SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number: 0-18933

ROCHESTER MEDICAL CORPORATION

(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

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.

5,439,031 Common Shares as of August 5, 2004.

Table of Contents

ROCHESTER MEDICAL CORPORATION

Report on Form 10-Q
for quarter ended
June 30, 2004

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

ROCHESTER MEDICAL CORPORATION

BALANCE SHEETS

See Notes to Financial Statements

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ROCHESTER MEDICAL CORPORATION

STATEMENTS OF OPERATIONS (UNAUDITED)

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ROCHESTER MEDICAL CORPORATION

STATEMENTS OF CASH FLOWS (UNAUDITED)

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ROCHESTER MEDICAL CORPORATION

Notes to Financial Statements (Unaudited)

June 30, 2004

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 2003 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 and nine-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004.

Note B — Net Income Per Share

     Net income per share is calculated in accordance with Financial Accounting Standards Board Statement No. 128, “Earnings Per Share.” The Company’s basic net income per share is computed by dividing income by the weighted average number of common shares outstanding during the period. Diluted net income 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. A reconciliation of the numerator and denominator in the basic and diluted net income per share calculation is as follows (in thousands, except per share):

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Employee stock options of 339,000 for the third quarter of fiscal year 2004 and for the nine months ended June 30, 2004, and employee stock options of 379,000 for the third quarter of fiscal year 2003 and for the nine months ended June 30, 2003, have been excluded from the diluted net income per share calculations because their exercise prices were greater than the average market price of the Company’s common stock.

Note C — Stock Based Compensation

     The Company accounts for employee stock options in accordance with APB 25, “Accounting for Stock Issued to Employees.” Under APB 25, the company recognizes no compensation expenses related to employee stock options, since options are always granted at a price equal to the market price on the day of grant.

     To determine the pro forma impact, the fair value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model and is then hypothetically amortized to compensation expenses over the four-year vesting period. The pro forma impact for the three-month and nine-month periods ended June 30 follows (in thousands, except per share):

Note D – Inventories

     Inventories consist of the following:

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Note E – Income Taxes

     The Company has a history of pre-tax losses and has not generated taxable income since inception until fiscal 2003. While the Company had pre-tax income in fiscal 2003 and the first three quarters of fiscal 2004, the Company has net operating loss carryforwards of approximately $24 million that will offset its taxable income and therefore, no federal income taxes are due. The Company has recorded a valuation allowance to reduce the carrying value of its net deferred tax assets to an amount that is more likely than not to be realized. As of September 30, 2003 and June 30, 2004, the valuation allowance has reduced the carrying value of the net deferred tax asset to $0.

Note F – Comprehensive Income

     Comprehensive income includes net income and all other nonowner changes in shareholders’ equity during a period.

     The comprehensive income for the three-month and nine-month periods ended June 30, 2004 and 2003 consists of the following:

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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 Month and Nine Month Periods Ended June 30, 2004 and June 30, 2003

     Net Sales. Net sales for the third quarter of fiscal 2004 increased 13% to $4,257,000 from $3,777,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted from a higher volume of product sales to private label customers.

     Net sales for the nine months ended June 30, 2004 increased 3% to $11,417,000 from $11,034,000 for the comparable nine-month period of last fiscal year. The nine-month sales increase primarily resulted from an increase in volume of branded product sales, offset by a proportionately lower net increase in the volume of private label sales, primarily attributable to a lower level of private label sales in the first quarter of fiscal 2004 as compared to the comparable period of the prior fiscal year.

     Although the timing of large private label orders may continue to be a factor that influences financial results in any given fiscal quarter, the Company currently expects that the overall growth trend is favorable in both the branded products and private label areas of its business.

     Gross Margin. The Company’s gross margin as a percentage of net sales for the third quarter of fiscal 2004 was 38% compared to 33% for the comparable quarter of last fiscal year. The current quarter’s margin primarily reflects the Company’s increased level of net sales offset against a relatively flat level of fixed overhead expense. The Company currently expects that an increase in net sales in future periods would favorably impact its gross margins in such periods if overall fixed overhead expense in such future periods remains relatively flat.

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     The Company’s gross margin as a percentage of net sales for the nine months ended June 30, 2004 was 36% compared to 34% 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 2004 increased 15% to $633,000 from $550,000 for the comparable quarter of last fiscal year. The increase in marketing and selling expense is primarily due to increased extended care marketing costs and increased direct sales costs.

     Marketing and selling expense for the nine months ended June 30, 2004 was generally flat as compared to marketing and selling expense for the comparable nine-month period of last fiscal year, with expenses of $1,640,000 for the nine months ended June 30, 2004, versus expenses of $1,628,000 for the comparable nine-month period of last fiscal year. The nine-month level of marketing and selling expense in fiscal 2004 as compared to the comparable period in the prior fiscal year primarily reflects an increase in salaries and other compensation offset by a decrease in advertising costs and a comparably lower level of accrued bonuses for management personnel in the current fiscal year.

     Research and Development. Research and development expense for the third quarter of fiscal 2004 decreased 15% to $183,000 from $215,000 for the comparable quarter of last fiscal year. The decrease in research and development expense is primarily related to a comparatively lower level of development costs relating to the Company’s intermittent catheters in the current year’s third fiscal quarter.

