|
|
|
$
|
948
|
|
|
$
|
3,043
|
|
|
$
|
1,730
|
|
|
$
|
1,294
|
|
|
$
|
3,024
|
|
|
Advanced products
|
|
|
441
|
|
|
|
—
|
|
|
|
441
|
|
|
|
175
|
|
|
|
525
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
$
|
2,535
|
|
|
$
|
948
|
|
|
$
|
3,483
|
|
|
$
|
1,905
|
|
|
$
|
1,819
|
|
|
$
|
3,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
1,000
|
|
|
$
|
4,024
|
|
|
$
|
5,024
|
|
|
$
|
963
|
|
|
$
|
3,086
|
|
|
$
|
4,049
|
|
|
Advanced products
|
|
|
616
|
|
|
|
92
|
|
|
|
708
|
|
|
|
429
|
|
|
|
145
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
$
|
1,616
|
|
|
$
|
4,116
|
|
|
$
|
5,732
|
|
|
$
|
1,392
|
|
|
$
|
3,231
|
|
|
$
|
4,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
4,151
|
|
|
$
|
5,064
|
|
|
$
|
9,215
|
|
|
$
|
3,297
|
|
|
$
|
5,050
|
|
|
$
|
8,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year to Date Ended March 31
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
3,423
|
|
|
$
|
1,884
|
|
|
$
|
5,307
|
|
|
$
|
3,558
|
|
|
$
|
2,300
|
|
|
$
|
5,858
|
|
|
Advanced products
|
|
|
605
|
|
|
|
—
|
|
|
|
605
|
|
|
|
442
|
|
|
|
550
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
$
|
4,028
|
|
|
$
|
1,884
|
|
|
$
|
5,912
|
|
|
$
|
4,000
|
|
|
$
|
2,850
|
|
|
$
|
6,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
1,997
|
|
|
$
|
8,143
|
|
|
$
|
10,140
|
|
|
$
|
1,818
|
|
|
$
|
6,123
|
|
|
$
|
7,941
|
|
|
Advanced products
|
|
|
1,203
|
|
|
|
185
|
|
|
|
1,388
|
|
|
|
819
|
|
|
|
249
|
|
|
|
1,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
$
|
3,200
|
|
|
$
|
8,328
|
|
|
$
|
11,528
|
|
|
$
|
2,637
|
|
|
$
|
6,372
|
|
|
$
|
9,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
7,228
|
|
|
$
|
10,212
|
|
|
$
|
17,440
|
|
|
$
|
6,637
|
|
|
$
|
9,222
|
|
|
$
|
15,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month and Six Month Periods Ended March 31, 2008 and March 31, 2007
Net Sales.
Net sales for the second quarter of fiscal 2008 increased 10% to $9,215,000 from
$8,347,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted
from an increase in sales of branded product both domestically and in the U.K. Domestic sales of
branded products increased by 16% for the quarter compared to the same period last year. Our
international branded sales increased 27% compared to the same period last year. Private label
sales decreased 6% for the quarter compared to the same period last year. However, last year
included $525,000 of deferred revenue related to a private label agreement that was terminated.
Excluding that deferred revenue, private label sales increased 9% for the quarter.
Net sales for the six months ended March 31, 2008 increased 10% to $17,439,000 from
$15,859,000 for the comparable six-month period of last fiscal year. Factors affecting the
comparative six-month sales are generally consistent with those discussed above for the current
quarter. However, excluding the deferred revenue, private label sales decreased 6% for the six
months ended March 31, 2008.
Gross Margin
. Our gross margin as a percentage of net sales for the second quarter of fiscal
2008 was 46% compared to 53% for the comparable quarter of last fiscal year. The decrease in gross
margin this quarter was primarily due to material cost increases, a change in product mix,
manufacturing variances and the recognition of $525,000 of deferred revenue in the prior year.
