10-Q 1 c71004e10vq.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] 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 41-1613227 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE ROCHESTER MEDICAL DRIVE, STEWARTVILLE, MN 55976 (Address of principal executive offices) (Zip Code) (507) 533-9600 (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 Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 5,328,500 Common Shares as of August 2, 2002. TABLE OF CONTENTS ROCHESTER MEDICAL CORPORATION REPORT ON FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets -- June 30, 2002 and September 30, 2001.................................................. 3 Statements of Operations -- Three months ended June 30, 2002 and 2001; Nine months ended June 30, 2002 and 2001 ............................................................. 4 Statements of Cash Flows -- Nine months ended June 30, 2002 and 2001 ................................... 5 Notes to Financial Statements .......................................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................................ 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................... 11 PART II. OTHER INFORMATION ..................................................................................... 11
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROCHESTER MEDICAL CORPORATION BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 2002 2001 ------------------ ---------------- ASSETS (UNAUDITED) CURRENT ASSETS: Cash and Cash Equivalents ........................................... $ 544,391 $ 1,842,796 Marketable Securities ............................................... 3,972,990 3,904,840 Accounts Receivable ................................................. 1,767,223 1,499,337 Inventories ......................................................... 3,256,001 2,099,226 Prepaid Expenses and Other Assets ................................... 204,505 177,105 ------------------- ---------------- TOTAL CURRENT ASSETS .......................................... 9,745,110 9,523,304 PROPERTY AND EQUIPMENT Land and Buildings .................................................. 5,454,537 5,454,537 Equipment and Fixtures .............................................. 10,416,267 10,175,200 ---------------- ---------------- 15,870,804 15,629,737 Less: Accumulated Depreciation ...................................... (6,608,452) (5,682,089) ---------------- ---------------- TOTAL PROPERTY AND EQUIPMENT .................................. 9,262,352 9,947,648 INTANGIBLE ASSETS Patents, Less Accumulated Amortization .............................. 194,798 188,345 ---------------- ---------------- TOTAL ASSETS ........................................................... $ 19,202,260 $ 19,659,297 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable .................................................... $ 452,504 $ 383,145 Accrued Expenses .................................................... 610,712 820,967 Short-term Debt ..................................................... -- -- Deferred Revenue..................................................... 100,000 -- ---------------- ---------------- TOTAL CURRENT LIABILITIES ..................................... 1,163,216 1,204,112 LONG-TERM LIABILITIES: Deferred Revenue..................................................... 875,000 -- SHAREHOLDERS' EQUITY Common Stock, no par value: Authorized -- 20,000,000 Issued and Outstanding Shares -- 5,328,500.................. 41,249,003 41,249,003 Accumulated Deficit ................................................. (24,038,370) (22,660,988) Unrealized loss on available-for-sale securities..................... (46,589) (132,830) ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY .................................... 17,164,044 18,455,185 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............................... $ 19,202,260 $ 19,659,297 ================ ================
Note -- The Balance Sheet at September 30, 2001 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. See Notes to Financial Statements 3 ROCHESTER MEDICAL CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- NET SALES .............................. $ 3,033,258 $ 2,152,009 $ 7,913,121 $ 6,110,281 COST OF SALES .......................... 2,130,274 1,774,222 5,782,257 4,665,320 ----------- ----------- ----------- ----------- GROSS PROFIT ........................... 902,984 377,787 2,130,864 1,444,961 COSTS AND EXPENSES: Marketing and Selling ............... 639,153 624,423 1,656,816 1,982,718 Research and Development ............ 193,790 230,960 627,349 760,940 General and Administrative .......... 429,774 367,907 1,383,027 1,261,017 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES ...... 1,262,717 1,223,290 3,667,192 4,004,675 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS ................... (359,733) (845,503) (1,536,328) (2,559,714) OTHER INCOME: Interest Income ..................... 49,540 81,396 158,946 311,448 ----------- ----------- ----------- ----------- NET LOSS ............................... $ (310,193) $ (764,107) (1,377,382) $(2,248,266) =========== =========== =========== =========== NET LOSS PER COMMON SHARE $ (0.06) $ (0.14) $ (0.26) $ (0.42) (Basic and Diluted) .................... =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF 5,328,500 5,338,900 5,328,500 5,338,900 COMMON SHARES OUTSTANDING =========== =========== =========== ===========
