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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM to
Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA State or other jurisdiction of incorporation or organization) | 41-1613227 (I.R.S. Employer Identification No.) | |
ONE ROCHESTER MEDICAL DRIVE, STEWARTVILLE, MN (Address of principal executive offices) | 55976 (Zip Code) |
(507) 533-9600
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
12,020,867 Common Shares as of May 5, 2009
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ROCHESTER MEDICAL CORPORATION
Report on Form 10-Q
for quarter ended
March 31, 2009
for quarter ended
March 31, 2009
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, | September 30, | |||||||
2009 | 2008 | |||||||
Assets: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,926,108 | $ | 8,508,000 | ||||
Marketable securities | 29,008,718 | 28,493,648 | ||||||
Accounts receivable, net | 5,383,294 | 6,009,023 | ||||||
Inventories, net | 8,853,143 | 8,745,873 | ||||||
Prepaid expenses and other assets | 690,669 | 1,110,291 | ||||||
Deferred income tax asset | 1,621,725 | 1,143,931 | ||||||
Total current assets | 51,483,657 | 54,010,766 | ||||||
Property and equipment: | ||||||||
Land and buildings | 7,694,424 | 7,696,076 | ||||||
Equipment and fixtures | 16,499,255 | 16,086,643 | ||||||
24,193,679 | 23,782,719 | |||||||
Less accumulated depreciation | (14,485,937 | ) | (13,899,390 | ) | ||||
Total property and equipment | 9,707,742 | 9,883,329 | ||||||
Deferred income tax asset | 1,009,834 | 831,299 | ||||||
Goodwill | 4,152,483 | 5,169,661 | ||||||
Finite life intangibles, net | 6,364,733 | 7,087,571 | ||||||
Total assets | $ | 72,718,449 | $ | 76,982,626 | ||||
Liabilities and Shareholders’ Equity: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,428,062 | $ | 2,127,470 | ||||
Accrued compensation | 778,922 | 915,661 | ||||||
Accrued expenses | 455,749 | 254,993 | ||||||
Current maturities of long-term debt | 2,756,178 | 1,940,292 | ||||||
Total current liabilities | 5,418,911 | 5,238,416 | ||||||
Long-term liabilities: | ||||||||
Other long-term liabilities | 239,496 | 239,496 | ||||||
Long-term debt, less current maturities | 2,040,751 | 3,806,185 | ||||||
Total long-term liabilities | 2,280,247 | 4,045,681 | ||||||
Shareholders’ equity: | ||||||||
Common stock, no par value: | ||||||||
Authorized — 40,000,000 | ||||||||
Issued and outstanding shares (12,005,867 — March 31, 2009; 11,936,586 — September 30, 2008) | 55,109,509 | 54,223,669 | ||||||
Retained earnings | 15,138,369 | 14,723,541 | ||||||
Accumulated other comprehensive loss | (5,228,587 | ) | (1,248,681 | ) | ||||
Total shareholders’ equity | 65,019,291 | 67,698,529 | ||||||
Total liabilities and shareholders’ equity | $ | 72,718,449 | $ | 76,982,626 | ||||
Note — The Balance Sheet at September 30, 2008 was derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements.
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ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales | $ | 8,445,029 | $ | 9,215,238 | $ | 16,881,114 | $ | 17,438,526 | ||||||||
Cost of sales | 4,030,671 | 4,942,975 | 8,541,842 | 9,025,460 | ||||||||||||
Gross profit | 4,414,358 | 4,272,263 | 8,339,272 | 8,413,066 | ||||||||||||
Operating expenses: | ||||||||||||||||
Marketing and selling | 2,448,122 | 2,380,306 | 5,014,384 | 4,604,671 | ||||||||||||
Research and development | 299,103 | 304,257 | 616,763 | 533,200 | ||||||||||||
General and administrative | 1,757,499 | 2,016,767 | 3,123,255 | 3,631,885 | ||||||||||||
Total operating expenses | 4,504,724 | 4,701,330 | 8,754,402 | 8,769,756 | ||||||||||||
Loss from operations | (90,366 | ) | (429,067 | ) | (415,130 | ) | (356,690 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 34,256 | 355,646 | 201,528 | 808,986 | ||||||||||||
Interest expense | (80,354 | ) | (128,834 | ) | (164,128 | ) | (278,323 | ) | ||||||||
Other income | 1,000,000 | — | 1,200,442 | — | ||||||||||||
Net income (loss) before income taxes | 863,536 | (202,255 | ) | 822,712 | 173,973 | |||||||||||
Income tax expense (benefit) | 502,334 | (35,397 | ) | 407,883 | 69,277 | |||||||||||
Net income (loss) | $ | 361,202 | $ | (166,858 | ) | $ | 414,829 | $ | 104,696 | |||||||
Net income (loss) per share — basic | $ | 0.03 | $ | (0.01 | ) | $ | 0.03 | $ | 0.01 | |||||||
Net income (loss) per share — diluted | $ | 0.03 | $ | (0.01 | ) | $ | 0.03 | $ | 0.01 | |||||||
Weighted average number of common shares outstanding — basic | 12,083,169 | 11,822,435 | 12,031,460 | 11,776,083 | ||||||||||||
Weighted average number of common shares outstanding — diluted | 12,671,119 | 11,822,435 | 12,663,538 | 12,557,214 |
The accompanying notes are an integral part of these condensed consolidated financial statements
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ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Operating activities: | ||||||||
Net income | $ | 414,829 | $ | 104,696 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 619,833 | 601,283 | ||||||
Amortization | 343,729 | 361,924 | ||||||
Stock based compensation | 742,481 | 786,142 | ||||||
Deferred income tax | (667,660 | ) | (374,844 | ) | ||||
Federal tax benefit of stock options exercised | — | 99,634 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 142,309 | (1,390,012 | ) | |||||
Inventories | (534,729 | ) | (154,043 | ) | ||||
Other current assets | 502,070 | (326,728 | ) | |||||
Accounts payable | (605,239 | ) | 829,806 | |||||
Income tax payable | (147 | ) | (827,465 | ) | ||||
Other current liabilities | 24,578 | (249,623 | ) | |||||
Net cash (used in) provided by operating activities | 982,051 | (539,229 | ) | |||||
Investing activities: | ||||||||
Purchase of property, plant and equipment | (714,788 | ) | (668,278 | ) | ||||
Patents | (20,864 | ) | (11,556 | ) | ||||
Purchases of marketable securities | (28,107,348 | ) | (48,791,975 | ) | ||||
Sales and maturities of marketable securities | 27,204,494 | 52,416,875 | ||||||
Net cash (used in) provided by investing activities | (1,638,506 | ) | 2,945,067 | |||||
Financing activities: | ||||||||
