UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For fiscal year ended September
30, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
Number: 0-18933
Rochester Medical
Corporation
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Minnesota
State of
Incorporation
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41-1613227
IRS Employer
Identification No.
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One Rochester Medical Drive
Stewartville, Minnesota 55976
(507) 533-9600
Address of Principal Executive
Offices and Telephone Number
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock without par value
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Nasdaq Global Market
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined by Rule 405 of the Securities
Act. Yes
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No
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Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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Indicate by checkmark 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
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No
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Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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
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Non-accelerated
filer
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Smaller
reporting
company
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(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
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No
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The aggregate market value of voting stock held by
non-affiliates based upon the closing Nasdaq sale price on
March 31, 2008 was $99,766,740.
Number of shares of common stock outstanding on December 1,
2008 was 11,994,670 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of Registrants Proxy Statement for its 2009
Annual Meeting of Shareholders are incorporated by reference in
Part III.
PART I
Overview
Rochester Medical Corporation (we, our,
or us) develops, manufactures and markets 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 extended care
products include a line of male external catheters for managing
male urinary incontinence and a line of intermittent catheters
for managing both male and female urinary retention. Along with
our full line of silicone male external catheters, we also sell
a line of latex male external catheters in the United Kingdom.
Our extended care products also include the
FemSoft
®
Insert
, a soft, liquid-filled, conformable urethral insert
for managing female stress urinary incontinence in adult
females. Our acute care products include a line of standard
Foley catheters and our
RELEASE-NF
®
Catheter
, an antibacterial Foley catheter that reduces the
incidence of hospital acquired urinary tract infection, or UTI.
A small percentage of our extended care products also are used
in the acute care market.
We market our products under our
Rochester
Medical
®
brand through a direct sales force in the United States and
United Kingdom and through independent distributors in other
international markets. We also supply our products to several
large medical product companies for sale under private label
brands owned by these companies.
Extended
Care Products
Male External Catheters.
Our male external
catheters (MECs) are self-care, disposable devices
for managing male urinary incontinence. We manufacture and
market six models of silicone male external catheters: the
UltraFlex
®
,
Pop-On
®
,
Wide
Band
®
,
Natural
®
,
Clear
Advantage
®
and
Transfix
®
catheters. The
UltraFlex, Clear Advantage
and
Transfix
Style 1
catheters have adhesive positioned midway down the
catheter sheath. The
Pop-On
and
Transfix Style 2
catheters have a sheath that is shorter than that of a
standard male external catheter and have adhesive applied to the
full length of the sheath, and are designed to accommodate
patients who require shorter-length external catheters. Our
Wide Band
and
Transfix Style 3
self-adhering male
external catheters have an adhesive band which extends over the
full length of the sheath, providing approximately 70% more
adhesive coverage than other conventional male external
catheters. The full length and forward placement of the
Wide
Band
adhesive is designed to reduce adhesive failure and the
resulting leakage, which is a common complaint among users of
male external catheters. The
Natural
catheter is a
non-adhesive version of our male external catheter.
All models of our male external catheters are produced in five
sizes for better patient fit. Most of our male external
catheters are made from silicone, a non-toxic and biocompatible
material that eliminates the risks of latex-related skin
irritation. Silicone catheters are also odor free and have
greater air permeability than catheters made from other
materials, including latex. Air permeability reduces skin
irritation and damage from catheter use and thereby increases
patient comfort. Our silicone catheters are transparent,
permitting visual skin inspection without removal of the
catheters and aiding proper placement of the catheters. Our
catheters also have a kink-proof funnel design to ensure
uninterrupted urine flow. The self-adhering technology and
patented forward-placement of the adhesive simplifies
application of the catheters and provides a strong bond to the
skin for greater patient confidence and improved wear.
We also manufacture and sell male external catheters made from a
proprietary non-latex, non-silicone material to certain private
label customers. Certain of these catheters use the same
self-adhesive technology as our silicone MECs. Like our silicone
MECs, these non-silicone catheters eliminate the risk of latex
reactions and latex-related skin irritations. The non-silicone
catheters also are odor free.
We also market two models of latex male external catheters in
the United Kingdom: the
Freedom
®
and
Freedom
Plus
®
catheters. Through a distribution agreement with Coloplast A/S
(Coloplast) entered in June 2006, Coloplast supplies
us with our requirement of latex male external catheters for
sale in the United Kingdom.
Intermittent Catheters.
Our
Personal
Catheters
®
are a line of disposable intermittent catheters manufactured
from silicone. We produce the
Personal Catheters
in three
lengths for male, female, and pediatric use and in multiple
diameters. We produce four distinct versions of the
Personal
Catheter
: the basic Standard
Personal
3
Catheter
, the Antibacterial
Personal Catheter,
the
Hydrophilic
Personal Catheter
(along with a new
UKonly brand, the
Hydrosil Discreet
) and the
Antibacterial
HydroPersonal Catheter
. The Antibacterial
Personal Catheter
provides site-specific delivery of
nitrofurazone, a drug that has been proven effective in reducing
urinary tract infections. The Hydrophilic
Personal Catheter
and the
Hydrosil Discreet
become extremely slippery
when moistened, providing a very low friction surface for ease
and comfort during insertion and removal. The Antibacterial
HydroPersonal Catheter
combines these innovations to
offer the most advanced intermittent catheter technology
available today. All of the
Personal Catheter
designs are
latex-free and PVC-free, eliminating the allergen, toxin or
disposal concerns commonly associated with latex and PVC
catheters.
FemSoft Insert.
The
FemSoft Insert
is a
disposable device for the management of stress urinary
incontinence in active women. It is a soft, conformable urethral
insert that assists the female urethra and bladder neck to
control the involuntary loss of urine. The device can be simply
inserted, worn and removed for voiding by most women. It
requires no inflation, deflation, syringes or valving mechanisms.
The
FemSoft Insert
is a minimally invasive device that
provides a patient with effective control of her urinary
function and eliminates the need for pads or liners that can
cause embarrassment, restrict mobility and compromise lifestyle.
In addition, the soft, liquid-filled silicone membrane of the
FemSoft Insert
has been designed to conform to anatomical
variations of the urethra and follow the movements of the
urethra during normal activities, thereby reducing leakage
without chafing or abrasion of the delicate tissues of the
urethra.
The
FemSoft Insert
is a prescription device that requires
a woman to visit her physician. The physician will fit the
patient with the proper size and instruct the patient on proper
application of the
FemSoft Insert
.
Acute
Care Products
Foley Catheters.
Our
RELEASE-NF Catheter
is a silicone Foley catheter that has been designed to
reduce the incidence of hospital acquired UTI. Using patented
technology, the
RELEASE-NF Catheter
incorporates
nitrofurazone, an effective broad-spectrum antibacterial agent,
into the structure of the catheter, permitting sustained release
of a controlled dosage directly into the urinary tract to retard
the onset of infection.
We also offer standard silicone Foley catheters in a two-lumen
version for urinary drainage management and in a three-lumen
version that also supports irrigation of the urinary tract.
These Foley catheters are available in all adult and pediatric
sizes. All of our silicone Foley catheters eliminate the risk of
the allergic reactions and tissue irritation and damage
associated with latex Foley catheters. Our standard Foley
catheters are transparent which enables healthcare professionals
to observe urine flow. Unlike the manufacturing processes used
by producers of competing silicone Foley catheters in which the
balloon is made separately and attached by hand in a separate
process involving gluing, our automated manufacturing processes
allow us to integrate the balloon into the structure of the
Foley catheter, resulting in a smoother, more uniform exterior
that may help reduce irritation to urinary tissue.
Our Foley catheters are packaged sterile in single catheter
strips or in procedural trays and sold under the
Rochester
Medical
brand and under private label arrangements. In
addition, we sell our Foley catheters in bulk under private
label arrangements for packaging in kits with tubing, collection
bags and other associated materials.
Technology
We use proprietary, automated manufacturing technologies and
processes to manufacture continence care devices cost
effectively. The production of our products also depends on our
materials expertise and know-how in the formulation of silicone
and advanced polymer products. Our proprietary liquid
encapsulation technology enables us to manufacture innovative
products, such as our
FemSoft Insert
, that have soft,
conformable, liquid-filled reservoirs, which cannot be
manufactured using conventional technologies. Using this liquid
encapsulation technology, we can mold and form liquid
encapsulated devices in a variety of shapes and sizes in an
automated process. Our manufacturing technologies and materials
know-how also allow us to incorporate a sustained release
antibacterial agent into our products. We believe that our
manufacturing technology is particularly well-suited to high
unit volume production and that our automated processes enable
cost-effective production. We further believe that our
manufacturing and materials expertise, particularly our
proprietary liquid encapsulation technology, may be applicable
to a variety of other devices for medical applications. We plan
to consider, commensurate with our
4
financial and personnel resources, future research and
development activities to investigate opportunities provided by
our technology and know-how.
We believe that our proprietary manufacturing processes,
materials expertise, custom designed equipment and technical
know-how allow us to simplify and further automate traditional
catheter manufacturing techniques to reduce our manufacturing
costs. In order to manufacture high quality products at
competitive costs, we concurrently design and develop new
products and the processes and equipment to manufacture them.
Marketing
and Sales
We sell our products in the United States under the
Rochester
Medical
brand name through a twelve-person direct sales
force. Through our subsidiary, Rochester Medical Limited, we
sell our products in the United Kingdom under the
Rochester
Medical
brand name through a sixteen-person direct sales
force. The primary markets for our products are distributors,
extended care facilities and individual hospitals and healthcare
institutions.
To date, a significant portion of our revenues have been derived
from sales of our MECs and standard Foley catheters to medical
products companies for resale under brands owned by such
companies. Private label arrangements are likely to continue to
account for a significant, but declining, portion of our
revenues in the foreseeable future, particularly in
non-United
Kingdom international markets where we do not maintain a direct
sales presence. Sales of products under the
Rochester Medical
brand comprised 68% of total sales in fiscal 2008, with
private label sales representing 32% of total sales. In fiscal
2007, private label sales comprised 41% of total sales.
In November 2006, we announced we had been awarded a national
Group Purchasing Contract for urological products from Premier
Purchasing Partners, L.P. (Premier). The agreement
became effective March 1, 2007. Premier is one of the
largest Group Purchasing Organizations in the United States with
over $27 billion in contract purchases per year. Its
members include more than 1,500 hospital facilities and hundreds
of other care sites. The contract includes our Foley catheters
(including our infection control catheters), male external
catheters, intermittent catheters, and urethral inserts.
In August 2007, we announced that Novation, LLC
(Novation) awarded us an Innovative Technology
Contract for our urological catheter products and related
accessories, including our advanced infection control catheters.
Novation provides contracting services to more than 2,500
members of VHA, Inc. and the University HealthSystem Consortium,
or UHC, and nearly 9,000 members of Provista (formerly HPPI).
The Innovative Technology Contract awarded to us has a three
year term from the effective date of September 1, 2007.
We also sell our
Rochester Medical
brand products and
other companies products direct to the patient in the
United Kingdom through the
Script-Easy
program. U.K.
residents can call a toll free number and order products for
direct home delivery upon verification of a prescription from a
doctor.
We rely on arrangements with medical product companies and
independent distributors to sell our products in Europe and
other international markets. These arrangements are conducted
under the
Rochester Medical
brand name and under brands
controlled by the medical product companies. International sales
accounted for 60% and 57% of total sales in 2008 and 2007,
respectively.
Manufacturing
We design and build custom equipment to implement our
manufacturing technologies and processes. Our manufacturing
facilities are located in Stewartville, Minnesota. We produce
our Foley catheters on one production line and our MECs on other
lines. We have constructed a separate manufacturing facility
which houses our liquid encapsulation manufacturing operations,
as well as our
FemSoft Insert
and intermittent catheter
manufacturing lines.
We maintain a comprehensive quality assurance and quality
control program, which includes documentation of all material
specifications, operating procedures, equipment maintenance and
quality control test methods. We have obtained ISO 13485
certification for our Foley catheter, male external catheter,
intermittent catheter and
FemSoft Insert
production lines.
5
Our manufacturing facilities have been designed to accommodate
the specialized requirements for the manufacture of medical
devices, including the Food and Drug Administrations
(FDA) requirements for Quality System Regulation, or
QSR.
Sources
of Supply
We obtain certain raw materials and components for a number of
our products from a sole supplier or limited number of
suppliers. The loss of such a supplier or suppliers, or a
material interruption of deliveries from such a supplier or
suppliers, could have a material adverse effect on us. We
believe that in most cases we have identified other potential
suppliers. In the event that we have to replace a supplier,
however, we may be required to repeat biocompatibility and other
testing of our products using the material from the new supplier
and may be required to obtain additional regulatory clearances.
Through a distribution agreement with Coloplast A/S
(Coloplast) entered in June 2006, Coloplast supplies
us with our requirement of latex male external catheters for
sale in the United Kingdom under our
Freedom
®
and
Freedom
Plus
®
brands.
Research
and Development
We believe that our ability to add new products to our existing
continence care product lines is important to our future
success. Accordingly, we are engaged in ongoing research and
development to develop and introduce new products which provide
additional features and functionality.
In September 2007, we announced the publication in the September
issue of Annals of Internal Medicine of results of a
randomized, double-blind, controlled clinical study involving
212 adult patients at Denmarks Copenhagen Trauma Center.
The study concluded nitrofurazone-impregnated urinary catheters
reduced the incidence of catheter-associated bacteriuria and
funguria in adult trauma patients, reducing the need to change
or prescribe new antimicrobial therapy. The
nitrofurazone-impregnated urinary catheters used in the study
were manufactured by Rochester Medical. The control catheter was
an all-silicone Foley catheter. In the future, consistent with
market opportunities and our financial and personnel resources,
we intend to perform clinical studies for other of our products
in development.
Research and development expense for fiscal years 2008, 2007 and
2006 was $1,044,000, $943,000 and $760,000, respectively.
Competition
The continence care market is highly competitive. We believe
that the primary competitive factors include price, product
quality, technical capability, breadth of product line and
distribution capabilities. Our ability to compete is affected by
our product development and innovation capabilities, our ability
to obtain regulatory clearances, our ability to protect the
proprietary technology of our products and manufacturing
processes, our marketing capabilities, and our ability to
attract and retain skilled employees, to maintain current
distribution relationships, to establish new distribution
relationships and to secure participation in purchase contracts
with group purchasing organizations. We believe that it is
important to differentiate our products and broaden our product
lines in order to attract large customers, such as distributors,
dealers, institutions and home care organizations.
Our products compete with a number of alternative products and
treatments for continence care. Our ability to compete with
these alternative methods for urinary continence care depends on
the relative market acceptance of alternative products and
therapies and the technological advances in these alternative
products and therapies. Any development of a broad-based and
effective cure for a significant form of incontinence could have
a material adverse effect on sales of continence care devices
such as our products.
We compete directly for sales of continence care devices under
our own
Rochester Medical
brand with larger,
multi-product medical device manufacturers and distributors such
as C.R. Bard, Inc., Unomedical, Kendall Covidan Healthcare
Products Company, Hollister Incorporated, Astra Tech AB and
Coloplast. Many of the competitive alternative products or
therapies are distributed by larger competitors including
Johnson & Johnson Personal Products Company,
Kimberly-Clark Corporation and Proctor & Gamble
Company (for adult diapers and absorbent
6
pads), and C.R. Bard, Inc. (for injectable materials). Many of
our competitors, potential competitors and providers of
alternative products or therapies have significantly greater
financial, manufacturing, marketing, distribution and technical
resources and experience than us. It is possible that other
large healthcare and consumer products companies may enter this
market in the future. Furthermore, academic institutions,
governmental agencies and other public and private research
organizations will likely continue to conduct research, seek
patent protection and establish arrangements for commercializing
products in this market. Such products may compete directly with
our products.
In February 2004, we brought suit against certain GPOs and
individual defendants alleging anti-competitive conduct against
the defendants in the markets for standard and anti-infection
Foley catheters as well as urethral catheters, and sought an
unspecified amount of damages and injunctive and other relief.
In November 2006, we announced that we had reached a settlement
with Premier, whereby Premier paid us $8,825,000 (net $5,155,000
after payment of attorneys fees and expenses) and was
dismissed from the lawsuit. In December 2006, we announced that
we had reached a settlement with C.R. Bard, Inc., whereby C.R.
Bard paid us $49,000,000 (net $33,450,000 after payment of
attorneys fees and expenses) and was dismissed from the
lawsuit. In August 2007, we announced that we had reached a
settlement with Novation LLC, whereby 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.
As discussed in Item 3. Legal Proceedings, our litigation
alleging anti-competitive conduct continues against Tyco, and is
scheduled for trial in January 2009.
Patents
and Proprietary Rights
Our success may depend in part on our ability to obtain patent
protection for our products and manufacturing processes, to
preserve our trade secrets and to operate without infringing the
proprietary rights of third parties. We may seek patents on
certain features of our products and technology based on our
analysis of various business considerations, such as the cost of
obtaining a patent, the likely scope of patent protection and
the benefits of patent protection relative to relying on trade
secret protection. We also rely upon trade secrets, know-how and
continuing technological innovations to develop and maintain our
competitive position.
We hold 20 patents in the United States and a number of
corresponding foreign patents that generally relate to certain
of our catheters and devices and certain of our production
processes. In addition, we have a number of pending United
States and corresponding foreign patent applications. We may
file additional patent applications for certain of our current
and proposed products and processes in the future. In addition,
we have entered into a Cross License Agreement with Coloplast
related to certain patents held by each party. The cross
licensing is for the purpose of avoidance of future infringement
claims by each party.
There can be no assurance that our patents will be of sufficient
scope or strength to provide meaningful protection of our
products and technologies. The coverage sought in a patent
application can be denied or significantly reduced before the
patent is issued. In addition, there can be no assurance that
our patents will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide proprietary
protection or commercial advantage to us.
Should attempts be made to challenge, invalidate or circumvent
our patents in the U.S. Patent and Trademark Office
and/or
courts of competent jurisdiction, including administrative
boards or tribunals, we may have to participate in legal or
quasi-legal proceedings, to maintain, defend or enforce our
rights in these patents. Any legal proceedings to maintain,
defend or enforce our patent rights can be lengthy and costly,
with no guarantee of success.
A claim by third parties that our current products or products
under development allegedly infringe their patent rights could
have a material adverse effect on us. We are aware that others
have obtained or are pursuing patent protection for various
aspects of the design, production and manufacturing of
continence care products. The medical device industry is
characterized by frequent and substantial intellectual property
litigation, particularly with respect to newly developed
technology. Intellectual property litigation is complex and
expensive, and the outcome of such litigation is difficult to
predict. Any future litigation, regardless of outcome, could
result in substantial expense to us and significant diversion of
the efforts of our technical and management personnel. An
adverse determination in any such proceeding could subject us to
significant liabilities to third parties, require disputed
rights to be licensed from such parties, if licenses to such
rights could be obtained,
and/or
require us to
7
cease using such technology. There can be no assurance that if
such licenses were obtainable, they would be obtainable at costs
reasonable to us. If forced to cease using such technology,
there can be no assurance that we would be able to develop or
obtain alternate technology. Additionally, if third party
patents containing claims affecting our technology are issued
and such claims are determined to be valid, there can be no
assurance that we would be able to obtain licenses to such
patents at costs reasonable to us, if at all, or be able to
develop or obtain alternate technology. Accordingly, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing, using or selling certain of our products, which
could have a material adverse effect on our business, financial
condition and results of operations.