See Notes to Financial Statements 4 ROCHESTER MEDICAL CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, ---------------------------- 2002 2001 ----------- ----------- OPERATING ACTIVITIES Net Loss ............................................................... $(1,377,382) $(2,248,266) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .......................................... 958,291 1,029,494 Other non-cash compensation ............................................ -- 16,620 Changes in assets and liabilities: Accounts Receivable .................................................... (267,889) (385,494) Inventories ............................................................ (1,156,775) (26,353) Other Current Assets ................................................... (27,401) 48,886 Accounts Payable ....................................................... 69,357 (406,087) Deferred Revenue ....................................................... 975,000 -- Other Current Liabilities .............................................. (210,254) (282,598) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES ........................ (1,037,050) (2,253,798) INVESTING ACTIVITIES Capital Expenditures ................................................... (241,067) (162,772) Patents ................................................................ (38,380) (31,736) Sales (Purchases) of Marketable Securities, Net ........................ 18,093 601,540 ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................... (261,355) 407,032 FINANCING ACTIVITIES Proceeds from Sales (Purchases) of Common Stock ........................ -- -- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES .................................. -- -- DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (1,298,405) (1,846,766) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................................... 1,842,796 3,204,161 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 544,391 $ 1,357,395 =========== ===========
See Notes to Financial Statements 5 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2002 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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 2001 Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. NOTE B -- NET LOSS PER COMMON SHARE For the nine-month periods ended June 30, 2002 and 2001, there is no difference between basic and diluted net loss per share. Common equivalent shares from stock options and convertible debt are excluded as their effects are antidilutive. NOTE C -- INVESTMENTS IN MARKETABLE SECURITIES As of June 30, 2002, the carrying value of the Company's marketable securities, which consisted primarily of corporate bonds and commercial paper, was $4.0 million. This total included a $1.0 million corporate bond from Pacific Gas & Electric ("PG&E") with a carrying value of $920,000 on June 30, 2002. This bond matured December 24, 2001 and, although PG&E remains current on its interest payment obligations, the principal amount of this bond has not yet been paid. On April 6, 2001, PG&E filed for Chapter 11 bankruptcy protection. Recently, PG&E and the State of California have asked PG&E's creditors to vote on two separate reorganization proposals, with votes required to be cast no later than August 12, 2002. While PG&E's management has stated their intent to pay their creditors, the numerous political and economic factors influencing the California utility market coupled with PG&E's bankruptcy filing could potentially impact the timing and/or actuality of payments. However, the Company currently believes that it will realize the full value of this investment. NOTE D -- INVENTORIES Inventories consist of the following:
JUNE 30, SEPTEMBER 30, 2002 2001 ----------- ------------- Raw materials .................................... $ 550,064 $ 675,234 Work-in progress ................................. 1,482,792 892,736 Finished goods ................................... 1,323,145 631,256 Reserve for inventory obsolescence ............... (100,000) (100,000) ----------- ------------- $ 3,256,001 $ 2,099,226 =========== =============
6 NOTE E -- COMPREHENSIVE LOSS Comprehensive loss includes net loss and all other nonowner changes in shareholders' equity during a period. The comprehensive loss for the third quarter ended June 30, 2002 and 2001 consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- ----------------------------- 2002 2001 2002 2001 ---------- ---------- ----------- ----------- Net loss ................................ $ (310,193) $ (764,107) $(1,377,382) $(2,248,266) Unrealized gain on securities held, net ............................... 6,738 -- 86,241 -- ---------- ---------- ----------- ----------- $ (303,455) $ (764,107) $(1,291,141) $(2,248,266) ========== ========== =========== ===========
NOTE F -- REVENUE RECOGNITION During 2002, the Company received a non-refundable up-front payment from Coloplast in connection with a contractual arrangement that requires continuing involvement of the Company. The Company is deferring recognition of the revenue over the term of the contractual arrangement. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, certain items from the statements of operations of the Company expressed as a percentage of net sales.
