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, 2009
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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 check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
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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
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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 common equity held by
non-affiliates based upon the closing Nasdaq sale price on
March 31, 2009 was $105,597,255.
Number of shares of common stock outstanding on December 1,
2009 was 12,192,867 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of Registrants Proxy Statement for its 2010
Annual Meeting of Shareholders are incorporated by reference
in Part III.
PART I
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.
We recently introduced
Magic3
tm
,
an advanced line of silicone intermittent catheters. 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 new
Strata
brand of Foley
catheters, which includes our
Strata
NF
tm
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, or 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 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), 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 Catheter
, the
Antibacterial
Personal Catheter,
the Hydrophilic
Personal Catheter
(along with a new UK only
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 UTI. 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
3
Catheter
combines these innovations. 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.
We also have recently introduced an advanced line of
intermittent catheters. Our
Magic3
catheters are the
first intermittent catheters created from a composition of three
distinct functional layers. Each of the three all-silicone
laminates is uniquely formulated to independently address a
particular product attribute required for comfortable, easy, and
reliable intermittent catheterization. The catheters
special outer layer of nano-smooth soft silicone provides for an
unparalleled hydrophilic surface which reduces trauma and
maximizes patient comfort. The proprietary middle layer of
firmer silicone supports confident handling for quick, simple
catheter insertion. The innermost layer is designed to resist
kinking and leverage the intrinsic hydrophobic (water-repelling)
characteristics of silicone to enhance urine flow through the
catheter. Similar to our
Personal Catheters
, the
Magic3
catheters are produced in three lengths for male,
female, and pediatric use and in multiple diameters. The
Magic3
product line also incorporates all of our coating
options and package configurations, including the advanced
antibacterial and antibacterial hydrophilic technologies.
FemSoft Insert.
The
FemSoft Insert
is a
disposable device for the management of stress urinary
incontinence in active women. It 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.
The device can be simply inserted, worn and removed for voiding
by most women. It requires no inflation, deflation, syringes or
valving mechanisms. 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
. In September 2009, the
FemSoft Insert
was approved for inclusion in Part IX
of the UK Drug Tariff as a prescription product that is
reimbursable under the National Healthcare System. In November
2009, Medicare issued a specific reimbursement code which covers
our
FemSoft Insert
. We believe the availability of
National Healthcare System reimbursement and Medicare
reimbursement, both of which commence in 2010, will help this
unique device become an economically accessible and often
preferred solution for incontinent women in the United Kingdom
and in the United States.
Acute
Care Products
Foley Catheters.
We 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.
In September 2009, we introduced our new
StrataSI
tm
and
StrataNF
tm
silicone Foley catheters. The improved silicone design consists
of a soft, pliable inner core surrounded by ultra-sort,
ultra-smooth outer layers allowing for softness and flexibility
we believe is unique in an all-silicone catheter. The
StrataNF
version includes a nitrofurazone anti-infective
matrix within the silicone. Nitrofurazone is an effective
broad-spectrum antibacterial agent which is released in a
controlled dosage from the catheter directly into the urinary
tract to retard the onset of infection.
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.
4
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 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 thirteen-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 currently we do not maintain
a direct sales presence. Sales of products under the
Rochester Medical
brand comprised 67% of total sales in
fiscal 2009, with private label sales representing 33% of total
sales. In fiscal 2008 and fiscal 2007, private label sales
comprised 32% and 41% of total sales, respectively. Sales to
Hollister Incorporated (Hollister) and to Coloplast
under private label arrangements accounted for 12% and 10% of
net sales for fiscal 2009, respectively.
In addition to direct sales to hospitals and other healthcare
institutions, we have actively sought to sell our
Rochester
Medical
brand products through 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 Group Purchasing
Contract for urological products from Premier Purchasing
Partners, L.P. (Premier). Premier is one of the
largest GPOs in the United States with over $27 billion in
contract purchases per year. Premier is owned by more than 200
leading not-for-profit hospitals and affiliated with 1,500
hospitals and 42,000 other healthcare sites. The contract
includes our Foley catheters (including our infection control
catheters), male external catheters, intermittent catheters, and
urethral inserts. The contract became effective March 1,
2007, and has been extended through February 2013.
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 nearly 25,000 members
of VHA, Inc. and the University HealthSystem Consortium, or UHC,
and more than 15,000 customers of Provista (formerly HPPI). The
contract has a three year term from the effective date of
September 1, 2007. We have also been awarded a urological
products contract with Broadlane Inc. This contract is effective
January 1, 2010 and is a two year contract. Broadlane is a
GPO whose clients include more than 915 acute care hospitals,
more than 2,600
sub-acute
care facilities and more than 18,000 physician practices.
5
We 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 58%, 60% and 57% of total sales in 2009, 2008 and
2007, respectively.
Manufacturing
We design and build custom equipment to implement our
manufacturing technologies and processes. Our two manufacturing
facilities are located in Stewartville, Minnesota. In one
building we produce our Foley catheters on one production line
and our MECs on other lines. Our second building 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.
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. In 2009, an FDA audit of our facilities was successfully
completed.
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 that expires in
June 2011, 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
In 2009 we introduced two new advanced product lines, our
Magic3
intermittent catheters and our
StrataSI
and
StrataNF
Foley catheters. Our
Magic3
intermittent
catheters are created from a composition of three distinct
functional layers designed to independently address a particular
product attribute required for comfortable, easy, and reliable
intermittent catheterization. Our
StrataSI
and
StrataNF
Foley catheters feature proprietary
comfort-layered technology consisting of a soft, pliable inner
core surrounded by ultra-soft, ultra-smooth outer layers.
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 the future, consistent
with market opportunities and our financial and personnel
resources, we intend to perform clinical studies for products in
development.
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.
6
Our patent rights provide us exclusive rights to use
nitrofurazone as an antibacterial compound for catheters. Using
our patented technology, nitrofurazone is incorporated into the
structure of our catheter, and a controlled dosage of the
antimicrobial compound is eluted from the catheter into the
urethral tract. Unlike competitive catheters, in vitro
tests show our antibacterial Foley catheter to be effective
against a broad range of pathogens including a number of
multi-drug resistant pathogens. Our Foley catheter is the only
catheter currently on the market which the FDA allows the
manufacturer to indicate on the packaging that it reduces the
incidence of Catheter Associated UTI. We believe it is also the
only non latex Foley catheter shown to be effective
against Catheter Associated UTI. We believe these to be
competitive advantages of our antibacterial catheters.
All topical antibacterial compounds (including nitrofurazone)
and all systemic antibiotics have some inherent risk of allowing
development of resistant organisms and allowing overgrowth of
organisms which are inherently resistant to the particular
compound. Two of the reasons we selected nitrofurazone for use
in our catheters, however, are that: (1) no known
significant resistance to the compound has yet developed in over
50 years of use by the medical community; and (2) it
has been found to be effective against a very broad spectrum of
pathogens that can cause urinary tract infections. Although we
have data from an extensive survey conducted in Spain from
November 2003 to October 2004 on Foley catheters in chronically
catheterized patients in an acute care setting (
i.e.
,
within a hospital environment) that showed positive results for
the use of nitrofurazone impregnated catheters on a
longer term basis (approximately 30 45 days of
use), we have not conducted clinical trials in the extended care
setting (
i.e.
, for personal, at home use) and
do not make clinical claims for our antibacterial intermittent
catheters used in that setting.
Research and development expense for fiscal years 2009, 2008 and
2007 was $1,241,000, $1,044,000 and $943,000, 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 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
7
catheters, and sought an unspecified amount of damages and
injunctive and other relief. Beginning in November 2006 and
concluding in January 2009, we reached a settlement with each of
the defendants, resulting in aggregate settlement proceeds to us
of $61,325,000 (net $39,605,000 after payment of attorneys
fees and expenses) and an Innovative Technology Contract with
Novation. No further action is expected with respect to this
lawsuit.
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 15 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 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
8
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, or
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 a medical 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. In 2009,
an FDA audit of our facilities was successfully completed.
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, and the products we
currently distribute into the EU display the required CE mark.
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 or cleared by
the FDA for marketing in the United States are subject to FDA
export requirements. These require that 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. The competitive
position of certain of our products may be partially dependent
upon the extent of reimbursement for our products.
9
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 November 2009, Medicare issued a specific reimbursement code
which covers the
FemSoft Insert
. We believe the
availability of Medicare reimbursement, which commences in 2010,
will help this unique device become an economically accessible
and often preferred solution for incontinent women in the United
States.
In September 2009, the
FemSoft Insert
was approved for
inclusion in Part IX of the UK Drug Tariff as a
prescription product that is reimbursable under the National
Healthcare System. 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.
Through a new Private Label Distribution Agreement with
Coloplast, we supply silicone MECs to be sold under
Coloplasts brands worldwide, excluding the United Kingdom,
through June 2011. Through a Private Label Agreement with
Hollister, we supply silicone MECs to be sold under the
Hollister brand worldwide, excluding the United Kingdom, through
December 2011.
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 are they expected to have in the
foreseeable future, any material impact on our capital
expenditures, earnings or competitive position.
Employees
As of September 30, 2009, we employed 253 full-time
employees, of whom 169 were in manufacturing, 66 in marketing
and sales and the remainder in 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:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Anthony J. Conway
|
|
|
65
|
|
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Chairman of the Board, Chief Executive Officer and President
|
Robert M. Anglin
|
|
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42
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Vice President, Quality and Regulatory
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James M. Carper
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58
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Vice President, Marketing
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Philip J. Conway
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53
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Vice President, Production Technologies
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David A. Jonas
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45
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Director, Chief Financial Officer, Treasurer and Secretary
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Martyn R. Sholtis
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50
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Corporate Vice President
|
10
Anthony J. Conway
, one of our founders, has served as our
Chairman of the Board, Chief Executive Officer and President
since May 1988, and also served as our Secretary until November
2008 and as our Treasurer until September 1997. In addition to
his duties as Chief Executive Officer, Mr. 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. Conway worked for twelve years
for International Business Machines Corporation in various
research and development capacities. Mr. Conway is one of
the named inventors on numerous patent applications that have
been assigned to us, of which to date over 20 resulted in issued
U.S. patents and 32 have resulted in issued foreign patents.
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 Manager 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.
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. Conway served as our Vice
President of Operations. Mr. 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. Conway served as
Plant and Production Manager of Arcon Corporation. Prior to
joining Arcon, Mr. 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 over 20 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.
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.
11
Recent
Developments
In January 2009, we introduced
Magic3,
our advanced line
of silicone intermittent catheters, which are the first
intermittent catheters created from a composition of three
distinct functional layers. Each of the three all-silicone
laminates is uniquely formulated to independently address a
particular product attribute required for comfortable, easy, and
reliable intermittent catheterization.
In September 2009, we introduced our new
StrataSI
and
StrataNF
silicone Foley catheters. The improved silicone
design consists of a soft, pliable inner core surrounded by
ultra-sort, ultra-smooth outer layers allowing for softness and
flexibility we believe is unique in an all-silicone catheter.
The
StrataNF
version includes a nitrofurazone
anti-infective matrix within the silicone.
In September 2009, the
FemSoft Insert
was approved for
inclusion in Part IX of the UK Drug Tariff as a
prescription product that is reimbursable under the National
Healthcare System. In November 2009, Medicare issued a specific
reimbursement code which covers our
FemSoft Insert
. We
believe the availability of National Healthcare System
reimbursement and Medicare reimbursement, both of which commence
in 2010, will help this unique device become an economically
accessible and often preferred solution for incontinent women in
the United Kingdom and in the United States.
In November 2009, we were awarded a urological products contract
with Broadlane Inc. This contract is effective January 1,
2010 and is a two year contract. Broadlane is a GPO whose
clients include more than 915 acute care hospitals, more than
2,600
sub-acute
care facilities and more than 18,000 physician practices.
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.
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.
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 2009 represented approximately 34% 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.