10
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 second quarter of fiscal 2008 increased 57% to
$2,380,000 from $1,521,000 for the comparable quarter of last fiscal year. The increase in
marketing and selling expense is primarily due to increased sales personnel and related expenses
incurred through the addition of sales and marketing staff in both our U.S. and U.K. operations,
and increased advertising expense related to marketing in the U.K. and the U.S. acute care market.
Marketing and selling expense as a percentage of net sales for the fiscal quarters ended March 31,
2008 and 2007 was 26% and 18%, respectively.
Marketing and selling expense for the six months ended March 31, 2008 increased 67% to
$4,605,000 from $2,754,000 for the comparable six-month period of last fiscal year. Factors
affecting the comparative six-month expense levels are generally consistent with those discussed
above for the current quarter.
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 second quarter of fiscal 2008 increased 27% to $304,000 from $240,000 for the
comparable quarter of last fiscal year. The increase in research and development expense relates
primarily to increased 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 March
31, 2008 and 2007 was 3% and 3%, respectively.
Research and development expense for the six months ended March 31, 2008 increased 20% to
$533,000 from $443,000 for the comparable six-month period of last fiscal year. The factors
affecting the increase in research and development expense for the six months ended March 31, 2008
are generally consistent with those discussed above for the current quarter.
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 and accounting advisors. General and
administrative expense for the second quarter of fiscal 2008 increased 18% to $2,017,000 from
$1,710,000 for the comparable quarter of last fiscal year. The increase in general and
administrative expense is primarily related to increased legal fees associated with potential
acquisitions, stock option compensation expenses and audit related expenses. General and
administrative expense as a percentage of net sales for the fiscal quarters ended March 31, 2008
and 2007 was 22% and 20%, respectively.
General and administrative expense for the six months ended March 31, 2008 decreased 3% to
$3,632,000 from $3,759,000 for the comparable six-month period of last fiscal year. The decrease
in general and administrative expenses for the six month period primarily reflects an increase in
legal and audit fees offset by a decrease in stock option compensation expenses from the prior
year.
Interest Income.
Interest income for the second quarter of fiscal 2008 decreased 19% to
$356,000 from $440,000 for the comparable quarter of last fiscal year. The decrease in interest
income reflects lower amounts being invested than the previous year and at lower interest rates.
Interest income for the six months ended March 31, 2008 increased 57% to $809,000 from
$514,000 for the comparable six-month period of last fiscal year. The increase reflects
significantly higher investment balances for the entire six months in fiscal 2008 resulting from
proceeds of lawsuit settlements received late in the first quarter of fiscal 2007.
Interest Expense
. Interest expense for the second quarter of fiscal 2008 decreased $24,000 to
$129,000 from the comparable quarter of last fiscal year. The decrease in interest expense
reflects lower amounts of debt as a result of quarterly debt payments.
Interest expense for the six months ended March 31, 2008 decreased $35,000 to $278,000 from
$313,000 for the comparable six-month period of last fiscal year. The decrease in interest
expenses are generally consistent with those discussed above for the current quarter.