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2002 2001 2002 2001 ------ ------ ------ ------ Total Net Sales........................... 100% 100% 100% 100% Cost of Sales............................. 70% 82% 73% 76% ------ ------ ------ ------ Gross Margin......................... 30% 18% 27% 24% Operating Expenses: Marketing and Selling................ 21% 29% 21% 32% Research and Development............. 7% 11% 8% 13% General and Administrative........... 14% 17% 17% 21% ------ ------ ------ ------ Total Operating Expenses.................. 42% 57% 46% 66% Loss From Operations...................... (12)% (39)% (19)% (42)% Interest Income........................... 2% 3% 2% 5% ------ ------ ------ ------ Net Loss.................................. (10)% (36)% (17)% (37)% ====== ====== ====== ======
Three Month and Nine Month Periods Ended June 30, 2002 and June 30, 2001 Net Sales. Net sales for the third quarter of fiscal 2002 increased 41% to $3,033,000 from $2,152,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted from an increase in domestic and international branded sales and domestic sales to private label customers, offset by slightly lower international sales to private label customers. Net sales for the nine months ended June 30, 2002 increased 30% to $7,913,000 from $6,110,000 for the comparable nine-month period of last fiscal year. The increase in nine-month sales resulted from an increase in sales of domestic and international branded products and sales to domestic and international private label customers. Gross Margin. The Company's gross margin as a percentage of net sales for the third quarter of fiscal 2002 was 30% compared to 18% for the comparable quarter of last fiscal year. The current quarter's margin primarily reflects increased production and sales resulting in lower per unit fixed overhead costs. The Company's gross margin as a percentage of net sales for the nine months ended June 30, 2002 was 27% compared to 24% for the comparable nine-month period of last fiscal year. Factors related to the nine-month margin are generally consistent with those discussed above for the current quarter. Marketing and Selling. Marketing and selling expense for the third quarter of fiscal 2002 increased 2% to $639,000 from $624,000 for the comparable quarter of last fiscal year. The increase in 8 marketing and selling expense is primarily due to an increase in extended care sales and marketing expenditures in the current quarter. Marketing and selling expense for the nine months ended June 30, 2002 decreased 16% to $1,657,000 from $1,983,000 for the comparable nine-month period of last fiscal year. The decrease in the comparative nine-month expense levels is primarily due to significant non-recurring costs associated with the FemSoft(R) Insert in the comparable nine months of the prior fiscal year offset by an increase in extended care sales and marketing expenditures in the current quarter. Research and Development. Research and development expense for the third quarter of fiscal 2002 decreased 16% to $194,000 from $231,000 for the comparable quarter of last fiscal year. The decrease in research and development expense is primarily related to decreased clinical costs. Research and development expense for the nine months ended June 30, 2002 decreased 18% to $627,000 from $761,000 for the comparable nine-month period of last fiscal year. Factors affecting the comparative nine-month expense levels are generally consistent with those discussed above for the current quarter. General and Administrative. General and administrative expense for the third quarter of fiscal 2002 increased 17% to $430,000 from $368,000 for the comparable quarter of last fiscal year. The increase in general and administrative expense is primarily related to an increase in labor and an increase in professional fees. General and administrative expense for the nine months ended June 30, 2002 increased 10% to $1,383,000 from $1,261,000 for the comparable nine-month period of last fiscal year. Factors affecting the comparative nine-month expense levels primarily relate to those factors discussed above for the current quarter, together with non-recurring costs associated with an arbitration proceeding and increased costs associated with being a public company, including increased Nasdaq filing fees. Interest Income. Interest income for the third quarter of fiscal 2002 decreased 38% to $50,000 from $81,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects the comparatively lower average level of invested cash balances in the current quarter due to the utilization of cash for operations and capital expenditures, together with an overall lower interest rate on short-term investments. Interest income for the nine months ended June 30, 2002 decreased 49% to $159,000 from $311,000 for the comparable nine-month period of last fiscal year. The decrease reflects a comparatively lower average level of invested cash balances for the current quarter and an overall lower interest rate on short-term investments as discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities were $4,517,000 at June 30, 2002 compared with $5,748,000 at September 30, 2001. The Company used a net $1,037,000 of cash from operating activities during the nine months ended June 30, 2002, primarily reflecting the net loss before non-cash depreciation, as well as an increase in inventory, offset by $975,000 of deferred revenue. During the fiscal quarter ended June 30, 2002, the Company entered into an agreement with Coloplast granting Coloplast exclusive marketing and distribution rights with respect to the Company's Release-NF Foley catheters in certain geographic areas. Coloplast paid the Company $1,000,000 for these exclusive rights. In accordance with generally accepted accounting principles, the Company 9 recognized $25,000 of this amount in the fiscal quarter ended June 30, 2002 and the remaining amount constitutes deferred revenue which will be recognized over the term of the agreement. During the fiscal quarter ended March 31, 2002, the Company entered into a $1,000,000 revolving line of credit with U.S. Bank National Association. As of June 30, 2002, the Company had no amounts outstanding under this line of credit. During the nine-month period ended June 30, 2002, the Company's working capital position, excluding cash and marketable securities, increased by a net $1,493,000. Accounts receivable balances increased 18% or $268,000 as a result of increased sales and the timing of customer orders. Inventories increased 55% or $1,157,000 during the recent nine-month period primarily as a result of increased sales, as well as the Company's strategic decision to increase its level of finished goods. Other current assets increased 15% or $27,000 during the recent nine-month period as a result of the timing of payment of prepaid expenses and the receipt of an interest receivable. Current liabilities decreased 3% or $41,000 during the recent nine-month period, primarily reflecting the timing of payments and the Company's repayment of borrowings under its revolving line of credit. Changes in other asset and liability balances during the recent nine-month period related to timing of expense recognition. The Company believes that its capital resources on hand at June 30, 2002, together with revenues from sales, will be sufficient to satisfy its 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 the Company's Annual Report on Form 10-K (Part II, Item 6) for the fiscal year ended September 30, 2001. However, the Company may be required to seek additional funding sources, such as additional borrowings under the Company's revolving line of credit or equity or debt financings, to fund the Company's working capital requirements. If the Company decides to seek additional financing, there can be no assurance as to the outcome of such efforts, including whether financing will be available to the Company, or if available, whether it would be on terms favorable to the Company and its shareholders. Failure by the Company to secure additional financing could result in significant cash constraints and financial issues for the Company. FORWARD-LOOKING 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 the actual results, performance or achievements of the Company, 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 gaining private label distributors for the hydrophilic intermittent catheters, the Release-NF Foley catheters and the FemSoft Insert; the uncertainty of insurance coverage of the FemSoft Insert by additional insurers; the uncertainty of market acceptance of the Release NF Foley catheter, the FemSoft Insert and new products; the uncertainty that initial consumer interest in the FemSoft Insert may not result in significant sales of the product or continued sales of the product after trial; the results of product evaluations; the securing of Group Purchasing Organization contract participation; the timing of purchases by customers (particularly international customers); manufacturing capacities for both current products and new products; results of clinical tests; the timing of clinical preference testing and new product introductions; FDA review and response times; and other risk factors listed from time to time in the Company's SEC reports, including, without 10 limitation, the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K (Part II, Item 6) for the year ended September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item. However, as disclosed under Note C to the Company's financial statements that appears on page 6, the bankruptcy of PG&E could potentially impact the timing and/or actuality of payment of our $1.0 million PG&E corporate bond. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: None. 11 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: August 8, 2002 By: /s/ Anthony J. Conway --------------------------------------- Anthony J. Conway Chief Executive Officer Date: August 8, 2002 By: /s/ David A. Jonas --------------------------------------- David A. Jonas Chief Financial Officer and Treasurer