12
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, but
declining, portion of our revenues in the future. We also rely
on various independent distributors to sell our products. There
can be no assurance that our private label 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 increased 1.8% in fiscal 2009 compared to
fiscal 2008, and represented 33% of total sales. 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, and has been extended through
February 2013. In August 2007, we announced that Novation, LLC
awarded us an Innovative Technology Contract for our urological
catheter products and related accessories, including our
advanced infection control catheters. The contract has a
three-year term from the effective date of September 1,
2007. In November 2009, we were awarded a urological products
contract with Broadlane Inc. This contract is effective
January 1, 2010 and is a two year contract. 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.
Beginning in November 2006 and concluding in January 2009, we
reached a settlement with each of the defendants, resulting in
aggregate settlement proceeds to us of $61,325,000 (net
$39,605,000 after payment of attorneys fees and expenses)
and an Innovative Technology Contract with Novation. No further
action is expected with respect to this lawsuit.
Our
products may not succeed in the market
We have several products, including the antibacterial
hydrophilic and antibacterial hydro intermittent catheters 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.
13
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 experienced net losses. Net income for the
fiscal years ended September 30, 2009, 2008 and 2007 was
$109,000, $759,000 and $34,050,000 (which included approximately
$31,000,000 from lawsuits net of taxes), respectively. 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 2009, we cannot be certain that we
will be able to sustain or increase profitability on a quarterly
or annual basis.
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,
14
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 reimbursement from third-party
payors, and cost containment measures could decrease the demand
for our products and the prices that our customers are willing
to pay for those products
Our products are purchased principally by healthcare providers
that typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private
insurance plans and managed care plans, for the healthcare
services provided to their patients. The ability of customers to
obtain appropriate reimbursement for their services and the
products they provide from government and third-party payors is
critical to the success of medical device companies because it
affects which products customers purchase and the prices they
are willing to pay. Reimbursement varies from country to country
and can significantly impact the acceptance of new technology.
Even when we develop a promising new product, we may find
limited demand for the product unless reimbursement approval is
obtained from private and governmental third-party payors.
Major third-party payors for healthcare provider services in the
United States and abroad continue to work to contain healthcare
costs through, among other things, the introduction of cost
containment incentives and closer scrutiny of healthcare
expenditures by both private health insurers and employers.
Initiatives to limit the growth of healthcare costs, including
price regulation, are also underway in several countries in
which we do business. Implementation of healthcare reforms in
the United States and in significant overseas markets such as
the United Kingdom and other countries within the European Union
may limit the price of, or the level at which, reimbursement is
provided for our products and adversely affect both our pricing
flexibility and the demand for our products. Healthcare
providers may respond to such cost-containment pressures by
substituting lower cost products or other therapies for our
products.
Further legislative or administrative reforms to the
U.S. or international reimbursement systems that
significantly reduce reimbursement for procedures using our
medical devices or deny coverage for such procedures, or adverse
decisions relating to our products by administrators of such
systems in coverage or reimbursement issues, would have an
adverse impact on the products, including clinical products,
purchased by our customers and the prices our customers are
willing to pay for them. This in turn would have an adverse
effect on our financial condition and results of operations.
The
adoption of certain types of healthcare reform programs in the
United States may adversely affect our business, financial
condition and results of operations.
Recently, there have been, and there could continue to be,
numerous proposals to implement significant reforms to the
healthcare system in the United States. Members of Congress have
introduced legislation that will, among other things, reduce
Medicare provider reimbursement rates, introduce
and/or
pilot
various new patient care and payment models, including Medicare
payment bundling and gain-sharing, and base reimbursement
policies and rates on clinical outcomes and the comparative
effectiveness and costs of different treatment technologies and
modalities. Legislation passed in the U.S. House of
Representatives on November 7, 2009 and a draft bill
released in the U.S. Senate also include an excise tax on
all medical devices, requiring the medical device industry to
pay an estimated $20 billion to $40 billion in
additional taxes over a period of at least 10 years.
Various healthcare reform proposals have also emerged at the
state level. We cannot predict what healthcare initiatives and
subsequent
15
regulations, if any, will be implemented at the federal or state
level, or the effect any future legislation or regulation will
have on us. However, if significant changes are made to the
healthcare system in the United States, those changes may lower
or eliminate reimbursements for our products, impact the demand
for our products or prices at which we sell our products,
and/or
increase our cost of doing business, any of which could have a
material adverse effect on our business, financial condition and
results of operations.
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
16
access to our proprietary technology or disclose such technology
or that we can ultimately protect meaningful rights to such
unpatented proprietary technology.
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.
Our
operations are subject to environmental, health and safety laws
and regulations that could require us to incur material
costs.
Our operations are subject to environmental, health and safety
laws and regulations concerning, among other things, the
generation, handling, transportation and disposal of hazardous
substances or wastes, the cleanup of hazardous substance
releases, and emissions or discharges into the air or water. We
have incurred and expect to incur expenditures in the future in
connection with compliance with environmental, health and safety
laws and regulations. New laws and regulations, violations of
these laws or regulations, stricter enforcement of existing
requirements, or the discovery of previously unknown
contamination could require us to incur costs or become the
basis for new or increased liabilities that could be material.
Our
international sales and operations expose us to foreign currency
fluctuations and additional risks and uncertainties that could
adversely affect our results of operations
Sales outside the U.S. accounted for approximately 58% of
our net sales in fiscal 2009. We anticipate that sales from
international operations will continue to represent a
significant portion of our total sales. We are currently
marketing our products in approximately 80 countries around the
world 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 three distributors in international markets. We cannot
assure you that international distributors for our products will
devote adequate resources to selling and servicing our products.
Additionally, we face currency and other risks associated with
our international
17
sales. Through our subsidiary Rochester Medical Limited, we are
exposed to foreign currency exchange rate fluctuations due to
transactions denominated primarily in British pounds, which may
potentially reduce the U.S. dollars we receive for sales
denominated in British pounds
and/or
increase the U.S. dollars we report as expenses in British
pounds, thereby affecting our reported consolidated revenues and
net earnings. Fluctuations between the currencies in which we do
business have caused and will continue to cause foreign currency
transaction gains and losses. We cannot predict the effects of
currency exchange rate fluctuations upon our future operating
results because of the volatility of currency exchange rates.
In addition to foreign currency exchange rate fluctuations,
there are a number of additional risks associated with our
international operations, including those related to:
|
|
|
|
|
the ability of our independent distributors to market and sell
our products;
|
|
|
|
our ability to identify new independent distributors in
international markets where we do not currently have
distributors;
|
|
|
|
the impact of recessions in economies outside the United States;
|
|
|
|
foreign tax laws and potential increased costs associated with
overlapping tax structures;
|
|
|
|
greater difficulty in collecting accounts receivable and longer
collection periods;
|
|
|
|
unexpected changes in regulatory requirements, surtaxes,
tariffs, customs duties or other trade barriers;
|
|
|
|
weaker intellectual property rights protection in some
countries; and
|
|
|
|
political and economic instability.
|
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.
Weakness
in the United States and international economies may continue to
adversely affect our business
We experienced a challenging economic environment in fiscal 2009
in which some customers in geographic regions in which we
operate reduced or deferred purchases of our products. Although
there are some indications that the economy in the United States
has begun to recover, the U.S. economy may not recover or
may deteriorate further, which could continue to adversely
affect our operations and results in fiscal 2010. The economies
of Europe and other regions may also remain distressed well into
2010 or longer, which could continue to adversely affect our
operations and results in fiscal 2010.
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 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. Our ability to obtain
financing for acquisitions or other general corporate and
commercial purposes will depend on our operating and financial
performance and is also subject to prevailing economic
conditions and to financial, business and other factors beyond
our control. Recently, global credit markets and the financial
services industry have been experiencing a period of
unprecedented turmoil characterized by the bankruptcy, failure
or sale of various financial institutions, a general tightening
of credit, and an unprecedented level of market intervention
from the United States and other governments. These events have
adversely affected the U.S. and world economy, and may
18
adversely affect the availability and cost of financing. 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.
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 current needs. Our manufacturing
facility in Stewartville, Minnesota could be expanded if the
need arises.
|
|
ITEM 3.
|
Legal
Proceedings
|
We were a plaintiff in a lawsuit initiated in February 2004
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 alleged 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.
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.
In January 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 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.
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, 2009.
19
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.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
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
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
15.58
|
|
|
|
10.51
|
|
Second Quarter
|
|
|
15.23
|
|
|
|
9.05
|
|
Third Quarter
|
|
|
14.15
|
|
|
|
9.74
|
|
Fourth Quarter
|
|
|
13.42
|
|
|
|
11.83
|
|
Repurchases
of Equity Securities
In December 1999, the Board of Directors authorized a share
repurchase program. Up to 2,000,000 shares may be
repurchased from time to time on the open market, or pursuant to
negotiated or block transactions, in accordance with applicable
Securities and Exchange Commission regulations. No time limit
has been placed on the duration of the share repurchase program
and it may be conducted over an extended period of time as
business and market conditions warrant. We also may discontinue
the share repurchase program at any time. We intend to fund such
repurchases with currently available funds. On March 3,
2009, we announced our intention to repurchase some of our
outstanding common shares pursuant to our previously authorized
share repurchase program. During the three months ended
September 30, 2009, no shares were repurchased. During
fiscal 2009, we repurchased 110,653 shares of common stock
pursuant to this program. As of September 30, 2009, there
remained 1,847,347 shares that may be purchased under the
program.
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, 2009, we had 120 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.
20
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, 2009. The comparison assumes $100 was
invested on October 1, 2004 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, 2004
ASSUMES DIVIDEND REINVESTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
9/30/04
|
|
|
9/30/05
|
|
|
9/30/06
|
|
|
9/30/07
|
|
|
9/30/08
|
|
|
9/30/09
|
Rochester Medical Corporation
|
|
|
$
|
100
|
|
|
|
$
|
104.34
|
|
|
|
$
|
176.50
|
|
|
|
$
|
404.23
|
|
|
|
$
|
295.32
|
|
|
|
$
|
268.15
|
|
|
Hemscott Group Medical Instruments and Supplies Index
|
|
|
|
100
|
|
|
|
|
110.37
|
|
|
|
|
110.09
|
|
|
|
|
136.06
|
|
|
|
|
141.30
|
|
|
|
|
121.32
|
|
|
Nasdaq Market Index
|
|
|
|
100
|
|
|
|
|
113.76
|
|
|
|
|
120.51
|
|
|
|
|
144.01
|
|
|
|
|
111.56
|
|
|
|
|
112.97
|
|
|
21
|
|
ITEM 6.
