ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Our Management's 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.
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 patients who generally use such products at home. A small percentage of our urological products also are used in the acute care market, which
generally includes hospitals and extended care treatment facilities. Through our recently acquired subsidiary, Laprolan B.V., we also sell certain ostomy and wound and scar care products and other
brands of urological products into the European marketplace. The primary purchasers of our products are distributors, individual hospitals and healthcare institutions, and extended care facilities. We
sell our products directly and through private label partners, both in the domestic market and internationally. International sales accounted for approximately 63% and 65% of total sales in the fiscal
years ended September 30, 2012 and 2011, respectively.
The
urological products we manufacture include our silicone male external catheters (MECs), our standard and advanced lines of silicone and anti-infection intermittent
catheters and our
FemSoft Insert
. Through our fiscal year ended September 30, 2012, we also manufactured standard and advanced lines of silicone
and anti-infection Foley catheters for the acute care market. In November 2012, we announced our decision to cease manufacturing and marketing Foley catheters, and will focus on our core
product lines of MECs and intermittent catheters. Net sales of Foley catheters were approximately $4.0 million for fiscal 2012, representing approximately 6% of our total net sales. Costs and
expenses associated with manufacturing and marketing Foley catheters are extensive, and this product line had not yet reached a point of positive earnings contribution. As such, we estimate our
decision to exit this business will significantly enhance our profitability. We will continue to fulfill orders for Foley catheters for up to 90 days from announcement, during which time we
expect to deplete the majority of our remaining Foley inventory. We will continue to own the intellectual property associated with our Foley catheters in anticipation of deriving additional value from
those assets in the future.
Direct
sales include all our
Rochester Medical
branded sales,
Script Easy
sales and all of
our other sales at Laprolan. We market our products under our
Rochester Medical
brand through a direct sales force in the United States, the United
Kingdom and the Netherlands, and through independent distributors in other international markets. As part of our three year strategic business plan through fiscal 2013, we increased the level of
investment in our sales and marketing programs in fiscal 2011 to support our direct sales growth in the U.S. and Europe through the addition of several members to our sales team. As of
September 30, 2012, our U.S. direct sales force consisted of 34 members, which has been reduced to 21 members following our decision to exit the Foley catheter business. Internationally, we
sell our
Rochester Medical
branded products in the United Kingdom through a direct sales force of 29 members, and in the Netherlands through a direct
sales force of twelve members as of September 30, 2012, respectively.
In
the U.K., we also sell our
Rochester Medical
brand products and other companies' products direct to the patient 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. In fiscal 2012, the
Script-Easy
program contributed $12.8 million of net sales compared to
$10.4 million in fiscal 2011, and is the vehicle where new intermittent catheter patients and
FemSoft
patients in the U.K. are driven.
In
the Netherlands, we have the exclusive rights to market a range of continence care, ostomy and wound and scar care products of other medical device companies. Laprolan has been an
importer and distributor of medical products since 1986, and markets its products and services exclusively to healthcare institutions, physicians and specialty nurses. On April 7, 2011, we
completed the acquisition of the outstanding capital stock of Laprolan B.V., a
26
Table of Contents
corporation
organized under the laws of the Netherlands and a wholly owned subsidiary of Fornix BioSciences N.V., pursuant to a Share Purchase Agreement. We paid a cash purchase price at closing of
€10,474,974 (US$15,057,775, of which $60,217 was paid for the cash balance of Laprolan B. on January 1, 2011 and $119,433 was interest paid to Fornix from January 1, 2011
until closing). As provided in the Share Purchase Agreement, the transaction had a retroactive effective date of January 1, 2011, and the operating results of Laprolan B. are for our account
from and after January 1, 2011. We have applied purchase accounting as of that date and have included the results of Laprolan B. in our financial statements beginning with the second quarter of
our fiscal 2011.
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
20% of total sales in fiscal 2012, compared to 22% of total sales in fiscal 2011. Increasing our percentage of direct sales versus private label sales over time will have a positive impact on our
gross margin.
Net
sales for our fiscal year ended September 30, 2012 were $61.7 million, an increase of $8.3 million, or 16%, from $53.4 million in the prior fiscal year.
The increase in net sales resulted from an 18% increase in direct sales for the fiscal year, while private label sales increased 6% for the fiscal year. The increase in direct sales resulted from an
increase in sales to the home care market in the United States and internationally, as well as an increase in sales to the acute care market in the U.S., offset by a decrease in acute care sales
internationally. Home care direct sales accounted for 89% of total direct sales for our fiscal year ended September 30, 2012.
Our
five largest customers in fiscal 2012 represented approximately 31% 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.
In
September 2009, the
FemSoft Insert
was approved for inclusion in Part IX of the UK Drug Tariff as a prescription product that is
reimbursable under the National Healthcare System, commencing in 2010. In November 2009, the CMS issued a specific Medicare reimbursement code which covers our
FemSoft
Insert
. In January 2011, the CMS notified us of their decision regarding the Medicare reimbursement fee to be used for the
FemSoft
Insert
in response to our request that the pricing data used to establish the fee schedule be revised. The current Medicare fee schedule amount is based on price data that is
closest to a 1986/1987 base period and is significantly lower than the current retail price for the
FemSoft Insert
. We continue to believe that the
reimbursement fee is unreasonably low, and we intend to continue to pursue a dialog with the CMS in an effort to change the reimbursement rate. We continue to believe the availability of National
Healthcare System and Medicare reimbursement will help this unique device become an economically accessible and often preferred solution for incontinent women in the United Kingdom and in the United
States. While it is still too early to know the full potential of this product in the marketplace, management believes it can become an integral part of our product offering.
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 as we are able to increase utilization of our capacity through increased sales of our products.
As
of September 30, 2012, we had $13.9 million in cash and cash equivalents, and $6.8 million invested in marketable securities. The marketable securities primarily
consist of $6.3 million invested in U.S. treasury bills and $.5 million invested in CDs. Our investments in marketable securities are subject to interest rate risk and the value
27
Table of Contents
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.
Our
net income for fiscal 2012 was $2,050,000, or $.17 per diluted share compared to a net loss of $(1,315,000), or $(.11) per diluted share, in fiscal 2011. The increase in net income
for fiscal 2012 compared to fiscal 2011 primarily resulted from increased sales as well as reduced operating expenses incurred in 2012.
The
objective of our three year strategic plan that we adopted at the beginning of fiscal 2011 was to double our annual overall sales during the three fiscal years of the plan, while
also producing a significant increase in net income in the third fiscal year. As part of that plan, we increased the level of investment in our sales and marketing programs to support our direct sales
growth in the U.S. and Europe through the addition of several members to our sales team, with the increased investment expected to be funded primarily through cash generated from operations. We
recently updated our three-year strategic plan, primarily as
a result of the discontinuation of our Foley catheter line and, to a lesser extent, a more conservative assumption regarding international sales given the broader economic challenges in Europe,
although we still expect significant growth in sales and improved net income as a result of our strategic plan and the higher level of profitability we expect to achieve following our exit of the
Foley catheter business. Management believes that the ongoing strategic effort to grow our Rochester Medical direct sales through increased investment in sales and marketing programs is providing
positive results. Some quarter to quarter fluctuation in sales growth remains likely, however, through the term of the plan, primarily due to the timing of large private label orders, but we expect
quarterly fluctuations in sales to diminish as private label sales represent a smaller percentage of total sales. We will also continue to look for other strategic opportunities to increase our
product line and distribution capabilities.
Management's Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions.
We
believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of our financial statements.
Inventories, 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, 2012,
this reserve was $148,000 compared to $166,000 at September 30, 2011. 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.
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, 2012, this allowance was $86,000
28
Table of Contents
compared
to $45,000 at September 30, 2011. 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.
We have standard contract terms with all non-Group Purchase Organization customers 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 in that
month. 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
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 post-shipment obligations to, or acceptance provisions with, our customers, including our distributors.
The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United
States, Netherlands, and the United Kingdom, based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax asset to the amount that is more
likely than not to be realized. At September 30, 2012, we recorded a valuation allowance of $216,000 of which $42,000 is related to Minnesota R&D credit and $174,000 pertains to U.S. federal
capital loss carryovers as we believe it is more likely than not that these deferred tax assets will not be utilized in future years. We have not recorded a valuation allowance on any other 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.
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, 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. We test annually for impairment of the asset, currently on
June 1st of each fiscal year for the goodwill
29
Table of Contents
associated
with our 2006 U.K. acquisition and for the goodwill related to our 2011 Netherlands acquisition. We have determined the reporting unit continues to be at the enterprise level. We apply a
fair value based impairment test on an annual basis and on an interim basis if certain triggering events or circumstances indicate that an impairment loss may have occurred by comparing the fair value
of discounted cash flows for each reporting unit to its carrying value. Goodwill was approximately $9.1 million as of September 30, 2012 and 2011.
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-lived. 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 $9.4 million and $10.3 million as of
September 30, 2012 and 2011, respectively.
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 asset's (asset group's) 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.
Under the fair value recognition provisions of ASC 718,
Compensation-Stock
Compensation,
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. Total stock-based compensation expense recognized during the fiscal year ended September 30, 2012 was approximately $600,000 after-tax
($1.0 million pre-tax). See Note 7 to
our consolidated financial statements for further information regarding our stock-based compensation programs.
The
estimated fair value of restricted shares is determined by the market price at the date of grant and expensed over the vesting period of four years. 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 use the intrinsic value method to estimate the value
of restricted stock awards.
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 option's 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.
30
Table of Contents
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 income and
diluted net income per share of a future period. There were no modifications to any of our plans in 2012.
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.
