UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For fiscal year
ended September 30, 2010
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
Commission File
Number: 0-18933
Rochester Medical
Corporation
|
|
|
Minnesota
State of
Incorporation
|
|
41-1613227
IRS Employer
Identification No.
|
One Rochester Medical Drive
Stewartville, Minnesota 55976
(507) 533-9600
Address of Principal Executive
Offices and Telephone Number
Securities Registered Pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock without par value
|
|
Nasdaq Global Market
|
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined by Rule 405 of the Securities
Act. Yes o No þ
Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by checkmark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act) Yes o No þ
The aggregate market value of voting common equity held by
non-affiliates based upon the closing Nasdaq sale price on
March 31, 2010 ($12.82) was $138,565,611.
Number of shares of common stock outstanding on December 1,
2010 was 12,175,752 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of Registrants Proxy Statement for its 2011
Annual Meeting of Shareholders are incorporated by reference
in Part III.
PART I
Rochester Medical Corporation (we, our,
or us) develops, manufactures and markets a broad
line of innovative, technologically enhanced PVC-free and
latex-free urinary continence and urine drainage care products
for the extended care and acute care markets. Our extended care
products include a line of male external catheters for managing
male urinary incontinence and a line of intermittent catheters
for managing both male and female urinary retention. Along with
our full line of silicone male external catheters, we also sell
a line of latex male external catheters in the United Kingdom.
We have also released
Magic3tm,
an advanced line of silicone intermittent catheters. Our
extended care products also include the
FemSoft®
Insert, a soft, liquid-filled, conformable urethral insert
for managing female stress urinary incontinence in adult
females. Our acute care products include a line of standard
Foley catheters, our new Strata brand of Foley catheters,
and our
Strata-NF®
Catheter, an antibacterial Foley catheter that reduces the
incidence of hospital acquired urinary tract infection, or UTI.
A small percentage of our extended care products also are used
in the acute care market.
We market our products under our Rochester
Medical®
brand through a direct sales force in the United States and
United Kingdom and through independent distributors in other
international markets. We also supply our products to several
large medical product companies for sale under private label
brands owned by these companies.
Extended
Care Products
Male External Catheters. Our male external
catheters, or MECs, are self-care, disposable devices for
managing male urinary incontinence. We manufacture and market
six models of silicone male external catheters: the
UltraFlex®,
Pop-On®,
Wide
Band®,
Natural®,
Clear
Advantage®
and
Transfix®
catheters. The UltraFlex, Clear Advantage and
Transfix Style 1 catheters have adhesive positioned
midway down the catheter sheath. The Pop-On and
Transfix Style 2 catheters have a sheath that is shorter
than that of a standard male external catheter and have adhesive
applied to the full length of the sheath, and are designed to
accommodate patients who require shorter-length external
catheters. Our Wide Band and Transfix Style 3
self-adhering male external catheters have an adhesive band
which extends over the full length of the sheath, providing
approximately 70% more adhesive coverage than other conventional
male external catheters. The full length and forward placement
of the Wide Band adhesive is designed to reduce adhesive
failure and the resulting leakage, which is a common complaint
among users of male external catheters. The Natural
catheter is a non-adhesive version of our male external
catheter.
All models of our male external catheters are produced in five
sizes for better patient fit. Most of our male external
catheters are made from silicone, a non-toxic and biocompatible
material that eliminates the risks of latex-related skin
irritation. Silicone catheters are also odor free and have
greater air permeability than catheters made from other
materials, including latex. Air permeability reduces skin
irritation and damage from catheter use and thereby increases
patient comfort. Our silicone catheters are transparent,
permitting visual skin inspection without removal of the
catheters and aiding proper placement of the catheters. Our
catheters also have a kink-proof funnel design to ensure
uninterrupted urine flow. The self-adhering technology and
patented forward-placement of the adhesive simplifies
application of the catheters and provides a strong bond to the
skin for greater patient confidence and improved wear.
We also market two models of latex male external catheters in
the United Kingdom: the
Freedom®
and Freedom
Plus®
catheters. Through a distribution agreement with Coloplast A/S
(Coloplast), Coloplast supplies us with our
requirement of latex male external catheters for sale in the
United Kingdom.
Intermittent Catheters. Our Personal
Catheters®
are a line of disposable intermittent catheters manufactured
from silicone. We produce the Personal Catheters in three
lengths for male, female, and pediatric use and in multiple
diameters. We produce four distinct versions of the Personal
Catheter: the basic Standard Personal Catheter, the
Antibacterial Personal Catheter, the Hydrophilic
Personal Catheter (along with a new UK-only brand, the
Hydrosil Discreet) and the Antibacterial HydroPersonal
Catheter. The Antibacterial Personal Catheter
provides site-specific delivery of nitrofurazone, a drug
that has been proven effective in reducing UTI. The Hydrophilic
Personal Catheter and the Hydrosil Discreet become
extremely slippery when moistened, providing a very low friction
surface for ease and comfort during insertion and removal. The
Antibacterial HydroPersonal Catheter
3
combines these innovations. All of the Personal Catheter
designs are latex-free and PVC-free, eliminating the
allergen, toxin or disposal concerns commonly associated with
latex and PVC catheters.
We have also released an advanced line of intermittent
catheters. Our Magic3 catheters are the first
intermittent catheters created from a composition of three
distinct functional layers. Each of the three all-silicone
laminates is uniquely formulated to independently address a
particular product attribute required for comfortable, easy, and
reliable intermittent catheterization. The catheters
special outer layer of nano-smooth soft silicone provides for an
unparalleled hydrophilic surface which reduces trauma and
maximizes patient comfort. The proprietary middle layer of
firmer silicone supports confident handling for quick, simple
catheter insertion. The innermost layer is designed to resist
kinking and leverage the intrinsic hydrophobic (water-repelling)
characteristics of silicone to enhance urine flow through the
catheter. Similar to our Personal Catheters, the
Magic3 catheters are produced in three lengths for male,
female, and pediatric use and in multiple diameters. The
Magic3 product line also incorporates all of our coating
options and package configurations, including the advanced
antibacterial and antibacterial hydrophilic technologies.
FemSoft Insert. The FemSoft Insert is a
disposable device for the management of stress urinary
incontinence in active women. It is a minimally invasive device
that provides a patient with effective control of her urinary
function and eliminates the need for pads or liners that can
cause embarrassment, restrict mobility and compromise lifestyle.
The device can be simply inserted, worn and removed for voiding
by most women. It requires no inflation, deflation, syringes or
valving mechanisms. In addition, the soft, liquid-filled
silicone membrane of the FemSoft Insert has been designed
to conform to anatomical variations of the urethra and follow
the movements of the urethra during normal activities, thereby
reducing leakage without chafing or abrasion of the delicate
tissues of the urethra.
The FemSoft Insert is a prescription device that requires
a woman to visit her physician, who will fit the patient with
the proper size and instruct the patient on proper application
of the FemSoft Insert. In September 2009, the FemSoft
Insert was approved for inclusion in Part IX of the UK
Drug Tariff as a prescription product that is reimbursable under
the National Healthcare System, commencing in 2010. In November
2009, the Centers for Medicare & Medicaid Services
(CMS) issued a specific reimbursement code which covers our
FemSoft Insert. We believe the availability of National
Healthcare System and Medicare reimbursement will help this
unique device become an economically accessible and often
preferred solution for incontinent women in the United Kingdom
and in the United States.
Acute
Care Products
Foley Catheters. We offer standard silicone
Foley catheters in a two-lumen version for urinary drainage
management and in a three-lumen version that also supports
irrigation of the urinary tract. These Foley catheters are
available in all adult and pediatric sizes. All of our silicone
Foley catheters eliminate the risk of the allergic reactions and
tissue irritation and damage associated with latex Foley
catheters. Our standard Foley catheters are transparent which
enables healthcare professionals to observe urine flow. Unlike
the manufacturing processes used by producers of competing
silicone Foley catheters in which the balloon is made separately
and attached by hand in a separate process involving gluing, our
automated manufacturing processes allow us to integrate the
balloon into the structure of the Foley catheter, resulting in a
smoother, more uniform exterior that may help reduce irritation
to urinary tissue.
In September 2009, we introduced our new
StrataSItm
and
StrataNFtm
silicone Foley catheters. The improved silicone design consists
of a soft, pliable inner core surrounded by ultra-soft,
ultra-smooth outer layers allowing for softness and flexibility
which we believe is unique in an all-silicone catheter. The
StrataNF version includes a nitrofurazone anti-infective
matrix within the silicone. Nitrofurazone is an effective
broad-spectrum antibacterial agent which is released from the
catheter during the period the catheter is in the patient.
Our Foley catheters are packaged sterile in single catheter
strips or in procedural trays and sold under the Rochester
Medical brand and under private label arrangements. In
addition, we sell our Foley catheters in bulk under private
label arrangements for packaging in kits with tubing, collection
bags and other associated materials.
4
Technology
We use proprietary, automated manufacturing technologies and
processes to manufacture continence care devices cost
effectively. The production of our products also depends on our
materials expertise and know-how in the formulation of silicone
and advanced polymer products. Our proprietary liquid
encapsulation technology enables us to manufacture innovative
products, such as our FemSoft Insert, that have soft,
conformable, liquid-filled reservoirs, which cannot be
manufactured using conventional technologies. Using this liquid
encapsulation technology, we can mold and form liquid
encapsulated devices in a variety of shapes and sizes in an
automated process. Our manufacturing technologies and materials
know-how also allow us to incorporate a sustained release
antibacterial agent into our products. We believe that our
manufacturing technology is particularly well-suited to high
unit volume production and that our automated processes enable
cost-effective production. We further believe that our
manufacturing and materials expertise, particularly our
proprietary liquid encapsulation technology, may be applicable
to a variety of other devices for medical applications. We plan
to consider, commensurate with our financial and personnel
resources, future research and development activities to
investigate opportunities provided by our technology and
know-how.
We believe that our proprietary manufacturing processes,
materials expertise, custom designed equipment and technical
know-how allow us to simplify and further automate traditional
catheter manufacturing techniques to reduce our manufacturing
costs. In order to manufacture high quality products at
competitive costs, we concurrently design and develop new
products and the processes and equipment to manufacture them.
Marketing
and Sales
We sell our products in the United States under the Rochester
Medical brand name through a direct sales force that has
grown to eighteen members as of September 30, 2010. As part
of our strategic plan, we are in the process of significantly
expanding our U.S. sales and marketing presence in order to
further enhance the sales and acceptance of our branded
products. By 2010 calendar year end, we plan to complete the
addition of over 30 new sales professionals to our staff.
Through our subsidiary, Rochester Medical Limited, we sell our
products in the United Kingdom under the Rochester
Medical brand name through an eighteen-person direct sales
force. The primary markets for our products are distributors,
extended care facilities and individual hospitals and healthcare
institutions.
To date, a significant portion of our revenues have been derived
from sales of our MECs and standard Foley catheters to medical
products companies for resale under brands owned by such
companies. Private label arrangements are likely to continue to
account for a significant, but declining, portion of our
revenues in the foreseeable future, particularly in
non-United
Kingdom international markets where currently we do not maintain
a direct sales presence. Sales of products under the
Rochester Medical brand comprised 72% of total sales in
fiscal 2010, with private label sales representing 28% of total
sales. In fiscal 2009 and fiscal 2008, private label sales
comprised 33% and 32% of total sales, respectively. Sales to
Coloplast and to Hollister Incorporated (Hollister)
under private label arrangements accounted for 14% and 10% of
net sales for fiscal 2010, respectively.
In addition to direct sales to hospitals and other healthcare
institutions, we have actively sought to sell our Rochester
Medical brand products through the Group Purchasing
Organization (GPO) market, where organizations such as
hospitals, rehabilitation centers and acute care facilities
acquire products not directly from manufacturers, but rather
from distributors where pricing is determined under agreements
between those distributors and GPOs. In November 2006, we
announced we had been awarded a national Group Purchasing
Contract for urological products from Premier Purchasing
Partners, L.P. (Premier). Premier is one of the
largest GPOs in the United States with over $27 billion in
contract purchases per year. Premier is owned by more than 200
leading
not-for-profit
hospitals and affiliated with 1,500 hospitals and 42,000 other
healthcare sites. The contract includes our Foley catheters
(including our infection control catheters), male external
catheters, intermittent catheters, and urethral inserts. The
contract became effective March 1, 2007, and has been
extended through February 2013.
In August 2007, we announced that Novation, LLC
(Novation) awarded us an Innovative Technology
Contract for our urological catheter products and related
accessories, including our advanced infection control catheters.
Novation provides contracting services to more than 25,000
members of VHA, Inc. and the University HealthSystem Consortium,
or UHC, and more than 15,000 customers of Provista (formerly
HPPI). This contract
5
became effective on September 1, 2007, and has been
extended through June 30, 2013. We have also been awarded a
urological products contract with Broadlane Inc. This contract
became effective January 1, 2010 and is a two year
contract. Broadlane is a GPO whose clients include more than 915
acute care hospitals, more than 2,600
sub-acute
care facilities and more than 18,000 physician practices.