We also rely on proprietary manufacturing processes and
techniques, materials expertise and trade secrets applicable to
the manufacture of our products. We seek to maintain the
confidentiality of this proprietary information. There can be no
assurance, however, that the measures taken by us will provide
us with adequate protection of our proprietary information or
with adequate remedies in the event of unauthorized use or
disclosure. In addition, there can be no assurance that our
competitors will not independently develop or otherwise gain
access to processes, techniques or trade secrets that are
similar or superior to ours. Finally, as with patent rights,
legal action to enforce trade secret rights can be lengthy and
costly, with no guarantee of success.
Government
Regulation
The manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the
FDA and corresponding foreign agencies. In the United States,
the medical devices manufactured and sold by us are subject to
laws and regulations administered by the FDA, including
regulations concerning the prerequisites to commercial
marketing, the conduct of clinical investigations, compliance
with QSR and labeling.
A manufacturer may seek from the FDA market authorization to
distribute a new medical device by filing a 510(k) Premarket
Notification to establish that the device is substantially
equivalent to medical devices legally marketed in the
United States prior to the Medical Device Amendments of 1976. A
manufacturer may also seek market authorization for a new
medical device through the more rigorous Premarket Approval
(PMA) application process, which requires the FDA to
determine that the device is safe and effective for the purposes
intended. All of our marketed products have received FDA
marketing authorization pursuant to 510(k) notifications or PMA
approval.
We are also required to register with the FDA as a medical
device manufacturer. As such, our manufacturing facilities are
subject to FDA inspections for compliance with QSR. These
regulations require that we manufacture our products and
maintain our documents in a prescribed manner with respect to
design, manufacturing, testing and quality control activities.
As a medical device manufacturer, we are further required to
comply with FDA requirements regarding the reporting of adverse
events associated with the use of our medical devices, as well
as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. FDA
regulations also govern product labeling and prohibit a
manufacturer from marketing an approved device for unapproved
applications. If the FDA believes that a manufacturer is not in
compliance with the law, it can institute enforcement
proceedings to detain or seize products, issue a recall, enjoin
future violations and assess civil and criminal penalties
against the manufacturer, its officers and employees.
Sales of medical devices outside the United States are subject
to foreign regulatory requirements that vary widely from country
to country. These laws and regulations range from simple product
registration requirements in some countries to complex clearance
and production controls in others. As a result, the processes
and time periods required to obtain foreign marketing approval
may be longer or shorter than those necessary to obtain FDA
market authorization. These differences may affect the
efficiency and timeliness of international market introduction
of our products. For countries in the European Union
(EU), medical devices must display a CE mark before
they may be imported or sold. In order to obtain and maintain
the CE mark, we must comply with the Medical Device Directive
and pass an initial and annual facilities audit inspections to
ISO 13485 standards by an EU inspection agency. We have obtained
ISO 13485 quality system certification for the products we
currently distribute into the EU. In order to maintain
certification, we are required to pass annual facilities audit
inspections conducted by EU inspectors.
In addition, international sales of medical devices manufactured
in the United States that have not been approved by the FDA for
marketing in the United States are subject to FDA export
requirements. These require that
8
we obtain documentation from the medical device regulatory
authority of the destination country stating that sale of the
medical device is not in violation of that countrys
medical device laws, and, under some circumstances, may require
us to apply to the FDA for permission to export a device to that
country.
Third
Party Reimbursement
In the United States, healthcare providers that purchase medical
devices generally rely on third party payors, such as Medicare,
Medicaid, private health insurance plans and managed care
organizations, to reimburse all or a portion of the cost of the
devices. The Medicare program is funded and administered by the
federal government, while the Medicaid program is jointly funded
by the federal government and the states, which administer the
program under general federal oversight. We believe our
currently marketed products are generally eligible for coverage
under these third party reimbursement programs. Medicare and
several private health insurance plans offer reimbursement for
the
FemSoft Insert
. The competitive position of certain
of our products may be partially dependent upon the extent of
reimbursement for our products.
Effective April 1, 2008, the four regional Durable Medical
Equipment Medicare Administrative Contractors covering the
United States implemented a new reimbursement policy for the use
of intermittent catheters. The main policy change now allows an
intermittent catheter user a maximum of 200 catheters per month
instead of four catheters per month under the previous policy.
We believe this is a very positive change in helping reduce
urinary tract infections and improving the quality of life for
intermittent catheter users. We expect the updated Medicare
coverage policy will increase the usage of intermittent
catheters in the U.S., although the scale and pace of the change
are difficult to predict.
In foreign countries, the policies and procedures for obtaining
third party payment of reimbursement for medical devices vary
widely. Compliance with such procedures may delay or prevent the
eligibility of our branded
and/or
private label products for reimbursement, and have an adverse
effect on our ability to sell our branded or private label
products in a particular foreign country.
Private
Label Distribution Agreements
We supply a number of medical product companies with products on
a private label basis. Our practice has been to enter into
written agreements with these distributors of our products.
In June 2006, we entered into a new Private Label Distribution
Agreement with Coloplast under which we will supply silicone
MECs to Coloplast, which will be sold under Coloplasts
brands worldwide, excluding the United Kingdom. In December
2006, we entered into a new Private Label Agreement for the
supply of MECs to Hollister Incorporated (Hollister)
for sale under the Hollister brand worldwide, excluding the
United Kingdom.
In two instances to date, we have entered into agreements with
distributors providing for certain exclusive marketing and
distribution rights. In fiscal 2002, we entered into an
agreement with Coloplast granting Coloplast exclusive marketing
and distribution rights with respect to our
Release-NF
Foley catheters in certain geographic areas. This agreement was
terminated by mutual consent in fiscal 2007. In fiscal 2003, we
entered into an agreement with Hollister granting exclusive
marketing and distribution rights in certain geographic areas
with respect to our hydrophilic intermittent catheters. The
agreement with Hollister was amended in December 2006, and
continues through December 31, 2008, although on a
non-exclusive basis. We do not expect this agreement will be
renewed upon its expiration.
Environmental
Matters
We and the industry in which we compete are subject to
environmental laws and regulations concerning emissions to the
air, discharges to waterways and the generation, handling,
storage, transportation, treatment and disposal of waste
materials. Our policy is to comply with all applicable
environmental, health and safety laws and regulations. These
laws and regulations are constantly evolving and it is difficult
to predict accurately the effect they will have on us in the
future. Compliance with applicable environmental regulations and
controls has not had, nor
9
are they expected to have in the future, any material impact on
our capital expenditures, earnings or competitive position.
Employees
As of September 30, 2008, we employed 271 full-time
employees, of whom 171 were in manufacturing, and the remainder
in marketing and sales, research and development and
administration. We are not a party to any collective bargaining
agreement and believe our employee relations are good.
Executive
Officers of the Registrant
Our executive officers are as follows:
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Name
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Age
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Position
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Anthony J. Conway
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Chairman of the Board, Chief Executive Officer and President
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David A. Jonas
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Director, Chief Financial Officer, Treasurer and Secretary
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Robert M. Anglin
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Vice President, Quality and Regulatory
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James M. Carper
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Vice President, Marketing
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Philip J. Conway
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Vice President, Production Technologies
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Martyn R. Sholtis
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Corporate Vice President
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Anthony J. Conway
, one of our founders, has served as our
Chairman of the Board, Chief Executive Officer and President
since May 1988, and until November 2008 also served as our
Secretary. In addition to his duties as Chief Executive
Officer, Mr. Anthony Conway actively contributes to our
research and development and design activities. From 1979 to
March 1988, he was President, Secretary and Treasurer of Arcon
Corporation, a company that he co-founded with Philip J. Conway
in 1979 to develop, manufacture and sell latex-based male
external catheters and related medical devices. Prior to
founding Arcon, Mr. Anthony Conway worked for twelve years
for International Business Machines Corporation in various
research and development capacities. Mr. Anthony Conway is
one of the named inventors on numerous patent applications that
have been assigned to us, of which to date 20 have resulted in
issued U.S. patents and 32 have resulted in issued foreign
patents.
David A. Jonas
has served as our Treasurer since November
2000, as our Chief Financial Officer since May 2001, and as
our Secretary since November 2008. Mr. Jonas was also elected to
fill a vacancy in our Board of Directors in November 2008. From
June 1, 1998 until May 2001, Mr. Jonas served as our
Controller. From August 1999 until October 2001, Mr. Jonas
served as our Director of Operations and had principal
responsibility for our operational activities. Since November
2000, Mr. Jonas has had principal responsibility for our
financial activities. Prior to joining us, Mr. Jonas was
employed in various financial, financial management and
operational management positions with Polaris Industries, Inc.
from January 1989 to June 1998. Mr. Jonas holds a BS degree
in Accounting from the University of Minnesota and is a
certified public accountant currently under a
non-active status.
Robert M. Anglin
has served as our Vice President of
Quality and Regulatory since November 2008. From December 2003
until November 2008, Mr. Anglin served as our Director of
Quality and Regulatory with principal responsibility for our
quality and regulatory compliance activities. From September
2000 until December 2003, Mr. Anglin served as our Director
of Quality with principal responsibility for our quality
management system. From June 1991 until September 2000,
Mr. Anglin served in various operational, quality, and
product development activities. Mr. Anglin holds a BS
degree in Operations Management from Winona State University and
holds various professional certifications from the Regulatory
Affairs Professionals Society, American Society for Quality, and
the APICS Association for Operations Management.
James M. Carper
has served as our Vice President of
Marketing since November 2008. Mr. Carper joined us in 1994
as a Regional Sales Manger and was promoted in 1996 to Director
of Marketing, a position he held until September 2000.
Mr. Carper ran his own marketing agency from 2000 to 2007
before rejoining us as our Marketing Director. Prior to
Rochester Medical, he served as the Marketing Manager for
urological products with Sherwood Medical.
10
Philip J. Conway
, one of our founders, has served as our
Vice President of Production Technologies since August 1999.
From 1988 to July 1999, Mr. Philip Conway served as our
Vice President of Operations. Mr. Philip Conway is
responsible for plant design as well as new product and
production processes, research, design and development
activities. Since November 2001, he has had principal
responsibility for our operational activities. From 1979 to
March 1988, Mr. Philip Conway served as Plant and
Production Manager of Arcon Corporation. Prior to joining Arcon,
Mr. Philip Conway was employed in a production supervisory
capacity by AFC Corp., a manufacturer and fabricator of
fiberglass, plastics and other composite materials. He is one of
the named inventors on numerous patent applications that have
been assigned to us, of which to date 20 have resulted in issued
U.S. patents and 32 have resulted in issued foreign patents.
Martyn R. Sholtis
joined us in April 1992 and serves as
our Corporate Vice President. Mr. Sholtis is responsible
for all sales and for corporate business development activities.
From 1985 to 1992, Mr. Sholtis was employed by Sherwood
Medical, a company that manufactured and sold a variety of
disposable medical products including urological catheters, most
recently as Regional Sales Manager for the Nursing Care Division.
Messrs. Anthony J. Conway and Philip J. Conway are brothers.
Recent
Developments
In September 2007, we announced the publication in the September
issue of Annals of Internal Medicine of results of a
randomized, double-blind, controlled clinical study involving
212 adult patients at Denmarks Copenhagen Trauma Center.
The study concluded nitrofurazone-impregnated urinary catheters
reduced the incidence of catheter-associated bacteriuria and
funguria in adult trauma patients, reducing the need to change
or prescribe new antimicrobial therapy. The
nitrofurazone-impregnated urinary catheters used in the study
were manufactured by Rochester Medical. The control catheter was
an all-silicone Foley catheter.
On May 15, 2008, we announced that the United
Kingdoms Association for Continence Advice
(ACA) awarded us its trophy for best product for our
Hydrosil Discreet
intermittent catheter. There were
seventeen entries competing for the ACA Look Good, Feel
Good Award at the ACA annual conference, including entries
from our major competitors. The ACA is a membership organization
for health and social care professionals concerned with the
progression of care for continence.
On June 12, 2008, we announced that Rochester Medical was a
winner of a Premier Performance Award, presented by the Premier
healthcare alliances Purchasing Partners unit. We were one
of 54 of more than 800 Premier contracted suppliers to receive
the Performance Award, which recognizes the efforts of
contracted suppliers to meet or exceed Premier members
service expectations. In selecting recipients, satisfaction and
performance data are collected and scored over four successive
calendar quarters. Organizations scoring 80 percent or
higher earn the Performance Award.
Information
Available on Our Website
We were incorporated in the State of Minnesota in 1988. Our
corporate office is located at One Rochester Medical Drive,
Stewartville, Minnesota 55976, and our telephone number is
(507) 533-9600.
We make our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
available free of charge through our website, at www.rocm.com,
as soon as reasonably practicable after we electronically file
such material with (or furnish such material to) the Securities
and Exchange Commission. The information contained on our
website is not incorporated by reference into this Annual Report
on
Form 10-K
and should not be considered to be part of this
Form 10-K.
ITEM 1A. Risk
Factors
Our business, financial condition or results of operations
could be materially adversely affected by any of the risks and
uncertainties described below. Additional risks not presently
known to us, or that we currently deem immaterial, may also
impair our business, financial condition or results of
operations.
11
A
significant portion of our revenues come from a small number of
customers
We depend on a relatively small number of customers for a
significant portion of our net sales. Our five largest customers
in fiscal 2008 represented approximately 42% of our total net
sales. Because our larger customers typically purchase products
in relatively large quantities at a time, our financial
performance can fluctuate from quarter to quarter depending upon
the timing of their purchases. We expect to continue to depend
upon a relatively small number of customers for a significant
percentage of our net sales. Because our major customers
represent such a large part of our business, the loss of any of
our major customers could negatively impact our business.
Our major customers may not continue to purchase products from
us at current levels or at all. In the past, we have lost
customers due to our customers changes in technology
preferences, customers shifting production of products to
internal facilities and the acquisition of our customers. We may
lose customers in the future for similar reasons. We may not be
able to expand our customer base to make up any sales shortfalls
if we lose a major customer. Our attempt to diversify our
customer base and reduce our reliance on particular customers
may not be successful.
We depend
on private label sales arrangements and third party distributors
for a significant portion of our revenues, the loss of one or
more of which could reduce our future sales revenue
A significant portion of our net sales to date have depended on
our ability to provide products that meet the requirements of
medical product companies that resell or distribute our products
under their brand names, and on the sales and marketing efforts
of such entities. Private label sales arrangements with these
entities are likely to continue to be a significant portion of
our revenues in the future. We also have distribution
arrangements with approximately 3 distributors in international
markets. There can be no assurance that our purchasers and
distributors will be able to successfully market and sell our
products, that they will devote sufficient resources to support
the marketing of any of our products, that they will market any
of our products at prices which will permit such products to
develop, achieve, or sustain market acceptance, or that they
will not develop alternative sources of supply. Worldwide
private label sales decreased 15.6% in fiscal 2008 compared to
fiscal 2007. The failure of our purchasers and distributors to
continue to purchase products from us at levels reasonably
consistent with their prior purchases or to effectively market
our products, or our failure to replace such private label sales
with sales under the
Rochester Medical
brand, could
significantly reduce our future sales revenue.
We may
not succeed in establishing a separate brand identity for our
Rochester Medical brand products
Our success will depend on our ability to overcome established
market positions of competitors and to establish our own market
presence under the
Rochester Medical
brand name. One of
the challenges facing us in this respect is our ability to
compete with companies that offer a wider array of products to
hospitals and medical care institutions, distributors and end
users. In addition, we have been unsuccessful until recently in
competing in the Group Purchasing Organization (GPO) market,
where organizations such as hospitals, rehabilitation centers
and acute care facilities acquire products not directly from
manufacturers, but rather from distributors where pricing is
determined under agreements between those distributors and GPOs.
In November 2006, we announced we had been awarded a national
GPO contract for urological products from Premier Purchasing
Partners, L.P., one of the largest GPOs in the United States
with over $27 billion in contract purchases per year. The
contract includes our Foley catheters (including our infection
control catheters), male external catheters, intermittent
catheters, and urethral inserts. In August 2007, we announced
that Novation, LLC was awarding us an Innovative Technology
Contract for our urological catheter products and related
accessories, including our advanced infection control catheters.
The Innovation Technology Contract has a three-year term from
the effective date of September 1, 2007. There can be no
assurance, however, that these contracts will generate
significant sales, that the contracts will be renewed beyond
their initial terms, or that contracts with other GPOs will
follow. We may also find it difficult to sell our products due
to the limited recognition of our brand name.
In February 2004, we brought suit against certain GPOs and
individual defendants alleging anti-competitive conduct against
the defendants in the markets for standard and anti-infection
Foley catheters as well as urethral catheters, and sought an
unspecified amount of damages and injunctive and other relief.
In November 2006, we announced that we had reached a settlement
with Premier, whereby Premier paid us $8,825,000 (net $5,155,000
after
12
payment of attorneys fees and expenses) and was dismissed
from the lawsuit. In December 2006, we announced that we had
reached a settlement with C.R. Bard, Inc., whereby C.R. Bard
paid us $49,000,000 (net $33,450,000 after payment of
attorneys fees and expenses) and was dismissed from the
lawsuit. In August 2007, we announced that we had reached a
settlement with Novation LLC, whereby Novation awarded us an
Innovative Technology Contract and was dismissed from the
lawsuit. The litigation continues against Tyco, which is
scheduled for trial in January 2009. There can be no assurance
that we will be successful in the lawsuit against the remaining
defendant.
Our
products may not succeed in the market
We have several products, including the antibacterial
hydrophilic and antibacterial hydro intermittent catheters, the
RELEASE-NF Catheter
, and the
FemSoft Insert
, that
represent new methods and improvements for urinary continence
care. There can be no assurance that these products will gain
any significant degree of market acceptance among physicians,
healthcare payors and patients. Market acceptance of these
products, if it occurs, may require lengthy hospital evaluations
and/or
the
training of numerous physicians and clinicians, which could
delay or dampen any such market acceptance. Moreover, approval
of third party reimbursement for our products, competing
products or alternative medical treatments, and our pricing
policies will be important factors in determining market
acceptance of these products. Any of the foregoing factors, or
other factors, could limit or detract from market acceptance of
these products. Insufficient market acceptance of these products
could impact future sales revenue and have a material adverse
effect on our business, financial condition and results of
operations.
We face
significant competition in the market for urinary continence
products
The medical products market in general is, and the markets for
urinary continence care products in particular are, highly
competitive. Many of our competitors have greater name
recognition than us and offer well known and established
products, some of which are less expensive than our products. As
a result, even if we can demonstrate that our products provide
greater ease of use, lifestyle improvement or beneficial effects
on medical outcomes over the course of treatment, we may not be
successful in capturing a significant share of the market. In
addition, many of our competitors offer broader product lines
than us, which may be a competitive advantage in obtaining
contracts with GPOs, and may adversely affect our ability to
obtain contracts with such GPOs. Additionally, many of our
competitors have substantially more marketing and sales
experience than us and substantially larger sales forces and
greater resources to devote to such efforts. There can be no
assurance that we will be able to compete successfully against
such competitors.
Our
products may become obsolete if we are unable to anticipate and
adapt to new treatments or techniques
Urinary continence care can be managed with a variety of
alternative medical treatments and management products or
techniques, including adult diapers and absorbent pads, surgery,
behavior therapy, pelvic muscle exercise, implantable devices,
injectable materials and other medical devices. Manufacturers of
these products or techniques are engaged in research to develop
more advanced versions of current products and techniques. Many
of the companies that are engaged in such development work have
substantially greater capital resources than us and greater
expertise than us in research, development and regulatory
matters. There can be no assurance that our products will be
able to compete with existing or future alternative products,
techniques or therapies, or that advancements in existing
products, techniques or therapies will not render our products
obsolete.