Increase in short-term debt | 2,000,000 | — | ||||||
Payments on long-term debt | (2,949,548 | ) | (568,053 | ) | ||||
Repurchase of common stock | (1,058,041 | ) | — | |||||
Excess tax benefit from exercises of stock options | 514,528 | — | ||||||
Proceeds from issuance of common stock | 686,881 | 653,208 | ||||||
Net cash (used in) provided by financing activities | (806,180 | ) | 85,155 | |||||
Effect of exchange rate on cash | (1,119,257 | ) | (44,223 | ) | ||||
Increase (decrease) in cash and cash equivalents | (2,581,892 | ) | 2,446,768 | |||||
Cash and cash equivalents at beginning of period | 8,508,000 | 6,671,356 | ||||||
Cash and cash equivalents at end of period | $ | 5,926,108 | $ | 9,118,124 | ||||
Supplemental Cash Flow Information | ||||||||
Interest paid | $ | 55,210 | $ | 138,586 | ||||
Taxes paid | $ | — | $ | 1,155,209 |
The accompanying notes are an integral part of these condensed consolidated financial statements
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ROCHESTER MEDICAL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009
Note A — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements which have been derived from the Company’s audited financial statements as of September 30, 2008 and the unaudited March 31, 2009 and 2008 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission which include the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Form 10-K for the year ended September 30, 2008. In the opinion of management, the unaudited condensed consolidated financial statements contain all recurring adjustments considered necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. Operating results for the six-month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending September 30, 2009.
Note B — Net Income (Loss) Per Share
Net income (loss) per share is calculated in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 128,Earnings Per Share.The Company’s basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing income by the weighted average number of common shares outstanding during the period, increased to include dilutive potential common shares issuable upon the exercise of stock options that were outstanding during the period. Net loss per share is computed without consideration for any dilutive securities. A reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) | $ | 361,202 | $ | (166,858 | ) | $ | 414,829 | $ | 104,696 | |||||||
Denominator: | ||||||||||||||||
Denominator for basic net income (loss) per share- weighted average shares outstanding | 12,083,169 | 11,822,435 | 12,031,460 | 11,776,083 | ||||||||||||
Effect of dilutive stock options | 587,950 | — | 632,078 | 781,131 | ||||||||||||
Denominator for diluted net income (loss) per share- weighted average shares outstanding | 12,671,119 | 11,822,435 | 12,663,538 | 12,557,214 | ||||||||||||
Basic net income (loss) per share | $ | 0.03 | $ | (0.01 | ) | $ | 0.03 | $ | 0.01 | |||||||
Dilute net income (loss) per share | $ | 0.03 | $ | (0.01 | ) | $ | 0.03 | $ | 0.01 | |||||||
Employee stock options of 332,000 shares for the second quarter of fiscal 2009 and 280,000 shares for the six months ended March 31, 2009 and 30,000 shares for the six months ended March 31, 2008 were excluded from the diluted net income (loss) per share calculation because their exercise prices were greater than the average market price of the Company’s common stock and their affect would have been antidilutive. Due to the net loss in the second quarter
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ended March 31, 2008, diluted shares were the same as basic shares since the effect of the options would have been anti-dilutive.
Note C — Stock Based Compensation
The Company has three stock option plans under which options have been granted to employees, including officers and directors of the Company, at a price not less than the fair market value of the Company’s common stock at the date the options were granted. Options under the 1991 Stock Option Plan are no longer granted because the 10-year granting period has expired. The granting period for the 2001 Stock Incentive Plan expires in 2011. Under the 1995 Non-Statutory Stock Option Plan, options also may be granted to certain non-employees at a price not less than the fair market value of the Company’s common stock at the date the options are granted. Options generally expire ten years from the date of grant or at an earlier date as determined by the committee of the Board of Directors of the Company that administers the plans. Options granted under the 1991, 1995 and 2001 Plans generally vest over four years from the date of grant.
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004),Share-Based Payment(“SFAS 123(R)”) which requires all share-based payments, including grants of stock options, to be recognized in the statement of operations as an operating expense based on their fair values over the requisite service period. The Company elected to utilize the modified-prospective transition method as permitted by SFAS 123(R). Stock-based compensation expense for the three and six months ended March 31, 2009 and 2008 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, October 1, 2005, based on grant-date fair value estimated in accordance with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation;and (b) compensation expense for all stock-based compensation awards granted subsequent to October 1, 2005, based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recorded approximately $478,000 ($354,000 net of tax) and $742,000 ($567,000 net of tax) of related stock-based compensation expense for the quarter and six months ended March 31, 2009, and approximately $535,000 ($391,000 net of tax) and $786,000 ($600,000 net of tax) of related stock-based compensation expense for the quarter and six months ended March 31, 2008. This stock-based compensation expense reduced both basic and diluted earnings per share by $0.03 and $0.03 for the three months ended March 31, 2009 and 2008, respectively, and $0.04 and $0.05 for the six months ended March 31, 2009 and 2008, respectively.