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,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
|
|
50.0
|
|
|
50.1
|
|
|
51.8
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
50.0
|
|
|
49.9
|
|
|
48.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
29.5
|
|
|
35.2
|
|
|
29.3
|
|
Research and development
|
|
|
1.9
|
|
|
1.9
|
|
|
3.0
|
|
General and administrative
|
|
|
13.2
|
|
|
15.9
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
44.6
|
|
|
53.0
|
|
|
47.7
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
5.4
|
|
|
(3.1
|
)
|
|
0.5
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(0.4
|
)
|
|
(0.5
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
5.0
|
%
|
|
(3.6
|
)%
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
31
Table of Contents
The following table sets forth, for the periods indicated, net sales information by market category (acute care and home care), marketing method (private label
and direct sales) and distribution channel (domestic and international markets) (all dollar amounts below are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year to Date ended Sept 30, 2012
|
|
|
|
2012
|
|
|
|
2011
|
|
|
|
US
|
|
Europe
&
Middle
East
|
|
Rest of
World
|
|
Total
|
|
|
|
US
|
|
Europe
&
Middle
East
|
|
Rest of
World
|
|
Total
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care Direct
|
|
$
|
3,229
|
|
$
|
1,758
|
|
$
|
477
|
|
$
|
5,464
|
|
|
|
$
|
2,486
|
|
$
|
1,923
|
|
$
|
457
|
|
$
|
4,866
|
|
Home Care Direct
|
|
$
|
10,667
|
|
$
|
32,638
|
|
$
|
547
|
|
$
|
43,852
|
|
|
|
$
|
8,043
|
|
$
|
28,239
|
|
$
|
558
|
|
$
|
36,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Total
|
|
$
|
13,896
|
|
$
|
34,396
|
|
$
|
1,024
|
|
$
|
49,315
|
|
|
|
$
|
10,529
|
|
$
|
30,162
|
|
$
|
1,015
|
|
$
|
41,706
|
|
Private Label
|
|
$
|
9,027
|
|
$
|
3,317
|
|
$
|
24
|
|
$
|
12,368
|
|
|
|
$
|
8,188
|
|
$
|
3,455
|
|
$
|
24
|
|
$
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
22,922
|
|
$
|
37,713
|
|
$
|
1,048
|
|
$
|
61,683
|
|
|
|
$
|
18,717
|
|
$
|
33,617
|
|
$
|
1,039
|
|
$
|
53,373
|
|
Direct Product Mix
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care Direct
|
|
|
23
|
%
|
|
5
|
%
|
|
47
|
%
|
|
11
|
%
|
|
|
|
24
|
%
|
|
6
|
%
|
|
45
|
%
|
|
12
|
%
|
Home Care Direct
|
|
|
77
|
%
|
|
95
|
%
|
|
53
|
%
|
|
89
|
%
|
|
|
|
76
|
%
|
|
94
|
%
|
|
55
|
%
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Direct Geographic Mix
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care Direct
|
|
|
6
|
%
|
|
4
|
%
|
|
1
|
%
|
|
11
|
%
|
|
|
|
6
|
%
|
|
5
|
%
|
|
1
|
%
|
|
12
|
%
|
Home Care Direct
|
|
|
22
|
%
|
|
66
|
%
|
|
1
|
%
|
|
89
|
%
|
|
|
|
19
|
%
|
|
68
|
%
|
|
1
|
%
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Total
|
|
|
28
|
%
|
|
70
|
%
|
|
2
|
%
|
|
100
|
%
|
|
|
|
25
|
%
|
|
73
|
%
|
|
2
|
%
|
|
100
|
%
|
YOY Sales Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
32
|
%
|
|
14
|
%
|
|
1
|
%
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label
|
|
|
10
|
%
|
|
(4
|
)%
|
|
2
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
22
|
%
|
|
12
|
%
|
|
1
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Direct
Sales include sales made directly to the end consumer and include all
Rochester Medical
branded sales, UK
Script
Easy
sales and all Laprolan sales. Private label sales include our products packaged and sold by other manufacturers. Acute care refers to hospital sales. Home care refers to
non-hospital sales.
Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011
Net Sales.
Net sales increased 16% to $61.7 million in fiscal 2012 from $53.4 million in the prior fiscal year. The increase in
net
sales resulted primarily from an increase in direct sales in the Europe and Middle East ("EME") region and the U.S., an increase in private label sales in the U.S., offset by a slight decrease in EME
private label sales. The increase in direct sales resulted from an increase in home care sales in both the U.S. and EME regions as well as modest increases in home care sales in the rest of the world
("ROW") and acute care sales in the U.S., offset by a slight decrease in acute care sales in the ROW and EME. U.S. direct sales increased by 32% over last fiscal year. Our EME direct sales increased
14% compared to last year led by a strong increase in the U.K. and twelve months of revenue from Laprolan versus nine months of revenue the prior year. Management believes these results demonstrate
the favorable impact of our strategic decision to increase investments in direct sales and marketing programs for our
Rochester Medical
branded
products, particularly for our advanced intermittent catheters, which we believe will continue to drive growth in branded sales. Total net sales for the fiscal year were negatively affected by
$975,000 as a result of the stronger U.S.
dollar versus the pound sterling and the euro, thereby affecting sales given the significant volume of our
Rochester Medical
branded product sales in
the United Kingdom and the Netherlands. Direct sales in the ROW were flat compared to the same period last year. Private label sales were up
32
Table of Contents
$701,000
from last year. Private label sales accounted for approximately 20% of total sales in fiscal 2012 compared to 22% in the prior fiscal year. We expect private label sales as a percentage of
total sales to decline over time as we focus more on growing our direct sales.
Gross Margin.
Our gross margin as a percentage of net sales was 50% in fiscal 2012, unchanged from fiscal 2011. Increased sales and higher
mix of
lower margin products, particularly new advanced intermittent catheters and Foley catheters, offset manufacturing efficiencies and increased sales of higher margin products, particularly MECs.
Management expects the sale of our new advanced intermittent catheters will continue to have a negative impact on margin until we are producing them at higher levels needed to achieve manufacturing
efficiencies. However, the sale of Laprolan products and our direct sales in both the U.S. and EME should continue to have a positive impact on margin as we continue to focus on direct sales. Our exit
from the Foley catheter business should also have a positive impact on gross margin.
Marketing and Selling.
Marketing and selling expense primarily includes costs associated with base salary paid to sales and marketing
personnel,
sales commissions, and travel and advertising expense. Marketing and selling expense decreased 3% in fiscal 2012 as compared to fiscal 2011, with marketing and selling expense of approximately
$18.2 million in fiscal 2012 and $18.8 million in fiscal 2011. The decrease in marketing and selling expense is primarily due to $83,000 of decreased travel expenses, $498,000 of
decreased advertising and project costs primarily for acute care partially offset by increases for home care and new intermittent catheter product launches, $34,000 of decreased freight costs and a
$180,000 decrease in consulting fees, partially offset by $225,000 of increased compensation expenses for our home care sales and marketing team. Marketing and selling expense as a percentage of net
sales for fiscal 2012 was 30% compared to 35% for fiscal 2011.
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 to
$1.2 million in fiscal 2012 compared to $1.0 million in fiscal year 2011. The increase was primarily related to the addition of our Vice President, Development & Research.
Research
and development expense as a percentage of net sales for fiscal 2012 and fiscal 2011 was 2% and 2%, respectively.
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 decreased to
$8.2 million in 2012 from $8.5 million in fiscal 2011. The changes in general and administrative expense primarily related to a decrease of the one-time costs associated with
the acquisition of Laprolan incurred in fiscal 2011, decreases of $34,000 in compensation expenses and $58,000 in travel, and increases of $103,000 in depreciation. General and administrative expense
as a percentage of net sales for fiscal 2012 and fiscal 2011 was 13% and 16%, respectively.
Interest Income.
Interest income decreased 69% to $43,000 in fiscal 2012 from $140,000 in the prior fiscal year. The decrease reflects
overall lower
interest rates on investments and lower cash available for investment following the payoff of our line of credit balance.
Interest Expense.
Interest expense decreased 68% to $90,000 in fiscal 2012 from $277,000 in fiscal 2011. The decrease in interest expense
reflects
lower amounts of debt as a result of paying off the outstanding balance on our line of credit originally incurred to finance our acquisition of Laprolan.
Income Taxes.
During the current fiscal year we utilized federal net operating losses (NOLs) of approximately $456,000 and have
approximately
$1.6 million remaining. We have U.K. NOL carry-forwards as of September 30, 2012 of approximately 51,000 pounds sterling (approximately $82,000). For fiscal 2012, we have a valuation
allowance of $216,000 related to Minnesota R&D credit and U.S. federal capital loss carryovers as we believe it is more likely than not that these deferred tax assets will not be utilized in future
years. We have not
33
Table of Contents
recorded
a valuation allowance on any other 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 2012, we had an effective tax rate of approximately 34% resulting primarily from foreign operations, incentive stock options and other permanent differences. In future periods
of taxable earnings, we expect an effective tax rate in the range of 30-34%.
Net Income (Loss).
For fiscal 2012, we reported a net income of $2,050,000 compared to a net loss of $(1,315,000) in fiscal 2011. The
increase in net
income was primarily driven by increased sales resulting from our strategic investment in net sales and marketing programs and our focus on direct sales in home care markets as we executed on our
three year strategic business plan.
Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30, 2010
Net Sales.
Net sales increased 28% to $53.4 million in fiscal 2011 from $41.5 million in the prior fiscal year. The increase in
net
sales resulted primarily from an increase in direct sales in the Europe and Middle East ("EME") region and the U.S. for the fiscal year, offset by a slight decrease in private label sales. The
increase in direct sales resulted from an increase in home care sales in both the U.S. and EME regions as well as modest increases in acute care sales in the U.S., EME and the rest of the world
("ROW"), offset by a slight decrease in home care sales in the ROW. U.S. direct sales increased by 19% over last fiscal year. Our EME direct sales increased 50% compared to last year led by a strong
increase in both the U.K. and the Netherlands in acute care sales of 117% and home care sales of 46%. Private label sales were down slightly in both the U.S. and EME regions. Management believes these
results demonstrate the favorable impact of our strategic decision to increase investments in direct sales and marketing programs for our
Rochester
Medical
branded products. Additionally, beginning with the quarter ended March 31, 2011, direct sales include the sales of Laprolan B.V., our recently acquired
subsidiary in the Netherlands. Total sales were partially strengthened $491,000 as a result of the change in foreign currency exchange rates in the United Kingdom as the U.S. dollar was somewhat
weaker versus the pound sterling, thereby affecting sales positively given the significant volume of our
Rochester Medical
branded product sales in the
United Kingdom. Direct sales in the ROW increased slightly compared to the same period last year including an increase in acute care sales of $289,000 offset by a decrease in home care sales of
$228,000. Private label sales were down $186,000 from last year. Private label sales accounted for approximately 22% of total sales in fiscal 2011 compared to 28% in the prior fiscal year.