We have a
limited history of profitability and may experience future
losses
Until fiscal 2003, we have experienced net losses. Net income
for the fiscal years ended September 30, 2008, 2007 and
2006 was $759,000, $34,050,000 (which included approximately
$31,000,000 from lawsuits net of taxes) and $1,959,000,
respectively, while in comparison our net loss for the fiscal
year ended September 30, 2002 was $1.4 million. A
substantial portion of the expenses associated with our
manufacturing facilities are fixed in nature (i.e. depreciation)
and will reduce our operating margin until such time, if ever,
as we are able to increase utilization of our capacity through
increased sales of our products. As a result, there can be no
assurance that we will ever generate substantial revenues or
sustain profitability. Although we achieved profitability in
fiscal years 2003 through 2008, we cannot be certain that we
will be able to sustain or increase profitability on a quarterly
or annual basis.
13
Our
products and manufacturing activities are subject to extensive
governmental regulation that could prevent us from selling our
products or introducing new and/or improved products in the
United States or internationally
Our products, product development activities and manufacturing
processes are subject to extensive regulation by the FDA and by
comparable agencies in foreign countries. In the United States,
the FDA regulates the introduction of medical devices as well as
manufacturing, labeling and record keeping procedures for such
products. The process of obtaining marketing clearance for new
medical products from the FDA can be costly and time consuming,
and there can be no assurance that such clearance will be
granted timely, if at all, for our products in development, or
that FDA review will not involve delays that would adversely
affect our ability to commercialize additional products or to
expand permitted uses of existing products. Even if regulatory
clearance to market a product is obtained from the FDA, this
clearance may entail limitations on the indicated uses of the
product. Marketing clearance can also be withdrawn by the FDA
due to failure to comply with regulatory standards or the
occurrence of unforeseen problems following initial clearance.
We may be required to make further filings with the FDA under
certain circumstances, such as the addition of product claims or
product reformulation. The FDA could also limit or prevent the
manufacture or distribution of our products and has the power to
require the recall of such products. FDA regulations depend
heavily on administrative interpretation, and there can be no
assurance that future interpretation made by the FDA or other
regulatory bodies, which may have retroactive effect, will not
adversely affect us. The FDA and various state agencies inspect
us and our facilities from time to time to determine whether we
are in compliance with regulations relating to medical device
manufacturing companies, including regulations concerning
design, manufacturing, testing, quality control and product
labeling practices. A determination that we are in material
violation of such regulations could lead to the imposition of
civil penalties, including fines, product recalls, product
seizures, or, in extreme cases, criminal sanctions.
A portion of our revenues are dependent upon sales of our
products outside the United States. Foreign regulatory bodies
have established varying regulations governing product
standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements.
We rely on our third-party foreign distributors to comply with
certain foreign regulatory requirements. The inability or
failure of us or such foreign distributors to comply with
varying foreign regulations or the imposition of new regulations
could restrict the sale of our products internationally and
thereby adversely affect our business, financial condition and
results of operations.
Our
success may depend on the ability of healthcare providers to
achieve adequate levels of third-party reimbursement
In the United States, healthcare providers that purchase medical
devices generally rely on third party payors, such as Medicare,
Medicaid, private health insurance plans and managed care
organizations, to reimburse all or a portion of the cost of the
devices. Third party payors are increasingly challenging the
pricing of medical products and procedures they consider
unnecessary, inappropriate, not cost effective, experimental or
used for a non-approved indication. Even if a medical device is
eligible for reimbursement, the level of reimbursement may not
be adequate to enable us to achieve or maintain market
acceptance of our products or maintain price levels that exceed
our costs of developing and manufacturing our products.
We are unable to predict what additional legislation or
regulation, if any, relating to the health care industry or
third party coverage and reimbursement may be enacted in the
future, or what effect such legislation or regulation would have
on us. Reforms may include mandated basic health care benefits,
limitations on the growth of private health insurance premiums
and Medicare and Medicaid spending, greater reliance on
prospective payment systems, the creation of large insurance
purchasing groups and fundamental changes to the health care
delivery system. We anticipate that Congress and state
legislatures will continue to review and assess alternative
health care delivery systems and payment methodologies. We
cannot predict whether any reform proposals will be adopted or
what impact they may have on us.
Reimbursement systems in international markets vary
significantly by country and by region within some countries.
Many international markets have government managed health care
systems that control reimbursement for new devices and
procedures. In most international markets, there are private
insurance systems as well as
14
government managed systems. We cannot assure you that
reimbursement for our products will be available in
international markets under either government or private
reimbursement systems.
We depend
on certain key personnel, the loss of whom could harm our
business
If we are unable to attract, train and retain highly-skilled
technical, managerial, sales and marketing personnel, we may be
at a competitive disadvantage and unable to develop new products
or increase revenue. We may grant large numbers of stock options
to attract and retain personnel, which could be highly dilutive
to our shareholders. The failure to attract, train, retain and
effectively manage employees could negatively impact our
research and development and sales efforts. In particular, the
loss of sales personnel could lead to lost sales opportunities
because it can take several months to hire and train replacement
sales personnel. Uncertainty created by turnover of key
employees could adversely affect our business, operating results
and stock price.
We depend
on a few suppliers for key components, making us vulnerable to
supply shortages and price fluctuation
We obtain certain raw materials and components for a number of
our products from a sole supplier or limited number of
suppliers; we have no long-term supply contracts with any of our
vendors. While it is our goal to have multiple sources to
procure certain key components, in some cases it is not
economically practical or feasible to do so. To mitigate this
risk, we maintain an awareness of alternate supply sources that
could provide our currently single-sourced raw materials or
components with minimal or no modification to the current
version of our products, practice supply chain management,
maintain safety stocks of critical raw materials and components
and have arrangements with our key suppliers to manage the
availability of critical components. Despite these efforts, if
our suppliers are unable to provide us with an adequate supply
of raw materials or components in a timely manner, or if we are
unable to locate qualified alternate suppliers for components at
a reasonable cost, the cost of our products would increase, the
availability of our products to our customers would decrease and
our ability to generate revenues could be materially limited.
Additionally, in the event that we have to replace a supplier,
we may be required to repeat biocompatibility and other testing
of our products using the material from the new supplier and may
be required to obtain additional regulatory clearances.
All of
our manufacturing operations are conducted at a single
industrial park; therefore, any disruption at our existing
facilities could substantially affect our business
We manufacture our products at one industrial park using certain
specialized equipment. Although we have contingency plans in
effect for certain natural disasters, as well as other
unforeseen events that could damage our facilities or equipment,
any such events could materially interrupt our manufacturing
operations. In the event of such an occurrence, we have business
interruption insurance to cover lost revenues and profits.
However, such insurance would not compensate us for the loss of
opportunity and potential adverse impact on relations with
existing customers created by an inability to produce our
products.
We depend
on patents and proprietary rights, which we may not be able to
protect
Our success may depend in part on our ability to obtain patent
protection for our products and manufacturing processes, to
preserve our trade secrets, and to operate without infringing
the proprietary rights of third parties. The validity and
breadth of claims covered in medical technology patents involve
complex legal and factual questions and, therefore, may be
highly uncertain. No assurance can be given that the scope of
any patent protection under our current patents, or under any
patent we might obtain in the future, will exclude competitors
or provide competitive advantages to us; that any of our patents
will be held valid if subsequently challenged; or that others
will not claim rights in or ownership of the patents and other
proprietary rights held by us. There can be no assurance that
our technology, current or future products or activities will
not be deemed to infringe upon the rights of others.
Furthermore, there can be no assurance that others have not
developed or will not develop similar products or manufacturing
processes, duplicate any of our products or manufacturing
processes, or design around our patents. We also rely upon
unpatented trade secrets to protect our proprietary technology,
and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent technology
or otherwise gain access to our proprietary technology or
disclose such technology or that we can ultimately protect
meaningful rights to such unpatented proprietary technology.
15
We may
face intellectual property infringement claims that would be
costly to resolve
The medical device industry is characterized by frequent and
substantial intellectual property litigation, particularly with
respect to newly developed technology. Litigation may be
necessary to enforce patents issued to us, to protect trade
secrets or know-how owned by us, or to determine the ownership,
scope or validity of the proprietary rights of us and others.
Intellectual property litigation is complex and expensive, and
the outcome of such litigation is difficult to predict. Any such
litigation, regardless of outcome, could result in substantial
expense to us and significant diversion of the efforts of our
technical and management personnel. As a result, a claim by a
third party that our current products or products in development
allegedly infringe its patent rights could have a material
adverse effect on us. Moreover, an adverse determination in any
such proceeding could subject us to significant liabilities to
third parties, require disputed rights to be licensed from such
parties, if licenses to such rights could be obtained,
and/or
require us to cease using such technology. If third party
patents containing claims affecting our technology were issued
and such claims were determined to be valid, there can be no
assurance that we would be able to obtain licenses to such
patents at costs reasonable to us, if at all, or be able to
develop or obtain alternate technology. Accordingly, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing, using or selling certain of our products, which
could have a material adverse effect on our business, financial
condition and results of operations.
We may
face product liability claims that could result in costly
litigation and significant liabilities
The medical products industry is subject to substantial product
liability litigation, and we face an inherent business risk of
exposure to product liability claims in the event that the use
of our products is alleged to have resulted in adverse effects
to a patient. Any such claims could have a material adverse
effect on us, including on market acceptance of our products. We
maintain general insurance policies that include coverage for
product liability claims. The policies are limited to an
aggregate maximum of $6 million per product liability
claim, with an annual aggregate limit of $7 million under
the policies. We have an additional $4 million of coverage
per product liability claim and annual aggregate limit related
to the United Kingdom. We may require increased product
liability coverage as new products are developed and
commercialized. There can be no assurance that liability claims
will not exceed the coverage limits of our policies or that
adequate insurance will continue to be available on commercially
reasonable terms, if at all. A product liability claim or other
claim with respect to uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on our
business, financial condition and results of operations.
International
operations will expose us to additional risks
We are marketing and will continue to market and sell our
products either through a direct sales force or through
distributors in international markets, subject to our receipt of
the requisite foreign regulatory approvals. We have distribution
arrangements with approximately 3 distributors in international
markets. We cannot assure you that international distributors
for our products will devote adequate resources to selling and
servicing our products.
Our international sales are subject to several risks, including:
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the ability of our independent distributors to market and sell
our products;
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our ability to identify new independent distributors in
international markets where we do not currently have
distributors;
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the impact of recessions in economies outside the United States;
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the impact of currency exchange rate fluctuations;
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greater difficulty in collecting accounts receivable and longer
collection periods;
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unexpected changes in regulatory requirements, tariffs or other
trade barriers;
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weaker intellectual property rights protection in some countries;
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potentially adverse tax consequences; and
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political and economic instability.
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The occurrence of any of these events could seriously harm our
future international sales and our ability to successfully
commercialize our products in international markets, thereby
limiting our growth and revenues.
Our business is also expected to subject us and our
representatives, agents and distributors to laws and regulations
of the foreign jurisdictions in which we operate or our products
are sold. We may depend on foreign distributors and agents for
compliance and adherence to foreign laws and regulations.
We will
incur significant increased costs as a result of operating as a
public company, and our management will be required to devote
substantial time to new compliance requirements
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, commencing in
2007, we must perform system and process evaluation and testing
of our internal controls over financial reporting to allow
management and our independent registered public accounting firm
to report on the effectiveness of our internal controls over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Our testing, or the subsequent testing by
our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting
that are deemed to be material weaknesses. Our compliance with
Section 404 will require that we incur substantial
accounting expense and expend significant management efforts.
Moreover, if our independent registered public accounting firm
identifies deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses, the market
price of our stock could decline and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other
regulatory authorities.
In addition, the Sarbanes-Oxley Act, together with new rules
subsequently implemented by the Securities and Exchange
Commission and Nasdaq, have imposed various new requirements on
public companies, including requiring certain corporate
governance practices. These rules and regulations will increase
our legal and financial compliance costs and will make some
activities more time-consuming and costly.
We may be
unable to meet our future capital requirements
We believe our existing resources and anticipated cash flows
from operations will be sufficient to satisfy our capital needs
for the foreseeable future. However, our actual liquidity and
capital requirements will depend on numerous factors, including
the costs, method and timing of expansion of sales and marketing
activities and manufacturing capacity; the amount of revenues
from sales of our existing and new products, including
hydrophilic and antibacterial intermittent catheters, the
RELEASE-NF Catheter
and the
FemSoft Insert
;
changes in, termination of, and the success of, existing and new
distribution arrangements; the cost of maintaining, enforcing
and defending patents and other intellectual property rights;
competing technological and market developments; developments
relating to regulatory and third party reimbursement matters;
the cost and progress of our research and development efforts;
opportunities for growth through acquisition, joint venture or
other business combinations, if any; and other factors. In the
event that additional financing is needed, we may seek to raise
additional funds through public or private financing,
collaborate relationships or other arrangements. 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.
|
|
ITEM 1B.
|
Unresolved
Staff Comments
|
None.
17
Our administrative offices and liquid encapsulation
manufacturing facilities occupy a 66,000 square foot
manufacturing and office facility on a
33-acre
site
owned by us and located in an industrial park in Stewartville,
Minnesota. Our male external catheter and Foley catheter
manufacturing facilities consist of a 34,000 square foot
manufacturing and office building located on a nearby
3.5 acre site owned by us in the same industrial park. We
also own a 13,000 square foot office building/warehouse in
Lancing, England. Based on present plans, we believe that our
current facilities, which are in good operating condition, will
be adequate to meet our anticipated needs for at least the next
several years. Our manufacturing facility in Stewartville,
Minnesota could be expanded if the need arises.
|
|
ITEM 3.
|
Legal
Proceedings
|
We are 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 that 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. 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
term from the effective date of September 1, 2007. The
litigation continues against Tyco, which is scheduled for trial
in January 2009.
We are not subject to any other pending or threatened litigation
other than routine litigation arising in the ordinary course of
business, none of which is expected to have a material adverse
effect on our financial condition, results of operations or cash
flows.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter ended September 30, 2008.
18
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Stock
Listing and Prices
Our common stock is quoted on the Nasdaq Global Market under the
symbol ROCM. The following table sets forth, for the periods
indicated, the range of high and low last sale prices for our
common stock as reported by the Nasdaq Global Market. On
October 31, 2006, our Board of Directors declared a
two-for-one stock split of our common stock. As a result of the
stock split, on November 17, 2006, shareholders received
one additional common share for each common share held on the
record date of November 14, 2006. All share and per share
amounts in this
Form 10-K
have been restated to reflect our stock split.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
12.58
|
|
|
|
7.75
|
|
Second Quarter
|
|
|
22.78
|
|
|
|
12.46
|
|
Third Quarter
|
|
|
29.48
|
|
|
|
14.57
|
|
Fourth Quarter
|
|
|
19.04
|
|
|
|
13.70
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
18.02
|
|
|
|
11.07
|
|
Second Quarter
|
|
|
13.98
|
|
|
|
9.24
|
|
Third Quarter
|
|
|
13.27
|
|
|
|
10.42
|
|
Fourth Quarter
|
|
|
14.61
|
|
|
|
9.90
|
|
Repurchases
of Equity Securities
In December 1999, the Board of Directors authorized a stock
repurchase program. Up to two million shares of our outstanding
common stock may be repurchased under the program. Purchases may
be made from time to time at prevailing prices in the open
market and through other customary means. No time limit has been
placed on the duration of the stock repurchase program and it
may be conducted over an extended period of time as business and
market conditions warrant. We also may discontinue the stock
repurchase program at any time. The repurchased shares will be
available for reissuance pursuant to employee stock option plans
and for other corporate purposes. We intend to fund such
repurchases with currently available funds. During fiscal 2008,
we did not repurchase any shares of common stock pursuant to
this program. To date, we have repurchased 42,000 shares.
Pursuant to our employee stock plans relating to the grant of
employee stock options and restricted stock awards, we have
granted and may in the future grant employee stock options to
purchase shares of our common stock for which the purchase price
may be paid by means of delivery to us by the optionee of shares
of our common stock that are already owned by the optionee (at a
value equal to market value on the date of the option exercise).
Holders
As of December 1, 2008, we had 121 shareholders of
record. Such number of record holders does not reflect
shareholders who beneficially own common stock in nominee or
street name.
Dividends
We have paid no cash dividends on our common stock, and we do
not intend to pay cash dividends on our common stock in the
foreseeable future.
19
Stock
Performance Graph
The following graph compares the yearly percentage changes in
the cumulative total shareholder return on our common stock with
the cumulative total return on the Nasdaq Market Index and the
Hemscott Group Medical Instruments and Supplies Index (MG
Index) during the five fiscal years ended
September 30, 2008. The comparison assumes $100 was
invested on October 1, 2003 in our common stock and in each
of the foregoing indices and assumes reinvestment of dividends.
We did not pay any dividends during any period presented.
Shareholder returns over the indicated period should not be
considered indicative of future shareholder returns.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ROCHESTER MEDICAL CORP.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
ASSUMES
$100 INVESTED ON OCT. 1, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
|
9/30/03
|
|
|
|
9/30/04
|
|
|
|
9/30/05
|
|
|
|
9/30/06
|
|
|
|
9/30/07
|
|
|
|
9/30/08
|
|
Rochester Medical Corporation
|
|
|
|
100.00
|
|
|
|
|
79.75
|
|
|
|
|
83.21
|
|
|
|
|
140.76
|
|
|
|
|
322.38
|
|
|
|
|
235.52
|
|
|
Hemscott Group Medical Instruments and Supplies Index
|
|
|
|
100.00
|
|
|
|
|
129.84
|
|
|
|
|
143.30
|
|
|
|
|
142.94
|
|
|
|
|
176.66
|
|
|
|
|
183.46
|
|
|
Nasdaq Market Index
|
|
|
|
100.00
|
|
|
|
|
106.02
|
|
|
|
|
120.61
|
|
|
|
|
127.77
|
|
|
|
|
152.68
|
|
|
|
|
118.28
|
|
|
20
|
|
ITEM 6.
|
Selected
Financial Data
|
The following selected financial data of Rochester Medical
Corporation as of September 30, 2008 and for the year ended
September 30, 2008, is derived from, and should be read
together with, our consolidated financial statements audited by
Grant Thornton, LLP, our current independent auditors, and the
financial data as of September 30, 2007 and for the two
years ended September 30, 2007 and 2006 are derived from,
and should be read together with, our consolidated financial
statements audited by McGladrey & Pullen LLP, our
former independent auditors, included elsewhere in this
Form 10-K.
