UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
to
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Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
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MINNESOTA
State or other jurisdiction of
incorporation or organization)
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41-1613227
(I.R.S. Employer
Identification No.)
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ONE ROCHESTER MEDICAL DRIVE,
STEWARTVILLE, MN
(Address of principal executive offices)
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55976
(Zip Code)
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(507) 533-9600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
12,104,520 Common Shares as of February 6, 2009.
Table of Contents
ROCHESTER MEDICAL CORPORATION
Report on Form 10-Q
for quarter ended
December 31, 2008
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31,
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September 30,
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2008
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2008
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Assets:
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Current assets:
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Cash and cash equivalents
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$
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10,247,030
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$
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8,508,000
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Marketable securities
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25,486,714
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28,493,648
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Accounts receivable, net
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4,663,966
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6,009,023
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Inventories, net
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8,504,445
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8,745,873
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Prepaid expenses and other assets
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1,083,509
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1,110,291
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Deferred income tax asset
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1,712,785
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1,143,931
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Total current assets
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51,698,449
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54,010,766
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Property, plant and equipment:
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Land and buildings
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7,724,468
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7,696,076
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Equipment and fixtures
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16,279,080
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16,086,643
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24,003,548
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23,782,719
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Less accumulated depreciation
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(14,175,917
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)
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(13,899,390
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)
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Total property and equipment
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9,827,631
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9,883,329
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Deferred income tax asset
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864,982
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831,299
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Goodwill
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4,244,848
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5,169,661
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Finite life intangibles, net
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6,337,719
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6,860,213
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Patents, net
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232,313
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227,358
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Total assets
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$
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73,205,942
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$
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76,982,626
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Liabilities and Shareholders Equity:
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Current liabilities:
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Accounts payable
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$
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1,476,055
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$
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2,127,470
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Accrued compensation
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485,980
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915,661
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Accrued expenses
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529,799
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254,993
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Current maturities of long-term debt
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1,953,004
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1,940,292
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Total current liabilities
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4,444,838
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5,238,416
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Long-term liabilities:
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Other long term liabilities
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239,496
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239,496
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Long-term debt, less current maturities
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3,531,684
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3,806,185
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Total long-term liabilities
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3,771,180
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4,045,681
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Shareholders equity:
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Common stock, no par value:
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Authorized 40,000,000
Issued and outstanding shares (12,044,270 December 31, 2008;
11,936,586 September 30, 2008)
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55,218,588
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54,223,669
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Retained earnings
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14,777,166
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14,723,541
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Accumulated other comprehensive loss
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(5,005,830
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(1,248,681
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Total shareholders equity
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64,989,924
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67,698,529
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Total liabilities and shareholders equity
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$
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73,205,942
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$
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76,982,626
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Note The Balance Sheet at September 30, 2008 was derived from the audited financial statements at that date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended
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December 31,
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2008
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2007
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Net sales
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$
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8,436,084
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$
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8,223,288
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Cost of sales
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4,511,171
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4,082,485
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Gross profit
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3,924,913
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4,140,803
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Operating expenses:
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Marketing and selling
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2,566,262
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2,224,365
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Research and development
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317,660
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228,943
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General and administrative
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1,365,757
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1,615,118
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Total operating expenses
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4,249,679
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4,068,426
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Income (loss) from operations
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(324,766
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72,377
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Other income (expense):
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Interest income
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167,272
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453,340
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Interest expense
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(83,774
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(149,489
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Other income
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200,442
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Net income (loss) before income taxes
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(40,826
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376,228
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Income tax expense (benefit)
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(94,451
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104,674
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Net income
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$
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53,625
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$
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271,554
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Net income per share basic
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$
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0.00
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$
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0.02
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Net income per share diluted
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$