Gross Margin.
Our gross margin as a percentage of net sales was 50% in fiscal 2011, compared to 48% in fiscal 2010. Increased sales of lower
margin
products, particularly new advanced intermittent catheters and
Foley catheters, offset manufacturing efficiencies and increased sales of higher margin products, particularly male external catheters.
Marketing and Selling.
As part of our three year strategic business plan through fiscal 2013, we continued to increase the investment in our
sales
and marketing programs, primarily through cash generated from current operations and use of available funds, to support direct 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 54% in fiscal
2011 as compared to fiscal 2010, with marketing and selling expense of approximately $18.8 million in fiscal 2011 and $12.2 million in fiscal 2010. The increase in marketing and selling
expense is primarily related to $5,258,000 of compensation expenses, $1,029,000 of increased travel expenses, $441,000 of increased advertising and project costs mostly focused on our
FemSoft Insert
and
our new advanced intermittent and Foley catheters, $327,000 in freight and $58,000 increase in consulting fees. Marketing and selling
expense as a percentage of net sales for fiscal 2011 was 35% compared to 29% for fiscal 2010.
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
34
Table of Contents
expense
decreased from the prior year to $1.0 million in fiscal 2011 compared to $1.2 million in fiscal year 2010. Research and development expense as a percentage of net sales for
fiscal 2011 and fiscal 2010 was 2% and 3%, respectively.
General and Administrative.
General and administrative expense primarily includes payroll expense related to our management and accounting,
information technology and human resources staff, as well as fees and expenses of outside legal counsel, accounting advisors and auditors. General and administrative expense increased to
$8.5 million in 2011 from $6.4 million in fiscal 2010. The changes in general and administrative expense primarily relate to one-time costs associated with the acquisition of
Laprolan, administrative expenses in Laprolan and increases of $160,000 in compensation expenses, $186,000 in depreciation, and $45,000 of travel expenses, offset by decreases of $56,000 in
professional fees. General and administrative expense as a percentage of net sales for fiscal 2011 and fiscal 2010 was 16% and 15%, respectively.
Interest Income.
Interest income decreased 41% to $140,000 in fiscal 2011 from $239,000 in the prior fiscal year. The decrease reflects
overall lower
interest rates on investments.
Interest Expense.
Interest expense increased 56% to $277,000 in fiscal 2011 from $177,000 in fiscal 2010. The increase in interest expense
reflects
increased interest related to debt incurred to fund the acquisition of Laprolan.
Income Taxes.
During fiscal 2011 we generated U.S. federal net operating losses (NOLs) of approximately $3.8 million. We had U.K. NOL
carry-forwards as of September 30, 2011 of approximately 1.3 million pounds sterling (approximately $2.1 million). For fiscal 2011, we recorded a valuation allowance of $42,000
related to Minnesota R&D credit carryovers as we believe it is more likely than not that the deferred tax asset will not be utilized in future years. We did not record a valuation allowance on any
other 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 2011, we had an effective tax rate of approximately 32% resulting primarily from foreign operations, incentive stock options and a few adjustments having an effect on the tax
rate. These discrete adjustments included retroactive changes in deferred taxes as a result of a change in tax rates and recording a valuation allowance in the current year for Minnesota R&D credit
carryovers. The amount of these items in comparison to our net income for the current year results in a significant effect on our effective tax rate percentage.
Net Income (Loss).
For fiscal 2011, we reported a net loss of $(1,315,000) compared to a net loss of $(254,000) in fiscal 2010. The increase
in net
loss was primarily impacted by our increased investment in sales and marketing programs as contemplated by our three year strategic business plan and one-time costs associated with the
acquisition of Laprolan.
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 $20.7 million at September 30, 2012, compared with $34.9 million at September 30, 2011. The decrease
in cash primarily resulted from cash used for capital expenditures, stock repurchases and debt repayments, partially offset by cash provided by operations and from stock option exercises. As of
September 30, 2012, we had $6.8 million invested in marketable securities. The marketable securities primarily consist of $6.3 million invested in U.S. treasury bills and
$.5 million in CDs. Our investments in marketable securities are subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our
investment choices, however, are conservative and are intended to reduce the risk of loss or any material impact on our financial condition.
35
Table of Contents
We
generated a net $5.9 million of cash from operating activities during the year compared with $2.6 million for the same period last year, with the primary difference
being positive net income and decreased levels of inventory offset by increased accounts receivable. Cash flow provided by operating activities in 2012 was comprised of net income of
$2.0 million decreased by an increase in net working capital components of $.2 million and increased by net non-cash charges of $4.0 million, including depreciation
and amortization of $2.7 million and stock-based compensation of $1.0 million. Significant working capital changes are as follows:
-
-
a $2,260,000 increase in accounts receivable reflecting timing of cash collections over prior year and sales growth,
-
-
a $1,426,000 decrease in inventory levels,
-
-
a $650,000 decrease in deferred income taxes,
-
-
a $52,000 increase in prepaid expenses and other current assets,
-
-
a $278,000 increase in accounts payable reflecting timing of payments, and
-
-
a $241,000 increase in income taxes payable.
During
fiscal 2012, our working capital position, excluding cash and marketable securities, increased by $18.3 million as a result of the pay off of short term borrowings used to
fund the acquisition of Laprolan. Accounts receivable balances increased $2.2 million during the fiscal year primarily due to growth in sales in the fourth quarter. Inventories as of
September 30, 2012 decreased $1.4 million over fiscal 2011. Changes in other asset and liability balances related to timing differences.
Investing
activities, primarily the sale of marketable securities offset by purchases of property, plant and equipment, provided net cash of $17.9 million in fiscal 2012.
Financing
activities, primarily payments on short term debt and share repurchases, used net cash of $18.7 million in fiscal 2012.
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 was non-interest bearing, payable and due in five equal installments of $1,068,000 payable annually on June 2. We discounted the note at 6.90%. The
final payment of $1,068,000 was made in May 2011.
In
December 2010, we entered into a credit facility with RBC Wealth Management. The credit facility consists of a revolving line of credit of up to $25,000,000 with interest accruing
monthly at a variable rate currently at 1.375%. In conjunction with the closing of the Laprolan acquisition, on April 7, 2011, we drew down $15,057,775 from the line of credit. In January 2012,
we used a portion of our cash and cash equivalents and marketable securities and paid off our entire outstanding balance on our line of credit. The borrowings under this credit facility are limited to
the value of eligible assets held with RBC Wealth
Management. The credit facility now consists of a revolving line of credit of up to $5,000,000 with interest accruing monthly at a variable rate of 1.375% as of September 30, 2012. As of
September 30, 2012, we had no outstanding balance under the revolving line of credit.
We
currently believe that our existing resources and anticipated cash flows from operations will be sufficient to satisfy our capital needs for the foreseeable future. However, our
actual liquidity and capital requirements will depend upon numerous factors, including the costs, method and timing of expansion of sales and marketing activities; the amount of revenues from sales of
our existing and new products; changes in, termination of, and the success of, existing and new distribution arrangements; the cost of maintaining, enforcing and defending patents and other
intellectual property rights; competing technological and market developments; developments related to regulatory and third party reimbursement matters; the cost and progress of our research and
development efforts; opportunities for growth through acquisition, joint venture or other business combinations, if any; and other factors. Our ability to obtain financing for acquisitions or other
general corporate and commercial purposes will depend on
36
Table of Contents
our
operating and financial performance and is also subject to prevailing economic and financial conditions and to 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.
The following table summarizes our contractual commitments and commercial obligations that affect our financial condition and liquidity
position as of September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5
years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits under FIN 48(1)
|
|
$
|
32,621
|
|
$
|
|
|
$
|
32,621
|
|
$
|
|
|
$
|
|
|
Operating leases
|
|
|
1,458,190
|
|
|
654,504
|
|
|
803,686
|
|
|
|
|
|
|
|
Purchase obligations (general operating)
|
|
|
3,075,921
|
|
|
3,075,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
4,566,732
|
|
$
|
3,730,425
|
|
$
|
836,307
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See
Item 8 of Part II of this Form 10-K, "Financial Statements and Supplementary Data
Note 8 Income Taxes."
As of September 30, 2012, we did not have any significant off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K.
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05,
"
Presentation of Comprehensive Income
" which requires comprehensive income to be reported in either a single statement or in two consecutive statements
reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income. Additionally, in December 2011, the FASB issued ASU
No. 2011-12, "
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of
Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
" which indefinitely defers the requirement in ASU
No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the
statement in which other comprehensive income is presented. During the deferral period, the existing requirements in U.S. GAAP for the presentation of reclassification adjustments must continue
to be followed. These standards will be effective for our fiscal quarter beginning October 1, 2012 with retrospective application required. As these standards impact presentation requirements
only, the adoption of this guidance will not have an impact on our results of operations or financial position.
37
Table of Contents
In
September 2011, the FASB issued ASU No. 2011-08,
"Testing Goodwill for Impairment"
that is intended to simplify how
entities test goodwill for impairment. This ASU permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less
than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350,
"
Intangibles Goodwill and Other
." This update is effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011 (our fiscal 2013). This standards update is not expected to have a material impact on our financial statements.
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 successfully establishing our separate
Rochester
Medical
brand identity and increasing our direct sales;
-
-
the uncertainty of timing of revenues from private label sales (particularly with respect to international customers);
-
-
the uncertainty of successfully growing our international operations;
-
-
the risks associated with operating an international business, including the impact of foreign currency exchange rate
fluctuations;
-
-
the uncertainty of gaining new strategic relationships;
-
-
the uncertainty of securing Group Purchasing Organization contract participation;
-
-
the uncertainty of gaining significant sales from secured GPO contracts;
-
-
FDA and other regulatory review and response times;
-
-
the impact of continued healthcare cost containment;
-
-
new laws related to healthcare availability, healthcare reform, payment for healthcare products and services or the
marketing and distribution of products, including legislative or administrative reforms to the U.S. Medicare and Medicaid systems or other U.S. or international reimbursement systems;
-
-
changes in the tax or environmental laws or standards affecting our business;
-
-
current economic instability in the U.S. and international economies;
-
-
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.