We started a Direct to Consumer pilot campaign in February 2010
for the sale of the FemSoft Insert in coordination with
clinical institutions and a distributor, primarily in the
Charlotte, North Carolina and south Florida areas, and have
invested over $600,000 in the campaign, primarily in the second
quarter of fiscal 2010. While it is still too early to know the
full potential of this product in the marketplace, management
believes it can become an integral part of our product offering.
We sell our Rochester Medical brand products and other
companies products direct to the patient in the
United Kingdom through the Script-Easy program. U.K.
residents can call a toll free number and order products for
direct home delivery upon verification of a prescription from a
doctor.
We rely on arrangements with medical product companies and
independent distributors to sell our products in Europe and
other international markets. These arrangements are conducted
under the Rochester Medical brand name and under brands
controlled by the medical product companies. International sales
accounted for 59%, 58% and 60% of total sales in fiscal 2010,
2009 and 2008, respectively.
Private
Label Distribution Agreements
We supply a number of medical product companies with products on
a private label basis. Our practice has been to enter into
written agreements with these distributors of our products.
Through a Private Label Distribution Agreement with Coloplast,
we supply silicone MECs to be sold under Coloplasts brands
worldwide, excluding the United Kingdom, through June 2011.
Through a Private Label Agreement with Hollister, we supply
silicone MECs to be sold under the Hollister brand worldwide,
excluding the United Kingdom, through December 2014.
Manufacturing
We design and build custom equipment to implement our
manufacturing technologies and processes. Our two manufacturing
facilities are located in Stewartville, Minnesota. In one
building, we produce our Foley catheters on one production line
and our MECs on other lines. Our second building houses our
liquid encapsulation manufacturing operations, as well as our
FemSoft Insert and intermittent catheter manufacturing
lines.
We maintain a comprehensive quality assurance and quality
control program, which includes documentation of all material
specifications, operating procedures, equipment maintenance and
quality control test methods. We have obtained ISO 13485
certification for our Foley catheter, male external catheter,
intermittent catheter and FemSoft Insert production lines.
Our manufacturing facilities have been designed to accommodate
the specialized requirements for the manufacture of medical
devices, including the Food and Drug Administrations
(FDA) requirements for Quality System Regulation, or
QSR. In 2009, an FDA audit of our facilities was successfully
completed.
Sources
of Supply
We obtain certain raw materials and components for a number of
our products from a sole supplier or limited number of
suppliers. The loss of such a supplier or suppliers, or a
material interruption of deliveries from such a supplier or
suppliers, could have a material adverse effect on us. We
believe that in most cases we have identified other potential
suppliers. In the event that we have to replace a supplier,
however, we may be required to repeat biocompatibility and other
testing of our products using the material from the new supplier
and may be required to obtain additional regulatory clearances.
Through a distribution agreement with Coloplast that expires in
June 2011, Coloplast supplies us with our requirement of latex
male external catheters for sale in the United Kingdom under our
Freedom®
and Freedom
Plus®
brands.
6
Research
and Development
In 2009, we introduced two new advanced product lines, our
Magic3 intermittent catheters and our StrataSI and
StrataNF Foley catheters. Our Magic3 intermittent
catheters are created from a composition of three distinct
functional layers designed to independently address a particular
product attribute required for comfortable, easy, and reliable
intermittent catheterization. Our StrataSI and
StrataNF Foley catheters feature proprietary
comfort-layered technology consisting of a soft, pliable inner
core surrounded by ultra-soft, ultra-smooth outer layers.
We believe that our ability to add new products to our existing
continence care product lines is important to our future
success. Accordingly, we are engaged in ongoing research and
development to develop and introduce new products which provide
additional features and functionality. In the future, consistent
with market opportunities and our financial and personnel
resources, we intend to perform clinical studies for products in
development.
In September 2007, we announced the publication in the September
issue of Annals of Internal Medicine of results of a
randomized, double-blind, controlled clinical study involving
212 adult patients at Denmarks Copenhagen Trauma Center.
The study concluded nitrofurazone-impregnated urinary catheters
reduced the incidence of catheter-associated bacteriuria and
funguria in adult trauma patients, reducing the need to change
or prescribe new antimicrobial therapy. The
nitrofurazone-impregnated urinary catheters used in the study
were manufactured by Rochester Medical. The control catheter was
an all-silicone Foley catheter.
With our patented technology, nitrofurazone is incorporated into
the structure of our catheter, and a controlled dosage of the
antimicrobial compound is eluted from the catheter into the
urethral tract. Unlike competitive catheters, in vitro
tests show our antibacterial Foley catheter to be effective
against a broad range of pathogens including a number of
multi-drug resistant pathogens. Our Foley catheter is the only
catheter currently on the market which the FDA allows the
manufacturer to indicate on the packaging that it reduces the
incidence of Catheter Associated UTI. We believe it is also the
only non-latex Foley catheter shown to be effective against
Catheter Associated UTI. We believe these to be competitive
advantages of our antibacterial catheters.
All topical antibacterial compounds (including nitrofurazone)
and all systemic antibiotics have some inherent risk of allowing
development of resistant organisms and allowing overgrowth of
organisms which are inherently resistant to the particular
compound. Two of the reasons we selected nitrofurazone for use
in our catheters, however, are that: (1) no known
significant resistance to the compound has yet developed in over
50 years of use by the medical community; and (2) it
has been found to be effective against a very broad spectrum of
pathogens that can cause urinary tract infections. Although we
have data from an extensive survey conducted in Spain from
November 2003 to October 2004 on Foley catheters in chronically
catheterized patients in an acute care setting (i.e.,
within a hospital environment) that showed positive results for
the use of nitrofurazone-impregnated catheters on a longer term
basis (approximately 30-45 days of use), we have not
conducted clinical trials in the extended care setting
(i.e., for personal, at-home use) and do not make
clinical claims for our antibacterial intermittent catheters
used in that setting.
Research and development expense for fiscal years 2010, 2009 and
2008 was $1,235,000, $1,241,000 and $1,044,000, respectively.
Competition
The continence care market is highly competitive. We believe
that the primary competitive factors include price, product
quality, technical capability, breadth of product line and
distribution capabilities. Our ability to compete is affected by
our product development and innovation capabilities, our ability
to obtain regulatory clearances, our ability to protect the
proprietary technology of our products and manufacturing
processes, our marketing capabilities, and our ability to
attract and retain skilled employees, to maintain current
distribution relationships, to establish new distribution
relationships and to secure participation in purchase contracts
with group purchasing organizations. We believe that it is
important to differentiate our products and broaden our product
lines in order to attract large customers, such as distributors,
dealers, institutions and home care organizations.
Our products compete with a number of alternative products and
treatments for continence care. Our ability to compete with
these alternative methods for urinary continence care depends on
the relative market acceptance of alternative products and
therapies and the technological advances in these alternative
products and therapies. Any
7
development of a broad-based and effective cure for a
significant form of incontinence could have a material adverse
effect on sales of continence care devices such as our products.
We compete directly for sales of continence care devices under
our own Rochester Medical brand with larger,
multi-product medical device manufacturers and distributors such
as C.R. Bard, Inc., Unomedical, Kendall Covidan Healthcare
Products Company, Hollister Incorporated, Astra Tech AB and
Coloplast. Many of the competitive alternative products or
therapies are distributed by larger competitors including
Johnson & Johnson Personal Products Company,
Kimberly-Clark Corporation and Proctor & Gamble
Company (for adult diapers and absorbent pads), and C.R. Bard,
Inc. (for injectable materials). Many of our competitors,
potential competitors and providers of alternative products or
therapies have significantly greater financial, manufacturing,
marketing, distribution and technical resources and experience
than us. It is possible that other large healthcare and consumer
products companies may enter this market in the future.
Furthermore, academic institutions, governmental agencies and
other public and private research organizations will likely
continue to conduct research, seek patent protection and
establish arrangements for commercializing products in this
market. Such products may compete directly with our products.
In February 2004, we brought suit against certain GPOs and
individual defendants alleging anti-competitive conduct against
the defendants in the markets for standard and anti-infection
Foley catheters as well as urethral catheters, and sought an
unspecified amount of damages and injunctive and other relief.
Beginning in November 2006 and concluding in January 2009, we
reached settlements with each of the defendants, resulting in
aggregate settlement proceeds to us of $61,325,000 (net
$39,605,000 after payment of attorneys fees and expenses)
and an Innovative Technology Contract with Novation. No further
action is expected with respect to this lawsuit.
Patents
and Proprietary Rights
Our success may depend in part on our ability to obtain patent
protection for our products and manufacturing processes, to
preserve our trade secrets and to operate without infringing the
proprietary rights of third parties. We may seek patents on
certain features of our products and technology based on our
analysis of various business considerations, such as the cost of
obtaining a patent, the likely scope of patent protection and
the benefits of patent protection relative to relying on trade
secret protection. We also rely upon trade secrets, know-how and
continuing technological innovations to develop and maintain our
competitive position.
We hold 15 patents in the United States and a number of
corresponding foreign patents that generally relate to certain
of our catheters and devices and certain of our production
processes. In addition, we have a number of pending United
States and corresponding foreign patent applications. We may
file additional patent applications for certain of our current
and proposed products and processes in the future. In addition,
we have entered into a Cross License Agreement with Coloplast
related to certain patents held by each party. The cross
licensing is for the purpose of avoidance of future infringement
claims by each party.
There can be no assurance that our patents will be of sufficient
scope or strength to provide meaningful protection of our
products and technologies. The coverage sought in a patent
application can be denied or significantly reduced before the
patent is issued. In addition, there can be no assurance that
our patents will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide proprietary
protection or commercial advantage to us.
Should attempts be made to challenge, invalidate or circumvent
our patents in the U.S. Patent and Trademark Office
and/or
courts of competent jurisdiction, including administrative
boards or tribunals, we may have to participate in legal or
quasi-legal proceedings, to maintain, defend or enforce our
rights in these patents. Any legal proceedings to maintain,
defend or enforce our patent rights can be lengthy and costly,
with no guarantee of success.
A claim by third parties that our current products or products
under development allegedly infringe their patent rights could
have a material adverse effect on us. We are aware that others
have obtained or are pursuing patent protection for various
aspects of the design, production and manufacturing of
continence care products. The medical device industry is
characterized by frequent and substantial intellectual property
litigation, particularly with respect to newly developed
technology. Intellectual property litigation is complex and
expensive, and the outcome of such litigation is difficult to
predict. Any future litigation, regardless of outcome, could
result in
8
substantial expense to us and significant diversion of the
efforts of our technical and management personnel. An adverse
determination in any such proceeding could subject us to
significant liabilities to third parties, require disputed
rights to be licensed from such parties, if licenses to such
rights could be obtained,
and/or
require us to cease using such technology. There can be no
assurance that if such licenses were obtainable, they would be
obtainable at costs reasonable to us. If forced to cease using
such technology, there can be no assurance that we would be able
to develop or obtain alternate technology. Additionally, if
third party patents containing claims affecting our technology
are issued and such claims are determined to be valid, there can
be no assurance that we would be able to obtain licenses to such
patents at costs reasonable to us, if at all, or be able to
develop or obtain alternate technology. Accordingly, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing, using or selling certain of our products, which
could have a material adverse effect on our business, financial
condition and results of operations.
We also rely on proprietary manufacturing processes and
techniques, materials expertise and trade secrets applicable to
the manufacture of our products. We seek to maintain the
confidentiality of this proprietary information. There can be no
assurance, however, that the measures taken by us will provide
us with adequate protection of our proprietary information or
with adequate remedies in the event of unauthorized use or
disclosure. In addition, there can be no assurance that our
competitors will not independently develop or otherwise gain
access to processes, techniques or trade secrets that are
similar or superior to ours. Finally, as with patent rights,
legal action to enforce trade secret rights can be lengthy and
costly, with no guarantee of success.
Government
Regulation
The manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the
FDA and corresponding foreign agencies. In the United States,
the medical devices manufactured and sold by us are subject to
laws and regulations administered by the FDA, including
regulations concerning the prerequisites to commercial
marketing, the conduct of clinical investigations, compliance
with QSR and labeling.
A manufacturer may seek from the FDA market authorization to
distribute a new medical device by filing a 510(k) Premarket
Notification to establish that the device is substantially
equivalent to medical devices legally marketed in the
United States prior to the Medical Device Amendments of 1976. A
manufacturer may also seek market authorization for a new
medical device through the more rigorous Premarket Approval, or
PMA, application process, which requires the FDA to determine
that the device is safe and effective for the purposes intended.
All of our marketed products have received FDA marketing
authorization pursuant to 510(k) notifications or PMA approval.
We are also required to register with the FDA as a medical
device manufacturer. As such, our manufacturing facilities are
subject to FDA inspections for compliance with QSR. These
regulations require that we manufacture our products and
maintain our documents in a prescribed manner with respect to
design, manufacturing, testing and quality control activities.