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0.00
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$
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0.02
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Weighted average number of common shares outstanding
basic
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11,980,875
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11,730,234
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Weighted average number of common shares outstanding
diluted
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12,697,645
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12,587,229
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended
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December 31,
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2008
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2007
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Operating activities:
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Net income
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$
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53,625
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$
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271,554
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Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
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Depreciation
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306,516
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300,534
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Amortization
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172,936
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178,797
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Stock based compensation
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264,532
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250,995
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Deferred income tax
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(353,960
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(2,223
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Changes in operating assets and liabilities:
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Accounts receivable
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925,997
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564,248
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Inventories
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(184,752
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(930,367
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Other current assets
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(17,764
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(309,582
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Accounts payable
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(572,870
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1,163,662
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Income tax payable
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25,085
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(535,103
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Other current liabilities
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(149,936
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(405,349
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Net cash (used in) provided by operating activities
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469,409
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547,166
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Investing activities:
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Purchase of property, plant and equipment
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(498,463
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(345,322
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Patents
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(19,414
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(11,556
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Purchases of marketable securities
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(23,630,806
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(10,000,000
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Sales and maturities of marketable securities
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25,805,997
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11,671,548
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Net cash provided by investing activities
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1,657,314
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1,314,670
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Financing activities:
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Payments on long-term debt
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(261,789
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)
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(224,866
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Excess tax benefit from exercises of stock options
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380,717
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Proceeds from exercises of stock options
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349,670
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650,646
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Net cash provided by financing activities
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468,598
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425,780
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Effect of exchange rate on cash
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(856,291
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(222,906
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Increase in cash and cash equivalents
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1,739,030
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2,064,710
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Cash and cash equivalents at beginning of period
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8,508,000
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6,671,356
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Cash and cash equivalents at end of period
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$
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10,247,030
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$
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8,736,066
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Supplemental Cash Flow Information
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Interest paid
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$
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22,461
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$
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72,096
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Taxes paid
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$
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642,000
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ROCHESTER MEDICAL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2008
Note A Basis of Presentation
The accompanying unaudited condensed consolidated financial statements which have been derived
from the Companys audited financial statements as of September 30, 2008 and the unaudited December
31, 2008 and 2007 condensed consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission which include the instructions to
Form 10-Q. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. These financial
statements should be read in conjunction with the financial statements and related notes included
in the Companys Form 10-K for the year ended September 30, 2008. In the opinion of management,
the unaudited condensed consolidated financial statements contain all recurring adjustments
considered necessary for a fair presentation of the financial position and results of operations
and cash flows for the interim periods presented. Operating results for the three-month period
ended December 31, 2008 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2009.
Note B Net Income Per Share
Net income per share is calculated in accordance with Financial Accounting Standards Board
(FASB) Statement No. 128,
Earnings Per Share.
The Companys basic net income per share is
computed by dividing net income by the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed by dividing 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. A reconciliation of the numerator and denominator in the basic and diluted net income
per share calculation is as follows:
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Three Months Ended
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December 31,
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December 31,
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2008
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2007
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Numerator:
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Net income
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$
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53,625
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$
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271,554
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Denominator:
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Denominator for basic net income per share-
weighted average shares outstanding
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11,980,875
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11,730,234
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Effect of dilutive stock options
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716,770
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856,995
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Denominator for diluted net income per share-
weighted average shares outstanding
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12,697,645
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12,587,229
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Basic net income per share
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$
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0.00
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$
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0.02
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Diluted net income per share
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$
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0.00
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$
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0.02
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Employee stock options for 5,000 and 30,000 shares have been excluded from the diluted net
income per share calculation for the first quarter of fiscal years 2009 and 2008, respectively,
because their exercise prices were greater than the average market price of the Companys common
stock and their affect would have been antidilutive.
Note C Stock Based Compensation
The Company has three stock option plans under which options have been granted to employees,
including officers and directors of the Company, at a price not less than the fair market value of
the Companys common stock at
4
the date the options were granted. Options under the 1991 Stock Option Plan are no longer granted
because the 10-year granting period has expired. The granting period for the 2001 Stock Incentive
Plan expires in 2011. Under the 1995 Non-Statutory Stock Option Plan, options also may be granted
to certain non-employees at a price not less than the fair market value of the Companys common
stock at the date the options are granted. Options generally expire ten years from the date of
grant or at an earlier date as determined by the committee of the Board of Directors of the Company
that administers the plans. Options granted under the 1991, 1995 and 2001 Plans generally vest
over four years from the date of grant.