As of March 31, 2009, $1,890,280 of unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately fourteen months.
Stock Options
In the second quarter of fiscal 2009 and 2008, 212,000 and 204,500 shares were granted respectively. The Black-Scholes option pricing model was used to estimate the fair value of stock-based awards with the following weighted average assumptions for the indicated periods.
2009 | 2008 | |||||||
Dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 53 | % | 54 | % | ||||
Risk-free interest rate | 2.30 | % | 3.08 | % | ||||
Expected holding period (in years) | 8.17 | 8.13 | ||||||
Weighted-average grant-date fair value | $ | 6.70 | $ | 6.86 |
The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility, holding period, and forfeitures of options are based on historical experience.
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The following table represents stock option activity for the three months ended March 31, 2009:
Weighted-Average | ||||||||||||
Weighted-Average | Remaining | |||||||||||
Number of Shares | Exercise Price | Contract Life | ||||||||||
Outstanding options at beginning of period | 1,606,450 | $ | 6.58 | 5.66 Yrs | ||||||||
Granted | 212,000 | 11.27 | ||||||||||
Exercised | (72,250 | ) | 4.67 | |||||||||
Canceled | (43,750 | ) | 10.82 | |||||||||
Outstanding options at end of period | 1,702,450 | $ | 7.14 | 5.83 Yrs. | ||||||||
Outstanding options exercisable at end of period | 1,264,825 | $ | 6.14 | 4.80 Yrs. | ||||||||
Shares available for future stock option grants to employees and directors under existing plans were 123,250 at March 31, 2009. At March 31, 2009, the aggregate intrinsic value of options outstanding was $7,122,694, and the aggregate intrinsic value of options exercisable was $6,520,117. Total intrinsic value of options exercised was $577,497 for the three months ended March 31, 2009.
Note D — Marketable Securities
As of March 31, 2009, the Company had $29.0 million invested in marketable securities. The marketable securities primarily consist of $26.8 million invested in U.S. treasury bills and $2.2 million invested in a mutual fund. The Company is currently reporting an unrealized loss of $1,053,096 related to the mutual fund as a result of the recent fluctuations in the credit markets impacting the current market value. The Company considers the current impairment in value to be temporary as it has the intent and ability to hold this investment long enough to avoid realizing any significant losses.
Marketable securities are classified as available for sale and are carried at fair value, with unrealized gains or losses included as a separate component of shareholders’ equity. The cost and fair value of available-for-sale securities were as follows:
Unrealized | ||||||||||||
Cost | Loss | Fair Value | ||||||||||
March 31, 2009 | $ | 30,061,814 | $ | (1,053,096 | ) | $ | 29,008,718 | |||||
September 30, 2008 | $ | 28,915,366 | $ | (421,718 | ) | $ | 28,493,648 |
Losses recognized are recorded ininterest expense, in the consolidated statements of operations. Gains and losses from the sale of investments are calculated based on the specific identification method.
Effective October 1, 2008, the Company adopted SFAS No. 157,Fair Value Measurements(“SFAS 157”), for financial assets and liabilities that are re-measured and reported at fair value at each reporting period. SFAS 157 requires that fair value measurements be classified and disclosed in one of the following three categories:
Level 1. Quoted prices 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 for similar assets or liabilities; quoted prices 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.
Level 3. Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.
The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements. The following table presents information about the Company’s financial assets and liabilities that are measured at fair value
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on a recurring basis as of March 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such value:
Fair Value Measurements at March 31, 2009 using: | ||||||||||||||||
Total Carrying | Significant Other | Significant | ||||||||||||||
Value at | Quoted Prices in | Observable | Unobservable | |||||||||||||
March 31, | Active Markets | Inputs | Inputs | |||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available-for-Sale Securities | $ | 29,008,718 | $ | 29,008,718 | $ | — | $ | — |
Note E — Inventories
Inventories consist of the following:
March 31, | September 30, | |||||||
2009 | 2008 | |||||||
Raw materials | $ | 2,054,265 | $ | 2,274,199 | ||||
Work-in-process | 3,474,595 | 3,375,796 | ||||||
Finished goods | 3,442,678 | 3,217,830 | ||||||
Reserve for inventory obsolescence | (118,395 | ) | (121,952 | ) | ||||
$ | 8,853,143 | $ | 8,745,873 | |||||
Note F — Income Taxes
On a quarterly basis, the Company evaluates the realizability of our deferred tax assets and assess the requirements for a valuation allowance. No valuation allowance has been recorded against the net deferred tax assets in 2009 or 2008 because there is sufficient future projected income as well as excess income from 2007 and 2008 to sustain that the deferred tax assets will more likely than not be able to be utilized. For the quarter ended March 31, 2009, the Company had an effective income tax rate of 49.58%. The tax rate is in line with the Company’s expectation due to increased volume of incentive stock option activity, of which the book expense is a permanent add-back item for tax purposes. In future periods, absent of true-up entries, the Company expects the effective tax rate on U.S. income to be in the range of 40-42%, and the effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations and UK operation profitability.
The Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109(“FIN 48”) on October 1, 2007. FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date, October 1, 2007, the Company did not have a material liability under FIN 48 for unrecognized tax benefits. Since adoption, the Company has recognized an approximately $239,000 increase in liability for unrecognized tax benefits.
It is the Company’s practice to recognize penalties and/or interest to income tax matters in income tax expense. As of March 31, 2009, the Company did not have a material amount of accrued interest or penalties related to unrecognized tax benefits.
The Company is subject to income tax examinations from time to time in the U.S. Federal jurisdiction, as well as in the United Kingdom and various state jurisdictions. The Internal Revenue Service is examining the Company’s income tax return for the fiscal year ended September 30, 2007. It is possible that this examination may be resolved within the next twelve months. Due to the potential for resolution of the Federal examination and the expiration of various statutes of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefit may change.