38
Table of Contents
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, British pounds and euros. The carrying value of these cash equivalents approximates fair market value. Our investments in marketable securities are
subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our investment choices, however, are conservative in light of current economic
conditions, and include primarily U.S. treasury bills to reduce the risk of loss or any material impact on our financial condition. Our revolving line of credit bears interest at a variable rate
currently at 1.375%. As of September 30, 2012 we had no outstanding balance under the revolving line of credit.
In
future periods, we believe a greater portion of our revenues could be denominated in currencies other than the U.S. dollar, thereby increasing our exposure to exchange rate gains and
losses on
non-United States currency transactions. Sales through our subsidiary, Rochester Medical, Ltd., are denominated in pound sterling, and fluctuations in the rate of exchange between the U.S.
dollar and the pound sterling could adversely affect our financial results. Similarly, sales through our subsidiary, Laprolan B.V., are denominated in euros, and fluctuations in the rate of exchange
between the U.S. dollar and the euro could adversely affect our financial results.
Otherwise,
we do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant
market price risks of a material nature. We do not currently use derivative financial instruments to manage interest rate risk or enter into forward exchange contracts to hedge exposure to foreign
currencies, or any other derivative financial instruments for trading or speculative purposes. In the future, if we believe an increase in our currency exposure merits further review, we may consider
entering into transactions to mitigate that risk.
39
Table of Contents
ITEM 8. Financial Statements and Supplementary Data
Rochester Medical Corporation
Consolidated Financial Statements
Years Ended September 30, 2012, 2011 and 2010
40
Table of Contents
Report of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders
Rochester Medical Corporation
We
have audited the accompanying consolidated balance sheets of Rochester Medical Corporation (a Minnesota corporation) and subsidiaries (collectively, the "Company") as of
September 30, 2012 and 2011, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for each of the three years in the
period ended September 30, 2012. Our audits of the basic consolidated 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 Company's management. Our responsibility is to express an opinion on these financial statements and financial
statement 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 provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rochester Medical Corporation and subsidiaries
as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012, 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 consolidated 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), the Company's internal control over financial reporting as of
September 30, 2012, 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 19, 2012 expressed an adverse opinion on the effectiveness of the Company's internal control over
financial reporting.
/s/
Grant Thornton LLP
Minneapolis,
Minnesota
December 19, 2012
41
Table of Contents
Report of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders
Rochester Medical Corporation
We
have audited Rochester Medical Corporation's (a Minnesota corporation) internal control over financial reporting as of September 30, 2012, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Rochester Medical Corporation's 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 Management's
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Rochester Medical Corporation's 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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
company's 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 company's 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 company's 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.
A
material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in
management's assessment. The Company had misinterpreted the accounting standards related to the classification of shipping and handling fees and related costs and the misinterpretation was not
identified in management's review of the financial statement reporting disclosures.
In
our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Rochester Medical Corporation has not
maintained effective internal control over financial reporting as of September 30, 2012, based on criteria established in
Internal Control
Integrated Framework
issued by COSO.
42
Table of Contents
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, 2012 and 2011, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows and financial statement schedule
for each of the three years in the period ended September 30, 2012. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in
our audit of the 2012 financial statements, and this report does not affect our report dated December 19, 2012, which expressed an unqualified opinion on those financial statements and
financial statement schedule.
/s/
Grant Thornton LLP
Minneapolis,
Minnesota
December 19, 2012
43
Table of Contents
ROCHESTER MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,921,363
|
|
$
|
8,722,935
|
|
Marketable securities
|
|
|
6,779,695
|
|
|
26,182,308
|
|
Accounts receivable, less allowance for doubtful accounts ($86,268 2012; $44,595 2011)
|
|
|
11,008,429
|
|
|
8,644,332
|
|
Inventories
|
|
|
9,883,651
|
|
|
11,278,694
|
|
Prepaid expenses and other current assets
|
|
|
1,726,908
|
|
|
1,361,259
|
|
Deferred income tax asset
|
|
|
1,287,177
|
|
|
1,618,495
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,607,223
|
|
|
57,808,023
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
Land
|
|
|
1,111,314
|
|
|
1,115,883
|
|
Buildings
|
|
|
9,539,813
|
|
|
9,455,840
|
|
Equipment and fixtures
|
|
|
20,550,952
|
|
|
19,531,006
|
|
|
|
|
|
|
|
|
|
|
31,202,079
|
|
|
30,102,729
|
|
Less accumulated depreciation
|
|
|
(19,340,007
|
)
|
|
(18,050,044
|
)
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
11,862,072
|
|
|
12,052,685
|
|
Deferred income tax asset
|
|
|
1,030,994
|
|
|
1,242,010
|
|
Goodwill
|
|
|
9,053,091
|
|
|
9,094,725
|
|
Intangible assets, less accumulated amortization ($4,628,474 2012; $3,682,633 2011)
|
|
|
9,191,727
|
|
|
10,061,655
|
|
Patents, less accumulated amortization ($1,385,266 2012; $1,328,486 2011)
|
|
|
185,627
|
|
|
211,016
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
75,930,734
|
|
$
|
90,470,114
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,070,329
|
|
$
|
2,773,398
|
|
Accrued compensation
|
|
|
1,970,468
|
|
|
1,460,726
|
|
Accrued expenses
|
|
|
1,456,929
|
|
|
1,500,544
|
|
Current maturities of debt
|
|
|
|
|
|
17,862,185
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,497,726
|
|
|
23,596,853
|
|
Long-term liabilities
|
|
|
1,137,212
|
|
|
896,414
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Common stock, no par value:
|
|
|
|
|
|
|
|
Authorized shares 40,000,000
|
|
|
|
|
|
|
|
Issued and outstanding shares: (12,120,050 2012; 12,141,817 2011)
|
|
|
56,904,308
|
|
|
56,829,350
|
|
Retained earnings
|
|
|
15,313,858
|
|
|
13,263,374
|
|
Accumulated other comprehensive loss
|
|
|
(3,922,370
|
)
|
|
(4,115,877
|
)
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
68,295,796
|
|
|
65,976,847
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
75,930,734
|
|
$
|
90,470,114
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
44
Table of Contents
ROCHESTER MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Net sales
|
|
$
|
61,683,201
|
|
$
|
53,372,698
|
|
$
|
41,547,788
|
|
Cost of sales
|
|
|
30,865,556
|
|
|
26,723,946
|
|
|
21,509,126
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,817,645
|
|
|
26,648,752
|
|
|
20,038,662
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
18,244,034
|
|
|
18,814,445
|
|
|
12,203,733
|
|
Research and development
|
|
|
1,190,095
|
|
|
1,008,767
|
|
|
1,235,367
|
|
General and administrative
|
|
|
8,170,468
|
|
|
8,502,956
|
|
|
6,391,003
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,604,597
|
|
|
28,326,168
|
|
|
19,830,103
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
3,213,048
|
|
|
(1,677,416
|
)
|
|
208,559
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
43,243
|
|
|
139,859
|
|
|
239,171
|
|
Other expense
|
|
|
(84,458
|
)
|
|
(123,901
|
)
|
|
|
|
Interest expense
|
|
|
(89,545
|
)
|
|
(277,008
|
)
|
|
(177,401
|
)
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
(130,760
|
)
|
|
(261,050
|
)
|
|
61,770
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3,082,288
|
|
|
(1,938,466
|
)
|
|
270,329
|
|
Income tax benefit (expense)
|
|
|
(1,031,804
|
)
|
|
623,162
|
|
|
(523,864
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,050,484
|
|
$
|
(1,315,304
|
)
|
$
|
(253,535
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
.17
|
|
$
|
(.11
|
)
|
$
|
(.02
|
)
|
Net income (loss) per common share diluted
|
|
$
|
.17
|
|
$
|
(.11
|
)
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding basic
|
|
|
12,032,113
|
|
|
12,217,900
|
|
|
12,181,549
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding diluted
|
|
|
12,339,500
|
|
|
12,217,900
|
|
|
12,181,549
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
45
Table of Contents
ROCHESTER MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balance at September 30, 2009
|
|
|
12,190,367
|
|
$
|
56,840,856
|
|
$
|
14,832,213
|
|
$
|
(2,853,172
|
)
|
$
|
68,819,897
|
|
Net loss for the year
|
|
|
|
|
|
|
|
|
(253,535
|
)
|
|
|
|
|
(253,535
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(117,457
|
)
|
|
(117,457
|
)
|
Unrealized gain on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
84,871
|
|
|
84,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal-comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286,121
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
39,970
|
|
|
|
|
|
|
|
|
39,970
|
|
Stock based compensation
|
|
|
|
|
|
1,481,102
|
|
|
|
|
|
|
|
|
1,481,102
|
|
Common stock repurchased
|
|
|
(132,915
|
)
|
|
(1,202,339
|
)
|
|
|
|
|
|
|
|
(1,202,339
|
)
|
Stock option exercises
|
|
|
15,000
|
|
|
40,942
|
|
|
|
|
|
|
|
|
40,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
12,072,452
|
|
|
57,200,531
|
|
|
14,578,678
|
|
|
(2,885,758
|
)
|
|
68,893,451
|
|
Net loss for the year
|
|
|
|
|
|
|
|
|
(1,315,304
|
)
|
|
|
|
|
(1,315,304
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(1,201,334
|
)
|
|
(1,201,334
|
)
|
Unrealized loss on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
(28,785
|
)
|
|
(28,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal-comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,545,423
|
)
|
Stock based compensation
|
|
|
|
|
|
1,495,773
|
|
|
|
|
|
|
|
|
1,495,773
|
|
Common stock repurchased
|
|
|
(284,585
|
)
|
|
(2,513,871
|
)
|
|
|
|
|
|
|
|
(2,513,871
|
)
|
Restricted shares issued
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
313,950
|
|
|
646,917
|
|
|
|
|
|
|
|
|
646,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
|
12,141,817
|
|
|
56,829,350
|
|
|
13,263,374
|
|
|
(4,115,877
|
)
|
|
65,976,847