As a medical device manufacturer, we are further required to
comply with FDA requirements regarding the reporting of adverse
events associated with the use of our medical devices, as well
as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. FDA
regulations also govern product labeling and prohibit a
manufacturer from marketing a medical device for unapproved
applications. If the FDA believes that a manufacturer is not in
compliance with the law, it can institute enforcement
proceedings to detain or seize products, issue a recall, enjoin
future violations and assess civil and criminal penalties
against the manufacturer, its officers and employees. In 2009,
an FDA audit of our facilities was successfully completed.
Sales of medical devices outside the United States are subject
to foreign regulatory requirements that vary widely from country
to country. These laws and regulations range from simple product
registration requirements in some countries to complex clearance
and production controls in others. As a result, the processes
and time periods required to obtain foreign marketing approval
may be longer or shorter than those necessary to obtain FDA
market authorization. These differences may affect the
efficiency and timeliness of international market introduction
of our products. For countries in the European Union
(EU), medical devices must display a CE mark before
they may be imported or sold. In order to obtain and maintain
the CE mark, we must comply with the Medical Device Directive
and pass an initial and annual facilities audit inspections to
ISO 13485 standards by an EU inspection agency. We
9
have obtained ISO 13485 quality system certification and the
products we currently distribute into the EU display the
required CE mark. In order to maintain certification, we are
required to pass annual facilities audit inspections conducted
by EU inspectors.
In addition, international sales of medical devices manufactured
in the United States that have not been approved or cleared by
the FDA for marketing in the United States are subject to FDA
export requirements. These require that we obtain documentation
from the medical device regulatory authority of the destination
country stating that sale of the medical device is not in
violation of that countrys medical device laws, and, under
some circumstances, may require us to apply to the FDA for
permission to export a device to that country.
Third
Party Reimbursement
In the United States, healthcare providers that purchase medical
devices generally rely on third party payors, such as Medicare,
Medicaid, private health insurance plans and managed care
organizations, to reimburse all or a portion of the cost of the
devices. The Medicare program is funded and administered by the
federal government, while the Medicaid program is jointly funded
by the federal government and the states, which administer the
program under general federal oversight. We believe our
currently marketed products are generally eligible for coverage
under these third party reimbursement programs. The competitive
position of certain of our products may be partially dependent
upon the extent of reimbursement for our products.
Effective April 1, 2008, the four regional Durable Medical
Equipment Medicare Administrative Contractors covering the
United States implemented a new reimbursement policy for the use
of intermittent catheters. The main policy change now allows an
intermittent catheter user a maximum of 200 catheters per month
instead of four catheters per month under the previous policy.
We believe this is a very positive change in helping reduce
urinary tract infections and improving the quality of life for
intermittent catheter users. We expect the updated Medicare
coverage policy will increase the usage of intermittent
catheters in the U.S., although the scale and pace of the change
are difficult to predict.
In November 2009, the CMS issued a specific Medicare
reimbursement code which covers our FemSoft Insert. Due
to an oversight by CMS, a non-coverage policy for the FemSoft
Insert was mistakenly issued. When notified of the error in
April 2010, the CMS reviewed the matter and has since removed
the non-coverage statement. We believe the availability of
Medicare reimbursement will help this unique device become an
economically accessible and often preferred solution for
incontinent women in the United States.
In September 2009, the FemSoft Insert was approved for
inclusion in Part IX of the UK Drug Tariff as a
prescription product that is reimbursable under the National
Healthcare System. In foreign countries, the policies and
procedures for obtaining third party payment of reimbursement
for medical devices vary widely. Compliance with such procedures
may delay or prevent the eligibility of our branded
and/or
private label products for reimbursement, and have an adverse
effect on our ability to sell our branded or private label
products in a particular foreign country.
Environmental
Matters
We and the industry in which we compete are subject to
environmental laws and regulations concerning emissions to the
air, discharges to waterways and the generation, handling,
storage, transportation, treatment and disposal of waste
materials. Our policy is to comply with all applicable
environmental, health and safety laws and regulations. These
laws and regulations are constantly evolving and it is difficult
to predict accurately the effect they will have on us in the
future. Compliance with applicable environmental regulations and
controls has not had, nor are they expected to have in the
foreseeable future, any material impact on our capital
expenditures, earnings or competitive position.
Employees
As of September 30, 2010, we employed 268 full-time
employees, of whom 170 were in manufacturing, 77 in marketing
and sales and the remainder in research and development and
administration. We are not a party to any collective bargaining
agreement and believe our employee relations are good.
10
Executive
Officers of the Registrant
Our executive officers are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Anthony J. Conway
|
|
|
66
|
|
|
Chairman of the Board, Chief Executive Officer and President
|
Robert M. Anglin
|
|
|
43
|
|
|
Vice President, Quality and Regulatory
|
James M. Carper
|
|
|
59
|
|
|
Vice President, Marketing
|
Philip J. Conway
|
|
|
54
|
|
|
Vice President, Production Technologies
|
David A. Jonas
|
|
|
46
|
|
|
Director, Chief Financial Officer, Treasurer and Secretary
|
Martyn R. Sholtis
|
|
|
51
|
|
|
Corporate Vice President
|
Anthony J. Conway, one of our founders, has served as our
Chairman of the Board, Chief Executive Officer and President
since May 1988, and also served as our Secretary until November
2008 and as our Treasurer until September 1997. In addition to
his duties as Chief Executive Officer, Mr. Conway actively
contributes to our research and development and design
activities. From 1979 to March 1988, he was President, Secretary
and Treasurer of Arcon Corporation, a company that he co-founded
with Philip J. Conway in 1979 to develop, manufacture and sell
latex-based male external catheters and related medical devices.
Prior to founding Arcon, Mr. Conway worked for twelve years
for International Business Machines Corporation in various
research and development capacities. Mr. Conway is one of
the named inventors on numerous patent applications that have
been assigned to us, of which to date over 20 resulted in issued
U.S. patents and 32 have resulted in issued foreign patents.
Robert M. Anglin has served as our Vice President of
Quality and Regulatory since November 2008. From December 2003
until November 2008, Mr. Anglin served as our Director of
Quality and Regulatory with principal responsibility for our
quality and regulatory compliance activities. From September
2000 until December 2003, Mr. Anglin served as our Director
of Quality with principal responsibility for our quality
management system. From June 1991 until September 2000,
Mr. Anglin served in various operational, quality, and
product development activities. Mr. Anglin holds a BS
degree in Operations Management from Winona State University and
holds various professional certifications from the Regulatory
Affairs Professionals Society, American Society for Quality, and
the APICS Association for Operations Management.
James M. Carper has served as our Vice President of
Marketing since November 2008, and also leads our
U.S. Acute Care sales team. Mr. Carper joined us in
1994 as a Regional Sales Manager and was promoted in 1996 to
Director of Marketing, a position he held until September 2000.
Mr. Carper ran his own marketing agency from 2000 to 2007
before rejoining us as our Marketing Director. Prior to
Rochester Medical, he served as the Marketing Manager for
urological products with Sherwood Medical.
Philip J. Conway, one of our founders, has served as our
Vice President of Production Technologies since August 1999.
From 1988 to July 1999, Mr. Conway served as our Vice
President of Operations. Mr. Conway is responsible for
plant design as well as new product and production processes,
research, design and development activities. Since November
2001, he has had principal responsibility for our operational
activities. From 1979 to March 1988, Mr. Conway served as
Plant and Production Manager of Arcon Corporation. Prior to
joining Arcon, Mr. Conway was employed in a production
supervisory capacity by AFC Corp., a manufacturer and fabricator
of fiberglass, plastics and other composite materials. He is one
of the named inventors on numerous patent applications that have
been assigned to us, of which to date 20 have resulted in issued
U.S. patents and 32 have resulted in issued foreign patents.
David A. Jonas has served as our Treasurer since November
2000, as our Chief Financial Officer since May 2001, and as
our Secretary since November 2008. Mr. Jonas was also
elected to fill a vacancy in our Board of Directors in November
2008. From June 1, 1998 until May 2001, Mr. Jonas
served as our Controller. From August 1999 until October 2001,
Mr. Jonas served as our Director of Operations and had
principal responsibility for our operational activities. Since
November 2000, Mr. Jonas has had principal responsibility
for our financial activities. Prior to joining us,
Mr. Jonas was employed in various financial, financial
management and operational management positions with Polaris
Industries, Inc. from January 1989 to June 1998. Mr. Jonas
holds a BS degree in
11
Accounting from the University of Minnesota and is a certified
public accountant currently under a non-active
status.
Martyn R. Sholtis joined us in April 1992 and serves as
our Corporate Vice President. Mr. Sholtis is responsible
for all corporate business development activities, and also
leads our international sales and U.S. Home Care sales
team. From 1985 to 1992, Mr. Sholtis was employed by
Sherwood Medical, a company that manufactured and sold a variety
of disposable medical products including urological catheters,
most recently as Regional Sales Manager for the Nursing Care
Division.
Messrs. Anthony J. Conway and Philip J. Conway are brothers.
Recent
Developments
In September 2009, the FemSoft Insert was approved for
inclusion in Part IX of the UK Drug Tariff as a
prescription product that is reimbursable under the National
Healthcare System, commencing in 2010. In November 2009, the CMS
issued a specific Medicare reimbursement code which covers our
FemSoft Insert. Due to an oversight by CMS, a
non-coverage policy for the FemSoft Insert was mistakenly
issued. When notified of the error in April 2010, the CMS
reviewed the matter and has since removed the non-coverage
statement.
In November 2009, we were awarded a urological products contract
with Broadlane Inc. This contract became effective
January 1, 2010 and is a two year contract. Broadlane is a
GPO whose clients include more than 915 acute care hospitals,
more than 2,600
sub-acute
care facilities and more than 18,000 physician practices.
In June 2010, we announced that we were a winner of the fifth
annual Pinnacle Award, presented by the Premier healthcare
alliance. Premier contracts with more than 800 suppliers and we
were one of 38 contracted suppliers to receive the Pinnacle
Award. The award recognizes outstanding management of Premier
agreements and drive toward the mutual goal of providing
clinical and financial value to the
not-for-profit
hospitals that are members of the Premier alliance.
As part of our strategic plan, we are in the process of
significantly expanding our U.S. sales and marketing
presence in order to further enhance the sales and acceptance of
our branded products. By 2010 calendar year end, we plan to
complete the addition of over 30 new sales professionals to our
staff.
Information
Available on Our Website
We were incorporated in the State of Minnesota in 1988. Our
corporate office is located at One Rochester Medical Drive,
Stewartville, Minnesota 55976, and our telephone number is
(507) 533-9600.
We make our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
available free of charge through our website, at www.rocm.com,
as soon as reasonably practicable after we electronically file
such material with (or furnish such material to) the Securities
and Exchange Commission. The information contained on our
website is not incorporated by reference into this Annual Report
on
Form 10-K
and should not be considered to be part of this
Form 10-K.
Our business, financial condition or results of operations
could be materially adversely affected by any of the risks and
uncertainties described below. Additional risks not presently
known to us, or that we currently deem immaterial, may also
impair our business, financial condition or results of
operations.
A
significant portion of our revenues come from a small number of
customers
We depend on a relatively small number of customers for a
significant portion of our net sales. Our five largest customers
in fiscal 2010 represented approximately 36% of our total net
sales. Because our larger customers typically purchase products
in relatively large quantities at a time, our financial
performance can fluctuate from quarter to quarter depending upon
the timing of their purchases. We expect to continue to depend
upon a relatively small number of customers for a significant
percentage of our net sales. Because our major customers
represent such a large part of our business, the loss of any of
our major customers could negatively impact our business.
12
Our major customers may not continue to purchase products from
us at current levels or at all. In the past, we have lost
customers due to our customers changes in technology
preferences, customers shifting production of products to
internal facilities and the acquisition of our customers. We may
lose customers in the future for similar reasons. We may not be
able to expand our customer base to make up any sales shortfalls
if we lose a major customer. Our attempt to diversify our
customer base and reduce our reliance on particular customers
may not be successful.
We depend
on private label sales arrangements and third party distributors
for a significant portion of our revenues, the loss of one or
more of which could reduce our future sales revenue
A significant portion of our net sales to date have depended on
our ability to provide products that meet the requirements of
medical product companies that resell or distribute our products
under their brand names, and on the sales and marketing efforts
of such entities. Private label sales arrangements with these
entities are likely to continue to be a significant, but
declining, portion of our revenues in the future. We also rely
on various independent distributors to sell our products. There
can be no assurance that our private label purchasers and
distributors will be able to successfully market and sell our
products, that they will devote sufficient resources to support
the marketing of any of our products, that they will market any
of our products at prices which will permit such products to
develop, achieve, or sustain market acceptance, or that they
will not develop alternative sources of supply. Worldwide
private label sales increased 1.2% in fiscal 2010 compared to
fiscal 2009, and represented 28% of total sales. The failure of
our purchasers and distributors to continue to purchase products
from us at levels reasonably consistent with their prior
purchases or to effectively market our products, or our failure
to replace such private label sales with sales under the
Rochester Medical brand, could significantly reduce our
future sales revenue.