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised 2004),
Share-Based Payment
(SFAS 123(R)) which requires all
share-based payments, including grants of stock options, to be recognized in the statement of
operations as an operating expense based on their fair values over the requisite service period.
The Company elected to utilize the modified-prospective transition method as permitted by SFAS
123(R). Stock-based compensation expense for the quarters ended December 31, 2008 and 2007
includes: (a) compensation expense for all stock-based compensation awards granted prior to, but
not yet vested as of, October 1, 2005, based on grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation;
and (b)
compensation expense for all stock-based compensation awards granted subsequent to October 1, 2005,
based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The
Company recorded approximately $265,000 and $251,000 of related stock-based compensation expense
for the quarter ended December 31, 2008 and 2007, respectively.
As of December 31, 2008, $1,095,979 of unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of approximately fourteen
months.
Stock Options
In the first quarter of fiscal 2009 5,000shares were granted. There were no grants in the
first quarter of fiscal 2008. 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 first quarter
of fiscal 2009.
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2009
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Dividend yield
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NA
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Expected volatility
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50
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%
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Risk-free interest rate
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2.94
|
|
Expected holding period (in years)
|
|
|
9.44
|
|
Weighted-average grant-date fair value
|
|
$
|
7.63
|
|
The risk-free interest rate is based on a treasury instrument whose term is consistent with
the expected life of our stock options. The expected volatility, holding period, and forfeitures
of options are based on historical experience.
The following table represents stock option activity for the three months ended December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Remaining
|
|
|
Shares
|
|
Price
|
|
Contract Life
|
Outstanding options at beginning of period
|
|
|
1,709,134
|
|
|
$
|
6.34
|
|
|
5.70 Yrs
|
Granted
|
|
|
5,000
|
|
|
|
12.29
|
|
|
|
|
|
Exercised
|
|
|
(107,684
|
)
|
|
|
3.03
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at end of period
|
|
|
1,606,450
|
|
|
$
|
6.58
|
|
|
5.66 Yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable at end of period
|
|
|
1,199,700
|
|
|
$
|
5.82
|
|
|
4.83 Yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
Shares available for future stock option grants to employees and directors under existing
plans were 379,500 at December 31, 2008. At December 31, 2008, the aggregate intrinsic value of
options outstanding was $14,148,557, and the aggregate intrinsic value of options exercisable was
$11,474,532. Total intrinsic value of options exercised was $1,069,581 for the three months ended
December 31, 2008.
Note D Marketable Securities
As of December 31, 2008, the Company had $25.5 million invested in marketable securities. The
marketable securities primarily consist of $23.5 million invested in U.S. treasury bills and $2
million invested in mutual funds. The Company is currently reporting an unrealized loss of
$1,238,916 related to the mutual fund as a result of the recent fluctuations in the credit markets
impacting the current market value. The Company considers the current impairment in value to be
temporary as it has the intent and ability to hold these investments.