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
2,050,484
|
|
|
|
|
|
2,050,484
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(13,198
|
)
|
|
(13,198
|
)
|
Unrealized gain on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
206,705
|
|
|
206,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal-comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,243,991
|
|
Stock based compensation
|
|
|
|
|
|
983,286
|
|
|
|
|
|
|
|
|
983,286
|
|
Restricted shares issued
|
|
|
61,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares canceled
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(150,900
|
)
|
|
(1,088,619
|
)
|
|
|
|
|
|
|
|
(1,088,619
|
)
|
Stock option exercises
|
|
|
69,250
|
|
|
180,291
|
|
|
|
|
|
|
|
|
180,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
|
12,120,050
|
|
$
|
56,904,308
|
|
$
|
15,313,858
|
|
$
|
(3,922,370
|
)
|
$
|
68,295,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
46
Table of Contents
ROCHESTER MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,050,484
|
|
$
|
(1,315,304
|
)
|
$
|
(253,535
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,643,014
|
|
|
1,538,102
|
|
|
1,407,963
|
|
Amortization
|
|
|
1,006,847
|
|
|
978,953
|
|
|
694,925
|
|
Stock based compensation
|
|
|
983,286
|
|
|
1,495,773
|
|
|
1,481,102
|
|
Deferred income taxes
|
|
|
650,209
|
|
|
(834,412
|
)
|
|
(172,627
|
)
|
Gain on disposal of property and equipment
|
|
|
(40,037
|
)
|
|
|
|
|
|
|
Loss on sale of investment
|
|
|
128,997
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(2,260,106
|
)
|
|
652,640
|
|
|
(1,481,287
|
)
|
Inventories
|
|
|
1,426,371
|
|
|
(323,136
|
)
|
|
409,967
|
|
Prepaid expenses and other current assets
|
|
|
(52,498
|
)
|
|
(519,003
|
)
|
|
228,520
|
|
Accounts payable
|
|
|
278,123
|
|
|
478,189
|
|
|
269,679
|
|
Income tax payable
|
|
|
(241,044
|
)
|
|
614,218
|
|
|
265,874
|
|
Other current liabilities
|
|
|
362,594
|
|
|
(120,912
|
)
|
|
267,041
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,936,240
|
|
|
2,645,108
|
|
|
3,117,622
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(1,519,437
|
)
|
|
(1,756,285
|
)
|
|
(1,763,869
|
)
|
Proceeds from sale of property and equipment
|
|
|
79,227
|
|
|
|
|
|
|
|
Business acquisition, net of cash acquired
|
|
|
|
|
|
(15,057,816
|
)
|
|
|
|
Patents, intangibles and goodwill
|
|
|
(265,423
|
)
|
|
346,571
|
|
|
(65,882
|
)
|
Purchases of marketable securities
|
|
|
(25,245,286
|
)
|
|
(46,363,183
|
)
|
|
(66,622,304
|
)
|
Sales and maturities of marketable securities
|
|
|
44,899,761
|
|
|
51,101,714
|
|
|
65,683,722
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
17,948,842
|
|
|
(11,728,999
|
)
|
|
(2,768,333
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt
|
|
|
778,623
|
|
|
17,864,367
|
|
|
|
|
Increase in short-term debt
|
|
|
|
|
|
|
|
|
600,000
|
|
Payments on long-term debt
|
|
|
(18,640,808
|
)
|
|
(2,643,415
|
)
|
|
(1,765,124
|
)
|
Excess tax benefit from exercises of stock options
|
|
|
|
|
|
|
|
|
39,979
|
|
Repurchase of common stock
|
|
|
(1,088,619
|
)
|
|
(2,513,871
|
)
|
|
(1,202,339
|
)
|
Proceeds from issuance of common stock
|
|
|
180,291
|
|
|
646,917
|
|
|
40,942
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(18,770,513
|
)
|
|
13,353,998
|
|
|
(2,286,542
|
)
|
Effect of exchange rate on cash and cash equivalents
|
|
|
83,859
|
|
|
(93,079
|
)
|
|
117,576
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
5,198,428
|
|
|
4,177,028
|
|
|
(1,819,677
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
8,722,935
|
|
|
4,545,907
|
|
|
6,365,584
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
13,921,363
|
|
$
|
8,722,935
|
|
$
|
4,545,907
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
164,178
|
|
$
|
73,907
|
|
$
|
109,779
|
|
Cash paid for income taxes
|
|
|
863,865
|
|
|
85,602
|
|
|
264,743
|
|
The
accompanying notes are an integral part of these financial statements.
47
Table of Contents
ROCHESTER MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
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 and intermittent catheters, and innovative and technologically advanced products such as its
FemSoft Insert
and antibacterial and hydrophilic
intermittent catheters. Through fiscal 2012, the Company also manufactured and marketed a line of standard and advanced Foley catheters. The Company markets its products under its
Rochester Medical
brand, and 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 Company also sells certain ostomy and wound and scar care products and other brands of urological products into the European marketplace.
The
Company's fiscal year end is September 30. The accompanying financial statements include the accounts of Rochester Medical Corporation, Rochester Medical Limited, its wholly
owned subsidiary in the United Kingdom, and Laprolan B.V., its wholly owned subsidiary in the Netherlands, 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, valuations used in the purchase of Laprolan and related to annual impairment testing, deferred income taxes and stock-based compensation. Actual results could
differ from those estimates.
2. Summary of Significant Accounting Policies
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in
the Unites States of America ("U.S. GAAP"). References in this report to a particular fiscal year are to the twelve months ended September 30 of that year.
The
accompanying consolidated financial statements include the accounts of Rochester Medical Corporation and its wholly owned subsidiaries. All material intercompany accounts and
transactions are eliminated in consolidation.
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 $7.7 million and $7.0 million at September 30, 2012 and 2011 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.
As of September 30, 2012, the Company has $6.8 million invested in high quality, investment grade debt securities,
primarily consisting of $6.3 million invested in U.S. treasury bills and $.5 million invested in CDs. At
48
Table of Contents
September 30,
2011, the Company's marketable securities included $26.2 million invested in high quality, investment grade debt securities, consisting of $16.5 million invested in
U.S. treasury bills, $3.2 million invested in a mutual fund and $6.5 million invested in CDs. The Company reported an unrealized loss from the mutual fund of $.5 million at
September 30, 2011. The mutual fund was liquidated in 2012 and a loss of $.1 million was realized.
Marketable
securities are classified as available for sale and are carried at fair value, with unrealized gains or losses included as a separate component of shareholders' equity. The
cost and fair value of available-for-sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gain/(Loss)
|
|
Fair Value
|
|
September 30, 2012
|
|
$
|
6,777,874
|
|
$
|
1,821
|
|
$
|
6,779,695
|
|
September 30, 2011
|
|
$
|
26,641,059
|
|
$
|
(458,751
|
)
|
$
|
26,182,308
|
|
Realized
gains and 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.
Accounting
Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures
, establishes a framework for measuring fair value of
financial assets and liabilities that are re-measured and reported at each reporting period. Fair value is defined as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires that fair value measurements be classified and disclosed using one of the
following three categories:
Level 1.
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2.
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for
similar assets or liabilities; quoted prices for identical or similar assets in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities; or
Level 3.
Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.
The
Company has determined that the values given to its marketable securities are appropriate and are measured using Level 1 inputs.
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 amount of the Company's long-term debt at September 30, 2011 approximated fair value
based on rates offered to the Company for debt.
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.
49
Table of Contents
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 Company's previous loss history, the customer's 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 management's expectations.
Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is based on estimated useful lives of
4-10 years for equipment and fixtures and 25-35 years for buildings computed using the straight-line method. Additions and improvements that extend
the lives of the assets are capitalized while expenditures for repairs and maintenance are expensed as incurred.
Intangible assets consist primarily of purchased trademarks, a supply agreement and customer relationships, and are amortized using the
straight-line method, as appropriate,
over their estimated useful lives, ranging from 5 to 20 years. The Company reviews these intangible assets for impairment as changes in circumstance or the occurrence of triggering events
suggest the remaining value may not be recoverable. No impairment loss on intangible assets was recognized in the fiscal years ended September 30, 2012, 2011 and 2010.
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,
Intangibles Goodwill and Other
. Under ASC 350, goodwill and intangibles with indefinite useful lives are
not amortized. Goodwill is also not amortizable for tax purposes. 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 has $4.3 million of goodwill
carrying value as of September 30, 2012 resulting from its acquisition in the U.K. of Rochester Medical Limited in 2006 and $4.8 million of goodwill carrying value resulting from its
acquisition in the Netherlands of Laprolan B.V. in 2011. The Company tests annually for impairment of the asset, currently on June 1st of each fiscal year for the goodwill associated
with the Company's 2006 U.K. acquisition and for the goodwill related to the 2011 Netherlands acquisition, or more frequently if the occurrence of triggering events and circumstances indicate that the
asset might be impaired. The Company applies a fair value based impairment test on an annual basis and on an interim basis if certain triggering events or circumstances indicate that an impairment
loss may have occurred by comparing the fair value of discounted cash flows for each reporting unit to its carrying value. The Company performed its most recent annual impairment testing of the
goodwill at June 1, 2012, and concluded that the goodwill was not impaired. In the third quarter of fiscal 2012, the Company did decrease the previously reported goodwill balance and deferred
tax liabilities as of September 30, 2011 by $669,000 to record a deferred tax asset related to Laprolan that existed as of the acquisition date and which impacted purchase accounting and was
treated as a correction of an immaterial error.
50
Table of Contents
No
impairment loss on goodwill was recognized in the fiscal years ended September 30, 2012, 2011 and 2010. The goodwill and intangible assets related to the Rochester Medical Limited and
Laprolan B.V. acquisitions are accounted for in British pounds and euros, respectively. The decrease in value of goodwill as of September 30, 2012 compared to September 30, 2011 is due
to the decrease in foreign currency exchange rates in the United Kingdom and the Eurozone.