|
Selected
Financial Data
|
The following selected financial data of Rochester Medical
Corporation as of September 30, 2009 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 for the year ended September 30, 2007 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,
2007, 2006 and 2005 and for the fiscal years ended
September 30, 2006 and 2005 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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except for per share data)
|
|
|
Net sales
|
|
$
|
34,799
|
|
|
$
|
35,192
|
|
|
$
|
32,663
|
|
|
$
|
21,666
|
|
|
$
|
15,942
|
|
Cost of sales
|
|
|
17,973
|
|
|
|
18,484
|
|
|
|
15,619
|
|
|
|
13,057
|
|
|
|
10,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,826
|
|
|
|
16,708
|
|
|
|
17,044
|
|
|
|
8,609
|
|
|
|
5,612
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
10,327
|
|
|
|
9,499
|
|
|
|
6,490
|
|
|
|
3,109
|
|
|
|
2,398
|
|
Research and development
|
|
|
1,241
|
|
|
|
1,044
|
|
|
|
943
|
|
|
|
760
|
|
|
|
730
|
|
General and administrative
|
|
|
6,007
|
|
|
|
6,658
|
|
|
|
6,743
|
|
|
|
3,345
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,575
|
|
|
|
17,201
|
|
|
|
14,176
|
|
|
|
7,214
|
|
|
|
5,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(749
|
)
|
|
|
(493
|
)
|
|
|
2,868
|
|
|
|
1,395
|
|
|
|
357
|
|
Other income
|
|
|
1,200
|
|
|
|
1,240
|
|
|
|
38,855
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
24
|
|
|
|
(566
|
)
|
|
|
775
|
|
|
|
(108
|
)
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income tax
|
|
|
475
|
|
|
|
181
|
|
|
|
42,498
|
|
|
|
1,287
|
|
|
|
481
|
|
Income tax benefit (expense)
|
|
|
(366
|
)
|
|
|
578
|
|
|
|
(8,448
|
)
|
|
|
672
|
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
109
|
|
|
$
|
759
|
|
|
$
|
34,050
|
|
|
$
|
1,959
|
|
|
$
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
2.97
|
|
|
$
|
.18
|
|
|
$
|
.09
|
|
Net income per common share diluted
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
2.77
|
|
|
$
|
.17
|
|
|
$
|
.08
|
|
Weighted average number of common shares outstanding
basic
|
|
|
12,045
|
|
|
|
11,816
|
|
|
|
11,450
|
|
|
|
11,068
|
|
|
|
10,932
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
12,640
|
|
|
|
12,577
|
|
|
|
12,272
|
|
|
|
11,666
|
|
|
|
11,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
36,262
|
|
|
$
|
37,002
|
|
|
$
|
37,137
|
|
|
$
|
2,907
|
|
|
$
|
6,416
|
|
Working capital
|
|
|
48,552
|
|
|
|
48,772
|
|
|
|
46,325
|
|
|
|
7,664
|
|
|
|
12,671
|
|
Total assets
|
|
|
75,965
|
|
|
|
76,983
|
|
|
|
75,495
|
|
|
|
35,952
|
|
|
|
22,209
|
|
Long-term debt and capital lease obligations
|
|
|
1,076
|
|
|
|
4,046
|
|
|
|
6,066
|
|
|
|
7,563
|
|
|
|
98
|
|
Retained earnings (accumulated deficit)
|
|
|
14,833
|
|
|
|
14,724
|
|
|
|
13,964
|
|
|
|
(20,086
|
)
|
|
|
(22,045
|
)
|
Total shareholders equity
|
|
|
68,820
|
|
|
|
67,699
|
|
|
|
64,509
|
|
|
|
23,097
|
|
|
|
20,288
|
|
No dividends were declared or paid in any year from 2005 to 2009.
22
|
|
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 58% and 60% of
total sales in the fiscal years ending September 30, 2009
and 2008, respectively.
We sell our products in the United States under the
Rochester
Medical
brand name through a thirteen-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. We also rely on various independent distributors to sell
our products. 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,
percentage of our revenues in the future, while we continue to
establish our own market presence under the
Rochester Medical
brand name. Private label sales represented 33% of total
sales in fiscal 2009, compared to 32% of total sales in fiscal
2008.
For fiscal 2009, 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. Our advanced products
will eventually contribute a higher profit margin than our base
products, and our
Rochester Medical
branded products
contribute a higher profit margin than private label sales,
particularly branded sales in the United Kingdom and elsewhere
in Europe. Increasing our percentage of sales of branded
products versus private label sales over time will have a
positive impact on our gross margin. Branded sales accounted for
67% of total sales for the year ended September 30, 2009,
compared to 68% for the prior year. Advanced products accounted
for 15% of total sales for the year ended September 30,
2009, compared to 13% for the prior year.
Net sales for our fiscal year ended September 30, 2009 were
$34.8 million, a decrease of $0.4 million from
$35.2 million in the prior fiscal year. The decrease in net
sales resulted from a 2% decrease in branded sales for the
fiscal year, partially offset by a 2% increase in private label
sales. The decrease in branded sales resulted from a decrease in
sales of base products in the United Kingdom primarily due to
fluctuations in the foreign currency exchange rate between the
US dollar and the British pound, partially offset by an increase
in sales of advanced products in the U.S. and
internationally. The aggregate effect of exchange rate
fluctuations for the year resulted in a decrease of
$2.8 million in net branded sales.
Our five largest customers in fiscal 2009 represented
approximately 34% 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 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.
23
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.
Events that have contributed to the recent growth of our
business include:
|
|
|
|
|
In February 2004, we brought suit against certain Group
Purchasing Organizations (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. Beginning in November
2006 and concluding in January 2009, we reached a settlement
with each of the defendants, resulting in aggregate settlement
proceeds to us of $61,325,000 (net $39,605,000 after payment of
attorneys fees and expenses) and an Innovative Technology
Contract with Novation. No further action is expected with
respect to this lawsuit.
|
|
|
|
In November 2006, we announced we had been awarded a national
Group Purchasing Contract for urological products from Premier
Purchasing Partners, L.P. (Premier). Premier is one
of the largest GPOs in the United States with over
$27 billion in contract purchases per year. Premier is
owned by more than 200 leading not-for-profit hospitals and
affiliated with more than 1,500 hospitals and 42,000 other
healthcare sites. The contract includes our Foley catheters
(including our infection control catheters), male external
catheters, intermittent catheters, and urethral inserts. The
contract became effective March 1, 2007, and has been
extended through February 2013.
|
|
|
|
As mentioned above, 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 nearly 25,000 members
of VHA, Inc. and the University HealthSystem Consortium, or UHC,
and more than 15,000 customers of Provista (formerly HPPI). The
Innovative Technology Contract has a three year term from the
effective date of September 1, 2007.
|
|
|
|
In November 2009, we were also awarded a urological products
contract with Broadlane Inc. This contract is effective
January 1, 2010 and is a two year contract. Broadlane is a
GPO whose clients include more than 915 acute care
hospitals, more than 2,600
sub-acute
care facilities and more than 18,000 physician practices.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
In January 2009, we introduced
Magic3,
our advanced line
of silicone intermittent catheters, which are the first
intermittent catheters created from a composition of three
distinct functional layers. We initiated a
|
24
|
|
|
|
|
comprehensive marketing campaign by rolling out the
Magic3
intermittent catheter line in the U.S. with
introduction to our distribution partners and targeted clinical
call points. The marketing campaign encompassed clinicians as
well as catheter users. Concurrently, the new product line was
introduced by Rochester Medical Limited in the United Kingdom
and Europe where a similar comprehensive marketing campaign was
launched.
|
Our net income for fiscal 2009 was $109,000, or $0.01 per
diluted share, compared to $759,000, or $0.06 per diluted share
in fiscal 2008. Net income was impacted by our increased
strategic investment in sales and marketing programs and
increased costs in research and development of new products.
Additionally, we experienced a challenging economic environment
in fiscal 2009 in which some customers in geographic regions in
which we operate reduced or deferred purchases of our products.
As of September 30, 2009, we had $6.4 million in cash
and cash equivalents, and $29.9 million invested in
marketable securities. The marketable securities primarily
consist of $27.1 million invested in U.S. treasury
bills and $2.8 million invested in mutual funds. Our
investments in marketable securities are subject to interest
rate risk and the value thereof could be adversely affected due
to movements in interest rates. Our investment choices, however,
are conservative and are intended to reduce the risk of loss or
any material impact on our financial condition. We are currently
reporting an unrealized loss of $544,000 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.
In fiscal 2010, we plan to continue with our strategic focus on
sales growth of
Rochester Medical
brand products,
principally in the U.S. and Europe but in other markets as
opportunites arise, through increased investment in our sales
and marketing programs. We expect such increased investment to
be funded primarily through cash generated from current
operations. We will also continue to look for other strategic
opportunities to increase our product line and distribution
capabilities.
In addition to our marketing campaign for our
Magic3
advanced line of silicone intermittent catheters, we will be
marketing our new
Strata
brand of Foley catheters. In
September 2009, we introduced our new
StrataSI
and
StrataNF
silicone Foley catheters. The improved silicone
design consists of a soft, pliable inner core surrounded by
ultra-sort, ultra-smooth outer layers allowing for softness and
flexibility we believe is unique in an all-silicone catheter.
The
StrataNF
version includes a nitrofurazone
anti-infective matrix within the silicone.
In September 2009, the
FemSoft Insert
was approved for
inclusion in Part IX of the UK Drug Tariff as a
prescription product that is reimbursable under the National
Healthcare System. In November 2009, Medicare issued a specific
reimbursement code which covers our
FemSoft Insert
. We
believe the availability of National Healthcare System
reimbursement and Medicare reimbursement, both of which commence
in 2010, will help this unique device become an economically
accessible and often preferred solution for incontinent women in
the United Kingdom and in the United States. We are making
sales and marketing preparations accordingly to ensure that
clinicians and women have access to this excellent choice.
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.
25
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, 2009,
this reserve was approximately $126,000, compared to $122,000 at
September 30, 2008. 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, 2009, this allowance was approximately
$63,000 compared to $65,000 at September 30, 2008. 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 prepayments by certain foreign customers. Receivables
generally are due within 30 to 60 days.
Revenue
Recognition
We have standard contract terms with all non Group
Purchase Organization customers, which include our independent
distributors, of FOB shipping point; as such, sales are
recognized upon shipment. GPO customers have terms of FOB
destination per the agreement and thus sales are recognized upon
delivery of goods to the customer. Revenue is recognized when
title and risk of ownership have passed, the price to the buyer
is fixed and determinable and recoverability is reasonably
assured. For all GPO customer orders shipped within the last
five working days of a quarter, we monitor the shipping tracking
number for such shipments to verify receipt by the customer. If
we are able to verify receipt by the customer by the end of the
month, the sale is recognized. Payment terms for all customers
range from prepayment to 60 days. Customers cannot return
unsold products unless we have authorized such return for
warranty claims. We do not grant significant price concessions
to our customers.
We warrant that the products we sell to our customers will
conform to the description and specifications furnished by us,
and that the products will be free from defects in material and
workmanship. In the event of a warranty claim, the customer is
responsible for shipping the product(s) back to us, freight
prepaid. If the failure of the product is due to a breach of
warranty, we may repair or replace the defective product(s) at
our option and return the repaired or replaced product(s) to the
customer, freight prepaid. This is the limit of our warranty
liability, and this warranty is made in lieu of all other
written or unwritten express or implied warranties.
Historically, due to the nature of use of our products and low
replacement cost, our warranty exposure has been immaterial.
Other than our limited warranty obligation, we do not have
significant post-shipment obligations to, or significant
acceptance provisions with, our customers, including our
distributors.
During the year ended September 30, 2007, we recognized
$525,000 of deferred revenue related to a 10 year
distribution agreement with Coloplast. As part of the original
agreement, Coloplast paid us $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. 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. During fiscal 2007, both companies mutually agreed
to terminate the contract thus accelerating the recognition of
our remaining deferred revenue. During fiscal 2008 and 2009, we
did not receive upfront license fees under any multiple-element
supply and distribution arrangements.
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
26
carrying value of our net deferred tax asset to the amount that
is more likely than not to be realized. For 2009, no valuation
allowance has been recorded against the net deferred tax assets
because there is sufficient future projected income 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
We follow Accounting Standards Codification (ASC) 350,
Goodwill and Other Intangible
Assets. 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 $4.6 million and
$5.2 million as of September 30, 2009 and 2008,
respectively. The change is entirely the result of fluctuations
in the exchange rate between the British pound and the
U.S. dollar.
Finite-life 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 5 to 20 years. All of our
intangible assets are finite-life and amortized on a
straight-line basis. We review these intangible assets for
impairment 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
$6.2 million and $7.1 million as of September 30,
2009 and 2008, respectively.
Long-Lived
Assets
We follow ASC 360,
Property, Plant and Equipment.
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
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 accounting
provisions that are now part of ASC 718,
Compensation-Stock
Compensation
. Under the fair value recognition provisions of
ASC 718, 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 ASC 718, 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 pro forma disclosures under ASC 718. Total
stock-based compensation expense recognized during the fiscal
year ended September 30, 2009 was $0.9 million
after-tax ($1.3 million pre-tax). See Note 7 to our
consolidated financial statements for further information
regarding our stock-based compensation programs.
27
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 2009.