The following selected financial data as of September 30,
2006, 2005 and 2004 and for the fiscal years ended
September 30, 2005 and 2004 are derived from audited
financial statements not included herein. The information set
forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Consolidated
Financial Statements and Notes thereto and other financial
information included elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except for per share data)
|
|
|
Net sales
|
|
$
|
35,192
|
|
|
$
|
32,663
|
|
|
$
|
21,666
|
|
|
$
|
15,942
|
|
|
$
|
15,011
|
|
Cost of sales
|
|
|
18,484
|
|
|
|
15,619
|
|
|
|
13,057
|
|
|
|
10,330
|
|
|
|
9,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,708
|
|
|
|
17,044
|
|
|
|
8,609
|
|
|
|
5,612
|
|
|
|
5,396
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
9,499
|
|
|
|
6,490
|
|
|
|
3,109
|
|
|
|
2,398
|
|
|
|
2,176
|
|
Research and development
|
|
|
1,044
|
|
|
|
943
|
|
|
|
760
|
|
|
|
730
|
|
|
|
706
|
|
General and administrative
|
|
|
6,658
|
|
|
|
6,743
|
|
|
|
3,345
|
|
|
|
2,127
|
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,201
|
|
|
|
14,176
|
|
|
|
7,214
|
|
|
|
5,255
|
|
|
|
4,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(493
|
)
|
|
|
2,868
|
|
|
|
1,395
|
|
|
|
357
|
|
|
|
657
|
|
Other income
|
|
|
1,240
|
|
|
|
38,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(566
|
)
|
|
|
775
|
|
|
|
(108
|
)
|
|
|
124
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income tax
|
|
|
181
|
|
|
|
42,498
|
|
|
|
1,287
|
|
|
|
481
|
|
|
|
747
|
|
Income tax benefit (expense)
|
|
|
578
|
|
|
|
(8,448
|
)
|
|
|
672
|
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
759
|
|
|
$
|
34,050
|
|
|
$
|
1,959
|
|
|
$
|
935
|
|
|
$
|
747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
.06
|
|
|
$
|
2.97
|
|
|
$
|
.18
|
|
|
$
|
.09
|
|
|
$
|
.07
|
|
Net income per common share diluted
|
|
$
|
.06
|
|
|
$
|
2.77
|
|
|
$
|
.17
|
|
|
$
|
.08
|
|
|
$
|
.07
|
|
Weighted average number of common shares outstanding
basic
|
|
|
11,816
|
|
|
|
11,450
|
|
|
|
11,068
|
|
|
|
10,932
|
|
|
|
10,868
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
12,577
|
|
|
|
12,272
|
|
|
|
11,666
|
|
|
|
11,430
|
|
|
|
11,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
37,002
|
|
|
$
|
37,137
|
|
|
$
|
2,907
|
|
|
$
|
6,416
|
|
|
$
|
5,872
|
|
Working capital
|
|
|
48,772
|
|
|
|
46,325
|
|
|
|
7,664
|
|
|
|
12,671
|
|
|
|
11,119
|
|
Total assets
|
|
|
76,983
|
|
|
|
75,495
|
|
|
|
35,952
|
|
|
|
22,209
|
|
|
|
21,384
|
|
Long-term debt and capital lease obligations
|
|
|
4,046
|
|
|
|
6,066
|
|
|
|
7,563
|
|
|
|
98
|
|
|
|
172
|
|
Retained earnings (accumulated deficit)
|
|
|
14,724
|
|
|
|
13,964
|
|
|
|
(20,086
|
)
|
|
|
(22,045
|
)
|
|
|
(22,979
|
)
|
Total shareholders equity
|
|
|
67,699
|
|
|
|
64,509
|
|
|
|
23,097
|
|
|
|
20,288
|
|
|
|
18,888
|
|
No dividends were declared or paid in any year from 2004 to 2008.
21
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Our Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with the narrative description of our business in
Item 1 of Part I of our Annual Report on
Form 10-K
and our Consolidated Financial Statements, accompanying Notes
and other information listed in the accompanying Financial Table
of Contents
.
Overview
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. We sell
our products both in the domestic market and internationally.
International sales accounted for approximately 60% and 57% of
total sales in fiscal 2008 and 2007, respectively.
We sell our products in the United States under the
Rochester
Medical
brand name through a twelve-person direct sales
force. Through our subsidiary, Rochester Medical Limited, we
sell our products in the United Kingdom under the
Rochester
Medical
brand name through a sixteen-person direct sales
force. The primary markets for our products are distributors,
extended care facilities and individual hospitals and healthcare
institutions.
A significant portion of our net sales to date have depended on
our ability to provide products that meet the requirements of
medical product companies that resell or distribute our
products, and on the sales and marketing efforts of such
entities. Private label sales arrangements with these entities
are likely to continue to be a significant, but declining,
portion of our revenues in the future, while we continue to
establish our own market presence under the
Rochester Medical
brand name. Sales of products under the
Rochester Medical
brand comprised 68% of total sales in fiscal 2008, with
private label sales representing 32% of total sales. In fiscal
2007, private label sales comprised 41% of total sales.
For fiscal 2008, we increased the investment in our sales and
marketing programs, primarily through cash generated from
current operations, to support
Rochester Medical
branded
sales growth in the U.S. and Europe. Net sales for our
fiscal year ended September 30, 2008 were
$35.2 million, an increase of 7.7% from $32.7 million
in the prior fiscal year. The increase in net sales was a result
of a 24% increase in branded sales offset by a 16% decrease in
private label sales. The increase in branded sales primarily was
attributable to an increase in sales of advanced products in the
U.S. and increased sales of base products in the United
Kingdom. Private label sales of both base products and advanced
products were down from last year, primarily as a result of
decreased sales to Coloplast and Hollister.
Our five largest customers in fiscal 2008 represented
approximately 42% of our total net sales. Because our larger
customers typically purchase products in relatively large
quantities at a time, our financial performance can fluctuate
from quarter to quarter depending upon the timing of their
purchases. We expect to continue to depend upon a relatively
small number of customers for a significant percentage of our
net sales.
We also sell
Rochester Medical
brand products and other
companies products direct to the patient in the United
Kingdom through the
Script-Easy
program. U.K. residents
can call a toll free number and order products for direct home
delivery upon verification of a prescription from a doctor.
Our manufacturing facilities, which we own, are located in
Stewartville, Minnesota, and have been designed to accommodate
the specialized requirements for the manufacture of medical
devices, including FDA requirements for Quality System
Regulation. A substantial portion of the expenses associated
with our manufacturing facilities are fixed in nature (i.e.
depreciation) and will reduce our operating margin until such
time, if ever, as we are able to increase utilization of our
capacity through increased sales of our products.
22
Events that have contributed to the recent growth of our
business include:
|
|
|
|
|
On November 6, 2006, we announced we had been awarded a
national Group Purchasing Contract for urological products from
Premier Purchasing Partners, L.P. (Premier). The
agreement became effective March 1, 2007. Premier is one of
the largest Group Purchasing Organizations in the United States
with over $27 billion in contract purchases per year. Its
members include more than 1,500 hospital facilities and hundreds
of other care sites. The contract includes our Foley catheters
(including our infection control catheters), MECs, intermittent
catheters, and urethral inserts.
|
|
|
|
On November 20, 2006, we announced that we had reached a
settlement with Premier with respect to the lawsuit we initiated
in February 2004 against certain GPOs and individual defendants
alleging anti-competitive conduct against the defendants in the
markets for standard and anti-infection Foley catheters as well
as urethral catheters. 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 released from the lawsuit. On
August 6, 2007, we announced that we had reached a
settlement with Novation LLC (Novation) 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 litigation continues against Tyco, which is scheduled for
trial in January 2009. We cannot now estimate the prospects of a
favorable outcome against Tyco.
|
|
|
|
On December 11, 2006, we announced we had signed a new
Private Label Agreement for supply of MECs to Hollister
Incorporated (Hollister) for sale under the
Hollister brand worldwide, excluding the United Kingdom, and
also announced that we amended our 2003 OEM/Private Label
Agreement. The two companies also agreed to terminate the Common
Interest and Defense Agreement which we entered into in
September 2004 for the defense of our Hydrophilic Intermittent
catheter technology with respect to the patent infringement
action in the United Kingdom between Coloplast A/S
(Coloplast) and Hollister. We have agreed with
Hollister to release each other from any claims under the Common
Interest and Defense Agreement. In particular, we will not be
required to pay any additional legal fees under the terminated
agreement.
|
|
|
|
As mentioned above, on August 6, 2007, we announced that
Novation awarded us an Innovative Technology Contract for our
urological catheter products and related accessories, including
our advanced infection control catheters. Novation provides
contracting services to more than 2,500 members of VHA, Inc. and
the University HealthSystem Consortium, or UHC, and nearly 9,000
members of Provista (formerly HPPI). The Innovative Technology
Contract has a three year term from the effective date of
September 1, 2007.
|
|
|
|
Effective April 1, 2008, the four regional Durable Medical
Equipment Medicare Administrative Contractors covering the
United States implemented a new reimbursement policy covering
the use of intermittent catheters. The main policy change now
allows an intermittent catheter user a maximum of 200 catheters
per month instead of four catheters per month under the previous
policy. We believe this is a very positive change in helping
reduce urinary tract infections and improving the quality of
life for intermittent catheter users. We expect the updated
Medicare coverage policy will increase the usage of intermittent
catheters in the U.S., although the scale and pace of the change
are difficult to predict.
|
|
|
|
On May 15, 2008, we announced that the United
Kingdoms Association for Continence Advice (ACA) awarded
us its trophy for best product for our
Hydrosil Discreet
intermittent catheter. There were seventeen entries
competing for the ACA Look Good, Feel Good Award at
the ACA annual conference, including entries from our major
competitors. The ACA is a membership organization for health and
social care professionals concerned with the progression of care
for continence.
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|
|
|
On June 12, 2008, we announced that Rochester Medical was a
winner of a Premier Performance Award, presented by the Premier
healthcare alliances Purchasing Partners unit. We were one
of 54 of more than 800 Premier contracted suppliers to receive
the Performance Award, which recognizes the efforts of
contracted
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23
|
|
|
|
|
suppliers to meet or exceed Premier members service
expectations. In selecting recipients, satisfaction and
performance data are collected and scored over four successive
calendar quarters. Organizations scoring 80 percent or
higher earn the Performance Award.
|
Our net income for fiscal 2008 was $759,000, or $.06 per diluted
share, compared to $34,050,000 in fiscal 2007, or $2.77 per
diluted share, which included approximately $31,000,000 from
settlements of lawsuits net of taxes. Until fiscal 2003, we have
experienced net losses. Net income for the fiscal years ended
September 30, 2006, 2005, 2004 and 2003 was $1,959,000,
$934,000, $747,000 and $330,000, respectively, while the net
loss for the fiscal year ended September 30, 2002 was
$1.4 million.
Application
of Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires that we make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. On an on-going basis, we evaluate these estimates and
judgments. We base our estimates and judgments on historical
experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies, among
others, affect the more significant judgments and estimates used
in the preparation of our financial statements.
Inventories
Inventories, consisting of material, labor and manufacturing
overhead, are stated at the lower of cost (first-in, first-out
method) or market. Our policy is to establish an excess and
obsolete reserve for our products in excess of the expected
demand for such products. At September 30, 2008, this
reserve was $122,000, compared to $117,000 at September 30,
2007. If actual future demand or market conditions differ from
those projected by us, additional inventory valuation
adjustments may be required. These valuation adjustments would
be included in cost of goods sold.
Accounts
Receivable
We maintain an allowance for doubtful accounts, which is
calculated by a combination of specific account identification
as well as percentages of past due balances. At
September 30, 2008, this allowance was $65,000 compared to
$58,000 at September 30, 2007. If actual future collections
or customer liquidity conditions differ from those projected by
us, additional receivables valuation adjustments may be
required. We perform periodic credit evaluations of our
customers financial condition. We require irrevocable
letters of credit on sales to certain foreign customers.
Receivables generally are due within 30 to 60 days.
Revenue
Recognition
We recognize non-Group Purchase Organization related revenue
from product sales upon shipment when title transfers to
customers. Revenue is recognized on Group Purchase Organization
related sales upon delivery to the customer. Amounts received
for upfront license fees under multiple-element supply and
distribution arrangements are deferred and recognized over the
period of supply, if such arrangements require our on-going
services or performance.
24
Income
Taxes
The carrying value of our net deferred tax assets assumes that
we will be able to generate sufficient taxable income in the
United States, based on estimates and assumptions. We record a
valuation allowance to reduce the carrying value of our net
deferred tax asset to the amount that is more likely than not to
be realized. During 2005 management concluded that we had
attained a sufficient level of sustained profitability to allow
the valuation allowance to be reduced to reflect
managements 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 tax 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
managements revised and increased estimates of future
taxable income. During 2007, our earnings were sufficient to
determine all deferred tax assets will be realized and the
valuation allowance was therefore reduced to zero. We utilized
our entire $21.0 million net operating loss in fiscal 2007
which reduced the overall effective state and federal income tax
rates. As a result, we recorded $8.4 million for income tax
expense. For 2008, no valuation allowance has been recorded
against the net deferred tax assets because there is sufficient
future projected income as well as excess income from 2007 to
sustain that the deferred tax assets will more likely than not
be able to be utilized. On a quarterly basis, we evaluate the
realizability of our deferred tax assets and assess the
requirements for a valuation allowance.
Valuation
of Goodwill and Other Intangibles
When we acquire a company, the purchase price is allocated, as
applicable, between identifiable trademarks, other intangible
assets, net tangible assets, and goodwill as required by
U.S. generally accepted accounting principles . Determining
the portion of the purchase price allocated to the trademarks
and other intangible assets requires us to make significant
estimates. The amount of the purchase price allocated to
trademarks and other intangible assets is determined by
estimating the future cash flows of each trademark or technology
and discounting the net cash flows back to their present values.
The discount rate used is determined at the time of acquisition
in accordance with accepted valuation methods.
Goodwill represents the excess of the aggregate purchase price
over the fair value of net assets of the acquired business.
Goodwill is tested for impairment annually on the anniversary
date of the acquisition, or more frequently if changes in
circumstance or the occurrence of events suggest that the
carrying amount may be impaired. We have determined the
reporting unit continues to be at the enterprise level. In our
judgment, the market capitalization of our company is the best
indicator of the fair value of the reporting unit and we have
used the market capitalization of our company in our annual
impairment test. Goodwill was $5.2 million and
$5.9 million as of September 30, 2008 and 2007,
respectively. The change is a result of fluctuations in the
exchange rate between the British pound and the U.S. dollar.
Other intangible assets consist primarily of purchased
technology, patents and trademarks and are amortized using the
straight-line method, as appropriate, over their estimated
useful lives, ranging from 3 to 20 years. As of
April 27, 2007, all of our intangible assets are
definite-lived and amortized on a straight-line basis. We review
these intangible assets for impairment annually or as changes in
circumstance or the occurrence of events suggest the remaining
value may not be recoverable. Other intangible assets, net of
accumulated amortization, were $6.9 million and
$7.8 million as of September 30, 2008 and 2007,
respectively.
Long-Lived
Assets
We follow Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment of Disposal of Long-Lived Assets
. As such,
we review our long-lived assets for impairment whenever events
or changes in circumstances indicate that our carrying value of
long-lived assets may not be recoverable. Long-lived assets are
considered not recoverable when the carrying amount of a
long-lived asset (asset group) exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset (asset group). If it is
determined that a long-lived asset (asset group) is not
recoverable, an impairment loss is recorded equal to the excess
of the carrying amount of the long-lived asset (asset group)
over the long-lived assets (asset groups) fair
25
value. Fair value is the amount at which the long-lived asset
(asset group) could be bought or sold in a current transaction
between a willing buyer and seller, other than in a forced or
liquidation sale.
Stock-Based
Compensation
Effective October 1, 2005, we adopted the provisions of,
and account for stock-based compensation in accordance with
SFAS No. 123 (Revised 2004),
Share-Based
Payment
(SFAS 123(R)). Under the fair
value recognition provisions of SFAS 123(R), we measure
stock-based compensation cost at the grant date based on the
fair value of the award and recognize the compensation expense
over the requisite service period, which is generally the
vesting period. We elected the modified-prospective method of
adopting SFAS 123(R), under which prior periods are not
retroactively revised. Estimated stock-based compensation
expense for the non-vested portion of awards granted prior to
the effective date is being recognized over the remaining
service period using the compensation cost estimated for
SFAS No. 123,
Accounting for Stock-Based
Compensation
, pro forma disclosures. Total stock-based
compensation expense recognized during the fiscal year ended
September 30, 2008 was $0.9 million after-tax
($1.4 million pre-tax). See Note 2 to our consolidated
financial statements for further information regarding our
stock-based compensation programs.
We use the Black-Scholes option pricing model to determine the
fair value of stock options as of the grant date. The fair value
of stock options under the Black-Scholes model requires
management to make assumptions regarding projected employee
stock option exercise behaviors, risk-free interest rate,
volatility of our stock price and expected dividends.
We analyze historical employee stock option exercise and
termination data to estimate the expected life assumption. We
believe that historical data currently represents the best
estimate of the expected life of a new employee option. We also
stratify our employee population based upon distinctive exercise
behavior patterns. The risk-free interest rate we use is based
on the yield, on the grant date, of a zero-coupon
U.S. Treasury bond whose maturity period equals or
approximates the options expected term. We calculate the
expected volatility based solely on historical volatility which
continues to be the most appropriate measure for us. The
dividend yield rate used is zero as we have not nor expect to
pay dividends. The amount of stock-based compensation expense we
recognize during a period is based on the portion of the awards
that are ultimately expected to vest. We estimate pre-vesting
option forfeitures at the time of grant by analyzing historical
data and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates.
If factors change and we employ different assumptions for
estimating stock-based compensation expense in future periods or
if we decide to use a different valuation model, the expense
associated with new awards in future periods may differ
significantly from what we have recorded in the current period
related to historical awards and could materially affect our net
earnings and diluted earnings per share of a future period.
There were no modifications to any of our plans in 2008.
There is a risk that our estimates of the fair values of our
stock-based awards on the grant dates as determined using the
Black-Scholes model may bear little resemblance to the actual
values realized upon the exercise or forfeiture of those
stock-based awards in the future. Some employee stock options
may expire without value, or only realize minimal intrinsic
value, as compared to the fair values originally estimated on
the grant date and recognized in our financial statements.
Alternatively, some employee stock options may realize
significantly more value than the fair values originally
estimated on the grant date and recognized in our financial
statements.
26
Results
of Operations
The following table sets forth, for the periods indicated,
certain items from our statements of operations expressed as a
percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of sales
|
|
|
53
|
|
|
|
48
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
47
|
|
|
|
52
|
|
|
|
40
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
27
|
|
|
|
20
|
|
|
|
14
|
|
Research and development
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
General and administrative
|
|
|
19
|
|
|
|
20
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49
|
|
|
|
43
|
|
|
|
33
|
|
Income (loss) from operations
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
7
|
|
Other income
|
|
|
|
|
|
|
119
|
|
|
|
|
|
Interest income (expense), net
|
|
|
2
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
1
|
%
|
|
|
130
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 Years Ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
6,533
|
|
|
$
|
3,827
|
|
|
$
|
10,360
|
|
|
$
|
7,635
|
|
|
$
|
4,200
|
|
|
$
|
11,835
|
|
|
$
|
5,596
|
|
|
$
|
4,406
|
|
|
$
|
10,002
|
|
Advanced products
|
|
|
984
|
|
|
|
|
|
|
|
984
|
|
|
|
1,042
|
|
|
|
550
|
|
|
|
1,592
|
|
|
|
646
|
|
|
|
100
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
|
7,517
|
|
|
|
3,827
|
|
|
|
11,344
|
|
|
|
8,677
|
|
|
|
4,750
|
|
|
|
13,427
|
|
|
|
6,242
|
|
|
|
4,506
|
|
|
|
10,748
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
|
3,950
|
|
|
|
16,792
|
|
|
|
20,742
|
|
|
|
3,576
|
|
|
|
13,586
|
|
|
|
17,162
|
|
|
|
3,368
|
|
|
|
5,706
|
|
|
|
9,074
|
|
Advanced products
|
|
|
2,676
|
|
|
|
430
|
|
|
|
3,106
|
|
|
|
1,678
|
|
|
|
396
|
|
|
|
2,074
|
|
|
|
1,383
|
|
|
|
461
|
|
|
|
1,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
|
6,626
|
|
|
|
17,222
|
|
|
|
23,848
|
|
|
|
5,254
|
|
|
|
13,982
|
|
|
|
19,236
|
|
|
|
4,751
|
|
|
|
6,167
|
|
|
|
10,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
14,143
|
|
|
$
|
21,049
|
|
|
$
|
35,192
|
|
|
$
|
13,931
|
|
|
$
|
18,732
|
|
|
$
|
32,663
|
|
|
$
|
10,993
|
|
|
$
|
10,673
|
|
|
$
|
21,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2008 Compared to Fiscal Year Ended
September 30, 2007
Net Sales.