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 asset's (asset group's) 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 on
long-lived assets was recognized in the fiscal years ended September 30, 2012, 2011 and 2010.
The financial statements of the Company's non-U.S. subsidiaries are translated into U.S. dollars in accordance with
ASC 830,
Foreign Currency Matters
. Under ASC 830, if the assets and liabilities of the Company are recorded in certain
non-U.S. functional currencies other than the U.S. dollar, they 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).
Capitalized costs include costs incurred in connection with making patent applications for the Company's products and are amortized on
a straight-line basis over eight years. The Company periodically reviews its patents for impairment. Any adjustment from the analysis is charged to operations.
The Company has standard contract terms with all non-Group Purchase Organization customers, which include its 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 in that month. 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 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 Company's warranty liability, and this warranty is made in lieu of all other written or
51
Table of Contents
unwritten
express or implied warranties. Historically, due to the nature of use of the Company's products and low replacement cost, the Company's warranty exposure has been immaterial.
Other
than the Company's limited warranty obligation, the Company does not have post-shipment obligations to, or acceptance provisions with, its customers, including its
distributors.
Shipping and handling billed to customers is recorded as revenue. Shipping and handling costs are recorded as marketing and selling
costs. The Company recorded such marketing and
selling costs of $1,708,000, $1,690,000 and $1,216,000 for the years ended September 30, 2012, 2011 and 2010, respectively.
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 are accounted for under the liability method. Deferred income taxes are provided for temporary differences between
financial reporting and tax bases of assets and liabilities. The Company records a valuation allowance to reduce the carrying value of its net deferred tax assets to the amount that is more likely
than not to be realized. For fiscal 2012, the Company recorded a valuation allowance of $216,000 of which $42,000 is related to Minnesota R&D credit and $174,000 pertains to U.S. federal capital loss
carryovers as the Company believes it is more likely than not that these deferred tax assets will not be utilized in future years. The Company has not recorded a valuation allowance on any other 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 realized.
It
is the Company's practice to recognize penalties and/or interest to income tax matters in income tax expenses. As of September 30, 2012, the Company did not have a material
amount of accrued interest or penalties related to unrecognized tax benefits.
The
Company is subject to income tax examinations in the U.S. federal jurisdiction, as well as in the United Kingdom, the Netherlands and various state jurisdictions.
The Company incurred advertising expenses of $1,353,000, $1,370,000 and $1,600,000 for the years ended September 30, 2012, 2011
and 2010, respectively. All advertising costs are charged to operations as incurred.
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 $983,000, $1,496,000 and $1,481,000 ($639,000, $969,000 and $959,000 net of tax) of related stock-based compensation expense for the years ended
September 30, 2012, 2011 and 2010, respectively.
52
Table of Contents
Net income (loss) per common share is calculated in accordance with ASC 260,
Earnings Per
Share
. The Company's basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the
period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, increased to include dilutive potential
common shares issuable upon the exercise of stock options that were outstanding during the period. For periods of net loss, diluted net loss per common share equals basic net loss per common share
because common stock equivalents are not included in periods where there is a loss, as they are antidilutive. A reconciliation of the numerator and denominator in the basic and diluted net income
(loss) per share calculation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,050,484
|
|
$
|
(1,315,304
|
)
|
$
|
(253,535
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share weighted average shares outstanding
|
|
|
12,032,113
|
|
|
12,217,900
|
|
|
12,181,549
|
|
Effect of dilutive stock options
|
|
|
307,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common share weighted average shares outstanding
|
|
|
12,339,500
|
|
|
12,217,900
|
|
|
12,181,549
|
|
|
|
|
|
|
|
|
|
For
the years ended September 30, 2011 and 2010, 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 net loss, as they are antidilutive. No shares were considered antidilutive for 2012. Average shares outstanding for diluted
net income per share does not include options to purchase 64,645 and 706,845 shares of common stock for the fiscal years 2011 and 2010, respectively, as their effect would have been antidilutive.
The Company conducts its business within one business segment which is defined as developing, manufacturing and marketing urinary
continence and urinary drainage care products.
The Company computes comprehensive income (loss) in accordance with ASC 220,
Comprehensive
Income
. ASC 220 establishes standards for the reporting and display of comprehensive income (loss) and its components in financial statements. Other comprehensive income
(loss), as defined, includes all changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities and
foreign currency translation. Total accumulated other comprehensive loss as of fiscal year-end 2012 and 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Unrealized gain (loss) on available-for-sale securities, net of tax
|
|
$
|
1,821
|
|
$
|
(204,884
|
)
|
Cumulative foreign currency translation
|
|
|
(3,924,191
|
)
|
|
(3,910,993
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(3,922,370
|
)
|
$
|
(4,115,877
|
)
|
|
|
|
|
|
|
53
Table of Contents
The Company is not subject to any 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 its financial condition, results of operations or cash flows.
The Company reclassified certain expenses from Marketing and Selling to General and Administrative in the fiscal 2011 financial
statements to conform to the current year presentation. The Company also made revisions to the fiscal 2011 and 2010 financial statements to properly
report shipping and handling fees and related costs. The reclassification and revisions are shown below but they had no impact on amounts previously reported for income (loss) from operations, income
(loss) before income taxes, and net income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
Reported
|
|
Reclassification
|
|
Revision
|
|
As
Reported
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
52,918,875
|
|
$
|
|
|
$
|
453,823
|
|
$
|
53,372,698
|
|
Cost of Goods Sold
|
|
|
26,821,427
|
|
|
|
|
|
(97,481
|
)
|
|
26,723,946
|
|
Marketing and Selling
|
|
|
18,966,887
|
|
|
(703,746
|
)
|
|
551,304
|
|
|
18,814,445
|
|
General and Administrative
|
|
|
7,799,210
|
|
|
703,746
|
|
|
|
|
|
8,502,956
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
41,442,680
|
|
|
|
|
|
105,108
|
|
|
41,547,788
|
|
Cost of Goods Sold
|
|
|
21,739,014
|
|
|
|
|
|
(229,888
|
)
|
|
21,509,126
|
|
Marketing and Selling
|
|
$
|
11,868,737
|
|
$
|
|
|
$
|
334,996
|
|
$
|
12,203,733
|
|
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05,
"
Presentation of Comprehensive Income
" which requires comprehensive income to be reported in either a single statement or in two consecutive statements
reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income. Additionally, in December 2011, the FASB issued ASU
No. 2011-12, "
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of
Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
" which indefinitely defers the requirement in ASU
No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the
statement in which other comprehensive income is presented. During the deferral period, the existing requirements in U.S. GAAP for the presentation of reclassification adjustments must continue
to be followed. These standards will be effective for the Company's fiscal quarter beginning October 1, 2012 with retrospective application required. As these standards impact presentation
requirements only, the adoption of this guidance will not have an impact on the Company's results of operations or financial position.
In
September 2011, the FASB issued ASU No. 2011-08,
"Testing Goodwill for Impairment"
that is intended to simplify how
entities test goodwill for impairment. This ASU permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less
than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350,
"
Intangibles Goodwill and Other
". This update is effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011 (the Company's fiscal 2013). This standards update is not expected to have a material impact on the Company's financial statements.
54
Table of Contents
3. Acquisition of Laprolan B.V. from Fornix BioSciences N.V.
On April 7, 2011, the Company completed the acquisition of the outstanding capital stock of Laprolan B.V., a corporation
organized under the laws of the Netherlands and a wholly owned subsidiary of Fornix BioSciences N.V., pursuant to a Share Purchase Agreement dated as of January 12, 2011 (the "Purchase
Agreement"). As provided in the Purchase Agreement, the transaction has a retroactive effective date of January 1, 2011, and the operating results of Laprolan are for the account of the Company
from and after January 1, 2011. The Company is applying purchase accounting as of that date and has included the results of Laprolan in its financial statements beginning with its second
quarter of fiscal 2011. At closing, the Company paid to Fornix €10,474,974 (US$15,057,775, of which $60,217 was paid for the cash balance of Laprolan on January 1, 2011 and
$119,433 was interest from January 1, 2011 until closing).
The
following table summarizes the fair values of the assets and liabilities acquired at the date of acquisition. Included in the intangible assets acquired was approximately $5,602,000
of goodwill and $5,612,000 of finite-lived intangibles. In the third quarter of fiscal 2012, the intangible assets and long-term liabilities were adjusted by $669,000 to record a deferred
tax asset related to Laprolan that existed as of the acquisition date and which impacted purchase accounting and was treated as a correction of an immaterial error.
|
|
|
|
|
Current assets
|
|
$
|
3,212,000
|
|
Property and equipment
|
|
|
1,831,000
|
|
Intangible assets
|
|
|
10,545,000
|
|
|
|
|
|
Total assets acquired
|
|
$
|
15,588,000
|
|
|
|
|
|
Current liabilities
|
|
$
|
824,000
|
|
Long term liabilities
|
|
|
877,000
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
1,701,000
|
|
|
|
|
|
The
pro forma unaudited results of operations for the years ended September 30, 2011 and 2010, assuming consummation of the purchase of Laprolan B.V. as of October 1, 2009,
are as follow (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
2011
|
|
2010
|
|
Net sales
|
|
$
|
55,633
|
|
|
52,767
|
|
Net income (loss)
|
|
|
(159
|
)
|
|
2,356
|
|
Per share data:
|
|
|
|
|
|
|
|
Basic income (loss)
|
|
$
|
(.01
|
)
|
$
|
0.19
|
|
Diluted income (loss)
|
|
$
|
(.01
|
)
|
$
|
0.18
|
|
In
the table above for the year ended September 30, 2011, $725,000 has been added back to net loss for one-time merger and acquisition costs and $45,000 has been added
back to net loss related to a short term accounting and IT support contract.
The
pro forma unaudited results do not purport to be indicative of the results which would actually have been obtained had the acquisition of Laprolan B.V. been completed as of the
beginning of the earliest period presented.