     Research and development expense for the nine months ended June 30, 2004 decreased 13% to $552,000 from $635,000 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 2004 were generally flat as compared to general and administrative expense for the comparable quarter of last fiscal year, with expenses of $431,000 in the third quarter of fiscal 2004, versus expenses of $438,000 for the comparable quarter of last fiscal year.

     General and administrative expense for the nine months ended June 30, 2004 was generally flat as compared to general and administrative expense for the comparable nine-month period of last fiscal year, with expenses of $1,424,000 for the nine months ended June 30, 2004, versus expenses of $1,364,000 for the comparable nine-month period of last fiscal year. The nine-month level of general and administrative expense in fiscal 2004 as compared to the comparable period in the prior fiscal year primarily reflects an increase in professional fees, including legal, audit and shareowner services, offset by a comparably lower level of accrued bonuses for management personnel in the current fiscal year. The Company expects that its costs for professional fees related to legal, audit and shareholder services will continue to increase in future periods as a result of higher costs associated with being a public company.

     Interest Income, Net. Interest income, net, for the third quarter of fiscal 2004 decreased 24% to $28,000 from $37,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects an overall lower interest rate on short-term investments, as well as increased interest expense relating to capital equipment leases and installment payments regarding the Company’s prior purchase of real estate.

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     Interest income, net, for the nine months ended June 30, 2004 decreased 49% to $62,000 from $122,000 for the comparable nine-month period of last fiscal year. Factors affecting the comparative level of nine-month net interest income are generally consistent with those discussed above for the current quarter.

Liquidity and Capital Resources

     The Company’s cash, cash equivalents and marketable securities were $6.2 million at June 30, 2004 compared with $6.0 million at September 30, 2003.

     During the three-month period ended June 30, 2004, the Company generated $79,000 of cash from operating activities compared to a net $471,000 of cash generated from operating activities during the comparable period of the prior fiscal year. Increased net cash from operating activities in fiscal 2004 primarily reflects net income before depreciation offset by increases in current assets and decreases in current liabilities. Accounts receivable balances for the three-month period increased 34% or $666,000, primarily as a result of the timing of orders. Inventories were essentially flat, with a decrease of $42,000 during the recent three-month period. Other current assets decreased 12% or $50,000 during the recent three-month period primarily as a result of prepaid insurance premiums and prepayments relating to certain manufacturing equipment. Current liabilities were essentially flat, with an increase of $1,000 during the recent three-month period. In addition, capital expenditures during this period were $358,000 compared to $24,000 for the comparable period of the prior fiscal year. The increase in capital expenditures in fiscal 2004 primarily reflects the Company’s warehouse expansion. The Company currently expects to spend up to an additional $400,000 in the fourth fiscal quarter of 2004 and the first fiscal quarter of 2005 with respect to this expansion.

     During the fiscal quarter ended March 31, 2003, the Company entered into a $1,000,000 revolving line of credit with U.S. Bank National Association. The agreement calls for a variable interest rate that is equal to 1% plus the one-month LIBOR rate. The agreement’s initial term expired March 31, 2004. However, on April 1, 2004, the parties extended the term of this line of credit through March 31, 2005. As of June 30, 2004, the company did not have any amounts outstanding under this line of credit.

     The Company believes that its capital resources on hand at June 30, 2004, together with cash generated 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, 2003. 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 restraints 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

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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 acceptance of the hydrophilic intermittent catheters, the Release-NF Foley catheters and the FemSoft Insert in the marketplace; the uncertainty of gaining new strategic relationships; the uncertainty of timing of revenues from private label sales (particularly with respect to international customers); FDA and other regulatory review and response times; manufacturing capacities for both current products and new products; the uncertainty of insurance coverage of the FemSoft Insert by additional insurers; 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; results of clinical tests; the timing of clinical preference testing and product introductions; and other risk factors listed from time to time in the Company’s SEC reports, including, without 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, 2003.

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.

Item 4. CONTROLS AND PROCEDURES

     Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are adequately designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms.

     Changes in Internal Controls. During our first fiscal quarter, there have not been any significant changes in the Company’s internal control over financial reporting (as defined in Rule 13(a)-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

     In December 1999, the Board of Directors authorized a plan for the Company to purchase up to a total of 1,000,000 shares of its outstanding common stock, primarily through open-market transactions.

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Unless earlier terminated by resolution of the Company’s board of directors, this plan will expire when the Company has repurchased all shares authorized for repurchase thereunder.

Information on the Company’s purchases of equity securities follows:

(a)

Exhibits:

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K:

The Company furnished a Current Report on Form 8-K dated April 26, 2004 reporting under Item 7 (“Financial Statements and Exhibits”) and Item 12 (“Results of Operations and Financial Condition”) a press release announcing the Company’s financial results for the second fiscal quarter ended March 31, 2004.

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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
August 6, 2004	By:	/s/ Anthony J. Conway
		Anthony J. Conway
		President and Chief Executive Officer

Date: August 6, 2004	By:	/s/ David A. Jonas
		David A. Jonas
		Chief Financial Officer and Treasurer

INDEX TO EXHIBITS