We may
not succeed in establishing a separate brand identity for our
Rochester Medical brand products
Our success will depend on our ability to overcome established
market positions of competitors and to establish our own market
presence under the Rochester Medical brand name. One of
the challenges facing us in this respect is our ability to
compete with companies that offer a wider array of products to
hospitals and medical care institutions, distributors and end
users. In addition, until 2007 we had been unsuccessful in
competing in the Group Purchasing Organization (GPO) market,
where organizations such as hospitals, rehabilitation centers
and acute care facilities acquire products not directly from
manufacturers, but rather from distributors where pricing is
determined under agreements between those distributors and GPOs.
In November 2006, we announced we had been awarded a national
GPO contract for urological products from Premier Purchasing
Partners, L.P., one of the largest GPOs in the United States
with over $27 billion in contract purchases per year. The
contract includes our Foley catheters (including our infection
control catheters), male external catheters, intermittent
catheters, and urethral inserts, and has been extended through
February 2013. In August 2007, we announced that Novation, LLC
awarded us an Innovative Technology Contract for our urological
catheter products and related accessories, including our
advanced infection control catheters. The contract became
effective on September 1, 2007, and has since been renewed
through June 30, 2013. In November 2009, we were awarded a
urological products contract with Broadlane Inc. This contract
became effective January 1, 2010 and is a two year
contract. There can be no assurance, however, that these
contracts will generate significant sales, that the contracts
will be renewed beyond their initial terms, or that contracts
with other GPOs will follow. We may also find it difficult to
sell our products due to the limited recognition of our brand
name.
Our
products may not succeed in the market
We have several products, including the antibacterial
hydrophilic and antibacterial hydro intermittent catheters and
the FemSoft Insert, that represent new methods and
improvements for urinary continence care. There can be no
assurance that these products will gain any significant degree
of market acceptance among physicians, healthcare payors and
patients. Market acceptance of these products, if it occurs, may
require lengthy hospital evaluations
and/or the
training of numerous physicians and clinicians, which could
delay or dampen any such market acceptance. Moreover, approval
of third party reimbursement for our products, competing
products or alternative medical treatments, and our pricing
policies will be important factors in determining market
acceptance of these products. Any of the foregoing factors, or
other factors, could limit or detract from market acceptance of
these
13
products. Insufficient market acceptance of these products could
impact future sales revenue and have a material adverse effect
on our business, financial condition and results of operations.
We face
significant competition in the market for urinary continence
products
The medical products market in general is, and the markets for
urinary continence care products in particular are, highly
competitive. Many of our competitors have greater name
recognition than us and offer well known and established
products, some of which are less expensive than our products. As
a result, even if we can demonstrate that our products provide
greater ease of use, lifestyle improvement or beneficial effects
on medical outcomes over the course of treatment, we may not be
successful in capturing a significant share of the market. In
addition, many of our competitors offer broader product lines
than us, which may be a competitive advantage in obtaining
contracts with GPOs, and may adversely affect our ability to
obtain contracts with such GPOs. Many of our competitors also
have substantially more marketing and sales experience than us
and substantially larger sales forces and greater resources to
devote to such efforts. There can be no assurance that we will
be able to compete successfully against such competitors.
Our
products may become obsolete if we are unable to anticipate and
adapt to new treatments or techniques
Urinary continence care can be managed with a variety of
alternative medical treatments and management products or
techniques, including adult diapers and absorbent pads, surgery,
behavior therapy, pelvic muscle exercise, implantable devices,
injectable materials and other medical devices. Manufacturers of
these products or techniques are engaged in research to develop
more advanced versions of current products and techniques. Many
of the companies that are engaged in such development work have
substantially greater capital resources than us and greater
expertise than us in research, development and regulatory
matters. There can be no assurance that our products will be
able to compete with existing or future alternative products,
techniques or therapies, or that advancements in existing
products, techniques or therapies will not render our products
obsolete.
We have a
limited history of profitability and may experience future
losses
Until fiscal 2003, we experienced net losses. Our net loss for
the fiscal year ended September 30, 2010 was ($254,000),
while net income for the fiscal years ended September 30,
2009 and 2008 was $109,000 and $759,000, respectively. A
substantial portion of the expenses associated with our
manufacturing facilities are fixed in nature (i.e. depreciation)
and will reduce our operating margin until such time, if ever,
as we are able to increase utilization of our capacity through
increased sales of our products. Our strategic plan continues to
require a significant investment in our sales and marketing
programs, which may not result in the accelerated revenue growth
that we anticipate. As a result, there can be no assurance that
we will ever generate substantial revenues or sustain
profitability. Although we achieved profitability in fiscal
years 2003 through 2009, we cannot be certain that we will be
able to sustain or increase profitability on a quarterly or
annual basis.
Our
products and manufacturing activities are subject to extensive
governmental regulation that could prevent us from selling our
products or introducing new and/or improved products in the
United States or internationally
Our products, product development activities and manufacturing
processes are subject to extensive regulation by the FDA and by
comparable agencies in foreign countries. In the United States,
the FDA regulates the introduction of medical devices as well as
manufacturing, labeling and record keeping procedures for such
products. The process of obtaining marketing clearance for new
medical products from the FDA can be costly and time consuming,
and there can be no assurance that such clearance will be
granted timely, if at all, for our products in development, or
that FDA review will not involve delays that would adversely
affect our ability to commercialize additional products or to
expand permitted uses of existing products. Even if regulatory
clearance to market a product is obtained from the FDA, this
clearance may entail limitations on the indicated uses of the
product. Marketing clearance can also be withdrawn by the FDA
due to failure to comply with regulatory standards or the
occurrence of unforeseen problems following initial clearance.
14
We may be required to make further filings with the FDA under
certain circumstances, such as the addition of product claims or
product reformulation. The FDA could also limit or prevent the
manufacture or distribution of our products and has the power to
require the recall of such products. FDA regulations depend
heavily on administrative interpretation, and there can be no
assurance that future interpretation made by the FDA or other
regulatory bodies, which may have retroactive effect, will not
adversely affect us. The FDA and various state agencies inspect
us and our facilities from time to time to determine whether we
are in compliance with regulations relating to medical device
manufacturing companies, including regulations concerning
design, manufacturing, testing, quality control and product
labeling practices. A determination that we are in material
violation of such regulations could lead to the imposition of
civil penalties, including fines, product recalls, product
seizures, or, in extreme cases, criminal sanctions.
A portion of our revenues are dependent upon sales of our
products outside the United States. Foreign regulatory bodies
have established varying regulations governing product
standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements.
Foreign governmental regulations have become increasingly
stringent and more common, and we may become subject to even
more rigorous regulation by foreign governmental authorities in
the future. Penalties for a companys noncompliance with
foreign governmental regulation could be severe, including
revocation or suspension of a companys business license
and criminal sanctions. We rely on our third-party foreign
distributors to comply with certain foreign regulatory
requirements. The inability or failure of us or such foreign
distributors to comply with varying foreign regulations or the
imposition of new regulations could restrict the sale of our
products internationally and thereby adversely affect our
business, financial condition and results of operations.
Our
success may depend on the ability of healthcare providers to
achieve adequate levels of reimbursement from
third-party
payors, and cost containment measures could decrease the demand
for our products and the prices that our customers are willing
to pay for those products
Our products are purchased principally by healthcare providers
that typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private
insurance plans and managed care plans, for the healthcare
services provided to their patients. The ability of customers to
obtain appropriate reimbursement for their services and the
products they provide from government and third-party payors is
critical to the success of medical device companies because it
affects which products customers purchase and the prices they
are willing to pay. Reimbursement varies from country to country
and can significantly impact the acceptance of new technology.
Even when we develop a promising new product, we may find
limited demand for the product unless reimbursement approval is
obtained from private and governmental third-party payors.
Major third-party payors for healthcare provider services in the
United States and abroad continue to work to contain healthcare
costs through, among other things, the introduction of cost
containment incentives and closer scrutiny of healthcare
expenditures by both private health insurers and employers.
Initiatives to limit the growth of healthcare costs, including
price regulation, are also underway in several countries in
which we do business. Implementation of healthcare reforms in
the United States and in significant overseas markets such as
the United Kingdom and other countries within the European
Union may limit the price of, or the level at which,
reimbursement is provided for our products and adversely affect
both our pricing flexibility and the demand for our products.
Healthcare providers may respond to such cost-containment
pressures by substituting lower cost products or other therapies
for our products.
In March 2010, significant health care reform was enacted into
law in the United States, which included a number of provisions
aimed at improving quality and decreasing costs. It is uncertain
what consequences these provisions will have on patient access
to new technologies and what impacts these provisions will have
on Medicare reimbursement rates. Further legislative or
administrative reforms to the U.S. or international
reimbursement systems that significantly reduce reimbursement
for our products or deny coverage for such products, or adverse
decisions relating to our products by administrators of such
systems in coverage or reimbursement issues, would have an
adverse impact on the products purchased by our customers and
the prices our customers are willing to pay for them. This in
turn would have an adverse effect on our financial condition and
results of operations.
15
Our
business, financial condition, results of operations and cash
flows could be significantly and adversely affected by recent
healthcare reform legislation and other administration and
legislative proposals.
The Patient Protection and Affordable Care Act and Health Care
and Educational Reconciliation Act (the Acts) were enacted into
law in March 2010. Certain provisions of the Acts will not be
effective for a number of years and there are many programs and
requirements for which the details have not yet been fully
established or consequences not fully understood, and it is
unclear what the full impacts will be from the legislation. The
legislation does levy a 2.3% excise tax on all U.S. medical
device sales beginning in 2013. This new tax may materially and
adversely affect our business and results of operations. The
legislation also focuses on a number of Medicare provisions
aimed at improving quality and decreasing costs. It is uncertain
at this point what negative unintended consequences these
provisions will have on patient access to new technologies. The
Medicare provisions include value-based payment programs,
increased funding of comparative effectiveness research, reduced
hospital payments for avoidable readmissions and hospital
acquired conditions, and pilot programs to evaluate alternative
payment methodologies that promote care coordination (such as
bundled physician and hospital payments). Additionally, the
provisions include a reduction in the annual rate of inflation
for hospitals starting in 2011 and the establishment of an
independent payment advisory board to recommend ways of reducing
the rate of growth in Medicare spending. We cannot predict what
healthcare programs and regulations will be ultimately
implemented at the federal or state level, or the effect of any
future legislation or regulation. However, any changes that
lower reimbursements for our products or reduce medical
procedure volumes could adversely affect our business and
results of operations.
We depend
on certain key personnel, the loss of whom could harm our
business
If we are unable to attract, train and retain highly-skilled
technical, managerial, sales and marketing personnel, we may be
at a competitive disadvantage and unable to develop new products
or increase revenue. We may grant large numbers of stock options
to attract and retain personnel, which could be highly dilutive
to our shareholders. The failure to attract, train, retain and
effectively manage employees could negatively impact our
research and development and sales efforts. As part of our
strategic plan, we are in the process of significantly expanding
our U.S. sales and marketing presence. The loss of sales
personnel could lead to lost sales opportunities because it can
take several months to hire and train replacement sales
personnel. Uncertainty created by turnover of key employees
could adversely affect our business, operating results and stock
price.
We depend
on a few suppliers for key components, making us vulnerable to
supply shortages and price fluctuation
We obtain certain raw materials and components for a number of
our products from a sole supplier or limited number of
suppliers; we have no long-term supply contracts with any of our
vendors. While it is our goal to have multiple sources to
procure certain key components, in some cases it is not
economically practical or feasible to do so. To mitigate this
risk, we maintain an awareness of alternate supply sources that
could provide our currently single-sourced raw materials or
components with minimal or no modification to the current
version of our products, practice supply chain management,
maintain safety stocks of critical raw materials and components
and have arrangements with our key suppliers to manage the
availability of critical components. Despite these efforts, if
our suppliers are unable to provide us with an adequate supply
of raw materials or components in a timely manner, or if we are
unable to locate qualified alternate suppliers for components at
a reasonable cost, the cost of our products would increase, the
availability of our products to our customers would decrease and
our ability to generate revenues could be materially limited.
Additionally, in the event that we have to replace a supplier,
we may be required to repeat biocompatibility and other testing
of our products using the material from the new supplier and may
be required to obtain additional regulatory clearances.
All of
our manufacturing operations are conducted at a single
industrial park; therefore, any disruption at our existing
facilities could substantially affect our business
We manufacture our products at one industrial park using certain
specialized equipment. Although we have contingency plans in
effect for certain natural disasters, as well as other
unforeseen events that could damage our
16
facilities or equipment, any such events could materially
interrupt our manufacturing operations. In the event of such an
occurrence, we have business interruption insurance to cover
lost revenues and profits. However, such insurance would not
compensate us for the loss of opportunity and potential adverse
impact on relations with existing customers created by an
inability to produce our products.