Net sales increased 7.7% to
$35.2 million in fiscal 2008 from $32.7 million in the
prior fiscal year. The increase in net sales was a result of an
increase in branded sales offset by a decrease in private label
sales. The increase in branded sales primarily was attributable
to increased sales of branded advanced products in the
United States and increased sales of branded base products
in the United Kingdom. Domestic sales of branded products
increased by 26% for fiscal 2008 compared to fiscal 2007. Our
international branded sales increased 23% compared to fiscal
2007. Private label sales of both base products and advanced
products were down from last year, primarily as a result of
decreased sales to Coloplast and Hollister. Sales of products
under the
Rochester Medical
brand comprised 68% of total
sales in fiscal 2008, with private label sales representing 32%
of total sales. In fiscal 2007, private label sales comprised
41% of total sales. We expect this trend to continue as we focus
more on our branded sales.
27
Gross Margin.
Our gross margin as a percentage
of net sales was 47% in fiscal 2008 compared to 52% in the prior
fiscal year. Our decrease in gross margin in fiscal 2008 was
primarily impacted by increased costs for medical insurance, raw
materials and freight during 2008. Additionally, a significant
portion of our increased sales were of lower margin products.
Marketing and Selling.
For fiscal 2008, we
increased the investment in our sales and marketing programs,
primarily through cash generated from current operations, to
support
Rochester Medical
branded sales growth in the
U.S. and Europe. 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 increased 46%
in fiscal 2008 as compared to fiscal 2007, with marketing and
selling expense of approximately $9.5 million in fiscal
2008 and $6.5 million in fiscal 2007. The increase in
marketing and selling expense is primarily related to increased
sales personnel and related expenses of $660,000 incurred in the
Companys U.K. operations, $1.6 million in increased
staff in U.S. acute care marketing, $550,000 of increased
advertising and project costs and $140,000 of increased
stock-based compensation expense. Marketing and selling expense
as a percentage of net sales for fiscal 2008 was 27% compared to
20% for fiscal 2007.
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
increased 11% to $1,044,000 in fiscal 2008 from $943,000 in the
prior fiscal year. The increase in research and development
expense relates primarily to increased project costs of $168,000
and $15,000 of increased stock-based compensation expense,
offset by a decrease in compensation expense of $103,000.
Research and development expense as a percentage of net sales
for each of fiscal 2008 and fiscal 2007 was 3%.
General and Administrative.
General and
administrative expense primarily includes payroll expense
related to our management and accounting, information technology
and human resources staff, as well as fees and expenses of
outside legal counsel, accounting advisors and auditors. General
and administrative expense remained flat at $6.7 million in
fiscal 2008 and fiscal 2007. The changes in general and
administrative expense primarily relate to decreased
administrative costs of $900,000 of stock-based compensation
expense, offset by increases of $610,000 in professional fees,
$55,000 of insurance, $50,000 of compensation expense, $60,000
in charitable contributions and $40,000 related to travel.
General and administrative expense as a percentage of net sales
for fiscal 2008 and fiscal 2007 was 19% and 21%, respectively.
Interest Income.
Interest income decreased 4%
to $1.2 million in fiscal 2008 from $1.3 million in
the prior fiscal year. The decrease reflects overall lower
interest rates on investments.
Interest Expense.
Interest expense decreased
7% to $478,000 in fiscal 2008 from $513,000 in fiscal 2007. The
decrease in interest expense reflects decreases in outstanding
debt used to partially finance our asset acquisitions in June
2006 from Mentor and Coloplast.
Income Taxes.
For the year ended
September 30, 2008, we have a federal net operating loss.
No valuation allowance has been recorded against the net
deferred tax assets because there is sufficient future projected
income as well as excess income from 2007 to sustain that the
deferred tax assets will more likely than not be able to be
utilized.
As of September 30, 2008, we have no federal net operating
loss carryforwards available to offset future taxable income,
since our earnings were sufficient to fully utilize the net
operating loss carryforward of $21.0 million during fiscal
2007. For fiscal 2008, we had an effective income tax rate of
approximately (320)% due to tax adjustments and credits known
after the tax return filing. In future periods of taxable
earnings, we expect to report an income tax provision using an
effective tax rate in the range of 30 34%.
Net Income.
Our net income decreased to
$759,000 in fiscal 2008, which is more consistent with our
expectations compared to $34,050,000 in fiscal 2007. Lawsuit
settlements of approximately $39 million pre-tax were
recognized in fiscal 2007. Net income was also impacted by our
increased strategic investment in sales and marketing programs.
28
Fiscal
Year Ended September 30, 2007 Compared to Fiscal Year Ended
September 30, 2006
Net Sales.
Net sales increased 50.8% to
$32.7 million in fiscal 2007 from $21.7 million in the
prior fiscal year. The increase in net sales was a result of an
increase in both branded and private label sales. The increase
in branded sales primarily was attributable to increased sales
of branded base products in the United Kingdom related to the
asset acquisition. Domestic sales of branded products increased
by 10% for fiscal 2007 compared to fiscal 2006. Our
international branded sales increased 127% compared to fiscal
2006. Private label sales of both base products and advanced
products were up over last year, primarily as a result of the
new private label agreements entered into with Coloplast and
Hollister in June and December 2006, respectively.
Gross Margin.
Our gross margin as a percentage
of net sales was 52% in fiscal 2007 compared to 40% in the prior
fiscal year. Our increase in gross margin in fiscal 2007 was
primarily due to increased sales volumes and increased sales of
higher margin products.
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
increased 108% in fiscal 2007 as compared to fiscal 2006, with
marketing and selling expense of approximately $6.5 million
in fiscal 2007 and $3.1 million in fiscal 2006. The
increase in marketing and selling expense is primarily related
to increased sales personnel and related expenses of
$2.0 million incurred in the Companys U.K.
operations, $1.0 million in increased staff in
U.S. acute care marketing and $267,000 of increased
stock-based compensation expense related to stock options in
accordance with the reporting requirements of SFAS 123(R).
Marketing and selling expense as a percentage of net sales for
fiscal 2007 was 20% compared to 14% for fiscal 2006.
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
increased 24% to $943,000 in fiscal 2007 from $760,000 in the
prior fiscal year. The increase in research and development
expense relates primarily to increased compensation expense of
$101,000 and $70,000 of increased stock-based compensation
expense related to stock options in accordance with the
reporting requirements of SFAS 123(R). Research and
development expense as a percentage of net sales for fiscal 2007
was 3% and fiscal 2006 was 4%.
General and Administrative.
General and
administrative expense primarily includes payroll expense
related to our management and accounting, information technology
and human resources staff, as well as fees and expenses of
outside legal counsel, accounting advisors and auditors. General
and administrative expense increased 102% to $6.7 million
in fiscal 2007 from $3.3 million in the prior fiscal year.
The increase in general and administrative expense is primarily
related to increased administrative costs of $1.2 million
of increased stock-based compensation expense related to stock
options in accordance with the reporting requirements of
SFAS 123(R), $910,000 associated with our U.K. operations,
$184,000 of compensation expense for bonus compensation under
our annual incentive program, $363,000 of additional
depreciation and amortization primarily related to our U.K.
operations and $356,000 in expenses related to our preparation
for compliance with Section 404 of the Sarbanes-Oxley Act.
General and administrative expense as a percentage of net sales
for fiscal 2007 and fiscal 2006 was 21% and 15%, respectively.
Interest Income.
Interest income increased
600% to $1.3 million in fiscal 2007 from $116,000 in the
prior fiscal year. The increase reflects significantly higher
cash positions as a result of the lawsuit settlements with
Premier and C.R. Bard in the first quarter, and an overall
higher interest rate on investments.
Other Income.
Other income of approximately
$39 million is primarily the result of lawsuit settlements
with Premier and C.R. Bard.
Interest Expense.
Interest expense increased
128% to $513,000 in fiscal 2007 from $225,000 in fiscal 2006.
The increase in interest expense reflects increases in debt used
to partially finance our asset acquisitions in June 2006 from
Mentor and Coloplast.
Income Taxes.
We had a history of pre-tax
losses and until fiscal 2003 had not generated taxable income.
While we had pre-tax income in fiscal 2006, 2005, 2004 and 2003,
we utilized a portion of our net operating loss
29
carryforward and therefore, no federal income taxes are due for
fiscal 2006, 2005, 2004 or fiscal 2003. During fiscal 2007, our
taxable earnings were sufficient to fully utilize the net
operating loss carryforward of $21.0 million. Income taxes
payable are a result of taxable income remaining after net
operating loss utilization.
We established a deferred tax asset of $454,000 in fiscal 2005.
As a result of the asset acquisition discussed above, management
further reduced the valuation allowance by approximately
$777,000 to reflect managements revised and increased
estimates of future taxable income. Since our current year
taxable earnings were sufficient to determine it more likely
than not that all deferred tax assets will be realized, the
valuation allowance was reduced to zero.
As of September 30, 2007, we have no federal net operating
loss carryforwards available to offset future taxable income. In
2007 our earnings were sufficient to fully utilize the net
operating loss carryforward of $21.0 million during fiscal
2007.
Net Income.
Our net income increased to
$34,050,000 in fiscal 2007. Lawsuit settlements along with
increased sales and gross margin were primarily responsible.
Liquidity
and Capital Resources
We have historically financed our operations primarily through
public offerings and private placements of our equity
securities, and have raised approximately $40.7 million in
net proceeds since our inception.
Our cash, cash equivalents and marketable securities were
$37.0 million at September 30, 2008 compared with
$37.1 million at September 30, 2007. The decrease in
cash primarily resulted from cash provided by stock option
exercises and operations offset by cash used for capital
expenditures and debt repayments. As of September 30, 2008,
we had $28.9 million invested in marketable securities. The
marketable securities primarily consist of $25.8 million
invested in U.S. treasury bills and $3.1 million
invested in mutual funds. We are currently reporting an
unrealized loss of $422,000 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.
We generated a net $2.4 million of cash in operating
activities during the year compared with $35.5 million for
the same period last year, with the primary difference being the
favorable lawsuit settlements in 2007. Cash flow provided by
operating activities in 2008 was comprised of net income of
$759,000 decreased by an increase in net working capital
components and increased by net non-cash charges of
$3.3 million, including depreciation and amortization of
$1.9 million and stock-based compensation of
$1.4 million. Significant working capital changes are as
follows:
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a $841,000 increase in accounts receivable reflecting increasing
sales activity over prior year.
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a $604,000 increase in inventory as we increased our finished
goods and
work-in-process
inventory to support the increase in sales volume.
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a $655,000 increase in other current assets
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a $1,097,000 increase in accounts payable reflecting timing of
payments and increased business over prior year.
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a $416,000 decrease in taxes payable due to levels of pre-tax
income and timing of payments.
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During fiscal 2008, our working capital position, excluding cash
and marketable securities, increased by $2.4 million.
Accounts receivable balances increased $841,000 during the
fiscal year primarily due to increased sales. Inventories as of
September 30, 2008 increased $604,000 over fiscal 2007 as
we carried more inventory in anticipation of increased sales.
Other current assets were relatively flat with fiscal 2007.
Changes in other asset and liability balances related to timing
differences.
Investing activities, primarily capital expenditures and the
purchase of marketable securities, provided net cash of $150,000
in fiscal 2008.
30
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 4.77%, 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 September 30, 2008, we had no borrowings under
the revolving line of credit and the term loan had an
outstanding balance of $2,949,548. Our obligations are secured
by our assets, including accounts, 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 September 30,
2008, we were in compliance with the financial covenants.
In June 2006, in conjunction with the asset purchase agreement
with Coloplast, we entered into an unsecured loan note deed with
Coloplast with an outstanding principal amount of $5,340,000.
The promissory note is non-interest bearing payable and due in
five equal installments of $1,068,000 payable annually on
June 2. We have imputed interest on the note at 6.90% and
reflect a net liability of $2,796,929 on our balance sheet as of
September 30, 2008.
We currently believe that our existing resources and anticipated
cash flows from operations will be sufficient to satisfy our
capital needs for the foreseeable future. However, our actual
liquidity and capital requirements will depend upon numerous
factors, including the costs, method and timing of expansion of
sales and marketing activities; the amount of revenues from
sales of our existing and new products; changes in, termination
of, and the success of, existing and new distribution
arrangements; the cost of maintaining, enforcing and defending
patents and other intellectual property rights; competing
technological and market developments; developments related to
regulatory and third party reimbursement matters; the cost and
progress of our research and development efforts; opportunities
for growth through acquisition, joint venture or other business
combinations, if any; and other factors. 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.
Disclosures
about Contractual Obligations and Commercial
Commitments
The following table summarizes our contractual commitments and
commercial obligations that affect our financial condition and
liquidity position as of September 30, 2008:
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Payments Due by Period
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Less than
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After 5
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Contractual Obligations
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Total
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1 year
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1-3 years
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4 - 5 years
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years
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Long term debt, including interest
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$
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6,470,587
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$
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2,255,850
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$
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4,214,737
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$
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$
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Unrecognized tax benefits under FIN
48
(1)
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239,496
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239,496
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Purchase obligations (general operating)
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574,590
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574,590
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Total Contractual Obligations
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$
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7,284,673
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$
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3,069,936
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$
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4,214,737
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$
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$
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(1)
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See Item 8 of Part II of this
Form 10-K,
Financial Statements and Supplementary Data
Note 7 Income Taxes.
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Off-Balance
Sheet Arrangements
As of September 30, 2008, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
31
New
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48, as
amended,
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
our 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. We adopted
FIN 48 in the first quarter of fiscal 2008, with no
material effect on the consolidated financial statements and to
the cumulative effect. In fiscal 2008, we recorded unrecognized
tax benefits of $239,496, all of which would have an impact on
our effective tax rate, if ultimately resolved.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
SFAS 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. The original pronouncement of SFAS 157 was
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. At a recent meeting, the FASB agreed
to defer the effective date of this pronouncement and has agreed
to issue additional guidance on specific related topics. We will
continue to evaluate the impact that this guidance, as amended,
will have on our results of operations and financial position.
Based on our understanding of the original pronouncement, the
impact would have been immaterial.
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. We adopted SFAS 159 in fiscal
2008 without any impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS 141(R)). SFAS 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 141(R) is effective for fiscal
years beginning on or after December 15, 2008, with early
adoption prohibited. We are required to adopt SFAS 141(R)
for all business combinations for which the acquisition date is
on or after January 1, 2009. This standard will change our
accounting treatment for business combinations on a prospective
basis.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51
(SFAS 160). SFAS 160 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
parents ownership interest in a subsidiary and requires
expanded disclosures. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008, with early
adoption prohibited. We do not expect the adoption of
SFAS 160 will have a material impact on our financial
position or results of operations.
In February 2008, the FASB issued FASB Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157
, or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities. The portion of
SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective for us beginning in the second fiscal quarter
of fiscal year 2009. We are currently evaluating the impact that
this guidance may have on our results of operations and
financial position.
In March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133
, which
changes the disclosure requirements for derivative instruments
and hedging activities. Entities will be required to provide
enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under
32
SFAS No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items
affect an entitys financial position, financial
performance and cash flows. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2008. We are currently evaluating the impact
of this statement.
In May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
, which
changed the framework for selecting accounting principles in
conformity with GAAP. The GAAP hierarchy will now be included in
the accounting literature established by the FASB.
Cautionary
Statement Regarding Forward Looking Information
Statements other than historical information contained herein
constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements may be identified by the use of
terminology such as believe, may,
will, expect, anticipate,
predict, intend, designed,
estimate, should or continue
or the negatives thereof or other variations thereon or
comparable terminology. Such forward-looking statements involve
known or unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements, or
industry results, to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among
other things, the following:
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the uncertainty of market acceptance of new product
introductions;
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the uncertainty of gaining new strategic relationships;
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the uncertainty of timing of revenues from private label sales
(particularly with respect to international customers);
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the uncertainty of successfully integrating and growing our new
UK operations and the risks associated with operating an
international business;
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FDA and other regulatory review and response times;
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the securing of Group Purchasing Organization contract
participation;
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the uncertainty of gaining significant sales from secured GPO
contracts;
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and other risk factors listed from time to time in our SEC
reports, including, without limitation, the section entitled
Risk Factors in Item 1A of this
Form 10-K.
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Managements
Report on Internal Control over Financial Reporting
Management of the company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those
policies and procedures that:
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pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
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Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
33
Management assessed the effectiveness of the companys
internal control over financial reporting as of
September 30, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes
that the company maintained effective internal control over
financial reporting as of September 30, 2008.
Our independent auditor has audited our consolidated financial
statements and the effectiveness of internal controls over
financial reporting as of September 30, 2008 as stated in
their reports on pages 36 and 37.
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ITEM 7A.
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Quantitative
and Qualitative Disclosures about Market Risk.
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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
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. Our revolving line of credit bears interest at a floating
rate based on the quoted one-month LIBOR rate plus 1.60%. As of
September 30, 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-U.S. 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.
34
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ITEM 8.
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Financial
Statements and Supplementary Data
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Rochester
Medical Corporation
Consolidated
Financial Statements
Years
Ended September 30, 2008, 2007 and 2006
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Page
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36-38
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Audited Financial Statements
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39
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40
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41
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42
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43
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35
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rochester Medical Corporation
We have audited the accompanying consolidated balance sheet of
Rochester Medical Corporation (a Minnesota corporation) and
subsidiary (collectively, the Company) as of
September 30, 2008 and the related consolidated statements
of operations, shareholders equity and comprehensive
income (loss), and cash flows for the year then ended. Our audit
of the basic financial statements included the financial
statement schedule listed in the index appearing under
Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial schedule based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Rochester Medical Corporation and subsidiary as of
September 30, 2008, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Rochester Medical Corporations internal control over
financial reporting as of September 30, 2008, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated December 11, 2008 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Minneapolis, Minnesota
December 11, 2008
36
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rochester Medical Corporation
We have audited Rochester Medical Corporations (the
Company) internal control over financial reporting
as of September 30, 2008, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Rochester Medical Corporation maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2008, based on criteria
established in
Internal Control Integrated
Framework
issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Rochester Medical Corporation as
of September 30, 2008, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows and financial
statement schedule for the year then ended, and our report dated
December 11, 2008 expressed an unqualified opinion on those
financial statements and financial statement schedule.
Minneapolis, Minnesota
December 11, 2008
37
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Rochester Medical Corporation
We have audited the consolidated balance sheet of Rochester
Medical Corporation and subsidiary as of September 30,
2007, and the related consolidated statements of operations,
shareholders equity and comprehensive income, and cash
flows for each of the two years in the period ended
September 30, 2007. Our audits also included the financial
statement schedule of Rochester Medical Corporation listed in
Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Rochester Medical Corporation and subsidiary as of
September 30, 2007, and the results of their operations and
their cash flows for each of the two years in the period ended
September 30, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the
information set forth therein.