Note E Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
Raw materials
|
|
$
|
2,335,287
|
|
|
$
|
2,274,199
|
|
Work-in-process
|
|
|
3,047,986
|
|
|
|
3,375,796
|
|
Finished goods
|
|
|
3,241,870
|
|
|
|
3,217,830
|
|
Reserve for inventory obsolescence
|
|
|
(120,698
|
)
|
|
|
(121,952
|
)
|
|
|
|
|
|
|
|
|
|
$
|
8,504,445
|
|
|
$
|
8,745,873
|
|
|
|
|
|
|
|
|
Note F Income Taxes
On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the
requirements for a valuation allowance. No valuation allowance has been recorded against the net
deferred tax assets in 2009 or 2008 because there is sufficient future projected income as well as
excess income from 2007 and 2008 to sustain that the deferred tax assets will more likely than not
be able to be utilized. For the quarter ended December 31, 2008, the Company had an effective
income tax rate of (232%). The higher than expected tax benefit for the current quarter is due to
reflecting the impact of recording the full benefit of the R&D credit for the calendar year 2008,
as the extension was not effective until the quarter ended December 31, 2008. In future periods,
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 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 December 31, 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 from time to time in the U.S. Federal
jurisdiction, as well as in the United Kingdom and various state jurisdictions. The Internal
Revenue Service is examining Companys income tax return for the fiscal year ended September 30,
2007. It is possible that this examination may be resolved within the next twelve months. Due to
the potential for resolution of the Federal examination and the expiration of various statutes of
limitations, it is reasonably possible that the Companys gross unrecognized tax benefit may
change.
6
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.
Note G Comprehensive Loss
Comprehensive loss includes net income and all other nonowner changes in shareholders equity
during a period. The comprehensive loss for the three months ended December 31, 2008 and 2007
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
53,625
|
|
|
$
|
271,554
|
|
Foreign currency adjustment
|
|
|
(3,176,387
|
)
|
|
|
(239,487
|
)
|
Unrealized loss on securities held
|
|
|
(580,099
|
)
|
|
|
(116,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(3,702,861
|
)
|
|
$
|
(84,706
|
)
|
|
|
|
|
|
|
|
Note H Line of Credit and Long-Term Debt
In June 2006, in conjunction with an asset purchase agreement with Coloplast A/S, the Company
entered into an unsecured loan note deed with Coloplast with an outstanding principal amount of
$5,340,000. The promissory note is non-interest bearing and payable in five equal annual
installments of $1,068,000 payable annually on June 2. The Company 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 at December 31, 2008.
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 December 31, 2008 and September 30, 2008, the Company had no borrowings
under the revolving line of credit and the term loan had an outstanding balance of $2,687,759 and
$2,949,548, 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 December 31, 2008, the
Company was in compliance with the loan covenants.
Note I Litigation Settlements
The Company was a plaintiff in a lawsuit titled Rochester Medical Corporation vs. C.R. Bard,
Inc.; Tyco International (US), Inc.; Tyco Health Care Group, L.P.; Novation LLC; VHA, Inc.;
Premier, Inc.; and Premier Purchasing Partners, in the United States District Court for the Eastern
District of Texas, Civil Action No. 504-CV-060. This suit alleges anti-competitive conduct against
the defendants in the markets for standard and anti-infection Foley catheters as well as urethral
catheters, and seeks an unspecified amount of damages and injunctive and other relief.
On November 20, 2006, the Company announced that it had reached a settlement with Premier,
Inc. and Premier Purchasing Partners, L.P. with respect to the lawsuit. Under the settlement
agreement, Premier paid the Company $8,825,000 (net $5,155,000 after payment of attorneys fees and
expenses) and was dismissed from the lawsuit.
7
On December 14, 2006, the Company announced it had reached a settlement with C.R. Bard, Inc.,
whereby C.R. Bard, Inc. paid the Company $49,000,000 (net $33,450,000 after payment of attorneys
fees and expenses) and was dismissed from the lawsuit.
On August 6, 2007, the Company announced that it had reached a settlement with Novation LLC
with respect to the lawsuit. Under the settlement agreement, Novation awarded the Company an
Innovative Technology Contract for its urological catheter products and related accessories,
including the Companys 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.
On January 15, 2009, the Company announced that it had reached a settlement with Covidien
Ltd., Tyco International (US), Inc. and Tyco Health Care Group, L.P., whereby Covidien Ltd. paid
the Company $3,500,000 (net $1,000,000 after payment of attorneys fees and expenses) and was
dismissed from the lawsuit. No further action is expected with respect to this lawsuit. The
impact of this settlement will be reflected in the Companys second quarter financial results.