We depend
on patents and proprietary rights, which we may not be able to
protect
Our success may depend in part on our ability to obtain patent
protection for our products and manufacturing processes, to
preserve our trade secrets, and to operate without infringing
the proprietary rights of third parties. The validity and
breadth of claims covered in medical technology patents involve
complex legal and factual questions and, therefore, may be
highly uncertain. No assurance can be given that the scope of
any patent protection under our current patents, or under any
patent we might obtain in the future, will exclude competitors
or provide competitive advantages to us; that any of our patents
will be held valid if subsequently challenged; or that others
will not claim rights in or ownership of the patents and other
proprietary rights held by us. There can be no assurance that
our technology, current or future products or activities will
not be deemed to infringe upon the rights of others.
Furthermore, there can be no assurance that others have not
developed or will not develop similar products or manufacturing
processes, duplicate any of our products or manufacturing
processes, or design around our patents. We also rely upon
unpatented trade secrets to protect our proprietary technology,
and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent technology
or otherwise gain access to our proprietary technology or
disclose such technology or that we can ultimately protect
meaningful rights to such unpatented proprietary technology.
We may
face intellectual property infringement claims that would be
costly to resolve
The medical device industry is characterized by frequent and
substantial intellectual property litigation, particularly with
respect to newly developed technology. Litigation may be
necessary to enforce patents issued to us, to protect trade
secrets or know-how owned by us, or to determine the ownership,
scope or validity of the proprietary rights of us and others.
Intellectual property litigation is complex and expensive, and
the outcome of such litigation is difficult to predict. Any such
litigation, regardless of outcome, could result in substantial
expense to us and significant diversion of the efforts of our
technical and management personnel. As a result, a claim by a
third party that our current products or products in development
allegedly infringe its patent rights could have a material
adverse effect on us. Moreover, an adverse determination in any
such proceeding could subject us to significant liabilities to
third parties, require disputed rights to be licensed from such
parties, if licenses to such rights could be obtained,
and/or
require us to cease using such technology. If third party
patents containing claims affecting our technology were issued
and such claims were determined to be valid, there can be no
assurance that we would be able to obtain licenses to such
patents at costs reasonable to us, if at all, or be able to
develop or obtain alternate technology. Accordingly, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing, using or selling certain of our products, which
could have a material adverse effect on our business, financial
condition and results of operations.
We may
face product liability claims that could result in costly
litigation and significant liabilities
The medical products industry is subject to substantial product
liability litigation, and we face an inherent business risk of
exposure to product liability claims in the event that the use
of our products is alleged to have resulted in adverse effects
to a patient. Any such claims could have a material adverse
effect on us, including on market acceptance of our products. We
maintain general insurance policies that include coverage for
product liability claims. The policies are limited to an
aggregate maximum of $6 million per product liability
claim, with an annual aggregate limit of $7 million under
the policies. We have an additional $4 million of coverage
per product liability claim and annual aggregate limit related
to the United Kingdom. We may require increased product
liability coverage as new products are developed and
commercialized. There can be no assurance that liability claims
will not exceed the coverage limits of our policies or that
adequate insurance will continue to be available on commercially
reasonable terms, if at all. A product liability claim or other
claim with respect to uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on our
business, financial condition and results of operations.
17
Our
operations are subject to environmental, health and safety laws
and regulations that could require us to incur material
costs.
Our operations are subject to environmental, health and safety
laws and regulations concerning, among other things, the
generation, handling, transportation and disposal of hazardous
substances or wastes, the cleanup of hazardous substance
releases, and emissions or discharges into the air or water. We
have incurred and expect to incur expenditures in the future in
connection with compliance with environmental, health and safety
laws and regulations. New laws and regulations, violations of
these laws or regulations, stricter enforcement of existing
requirements, or the discovery of previously unknown
contamination could require us to incur costs or become the
basis for new or increased liabilities that could be material.
Our
international sales and operations expose us to foreign currency
fluctuations and additional risks and uncertainties that could
adversely affect our results of operations
Sales outside the U.S. accounted for approximately 59% of
our net sales in fiscal 2010. We anticipate that sales from
international operations will continue to represent a
significant portion of our total sales. We are currently
marketing our products in approximately 80 countries around the
world and will continue to market and sell our products either
through a direct sales force or through distributors in
international markets, subject to our receipt of the requisite
foreign regulatory approvals. We have distribution arrangements
with three distributors in international markets. We cannot
assure you that international distributors for our products will
devote adequate resources to selling and servicing our products.
Additionally, we face currency and other risks associated with
our international sales. Through our subsidiary Rochester
Medical Limited, we are exposed to foreign currency exchange
rate fluctuations due to transactions denominated primarily in
British pounds, which may potentially reduce the
U.S. dollars we receive for sales denominated in British
pounds
and/or
increase the U.S. dollars we report as expenses in British
pounds, thereby affecting our reported consolidated revenues and
net earnings. Fluctuations between the currencies in which we do
business have caused and will continue to cause foreign currency
transaction gains and losses. We cannot predict the effects of
currency exchange rate fluctuations upon our future operating
results because of the volatility of currency exchange rates.
In addition to foreign currency exchange rate fluctuations,
there are a number of additional risks associated with our
international operations, including those related to:
|
|
|
|
|
the ability of our independent distributors to market and sell
our products;
|
|
|
|
our ability to identify new independent distributors in
international markets where we do not currently have
distributors;
|
|
|
|
the impact of recessions in economies outside the United States;
|
|
|
|
foreign tax laws and potential increased costs associated with
overlapping tax structures;
|
|
|
|
greater difficulty in collecting accounts receivable and longer
collection periods;
|
|
|
|
unexpected changes or increases in regulatory requirements,
surtaxes, tariffs, customs duties or other trade barriers;
|
|
|
|
weaker intellectual property rights protection in some
countries; and
|
|
|
|
political and economic instability, including concerns over
excessive levels of national debt and budget deficits in
countries where we market our products that could result in an
inability to pay or timely pay outstanding payables.
|
The occurrence of any of these events could seriously harm our
future international sales and our ability to successfully
commercialize our products in international markets, thereby
limiting our growth and revenues.
Our business is also expected to subject us and our
representatives, agents and distributors to laws and regulations
of the foreign jurisdictions in which we operate or our products
are sold. We may depend on foreign distributors and agents for
compliance and adherence to foreign laws and regulations.
18
Weakness
in the United States and international economies may continue to
adversely affect our business
We experienced a challenging economic environment in fiscal 2010
in which customers in all geographic regions in which we operate
reduced or deferred purchases of our products. Financial
difficulties or the inability to borrow money to fund operations
may adversely impact our customers ability or decision to
purchase our products or to pay for products they do purchase on
a timely basis, if at all. Although there are some indications
that the economy in the United States has begun to recover, the
strength and timing of an economic recovery remains uncertain,
which could continue to adversely affect our operations and
results in fiscal 2011. The economies of Europe and other
regions may also remain distressed well into 2011 or longer,
which could continue to adversely affect our operations and
results in fiscal 2011. The strength and timing of any economic
recovery remains uncertain, and we cannot predict to what extent
a continued global economic slowdown may negatively impact our
net sales and profit margins, sales volumes and reimbursement
rates from third party payors.
Our
strategic business plan may not produce the intended growth in
revenue and operating income.
Our strategies include making significant investments in sales
and marketing programs to achieve revenue growth and margin
improvement targets. If we do not achieve the expected benefits
from these investments or otherwise fail to execute on our
strategic initiatives, we may not achieve the growth improvement
we are targeting and our results of operations may be adversely
affected.
In addition, as part of our strategy for growth, we may make
acquisitions and enter into strategic alliances such as joint
ventures and joint development agreements. However, we may not
be able to identify suitable acquisition candidates, complete
acquisitions or integrate acquisitions successfully, and our
strategic alliances may not prove to be successful. In this
regard, acquisitions involve numerous risks, including
difficulties in the integration of the operations, technologies,
services and products of the acquired companies and the
diversion of managements attention from other business
concerns. Although our management will endeavor to evaluate the
risks inherent in any particular transaction, there can be no
assurance that we will properly ascertain all such risks. In
addition, acquisitions could result in the incurrence of
substantial additional indebtedness and other expenses or in
potentially dilutive issuances of equity securities. There can
be no assurance that difficulties encountered with acquisitions
will not have a material adverse effect on our business,
financial condition and results of operations.
We may be
unable to meet our future capital requirements
We believe our existing resources and anticipated cash flows
from operations will be sufficient to satisfy our capital needs
for the foreseeable future. However, our actual liquidity and
capital requirements will depend on numerous factors, including
the costs, method and timing of expansion of sales and marketing
activities and manufacturing capacity; the amount of revenues
from sales of our existing and new products, including
hydrophilic and antibacterial intermittent catheters and the
FemSoft Insert; changes in, termination of, and the
success of, existing and new distribution arrangements; the cost
of maintaining, enforcing and defending patents and other
intellectual property rights; competing technological and market
developments; developments relating to regulatory and third
party reimbursement matters; the cost and progress of our
research and development efforts; opportunities for growth
through acquisition, joint venture or other business
combinations, if any; and other factors. Our ability to obtain
financing for acquisitions or other general corporate and
commercial purposes will depend on our operating and financial
performance and is also subject to prevailing economic and
financial conditions and to business and other factors beyond
our control. Recently, global credit markets and the financial
services industry have been experiencing a period of
unprecedented turmoil characterized by the bankruptcy, failure
or sale of various financial institutions, a general tightening
of credit, and an unprecedented level of market intervention
from the United States and other governments. These events have
adversely affected the U.S. and world economy, and may
adversely affect the availability and cost of financing. In the
event that additional financing is needed, we may seek to raise
additional funds through public or private financing,
collaborate relationships or other arrangements. Any additional
equity financing may be dilutive to shareholders, and debt
financing, if available, may involve significant restrictive
covenants. Failure to raise capital when needed could have a
material adverse effect on our business, financial condition and
results of operations. There can be no assurance that such
financing, if required, will be available on terms satisfactory
to us, if at all.
19
|
|
ITEM 1B.
|
Unresolved
Staff Comments
|
None.
Our administrative offices and liquid encapsulation
manufacturing operations occupy a 66,000 square foot
manufacturing and office facility on a
33-acre site
owned by us and located in an industrial park in Stewartville,
Minnesota. Our male external catheter and Foley catheter
manufacturing operations occupy a 34,000 square foot
manufacturing and office building located on a nearby
3.5 acre site owned by us in the same industrial park. In
fiscal 2010, we constructed 3,000 square feet of chemical
storage space as an addition to our male external catheter and
Foley catheter manufacturing facility. We also own a
13,000 square foot office building/warehouse in Lancing,
England. Based on present plans, we believe that our current
facilities, which are in good operating condition, will be
adequate to meet our current needs. Our manufacturing facilities
in Stewartville, Minnesota could be expanded if the need arises.
|
|
ITEM 3.
|
Legal
Proceedings
|
We are not subject to any pending or threatened litigation other
than routine litigation arising in the ordinary course of
business, none of which is expected to have a material adverse
effect on our financial condition, results of operations or cash
flows.
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Stock
Listing and Prices
Our common stock is quoted on the Nasdaq Global Market under the
symbol ROCM. The following table sets forth, for the periods
indicated, the range of high and low last sale prices for our
common stock as reported by the Nasdaq Global Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
15.58
|
|
|
$
|
10.51
|
|
Second Quarter
|
|
|
15.23
|
|
|
|
9.05
|
|
Third Quarter
|
|
|
14.15
|
|
|
|
9.74
|
|
Fourth Quarter
|
|
|
13.42
|
|
|
|
11.83
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.88
|
|
|
$
|
10.11
|
|
Second Quarter
|
|
|
13.80
|
|
|
|
11.50
|
|
Third Quarter
|
|
|
13.12
|
|
|
|
9.44
|
|
Fourth Quarter
|
|
|
11.17
|
|
|
|
8.56
|
|
Repurchases
of Equity Securities
In December 1999, our Board of Directors authorized a share
repurchase program. Up to 2,000,000 shares may be
repurchased from time to time on the open market, or pursuant to
negotiated or block transactions, in accordance with applicable
Securities and Exchange Commission regulations. No time limit
has been placed on the duration of the share repurchase program
and it may be conducted over an extended period of time as
business and market conditions warrant. We also may discontinue
the share repurchase program at any time. We intend to fund such
repurchases with currently available funds. On March 3,
2009, we announced our intention to repurchase some of our
outstanding common shares pursuant to our previously authorized
share repurchase program.
20
During fiscal 2010, we repurchased a total of
132,915 shares of common stock pursuant to this program.
The following table summarizes our share repurchases during the
three months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
that May Yet be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Purchased
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Announced Plans
|
|
|
Under the Plan
|
|
|
July 1, 2010 July 31, 2010
|
|
|
|
|
|
|
|
|
|
|
151,993
|
|
|
|
1,848,007
|
|
August 1, 2010 August 31, 2010
|
|
|
77,315
|
|
|
$
|
9.18
|
|
|
|
229,308
|
|
|
|
1,770,692
|
|
September 1, 2010 September 30, 2010
|
|
|
55,600
|
|
|
$
|
8.89
|
|
|
|
284,908
|
|
|
|
1,715,092
|
|
Pursuant to our employee stock plans relating to the grant of
employee stock options and restricted stock awards, we have
granted and may in the future grant employee stock options to
purchase shares of our common stock for which the purchase price
may be paid by means of delivery to us by the optionee of shares
of our common stock that are already owned by the optionee (at a
value equal to market value on the date of the option exercise).