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.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
51.6
|
|
|
|
52.5
|
|
|
|
47.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
48.4
|
|
|
|
47.5
|
|
|
|
52.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
29.7
|
|
|
|
27.0
|
|
|
|
19.9
|
|
Research and development
|
|
|
3.6
|
|
|
|
3.0
|
|
|
|
2.9
|
|
General and administrative
|
|
|
17.3
|
|
|
|
18.9
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50.6
|
|
|
|
48.9
|
|
|
|
43.4
|
|
Income (loss) from operations
|
|
|
(2.2
|
)
|
|
|
(1.4
|
)
|
|
|
8.8
|
|
Other income
|
|
|
3.5
|
|
|
|
|
|
|
|
119.0
|
|
Interest income (expense), net
|
|
|
|
|
|
|
1.9
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
1.3
|
%
|
|
|
0.5
|
%
|
|
|
130.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
28
Rochester Medical
branded sales) and distribution channel
(domestic and international markets) (all dollar amounts below
are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
6,756
|
|
|
$
|
4,158
|
|
|
$
|
10,914
|
|
|
$
|
6,533
|
|
|
$
|
3,827
|
|
|
$
|
10,360
|
|
|
$
|
7,635
|
|
|
$
|
4,200
|
|
|
$
|
11,835
|
|
Advanced products
|
|
|
629
|
|
|
|
|
|
|
|
629
|
|
|
|
984
|
|
|
|
|
|
|
|
984
|
|
|
|
1,042
|
|
|
|
550
|
|
|
|
1,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
|
7,385
|
|
|
|
4,158
|
|
|
|
11,543
|
|
|
|
7,517
|
|
|
|
3,827
|
|
|
|
11,344
|
|
|
|
8,677
|
|
|
|
4,750
|
|
|
|
13,427
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
|
4,029
|
|
|
|
14,605
|
|
|
|
18,634
|
|
|
|
3,950
|
|
|
|
16,493
|
|
|
|
20,443
|
|
|
|
3,576
|
|
|
|
13,586
|
|
|
|
17,162
|
|
Advanced products
|
|
|
3,033
|
|
|
|
1,589
|
|
|
|
4,622
|
|
|
|
2,676
|
|
|
|
729
|
|
|
|
3,405
|
|
|
|
1,678
|
|
|
|
396
|
|
|
|
2,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
|
7,062
|
|
|
|
16,194
|
|
|
|
23,256
|
|
|
|
6,626
|
|
|
|
17,222
|
|
|
|
23,848
|
|
|
|
5,254
|
|
|
|
13,982
|
|
|
|
19,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
14,447
|
|
|
$
|
20,352
|
|
|
$
|
34,799
|
|
|
$
|
14,143
|
|
|
$
|
21,049
|
|
|
$
|
35,192
|
|
|
$
|
13,931
|
|
|
$
|
18,732
|
|
|
$
|
32,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
Net Sales.
Net sales decreased 1% to
$34.8 million in fiscal 2009 from $35.2 million in the
prior fiscal year. The decrease in net sales resulted from a 2%
decrease in branded sales for the fiscal year, partially offset
by a 2% increase in private label sales. The decrease in branded
sales resulted from a decrease in sales of base products in the
United Kingdom primarily due to fluctuations in the foreign
currency exchange rate between the US dollar and the British
pound, partially offset by an increase in sales of advanced
products in the U.S. and internationally. The aggregate
effect of exchange rate fluctuations for the year resulted in a
decrease of $2.8 million in net branded sales. Domestic
sales of branded products increased by 7% for fiscal 2009
compared to fiscal 2008. Our international branded sales
decreased 6% compared to fiscal 2008 primarily as a result of
the change in foreign currency exchange rates. Private label
sales of base products were up slightly from the prior year
offset by a slight decrease in sales of advanced products to
Hollister. Sales of products under the
Rochester Medical
brand comprised 67% of total sales in fiscal 2009, with
private label sales representing 33% of total sales. In fiscal
2008, private label sales comprised 32% of total sales. We
expect private label sales as a percentage of total sales to
decline over time as we focus more on our branded sales.
Gross Margin.
Our gross margin as a percentage
of net sales was 48% in fiscal 2009 compared to 47% in the prior
fiscal year. Our increase in gross margin in fiscal 2009 was
primarily affected by increased sales of higher margin products
and lower raw material costs.
Marketing and Selling.
For fiscal 2009, 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 9%
in fiscal 2009 as compared to fiscal 2008, with marketing and
selling expense of approximately $10.3 million in fiscal
2009 and $9.5 million in fiscal 2008. The increase in
marketing and selling expense is primarily related to $660,000
of increased advertising and project costs, $63,000 of
compensation expenses, $54,000 increase in consulting fees,
$34,000 in utilities and $33,000 of increased travel expenses.
Marketing and selling expense as a percentage of net sales for
fiscal 2009 was 30% compared to 27% for fiscal 2008.
Research and Development.
Research and
development expense primarily includes internal labor costs,
materials used to develop new products 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 19% to
$1,241,000 in fiscal 2009 from $1,044,000 in the prior fiscal
year. The increase in research and development expense relates
primarily to increased compensation expense of $177,000 and
$50,000 of project costs, offset by a decrease in supplies
expense of $30,000. Research and development expense as a
percentage of net sales for fiscal 2009 and fiscal 2008 was 4%
and 3%, respectively.
29
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 declined to $6.0 million in 2009
from $6.7 million in fiscal 2008. The changes in general
and administrative expense primarily relate to decreased
administrative costs of $286,000 in professional fees, $211,000
of other expenses, $82,000 of travel expenses, $63,000 of
utilities expenses, $44,000 of consulting fees and $38,000 in
charitable contributions, offset by increases of $91,000 in
compensation expense. General and administrative expense as a
percentage of net sales for fiscal 2009 and fiscal 2008 was 17%
and 19%, respectively.
Interest Income.
Interest income decreased 77%
to $283,000 in fiscal 2009 from $1.2 million in the prior
fiscal year. The decrease reflects overall lower interest rates
on investments.
Interest Expense.
Interest expense decreased
46% to $259,000 in fiscal 2009 from $478,000 in fiscal 2008. The
decrease in interest expense reflects decreases in outstanding
debt used to partially finance our asset acquisitions in June
2006 from Mentor and Coloplast and refinancing of debt at a
lower interest rate.
Income Taxes.
As of September 30, 2009,
we have federal net operating loss carryforwards available to
offset future taxable income. No valuation allowance has been
recorded against the net deferred tax assets because there is
sufficient future projected income to sustain that the deferred
tax assets will more likely than not be able to be utilized.
For fiscal 2009, we had an effective tax rate of approximately
77% that was affected by foreign operations, incentive stock
options and research and development tax credits. The amount of
these items in comparison to our net income for the current year
results in a significant effect on the effective tax rate
percentage. 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
$109,000 in fiscal 2009 from $759,000 in 2008. Net income was
impacted by our increased strategic investment in sales and
marketing programs and increased costs in research and
development of new products. Additionally, we experienced a
challenging economic environment in fiscal 2009 in which some
customers in geographic regions in which we operate reduced or
deferred purchases of our products.
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.
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
30
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 had a federal net operating loss. No
valuation allowance was recorded against the net deferred tax
assets because there was 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 had 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 a few new or one time items. We had
a one time adjustment for deferred taxes resulting from a change
in tax rate as well as retroactive changes. There was also a
first time deduction for Domestic Production Activities, arising
from the change in taxable income position in the 2007 fiscal
year. Lastly, we performed a detailed analysis of our research
and development activities for the current and prior years
which, coupled with the change in taxable income position in the
2007 fiscal year, resulted in additional tax credits. Other
items having a material effect on the effective income tax rate
were tax exempt interest and unrecognized tax benefits.
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.
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
$36.3 million at September 30, 2009 compared with
$37.0 million at September 30, 2008. The decrease in
cash primarily resulted from cash used for capital expenditures
and debt repayments offset by cash provided by litigation
settlements, stock option exercises and operations. As of
September 30, 2009, we had $29.9 million invested in
marketable securities. The marketable securities primarily
consist of $27.1 million invested in U.S. treasury
bills and $2.8 million invested in mutual
31
funds. Our investments in marketable securities are subject to
interest rate risk and the value thereof could be adversely
affected due to movements in interest rates. Our investment
choices, however, are conservative and are intended to reduce
the risk of loss or any material impact on our financial
condition. We are currently reporting an unrealized loss of
$544,000 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 $1.7 million of cash in operating
activities during the year compared with $2.4 million for
the same period last year, with the primary difference being
increased levels of inventory in 2009. Cash flow provided by
operating activities in 2009 was comprised of net income of
$109,000, decreased by an increase in net working capital
components and increased by net non-cash charges of
$3.2 million, including depreciation and amortization of
$1.9 million and stock-based compensation of
$1.3 million. Significant working capital changes are as
follows:
|
|
|
|
|
a $658,000 increase in accounts receivable reflecting increasing
sales activity over prior year;
|
|
|
|
a $1,102,000 increase in inventory as we increased our finished
goods and
work-in-process
inventory to support the increase in sales volume;
|
|
|
|
a $197,000 decrease in deferred income taxes;
|
|
|
|
a $321,000 decrease in accounts payable reflecting timing of
payments; and
|
|
|
|
a $325,000 increase in other current liabilities including
normal business expense accruals.
|
During fiscal 2009, our working capital position, excluding cash
and marketable securities, increased by $519,000. Accounts
receivable balances increased $658,000 during the fiscal year
primarily due to increased sales at the end of the fourth
quarter. Inventories as of September 30, 2009 increased
$1.1 million over fiscal 2008 as we carried more inventory
in anticipation of increased sales and new product launches.
Other current assets were relatively flat with fiscal 2008.
Changes in other asset and liability balances related to timing
differences.
Investing activities, primarily capital expenditures and the
purchase of marketable securities, used net cash of
$2.7 million in fiscal 2009.
Financing activities, primarily long term debt payments and
share repurchases offset by increases in short term debt and
proceeds from stock option exercises, used net cash of $653,000
in fiscal 2009.
In June 2006, we entered into a $7,000,000 credit facility with
U.S. Bank National Association. The credit facility
consisted 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%. In March
2009, we paid off the entire term loan and terminated the
revolving line of credit.
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 $1,927,910 on our balance sheet as of
September 30, 2009.
In February 2009, we entered into a $14,000,000 credit facility
with UBS Financial. The credit facility consists of a revolving
line of credit of up to $14,000,000 with interest accruing
monthly at a floating rate based on the quoted one-month LIBOR
rate plus 1.25%. As of September 30, 2009, we had an
outstanding balance of $1,878,447 under the revolving line of
credit. Our obligations under the credit facility are payable on
demand and are secured by our investments in marketable
securities held at UBS.
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
32
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. Our ability to obtain financing for
acquisitions or other general corporate and commercial purposes
will depend on our operating and financial performance and is
also subject to prevailing economic conditions and to financial,
business and other factors beyond our control. Recently, global
credit markets and the financial services industry have been
experiencing a period of unprecedented turmoil characterized by
the bankruptcy, failure or sale of various financial
institutions, a general tightening of credit, and an
unprecedented level of market intervention from the United
States and other governments. These events have adversely
affected the U.S. and world economy, and may adversely
affect the availability and cost of financing. 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, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4 - 5 years
|
|
|
years
|
|
|
Long term debt, including interest
|
|
$
|
3,852,794
|
|
|
$
|
2,833,059
|
|
|
$
|
1,019,735
|
|
|
$
|
|
|
|
$
|
|
|
Unrecognized tax benefits under ASC
740
(1)
|
|
|
55,889
|
|
|
|
|
|
|
|
55,889
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
581,429
|
|
|
|
252,458
|
|
|
|
328,971
|
|
|
|
|
|
|
|
|
|
Purchase obligations (general operating)
|
|
|
2,044,707
|
|
|
|
2,044,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
6,534,819
|
|
|
$
|
5,130,224
|
|
|
$
|
1,404,595
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Item 8 of Part II of this
Form 10-K,
Financial Statements and Supplementary Data
Note 8 Income Taxes.
|
Off-Balance
Sheet Arrangements
As of September 30, 2009, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
New
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 168,
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles a
replacement of FASB Statement No 162
(the Codification). The
Codification reorganized the existing U.S. accounting and
reporting standards into a single source of authoritative
accounting principles arranged by topic. The Codification
supersedes all existing U.S. accounting standards; all
other accounting literature not included in the Codification,
except for rules and interpretive releases of the SEC, which are
also sources of authoritative U.S. GAAP for SEC
registrants, is considered non-authoritative. The Codification
was effective on a prospective basis for interim and annual
reporting periods ending after September 15, 2009. We
adopted the Codification in our year ended September 30,
2009. The adoption of the
33
Codification changed our references to U.S. GAAP, but it
had no impact on our consolidated financial position or results
of operations.