55
Table of Contents
4. Inventories
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
Raw materials
|
|
$
|
1,301,145
|
|
$
|
1,548,095
|
|
Work-in-process
|
|
|
3,251,644
|
|
|
3,598,623
|
|
Finished goods
|
|
|
5,330,862
|
|
|
6,131,976
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,883,651
|
|
$
|
11,278,694
|
|
|
|
|
|
|
|
5. Intangible Assets
Intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
September 30, 2011
|
|
|
|
Estimated Lives
(Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Value
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Value
|
|
Trademarks
|
|
8 to 15
|
|
$
|
6,168,758
|
|
$
|
2,736,004
|
|
$
|
3,432,754
|
|
$
|
5,958,480
|
|
$
|
2,187,663
|
|
$
|
3,770,817
|
|
Supply agreement
|
|
5 to 6.5
|
|
|
762,579
|
|
|
634,050
|
|
|
128,529
|
|
|
767,870
|
|
|
628,357
|
|
|
139,513
|
|
Customer relationships
|
|
15 to 20
|
|
|
6,888,864
|
|
|
1,258,420
|
|
|
5,630,444
|
|
|
7,017,938
|
|
|
866,613
|
|
|
6,151,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
13,820,201
|
|
$
|
4,628,474
|
|
$
|
9,191,727
|
|
$
|
13,744,288
|
|
$
|
3,682,633
|
|
$
|
10,061,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to these assets was as follows:
|
|
|
|
|
Year ended September 30, 2012
|
|
$
|
945,841
|
|
Year ended September 30, 2011
|
|
|
934,890
|
|
Year ended September 30, 2010
|
|
|
633,335
|
|
Estimated
annual amortization expense for these assets over the next five years is as follows:
|
|
|
|
|
2013
|
|
$
|
899,000
|
|
2014
|
|
|
868,000
|
|
2015
|
|
|
805,000
|
|
2016
|
|
|
805,000
|
|
2017
|
|
|
800,000
|
|
6. Leases
The Company leases many of its automobiles for its sales staff in the United States, the United Kingdom and the Netherlands for various
terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2015. 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 $778,000, $724,000 and $378,000 during fiscal 2012, 2011 and 2010, respectively.
The
following is a schedule by fiscal year of future minimum rental payments required under the operating lease agreements:
|
|
|
|
|
2013
|
|
$
|
646,000
|
|
2014
|
|
|
546,000
|
|
2015
|
|
|
257,000
|
|
56
Table of Contents
7. Shareholders' Equity
The Rochester Medical Corporation 2001 Stock Incentive Plan authorized 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. As of January 28, 2010, no new awards may be
granted under the 2001 Stock Incentive Plan. As of September 30, 2012, there were 1,083,500 options outstanding under this plan.
On
January 28, 2010, the Company's shareholders approved the Rochester Medical Corporation 2010 Stock Incentive Plan. The 2010 Stock Incentive Plan authorizes the issuance of up
to 1,000,000 shares of common stock pursuant to grants of incentive stock options, non-incentive stock options, stock appreciation rights, restricted stock, restricted stock units,
dividend equivalents, performance awards, stock awards, and other stock-based awards. Per the terms of the 2010 Stock Incentive Plan, awards may be granted with a term no longer than ten years. The
vesting schedule and other terms of the awards granted under the 2010 Stock Incentive Plan will be determined by the Compensation Committee of the Board of Directors at the time of the grant. As of
September 30, 2012, 346,627 shares of common stock remain available for issuance under the 2010 Stock Incentive Plan.
The
Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which
is generally the vesting period.
Restricted stock
The fair value of restricted stock awards was calculated using the Company's stock price as of the associated grant date, and the
expense is accrued ratably over the vesting period of the award.
Compensation
expenses associated with restricted stock awards for years ended September 30, 2012 and 2011, totaled $237,000 and $59,000, respectively. At September 30,
2012, unamortized compensation cost of restricted stock awards totaled $629,000. The unamortized cost is expected to be recognized over a weighted-average period of 2.5 years as of
September 30, 2012.
A
summary of restricted shares activity under the Plans as of September 30, 2012 and 2011, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested balance at September 30, 2010
|
|
|
40,000
|
|
$
|
11.77
|
|
Granted
|
|
|
40,000
|
|
|
10.99
|
|
Vested
|
|
|
(40,000
|
)
|
|
11.77
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at September 30, 2011
|
|
|
40,000
|
|
|
10.99
|
|
Granted
|
|
|
61,883
|
|
|
7.86
|
|
Vested
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
7.86
|
|
|
|
|
|
|
|
Unvested balance at September 30, 2012
|
|
|
99,883
|
|
$
|
9.11
|
|
|
|
|
|
|
|
Restricted stock units
In fiscal 2012, the Company issued 135,491 restricted stock units (RSUs) to its executive management team. The fair value of the RSUs
was calculated using the Company's stock price, $7.86 per unit, at the date of grant. The RSUs include a performance-based vesting trigger measured in fiscal 2013, and the Company did not recognize
any compensation expense associated with the RSUs for the year ended September 30, 2012.
57
Table of Contents
Stock options
The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option
valuation model. The Company recognizes the expense for grants of stock options on a straight-line basis in the statement of operations as operating expense based on their fair value over
the requisite service period.
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 Company's 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 management's 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-option awards with the following weighted-average assumptions for the year ended September 30,
2011. There were no stock option awards issued for the year ended September 30, 2012.
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Dividend yield
|
|
|
n/a
|
|
|
0
|
%
|
Expected volatility
|
|
|
n/a
|
|
|
47
|
%
|
Risk-free interest rate
|
|
|
n/a
|
|
|
3.42
|
%
|
Expected holding period (in years)
|
|
|
n/a
|
|
|
8.74
|
|
Weighted-average grant-date fair value
|
|
|
n/a
|
|
$
|
6.29
|
|
The
risk-free rate is based on a treasury instrument whose term is consistent with the expected life of the Company's stock options. The expected volatility, holding period,
and forfeitures of options are based on historical experience. The Company has not paid, and does not anticipate, dividend payments.
The
weighted average fair value of options granted in 2011 was $6.29 per share.
A
summary of option activity under the Plans as of September 30, 2012 and 2011, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2010
|
|
|
1,632,700
|
|
$
|
8.03
|
|
|
|
|
|
|
|
Granted
|
|
|
230,000
|
|
|
10.72
|
|
|
|
|
|
|
|
Exercised
|
|
|
(273,950
|
)
|
|
2.36
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
1,588,750
|
|
$
|
9.39
|
|
|
5.8
|
|
$
|
1,464,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(69,250
|
)
|
|
2.60
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(18,000
|
)
|
|
10.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
1,501,500
|
|
$
|
9.69
|
|
|
5.1
|
|
$
|
3,425,000
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012
|
|
|
1,249,750
|
|
$
|
9.36
|
|
|
4.6
|
|
$
|
3,266,000
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2011
|
|
|
1,160,625
|
|
$
|
8.68
|
|
|
4.9
|
|
$
|
1,464,000
|
|
|
|
|
|
|
|
|
|
|
|
58
Table of Contents
The
Company recorded compensation expense of stock options of $746,000, $1,437,000 and $1,481,000 for the years ended September 30, 2012, 2011 and 2010, respectively. As of
September 30, 2012, there was $467,000 of total unrecognized compensation cost related to unvested stock option based compensation arrangements granted under the Plans. The unamortized cost is
expected to be recognized over a weighted-average period of 1.4 years as of September 30, 2012.
The
Company issues new shares as settlement of options exercised. Cash received from option exercises for the years ended September 30, 2012, 2011 and 2010 was $180,000, $647,000,
and $41,000, respectively. The intrinsic value of shares exercised was $273,000, $2,192,000 and $52,800, for the years ended September 30, 2012, 2011 and 2010, respectively.
8. Income Taxes
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,
|
|
|
|
2012
|
|
2011
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
29,000
|
|
$
|
15,000
|
|
Inventory reserves
|
|
|
44,000
|
|
|
57,000
|
|
Inventory capitalization
|
|
|
289,000
|
|
|
450,000
|
|
Accrued expenses
|
|
|
127,000
|
|
|
94,000
|
|
Nonqualified option expense
|
|
|
1,824,000
|
|
|
1,648,000
|
|
Restricted stock expense
|
|
|
109,000
|
|
|
17,000
|
|
Capital loss carryforward
|
|
|
174,000
|
|
|
39,000
|
|
Charitable contributions
|
|
|
59,000
|
|
|
58,000
|
|
Research and development credits
|
|
|
136,000
|
|
|
71,000
|
|
Net operating loss
|
|
|
606,000
|
|
|
1,095,000
|
|
ASC 320 unrealized loss
|
|
|
|
|
|
202,000
|
|
Valuation allowance
|
|
|
(216,000
|
)
|
|
(42,000
|
)
|
|
|
|
|
|
|
Total income tax deferred assets
|
|
|
3,181,000
|
|
|
3,704,000
|
|
Deferred income tax liability:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,957,000
|
|
|
1,684,000
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
1,224,000
|
|
$
|
2,020,000
|
|
|
|
|
|
|
|
The
deferred tax amounts above have been classified in the accompanying balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
Current assets
|
|
$
|
1,287,177
|
|
$
|
1,618,495
|
|
Noncurrent assets
|
|
|
1,030,994
|
|
|
1,242,010
|
|
Noncurrent liabilities
|
|
|
(1,093,717
|
)
|
|
(840,512
|
)
|
|
|
|
|
|
|
|
|
$
|
1,224,454
|
|
$
|
2,019,993
|
|
|
|
|
|
|
|
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. For fiscal 2012, the
Company recorded a valuation allowance of $216,000 related to Minnesota R&D credit and U.S. federal capital loss carryovers as the Company believes it is more likely than not that these deferred tax
assets will not be utilized in future years. The Company has not recorded
59
Table of Contents
a
valuation allowance on any other 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 realized.