/s/
McGladrey &
Pullen LLP
Minneapolis, Minnesota
December 3, 2007
38
ROCHESTER
MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,508,000
|
|
|
$
|
6,671,356
|
|
Marketable securities
|
|
|
28,493,648
|
|
|
|
30,465,244
|
|
Accounts receivable, less allowance for doubtful accounts
($65,202 2008; $57,913 2007)
|
|
|
6,009,023
|
|
|
|
5,527,518
|
|
Inventories, net
|
|
|
8,745,873
|
|
|
|
7,698,889
|
|
Prepaid expenses and other current assets
|
|
|
1,110,291
|
|
|
|
6,480
|
|
Deferred income tax asset
|
|
|
1,143,931
|
|
|
|
876,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,010,766
|
|
|
|
51,245,519
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
739,836
|
|
|
|
365,952
|
|
Buildings
|
|
|
6,956,240
|
|
|
|
7,400,706
|
|
Equipment and fixtures
|
|
|
16,086,643
|
|
|
|
14,622,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,782,719
|
|
|
|
22,389,019
|
|
Less accumulated depreciation
|
|
|
(13,899,390
|
)
|
|
|
(12,709,984
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
9,883,329
|
|
|
|
9,679,035
|
|
Deferred income tax asset
|
|
|
831,299
|
|
|
|
571,721
|
|
Goodwill
|
|
|
5,169,661
|
|
|
|
5,920,255
|
|
Finite life intangibles, less accumulated amortization
($1,511,307 2008; $886,008 2007)
|
|
|
6,860,213
|
|
|
|
7,821,562
|
|
Patents, less accumulated amortization ($1,147,088
2008;
$1,090,178 2007)
|
|
|
227,358
|
|
|
|
257,353
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,982,626
|
|
|
$
|
75,495,445
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,127,470
|
|
|
$
|
1,091,874
|
|
Accrued compensation
|
|
|
915,661
|
|
|
|
1,109,533
|
|
Accrued expenses
|
|
|
254,993
|
|
|
|
869,404
|
|
Current maturities of debt
|
|
|
1,940,292
|
|
|
|
1,849,463
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,238,416
|
|
|
|
4,920,274
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
239,496
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
3,806,185
|
|
|
|
6,066,246
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
4,045,681
|
|
|
|
6,066,246
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value:
|
|
|
|
|
|
|
|
|
Authorized shares 40,000,000
|
|
|
|
|
|
|
|
|
Issued and outstanding shares: (11,936,586 2008;
11,690,886 2007)
|
|
|
54,223,669
|
|
|
|
50,150,739
|
|
Retained earnings
|
|
|
14,723,541
|
|
|
|
13,964,438
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,248,681
|
)
|
|
|
393,748
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
67,698,529
|
|
|
|
64,508,925
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
76,982,626
|
|
|
$
|
75,495,445
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
39
ROCHESTER
MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
35,191,949
|
|
|
$
|
32,663,087
|
|
|
$
|
21,665,837
|
|
Cost of sales
|
|
|
18,483,985
|
|
|
|
15,619,178
|
|
|
|
13,057,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,707,964
|
|
|
|
17,043,909
|
|
|
|
8,608,747
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
9,498,596
|
|
|
|
6,490,497
|
|
|
|
3,109,207
|
|
Research and development
|
|
|
1,044,205
|
|
|
|
943,225
|
|
|
|
759,639
|
|
General and administrative
|
|
|
6,658,002
|
|
|
|
6,742,665
|
|
|
|
3,344,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,200,803
|
|
|
|
14,176,387
|
|
|
|
7,213,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(492,839
|
)
|
|
|
2,867,522
|
|
|
|
1,395,239
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,239,689
|
|
|
|
1,288,603
|
|
|
|
116,341
|
|
Other income (expense)
|
|
|
(88,642
|
)
|
|
|
38,855,000
|
|
|
|
|
|
Interest expense
|
|
|
(477,560
|
)
|
|
|
(513,296
|
)
|
|
|
(224,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
673,487
|
|
|
|
39,630,307
|
|
|
|
(108,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
180,648
|
|
|
|
42,497,829
|
|
|
|
1,286,732
|
|
Income tax benefit (expense)
|
|
|
578,455
|
|
|
|
(8,447,649
|
)
|
|
|
672,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
759,103
|
|
|
$
|
34,050,180
|
|
|
$
|
1,958,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
.06
|
|
|
$
|
2.97
|
|
|
$
|
.18
|
|
Net income per common share diluted
|
|
$
|
.06
|
|
|
$
|
2.77
|
|
|
$
|
.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
11,815,904
|
|
|
|
11,449,646
|
|
|
|
11,068,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
12,577,337
|
|
|
|
12,272,172
|
|
|
|
11,665,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
40
ROCHESTER
MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at October 1, 2006
|
|
|
11,047,000
|
|
|
$
|
42,407,912
|
|
|
$
|
(22,044,650
|
)
|
|
$
|
(75,074
|
)
|
|
$
|
20,288,188
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
1,958,908
|
|
|
|
|
|
|
|
1,958,908
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,577
|
|
|
|
53,577
|
|
Unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,074
|
|
|
|
75,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,087,559
|
|
Stock based compensation
|
|
|
|
|
|
|
599,527
|
|
|
|
|
|
|
|
|
|
|
|
599,527
|
|
Stock option exercises
|
|
|
39,560
|
|
|
|
121,288
|
|
|
|
|
|
|
|
|
|
|
|
121,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
11,086,560
|
|
|
|
43,128,727
|
|
|
|
(20,085,742
|
)
|
|
|
53,577
|
|
|
|
23,096,562
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
34,050,180
|
|
|
|
|
|
|
|
34,050,180
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443,534
|
|
|
|
443,534
|
|
Unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,363
|
)
|
|
|
(103,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,390,351
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
2,325,866
|
|
|
|
|
|
|
|
|
|
|
|
2,325,866
|
|
Stock based compensation
|
|
|
|
|
|
|
2,117,011
|
|
|
|
|
|
|
|
|
|
|
|
2,117,011
|
|
Stock option exercises
|
|
|
604,326
|
|
|
|
2,579,135
|
|
|
|
|
|
|
|
|
|
|
|
2,579,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
11,690,886
|
|
|
|
50,150,739
|
|
|
|
13,964,438
|
|
|
|
393,748
|
|
|
|
64,508,925
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
759,103
|
|
|
|
|
|
|
|
759,103
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,456,869
|
)
|
|
|
(1,456,869
|
)
|
Tax effect on unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,890
|
|
|
|
138,890
|
|
Unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(324,450
|
)
|
|
|
(324,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(833,326
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
1,364,491
|
|
|
|
|
|
|
|
|
|
|
|
1,364,491
|
|
Stock based compensation
|
|
|
|
|
|
|
1,364,561
|
|
|
|
|
|
|
|
|
|
|
|
1,364,561
|
|
Stock option exercises
|
|
|
245,700
|
|
|
|
1,343,878
|
|
|
|
|
|
|
|
|
|
|
|
1,343,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
11,936,586
|
|
|
$
|
54,223,669
|
|
|
$
|
14,723,541
|
|
|
$
|
(1,248,681
|
)
|
|
$
|
67,698,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
41
ROCHESTER
MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
759,103
|
|
|
$
|
34,050,180
|
|
|
$
|
1,958,908
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,209,554
|
|
|
|
1,161,291
|
|
|
|
962,698
|
|
Amortization
|
|
|
717,009
|
|
|
|
724,067
|
|
|
|
279,394
|
|
Stock based compensation
|
|
|
1,364,561
|
|
|
|
2,117,011
|
|
|
|
599,527
|
|
Deferred revenue
|
|
|
|
|
|
|
(564,286
|
)
|
|
|
(157,142
|
)
|
Deferred income taxes
|
|
|
(528,535
|
)
|
|
|
(203,070
|
)
|
|
|
(776,999
|
)
|
Tax benefit of stock options exercised
|
|
|
404,959
|
|
|
|
2,325,866
|
|
|
|
|
|
Changes in operating assets and liabilities, net of the effects
of business acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(841,382
|
)
|
|
|
(877,450
|
)
|
|
|
(1,267,082
|
)
|
Inventories
|
|
|
(604,318
|
)
|
|
|
(2,966,577
|
)
|
|
|
(693,206
|
)
|
Prepaid expenses and other current assets
|
|
|
(655,116
|
)
|
|
|
(240,402
|
)
|
|
|
(59,240
|
)
|
Accounts payable
|
|
|
1,096,684
|
|
|
|
(197,366
|
)
|
|
|
995,117
|
|
Income tax payable
|
|
|
(415,671
|
)
|
|
|
500,688
|
|
|
|
|
|
Other current liabilities
|
|
|
(110,327
|
)
|
|
|
(308,524
|
)
|
|
|
982,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,396,521
|
|
|
|
35,521,428
|
|
|
|
2,824,649
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,609,741
|
)
|
|
|
(2,482,625
|
)
|
|
|
(354,182
|
)
|
Business acquisition
|
|
|
|
|
|
|
60,579
|
|
|
|
(10,857,505
|
)
|
Patents
|
|
|
(26,915
|
)
|
|
|
(49,795
|
)
|
|
|
(47,529
|
)
|
Purchase of marketable securities
|
|
|
(76,658,063
|
)
|
|
|
(36,557,555
|
)
|
|
|
|
|
Proceeds from sales and maturities of marketable securities
|
|
|
78,444,303
|
|
|
|
5,975,000
|
|
|
|
5,361,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
149,584
|
|
|
|
(33,054,396
|
)
|
|
|
(5,897,591
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on capital leases
|
|
|
|
|
|
|
(64,030
|
)
|
|
|
(39,785
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
Payments on long-term debt
|
|
|
(2,169,233
|
)
|
|
|
(1,744,919
|
)
|
|
|
(250,000
|
)
|
Excess tax benefit from exercises of stock options
|
|
|
959,523
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock from option exercises
|
|
|
1,343,877
|
|
|
|
2,579,135
|
|
|
|
121,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
134,167
|
|
|
|
770,186
|
|
|
|
4,831,503
|
|
Effect of exchange rate on cash
|
|
|
(843,628
|
)
|
|
|
527,440
|
|
|
|
18,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,836,644
|
|
|
|
3,764,658
|
|
|
|
1,776,822
|
|
Cash and cash equivalents at beginning of year
|
|
|
6,671,356
|
|
|
|
2,906,698
|
|
|
|
1,129,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
8,508,000
|
|
|
$
|
6,671,356
|
|
|
$
|
2,906,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
476,577
|
|
|
$
|
604,635
|
|
|
$
|
94,650
|
|
Cash paid for income taxes
|
|
|
785,000
|
|
|
|
5,750,000
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt used to finance asset acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,409,099
|
|
The accompanying notes are an integral part of these
financial statements.
42
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2008
Rochester Medical Corporation develops, manufactures and markets
a broad line of innovative, technologically enhanced urinary
continence and urine drainage care products for the home care
and acute/extended care markets. The Company currently
manufactures and markets standard continence care products,
including male external catheters, Foley catheters and
intermittent catheters and innovative and technologically
advanced products such as its
FemSoft Insert
,
Release-NF
catheter and antibacterial and hydrophilic
intermittent catheters. The Company markets its products under
its Rochester Medical brand, and also supplies its products to
several large medical product companies for sale under brands
owned by these companies, which are referred to as private label
sales. The accompanying financial statements include the
accounts of Rochester Medical Corporation and Rochester Medical
Ltd., its wholly owned subsidiary in the United Kingdom,
together which are herein referred to as the Company.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of Rochester Medical Corporation and its wholly owned
subsidiary. All material intercompany accounts and transactions
are eliminated in consolidation.
Cash
Equivalents
The Company considers all highly liquid investments with a
remaining maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents includes balances in
foreign accounts totaling $3.9 million and
$5.6 million at September 30, 2008 and 2007
respectively. The Company maintains its cash in bank deposit
accounts which, at times, may exceed the insurance limits of the
Federal Deposit Insurance Corporation. The Company has not
experienced any losses in such accounts.
Marketable
Securities
Marketable securities are classified as available for sale and
are carried at fair value, with unrealized gains or losses
included as a separate component of shareholders equity.
The cost and fair value of available-for-sale securities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Cost
|
|
Loss
|
|
Fair Value
|
|
September 30, 2008
|
|
$
|
28,915,366
|
|
|
$
|
(421,718
|
)
|
|
$
|
28,493,648
|
|
September 30, 2007
|
|
$
|
30,582,556
|
|
|
$
|
(117,312
|
)
|
|
$
|
30,465,244
|
|
As of September 30, 2008, the Company has
$28.9 million in high quality, investment grade debt
securities, with an unrealized loss of $421,718. The Company
considers these unrealized losses temporary as it has the intent
and ability to hold these investments to maturity. At
September 30, 2007, the Company owned primarily municipal
bonds.
Losses recognized are recorded in
interest expense
, in
the consolidated statements of operations. Gains and losses from
the sale of investments are calculated based on the specific
identification method.
Fair
Value of Financial Instruments
The carrying amounts of all financial instruments, including
cash, accounts receivable, accounts payable and accrued expenses
approximate their fair values because of the short maturity of
these instruments. The carrying
43
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts of the Companys long-term debt approximates fair
value based on current rates offered to the Company for debt of
the same remaining maturities.
Concentration
of Credit
The Company manufactures and sells its products to a full range
of companies in the medical industry on a worldwide basis. There
is a concentration of sales to larger medical wholesalers and
distributors. The Company performs periodic credit evaluations
of its customers financial condition. The Company requires
irrevocable letters of credit on sales to certain foreign
customers. Receivables generally are due within 30 to
60 days.
Accounts
Receivable
The Company grants credit to customers in the normal course of
business, but generally does not require collateral or any other
security to support its receivables. The Company maintains an
allowance for doubtful accounts for potential credit losses.
Uncollectible accounts are written-off against the allowance
when it is deemed that a customer account is uncollectible.
Accounts outstanding longer than the contractual payment terms
are considered past due. The Company determines its allowances
by considering a number of factors, including the length of time
accounts receivables are past due, the Companys previous
loss history, the customers current ability to pay its
obligation to the Company, and the condition of the general
economy and the industry as a whole. The Company writes off
accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the
allowance for doubtful accounts. Accounts receivable balances
written off have been within managements expectations.
Inventories
Inventories, consisting of material, labor and manufacturing
overhead, are stated at the lower of cost
(first-in,
first-out method) or market.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is based on estimated
useful lives of 4-10 years for equipment and fixtures and
25-35 years
for buildings computed using the straight-line method. Additions
and improvements that extend the lives of the assets are
capitalized while expenditures for repairs and maintenance are
expensed as incurred.
Finite
Life Intangible Assets
Finite life intangible assets consist primarily of purchased
trademarks, a supply agreement, and customer relationships and
are amortized using the straight-line method, as appropriate,
over their estimated useful lives, ranging from 5 to
20 years. The Company reviews these intangible assets for
impairment annually or as changes in circumstance or the
occurrence of events suggest the remaining value may not be
recoverable. No impairment loss was recognized in the fiscal
years ended September 30, 2008, 2007 and 2006.
Goodwill
and Other Intangible Assets
The Company records as goodwill the excess of purchase price
over the fair value of the identifiable net assets acquired as
prescribed by Statement of Financial Accounting Standards
(SFAS) No. 142,
Goodwill and Other
Intangible Assets
. Under this Standard, goodwill and
intangibles with indefinite useful lives are not amortized. This
Standard also requires, at a minimum, an annual assessment of
the carrying value of goodwill and other intangibles with
indefinite useful lives. If the carrying value of goodwill or an
intangible asset exceeds its fair value, an impairment loss
shall be recognized. No impairment loss was recognized in the
fiscal years ended September 30, 2008, 2007 and 2006.
44
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Lived
Assets
The Company reviews its long-lived assets for impairment as
prescribed by SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-Lived Assets
whenever events or changes in circumstances indicate that its
carrying value of long-lived may not be recoverable. Long-lived
assets are considered not recoverable when the carrying amount
of a long-lived asset (asset group) exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset (asset group). If it is
determined that a long-lived asset (asset group) is not
recoverable, an impairment loss is recorded equal to the excess
of the carrying amount of the long-lived asset (asset group)
over the long-lived assets (asset groups) fair
value. Fair value is the amount at which the long-lived asset
(asset group) could be bought or sold in a current transaction
between a willing buyer and seller, other than in a forced or
liquidation sale. No impairment loss was recognized in the
fiscal years ended September 30, 2008, 2007 and 2006.
Foreign
Currency Translation
The financial statements of the Companys
non-U.S. subsidiary
are translated into U.S. dollars in accordance with
SFAS No. 52,
Foreign Currency
Translation
. The assets and liabilities of certain
non-U.S. subsidiaries
whose functional currencies are other than the U.S. dollar
are translated at current rates of exchange. Revenue and expense
items are translated at the average exchange rates. The
resulting translation adjustments are recorded directly into
accumulated other comprehensive income (loss).
Patents
Capitalized costs include costs incurred in connection with
making patent applications for the Companys products and
are amortized on a straight-line basis over eight years. The
Company periodically reviews its patents for impairment of
value. Any adjustment from the analysis is charged to operations.
Revenue
Recognition
The Company recognizes non-Group Purchase Organization related
revenue from product sales upon shipment when title transfers to
customers. Revenue is recognized on Group Purchase Organization
related sales upon delivery to the customer. Amounts received
for upfront license fees under multiple-element supply and
distribution arrangements are deferred and recognized over the
period of supply, if such arrangements require the
Companys on-going services or performance.
During the year ended September 30, 2007, the Company
recognized $525,000 of deferred revenue related to a
10 year distribution agreement with Coloplast. As part of
the original agreement, Coloplast paid the Company $1,000,000
for the exclusive right to market and sell the
Release NF
foley catheter in the U.K. for a period of 10 years.
During the year, both companies mutually agreed to terminate the
contract thus accelerating the recognition of the remaining
deferred revenue of the Company.
Shipping
and Handling
Shipping and handling billed to customers is recorded as
revenue. Shipping and handling costs are recorded within cost of
goods sold.
Research
and Development Costs
Research and development costs are charged to operations as
incurred. Research and development costs include clinical
testing costs, certain salary and related expenses, other labor
costs, materials and an allocation of certain overhead expenses.
45
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Income taxes are accounted for under the liability method.
Deferred income taxes are provided for temporary differences
between financial reporting and tax bases of assets and
liabilities. 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. The Company has
determined it is more likely than not that all deferred tax
assets will be realized and therefore no valuation allowance is
necessary.
It is the Companys practice to recognize penalties
and/or
interest to income tax matters in income tax expenses. As of
September 30, 2008, 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 in the
U.S. Federal jurisdiction, as well as in the United Kingdom
and various state jurisdictions. The Internal Revenue Service
has just begun an examination of the Companys income tax
return for the fiscal year ended September 30, 2007. It is
more likely than not that the examination phase of the audit
will conclude in the next 12 months, and that the related
unrecognized tax benefits for tax positions taken may change
from those as liabilities for uncertain tax positions in the
financial statements at September 30, 2008. Although the
outcome of this matter cannot currently be determined, the
Company believes adequate provision has been made for any
potential unfavorable financial statement impact.
Advertising
Costs
The Company incurred advertising expenses of $946,000, $397,000
and $333,000 for the years ended September 30, 2008, 2007
and 2006, respectively. All advertising costs are charged to
operations as incurred.
Stock-Based
Compensation
Effective October 1, 2005, the Company adopted
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. SFAS 123(R) supersedes the Companys previous
accounting under Accounting Principles Board Opinion
No. 25,
Accounting for Stock Issued to
Employees
for periods beginning in fiscal 2006. In
March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107) relating
to SFAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R). The Company
elected to utilize the modified-prospective transition method as
permitted by SFAS 123(R). Under this transition method, the
Companys 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 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) recognized
utilizing the accelerated expense attribution method for awards
with graded vesting. The Company recorded approximately
$1,365,000, $2,100,000 and $600,000 ($887,000, $1,365,000 and
$390,000 net of tax) of related stock-based compensation
expense for the years ended September 30, 2008, 2007 and
2006 respectively.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Significant
items subject to estimates and assumptions include the valuation
allowances for inventories, fair value assumptions related to
investments, deferred income tax assets and stock-based
compensation. Actual results could differ from those estimates.
46
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Income Per Share
Net income per common share is calculated in accordance with
Financial Accounting Standards Board (FASB)
Statement No. 128,
Earnings Per Share
.