In September 2006, the FASB issued new guidance for using fair
value to measure assets and liabilities. The new guidance, which
is now a part of ASC 820,
Fair Value Measurements and
Disclosures
, defines fair value, establishes a framework for
measuring fair value under U.S. GAAP and expands
disclosures about fair value measurements. The new guidance
applies whenever other pronouncements require or permit assets
or liabilities to be measured by fair value and while not
requiring new fair value measurements, may change current
practices. We adopted the new guidance in the second quarter of
fiscal 2009. The adoption did not have a material impact on our
consolidated financial position or results of operations, as it
is a disclosure-only standard.
In December 2007, the FASB issued updated accounting standards
on business combinations. The new standards, which are now part
of ASC 805,
Business Combinations
, establish principles
and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. ASC 805 also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination or a gain from a bargain purchase and determines
what information to disclose to enable users of financial
statements to evaluate the nature and financial effects of the
business combination. ASC 805 applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008, which for us is the first quarter
of fiscal 2010. ASC 805 will impact our consolidated financial
statements for business combinations with an acquisition date on
or after adoption in the first quarter of fiscal 2010.
In December 2007, the FASB issued new accounting and reporting
standards for noncontrolling interests in a subsidiary and for
the deconsolidation of a subsidiary. Under the new standards,
which are now part of ASC 810,
Noncontrolling Interests in
Consolidated Financial Statement
, minority interests will be
recharacterized as noncontrolling interests and classified as a
component of equity. ASC 810 also establishes a single method of
accounting for changes in a parents ownership interest in
a subsidiary and requires expanded disclosures. The new
standards are effective for fiscal years beginning on or after
December 15, 2008. We do not expect the adoption of ASC 810
will have a material impact on our financial position or results
of operations.
In March 2008, the FASB issued new guidance on the disclosure of
derivative instruments and hedging activities. The new guidance,
which is now a part of ASC 815,
Derivatives and Hedging
Activities
, requires enhanced disclosures about an
entitys derivative and hedging activities in order to
improve the transparency of financial reporting. The provisions
of the new guidance were effective for fiscal years and interim
periods beginning after November 15, 2008. We adopted the
new guidance in the first quarter of 2009. The adoption did not
have a material impact on our consolidated financial position or
results of operations, as it is a disclosure-only standard.
In April 2009, the FASB issued new guidance related to the
disclosure of the fair value of financial instruments. The new
guidance, which is now a part of ASC 825,
Financial
Instruments
, requires fair value disclosures in both interim
as well as annual financial statements in order to provide more
timely information about the effects of current market
conditions on financial instruments. The new guidance is
effective for interim and annual periods ending after
June 15, 2009. We adopted the new guidance for our interim
period ending June 30, 2009. The adoption did not have a
material impact on our consolidated financial position for
results of operations, as it is a disclosure-only standard.
In April 2009, the FASB issued new guidance applicable to
investments in debt securities for which
other-than-temporary
impairments may be recorded. Under the new guidance, which is
now a part of ASC 320,
Investments Debt and
Equity Securities,
if an entitys management asserts
that it does not have the intent to sell a debt security and it
is more likely than not that it will not have to sell the
security before recovery of its cost basis, then an entity may
separate
other-than-temporary
impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other
amounts (recorded in other comprehensive income). This guidance
is to be applied prospectively and is effective for interim and
annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.
The adoption did not have a material impact on our consolidated
financial position or results of operations.
In May 2009, the FASB issued new guidance for accounting for
subsequent events. The new guidance, which is now a part of ASC
855,
Subsequent Events,
establishes the accounting for,
and disclosure of, events that occur after
34
the balance sheet date but before financial statements are
issued or are available to be issued. The new guidance requires
the disclosure of the date through which and entity has
evaluated subsequent events and the basis for that date. We
adopted the new guidance for our interim period ending June, 30,
2009. The adoption of the new guidance and the related
disclosures had no impact on our consolidated financial position
or results of operations.
Cautionary
Statement Regarding Forward Looking Information
Statements other than historical information contained herein
constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements may be identified by the use of
terminology such as believe, may,
will, expect, anticipate,
predict, intend, designed,
estimate, should or continue
or the negatives thereof or other variations thereon or
comparable terminology. Such forward-looking statements involve
known or unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements, or
industry results, to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among
other things, the following:
|
|
|
|
|
the uncertainty of market acceptance of new product
introductions;
|
|
|
|
the uncertainty of gaining new strategic relationships;
|
|
|
|
the uncertainty of timing of revenues from private label sales
(particularly with respect to international customers);
|
|
|
|
the uncertainty of successfully establishing our separate
Rochester Medical
brand identity;
|
|
|
|
the uncertainty of successfully integrating and growing our U.K.
operations;
|
|
|
|
the risks associated with operating an international business,
including the impact of foreign currency exchange rate
fluctuations;
|
|
|
|
FDA and other regulatory review and response times;
|
|
|
|
the securing of Group Purchasing Organization contract
participation;
|
|
|
|
the uncertainty of gaining significant sales from secured GPO
contracts;
|
|
|
|
the impact of continued healthcare cost containment;
|
|
|
|
new laws related to healthcare availability, healthcare reform,
payment for healthcare products and services or the marketing
and distribution of products, including legislative or
administrative reforms to the U.S. Medicare and Medicaid
systems or other U.S. or international reimbursement
systems;
|
|
|
|
changes in the tax or environmental laws or standards affecting
our business;
|
|
|
|
and other risk factors listed from time to time in our SEC
reports, including, without limitation, the section entitled
Risk Factors in Item 1A of this
Form 10-K.
|
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:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
|
|
|
|
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
|
35
|
|
|
|
|
of the company are being made only in accordance with
authorizations of management and directors of the
company; and
|
|
|
|
|
|
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.
Management assessed the effectiveness of the companys
internal control over financial reporting as of
September 30, 2009. 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, 2009.
Our independent auditor has audited our consolidated financial
statements and the effectiveness of internal controls over
financial reporting as of September 30, 2009 as stated in
their reports on pages 38 and 39.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Our primary financial instrument market risk results from
fluctuations in interest rates. Our cash is invested in bank
deposits and money market funds denominated in U.S. dollars
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 investment choices, however, are conservative in
light of current economic conditions, and include primarily
U.S. treasury bills to reduce the risk of loss or any
material impact on our financial condition. Our revolving line
of credit bears interest at a floating rate based on the quoted
one-month LIBOR rate plus 1.25%. As of September 30, 2009
we had an outstanding balance of $1,878,447 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
Limited, 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.
36
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
Rochester
Medical Corporation
Consolidated
Financial Statements
Years
Ended September 30, 2009, 2008 and 2007
|
|
|
|
|
Page
|
|
|
|
38-40
|
Audited Financial Statements
|
|
|
|
|
41
|
|
|
42
|
|
|
43
|
|
|
44
|
|
|
45
|
37
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, 2009 and 2008 and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the two
years in the period ended September 30, 2009. 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 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 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the two years in the
period ended September 30, 2009 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, 2009, 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, 2009 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Minneapolis, Minnesota
December 11, 2009
38
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, 2009, 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 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, 2009, 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 sheets of Rochester Medical Corporation as
of September 30, 2009 and 2008, and the related
consolidated statements of operations, shareholders equity
and comprehensive income (loss), and cash flows and financial
statement schedule for each of the two years in the period ended
September 30, 2009, and our report dated December 11,
2009 expressed an unqualified opinion on those financial
statements and financial statement schedule.
Minneapolis, Minnesota
December 11, 2009
39
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Rochester Medical Corporation
We have audited the consolidated statements of operations,
shareholders equity and comprehensive income, and cash
flows of Rochester Medical Corporation and subsidiary for the
year ended September 30, 2007. Our audit 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 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 results
of Rochester Medical Corporation and subsidiarys
operations and their cash flows for the year 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
40
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,365,584
|
|
|
$
|
8,508,000
|
|
Marketable securities
|
|
|
29,896,740
|
|
|
|
28,493,648
|
|
Accounts receivable, less allowance for doubtful accounts
($63,369 2009; $65,202 2008)
|
|
|
6,418,656
|
|
|
|
6,009,023
|
|
Inventories, net
|
|
|
9,710,234
|
|
|
|
8,745,873
|
|
Prepaid expenses and other current assets
|
|
|
1,076,183
|
|
|
|
1,110,291
|
|
Deferred income tax asset
|
|
|
1,153,964
|
|
|
|
1,143,931
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
54,621,361
|
|
|
|
54,010,766
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
702,120
|
|
|
|
739,836
|
|
Buildings
|
|
|
7,145,768
|
|
|
|
6,956,240
|
|
Equipment and fixtures
|
|
|
16,954,719
|
|
|
|
16,086,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,802,607
|
|
|
|
23,782,719
|
|
Less accumulated depreciation
|
|
|
(15,118,799
|
)
|
|
|
(13,899,390
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
9,683,808
|
|
|
|
9,883,329
|
|
Deferred income tax asset
|
|
|
768,874
|
|
|
|
831,299
|
|
Goodwill
|
|
|
4,648,165
|
|
|
|
5,169,661
|
|
Finite life intangibles, less accumulated amortization
($2,120,096 2009; $1,511,307 2008)
|
|
|
6,017,944
|
|
|
|
6,860,213
|
|
Patents, less accumulated amortization ($1,207,316
2009; $1,147,088 2008)
|
|
|
224,815
|
|
|
|
227,358
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
75,964,967
|
|
|
$
|
76,982,626
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,755,472
|
|
|
$
|
2,127,470
|
|
Accrued compensation
|
|
|
1,176,949
|
|
|
|
915,661
|
|
Accrued expenses
|
|
|
350,403
|
|
|
|
254,993
|
|
Current maturities of debt
|
|
|
2,786,622
|
|
|
|
1,940,292
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,069,446
|
|
|
|
5,238,416
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
55,889
|
|
|
|
239,496
|
|
Long-term debt, less current maturities
|
|
|
1,019,735
|
|
|
|
3,806,185
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,075,624
|
|
|
|
4,045,681
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value:
|
|
|
|
|
|
|
|
|
Authorized shares 40,000,000
|
|
|
|
|
|
|
|
|
Issued and outstanding shares: (12,190,367 2009;
11,936,586 2008)
|
|
|
56,840,856
|
|
|
|
54,223,669
|
|
Retained earnings
|
|
|
14,832,213
|
|
|
|
14,723,541
|
|
Accumulated other comprehensive loss
|
|
|
(2,853,172
|
)
|
|
|
(1,248,681
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
68,819,897
|
|
|
|
67,698,529
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
75,964,967
|
|
|
$
|
76,982,626
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net sales
|
|
$
|
34,798,829
|
|
|
$
|
35,191,949
|
|
|
$
|
32,663,087
|
|
Cost of sales
|
|
|
17,973,314
|
|
|
|
18,483,985
|
|
|
|
15,619,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,825,515
|
|
|
|
16,707,964
|
|
|
|
17,043,909
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
10,327,396
|
|
|
|
9,498,596
|
|
|
|
6,490,497
|
|
Research and development
|
|
|
1,241,095
|
|
|
|
1,044,205
|
|
|
|
943,225
|
|
General and administrative
|
|
|
6,006,906
|
|
|
|
6,658,002
|
|
|
|
6,742,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,575,397
|
|
|
|
17,200,803
|
|
|
|
14,176,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(749,882
|
)
|
|
|
(492,839
|
)
|
|
|
2,867,522
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
283,195
|
|
|
|