Note J Recently Issued Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007),
Business Combinations
(SFAS No. 141(R)). SFAS No. 141(R), among other things, establishes
principles and requirements for how the acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008, with early adoption prohibited. The Company is required
to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or
after January 1, 2009. This standard will change the Companys accounting treatment for business
combinations on a prospective basis.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51
(SFAS
No. 160). SFAS No. 160 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 No. 160 is effective for fiscal years beginning
on or after December 15, 2008, with early adoption prohibited. The Company does not expect the
adoption of SFAS No. 160 will have a material impact on its financial position or results of
operations.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,
Effective Date of FASB
Statement No. 157
, (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 does not expect the adoption of FSP FAS 157-2 will have a
material impact on its financial position or results of operations.
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 April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP FAS 142-3), which amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
FASB Statement No. 142 Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for
fiscal years beginning on or after December 15, 2008, which for the
Company is the first quarter of fiscal year 2010. The Company is currently evaluating the
impact the adoption of FSP FAS 142-3 will have on its consolidated financial statements.
8
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.
|
|
|
Item 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
We develop, manufacture and market a broad line of innovative, technologically enhanced
PVC-free and latex-free urinary continence and urine drainage care products for the extended care
and acute care markets. Our products are comprised of our base products, which include our male
external catheters and standard silicone Foley catheters, and our advanced products, which include
our intermittent catheters, our anti-infection Foley catheters and our FemSoft Insert. We market
our products under our Rochester Medical brand, and also supply our products to several large
medical product companies for sale under brands owned by these companies, which are referred to as
private label sales. The primary markets for our products are distributors, extended care
facilities and individual hospitals and healthcare institutions. We sell our products both in the
domestic market and internationally. For fiscal 2009, we intend to increase investment in our
sales and marketing programs, primarily through cash generated from current operations, to support
branded sales growth in the United States and Europe.
The following discussion pertains to our results of operations and financial position for the
quarters ended December 31, 2008 and 2007. Results of the periods are not necessarily indicative
of the results to be expected for the complete year. For the first quarter ended December 31,
2008, we reported net income of $0.00 per diluted share, compared to $0.02 per diluted share for
the same period last year. Loss from operations was $325,000 for the quarter ended December 31,
2008 compared to income from operations of $72,000 for the quarter ended December 31, 2007, while
net income was $54,000 compared to $272,000 for the same period last year.
Results of Operations
The following table sets forth, for the fiscal periods indicated, certain items from our
statements of operations expressed as a percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net Sales
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of Sales
|
|
|
53
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
47
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Marketing and Selling
|
|
|
30
|
%
|
|
|
27
|
%
|
Research and Development
|
|
|
4
|
%
|
|
|
3
|
%
|
General and Administrative
|
|
|
16
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
Income (loss) from Operations
|
|
|
(3)
|
%
|
|
|
0
|
%
|
Interest Income
|
|
|
2
|
%
|
|
|
7
|
%
|
Interest (Expense)
|
|
|
(1)
|
%
|
|
|
(3)
|
%
|
Other Income
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
Net Income before taxes
|
|
|
0
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(1)
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
Net Income after taxes
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
9
The following table sets forth, for the periods indicated, net sales information by product
category (base products and advanced products), marketing method (private label and
Rochester
Medical
®
branded sales) and distribution channel (domestic and international markets) (all dollar
amounts below are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
1,527
|
|
|
$
|
1,101
|
|
|
$
|
2,628
|
|
|
$
|
1,328
|
|
|
$
|
936
|
|
|
$
|
2,264
|
|
Advanced products
|
|
|
244
|
|
|
|
|
|
|
|
244
|
|
|
|
164
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
|
1,771
|
|
|
|
1,101
|
|
|
|
2,872
|
|
|
|
1,492
|
|
|
|
936
|
|
|
|
2,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
|
891
|
|
|
|
3,771
|
|
|
|
4,662
|
|
|
|
997
|
|
|
|
4,119
|
|
|
|
5,116
|
|
Advanced products
|
|
|
671
|
|
|
|
231
|
|
|
|
902
|
|
|
|
587
|
|
|
|
92
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
|
1,562
|
|
|
|
4,002
|
|
|
|
5,564
|
|
|
|
1,584
|
|
|
|
4,211
|
|
|
|
5,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
3,333
|
|
|
$
|
5,103
|
|
|
$
|
8,436
|
|
|
$
|
3,076
|
|
|
$
|
5,147
|
|
|
$
|
8,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Periods Ended December 31, 2008 and December 31, 2007
Net Sales.