Holders
As of December 1, 2010, we had 117 shareholders of
record. Such number of record holders does not reflect
shareholders who beneficially own common stock in nominee or
street name.
Dividends
We have paid no cash dividends on our common stock, and we do
not intend to pay cash dividends on our common stock in the
foreseeable future.
21
Stock
Performance Graph
The following graph compares the yearly percentage changes in
the cumulative total shareholder return on our common stock with
the cumulative total return on the Nasdaq Market Index and the
Hemscott Group Medical Instruments and Supplies Index (MG
Index) during the five fiscal years ended
September 30, 2010. The comparison assumes $100 was
invested on October 1, 2005 in our common stock and in each
of the foregoing indices and assumes reinvestment of dividends.
We did not pay any dividends during any period presented.
Shareholder returns over the indicated period should not be
considered indicative of future shareholder returns.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ROCHESTER MEDICAL CORP.,
NASDAQ MARKET INDEX AND MORNINGSTAR GROUP INDEX
ASSUMES
$100 INVESTED ON OCT. 01, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEP. 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
9/30/05
|
|
|
9/30/06
|
|
|
9/30/07
|
|
|
9/30/08
|
|
|
9/30/09
|
|
|
9/30/10
|
Rochester Medical Corporation
|
|
|
$
|
100
|
|
|
|
$
|
169.16
|
|
|
|
$
|
387.41
|
|
|
|
$
|
283.03
|
|
|
|
$
|
256.99
|
|
|
|
$
|
232.87
|
|
|
Morningstar Group Medical Instruments and Supplies Index
|
|
|
|
100
|
|
|
|
|
99.75
|
|
|
|
|
123.28
|
|
|
|
|
128.02
|
|
|
|
|
109.92
|
|
|
|
|
99.05
|
|
|
Nasdaq Composite Index
|
|
|
|
100
|
|
|
|
|
105.83
|
|
|
|
|
127.44
|
|
|
|
|
99.42
|
|
|
|
|
101.93
|
|
|
|
|
114.78
|
|
|
22
|
|
ITEM 6.
|
Selected
Financial Data
|
The following selected financial data of Rochester Medical
Corporation as of September 30, 2010 and 2009 and for each
of the three years in the period ended September 30, 2010,
is derived from, and should be read together with, our
consolidated financial statements audited by Grant Thornton,
LLP, our independent auditors. The following selected financial
data as of September 30, 2008, 2007 and 2006 and for the
fiscal years ended September 30, 2007 and 2006 are derived
from audited financial statements not included herein. The
information set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Consolidated
Financial Statements and Notes thereto and other financial
information included elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for per share data)
|
|
|
Net sales
|
|
$
|
41,443
|
|
|
$
|
34,799
|
|
|
$
|
35,192
|
|
|
$
|
32,663
|
|
|
$
|
21,666
|
|
Cost of sales
|
|
|
21,739
|
|
|
|
17,973
|
|
|
|
18,484
|
|
|
|
15,619
|
|
|
|
13,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19,704
|
|
|
|
16,826
|
|
|
|
16,708
|
|
|
|
17,044
|
|
|
|
8,609
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
11,869
|
|
|
|
10,327
|
|
|
|
9,499
|
|
|
|
6,490
|
|
|
|
3,109
|
|
Research and development
|
|
|
1,235
|
|
|
|
1,241
|
|
|
|
1,044
|
|
|
|
943
|
|
|
|
760
|
|
General and administrative
|
|
|
6,391
|
|
|
|
6,007
|
|
|
|
6,658
|
|
|
|
6,743
|
|
|
|
3,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,495
|
|
|
|
17,575
|
|
|
|
17,201
|
|
|
|
14,176
|
|
|
|
7,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
209
|
|
|
|
(749
|
)
|
|
|
(493
|
)
|
|
|
2,868
|
|
|
|
1,395
|
|
Other income
|
|
|
|
|
|
|
1,200
|
|
|
|
1,240
|
|
|
|
38,855
|
|
|
|
|
|
Interest income (expense), net
|
|
|
61
|
|
|
|
24
|
|
|
|
(566
|
)
|
|
|
775
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income tax
|
|
|
270
|
|
|
|
475
|
|
|
|
181
|
|
|
|
42,498
|
|
|
|
1,287
|
|
Income tax benefit (expense)
|
|
|
(524
|
)
|
|
|
(366
|
)
|
|
|
578
|
|
|
|
(8,448
|
)
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(254
|
)
|
|
$
|
109
|
|
|
$
|
759
|
|
|
$
|
34,050
|
|
|
$
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
(.02
|
)
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
2.97
|
|
|
$
|
.18
|
|
Net income (loss) per common share diluted
|
|
$
|
(.02
|
)
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
2.77
|
|
|
$
|
.17
|
|
Weighted average number of common shares outstanding
basic
|
|
|
12,182
|
|
|
|
12,045
|
|
|
|
11,816
|
|
|
|
11,450
|
|
|
|
11,068
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
12,182
|
|
|
|
12,640
|
|
|
|
12,577
|
|
|
|
12,272
|
|
|
|
11,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
35,513
|
|
|
$
|
36,262
|
|
|
$
|
37,002
|
|
|
$
|
37,137
|
|
|
$
|
2,907
|
|
Working capital
|
|
|
47,605
|
|
|
|
48,552
|
|
|
|
48,772
|
|
|
|
46,325
|
|
|
|
7,664
|
|
Total assets
|
|
|
75,666
|
|
|
|
75,965
|
|
|
|
76,983
|
|
|
|
75,495
|
|
|
|
35,952
|
|
Long-term debt and other long term obligations
|
|
|
46
|
|
|
|
1,076
|
|
|
|
4,046
|
|
|
|
6,066
|
|
|
|
7,563
|
|
Retained earnings (accumulated deficit)
|
|
|
14,579
|
|
|
|
14,833
|
|
|
|
14,724
|
|
|
|
13,964
|
|
|
|
(20,086
|
)
|
Total shareholders equity
|
|
|
68,893
|
|
|
|
68,820
|
|
|
|
67,699
|
|
|
|
64,509
|
|
|
|
23,097
|
|
No dividends were declared or paid in any year from 2006 to 2010.
23
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Our Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with the narrative description of our business in
Item 1 of Part I of our Annual Report on
Form 10-K
and our Consolidated Financial Statements, accompanying Notes
and other information listed in the accompanying Financial Table
of Contents.
Overview
We develop, manufacture and market a broad line of innovative,
technologically enhanced PVC-free and latex-free urinary
continence and urine drainage care products for the extended
care and acute care markets. Our products are comprised of our
base products, which include our male external catheters and
standard silicone Foley catheters, and our advanced products,
which include our intermittent catheters, our anti-infection
Foley catheters and our FemSoft Insert. We market our
products under our Rochester
Medical®
brand, and also supply our products to several large medical
product companies for sale under brands owned by these
companies, which are referred to as private label sales. We sell
our products both in the domestic market and internationally.
International sales accounted for approximately 59% and 58% of
total sales in the fiscal years ending September 30, 2010
and 2009, respectively.
We sell our products in the United States under the Rochester
Medical brand name through an eighteen-person direct sales
force. As part of our strategic plan, we are in the process of
significantly expanding our U.S. sales and marketing
presence in order to further enhance the sales and acceptance of
our branded products. By 2010 calendar year end, we plan to
complete the addition of over 30 additional sales professionals
to our staff. We have also reorganized our sales and marketing
team for better efficiencies and allocation of talent, increased
management involvement with field sales and upgraded our sales
tools and training programs. Through our subsidiary, Rochester
Medical Limited, we sell our products in the United Kingdom
under the Rochester Medical brand name through an
eighteen-person direct sales force. We also have distribution
arrangements with three distributors in international markets.
The primary markets for our products are distributors, extended
care facilities and individual hospitals and healthcare
institutions.
A significant portion of our net sales to date have depended on
our ability to provide products that meet the requirements of
medical product companies that resell or distribute our
products, and on the sales and marketing efforts of such
entities. Private label sales arrangements with these entities
are likely to continue to be a significant, but declining,
percentage of our revenues in the future, while we continue to
establish our own market presence under the Rochester Medical
brand name. Private label sales represented 28% of total
sales in fiscal 2010, compared to 33% of total sales in fiscal
2009.
For fiscal 2010, we increased the investment in our sales and
marketing programs, primarily through cash generated from
current operations, to support Rochester Medical branded
sales growth in the U.S. and Europe. Our advanced products
will eventually contribute a higher profit margin than our base
products, and our Rochester Medical branded products
contribute a higher profit margin than private label sales,
particularly branded sales in the United Kingdom and elsewhere
in Europe. Increasing our percentage of sales of branded
products versus private label sales over time will have a
positive impact on our gross margin. Branded sales accounted for
72% of total sales for the year ended September 30, 2010,
compared to 67% for the prior year. Advanced products accounted
for 18% of total sales for the year ended September 30,
2010, compared to 15% for the prior year.
Net sales for our fiscal year ended September 30, 2010 were
$41.4 million, an increase of $6.6 million from
$34.8 million in the prior fiscal year. The increase in net
sales resulted from a 28% increase in branded sales for the
fiscal year and a 1% increase in private label sales. The
increase in branded sales resulted from an increase in sales of
both base and advanced products in the United Kingdom as well as
in the United States and internationally.
Our five largest customers in fiscal 2010 represented
approximately 36% of our total net sales. Because our larger
customers typically purchase products in relatively large
quantities at a time, our financial performance can fluctuate
from quarter to quarter depending upon the timing of their
purchases. We expect to continue to depend upon a relatively
small number of customers for a significant percentage of our
net sales.
24
We also sell our Rochester Medical brand products and
other companies products direct to the patient in the
United Kingdom through the Script-Easy program. U.K.
residents can call a toll free number and order products for
direct home delivery upon verification of a prescription from a
doctor. In fiscal 2010, the Script-Easy program
contributed $7.5 million of net sales compared to
$4.7 million in fiscal 2009, and is the vehicle where new
intermittent catheter patients and FemSoft patients in
the U.K. are driven.
Our manufacturing facilities, which we own, are located in
Stewartville, Minnesota, and have been designed to accommodate
the specialized requirements for the manufacture of medical
devices, including FDA requirements for Quality System
Regulation. A substantial portion of the expenses associated
with our manufacturing facilities are fixed in nature (i.e.
depreciation) and will reduce our operating margin until such
time, if ever, as we are able to increase utilization of our
capacity through increased sales of our products.
Events that have contributed to the recent growth of our
business include:
|
|
|
|
|
In February 2004, we brought suit against certain Group
Purchasing Organizations (GPOs) and individual defendants
alleging anti-competitive conduct against the defendants in the
markets for standard and anti-infection Foley catheters as well
as urethral catheters, and sought an unspecified amount of
damages and injunctive and other relief. Beginning in November
2006 and concluding in January 2009, we reached settlements with
each of the defendants, resulting in aggregate settlement
proceeds to us of $61,325,000 (net $39,605,000 after payment of
attorneys fees and expenses) and an Innovative Technology
Contract with Novation. No further action is expected with
respect to this lawsuit.
|
|
|
|
In November 2006, we announced we had been awarded a national
Group Purchasing Contract for urological products from Premier
Purchasing Partners, L.P. (Premier). Premier is one
of the largest GPOs in the United States with over
$27 billion in contract purchases per year. Premier is
owned by more than 200 leading
not-for-profit
hospitals and affiliated with more than 1,500 hospitals and
42,000 other healthcare sites. The contract includes our Foley
catheters (including our infection control catheters), male
external catheters, intermittent catheters, and urethral
inserts. The contract became effective March 1, 2007, and
has been extended through February 2013.
|
|
|
|
As mentioned above, Novation awarded us an Innovative Technology
Contract for our urological catheter products and related
accessories, including our advanced infection control catheters.
Novation provides contracting services to nearly 25,000 members
of VHA, Inc. and the University HealthSystem Consortium, or UHC,
and more than 15,000 customers of Provista (formerly HPPI). The
contract became effective on September 1, 2007, and has
been extended through June 30, 2013.
|
|
|
|
Effective April 1, 2008, the four regional Durable Medical
Equipment Medicare Administrative Contractors covering the
United States implemented a new reimbursement policy covering
the use of intermittent catheters. The main policy change now
allows an intermittent catheter user a maximum of 200 catheters
per month instead of four catheters per month under the previous
policy. We believe this is a very positive change in helping
reduce urinary tract infections and improving the quality of
life for intermittent catheter users. We expect the updated
Medicare coverage policy will increase the usage of intermittent
catheters in the U.S., although the scale and pace of the change
are difficult to predict.
|
|
|
|
In January 2009, we introduced Magic3, our advanced line
of silicone intermittent catheters, which are the first
intermittent catheters created from a composition of three
distinct functional layers. We initiated a comprehensive
marketing campaign by rolling out the Magic3 intermittent
catheter line in the U.S. with introduction to our
distribution partners and targeted clinical call points. The
marketing campaign encompassed clinicians as well as catheter
users. Concurrently, the new product line was introduced by
Rochester Medical Limited in the United Kingdom and Europe where
a similar comprehensive marketing campaign was launched.
|
|
|
|
In September 2009, we introduced our new StrataSI and
StrataNF silicone Foley catheters. The improved silicone
design consists of a soft, pliable inner core surrounded by
ultra-soft, ultra-smooth outer layers allowing for softness and
flexibility we believe is unique in an all-silicone catheter.