1,239,689
|
|
|
|
1,288,603
|
|
Other income (expense)
|
|
|
1,200,442
|
|
|
|
(88,642
|
)
|
|
|
38,855,000
|
|
Interest expense
|
|
|
(259,341
|
)
|
|
|
(477,560
|
)
|
|
|
(513,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,224,296
|
|
|
|
673,487
|
|
|
|
39,630,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
474,414
|
|
|
|
180,648
|
|
|
|
42,497,829
|
|
Income tax benefit (expense)
|
|
|
(365,742
|
)
|
|
|
578,455
|
|
|
|
(8,447,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
108,672
|
|
|
$
|
759,103
|
|
|
$
|
34,050,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
2.97
|
|
Net income per common share diluted
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
2.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
12,045,313
|
|
|
|
11,815,904
|
|
|
|
11,449,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
12,639,853
|
|
|
|
12,577,337
|
|
|
|
12,272,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at September 30, 2006
|
|
|
11,086,560
|
|
|
$
|
43,128,727
|
|
|
$
|
(20,085,742
|
)
|
|
$
|
53,577
|
|
|
$
|
23,096,562
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(883,326
|
)
|
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
|
|
Comprehensive income(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
108,672
|
|
|
|
|
|
|
|
108,672
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,624,527
|
)
|
|
|
(1,624,527
|
)
|
Tax effect on unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,587
|
|
|
|
142,587
|
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,551
|
)
|
|
|
(122,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,495,819
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
562,308
|
|
|
|
|
|
|
|
|
|
|
|
562,308
|
|
Stock based compensation
|
|
|
|
|
|
|
1,330,220
|
|
|
|
|
|
|
|
|
|
|
|
1,330,220
|
|
Common stock repurchased
|
|
|
(110,653
|
)
|
|
|
(1,058,041
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,058,041
|
)
|
Stock option exercises
|
|
|
364,434
|
|
|
|
1,782,700
|
|
|
|
|
|
|
|
|
|
|
|
1,782,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
12,190,367
|
|
|
$
|
56,840,856
|
|
|
$
|
14,832,213
|
|
|
$
|
(2,853,172
|
)
|
|
$
|
68,819,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
108,672
|
|
|
$
|
759,103
|
|
|
$
|
34,050,180
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,234,081
|
|
|
|
1,209,554
|
|
|
|
1,161,291
|
|
Amortization
|
|
|
692,756
|
|
|
|
717,009
|
|
|
|
724,067
|
|
Stock based compensation
|
|
|
1,330,220
|
|
|
|
1,364,561
|
|
|
|
2,117,011
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
(564,286
|
)
|
Deferred income taxes
|
|
|
196,545
|
|
|
|
(528,535
|
)
|
|
|
(203,070
|
)
|
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
|
|
|
(657,793
|
)
|
|
|
(841,382
|
)
|
|
|
(877,450
|
)
|
Inventories
|
|
|
(1,101,735
|
)
|
|
|
(604,318
|
)
|
|
|
(2,966,577
|
)
|
Prepaid expenses and other current assets
|
|
|
(62,859
|
)
|
|
|
(655,116
|
)
|
|
|
(240,402
|
)
|
Accounts payable
|
|
|
(320,632
|
)
|
|
|
1,096,684
|
|
|
|
(197,366
|
)
|
Income tax payable
|
|
|
(60,034
|
)
|
|
|
(415,671
|
)
|
|
|
500,688
|
|
Other current liabilities
|
|
|
325,055
|
|
|
|
(110,327
|
)
|
|
|
(308,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,684,276
|
|
|
|
2,396,521
|
|
|
|
35,521,428
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,171,788
|
)
|
|
|
(1,609,741
|
)
|
|
|
(2,482,625
|
)
|
Business acquisition
|
|
|
|
|
|
|
|
|
|
|
60,579
|
|
Patents
|
|
|
(57,685
|
)
|
|
|
(26,915
|
)
|
|
|
(49,795
|
)
|
Purchase of marketable securities
|
|
|
(55,358,876
|
)
|
|
|
(76,658,063
|
)
|
|
|
(36,557,555
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
53,853,269
|
|
|
|
78,444,303
|
|
|
|
5,975,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(2,735,080
|
)
|
|
|
149,584
|
|
|
|
(33,054,396
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on capital leases
|
|
|
|
|
|
|
|
|
|
|
(64,030
|
)
|
Increase in short-term debt
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(3,940,120
|
)
|
|
|
(2,169,233
|
)
|
|
|
(1,744,919
|
)
|
Repurchase of common stock
|
|
|
(1,058,041
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefit from exercises of stock options
|
|
|
562,308
|
|
|
|
959,523
|
|
|
|
|
|
Net proceeds from issuance of common stock from option exercises
|
|
|
1,782,700
|
|
|
|
1,343,877
|
|
|
|
2,579,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(653,153
|
)
|
|
|
134,167
|
|
|
|
770,186
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(438,459
|
)
|
|
|
(843,628
|
)
|
|
|
527,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(2,142,416
|
)
|
|
|
1,836,644
|
|
|
|
3,764,658
|
|
Cash and cash equivalents at beginning of year
|
|
|
8,508,000
|
|
|
|
6,671,356
|
|
|
|
2,906,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
6,365,584
|
|
|
$
|
8,508,000
|
|
|
$
|
6,671,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
443,791
|
|
|
$
|
476,577
|
|
|
$
|
604,635
|
|
Cash paid for income taxes
|
|
|
313,640
|
|
|
|
785,000
|
|
|
|
5,750,000
|
|
The accompanying notes are an integral part of these
financial statements.
44
|
|
1.
|
Description
of Business and Basis of Presentation
|
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
,
StrataNF
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 Companys fiscal year end is September 30. The
accompanying financial statements include the accounts of
Rochester Medical Corporation and Rochester Medical Limited, its
wholly owned subsidiary in the United Kingdom, together which
are herein referred to as the Company.
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 and accounts receivable, fair value
assumptions related to investments, deferred income tax assets
and stock-based compensation. Actual results could differ from
those estimates.
|
|
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 $4.2 million and
$3.9 million at September 30, 2009 and 2008,
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
As of September 30, 2009, the Company has
$29.9 million invested in high quality, investment grade
debt securities, primarily consisting of $27.1 million
invested in U.S. treasury bills and $2.8 million
invested in a mutual fund. The Company is currently reporting an
unrealized loss of $544,268 related to the mutual fund as a
result of the recent fluctuations in the credit markets
impacting the current market value. The Company considers these
unrealized losses temporary as it has the intent and ability to
hold these investments to maturity.
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, 2009
|
|
$
|
30,441,008
|
|
|
$
|
(544,268
|
)
|
|
$
|
29,896,740
|
|
September 30, 2008
|
|
$
|
28,915,366
|
|
|
$
|
(421,718
|
)
|
|
$
|
28,493,648
|
|
45
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Losses recognized are recorded in
Other expense
, in the
consolidated statements of operations. Gains and losses from the
sale of investments are calculated based on the specific
identification method.
Effective October 1, 2008, the Company adopted the
accounting standards which are now part of Accounting Standards
Codification (ASC) 820,
Fair Value Measurements and
Disclosures
, for financial assets and liabilities that are
re-measured and reported at fair value at each reporting period.
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
ASC 820 requires that fair value measurements be classified and
disclosed using one of the following three categories:
Level 1.
Quoted prices (unadjusted) in
active markets for identical assets or liabilities;
Level 2.
Inputs other than Level 1
that are observable, either directly or indirectly, such as
quoted prices in active markets for similar assets or
liabilities; quoted prices for identical or similar assets in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities; or
Level 3.
Inputs that are unobservable for
the asset or liability and that are significant to the fair
value of the assets or liabilities.
The adoption of these standards did not have a material impact
on the Companys consolidated financial statements. The
Company has determined that the values given to its marketable
securities are appropriate and are measured using Level 1
inputs.
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 amounts of the Companys
long-term debt approximates fair value based on rates offered to
the Company for debt.
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.
46
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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, 2009,
2008 and 2007.
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 ASC 350,
Goodwill and Other Intangible
Assets
. Under ASC 350, goodwill and intangibles with
indefinite useful lives are not amortized. ASC 350 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.
The Company tests annually for impairment on the anniversary
date of the acquisition of the asset, which is currently on
June 2nd of each fiscal year, or more frequently if
events and circumstances indicate that the asset might be
impaired. The recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an
impairment charge would be recognized by the amount that the
carrying amount of the asset exceeds the fair value of the
asset. The Company performed annual goodwill impairment testing
by comparing the market value of the Companys assets at
June 2, 2009 to the net book value of its equity, and
concluded that the goodwill was not impaired. No impairment loss
was recognized in the fiscal years ended September 30,
2009, 2008 and 2007. The decrease in value of goodwill as of
September 30, 2009 is entirely related to the change in
foreign currency exchange rates in the United Kingdom.
Long-Lived
Assets
The Company reviews its long-lived assets for impairment as
prescribed by ASC 360,
Property, Plant, and Equipment,
whenever events or changes in circumstances indicate that
its 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
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, 2009, 2008 and 2007.
Foreign
Currency Translation
The financial statements of the Companys
non-U.S. subsidiary
are translated into U.S. dollars in accordance with ASC
830,
Foreign Currency Matters
. Under ASC 830, 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).
47
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 has standard contract terms with all non-Group
Purchase Organization customers, which include our independent
distributors, of FOB shipping point; as such, sales are
recognized upon shipment. Group Purchase Organization customers
have terms of FOB destination per the agreement and thus sales
are recognized upon delivery of goods to the customer. Revenue
is recognized when title and risk of ownership have passed, the
price to the buyer is fixed and determinable and recoverability
is reasonably assured. For all Group Purchase Organization
customer orders shipped within the last five working days of a
quarter, the Company monitors the shipping tracking number for
such shipments to verify receipt by the customer. If the Company
is able to verify receipt by the customer by the end of the
month, the sale is recognized. Payment terms for all customers
range from prepayment to 60 days. Customers cannot return
unsold products unless the Company has authorized such return
for warranty claims. The Company does not grant significant
price concessions to its customers.
The Company warrants that the products it sells to its customers
will conform to the description and specifications furnished by
the Company, and that the products will be free from defects in
material and workmanship. In the event of a warranty claim, the
customer is responsible for shipping the product(s) back to the
Company, freight prepaid. If the failure of the product is due
to a breach of warranty, the Company may repair or replace the
defective product(s) at its option and return the repaired or
replaced product(s) to the customer, freight prepaid. This is
the limit of the Companys warranty liability, and this
warranty is made in lieu of all other written or unwritten
express or implied warranties. Historically, due to the nature
of use of the Companys products and low replacement cost,
the Companys warranty exposure has been immaterial.
Other than the Companys limited warranty obligation, the
Company does not have significant post-shipment obligations to,
or significant acceptance provisions with, its customers,
including its distributors.
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.
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 on-going
services or performance by the Company. During fiscal 2007, both
companies mutually agreed to terminate the contract thus
accelerating the recognition of the remaining deferred revenue
of the Company. During fiscal 2008 and 2009, the Company did not
receive upfront license fees under any multiple-element supply
and distribution arrangements.
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.
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
48
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2009, 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
(IRS) completed an examination of the Companys
income tax return for the fiscal year ended September 30,
2007 and a settlement was reached in September 2009. Reserves in
accordance with ASC 740,
Income Taxes
for unrecognized
tax benefits was more than the additional taxes assessed by the
IRS. The remaining reserves relating to the 2007 tax year were
released during the year ended September 30, 2009, as a
result of the settlement.
Advertising
Costs
The Company incurred advertising expenses of approximately
$929,000, $946,000 and $397,000 for the years ended
September 30, 2009, 2008 and 2007, respectively. All
advertising costs are charged to operations as incurred.
Stock-Based
Compensation
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
accounting provisions that are now part of ASC 718,
Compensation-Stock 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 ASC 718, recognized utilizing the accelerated
expense attribution method for awards with graded vesting. The
Company recorded approximately $1,330,000, $1,365,000 and
$2,100,000 ($878,000, $887,000 and $1,365,000 net of tax)
of related stock-based compensation expense for the years ended
September 30, 2009, 2008 and 2007, respectively.