The
income (loss) before taxes and the provision (benefit) for taxes for the years ended September 30, 2012, 2011, and 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
257,703
|
|
$
|
(3,565,971
|
)
|
$
|
584,963
|
|
Non-U.S.
|
|
|
2,824,585
|
|
|
1,627,505
|
|
|
(314,634
|
)
|
|
|
|
|
|
|
|
|
Total income (loss) before taxes
|
|
|
3,082,288
|
|
|
(1,938,466
|
)
|
|
270,329
|
|
Provision (benefit) for taxes:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit)
|
|
|
163,335
|
|
|
(142,766
|
)
|
|
551,779
|
|
Deferred tax expense (benefit)
|
|
|
242,852
|
|
|
(946,530
|
)
|
|
609
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
406,187
|
|
|
(1,089,296
|
)
|
|
552,388
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
|
229,998
|
|
|
425,820
|
|
|
|
|
Deferred tax expense (benefit)
|
|
|
395,619
|
|
|
40,314
|
|
|
(28,524
|
)
|
|
|
|
|
|
|
|
|
Total Non-U.S.
|
|
|
625,617
|
|
|
466,134
|
|
|
(28,524
|
)
|
|
|
|
|
|
|
|
|
Total provision (benefit) for taxes
|
|
$
|
1,031,804
|
|
$
|
(623,162
|
)
|
$
|
523,864
|
|
|
|
|
|
|
|
|
|
The
reconciliation between the statutory federal income tax rate and the effective income tax rate for the years ended September 30, 2012, 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Statutory federal income tax rate
|
|
|
34
|
%
|
|
34
|
%
|
|
34
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
6
|
|
|
3
|
|
|
4
|
|
Foreign taxes
|
|
|
(12
|
)
|
|
11
|
|
|
31
|
|
Meals and entertainment
|
|
|
2
|
|
|
(2
|
)
|
|
6
|
|
Acquisition costs
|
|
|
|
|
|
(9
|
)
|
|
|
|
Incentive stock options
|
|
|
4
|
|
|
(9
|
)
|
|
66
|
|
Change in valuation allowance and utilization of net operating loss carryforward
|
|
|
4
|
|
|
|
|
|
17
|
|
R&D credits
|
|
|
(2
|
)
|
|
1
|
|
|
(15
|
)
|
Return to provision and true up adjustments
|
|
|
1
|
|
|
(2
|
)
|
|
46
|
|
Change in reserves
|
|
|
(1
|
)
|
|
1
|
|
|
(4
|
)
|
Rate adjustment on deferred taxes
|
|
|
(2
|
)
|
|
7
|
|
|
18
|
|
DPAD
|
|
|
|
|
|
|
|
|
(10
|
)
|
Other
|
|
|
|
|
|
(3
|
)
|
|
1
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
34
|
%
|
|
32
|
%
|
|
194
|
%
|
|
|
|
|
|
|
|
|
On
October 1, 2007, the Company adopted amendments to ASC 740,
Income Taxes
, 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,
classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date, October 1, 2007, the Company did
60
Table of Contents
not
have a material liability under ASC 740 for unrecognized tax benefits. As of September 30, 2012, the Company has recognized approximately $43,000 for unrecognized tax benefits. If
the Company were to prevail on all unrecognized tax benefits recorded at September 30, 2012, the total gross unrecognized tax benefit totaling approximately $43,000 would benefit the Company's
effective tax rate if recognized.
It
is the Company's practice to recognize penalties and/or interest to income tax matters in income tax expenses. As of September 30, 2012, the Company did not have a material
amount of accrued interest or penalties related to unrecognized tax benefits.
A
reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
|
|
|
|
|
Balance at October 1, 2010
|
|
$
|
46,327
|
|
Increases/(decreases) as a result of tax positions taken during a prior period
|
|
|
1,846
|
|
Increases/(decreases) as a result of tax positions taken during the current period (including interest)
|
|
|
7,729
|
|
|
|
|
|
Balance at October 1, 2011
|
|
|
55,902
|
|
Increases/(decreases) as a result of tax positions taken during a prior period
|
|
|
3,997
|
|
Increases/(decreases) as a result of expiration of jurisdiction statutes of limitations
|
|
|
(21,444
|
)
|
Increases/(decreases) as a result of tax positions taken during the current period (including interest)
|
|
|
5,040
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
43,495
|
|
|
|
|
|
The
Company is subject to income tax examinations in the U.S. Federal jurisdiction, as well as in the United Kingdom, the Netherlands and various state jurisdictions.
9. Significant Customers
Significant customers, measured as a percentage of sales, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Significant customers:
|
|
|
|
|
|
|
|
|
|
|
Hollister
|
|
|
9
|
%
|
|
9
|
%
|
|
10
|
%
|
Coloplast and Coloplast subsidiaries
|
|
|
9
|
|
|
10
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18
|
%
|
|
19
|
%
|
|
24
|
%
|
|
|
|
|
|
|
|
|
10. Employee Benefit Plans
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, 2012, 2011 and 2010 was approximately $154,000, $149,000 and
$134,000 respectively. The Company also makes contributions to the Group Personal Pension Scheme for the benefit of the employees of its U.K. and Laprolan B.V.
subsidiaries. The total contributions for the years ended September 30, 2012, 2011 and 2010 were approximately $252,000, $165,000 and $65,000, respectively.
61
Table of Contents
11. Geographic Area Data
Sales related to customers in the United States, Europe and the rest of the world are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
22,922,000
|
|
$
|
18,717,000
|
|
$
|
16,888,000
|
|
United Kingdom
|
|
|
21,166,000
|
|
|
18,296,000
|
|
|
15,120,000
|
|
The Netherlands*
|
|
|
8,646,000
|
|
|
7,345,000
|
|
|
432,000
|
|
Europe & Middle East**
|
|
|
7,901,000
|
|
|
7,976,000
|
|
|
8,139,000
|
|
Rest of world
|
|
|
1,048,000
|
|
|
1,039,000
|
|
|
969,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,683,000
|
|
$
|
53,373,000
|
|
$
|
41,548,000
|
|
|
|
|
|
|
|
|
|
-
*
-
The
Company acquired Laprolan B.V. located in the Netherlands effective January 1, 2011.
-
**
-
Europe
sales exclude sales in the U.K. and the Netherlands.
Sales
are attributed to countries based upon the address to which the Company ships products, as set forth on the customer's purchase order.
Long-lived
assets, excluding intangible assets, of the Company are located in the United States, United Kingdom and the Netherlands as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
2011
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,689,000
|
|
$
|
8,762,000
|
|
United Kingdom
|
|
|
1,363,000
|
|
|
1,326,000
|
|
The Netherlands
|
|
|
1,810,000
|
|
|
1,965,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,862,000
|
|
$
|
12,053,000
|
|
|
|
|
|
|
|
12. Line of Credit and Long-Term Debt
In June 2006, in conjunction with the asset purchase agreement with Coloplast, the Company entered into an unsecured loan note deed
with Coloplast with an outstanding principal amount of $5,340,000. The promissory note was non-interest bearing, payable and due in five equal installments of $1,068,000 payable annually
on June 2. The Company discounted the note at 6.90%, which reflected the Company's cost of borrowing at the date of the purchase agreement and the discount was amortized over the life of the
note. The final payment of $1,068,000 was paid in May 2011.
In
December 2010, the Company entered into a credit facility with RBC Wealth Management. The credit facility consists of a revolving line of credit of up to $25,000,000 with interest
accruing monthly at a variable rate. In conjunction with the closing of the Laprolan acquisition described under Note 3, on April 7, 2011, the Company drew down $15,057,775 from the line
of credit. In January 2012, the Company used a portion of its cash and cash equivalents and marketable securities and paid off its entire outstanding balance on its line of credit. The borrowings
under this credit facility are limited to the value of eligible assets held with RBC Wealth Management. The credit facility now consists of a revolving line of credit of up to $5,000,000 with
interest accruing monthly at a variable rate of 1.375% as of September 30, 2012. As of September 30, 2012, the Company had no outstanding balance under the revolving line of credit.
62
Table of Contents
13. 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, 2012, the Company did not repurchase any shares. During fiscal 2012, the Company
repurchased 150,900 shares of common stock pursuant to this program at an average price of $7.21 per share. Total cash consideration for the repurchased shares was $1,089,000. As of
September 30, 2012, there remained 1,278,947 shares that may be purchased under the program.
14. Subsequent Events
Through the Company's fiscal year ended September 30, 2012, the Company's urological products included a line of Foley catheters
targeted to the acute care market under the
Rochester Medical
brand and under private label arrangements. In November 2012, the Company announced its
decision to cease manufacturing and marketing Foley catheters and focus on its core product lines of MECs and intermittent catheters.
15. Quarterly Results (Unaudited)
Summary data relating to the results of operations for each quarter of the years ended September 30, 2012 and 2011 follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
March 31
|
|
June 30
|
|
September 30
|
|
Fiscal year 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
13,973
|
|
$
|
15,428
|
|
$
|
15,385
|
|
$
|
16,897
|
|
Gross profit
|
|
|
7,111
|
|
|
7,605
|
|
|
7,625
|
|
|
8,477
|
|
Income (loss) from operations
|
|
|
(21
|
)
|
|
834
|
|
|
713
|
|
|
1,687
|
|
Net income (loss) before taxes
|
|
|
(112
|
)
|
|
884
|
|
|
735
|
|
|
1,575
|
|
Net income (loss) per common share basic
|
|
$
|
(.01
|
)
|
$
|
.05
|
|
$
|
.04
|
|
$
|
.09
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(.01
|
)
|
$
|
.05
|
|
$
|
.04
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,999
|
|
$
|
12,942
|
|
$
|
14,413
|
|
$
|
15,019
|
|
Gross profit
|
|
|
5,499
|
|
|
6,457
|
|
|
7,129
|
|
|
7,564
|
|
Income (loss) from operations
|
|
|
(465
|
)
|
|
(1,309
|
)
|
|
(491
|
)
|
|
588
|
|
Net income (loss) before taxes
|
|
|
(460
|
)
|
|
(1,393
|
)
|
|
(535
|
)
|
|
450
|
|
Net income (loss) per common share basic
|
|
$
|
(.01
|
)
|
$
|
(.10
|
)
|
$
|
(.02
|
)
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(.01
|
)
|
$
|
(.10
|
)
|
$
|
(.02
|
)
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
63
Table of Contents