The Companys basic net income per common share is computed
by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net 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
per share calculation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
759,103
|
|
|
$
|
34,050,180
|
|
|
$
|
1,958,903
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share
weighted average shares outstanding
|
|
|
11,815,904
|
|
|
|
11,449,646
|
|
|
|
11,068,102
|
|
Effect of dilutive stock options
|
|
|
761,433
|
|
|
|
822,526
|
|
|
|
597,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common share
weighted average shares outstanding
|
|
|
12,577,337
|
|
|
|
12,272,172
|
|
|
|
11,665,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options of 5,000, 30,000 and 382,000 for fiscal
years 2008, 2007 and 2006, respectively, have been excluded from
the diluted net income per common share calculations because
their exercise prices were greater than the average market price
of the Companys common stock.
Business
Segment
The Company conducts its business within one business segment
which is defined as developing, manufacturing and marketing
urinary continence and urinary drainage care products.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
SFAS 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. The original pronouncement of SFAS 157 was
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. At a recent meeting, the FASB agreed
to defer the effective date of this pronouncement and has agreed
to issue additional guidance on specific related topics. The
Company will continue to evaluate the impact that this guidance,
as amended, will have on its results of operations and financial
position. Based on the Companys understanding of the
original pronouncement, the impact would have been immaterial.
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 adopted SFAS 159
in fiscal 2008 without any impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS 141(R)). SFAS 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
47
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 141(R) for all
business combinations for which the acquisition date is on or
after January 1, 2009. This standard will change the
Companys accounting treatment for business combinations on
a prospective basis.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51
(SFAS 160). SFAS 160 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
parents ownership interest in a subsidiary and requires
expanded disclosures. SFAS 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 160 will have a material impact on its financial
position or results of operations.
In February 2008, the FASB issued FASB Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157
, or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities. The portion of
SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective for the Company beginning in the second fiscal
quarter of fiscal year 2009. The Company is currently evaluating
the impact that this guidance may have on its results of
operations and financial position.
In March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133
, which
changes the disclosure requirements for derivative instruments
and hedging activities. Entities will be required to provide
enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items
affect an entitys financial position, financial
performance and cash flows. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2008. The Company is currently evaluating the
impact of this statement.
In May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
,
which changed the framework for selecting accounting principles
in conformity with GAAP. The GAAP hierarchy will now be included
in the accounting literature established by the FASB.
During fiscal 2008, the Company recorded a foreign currency
transaction loss of $89,000 related to the note payable to
Coloplast A/S.
During the fiscal year ended September 30, 2007, the
Company recorded $38,855,000 of other income, consisting
primarily of two cash settlements. The first occurred on
November 20, 2006, when the Company reached a settlement
with Premier, Inc and Premier Purchasing Partners, L.P. with
respect to the lawsuit it initiated in February 2004 against
certain GPOs and individual defendants alleging anti-competitive
conduct against the defendants in the markets for standard and
anti-infection Foley catheters as well as urethral catheters.
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. The second
occurred on December 14, 2006, when the Company 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.
48
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
2,274,199
|
|
|
$
|
1,762,593
|
|
Work-in-process
|
|
|
3,375,796
|
|
|
|
3,202,035
|
|
Finished goods
|
|
|
3,217,830
|
|
|
|
2,851,288
|
|
Reserve for inventory obsolescence
|
|
|
(121,952
|
)
|
|
|
(117,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,745,873
|
|
|
$
|
7,698,889
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Finite
Life Intangible Assets
|
Finite life intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
Estimated Lives
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Trademarks
|
|
8 to 15
|
|
$
|
5,423,000
|
|
|
$
|
945,410
|
|
|
$
|
4,477,590
|
|
|
$
|
5,423,000
|
|
|
$
|
540,233
|
|
|
$
|
4,882,767
|
|
Supply agreement
|
|
5
|
|
|
634,000
|
|
|
|
295,870
|
|
|
|
338,130
|
|
|
|
634,000
|
|
|
|
169,070
|
|
|
|
464,930
|
|
Customer relationships
|
|
20
|
|
|
2,314,520
|
|
|
|
270,027
|
|
|
|
2,044,493
|
|
|
|
2,650,570
|
|
|
|
176,705
|
|
|
|
2,473,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
8,371,520
|
|
|
$
|
1,511,307
|
|
|
$
|
6,860,213
|
|
|
$
|
8,707,570
|
|
|
$
|
886,008
|
|
|
$
|
7,821,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these assets was as follows:
|
|
|
|
|
Year ended September 30, 2008
|
|
$
|
625,299
|
|
Year ended September 30, 2007
|
|
$
|
668,165
|
|
Year ended September 30, 2006
|
|
$
|
217,843
|
|
Estimated annual amortization expense for these assets over the
next five years is as follows:
|
|
|
|
|
2009
|
|
$
|
653,427
|
|
2010
|
|
$
|
653,427
|
|
2011
|
|
$
|
590,022
|
|
2012
|
|
$
|
526,617
|
|
2013
|
|
$
|
526,617
|
|
Stock
Options
On November 17, 2006, the Company completed a 2:1 stock
split. All numbers presented below reflect shares and prices
post split.
Under the terms of the Companys 1991 Stock Option Plan,
the Board of Directors may grant employee incentive stock
options equal to fair market value of the Companys Common
Stock or employee non-qualified options at a price which cannot
be less than 85% of the fair market value. In August 1998, the
1991 Stock Option Plan was amended to increase by
600,000 shares the number of shares authorized for issuance
to 2,000,000 shares. Per the terms of the 1991 Stock Option
Plan, as of April 20, 2001, no new stock options may be
granted under the 1991 Stock Option Plan.
49
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The 1995 Non-Statutory Stock Option Plan authorizes the issuance
of up to 100,000 shares of Common Stock. Per the terms of
the 1995 Non-Statutory Stock Option Plan, no option may be
granted with a term longer than ten years. The vesting schedule
for options granted under the 1995 Non-Statutory Stock Option
Plan is determined by the Compensation Committee of the
Companys Board of Directors. In September 1995, Medical
Advisory Board members were granted options to purchase
24,000 shares of the Companys Common Stock at an
exercise price of $7.875 per share. These 24,000 shares
have now expired. In April 1999, one member of the Medical
Advisory Board was granted options to purchase
12,000 shares of the Companys Common Stock at an
exercise price of $5.06 per share.
In February 2001, the Companys shareholders approved the
2001 Stock Incentive Plan. Under the terms of the 2001 Stock
Incentive Plan, 1,000,000 shares were authorized for
issuance pursuant to grants of incentive stock options and
non-qualified options. Per the terms of the 2001 Stock Incentive
Plan, options may be granted with a term no longer than ten
years. The vesting schedule and term for options granted under
the 2001 Stock Incentive Plan is determined by the Compensation
Committee of the Companys Board of Directors. In January
2006, the 2001 Stock Incentive Plan was amended to increase by
1,000,000 shares the number of shares authorized for
issuance to 2,000,000 shares.
Option activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Shares
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Reserved
|
|
|
Options
|
|
|
Price Per
|
|
|
Contract
|
|
|
|
For Grant
|
|
|
Outstanding
|
|
|
Share
|
|
|
Life
|
|
|
Balance as of September 30, 2005
|
|
|
156,500
|
|
|
|
2,046,000
|
|
|
$
|
4.42
|
|
|
|
4.90 years
|
|
Increase in authorized shares
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(210,000
|
)
|
|
|
210,000
|
|
|
|
5.85
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(39,560
|
)
|
|
|
3.07
|
|
|
|
|
|
Options canceled
|
|
|
194,440
|
|
|
|
(194,440
|
)
|
|
|
6.64
|
|
|
|
|
|
1991, 1995 Plan options canceled and not reissuable
|
|
|
(175,940
|
)
|
|
|
|
|
|
|
6.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006
|
|
|
965,000
|
|
|
|
2,022,000
|
|
|
|
4.39
|
|
|
|
4.94 years
|
|
Options granted
|
|
|
(407,000
|
)
|
|
|
407,000
|
|
|
|
11.69
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(645,666
|
)
|
|
|
4.75
|
|
|
|
|
|
Options canceled
|
|
|
6,000
|
|
|
|
(6,000
|
)
|
|
|
10.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
|
564,000
|
|
|
|
1,777,334
|
|
|
|
5.90
|
|
|
|
5.73 years
|
|
Options granted
|
|
|
(204,500
|
)
|
|
|
204,500
|
|
|
|
11.14
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(245,700
|
)
|
|
|
5.57
|
|
|
|
|
|
Options canceled
|
|
|
27,000
|
|
|
|
(27,000
|
)
|
|
|
20.91
|
|
|
|
|
|
1991, 1995 Plan options canceled and not reissuable
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
384,500
|
|
|
|
1,709,134
|
|
|
$
|
6.34
|
|
|
|
5.70 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options exercisable at end of period
|
|
|
|
|
|
|
1,264,384
|
|
|
$
|
5.36
|
|
|
|
4.78 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended September 30, 2007, two of the
Companys executives and one of its directors tendered an
aggregate of 41,340 shares with a fair market value of
$485,750 to the Company as consideration for the exercise
50
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of 56,000 stock options with an exercise price of $485,750. The
shares acquired by the Company were subsequently retired.
The number of stock options exercisable at September 30,
2008, 2007 and 2006 was 1,264,384, 1,323,334 and 1,698,000 at a
weighted average exercise price of $5.36, $4.96 and $4.24 per
share, respectively.
Shares available for future stock option grants to employees and
directors under existing plans were 384,500 at
September 30, 2008. At September 30, 2008, the
aggregate intrinsic value of options outstanding was
$11,850,603, and the aggregate intrinsic value of options
exercisable was $9,989,438. Total intrinsic value of options
exercised was $1,769,643 for the year ended September 30,
2008.
As of September 30, 2008, $1,322,360 of unrecognized
compensation costs related to non-vested awards is expected to
be recognized over a weighted average period of approximately
fourteen months.
The weighted average fair value of options granted in 2008, 2007
and 2006 was $6.86, $8.03 and $3.40 per share, respectively. The
exercise price of options outstanding at September 30, 2008
ranged from $2.17 to $18.02 per share as summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
Exercise Price
|
|
|
|
|
|
Exercise Price
|
|
|
|
Number
|
|
|
Average
|
|
Per Share
|
|
|
Number
|
|
|
Per Share
|
|
Range of
|
|
Outstanding
|
|
|
Remaining
|
|
Total Options
|
|
|
Exercisable
|
|
|
Options
|
|
Exercise Prices
|
|
at 9/30/08
|
|
|
Contractual Life
|
|
Outstanding
|
|
|
at 9/30/08
|
|
|
Exercisable
|
|
|
$0.00 $5.00
|
|
|
957,634
|
|
|
|
3.8 years
|
|
|
$
|
3.33
|
|
|
|
875,134
|
|
|
$
|
3.41
|
|
5.01 10.00
|
|
|
210,000
|
|
|
|
6.7 years
|
|
|
|
5.80
|
|
|
|
145,000
|
|
|
|
5.74
|
|
10.01 15.00
|
|
|
536,500
|
|
|
|
8.6 years
|
|
|
|
11.82
|
|
|
|
243,000
|
|
|
|
12.10
|
|
15.01 20.00
|
|
|
5,000
|
|
|
|
8.5 years
|
|
|
|
18.02
|
|
|
|
1,250
|
|
|
|
18.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,709,134
|
|
|
|
5.7 years
|
|
|
$
|
6.34
|
|
|
|
1,264,384
|
|
|
$
|
5.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.
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 years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
54
|
%
|
|
|
48
|
%
|
Risk-free interest rate
|
|
|
3.09
|
%
|
|
|
4.113
|
%
|
Expected holding period (in years)
|
|
|
8.13
|
|
|
|
6.19
|
|
Weighted-average grant-date fair value
|
|
$
|
6.86
|
|
|
$
|
8.03
|
|
The risk-free rate is based on a treasury instrument whose term
is consistent with the expected life of the Companys stock
options. The expected volatility, holding period, and
forfeitures of options are based on historical experience.
51
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes are due to temporary differences between
the carrying values of certain assets and liabilities for
financial reporting and income tax purposes, in addition to
certain tax carryforwards. Significant components of deferred
income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
20,448
|
|
|
$
|
21,034
|
|
Inventory reserves
|
|
|
44,293
|
|
|
|
42,505
|
|
Inventory capitalization
|
|
|
514,072
|
|
|
|
504,864
|
|
Accrued expenses
|
|
|
56,200
|
|
|
|
86,396
|
|
Nonqualified option expense
|
|
|
994,478
|
|
|
|
724,040
|
|
Restricted stock expense
|
|
|
72,835
|
|
|
|
34,199
|
|
Capital loss carryforward
|
|
|
37,602
|
|
|
|
37,602
|
|
Prepaid taxes on intercompany sales
|
|
|
355,556
|
|
|
|
206,956
|
|
Other
|
|
|
153,141
|
|
|
|
14,278
|
|
|
|
|
|
|
|
|
|
|
Total income tax deferred assets
|
|
|
2,248,625
|
|
|
|
1,671,874
|
|
Deferred income tax liability:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
273,395
|
|
|
|
207,283
|
|
Other
|
|
|
|
|
|
|
16,838
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
1,975,230
|
|
|
$
|
1,447,753
|
|
|
|
|
|
|
|
|
|
|
The deferred tax amounts above have been classified in the
accompanying balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current assets
|
|
$
|
1,143,931
|
|
|
$
|
876,032
|
|
Noncurrent assets
|
|
|
831,299
|
|
|
|
571,721
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,975,230
|
|
|
$
|
1,447,753
|
|
|
|
|
|
|
|
|
|
|
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. During 2004 all of the
Companys taxable income was offset by available net
operating loss (NOL) carryforwards and management
had recorded a $9.1 million 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
managements 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 tax assets, management reduced the valuation allowance
by $454,000 during 2005, resulting an a corresponding income tax
benefit in the statement of operations, and management further
reduced the allowance by $777,000 in 2006 to reflect
managements revised and increased estimates of future
taxable income. During 2007, the Companys earnings were
sufficient to determine it is more likely than not that all
deferred tax assets will be realized and the valuation allowance
was therefore reduced to zero. The Company utilized its entire
$21.0 million net operating loss in 2007 which reduced the
overall effective state and federal income tax rates. As a
result, the Company recorded $8.4 million for income tax
expense. For 2008, no valuation allowance has been recorded
against the net deferred tax assets because there is sufficient
future projected income as well as excess income from
52
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007 to sustain that the deferred tax assets will more likely
than not be able to be utilized. During 2008, the Company
recorded ($578,454) for income tax benefit. The higher than
expected tax benefit for the current year is due to relecting
the impact of certain items from previous years that were
identified in the current year upon completion of the tax return
for the prior year. In future years, the Company expects the
effective tax rate on income to be in the range of
34-35%.
The Company adopted the provisions of FASB Interpretation
No. 48,
Accounting for Uncertainty in Income
Taxes, an Interpretation of SFAS No. 109
(FIN 48) on October 1, 2007. FIN 48
creates a single model to address uncertainty in tax positions
and clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. At the adoption date,
October 1, 2007, the Company did not have a material
liability under FIN 48 for unrecognized tax benefits. Since
adoption, the Company has recognized an approximately $239,000
increase in the liability for unrecognized tax benefits.
It is the Companys practice to recognize penalties
and/or
interest to income tax matters in income tax expenses. As of
September 30, 2008, 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 in the
U.S. Federal jurisdiction, as well as in the United Kingdom
and various state jurisdictions. The Internal Revenue Service
has just begun an examination of the Companys income tax
return for the fiscal year ended September 30, 2007. It is
more likely than not that the examination phase of the audit
will conclude in the next 12 months, and that the related
unrecognized tax benefits for tax positions taken may change
from those as liabilities for uncertain tax positions in the
financial statements at September 30, 2008. Although the
outcome of this matter cannot currently be determined, the
Company believes adequate provision has been made for any
potential unfavorable financial statement impact.
A reconciliation of the beginning and ending amount of
unrecognized tax benefit is as follows:
|
|
|
|
|
Balance at October 1, 2007
|
|
$
|
0
|
|
Increases/(decreases) as a result of tax positions taken during
a prior period
|
|
|
0
|
|
Increases/(decreases) as a result of tax positions taken during
the current period
|
|
|
239,496
|
|
Decreases for tax positions related to acquired entities during
a prior period
|
|
|
0
|
|
Reductions as a result of lapse of the applicable statute of
limitations
|
|
|
0
|
|
Decreases relating to settlements with taxing authorities
|
|
|
0
|
|
Balance at September 30, 2008
|
|
$
|
239,496
|
|
53
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income before taxes and the provision for taxes for the
years ended September 30, 2008, 2007, and 2006 consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
317,024
|
|
|
$
|
41,700,139
|
|
|
$
|
836,990
|
|
Non-U.S.
|
|
|
(136,376
|
)
|
|
|
797,690
|
|
|
|
449,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before taxes
|
|
|
180,648
|
|
|
|
42,497,829
|
|
|
|
1,286,732
|
|
Provision for taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit)
|
|
$
|
(230,078
|
)
|
|
$
|
16,554,431
|
|
|
|
593,000
|
|
Deferred tax expense (benefit)
|
|
|
(363,176
|
)
|
|
|
(212,801
|
)
|
|
|
(777,000
|
)
|
Benefit of operating loss carryforwards
|
|
|
|
|
|
|
(8,140,581
|
)
|
|
|
(593,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
(593,254
|
)
|
|
|
8,201,049
|
|
|
|
(777,000
|
)
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
|
40,238
|
|
|
|
236,275
|
|
|
|
104,824
|
|
Deferred tax expense (benefit)
|
|
|
(25,439
|
)
|
|
|
10,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-U.S.
|
|
|
14,799
|
|
|
|
246,600
|
|
|
|
104,824
|
|
Total provision (benefit) for taxes
|
|
$
|
(578,455
|
)
|
|
$
|
8,447,649
|
|
|
$
|
(672,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the statutory federal income tax rate
and the effective income tax rate for the years ended September
30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory federal income tax rate
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
28
|
|
|
|
2
|
|
|
|
3
|
|
Foreign taxes
|
|
|
52
|
|
|
|
1
|
|
|
|
8
|
|
Tax exempt interest
|
|
|
(142
|
)
|
|
|
(1
|
)
|
|
|
|
|
FAS 123R on incentive stock options
|
|
|
59
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance and utilization of net operating
loss carryforward
|
|
|
|
|
|
|
(17
|
)
|
|
|
(97
|
)
|
R&D credits
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
Change in FIN 48 reserve
|
|
|
129
|
|
|
|
|
|
|
|
|
|
Rate adjustment on deferred taxes
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
DPAD
|
|
|
70
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(320
|
)%
|
|
|
20
|
%
|
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Related
Party Transactions
|
The
brother-in-law
of the CEO and President, has performed legal services for the
Company. During the years ended September 30, 2008, 2007
and 2006, the Company incurred legal fees and expenses of
approximately $3,000, $34,000 and $58,000, respectively, to such
counsel for services rendered in connection with litigation and
for
54
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
general legal services. Management believes the fees paid for
the services rendered to the Company were on terms at least as
favorable to the Company as could have been obtained from an
unrelated party.
Significant customers, measured as a percentage of sales, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Significant customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollister
|
|
|
12
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
Coloplast
|
|
|
11
|
|
|
|
13
|
|
|
|
9
|
|
Porges (subsidiary of Coloplast)
|
|
|
3
|
|
|
|
3
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26
|
%
|
|
|
31
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Employee
Benefit Plan
|
The Company has a 401(k) plan covering employees meeting certain
eligibility requirements. The Company currently matches employee
contributions at a rate of 50% with a maximum match of 2.5% of
salary. The total matching expense for the years ended
September 30, 2008 and 2007 was $120,536 and $70,817. There
was no matching expense for the year ended September 30,
2006.