Net
Income Per Share
Net income per common share is calculated in accordance with ASC
260,
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
108,672
|
|
|
$
|
759,103
|
|
|
$
|
34,050,180
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share
weighted average shares outstanding
|
|
|
12,045,313
|
|
|
|
11,815,904
|
|
|
|
11,449,646
|
|
Effect of dilutive stock options
|
|
|
594,540
|
|
|
|
761,433
|
|
|
|
822,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common share
weighted average shares outstanding
|
|
|
12,639,853
|
|
|
|
12,577,337
|
|
|
|
12,272,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Employee stock options of 230,000, 5,000 and 30,000 for fiscal
years 2009, 2008 and 2007, 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 June 2009, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 168,
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles a
replacement of FASB Statement No 162
(the Codification). The
Codification reorganized the existing U.S. accounting and
reporting standards into a single source of authoritative
accounting principles arranged by topic. The Codification
supersedes all existing U.S. accounting standards; all
other accounting literature not included in the Codification,
except for rules and interpretive releases of the SEC, which are
also sources of authoritative U.S. GAAP for SEC
registrants, is considered non-authoritative. The Codification
was effective on a prospective basis for interim and annual
reporting periods ending after September 15, 2009. The
Company adopted the Codification in its fiscal year ended
September 30, 2009. The adoption of the Codification
changed the Companys references to U.S. GAAP, but it
had no impact on the Companys consolidated financial
position or results of operations.
In September 2006, the FASB issued new guidance for using fair
value to measure assets and liabilities. The new guidance, which
is now a part of ASC 820,
Fair Value Measurements and
Disclosures
, defines fair value, establishes a framework for
measuring fair value under U.S. GAAP and expands
disclosures about fair value measurements. The new guidance
applies whenever other pronouncements require or permit assets
or liabilities to be measured by fair value and while not
requiring new fair value measurements, may change current
practices. The Company adopted the new guidance in the second
quarter of fiscal 2009. The adoption did not have a material
impact on the Companys consolidated financial position or
results of operations, as it is a disclosure-only standard.
In December 2007, the FASB issued updated accounting standards
on business combinations. The new standards, which are now part
of ASC 805,
Business Combinations
, establish principles
and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. ASC 805 also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination or a gain from a bargain purchase and determines
what information to disclose to enable users of financial
statements to evaluate the nature and financial effects of the
business combination. ASC 805 applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008, which for the Company is the first
quarter of fiscal 2010. ASC 805 will impact the Companys
consolidated financial statements for business combinations with
an acquisition date on or after adoption in the first quarter of
fiscal 2010.
In December 2007, the FASB issued new accounting and reporting
standards for noncontrolling interests in a subsidiary and for
the deconsolidation of a subsidiary. Under the new standards,
which are now part of ASC 810,
Noncontrolling Interests in
Consolidated Financial Statement
, minority interests will be
recharacterized as noncontrolling interests and classified as a
component of equity. ASC 810 also establishes a single method of
accounting for changes in a parents ownership interest in
a subsidiary and requires expanded disclosures. The new
standards are effective for fiscal years beginning on or after
December 15, 2008. The Company does not expect the adoption
of ASC 810 will have a material impact on its financial position
or results of operations.
In March 2008, the FASB issued new guidance on the disclosure of
derivative instruments and hedging activities. The new guidance,
which is now a part of ASC 815,
Derivatives and Hedging
Activities
, requires enhanced disclosures about an
entitys derivative and hedging activities in order to
improve the transparency of
50
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial reporting. The provisions of the new guidance were
effective for fiscal years and interim periods beginning after
November 15, 2008. The Company adopted the new guidance in
the first quarter of 2009. The adoption did not have a material
impact on the Companys consolidated financial position or
results of operations, as it is a disclosure-only standard.
In April 2009, the FASB issued new guidance related to the
disclosure of the fair value of financial instruments. The new
guidance, which is now a part of ASC 825,
Financial
Instruments
, requires fair value disclosures in both interim
as well as annual financial statements in order to provide more
timely information about the effects of current market
conditions on financial instruments. The new guidance is
effective for interim and annual periods ending after
June 15, 2009. The Company adopted the new guidance for its
interim period ending June 30, 2009. The adoption did not
have a material impact on the Companys consolidated
financial position for results of operations, as it is a
disclosure-only standard.
In April 2009, the FASB issued new guidance applicable to
investments in debt securities for which
other-than-temporary
impairments may be recorded. Under the new guidance, which is
now a part of ASC 320,
Investments Debt and
Equity Securities,
if an entitys management asserts
that it does not have the intent to sell a debt security and it
is more likely than not that it will not have to sell the
security before recovery of its cost basis, then an entity may
separate
other-than-temporary
impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other
amounts (recorded in other comprehensive income). This guidance
is to be applied prospectively and is effective for interim and
annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.
The adoption did not have a material impact on the
Companys consolidated financial position or results of
operations.
In May 2009, the FASB issued new guidance for accounting for
subsequent events. The new guidance, which is now a part of ASC
855,
Subsequent Events,
establishes the accounting for,
and disclosure of, events that occur after the balance sheet
date but before financial statements are issued or are available
to be issued. The new guidance requires the disclosure of the
date through which and entity has evaluated subsequent events
and the basis for that date. The Company adopted the new
guidance for its interim period ending June, 30, 2009. The
adoption of the new guidance and the related disclosures had no
impact on the Companys consolidated financial position or
results of operations.
During fiscal 2009, the Company recorded $1,200,000 of other
income, consisting primarily of a cash settlement from Covidien
Ltd. when the Company reached a settlement with Covidien Ltd.,
Tyco International (US) Inc. and Tyco Health Care Group, 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, 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.
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. 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.
51
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
1,983,279
|
|
|
$
|
2,274,199
|
|
Work-in-process
|
|
|
3,863,824
|
|
|
|
3,375,795
|
|
Finished goods
|
|
|
3,989,555
|
|
|
|
3,217,830
|
|
Reserve for inventory obsolescence
|
|
|
(126,424
|
)
|
|
|
(121,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,710,234
|
|
|
$
|
8,745,873
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Finite
Life Intangible Assets
|
Finite life intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Estimated Lives
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Trademarks
|
|
8 to 15
|
|
$
|
5,423,000
|
|
|
$
|
1,350,586
|
|
|
$
|
4,072,414
|
|
|
$
|
5,423,000
|
|
|
$
|
945,410
|
|
|
$
|
4,477,590
|
|
Supply agreement
|
|
5
|
|
|
634,000
|
|
|
|
422,670
|
|
|
|
211,330
|
|
|
|
634,000
|
|
|
|
295,870
|
|
|
|
338,130
|
|
Customer relationships
|
|
20
|
|
|
2,081,040
|
|
|
|
346,840
|
|
|
|
1,734,200
|
|
|
|
2,314,520
|
|
|
|
270,027
|
|
|
|
2,044,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
8,138,040
|
|
|
$
|
2,120,096
|
|
|
$
|
6,017,944
|
|
|
$
|
8,371,520
|
|
|
$
|
1,511,307
|
|
|
$
|
6,860,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these assets was as follows:
|
|
|
|
|
Year ended September 30, 2009
|
|
$
|
632,661
|
|
Year ended September 30, 2008
|
|
$
|
625,299
|
|
Year ended September 30, 2007
|
|
$
|
668,165
|
|
Estimated annual amortization expense for these assets over the
next five years is as follows:
|
|
|
|
|
2010
|
|
$
|
636,000
|
|
2011
|
|
$
|
594,000
|
|
2012
|
|
$
|
509,000
|
|
2013
|
|
$
|
509,000
|
|
2014
|
|
$
|
478,000
|
|
The Company leases many of its automobiles for its sales staff
in the United Kingdom for various terms under long-term,
non-cancelable operating lease agreements. The leases expire at
various dates through 2013. In the normal course of business, it
is expected that these leases will be replaced by leases on
other vehicles as the lease terms expire.
Lease expense totaled approximately $312,000, $245,000 and
$19,000 during fiscal 2009, 2008 and 2007, respectively.
52
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a schedule by year of estimated future minimum
rental payments required under the operating lease agreements:
|
|
|
|
|
2010
|
|
$
|
252,000
|
|
2011
|
|
$
|
197,000
|
|
2012
|
|
$
|
131,000
|
|
2013
|
|
$
|
1,000
|
|
Stock
Options
The Rochester Medical Corporation 1991 Stock Option Plan
authorized the issuance of up to 2,000,000 shares of Common
Stock. Under the terms of the 1991 Stock Option Plan, the Board
of Directors could grant employee incentive stock options equal
to fair market value of the Companys Common Stock or
employee non-qualified options at a price which could not be
less than 85% of the fair market value. Per the terms of the
1991 Stock Option Plan, as of April 20, 2001, no new stock
options may be granted under the 1991 Stock Option Plan. As of
September 30, 2009, 146,200 options remain outstanding
under the 1991 Stock Option Plan.
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. As of September 30,
2009, 88,000 shares remain available for issuance under the
1995 Non-Statutory Stock Option Plan, and there were no options
outstanding under the plan.
The 2001 Stock Incentive Plan authorizes the issuance of up to
2,000,000 shares of Common Stock pursuant to grants of
incentive stock options, non-qualified options or restricted
stock. 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 and restricted stock granted under
the 2001 Stock Incentive Plan is determined by the Compensation
Committee of the Companys Board of Directors. As of
September 30, 2009, 146,500 shares remain available
for issuance under the 2001 Stock Incentive Plan, and there were
1,348,500 options outstanding under the plan.
53
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 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
|
|
Options granted
|
|
|
(217,000
|
)
|
|
|
217,000
|
|
|
|
11.29
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(364,434
|
)
|
|
|
4.83
|
|
|
|
|
|
Options canceled
|
|
|
67,000
|
|
|
|
(67,000
|
)
|
|
|
11.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
234,500
|
|
|
|
1,494,700
|
|
|
$
|
7.21
|
|
|
|
5.74 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options exercisable at end of period
|
|
|
|
|
|
|
1,062,075
|
|
|
$
|
6.04
|
|
|
|
4.69 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 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,
2009, 2008 and 2007 was 1,062,075, 1,264,384 and 1,323,334 at a
weighted average exercise price of $6.04, $5.36 and $4.96 per
share, respectively.
At September 30, 2009, the aggregate intrinsic value of
options outstanding was $7,313,983, and the aggregate intrinsic
value of options exercisable was $6,428,970. Total intrinsic
value of options exercised was $2,848,159 for the year ended
September 30, 2009.
As of September 30, 2009, $1,302,539 of unrecognized
compensation costs related to non-vested awards is expected to
be recognized over a weighted average period of approximately
fourteen months.
54
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average fair value of options granted in 2009, 2008
and 2007 was $6.70, $6.86 and $8.03 per share, respectively. The
exercise price of options outstanding at September 30, 2009
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 9/30/09
|
|
|
Contractual Life
|
|
Outstanding
|
|
|
at 9/30/09
|
|
|
Exercisable
|
|
|
$0.00 $5.00
|
|
|
686,200
|
|
|
|
3.3 years
|
|
|
$
|
3.19
|
|
|
|
646,200
|
|
|
$
|
3.38
|
|
$5.01 $10.00
|
|
|
150,000
|
|
|
|
6.4 years
|
|
|
|
5.91
|
|
|
|
122,500
|
|
|
|
5.90
|
|
$10.01 $15.00
|
|
|
653,500
|
|
|
|
8.2 years
|
|
|
|
11.64
|
|
|
|
290,875
|
|
|
|
11.91
|
|
$15.01 $20.00
|
|
|
5,000
|
|
|
|
7.5 years
|
|
|
|
18.02
|
|
|
|
2,500
|
|
|
|
18.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,494,700
|
|
|
|
5.7 years
|
|
|
$
|
7.21
|
|
|
|
1,062,075
|
|
|
$
|
6.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
53
|
%
|
|
|
54
|
%
|
Risk-free interest rate
|
|
|
2.30
|
%
|
|
|
3.09
|
%
|
Expected holding period (in years)
|
|
|
8.17
|
|
|
|
8.13
|
|
Weighted-average grant-date fair value
|
|
$
|
6.70
|
|
|
$
|
6.86
|
|
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.