The StrataNF version includes a nitrofurazone
anti-infective matrix within the silicone.
|
25
|
|
|
|
|
In September 2009, the FemSoft Insert was approved for
inclusion in Part IX of the UK Drug Tariff as a
prescription product that is reimbursable under the National
Healthcare System, commencing in 2010. In November 2009, the CMS
issued a specific Medicare reimbursement code which covers our
FemSoft Insert. Due to an oversight by CMS, a
non-coverage policy for the FemSoft Insert was mistakenly
issued. When notified of the error in April 2010, the CMS
reviewed the matter and has since removed the non-coverage
statement. We believe the availability of National Healthcare
System and Medicare reimbursement will help this unique device
become an economically accessible and often preferred solution
for incontinent women in the United Kingdom and in the United
States. We started a Direct to Consumer pilot campaign in
February 2010 for the sale of the FemSoft Insert in
coordination with clinical institutions and a distributor,
primarily in the Charlotte, North Carolina and south Florida
areas, and have invested over $600,000 in the campaign,
primarily in the second quarter of fiscal 2010. While it is
still too early to know the full potential of this product in
the marketplace, management believes it can become an integral
part of our product offering.
|
|
|
|
In November 2009, we were also awarded a urological products
contract with Broadlane Inc. This contract became effective
January 1, 2010 and is a two year contract. Broadlane is a
GPO whose clients include more than 915 acute care hospitals,
more than 2,600
sub-acute
care facilities and more than 18,000 physician practices.
|
|
|
|
In June 2010, we announced that we were a winner of the fifth
annual Pinnacle Award, presented by the Premier healthcare
alliance. Premier contracts with more than 800 suppliers and we
were one of 38 contracted suppliers to receive the Pinnacle
Award. The award recognizes outstanding management of Premier
agreements and drive toward the mutual goal of providing
clinical and financial value to the
not-for-profit
hospitals that are members of the Premier Alliance.
|
Our net loss for fiscal 2010 was $254,000, or $0.02 per diluted
share compared to net income of $109,000, or $0.01 per diluted
share, in fiscal 2009. The 2010 net loss compared to the
2009 net income primarily resulted from our increased
investment in sales and marketing, as well as the impact of a
lawsuit settlement ($1 million after payment of
attorneys fees and expenses) recorded in fiscal 2009 and
the recognition of income taxes in 2010.
As of September 30, 2010, we had $4.5 million in cash
and cash equivalents, and $31.0 million invested in
marketable securities. The marketable securities primarily
consist of $25.7 million invested in U.S. treasury
bills and $3.1 million invested in mutual funds and
$2.2 million in CDs. Our investments in marketable
securities are subject to interest rate risk and the value
thereof could be adversely affected due to movements in interest
rates. Our investment choices, however, are conservative and are
intended to reduce the risk of loss or any material impact on
our financial condition. We are currently reporting an
unrealized loss of $413,000 related to the mutual fund as a
result of the recent fluctuations in the credit markets
impacting the current market value. We currently consider these
unrealized losses to be temporary.
Management believes that the ongoing strategic effort to grow
our Rochester Medical branded sales through increased investment
in sales and marketing programs is providing positive results.
In order to further enhance the sales and acceptance of our
branded products, we are in the process of significantly
expanding our U.S. sales and marketing presence as part of
our updated three year strategic business plan. We expect such
increased investment to be funded primarily through cash
generated from current operations. While most of the anticipated
resulting acceleration in sales growth is expected to occur in
fiscal years 2012 and 2013, sales in fiscal 2011 are expected to
remain strong with an annual growth rate in a range comparable
to fiscal 2010. Some quarter to quarter fluctuation in sales
growth remains likely through the term of the plan, primarily
due to the timing of large private label orders. We will also
continue to look for other strategic opportunities to increase
our product line and distribution capabilities.
Application
of Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires that we make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. On an
26
on-going basis, we evaluate these estimates and judgments. We
base our estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies, among
others, affect the more significant judgments and estimates used
in the preparation of our financial statements.
Inventories
Inventories, consisting of material, labor and manufacturing
overhead, are stated at the lower of cost
(first-in,
first-out method) or market. Our policy is to establish an
excess and obsolete reserve for our products in excess of the
expected demand for such products. At September 30, 2010,
this reserve was $125,000, compared to $126,000 at
September 30, 2009. If actual future demand or market
conditions differ from those projected by us, additional
inventory valuation adjustments may be required. These valuation
adjustments would be included in cost of goods sold.
Accounts
Receivable
We maintain an allowance for doubtful accounts, which is
calculated by a combination of specific account identification
as well as percentages of past due balances. At
September 30, 2010, this allowance was $54,000 compared to
$63,000 at September 30, 2009. If actual future collections
or customer liquidity conditions differ from those projected by
us, additional receivables valuation adjustments may be
required. We perform periodic credit evaluations of our
customers financial condition. We require prepayments by
certain foreign customers. Receivables generally are due within
30 to 60 days.
Revenue
Recognition
We have standard contract terms with all non-Group Purchase
Organization customers of FOB shipping point; as such, sales are
recognized upon shipment. GPO customers have terms of FOB
destination per the agreement and thus sales are recognized upon
delivery of goods to the customer. Revenue is recognized when
title and risk of ownership have passed, the price to the buyer
is fixed and determinable and recoverability is reasonably
assured. For all GPO customer orders shipped within the last
five working days of a quarter, we monitor the shipping tracking
number for such shipments to verify receipt by the customer. If
we are able to verify receipt by the customer by the end of the
month, the sale is recognized. Payment terms for all customers
range from prepayment to 60 days. Customers cannot return
unsold products unless we have authorized such return for
warranty claims. We do not grant significant price concessions
to our customers.
We warrant that the products we sell to our customers will
conform to the description and specifications furnished by us,
and that the products will be free from defects in material and
workmanship. In the event of a warranty claim, the customer is
responsible for shipping the product(s) back to us, freight
prepaid. If the failure of the product is due to a breach of
warranty, we may repair or replace the defective product(s) at
our option and return the repaired or replaced product(s) to the
customer, freight prepaid. This is the limit of our warranty
liability, and this warranty is made in lieu of all other
written or unwritten express or implied warranties.
Historically, due to the nature of use of our products and low
replacement cost, our warranty exposure has been immaterial.
Other than our limited warranty obligation, we do not have
significant post-shipment obligations to, or significant
acceptance provisions with, our customers, including our
distributors.
Income
Taxes
The carrying value of our net deferred tax assets assumes that
we will be able to generate sufficient taxable income in the
United States and United Kingdom, based on estimates and
assumptions. We record a valuation allowance to reduce the
carrying value of our net deferred tax asset to the amount that
is more likely than not to be realized. For 2010,we recorded a
valuation allowance of $47,000 related to Minnesota R&D
credit carryovers as we
27
believe it is more likely than not that the deferred tax asset
will not be utilized in future years. We have not recorded a
valuation allowance on any other net deferred tax assets because
there is sufficient future projected income to sustain that the
deferred tax assets will more likely than not be able to be
utilized. On a quarterly basis, we evaluate the realizability of
our deferred tax assets and assess the requirements for a
valuation allowance.
Valuation
of Goodwill and Other Intangibles
We follow Accounting Standards Codification (ASC) 350,
Goodwill and Other Intangible Assets. When we acquire a
company, the purchase price is allocated, as applicable, between
identifiable trademarks, other intangible assets, net tangible
assets, and goodwill as required by U.S. generally accepted
accounting principles. Determining the portion of the purchase
price allocated to the trademarks and other intangible assets
requires us to make significant estimates. The amount of the
purchase price allocated to trademarks and other intangible
assets is determined by estimating the future cash flows of each
trademark or technology and discounting the net cash flows back
to their present values. The discount rate used is determined at
the time of acquisition in accordance with accepted valuation
methods.
Goodwill represents the excess of the aggregate purchase price
over the fair value of net assets of the acquired business.
Goodwill is tested for impairment annually on the anniversary
date of the acquisition, or more frequently if changes in
circumstance or the occurrence of events suggest that the
carrying amount may be impaired. We have determined the
reporting unit continues to be at the enterprise level. In our
judgment, the market capitalization of our company is the best
indicator of the fair value of the reporting unit and we have
used the market capitalization of our company in our annual
impairment test. Goodwill was $4.6 million as of
September 30, 2010 and 2009.
Finite-life intangible assets consist primarily of purchased
technology, patents and trademarks and are amortized using the
straight-line method, as appropriate, over their estimated
useful lives, ranging from 5 to 20 years. All of our
intangible assets are finite-lived. We review these intangible
assets for impairment as changes in circumstance or the
occurrence of events suggest the remaining value may not be
recoverable. Other intangible assets, net of accumulated
amortization, were $5.6 million and $6.2 million as of
September 30, 2010 and 2009, respectively.
Long-Lived
Assets
We follow ASC 360, Property, Plant and Equipment. As
such, we review our long-lived assets for impairment whenever
events or changes in circumstances indicate that our carrying
value of long-lived assets may not be recoverable. Long-lived
assets are considered not recoverable when the carrying amount
of a long-lived asset (asset group) exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset (asset group). If it is
determined that a long-lived asset (asset group) is not
recoverable, an impairment loss is recorded equal to the excess
of the carrying amount of the long-lived asset (asset group)
over the long-lived assets (asset groups) fair
value. Fair value is the amount at which the long-lived asset
(asset group) could be bought or sold in a current transaction
between a willing buyer and seller, other than in a forced or
liquidation sale.
Stock-Based
Compensation
Effective October 1, 2005, we adopted the accounting
provisions that are now part of ASC 718,
Compensation-Stock Compensation. Under the fair value
recognition provisions of ASC 718, we measure stock-based
compensation cost at the grant date based on the fair value of
the award and recognize the compensation expense over the
requisite service period, which is generally the vesting period.
We elected the modified-prospective method of adopting
ASC 718, under which prior periods are not retroactively
revised. Estimated stock-based compensation expense for the
non-vested portion of awards granted prior to the effective date
is being recognized over the remaining service period using the
compensation cost estimated for pro forma disclosures under
ASC 718. Total stock-based compensation expense recognized
during the fiscal year ended September 30, 2010 was
$1.0 million after-tax ($1.5 million pre-tax). See
Note 7 to our consolidated financial statements for further
information regarding our stock-based compensation programs.
We use the Black-Scholes option pricing model to determine the
fair value of stock options as of the grant date. The fair value
of stock options under the Black-Scholes model requires
management to make assumptions
28
regarding projected employee stock option exercise behaviors,
risk-free interest rate, volatility of our stock price and
expected dividends.
We analyze historical employee stock option exercise and
termination data to estimate the expected life assumption. We
believe that historical data currently represents the best
estimate of the expected life of a new employee option. We also
stratify our employee population based upon distinctive exercise
behavior patterns. The risk-free interest rate we use is based
on the yield, on the grant date, of a zero-coupon
U.S. Treasury bond whose maturity period equals or
approximates the options expected term. We calculate the
expected volatility based solely on historical volatility which
continues to be the most appropriate measure for us. The
dividend yield rate used is zero as we have not nor expect to
pay dividends. The amount of stock-based compensation expense we
recognize during a period is based on the portion of the awards
that are ultimately expected to vest. We estimate pre-vesting
option forfeitures at the time of grant by analyzing historical
data and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates.
If factors change and we employ different assumptions for
estimating stock-based compensation expense in future periods or
if we decide to use a different valuation model, the expense
associated with new awards in future periods may differ
significantly from what we have recorded in the current period
related to historical awards and could materially affect our net
earnings and diluted earnings per share of a future period.
There were no modifications to any of our plans in 2010.
There is a risk that our estimates of the fair values of our
stock-based awards on the grant dates as determined using the
Black-Scholes model may bear little resemblance to the actual
values realized upon the exercise or forfeiture of those
stock-based awards in the future. Some employee stock options
may expire without value, or only realize minimal intrinsic
value, as compared to the fair values originally estimated on
the grant date and recognized in our financial statements.
Alternatively, some employee stock options may realize
significantly more value than the fair values originally
estimated on the grant date and recognized in our financial
statements.