Net sales for the first quarter of fiscal 2009 increased 3% to $8,436,000 from
$8,223,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted
from an increase in private label sales offset by a decrease in branded sales. Domestic sales of
branded products decreased by 1% for the quarter compared to the same period last year. A decrease
in male external catheter unit sales during the quarter rather than the expected growth was due to
the timing of orders from one of our largest distribution partners, which we expect will return to
normal in the second quarter. Our international branded sales decreased 5% compared to the same
period last year, primarily as a result of the change in exchange rates in the United Kingdom as
the U.S. dollar continued to strengthen versus the British pound. Total branded sales volumes met
managements expectations, and management believes its strategic decision to increase investments
in sales and marketing programs will continue to drive growth in branded sales. Private label
sales increased 18% for the quarter compared to the same period last year.
Gross Margin
. Our gross margin as a percentage of net sales for the first quarter of fiscal
2009 was 47% compared to 50% for the comparable quarter of last fiscal year. The decrease in gross
margin was primarily due to increased raw material costs, increased medical insurance costs and the
change in the exchange rate in the United Kingdom of the British pound to the U.S. dollar.
Marketing and Selling.
Marketing and selling expense primarily includes costs associated with
base salary paid to sales and marketing personnel, sales commissions, and travel and advertising
expense. Marketing and selling expense for the first quarter of fiscal 2009 increased 15% to
$2,566,000 from $2,224,000 for the comparable quarter of last fiscal year. The increase in
marketing and selling expense is primarily due to increased sales and marketing personnel and
related expenses of $127,000 incurred through the expansion of our sales force in both the U.S. and
our U.K. operations, and increased advertising expense of $182,000, as part of our strategic
decision to increase investments in our sales and marketing programs. Marketing and selling
expense as a percentage of net sales for the fiscal quarters ended December 31, 2008 and 2007 were
30% and 27%, respectively.
Research and Development.
Research and development expense primarily includes internal labor
costs, as well as expenses associated with third-party vendors performing validation and
investigative research regarding our products and development activities. Research and development
expense for the first quarter of fiscal 2009 increased to $318,000 from $229,000 for the comparable
quarter of last fiscal year. The increase in research and development expense relates primarily to
increased project costs of $66,000 to develop and enhance new and existing products. Research and
development expense as a percentage of net sales for each of the fiscal quarters ended
December 31, 2008 and 2007 was 4%.
10
General and Administrative.
General and administrative expense primarily includes payroll
expense relating to our management and accounting, information technology and human resources
staff, as well as fees and expenses of outside legal counsel, accounting advisors and auditors.
General and administrative expense for the first quarter of fiscal 2009 decreased 15% to $1,366,000
from $1,615,000 for the comparable quarter of last fiscal year. The decrease in general and
administrative expense is primarily related to a decrease of $155,000 for professional fees, a
decrease in utilities of $35,000 and a decrease in repairs of $20,000. General and administrative
expense as a percentage of net sales for the fiscal quarters ended December 31, 2008 and 2007 were
16% and 20%, respectively.
Interest Income.
Interest income for the first quarter of fiscal 2009 decreased 63% to
$167,000 from $453,000 for the comparable quarter of last fiscal year. The decrease in interest
income reflects significantly lower interest rates on investments and marketable securities.
Interest Expense
. Interest expense for the first quarter of fiscal 2009 decreased to $84,000
from $149,000 for the comparable quarter of last fiscal year. The decrease in interest expense
reflects decreases in debt and a decrease in the interest rate.