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Although the outcome of this matter cannot currently be determined, the Company believes adequate provision has been made for any potential unfavorable financial statement impact.
Note G — Goodwill and Other Intangible Assets
The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired as prescribed by SFAS No. 142,Goodwill and Other Intangible Assets(“SFAS 142”). Under this standard, goodwill and intangibles with indefinite useful lives are not amortized. SFAS 142 also requires, at a minimum, an annual assessment of the carrying value of goodwill and other intangibles with indefinite useful lives. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. The Company tests annually for impairment on June 30th of each fiscal year or more frequently if events and circumstances indicate that the asset might be impaired. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge would be recognized by the amount that the carrying amount of the asset exceeds the fair value of the asset. The decrease in value of goodwill as of March 31, 2009 is strictly related to the change in foreign currency exchange rates in the United Kingdom.
Note H — Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and all other nonowner changes in shareholders’ equity during a period. The comprehensive income (loss) for the three and six months ended March 31, 2009 and 2008 consists of the following:
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) | $ | 361,202 | $ | (166,864 | ) | $ | 414,829 | $ | 104,696 | |||||||
Foreign currency adjustment | (415,070 | ) | 321,311 | (3,591,458 | ) | 81,818 | ||||||||||
Unrealized (loss) gain on securities held | 192,315 | (267,172 | ) | (387,784 | ) | (383,945 | ) | |||||||||
Comprehensive income (loss) | $ | 138,447 | $ | (112,725 | ) | $ | (3,564,413 | ) | $ | (197,431 | ) | |||||
Note I — Line of Credit and Long-Term Debt
In June 2006, in conjunction with an asset purchase agreement with Coloplast A/S, the Company entered into an unsecured loan note deed with Coloplast with an outstanding principal amount of $5,340,000. The promissory note is non-interest bearing and payable in five equal annual installments of $1,068,000 payable annually on June 2. The Company discounted the note at 6.90% which reflected the Company’s cost of borrowing at the date of the purchase agreement and the discount is being amortized over the life of the note. The liability balance was $2,796,929 at March 31, 2009.
In June 2006, the Company entered into a $7,000,000 credit facility with U.S. Bank National Association. The credit facility consisted of a $5,000,000 term loan payable in five years and accruing interest at a rate equal to 4.77%, and a revolving line of credit of up to $2,000,000, maturing annually on March 31, with interest payable monthly at a floating rate based on the quoted one-month LIBOR rate plus 1.60%. In March 2009, the Company paid off the entire term loan and terminated the revolving line of credit.
In February 2009, the Company entered into a $14,000,000 credit facility with UBS Financial. The credit facility consists of a revolving line of credit of up to $14,000,000 with interest accruing monthly at a floating rate based on the quoted one-month LIBOR rate plus 0.50%. As of March 31, 2009, the Company had an outstanding balance of $2,000,000 under the revolving line of credit. The Company’s obligations under the credit facility are payable on demand and are secured by its investments in marketable securities held at UBS.
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Note J — Litigation Settlements
The Company was a plaintiff in a lawsuit titled Rochester Medical Corporation vs. C.R. Bard, Inc.; Tyco International (US), Inc.; Tyco Health Care Group, L.P.; Novation LLC; VHA, Inc.; Premier, Inc.; and Premier Purchasing Partners, in the United States District Court for the Eastern District of Texas, Civil Action No. 504-CV-060. This suit alleged anti-competitive conduct against the defendants in the markets for standard and anti-infection Foley catheters as well as urethral catheters, and seeks an unspecified amount of damages and injunctive and other relief.
On November 20, 2006, the Company announced that it had reached a settlement with Premier, Inc. and Premier Purchasing Partners, L.P. with respect to the lawsuit. Under the settlement agreement, Premier paid the Company $8,825,000 (net $5,155,000 after payment of attorneys’ fees and expenses) and was dismissed from the lawsuit.
On December 14, 2006, the Company announced it had reached a settlement with C.R. Bard, Inc., whereby C.R. Bard, Inc. paid the Company $49,000,000 (net $33,450,000 after payment of attorneys’ fees and expenses) and was dismissed from the lawsuit.
On August 6, 2007, the Company announced that it had reached a settlement with Novation LLC with respect to the lawsuit. Under the settlement agreement, Novation awarded the Company an Innovative Technology Contract for its urological catheter products and related accessories, including the Company’s advanced Infection Control catheters, and was dismissed from the lawsuit. The Innovation Technology Contract has a three-year term from the effective date of September 1, 2007.
On January 15, 2009, the Company announced that it had reached a settlement with Covidien Ltd., Tyco International (US), Inc. and Tyco Health Care Group, L.P., whereby Covidien Ltd. paid the Company $3,500,000 (net $1,000,000 after payment of attorney’s fees and expenses) and was dismissed from the lawsuit. No further action is expected with respect to this lawsuit.
Note K — 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 March 31, 2009, the Company repurchased 110,653 common shares at an average price of $9.56 per share. Total cash consideration for the repurchased shares was approximately $1,100,000. As of March 31, 2009, there remained 1,847,347 shares that may be purchased under the program.
Note L — Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS No.141 (revised 2007),Business Combinations(“SFAS 141(R)”). SFAS 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. The Company is required to adopt SFAS 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009. This standard will change the Company’s accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No.160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51(“SFAS 160”). SFAS 160 establishes accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be
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recharacterized as noncontrolling interests and classified as a component of equity. It also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary and requires expanded disclosures. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. The Company does not expect the adoption of SFAS 160 will have a material impact on its financial position or results of operations.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,Effective Date of FASB Statement No. 157(“FSP FAS 157-2”). FSP FAS 157-2 defers the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The portion of SFAS No. 157 that has been deferred by FSP FAS 157-2 will be effective for the Company beginning in the second fiscal quarter of fiscal year 2009. The Company does not expect the adoption of FSP FAS 157-2 will have a material impact on its financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161,Disclosures About Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, which changes the disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of this statement.