Sales related to customers in the United States, Europe and the
rest of the world are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,143,490
|
|
|
$
|
13,925,808
|
|
|
$
|
10,993,204
|
|
Europe
|
|
|
19,107,071
|
|
|
|
16,777,866
|
|
|
|
8,383,854
|
|
Rest of world
|
|
|
1,941,388
|
|
|
|
1,959,413
|
|
|
|
2,288,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,191,949
|
|
|
$
|
32,663,087
|
|
|
$
|
21,665,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales are attributed to countries based upon the address to
which the Company ships products, as set forth on the
customers purchase order.
Long-lived assets, excluding deferred income tax assets of the
Company are located in the United States and Europe as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
13,557,637
|
|
|
$
|
13,805,558
|
|
Europe
|
|
|
8,582,924
|
|
|
|
9,872,648
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,140,561
|
|
|
$
|
23,678,206
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Acquisition
of Assets from Mentor and Coloplast
|
On June 2, 2006, the Company, through its subsidiary
Rochester Medical Limited, completed the acquisition of certain
assets of Coloplast A/S (Coloplast) and Mentor
Medical Limited (MML), pursuant to an agreement
55
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
dated May 17, 2006. The Company paid a cash purchase price
of $9.3 million at closing, and agreed to pay an additional
$5.3 million in equal installments over five years. As
provided in the agreement, the Company acquired certain assets,
including certain trademarks, related to sales of MECs in the
United Kingdom. The assets also include MMLs UK Dispensing
Appliance Contractor License and its sales offices and warehouse
facility in Lancing, England. The Company also agreed to
purchase approximately $160,000 of inventory to be sold in the
United Kingdom.
On June 2, 2006, the Company completed the acquisition of
certain assets owned and used by Mentor Corporation
(Mentor) in its silicone MEC business. Pursuant to
the Asset Purchase Agreement, the Company paid $750,000 for
certain equipment and other tangible assets in Mentors
facility in Anoka, Minnesota, and purchased certain inventory,
work-in-progress
and raw materials for the production of silicone MECs for
approximately $879,000; the Company also leased the Anoka
facility from Mentor for a period of six months following the
closing of the transactions. Upon the closing of the
transactions, the existing Supply Agreement, Foley Catheter
Sales and Distribution Agreement and MEC License and Sales
Distribution Agreement (including, but not limited to the Patent
License and Technology License thereunder) between the Company
and Mentor were terminated.
Coloplast and the Company also entered into a separately
negotiated Private Label Distribution Agreement under which the
Company supplies silicone MECs to Coloplast, which will be sold
under Coloplasts brands worldwide excepting the United
Kingdom. The Private Label Distribution Agreement specifies
annual minimum purchases of silicone MECs by Coloplast.
Coloplast also supplies the Company with its requirements of
latex MECs which the Company sells in the United Kingdom under
its newly acquired
Freedom
®
and Freedom
Plus
®
brands.
The Company accounted for the acquisition under the purchase
method of accounting in accordance with SFAS 141.
Accordingly, the purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed based on
the Companys estimates of fair value at the acquisition
date. The Company engaged an independent valuation firm to
assist in the determination of the fair values. The initial
purchase price exceeded the amounts allocated to the tangible
and intangible assets by approximately $5.5 million and
this excess was classified as goodwill.
The following tables provide further information on the
acquisition and allocations:
Purchase
Price Summary
|
|
|
|
|
Category
|
|
Amount
|
|
|
Initial cash payment
|
|
$
|
9,269,000
|
|
Cash payment for inventories
|
|
|
936,000
|
|
Direct acquisition costs
|
|
|
653,000
|
|
Total cash paid
|
|
|
10,858,000
|
|
Seller financed debt
|
|
|
5,340,000
|
|
|
|
|
|
|
Total Consideration
|
|
$
|
16,198,000
|
|
|
|
|
|
|
Value
Assigned to Assets & Liabilities
|
|
|
|
|
Category
|
|
Amount
|
|
|
Current assets
|
|
$
|
936,000
|
|
Property & equipment
|
|
|
1,287,000
|
|
Identifiable intangibles
|
|
|
8,488,000
|
|
Goodwill
|
|
|
5,487,000
|
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
16,198,000
|
|
|
|
|
|
|
56
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pro forma unaudited results of operations for the years
ended September 30, 2006, assuming consummation of the
purchase of the assets from Coloplast and MML as of
October 1, 2004, are as follows:
|
|
|
|
|
|
|
2006
|
|
|
Net Sales
|
|
$
|
26,634,721
|
|
Net Income
|
|
|
3,295,002
|
|
Per share data:
|
|
|
|
|
Basic earnings
|
|
$
|
0.30
|
|
Diluted earnings
|
|
$
|
0.28
|
|
The pro forma unaudited results do not purport to be indicative
of the results which would actually have been obtained had the
acquisition of assets been completed as of the beginning of the
earliest period presented.
|
|
13.
|
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 has imputed interest on the
note at 6.90% which reflected the Companys cost of
borrowing at the date of the purchase agreement and the discount
is being amortized over the life of the note. The liability
balance was $2,796,929 and $4,010,029 at September 30, 2008
and 2007.
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 4.77%, 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 September 30, 2008 and 2007, the
Company had no borrowings under the revolving line of credit and
the term loan had an outstanding balance of $2,949,548 and
$3,905,681 respectively. 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 September 30, 2008, the Company was in
compliance with the loan covenants.
Aggregate maturities of long-term debt are as follows for the
years ending September 30:
|
|
|
|
|
2009
|
|
$
|
1,940,292
|
|
2010
|
|
|
2,052,383
|
|
2011
|
|
|
1,753,802
|
|
|
|
|
|
|
Total
|
|
$
|
5,746,477
|
|
|
|
|
|
|
57
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Quarterly
Results (Unaudited)
|
Summary data relating to the results of operations for each
quarter of the years ended September 30, 2008 and 2007
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
Fiscal year 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,223
|
|
|
$
|
9,215
|
|
|
$
|
8,241
|
|
|
$
|
9,512
|
|
Gross profit
|
|
|
4,141
|
|
|
|
4,272
|
|
|
|
3,672
|
|
|
|
4,622
|
|
Income (loss) from operations
|
|
|
72
|
|
|
|
(429
|
)
|
|
|
(458
|
)
|
|
|
322
|
|
Net income (loss) before taxes
|
|
|
376
|
|
|
|
(202
|
)
|
|
|
(342
|
)
|
|
|
348
|
|
Net income (loss) per common share basic
|
|
$
|
.02
|
|
|
$
|
(.01
|
)
|
|
$
|
.03
|
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
.02
|
|
|
$
|
(.01
|
)
|
|
$
|
.02
|
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,512
|
|
|
$
|
8,347
|
|
|
$
|
8,367
|
|
|
$
|
8,437
|
|
Gross profit
|
|
|
3,736
|
|
|
|
4,427
|
|
|
|
4,449
|
|
|
|
4,392
|
|
Income from operations
|
|
|
290
|
|
|
|
957
|
|
|
|
927
|
|
|
|
693
|
|
Net income before taxes
|
|
|
38,810
|
|
|
|
1,243
|
|
|
|
1,231
|
|
|
|
1,213
|
|
Net income per common share basic
|
|
$
|
2.83
|
|
|
$
|
.09
|
|
|
$
|
.07
|
|
|
$
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$
|
2.59
|
|
|
$
|
.08
|
|
|
$
|
.06
|
|
|
$
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
On March 11, 2008, the Audit Committee of the Board of
Directors of Rochester Medical Corporation, after a review of
proposals for audit services from several public accountants,
decided to engage Grant Thornton LLP as our independent
registered public accounting firm for the fiscal year commencing
October 1, 2007 and ending September 30, 2008.
McGladrey & Pullen LLP (McGladrey &
Pullen), the current independent registered public
accounting firm, was dismissed by the Audit Committee as of
March 11, 2008.
In connection with the audits of the two fiscal years ended
September 30, 2007, and the subsequent interim period
through March 11, 2008, there were no disagreements between
us and McGladrey & Pullen on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of McGladrey & Pullen,
would have caused McGladrey & Pullen to make reference
in connection with their opinion to the subject matter of the
disagreement.
There were no reportable events (as defined in
Regulation S-K
Item 304(a)(1)(v)) during our two most recent fiscal years
ended September 30, 2007, or the subsequent interim period
through March 11, 2008.
The audit reports of McGladrey & Pullen on our
consolidated financial statements as of and for the years ended
September 30, 2007 and September 30, 2006 did not
contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or
accounting principles.
A letter from McGladrey & Pullen LLP is included as
Exhibit 16 to this
Form 10-K.
On March 13, 2008, the Audit Committee engaged Grant
Thornton as our new independent registered public accounting
firm. During our two most recent fiscal years and the subsequent
interim period through February 29, 2008, we did not
consult with Grant Thornton LLP regarding any of the matters set
forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
|
|
ITEM 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures.
Under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated 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) as of the
end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures are
adequately designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in applicable rules and forms.
Managements Annual Report on Internal Control Over
Financial Reporting.
Managements report on
our internal control over financial reporting is contained in
Item 7 above. The report of Grant Thornton LLP on our
internal control over financial reporting is contained in
Item 8 above.
Changes in Internal Control Over Financial
Reporting.
During our fourth fiscal quarter,
there was no significant change made in our internal control
over financial reporting (as defined in
Rule 13(a) 15(f) under the Exchange Act) that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
Other
Information
|
None.
59
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information with respect to the Board of Directors contained
under the heading Election of Directors, the
information contained under the heading Section 16(a)
Beneficial Ownership Reporting Compliance and the
information contained under the heading Corporate
Governance Board Meetings and Committees
Audit Committee in the Proxy Statement for Annual Meeting
of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended September 30, 2008, is incorporated herein by
reference. Information with respect to our executive officers is
provided in Part I, Item 1.
We have adopted a code of ethics in compliance with applicable
rules of the Securities and Exchange Commission that applies to
all of our employees, including our principal executive officer,
our principal financial officer and our principal accounting
officer or controller, or persons performing similar functions.
We have posted a copy of the code of ethics on our website at
www.rocm.com. We intend to disclose any amendments to, or
waivers from, any provision of the code of ethics by posting
such information on such website.
|
|
ITEM 11.
|
Executive
Compensation
|
The information contained under the heading Executive
Compensation in the Proxy Statement for Annual Meeting of
Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended September 30, 2008, (except for the information set
forth under the subcaption Compensation Committee Report
on Executive Compensation) is incorporated herein by
reference.
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
(a) Equity Compensation Plans. The following table provides
information related to our equity compensation plans as of
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Securities
|
|
|
|
|
|
Under Equity
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding Securities
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Reflected in Column
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
(a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
1,697,134
|
|
|
$
|
6.35
|
|
|
|
296,500
|
|
Equity compensation plans not approved by security holders(2)
|
|
|
12,000
|
|
|
$
|
5.06
|
|
|
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,709,134
|
|
|
$
|
6.34
|
|
|
|
384,500
|
|
|
|
|
(1)
|
|
Includes shares issuable under our 1991 Stock Option Plan and
2001 Stock Incentive Plan.
|
|
(2)
|
|
Includes shares issuable to persons other than our full-time
officers or employees pursuant to the exercise of stock options
granted under our 1995 Non-Statutory Stock Option Plan that do
not qualify as incentive stock options within the
meaning of Section 422 of the Code.
|
(b) Security Ownership. The information contained under the
heading Security Ownership of Certain Beneficial Owners
and Management in the Proxy Statement for Annual Meeting
of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended September 30, 2008, is incorporated herein by
reference.
60
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information contained under the heading Certain
Relationships and Related Transactions in the Proxy
Statement for Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission within 120 days of
the close of the fiscal year ended September 30, 2008, is
incorporated herein by reference.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The information contained under the heading Audit
Committee Report and Payment of Fees to Auditors in the
Proxy Statement for Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days
of the close of the fiscal year ended September 30, 2008,
is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) The following financial statements are filed herewith in
Item 8.
(i) Consolidated Balance Sheets as of September 30,
2008 and 2007.
(ii) Consolidated Statements of Operations for the years
ended September 30, 2008, 2007 and 2006.
(iii) Consolidated Statement of Shareholders Equity
and Comprehensive Income (Loss) for the years ended
September 30, 2008, 2007 and 2006.
(iv) Consolidated Statements of Cash Flows for the years
ended September 30, 2008, 2007 and 2006.
(v) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
Financial statement schedules other than those listed have been
omitted since they are not required or are not applicable or the
required information is shown in the financial statements or
related notes.
(b) Exhibits
The following exhibits are submitted herewith:
|
|
|
|
|
|
3
|
.1
|
|
Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 of
Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 2006).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Company, as amended.
(Incorporated by reference to Exhibit 3.2 of
Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 2007).
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate. (Incorporated by reference
to Exhibit 4.4 of Registrants Annual Report on
Form 10-KSB
for fiscal year ended September 30, 1995).
|
|
10
|
.1
|
|
The Companys 1991 Stock Option Plan as amended
(Incorporated by reference to Exhibit 4.5 of
Registrants Registration Statement on
Form S-8,
Registration Number
333-10261).
|
|
10
|
.2
|
|
Amendment to the Companys 1991 Stock Option Plan as
amended (Incorporated by reference to Exhibit 4.3 of
Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 1998).
|
|
10
|
.3
|
|
Employment Agreement, dated August 31, 1990 between the
Company and Anthony J. Conway. (Incorporated by reference to
Exhibit 10.13 of Registrants Registration Statement
on
Form S-18,
Registration Number
33-36362-C).
|
|
10
|
.4
|
|
Employment Agreement, dated August 31, 1990 between the
Company and Philip J. Conway. (Incorporated by reference to
Exhibit 10.14 of Registrants Registration Statement
on
Form S-18,
Registration Number
33-36362-C).
|
|
10
|
.5
|
|
Change of Control Agreement dated December 4, 1998, between
the Company and Philip J. Conway (Incorporated by reference to
Exhibit 10.3 of Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 1998).
|
61
|
|
|
|
|
|
10
|
.6
|
|
Change of Control Agreement dated November 21, 2000,
between the Company and Anthony J. Conway. (Incorporated by
reference to Exhibit 10.6 of the Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2000).
|
|
10
|
.7
|
|
Change of Control Agreement dated November 21, 2000,
between the Company and Martyn R. Sholtis. (Incorporated by
reference to Exhibit 10.9 of the Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2000).
|
|
10
|
.8
|
|
Change of Control Agreement dated November 21, 2000,
between the Company and David A. Jonas. (Incorporated by
reference to Exhibit 10.10 of the Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2000).
|
|
10
|
.9
|
|
The Companys 2001 Stock Incentive Plan. (Incorporated by
reference to Exhibit 10.1 of Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2006).
|
|
10
|
.10
|
|
Form of Incentive Stock Option Agreement. (Incorporated by
reference to Exhibit 10.10 of Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2006).
|
|
10
|
.11
|
|
Form of Non-Incentive Stock Option Agreement. (Incorporated by
reference to Exhibit 10.11 of Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2006).
|
|
10
|
.12
|
|
Form of Restricted Stock Award (Incorporated by reference to
Exhibit 10.2 of the Registrants Current Report on
Form 8-K
filed on November 21, 2006).
|
|
10
|
.13
|
|
The Companys Fiscal 2007 Management Incentive Plan.
(Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on
Form 8-K
filed on November 21, 2006).
|
|
10
|
.14
|
|
The Companys Fiscal 2008 Management Incentive Plan.
(Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on
Form 8-K
filed on November 20, 2007).
|
|
10
|
.15
|
|
Agreement, dated May 17, 2006, between Coloplast A/S,
Coloplast Limited, Mentor Medical Limited, the Company and
Rochester Medical Limited (Incorporated by reference to
Exhibit 10.1 of the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
|
10
|
.16
|
|
Asset Purchase Agreement, dated May 27, 2006, by and
between Mentor Corporation and the Company (Incorporated by
reference to Exhibit 10.4 of the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
|
10
|
.17
|
|
Term Loan Agreement, dated May 26, 2006, between the
Company and U.S. Bank N.A. (Incorporated by reference to
Exhibit 10.5 of the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
|
10
|
.18
|
|
Revolving Credit Agreement, dated May 26, 2006, between the
Company and U.S. Bank N.A. (Incorporated by reference to
Exhibit 10.6 of the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
|
10
|
.19
|
|
First Amendment to Term Loan Agreement and Addendum and
Revolving Credit Agreement, dated May 26, 2006
(Incorporated by reference to Exhibit 10.7 of the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
|
16
|
|
|
Letter from McGladrey & Pullen LLP, (Incorporated by
reference to Exhibit 16.1 of the Registrants Current
Report on
Form 8-K
filed on March 14, 2008)
|
|
21
|
*
|
|
Subsidiaries of the Company
|
|
23
|
.1*
|
|
Consent of Grant Thornton LLP.
|
|
23
|
.2*
|
|
Consent of McGladrey & Pullen LLP.
|
|
24
|
*
|
|
Power of Attorney.
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
|
|
32
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(b).
|
|
32
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(b).
|
|
|
|
*
|
|
Filed herewith.
|
|
|
|
Management contract or compensatory plan or arrangement required
to be filed as an exhibit to
Form 10-K
pursuant to Item 15(c) of
Form 10-K.
|
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
|
|
By:
|
/s/ Anthony
J. Conway
|
Anthony J. Conway
Chairman of the Board, President and,
Chief Executive Officer
Dated: December 12, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Anthony
J. Conway
Anthony
J. Conway
|
|
Chairman of the Board, President and Chief Executive Officer
(principal executive officer)
|
|
|
|
/s/ David
A. Jonas
David
A. Jonas
|
|
Director, Chief Financial Officer, Treasurer and Secretary
(principal financial and accounting officer)
|
|
|
|
*
Darnell
L. Boehm
|
|
Director
|
|
|
|
*
Roger
W. Schnobrich
|
|
Director
|
|
|
|
*
Benson
Smith
|
|
Director
|
|
|
|
|
|
*By
|
|
/s/ David
A. Jonas
David
A. Jonas
Attorney-in-Fact
|
|
|
Dated: December 12, 2008
63
ROCHESTER
MEDICAL CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COL. A
|
|
COL. B
|
|
|
COL. C
|
|
|
COL. D
|
|
|
COL. E
|
|
|
|
|
|
|
|
|
Additions
|
|
|
(1), (2)
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other Accounts
|
|
|
Deductions
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Describe
|
|
|
Describe
|
|
|
Period
|
|
|
Year ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
57,913
|
|
|
$
|
10,807
|
|
|
|
|
|
|
$
|
3,518
|
|
|
$
|
65,202
|
|
Allowance for inventory obsolescence
|
|
|
117,027
|
|
|
|
104,196
|
|
|
|
|
|
|
|
99,272
|
|
|
|
121,951
|
|
Year ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
55,540
|
|
|
$
|
7,080
|
|
|
|
|
|
|
$
|
4,707
|
|
|
$
|
57,913
|
|
Allowance for inventory obsolescence
|
|
|
82,018
|
|
|
|
131,686
|
|
|
|
|
|
|
|
96,677
|
|
|
|
117,027
|
|
Year ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
93,549
|
|
|
$
|
6,128
|
|
|
|
|
|
|
$
|
44,137
|
|
|
$
|
55,540
|
|
Allowance for inventory obsolescence
|
|
|
100,000
|
|
|
|
85,993
|
|
|
|
|
|
|
|
103,976
|
|
|
|
82,018
|
|
|
|
|
(1)
|
|
Uncollectible accounts written off net of recoveries
|
|
(2)
|
|
Obsolete inventory written off against the allowance
|
64
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
23
|
.2
|
|
Consent of McGladrey & Pullen LLP
|
|
24
|
|
|
Power of Attorney
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(b)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(b)
|
65
Rochester Medical Corp. (MM) (NASDAQ:ROCM)
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Rochester Medical Corp. (MM) (NASDAQ:ROCM)
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