Other Income
. Other income for the first quarter of fiscal 2009 was $200,000 compared to zero
for the comparable quarter of last fiscal year. The other income reflects a one time payment from
Coloplast A/S reimbursing us for lost profit per the terms of our June 2006 asset purchase.
Income Taxes
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For the quarter ended December 31, 2008, we had an effective income tax rate of (232%).
The higher than expected tax benefit for the current quarter is due to reflecting the impact of
recording the full benefit of the R&D credit for the calendar year 2008, as the extension was not
effective until the quarter ended December 31, 2008.
In future periods, we expect the effective tax rate on income to be in the range of 34-35%.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $35.7 million at December 31, 2008
compared to $37.0 million at September 30, 2008. The decrease in cash primarily resulted from
cash used for capital expenditures and repayment of long-term debt as well as the impact of the strengthening of the U.S. dollar
compared to the British pound, offset by cash provided by operations and
cash received from the sale of common stock upon exercise of options. As of December 31, 2008, we
had $25.5 million invested in marketable securities. The marketable securities primarily consist
of $23.5 million invested in U.S. treasury bills and $2 million invested in mutual funds. We are
currently reporting an unrealized loss of $1,238,916 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.
During the three-month period ended December 31, 2008, we generated $469,000 of cash in operating
activities compared to $547,000 of cash provided by operations during the comparable period of the
prior fiscal year. Decreased net cash from operating activities in the first quarter of fiscal 2009
primarily reflects lower net income before depreciation and decreases in accounts receivable
and increases in taxes payable, offset by increases in inventory and other current assets and decreases
in accounts payable and other current liabilities. Accounts receivable balances during this period
decreased 15% or $926,000, primarily as a result of increased collections. Inventories increased
2%, or $185,000, primarily as a result of building inventory for the
launch of our new advanced intermittent catheter. Accounts payable decreased 27%, or $573,000 primarily reflecting timing of
expenses related to year end. Other current liabilities decreased 15%, or $150,000, primarily
reflecting payments of annual executive bonuses. Income tax payable increased
$25,000 in the current quarter related to taxes in the United Kingdom. In addition, capital
expenditures during this period were $498,000 compared to $345,000 for the comparable period last
year.
11
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 December 31, 2008, we had no borrowings under the revolving line of credit and the
term loan had an outstanding balance of $2,687,759. 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 December 31, 2008, we were in compliance with the financial
covenants.
We believe that our capital resources on hand at December 31, 2008, together with cash
generated from sales, will be sufficient to satisfy our working capital requirements for the
foreseeable future as described in the Liquidity and Capital Resources portion of Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2008. In the event that additional financing is
needed, we may seek to raise additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be dilutive to
shareholders, and debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish
our rights to certain of our technologies, products or marketing territories. Failure to raise
capital when needed could have a material adverse effect on our business, financial condition and
results of operations. There can be no assurance that such financing, if required, will be
available on terms satisfactory to us, if at all.
Cautionary Statement Regarding Forward Looking Information
Statements other than historical information contained herein constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be identified by the use of terminology such as believe, may,
will, expect, anticipate, predict, intend, designed, estimate, should or continue
or the negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known or unknown risks, uncertainties and other factors which
may cause our actual 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 growing our U.K. 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 our Annual Report on Form 10-K for the year ended September
30, 2008.
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Item 3.
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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 United States dollars and
British pounds. The carrying value of these cash equivalents approximates fair market value. Our
investments in marketable securities are subject to interest rate risk and the value thereof could
be adversely affected due to movements in interest rates. Our revolving line of
credit bears interest at a floating rate based on the quoted one-month LIBOR rate plus 1.60%.
As of December 31, 2008, we had no borrowings under the revolving line of credit.
12
In future periods, we believe a greater portion of our revenues could be denominated in
currencies other than the U.S. dollar, thereby increasing our exposure to exchange rate gains and
losses on non-United States currency transactions. Sales through our subsidiary, Rochester
Medical, Ltd., are denominated in British pounds, and fluctuations in the rate of exchange between
the U.S. dollar and the British pound could adversely affect our financial results.