In April 2008, the FASB issued FSP FAS 142-3,Determination of the Useful Life of Intangible Assets(“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning on or after December 15, 2008, which for the Company is the first quarter of fiscal year 2010. The Company is currently evaluating the impact the adoption of FSP FAS 142-3 will have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles, which changed the framework for selecting accounting principles in conformity with GAAP. The GAAP hierarchy will now be included in the accounting literature established by the FASB.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1,Interim Disclosures about Fair Value of Financial Instruments. The FSP amends SFAS No. 107,Disclosures about Fair Value of Financial Instrumentsto require an entity to provide disclosures about fair value of financial instruments in interim financial information and annual reporting periods. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will include the required disclosures in its interim financial statements for the quarter ending June 30, 2009.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments.The guidance applies to investments in debt securities for which other-than-temporary impairments may be recorded. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings), and 2) all other amounts (recorded in other comprehensive income). This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt this FSP for its quarter ending June 30, 2009. There is no expected impact on the consolidated financial statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We develop, manufacture and market a broad line of innovative, technologically enhanced PVC-free and latex-free urinary continence and urine drainage care products for the extended care and acute care markets. Our products are comprised of our base products, which include our male external catheters and standard silicone Foley catheters, and our advanced products, which include our intermittent catheters, our anti-infection Foley catheters and our FemSoft Insert. We market our products under our Rochester Medical brand, which are referred to as branded sales, and also supply our
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products to several large medical product companies for sale under brands owned by these companies, which are referred to as private label sales. The primary markets for our products are distributors, extended care facilities and individual hospitals and healthcare institutions. We sell our products both in the domestic market and internationally.
For fiscal 2009, we intend to increase investment in our sales and marketing programs, primarily through cash generated from current operations, to support branded sales growth in the U.S. and Europe. Our advanced products will eventually contribute a higher profit margin than our base products, and our Rochester Medical branded products contribute a higher profit margin than private label sales, particularly branded sales in the United Kingdom and elsewhere in Europe. Increasing our percentage of sales of branded products versus private label sales over time will have a positive impact on our gross margin. Branded sales accounted for 65% of total sales for the quarter ended March 31, 2009, and 66% of total sales year to date, compared to 62% for the quarter ended March 31, 2008 and 66% for the same period last year. Advanced products accounted for 11% of total sales for the quarter ended March 31, 2009, and 12% of total sales year to date, compared to 12% for the quarter ended March 31, 2008 and 11% for the same period last year.
The following discussion pertains to our results of operations and financial position for the quarters and six month periods ended March 31, 2009 and 2008. Results of the periods are not necessarily indicative of the results to be expected for the complete year. For the second quarter ended March 31, 2009, we reported net income of $0.03 per diluted share, compared to a net loss of $0.01 per diluted share for the same period last year. Loss from operations was $90,000 for the quarter ended March 31, 2009 compared to a loss of $429,000 for the quarter ended March 31, 2008, while net income was $361,000 for the quarter ended March 31, 2009 compared to a net loss of $167,000 for the same period last year.
As of March 31, 2009, we had $5.9 million in cash and cash equivalents, and $29 million invested in marketable securities. The marketable securities primarily consist of $26.8 million invested in U.S. treasury bills and $2.2 million invested in a mutual fund. Our investments in marketable securities are subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our investment choices, however, are conservative and are intended to reduce the risk of loss or any material impact on our financial condition. We are currently reporting an unrealized loss $1,053,096 related to the mutual fund as a result of the recent fluctuations in the credit markets impacting the current market value. We consider this unrealized loss temporary as we have the intent and ability to hold this investment long enough to avoid realizing any significant losses.
Results of Operations
The following table sets forth, for the fiscal periods indicated, certain items from our statements of operations expressed as a percentage of net sales.
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Sales | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of Sales | 48 | % | 54 | % | 51 | % | 52 | % | ||||||||
Gross Margin | 52 | % | 46 | % | 49 | % | 48 | % | ||||||||
Operating Expenses: | ||||||||||||||||
Marketing and Selling | 29 | % | 26 | % | 30 | % | 26 | % | ||||||||
Research and Development | 4 | % | 3 | % | 4 | % | 3 | % | ||||||||
General and Administrative | 21 | % | 22 | % | 19 | % | 21 | % | ||||||||
Total Operating Expenses | 54 | % | 51 | % | 53 | % | 50 | % | ||||||||
Loss from Operations | (2 | )% | (5 | )% | (4 | )% | (2 | )% | ||||||||
Interest Income (Expense), Net | (1 | )% | 3 | % | 0 | % | 3 | % | ||||||||
Other Income, | 12 | % | 0 | % | 7 | % | 0 | % | ||||||||
Net Income (loss) before taxes | 10 | % | (2 | )% | 3 | % | 1 | % | ||||||||
Income tax expense | 6 | % | 0 | % | 2 | % | 0 | % | ||||||||
Net Income (loss) after taxes | 4 | % | (2 | )% | 1 | % | 1 | % | ||||||||
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The following table sets forth, for the periods indicated, net sales information by product category (base products and advanced products), marketing method (private label andRochester Medical® branded sales) and distribution channel (domestic and international markets) (all dollar amounts below are in thousands):
Fiscal Quarter Ended March 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Domestic | International | Total | Domestic | International | Total | |||||||||||||||||||
Private label sales: | ||||||||||||||||||||||||