11
Income Taxes
. We recorded a valuation allowance to reduce the carrying value of our net
deferred tax assets to the amount that is more likely than not to be realized. Prior to fiscal
2005, we recorded a full valuation allowance against our deferred tax assets due to the uncertainty
of the realization and timing of the benefits from those deferred tax assets as we had not achieved
a sufficient level of sustained profitability. During 2005, management concluded that we had
attained a sufficient level of sustained profitability to allow the valuation allowance to be
reduced to reflect management’s estimate of the amount of deferred tax assets that will be realized
in the near term. During the first quarter of fiscal 2007, our earnings fully offset the valuation
allowance. We utilized our entire $20.7 million net operating loss carryforward during fiscal
2007. For the quarter ended March 31, 2008, the Company had an effective income tax rate of
approximately 40%. In future periods of taxable earnings, we expect to report an income tax
provision using an effective tax rate to be in the range of 34 — 35%.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $35.6 million at March 31, 2008
compared to $37.1 million at September 30, 2007. The decrease in cash primarily resulted from cash
provided from operations and the sale of common stock upon exercise of options offset by capital
expenditures and repayment of long-term debt. As of March 31, 2008, we had $26.5 million invested
in marketable securities as a result of the cash settlements received from lawsuits. The
marketable securities primarily consist of $19 million invested in U.S. treasury bills, $4.8
million invested in a high quality, investment grade municipal bond issued by the State of New
Jersey with a variable interest rate that matures within the next 12 months, and $3 million
invested in mutual funds. We are currently reporting an unrealized loss of $54,563 with respect to
the municipal bond because the secondary market for auction rate securities is currently illiquid,
and an unrealized loss of $399,742 related to the mutual fund as a result of the recent
fluctuations in the credit markets impacting the current market value. We consider these
unrealized losses temporary as we have the intent and ability to hold these investments long enough
to avoid realizing any significant losses.
During the six-month period ended March 31, 2008, we used $539,000 of cash in operating
activities compared to $36,518,000 of cash being provided by operations during the comparable
period of the prior fiscal year. Decreased net cash from operating activities in the first six
months of fiscal 2008 primarily reflects net income before depreciation and increases in accounts
receivable, inventories and other current assets and decreases in income tax payable and other
current liabilities, offset by increases in accounts payable. Accounts receivable balances during
this period increased 25% or $1,390,000, primarily due to the timing of large shipments.
Inventories increased 2% or $154,000. Accounts payable increased 76% or $830,000, primarily
reflecting timing of expenses. Other current liabilities decreased 13% or $250,000 primarily
reflecting payments of annual executive bonuses. Income tax payable decreased $827,000 in the
current period due to various state tax payments. In addition, capital expenditures during this
period were $668,000 compared to $1,092,000 for the comparable period last year.
In June 2006, we entered into a $7,000,000 credit facility with U.S. Bank National
Association. The credit facility consists of a $5,000,000 term loan payable in five years and
accruing interest at a rate equal to 6.83%, and a revolving line of credit of up to $2,000,000,
maturing annually on March 31, with interest payable monthly at a floating rate based on the quoted
one-month LIBOR rate plus 1.60%. We have renewed the revolving line of credit through March 31,
2009. As of March 31, 2008, we had no borrowings under the revolving line of credit and the term
loan had an outstanding balance of $3,442,654. Our obligations are secured by our assets, including
accounts receivable, investments, general intangibles, inventory, and equipment. The term loan
agreement and revolving credit agreement require us to comply with certain financial covenants,
including a fixed charge coverage ratio and minimum working capital of $8 million, and restrict
certain additional indebtedness and liens. As of March 31, 2008, we were in compliance with the
bank covenants.
We believe that our capital resources on hand at March 31, 2008, 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, 2007. In the event that additional financing is needed, we may
seek to raise additional funds through public or private financing. Any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may involve
significant restrictive covenants. 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.
12
Cautionary Statement Regarding Forward Looking Information
Statements other than historical information contained herein constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be identified by the use of terminology such as “believe,” “may,”
“will,” “expect,” “anticipate,” “predict,” “intend,” “designed,” “estimate,” “should” or “continue”
or the negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known or unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the following:
|
|
•
|
|
the uncertainty of market acceptance of new product introductions;
|
|
|
|
|
•
|
|
the uncertainty of gaining new strategic relationships;
|
|
|
|
|
•
|
|
the uncertainty of timing of revenues from private label sales (particularly with
respect to international customers);
|
|
|
|
|
•
|
|
the uncertainty of successfully integrating and growing our new UK operations and the
risks associated with operating an international business;
|
|
|
|
|
•
|
|
FDA and other regulatory review and response times;
|
|
|
|
|
•
|
|
the securing of Group Purchasing Organization contract participation;
|
|
|
|
|
•
|
|
the uncertainty of gaining significant sales from secured GPO contracts;
|
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, 2007.