55
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
20,457
|
|
|
$
|
20,448
|
|
Inventory reserves
|
|
|
43,010
|
|
|
|
44,293
|
|
Inventory capitalization
|
|
|
506,438
|
|
|
|
514,072
|
|
Accrued expenses
|
|
|
114,855
|
|
|
|
56,200
|
|
Nonqualified option expense
|
|
|
936,176
|
|
|
|
994,478
|
|
Restricted stock expense
|
|
|
111,360
|
|
|
|
72,835
|
|
Capital loss carryforward
|
|
|
|
|
|
|
37,602
|
|
Prepaid taxes on intercompany sales
|
|
|
|
|
|
|
355,556
|
|
Charitable contributions
|
|
|
20,996
|
|
|
|
|
|
Research and development credits
|
|
|
194,783
|
|
|
|
|
|
Net operating loss
|
|
|
342,577
|
|
|
|
|
|
ASC 320 unrealized loss
|
|
|
197,678
|
|
|
|
153,141
|
|
|
|
|
|
|
|
|
|
|
Total income tax deferred assets
|
|
|
2,488,330
|
|
|
|
2,248,625
|
|
Deferred income tax liability:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
565,492
|
|
|
|
273,395
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
1,922,838
|
|
|
$
|
1,975,230
|
|
|
|
|
|
|
|
|
|
|
The deferred tax amounts above have been classified in the
accompanying balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current assets
|
|
$
|
1,153,964
|
|
|
$
|
1,143,931
|
|
Noncurrent assets
|
|
|
768,874
|
|
|
|
831,299
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,922,838
|
|
|
$
|
1,975,230
|
|
|
|
|
|
|
|
|
|
|
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 for
the year ended September 30, 2009.
56
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income (loss) before taxes and the provision for taxes for
the years ended September 30, 2009, 2008, and 2007 consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,155,518
|
|
|
$
|
317,024
|
|
|
$
|
41,700,139
|
|
Non-U.S.
|
|
|
(681,104
|
)
|
|
|
(136,376
|
)
|
|
|
797,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before taxes
|
|
$
|
474,414
|
|
|
$
|
180,648
|
|
|
$
|
42,497,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit)
|
|
$
|
622,512
|
|
|
$
|
(230,078
|
)
|
|
$
|
16,554,431
|
|
Deferred tax benefit
|
|
|
(163,393
|
)
|
|
|
(363,176
|
)
|
|
|
(212,801
|
)
|
Benefit of operating loss carryforwards
|
|
|
|
|
|
|
|
|
|
|
(8,140,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
459,119
|
|
|
|
(593,254
|
)
|
|
|
8,201,049
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
|
1,857
|
|
|
|
40,238
|
|
|
|
236,275
|
|
Deferred tax expense (benefit)
|
|
|
(95,234
|
)
|
|
|
(25,439
|
)
|
|
|
10,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
(93,377
|
)
|
|
|
14,799
|
|
|
|
246,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for taxes
|
|
$
|
365,742
|
|
|
$
|
(578,455
|
)
|
|
$
|
8,447,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the statutory federal income tax rate
and the effective income tax rate for the years ended September
30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory federal income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
35
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
6
|
|
|
|
28
|
|
|
|
2
|
|
Foreign taxes
|
|
|
29
|
|
|
|
52
|
|
|
|
1
|
|
Tax exempt interest
|
|
|
|
|
|
|
(142
|
)
|
|
|
(1
|
)
|
ASC 718 on incentive stock options
|
|
|
28
|
|
|
|
59
|
|
|
|
|
|
Change in valuation allowance and utilization of net operating
loss carryforward
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
R&D credits
|
|
|
(38
|
)
|
|
|
(310
|
)
|
|
|
|
|
Change in reserves
|
|
|
(2
|
)
|
|
|
129
|
|
|
|
|
|
Rate adjustment on deferred taxes
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
DPAD
|
|
|
8
|
|
|
|
(70
|
)
|
|
|
|
|
Other
|
|
|
12
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
77
|
%
|
|
|
(320
|
)%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 1, 2007, the Company adopted accounting
provisions that now form part of ASC 740,
Income Taxes
,
and which clarify the accounting for uncertainty in tax
positions recognized in the financial statements. These
provisions create a single model to address uncertainty in tax
positions and clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. ASC 740 also provides guidance on derecognition,
measurement,
57
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
classification, interest and penalties, accounting in interim
periods, disclosure and transition. At the adoption date,
October 1, 2007, the Company did not have a material
liability for unrecognized tax benefits. As of
September 30, 2009, the Company has recognized
approximately $56,000 for unrecognized tax benefits. If the
Company were to prevail on all unrecognized tax benefits
recorded at September 30, 2009, the total gross
unrecognized tax benefit totaling approximately $56,000 would
benefit the Companys effective tax rate if recognized.
It is the Companys practice to recognize penalties
and/or
interest to income tax matters in income tax expenses. As of
September 30, 2009, 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 completed an examination of our income
tax return for the fiscal year ended September 30, 2007,
and a settlement was reached in September 2009. ASC 740 reserves
relating to the settlement items were more than the additional
taxes assessed by the IRS. The remaining ASC 740 reserves
relating to the 2007 tax year were released during the year
ended September 30, 2009, as a result of the settlement.
A reconciliation of the beginning and ending amount of
unrecognized tax benefit is as follows:
|
|
|
|
|
Balance at October 1, 2008
|
|
$
|
239,496
|
|
Increases/(decreases) as a result of tax positions taken during
a prior period
|
|
|
21,764
|
|
Increases/(decreases) as a result of tax positions taken during
the current period (including interest)
|
|
|
27,175
|
|
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
|
|
|
(232,546
|
)
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
55,889
|
|
|
|
|
|
|
|
|
9.
|
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 and
2007, the Company incurred legal fees and expenses of
approximately $3,000 and $34,000, respectively, to such counsel
for services rendered in connection with litigation and for
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. There were no expenses incurred for legal fees
from this related party during the year ended September 30,
2009.
|
|
10.
|
Significant
Customers
|
Significant customers, measured as a percentage of sales, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Significant customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollister
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
15
|
%
|
Coloplast and Coloplast subsidiaries
|
|
|
10
|
|
|
|
14
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22
|
%
|
|
|
26
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
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, 2009, 2008 and 2007 was $136,497, $120,536
and $70,817, respectively.
Sales related to customers in the United States, Europe and the
rest of the world are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,446,788
|
|
|
$
|
14,143,490
|
|
|
$
|
13,925,808
|
|
Europe
|
|
|
18,794,401
|
|
|
|
19,107,071
|
|
|
|
16,777,866
|
|
Rest of world
|
|
|
1,557,640
|
|
|
|
1,941,388
|
|
|
|
1,959,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,798,829
|
|
|
$
|
35,191,949
|
|
|
$
|
32,663,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,936,346
|
|
|
$
|
13,557,637
|
|
Europe
|
|
|
7,638,386
|
|
|
|
8,582,924
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,574,732
|
|
|
$
|
22,140,561
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1,927,910 and $2,796,929 at September 30, 2009
and 2008, respectively.
In June 2006, we entered into a $7,000,000 credit facility with
U.S. Bank National Association. The credit facility
consisted 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%. In March
2009, we paid off the entire term loan and terminated the
revolving line of credit.
In February 2009, we entered into a $14,000,000 credit facility
with UBS Financial. The credit facility consists of a revolving
line of credit of up to $14,000,000 with interest accruing
monthly at a floating rate based on the quoted one-month LIBOR
rate plus 1.25%. As of September 30, 2009 we had an
outstanding balance of $1,878,447 under the revolving line of
credit. Our obligations under the credit facility are payable on
demand and are secured by our investments in marketable
securities held at UBS.
59
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Aggregate maturities of long-term debt are as follows for the
years ending September 30:
|
|
|
|
|
2010
|
|
$
|
2,786,622
|
|
2011
|
|
|
1,019,735
|
|
|
|
|
|
|
Total
|
|
$
|
3,806,357
|
|
|
|
|
|
|
|
|
14.
|
Share
Repurchase Program
|
On March 3, 2009, the Company announced its intention to
repurchase some of its outstanding common shares pursuant to its
previously authorized share repurchase program. Up to
2,000,000 shares may be repurchased from time to time on
the open market, or pursuant to negotiated or block
transactions, in accordance with applicable Securities and
Exchange Commission regulations. During the three months ended
September 30, 2009, no shares were repurchased. During
fiscal 2009, the Company repurchased 110,653 shares of
common stock pursuant to this program at an average price of
$9.56 per share. Total cash consideration for the repurchased
shares was approximately $1,100,000. As of September 30,
2009, there remained 1,847,347 shares that may be purchased
under the program.
|
|
15.
|
Quarterly
Results (Unaudited)
|
Summary data relating to the results of operations for each
quarter of the years ended September 30, 2009 and 2008
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
Fiscal year 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,436
|
|
|
$
|
8,445
|
|
|
$
|
8,909
|
|
|
$
|
9,009
|
|
Gross profit
|
|
|
3,925
|
|
|
|
4,414
|
|
|
|
4,184
|
|
|
|
4,303
|
|
Income (loss) from operations
|
|
|
(325
|
)
|
|
|
(90
|
)
|
|
|
(161
|
)
|
|
|
(173
|
)
|
Net income (loss) before taxes
|
|
|
(40
|
)
|
|
|
864
|
|
|
|
(176
|
)
|
|
|
(172
|
)
|
Net income (loss) per common share basic
|
|
$
|
.00
|
|
|
$
|
.03
|
|
|
$
|
(.01
|
)
|
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
.00
|
|
|
$
|
.03
|
|
|
$
|
(.01
|
)
|
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluated its September 30, 2009 financial
statements for subsequent events through December 11, 2009,
the date the financial statements were available to be issued.
The Company is not aware of any subsequent events which would
require recognition or disclosure in the financial statements.
60
|
|
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 then-current independent registered public
accounting firm, was dismissed by the Audit Committee as of
March 11, 2008.
In connection with the audit of the fiscal year 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 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.
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.
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.
61
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, 2009, 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, 2009, (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 information contained
under the heading Proposal No. 2
Proposal to Approve the Rochester Medical Corporation 2010 Stock
Incentive Plan Equity Compensation Plan
Information 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, 2009, is incorporated herein by
reference.
(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, 2009, is incorporated herein by
reference.
|
|
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, 2009, 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 Auditor 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, 2009,
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,
2009 and 2008.
62
(ii) Consolidated Statements of Operations for the years
ended September 30, 2009, 2008 and 2007.
(iii) Consolidated Statement of Shareholders Equity
and Comprehensive Income (Loss) for the years ended
September 30, 2009, 2008 and 2007.
(iv) Consolidated Statements of Cash Flows for the years
ended September 30, 2009, 2008 and 2007.
(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 3.1 of Registrants
Current Report on Form 8-K filed on June 12, 2009).
|
|
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
|
|
Form of Change of Control Agreement between the Company and each
of its executive officers. (Incorporated by reference to Exhibit
10.10 of the Registrants Annual Report on Form 10-K for
fiscal year ended September 30, 2000).
|
|
10
|
.6
|
|
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
|
.7
|
|
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
|
.8
|
|
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
|
.9
|
|
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
|
.10
|
|
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
|
.11
|
|
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).
|
|
10
|
.12
|
|
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
|
.13
|
|
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).
|
63
|
|
|
|
|
|
10
|
.14
|
|
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
|
.15
|
|
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
|
.16
|
|
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.
|
64
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 11, 2009
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:
|
|
David A. Jonas
David
A. Jonas
Attorney-in-Fact
|
|
|
Dated: December 11, 2009
65
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, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
65,202
|
|
|
$
|
|
|
|
|
|
|
|
$
|
1,833
|
|
|
$
|
63,369
|
|
Allowance for inventory obsolescence
|
|
|
121,951
|
|
|
|
52,512
|
|
|
|
|
|
|
|
48,039
|
|
|
|
126,424
|
|
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
|
|
|
|
|
(1)
|
|
Uncollectible accounts written off net of recoveries
|
|
(2)
|
|
Obsolete inventory written off against the allowance
|
66
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)
|
67
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