Base products | $ | 1,678 | $ | 1,148 | $ | 2,826 | $ | 2,095 | $ | 948 | $ | 3,043 | ||||||||||||
Advanced products | 111 | — | 111 | 441 | — | 441 | ||||||||||||||||||
Total private label sales | 1,789 | 1,148 | 2,937 | 2,535 | 948 | 3,483 | ||||||||||||||||||
Branded sales: | ||||||||||||||||||||||||
Base products | 1,036 | 3,657 | 4,693 | 1,000 | 4,024 | 5,024 | ||||||||||||||||||
Advanced products | 671 | 144 | 815 | 616 | 92 | 708 | ||||||||||||||||||
Total branded sales | 1,707 | 3,801 | 5,508 | 1,616 | 4,116 | 5,732 | ||||||||||||||||||
Total net sales: | $ | 3,496 | $ | 4,949 | $ | 8,445 | $ | 4,151 | $ | 5,064 | $ | 9,215 | ||||||||||||
Fiscal Year to Date Ended March 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Domestic | International | Total | Domestic | International | Total | |||||||||||||||||||
Private label sales: | ||||||||||||||||||||||||
Base products | $ | 3,205 | $ | 2,249 | $ | 5,454 | $ | 3,423 | $ | 1,884 | $ | 5,307 | ||||||||||||
Advanced products | 355 | — | 355 | 605 | — | 605 | ||||||||||||||||||
Total private label sales | 3,560 | 2,249 | 5,809 | 4,028 | 1,884 | 5,912 | ||||||||||||||||||
Branded sales: | ||||||||||||||||||||||||
Base products | 1,927 | 7,428 | 9,355 | 1,997 | 8,143 | 10,140 | ||||||||||||||||||
Advanced products | 1,342 | 375 | 1,717 | 1,203 | 185 | 1,388 | ||||||||||||||||||
Total branded sales | 3,269 | 7,803 | 11,072 | 3,200 | 8,328 | 11,528 | ||||||||||||||||||
Total net sales: | $ | 6,829 | $ | 10,052 | $ | 16,881 | $ | 7,228 | $ | 10,212 | $ | 17,440 | ||||||||||||
Three Month and Six Month Periods Ended March 31, 2009 and March 31, 2008
Net Sales.Net sales for the second quarter of fiscal 2009 decreased 8% to $8,445,000 from $9,215,000 for the comparable quarter of last fiscal year. The sales decrease primarily resulted from a decrease in sales of private label products and a decrease in branded sales in the U.K., offset by slightly higher sales of branded products domestically and increased branded sales internationally outside of the U.K. Domestic sales of branded products increased by 5.6% for the quarter compared to the same period last year. Our international branded sales decreased 2.3% compared to the same period last year, primarily as a result of the change in foreign currency exchange rates in the United Kingdom as the U.S. dollar was significantly stronger versus the British pound, thereby affecting total branded sales given the significant volume of our branded product sales in the United Kingdom. Private label sales were down 16% from last year. Private label sales accounted for approximately 35% of total sales. Management continues to focus on growth in branded sales, and total branded sales volumes of intermittent catheters and Foley catheters increased for the second quarter compared to last fiscal year. In line with our strategic decision to increase investments in sales and marketing to drive growth in branded sales, we have initiated direct sales efforts into Japan and mainland Europe.
Net sales for the six months ended March 31, 2009 decreased 3% to $16,881,000 from $17,440,000 for the comparable six-month period of last fiscal year. The decrease in sales primarily resulted from a decrease in domestic private label sales and a decrease in branded sales in the U.K. as a result of the change in the foreign currency exchange
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rate in the United Kingdom of the British pound to the U.S. dollar from last year, offset by increased sales of private label products internationally and branded sales internationally outside of the U.K. Sales of branded products domestically were virtually flat compared to the same period last year.
Gross Margin. Our gross margin as a percentage of net sales for the second quarter of fiscal 2009 was 52% compared to 46% for the comparable quarter of last fiscal year. The increase in gross margin this quarter was primarily due to increased sales of higher margin product, including male external catheters and script easy in the U.K. and other international markets, and favorable manufacturing variances and efficiencies, partially offset by the change in the foreign currency exchange rate in the United Kingdom of the British pound to the U.S. dollar and increased medical claim costs. Gross margin for the six months ended March 31, 2009 increased slightly to 49% from 48%. Factors affecting the comparative six month gross margin are generally consistent with those discussed above for the current quarter.
Marketing and Selling.Marketing and selling expense primarily includes costs associated with base salary paid to sales and marketing personnel, sales commissions, and travel and advertising expense. Marketing and selling expense for the second quarter of fiscal 2009 increased 3% to $2,448,000 from $2,380,000 for the comparable quarter of last fiscal year. The increase in marketing and selling expense is primarily due to increased sales personnel and related expenses incurred through the addition of sales and marketing staff in both our U.S. and U.K. operations, and increased advertising expense related to marketing in the U.K. and the U.S. of our new intermittent catheter and preparation for our advanced Foley catheter launch, partially offset by the change in the foreign currency exchange rate in the United Kingdom of the British pound to the U.S. dollar from last year. Marketing and selling expense as a percentage of net sales for the fiscal quarters ended March 31, 2009 and 2008 was 29% and 26%, respectively.
Marketing and selling expense for the six months ended March 31, 2009 increased 9% to $5,014,000 from $4,605,000 for the comparable six-month period of last fiscal year. Factors affecting the comparative six-month expense levels are generally consistent with those discussed above for the current quarter.
Research and Development.Research and development expense primarily includes internal labor costs, as well as expense associated with third-party vendors performing validation and investigative research regarding our products and development activities. Research and development expense for the second quarter of fiscal 2009 decreased 2% to $299,000 from $304,000 for the comparable quarter of last fiscal year. The decrease in research and development expense relates primarily to decreased expenses related to testing and development of new and enhanced products as we introduced our new line of intermittent catheters earlier this year. Research and development expense as a percentage of net sales for the fiscal quarters ended March 31, 2009 and 2008 was 4% and 3%, respectively.
Research and development expense for the six months ended March 31, 2009 increased 16% to $617,000 from $533,000 for the comparable six-month period of last fiscal year. The increase in research and development expense for the six months ended March 31, 2009 primarily relates to increased testing and development of new products during the first quarter of fiscal 2009.