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
British pounds. 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. We are currently reporting an unrealized
loss of $54,563 with respect to a high quality, investment grade municipal bond issued by the State
of New Jersey with a variable interest rate that matures within the next 12 months because the
secondary market for auction rate securities is currently illiquid, and an unrealized loss of
$399,742 related to a mutual fund as a result of the recent fluctuations in the credit markets
impacting the current market value. We consider these unrealized losses temporary as we have the
intent and ability to hold these investments long enough to avoid realizing any significant losses.
Our revolving line of credit bears interest at a floating rate based on the quoted one-month LIBOR
rate plus 1.60%. As of March 31, 2008, 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 British pounds, and fluctuations in the rate of exchange between
the U.S. dollar and the British pound 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
13
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 second 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 1. Legal Proceedings
We are the plaintiff in a lawsuit titled Rochester Medical Corporation vs. C.R. Bard, Inc.;
Tyco International (US), Inc.; Tyco Health Care Group, L.P.; Novation LLC; VHA, Inc.; Premier,
Inc.; and Premier Purchasing Partners, in the United States District Court for the Eastern District
of Texas, Civil Action No. 504-CV-060. This suit alleges anti-competitive conduct against the
defendants in the markets for standard and anti-infection Foley catheters as well as urethral
catheters, and seeks an unspecified amount of damages and injunctive and other relief.
On November 20, 2006, we announced that we had reached a settlement with Premier, Inc. and
Premier Purchasing Partners, L.P. with respect to the lawsuit. Under the settlement agreement,
Premier paid us $8,825,000 (net $5,155,000 after payment of attorneys’ fees and expenses) and was
dismissed from the lawsuit. On December 14, 2006, we announced we had reached a settlement with
C.R. Bard, Inc., whereby C.R. Bard, Inc. paid us $49,000,000 (net $33,450,000 after payment of
attorneys’ fees and expenses) and was dismissed from the lawsuit.
On August 6, 2007, we announced that we had reached a settlement with Novation LLC with
respect to the lawsuit. Under the settlement agreement, Novation awarded us an Innovative
Technology Contract for our urological catheter products and related accessories, including our
advanced Infection Control catheters, and was dismissed from the lawsuit. The Innovation
Technology Contract has a three-year tem from the effective date of September 1, 2007. The
litigation continues against Tyco, with a new trial date scheduled for December 2008.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Company’s shareholders was held on February 5, 2008. At the
meeting, shareholders voted on the reelection of five directors for terms expiring at the Annual
Meeting of the Company in 2009. Each of the directors was reelected by a vote as follows:
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•
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Anthony J. Conway received 10,713,221 votes “For” and 189,965 votes were “Withheld.”
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•
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Darnell L. Boehm received 10,562,296 votes “For” and 340,890 votes were “Withheld.”
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•
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Peter R. Conway received 10,220,327 votes “For” and 682,859 votes were “Withheld.”
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•
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Roger W. Schnobrich received 10,673,171 votes “For” and 230,015 votes were
“Withheld.”
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•
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Benson Smith received 10,559,286 votes “For” and 343,900 votes were “Withheld.”
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Item 6. Exhibits
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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32.1
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Section 1350 Certification of Chief Executive Officer.
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32.2
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Section 1350 Certification of Chief Financial Officer.
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14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ROCHESTER MEDICAL CORPORATION
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Date: May 12, 2008
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By:
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/s/ Anthony J. Conway
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Anthony J. Conway
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President and Chief Executive Officer
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Date: May 12, 2008
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By:
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/s/ David A. Jonas
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David A. Jonas
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Chief Financial Officer and Treasurer
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15
INDEX TO EXHIBITS
Exhibit
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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32.1
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Section 1350 Certification of Chief Executive Officer.
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32.2
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Section 1350 Certification of Chief Financial Officer.
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16
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