Otherwise, we do not believe our operations are currently subject to significant market risks
for interest rates, foreign currency exchange rates, commodity prices or other relevant market
price risks of a material nature. We do not currently use derivative financial instruments to
manage interest rate risk or enter into forward exchange contracts to hedge exposure to foreign
currencies, or any other derivative financial instruments for trading or speculative purposes. In
the future, if we believe an increase in our currency exposure merits further review, we may
consider entering into transactions to mitigate that risk.
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Item 4.
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CONTROLS AND PROCEDURES
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Evaluation of Disclosure Controls and Procedures
. As of the end of the period covered by this
report (the Evaluation Date) we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is (i) recorded, processed, summarized and reported within the time periods specified in the
Commissions rules and forms, and (ii) accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
. During our first fiscal quarter, there has been no change in our
internal control over financial reporting (as defined in Rule 13(a)-15(f) under the Exchange Act)
that materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We were the plaintiff in a lawsuit titled Rochester Medical Corporation vs. C.R. Bard, Inc.;
Tyco International (US), Inc.; Tyco Health Care Group, L.P.; Novation LLC; VHA, Inc.; Premier,
Inc.; and Premier Purchasing Partners, in the United States District Court for the Eastern District
of Texas, Civil Action No. 504-CV-060. This suit alleges anti-competitive conduct against the
defendants in the markets for standard and anti-infection Foley catheters as well as urethral
catheters, and seeks an unspecified amount of damages and injunctive and other relief.
On November 20, 2006, we announced that we had reached a settlement with Premier, Inc. and
Premier Purchasing Partners, L.P. with respect to the lawsuit. Under the settlement agreement,
Premier paid us $8,825,000 (net $5,155,000 after payment of attorneys fees and expenses) and was
dismissed from the lawsuit. On December 14, 2006, we announced we had reached a settlement with
C.R. Bard, Inc., whereby C.R. Bard, Inc. paid us $49,000,000 (net $33,450,000 after payment of
attorneys fees and expenses) and was dismissed from the lawsuit.
On August 6, 2007, we announced that we had reached a settlement with Novation LLC with
respect to the lawsuit. Under the settlement agreement, Novation awarded us an Innovative
Technology Contract for our urological catheter products and related accessories, including our
advanced Infection Control catheters, and was dismissed from the lawsuit. The Innovation
Technology Contract has a three-year tem from the effective date of September 1, 2007.
Subsequent to the end of the quarter, on January 15, 2009, we announced that we had reached a
settlement with Covidien Ltd., Tyco International (US), Inc. and Tyco Health Care Group, L.P.,
whereby Covidien Ltd. paid us $3,500,000 (net $1,000,000 after payment of attorneys fees and
expenses) and these parties were dismissed from the lawsuit. No further action is expected with
respect to this lawsuit.
Item 6. Exhibits
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10.1
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The Companys Fiscal 2009 Management Incentive Plan (Incorporated by reference to
Exhibit 10.1 of the registrants Current Report on Form 8-K filed on December 24,
2008).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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32.1
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Section 1350 Certification of Chief Executive Officer.
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32.2
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Section 1350 Certification of Chief Financial Officer.
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14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ROCHESTER MEDICAL CORPORATION
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Date: February 9, 2009
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By:
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/s/ Anthony J. Conway
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Anthony J. Conway
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President and Chief Executive Officer
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Date: February 9, 2009
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By:
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/s/ David A. Jonas
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David A. Jonas
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Chief Financial Officer and Treasurer
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15
INDEX TO EXHIBITS
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Exhibit
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10.1
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The Companys Fiscal 2009 Management Incentive Plan (Incorporated by reference to
Exhibit 10.1 of the registrants Current Report on Form 8-K filed on December 24,
2008).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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32.1
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Section 1350 Certification of Chief Executive Officer.
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32.2
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Section 1350 Certification of Chief Financial Officer.
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16
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