General and Administrative.General and administrative expense primarily includes payroll expense relating to our management and accounting, information technology and human resources staff, as well as fees and expenses of outside legal counsel and accounting advisors. General and administrative expense for the second quarter of fiscal 2009 decreased 13% to $1,757,000 from $2,017,000 for the comparable quarter of last fiscal year. The decrease in general and administrative expense is primarily related to decreased legal fees, stock option compensation expenses, audit related expenses and the change in the foreign currency exchange rate in the United Kingdom of the British pound to the U.S. dollar from last year, offset by increased professional fees related to tax matters. General and administrative expense as a percentage of net sales for the fiscal quarters ended March 31, 2009 and 2008 was 21% and 22%, respectively.
General and administrative expense for the six months ended March 31, 2009 decreased 14% to $3,123,000 from $3,632,000 for the comparable six-month period of last fiscal year. The decrease in general and administrative expenses for the six month period primarily reflects a decrease in legal, audit fees and stock option compensation expenses from the prior year.
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Interest Income.Interest income for the second quarter of fiscal 2009 decreased 90% to $34,000 from $356,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects significantly lower interest rates on investments.
Interest income for the six months ended March 31, 2009 decreased 75% to $202,000 from $809,000 for the comparable six-month period of last fiscal year. Factors affecting the comparative six-month interest income are generally consistent with those discussed above for the current quarter.
Interest Expense. Interest expense for the second quarter of fiscal 2009 decreased $48,000 to $80,000 from the comparable quarter of last fiscal year. The decrease in interest expense reflects lower amounts of debt as a result of quarterly debt payments.
Interest expense for the six months ended March 31, 2009 decreased $114,000 to $164,000 from $278,000 for the comparable six-month period of last fiscal year. The decrease in interest expenses for the six month period are generally consistent with those discussed above for the current quarter.
Income Taxes. For the quarter ended March 31, 2009, we had an effective income tax rate of approximately 49.6%. The tax rate is in line with our expectation due to the increased volume of incentive stock option activity, of which the book expense is a permanent add-back item for tax purposes and increased our effective tax rate by 9% for the quarter. In future periods of taxable earnings, we expect to report an income tax provision using an effective tax rate in the range of 40 — 42% for U.S. income. The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations and U.K. operation profitability.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $34.9 million at March 31, 2009 compared to $37.0 million at September 30, 2008. The decrease in cash primarily resulted from capital expenditures, repayment of long-term debt and the repurchase of common stock offset by cash provided from operations, borrowing on our new credit facility and the sale of common stock upon exercise of options. As of March 31, 2009, we had $29 million invested in marketable securities as a result of the cash settlements received from lawsuits. The marketable securities primarily consist of $26.8 million invested in U.S. treasury bills and $2.2 million invested in a mutual fund. We are currently reporting an unrealized loss $1,053,096 related to the mutual fund as a result of the recent fluctuations in the credit markets impacting the current market value. We consider this unrealized loss temporary as we have the intent and ability to hold this investment long enough to avoid realizing any significant losses.
During the six-month period ended March 31, 2009, we generated $982,000 of cash in operating activities compared to $539,000 of cash being used by operations during the comparable period of the prior fiscal year. Increased net cash from operating activities in the first six months of fiscal 2009 primarily reflects net income before depreciation and decreases in accounts receivable and other current assets and increases in other current liabilities, offset by increases in inventories and decreases in accounts payable. Accounts receivable balances during this period decreased 2% or $142,000, primarily due to increased collections. Inventories increased 6% or $535,000. Accounts payable decreased 28% or $605,000, primarily reflecting timing of expenses. Other current liabilities increased 2% or $25,000, primarily reflecting payments of annual executive bonuses offset by timing of normal operating accruals. In addition, capital expenditures during this period were $715,000 compared to $668,000 for the comparable period last year.
In June 2006, we entered into a $7,000,000 credit facility with U.S. Bank National Association. The credit facility consisted of a $5,000,000 term loan payable in five years and accruing interest at a rate equal to 4.77%, and a revolving line of credit of up to $2,000,000, maturing annually on March 31, with interest payable monthly at a floating rate based on the quoted one-month LIBOR rate plus 1.60%. In March 2009, we paid off the entire term loan and terminated the revolving line of credit.
In February 2009, we entered into a $14,000,000 credit facility with UBS Financial. The credit facility consists of a revolving line of credit of up to $14,000,000 with interest accruing monthly at a floating rate based on the quoted one-month LIBOR rate plus 0.50%. As of March 31, 2009, we had an outstanding balance of $2,000,000 under the revolving line of credit. Our obligations under the credit facility are payable on demand and are secured by our investments in marketable securities held at UBS.
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We believe that our capital resources on hand at March 31, 2009, together with cash generated from sales, will be sufficient to satisfy our working capital requirements for the foreseeable future as described in the Liquidity and Capital Resources portion of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. In the event that additional financing is needed, we may seek to raise additional funds through public or private financing. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. Failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that such financing, if required, will be available on terms satisfactory to us, if at all.
Cautionary Statement Regarding Forward Looking Information
Statements other than historical information contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as “believe,” “may,” “will,” “expect,” “anticipate,” “predict,” “intend,” “designed,” “estimate,” “should” or “continue” or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following:
• | the uncertainty of current domestic and international economic conditions that could adversely affect the level of demand for our products and increased volatility in foreign exchange rates; | ||
• | the uncertainty of market acceptance of new product introductions; | ||
• | the uncertainty of gaining new strategic relationships; | ||
• | the uncertainty of timing of revenues from private label sales (particularly with respect to international customers); | ||
• | the uncertainty of successfully growing our U.K. operations and the risks associated with operating an international business; | ||
• | FDA and other regulatory review and response times; | ||
• | the securing of Group Purchasing Organization contract participation; | ||
• | the uncertainty of gaining significant sales from secured GPO contracts; |
and other risk factors listed from time to time in our SEC reports, including, without limitation, the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2008.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary financial instrument market risk results from fluctuations in interest rates. Our cash is invested in bank deposits and money market funds denominated in United States dollars and British pounds. The carrying value of these cash equivalents approximates fair market value. Our investments in marketable securities are subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our investment choices, however, are conservative in light of current economic conditions, and include primarily U.S. treasury bills to reduce the risk of loss or any material impact on our financial condition. Our revolving line of credit bears interest at a floating rate based on the quoted one-month LIBOR rate plus 0.50%. As of March 31, 2009, our revolving line of credit had a balance of $2,000,000.
In future periods, we believe a greater portion of our revenues could be denominated in currencies other than the U.S. dollar, thereby increasing our exposure to exchange rate gains and losses on non-United States currency transactions. Sales through our subsidiary, Rochester Medical, Ltd., are denominated in British pounds, and fluctuations in the rate of exchange between the U.S. dollar and the British pound could adversely affect our financial results.
Otherwise, we do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature. We do not currently use derivative financial instruments to manage interest rate risk or enter into forward exchange contracts to
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hedge exposure to foreign currencies, or any other derivative financial instruments for trading or speculative purposes. In the future, if we believe an increase in our currency exposure merits further review, we may consider entering into transactions to mitigate that risk.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report (the Evaluation Date) we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls. During our second fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rule 13(a)-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We were the plaintiff in a lawsuit titled Rochester Medical Corporation vs. C.R. Bard, Inc.; Tyco International (US), Inc.; Tyco Health Care Group, L.P.; Novation LLC; VHA, Inc.; Premier, Inc.; and Premier Purchasing Partners, in the United States District Court for the Eastern District of Texas, Civil Action No. 504-CV-060. This suit alleged anti-competitive conduct against the defendants in the markets for standard and anti-infection Foley catheters as well as urethral catheters, and seeks an unspecified amount of damages and injunctive and other relief.
On November 20, 2006, we announced that we had reached a settlement with Premier, Inc. and Premier Purchasing Partners, L.P. with respect to the lawsuit. Under the settlement agreement, Premier paid us $8,825,000 (net $5,155,000 after payment of attorneys’ fees and expenses) and was dismissed from the lawsuit. On December 14, 2006, we announced we had reached a settlement with C.R. Bard, Inc., whereby C.R. Bard, Inc. paid us $49,000,000 (net $33,450,000 after payment of attorneys’ fees and expenses) and was dismissed from the lawsuit.
On August 6, 2007, we announced that we had reached a settlement with Novation LLC with respect to the lawsuit. Under the settlement agreement, Novation awarded us an Innovative Technology Contract for our urological catheter products and related accessories, including our advanced Infection Control catheters, and was dismissed from the lawsuit. The Innovation Technology Contract has a three-year tem from the effective date of September 1, 2007.
On January 15, 2009, we announced that we had reached a settlement with Covidien Ltd., Tyco International (US), Inc. and Tyco Health Care Group, L.P., whereby Covidien Ltd. paid us $3,500,000 (net $1,000,000 after payment of attorneys’ fees and expenses) and these parties were dismissed from the lawsuit. No further action is expected with respect to this lawsuit.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On March 3, 2009, we announced our intention to repurchase some of our outstanding common shares pursuant to our 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. The repurchase program does not have an expiration date. During the period from
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March 3, 2009 to March 31, 2009, we repurchased shares in the open market. The following table summarizes the repurchases:
Total Number | ||||||||||||||||
of Shares | Maximum Number | |||||||||||||||
Total Number | Average Price | Purchased as | of Shares that | |||||||||||||
of Shares | Paid per | Part of Publicly | May Yet Be Purchased | |||||||||||||
Period | Purchased | Share | Announced Plans | Under the Plan | ||||||||||||
March 3, 2009 — March 31, 2009 | 110,653 | $ | 9.56 | 152,653 | 1,847,347 |
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Company’s shareholders was held on February 3, 2009. At the meeting, shareholders voted on the reelection of five directors for terms expiring at the Annual Meeting of the Company in 2010. Each of the directors was reelected by a vote as follows:
• | Darnell L. Boehm received 9,511,044 votes “For” and 658,535 votes were “Withheld.” | ||
• | Anthony J. Conway received 9,566,661 votes “For” and 602,918 votes were “Withheld.” | ||
• | David A. Jonas received 9,490,841 votes “For” and 678,738 votes were “Withheld.” | ||
• | Roger W. Schnobrich received 9,551,233 votes “For” and 618,346 votes were “Withheld.” | ||
• | Benson Smith received 9,500,473 votes “For” and 669,106 votes were “Withheld.” |
Item 5. Other Information
On February 23, 2009, we entered into a $14,000,000 credit facility with UBS Financial. The credit facility consists of a revolving line of credit of up to $14,000,000 with interest accruing monthly at a floating rate based on the quoted one-month LIBOR rate plus 0.5%. Our obligations under the credit facility are payable on demand and are secured by our investments in marketable securities held at UBS.
Item 6. Exhibits
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
32.1 | Section 1350 Certification of Chief Executive Officer. | |
32.2 | Section 1350 Certification of Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROCHESTER MEDICAL CORPORATION | ||||
Date: May 8, 2009 | By: | /s/ Anthony J. Conway | ||
Anthony J. Conway | ||||
President and Chief Executive Officer | ||||
Date: May 8, 2009 | By: | /s/ David A. Jonas | ||
David A. Jonas | ||||
Chief Financial Officer and Treasurer |
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INDEX TO EXHIBITS
Exhibit | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
32.1 | Section 1350 Certification of Chief Executive Officer. | |
32.2 | Section 1350 Certification of Chief Financial Officer. |
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