Results
of Operations
The following table sets forth, for the periods indicated,
certain items from our statements of operations expressed as a
percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Total net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
52.5
|
|
|
|
51.6
|
|
|
|
52.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
47.5
|
|
|
|
48.4
|
|
|
|
47.5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
28.6
|
|
|
|
29.7
|
|
|
|
27.0
|
|
Research and development
|
|
|
3.0
|
|
|
|
3.6
|
|
|
|
3.0
|
|
General and administrative
|
|
|
15.4
|
|
|
|
17.3
|
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47.0
|
|
|
|
50.6
|
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
0.5
|
|
|
|
(2.2
|
)
|
|
|
(1.4
|
)
|
Other income
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
Interest income (expense), net
|
|
|
0.2
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
0.7
|
%
|
|
|
1.3
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our products are comprised of our base products, which include
our male external catheters and standard silicone Foley
catheters, and our advanced products, which include our
intermittent catheters, our anti-infection Foley catheters and
our FemSoft Insert. The following table sets forth, for
the periods indicated, net sales information by product category
(base products and advanced products), marketing method (private
label and
29
Rochester Medical branded sales) and distribution channel
(domestic and international markets) (all dollar amounts below
are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
7,799
|
|
|
$
|
3,580
|
|
|
$
|
11,379
|
|
|
$
|
6,756
|
|
|
$
|
4,158
|
|
|
$
|
10,914
|
|
|
$
|
6,533
|
|
|
$
|
3,827
|
|
|
$
|
10,360
|
|
Advanced products
|
|
|
302
|
|
|
|
|
|
|
|
302
|
|
|
|
629
|
|
|
|
|
|
|
|
629
|
|
|
|
984
|
|
|
|
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
|
8,101
|
|
|
|
3,580
|
|
|
|
11,681
|
|
|
|
7,385
|
|
|
|
4,158
|
|
|
|
11,543
|
|
|
|
7,517
|
|
|
|
3,827
|
|
|
|
11,344
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
|
4,668
|
|
|
|
18,025
|
|
|
|
22,693
|
|
|
|
4,029
|
|
|
|
14,605
|
|
|
|
18,634
|
|
|
|
3,950
|
|
|
|
16,493
|
|
|
|
20,443
|
|
Advanced products
|
|
|
4,051
|
|
|
|
3,018
|
|
|
|
7,069
|
|
|
|
3,033
|
|
|
|
1,589
|
|
|
|
4,622
|
|
|
|
2,676
|
|
|
|
729
|
|
|
|
3,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
|
8,719
|
|
|
|
21,043
|
|
|
|
29,762
|
|
|
|
7,062
|
|
|
|
16,194
|
|
|
|
23,256
|
|
|
|
6,626
|
|
|
|
17,222
|
|
|
|
23,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
16,820
|
|
|
$
|
24,623
|
|
|
$
|
41,443
|
|
|
$
|
14,447
|
|
|
$
|
20,352
|
|
|
$
|
34,799
|
|
|
$
|
14,143
|
|
|
$
|
21,049
|
|
|
$
|
35,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
Net Sales. Net sales increased 19% to
$41.4 million in fiscal 2010 from $34.8 million in the
prior fiscal year. The increase in net sales resulted from a 28%
increase in branded sales for the fiscal year and a 1% increase
in private label sales. The increase in branded sales resulted
from an increase in sales of base and advanced products in the
United Kingdom as well as increased sales of base and advanced
products in the U.S. and other international markets.
Domestic sales of branded products increased by 23% for fiscal
2010 compared to fiscal 2009. Our international branded sales
increased 30% compared to fiscal 2009. Management believes these
results demonstrate the favorable impact of our strategic
decision to increase investments in sales and marketing programs
for our Rochester Medical branded products, particularly for our
advanced intermittent and Foley catheters, and which we believe
will continue to drive growth in branded sales.
Private label sales of base products were up slightly from the
prior year offset by a slight decrease in sales of advanced
products to Hollister. Additionally, starting in the second
quarter of fiscal 2010, one of our European private label
customers began purchasing branded products and stopped
purchasing private label products, resulting in a negative
impact on our overall private label sales for the year and a
corresponding positive impact on branded sales. Sales of
products under the Rochester Medical brand comprised 72%
of total sales in fiscal 2010, with private label sales
representing 28% of total sales. In fiscal 2009, private label
sales comprised 33% of total sales. We expect private label
sales as a percentage of total sales to decline over time as we
focus more on our branded sales.
Gross Margin. Our gross margin as a percentage
of net sales was 48% in fiscal 2010 and 2009. Increased sales of
lower margin products, particularly new advanced intermittent
catheters and Foley catheters, offset manufacturing efficiencies
and increased sales of higher margin products, particularly male
external catheters. Management expects the sale of our new
advanced intermittent catheters and our Foley catheters in kit
and tray configurations will continue to have a negative impact
on margin until we are producing them at higher levels needed to
achieve manufacturing efficiencies.
Marketing and Selling. For fiscal 2010, we
continued to increase the investment in our sales and marketing
programs, primarily through cash generated from current
operations, to support Rochester Medical branded sales
growth in the U.S. and Europe. Marketing and selling
expense primarily includes costs associated with base salary
paid to sales and marketing personnel, sales commissions, and
travel and advertising expense. Marketing and selling expense
increased 15% in fiscal 2010 as compared to fiscal 2009, with
marketing and selling expense of approximately
$11.9 million in fiscal 2010 and $10.3 million in
fiscal 2009. The increase in marketing and selling expense is
primarily related to $1,015,000 of increased advertising and
project costs mostly focused on our Femsoft Insert and
our new advanced intermittent and Foley catheters, $259,000 of
compensation expenses, $149,000 in freight, $120,000 of
increased travel expenses and $65,000 increase in consulting
fees. Marketing and selling expense as a percentage of net sales
for fiscal 2010 was 29% compared to 30% for fiscal 2009.
30
Research and Development. Research and
development expense primarily includes internal labor costs,
materials used to develop new products as well as expense
associated with third-party vendors performing validation and
investigative research regarding our products and development
activities. Research and development expense remained flat with
the prior year at $1,235,000 in fiscal 2010 compared to
$1,241,000 in the prior fiscal year. Research and development
expense as a percentage of net sales for fiscal 2010 and fiscal
2009 was 3% and 4%, respectively.
General and Administrative. General and
administrative expense primarily includes payroll expense
related to our management and accounting, information technology
and human resources staff, as well as fees and expenses of
outside legal counsel, accounting advisors and auditors. General
and administrative expense increased to $6.4 million in
2010 from $6.0 million in fiscal 2009. The changes in
general and administrative expense primarily relate to increases
of $220,000 in compensation expenses, $100,000 in supplies and
repairs, $90,000 in charitable contributions, $75,000 in
depreciation, $45,000 of travel expenses, $43,000 of utilities
expenses, and $30,000 of other expenses, offset by decreases of
$210,000 in professional fees. General and administrative
expense as a percentage of net sales for fiscal 2010 and fiscal
2009 was 15% and 17%, respectively.
Interest Income. Interest income decreased 16%
to $239,000 in fiscal 2010 from $283,000 in the prior fiscal
year. The decrease reflects overall lower interest rates on
investments.
Interest Expense. Interest expense decreased
32% to $177,000 in fiscal 2010 from $259,000 in fiscal 2009. The
decrease in interest expense reflects decreases in our
outstanding debt that was used to partially finance our asset
acquisitions in June 2006 from Mentor and Coloplast.
Income Taxes. During the current fiscal year
we utilized our remaining federal NOL carryovers, and had
previously utilized all of our state NOL carryovers. We have UK
NOL carry-forwards as of September 30, 2010 of
approximately 1.3 million pounds sterling (approximately
$2.0 million). For fiscal 2010, we recorded a valuation
allowance of $47,000 related to Minnesota R&D credit
carryovers as we believe it is more likely than not that the
deferred tax asset will not be utilized in future years. We have
not recorded a valuation allowance on any other net deferred tax
assets because there is sufficient future projected income to
sustain that the deferred tax assets will more likely than not
be able to be utilized.
For fiscal 2010, we had an effective tax rate of approximately
194% resulting primarily from foreign operations, incentive
stock options and a few discrete adjustments having an effect on
the tax rate. These discrete adjustments included retroactive
changes in deferred taxes as a result of a change in tax rates
and recording a valuation allowance in the current year for
Minnesota R&D credit carryovers. The amount of these items
in comparison to our net income for the current year results in
a significant effect on our effective tax rate percentage. In
future periods of taxable earnings, we expect to report an
income tax provision using an effective tax rate in the range of
30-34%.
Net Income. For fiscal 2010, we reported a net
loss of $254,000 compared to net income of $109,000 in fiscal
2009. The change in net income was primarily impacted by our
increased strategic investment in sales and marketing programs,
a lawsuit settlement ($1 million after payment of
attorneys fees and expenses) recorded in fiscal 2009 and
the recognition of income taxes in fiscal 2010.
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
Net Sales. Net sales decreased 1% to
$34.8 million in fiscal 2009 from $35.2 million in the
prior fiscal year. The decrease in net sales resulted from a 2%
decrease in branded sales for the fiscal year, partially offset
by a 2% increase in private label sales. The decrease in branded
sales resulted from a decrease in sales of base products in the
United Kingdom primarily due to fluctuations in the foreign
currency exchange rate between the US dollar and the pound
sterling, partially offset by an increase in sales of advanced
products in the U.S. and internationally. The aggregate
effect of exchange rate fluctuations for the year resulted in a
decrease of $2.8 million in net branded sales. Domestic
sales of branded products increased by 7% for fiscal 2009
compared to fiscal 2008. Our international branded sales
decreased 6% compared to fiscal 2008 primarily as a result of
the change in foreign currency exchange rates. Private label
sales of base products were up slightly from the prior year
offset by a slight decrease in sales of advanced products to
Hollister. Sales of products under the Rochester Medical
brand comprised 67% of
31
total sales in fiscal 2009, with private label sales
representing 33% of total sales. In fiscal 2008, private label
sales comprised 32% of total sales.
Gross Margin. Our gross margin as a percentage
of net sales was 48% in fiscal 2009 compared to 47% in the prior
fiscal year. Our increase in gross margin in fiscal 2009 was
primarily affected by increased sales of higher margin products
and lower raw material costs.
Marketing and Selling. For fiscal 2009, we
increased the investment in our sales and marketing programs,
primarily through cash generated from current operations, to
support Rochester Medical branded sales growth in the
U.S. and Europe. Marketing and selling expense primarily
includes costs associated with base salary paid to sales and
marketing personnel, sales commissions, and travel and
advertising expense. Marketing and selling expense increased 9%
in fiscal 2009 as compared to fiscal 2008, with marketing and
selling expense of approximately $10.3 million in fiscal
2009 and $9.5 million in fiscal 2008. The increase in
marketing and selling expense is primarily related to $660,000
of increased advertising and project costs, $63,000 of
compensation expenses, $54,000 increase in consulting fees,
$34,000 in utilities and $33,000 of increased travel expenses.
Marketing and selling expense as a percentage of net sales for
fiscal 2009 was 30% compared to 27% for fiscal 2008.
Research and Development. Research and
development expense primarily includes internal labor costs,
materials used to develop new products as well as expense
associated with third-party vendors performing validation and
investigative research regarding our products and development
activities. Research and development expense increased 19% to
$1,241,000 in fiscal 2009 from $1,044,000 in the prior fiscal
year. The increase in research and development expense relates
primarily to increased compensation expense of $177,000 and
$50,000 of project costs offset by a decrease in supplies
expense of $30,000. Research and development expense as a
percentage of net sales for fiscal 2009 and fiscal 2008 was 4%
and 3%, respectively.
General and Administrative. General and
administrative expense primarily includes payroll expense
related to our management and accounting, information technology
and human resources staff, as well as fees and expenses of
outside legal counsel, accounting advisors and auditors. General
and administrative expense declined to $6.0 million in 2009
from $6.7 million in fiscal 2008. The changes in general
and administrative expense primarily relate to decreased
administrative costs of $286,000 in professional fees, $211,000
of other expenses, $82,000 of travel expenses, $63,000 of
utilities expenses, $44,000 of consulting fees and $38,000 in
charitable contributions offset by increases of $91,000 in
compensation expense. General and administrative expense as a
percentage of net sales for fiscal 2009 and fiscal 2008 was 17%
and 19%, respectively.
Interest Income. Interest income decreased 77%
to $283,000 in fiscal 2009 from $1.2 million in the prior
fiscal year. The decrease reflects overall lower interest rates
on investments.
Interest Expense. Interest expense decreased
46% to $259,000 in fiscal 2009 from $478,000 in fiscal 2008. The
decrease in interest expense reflects decreases in our
outstanding debt that was used to partially finance our asset
acquisitions in June 2006 from Mentor and Coloplast and
refinancing of debt at a lower interest rate.
Income Taxes. As of September 30, 2009,
we had federal net operating loss carryforwards available to
offset future taxable income. No valuation allowance was
recorded against the net deferred tax assets because there was
sufficient future projected income to sustain that the deferred
tax assets will more likely than not be able to be utilized.
For fiscal 2009, we had an effective tax rate of approximately
77% affected by foreign operations, incentive stock options and
research and development tax credits. The amount of these items
in comparison to our net income for fiscal 2009 resulted in a
significant effect on the effective tax rate percentage.
Net Income. Our net income decreased to
$109,000 in fiscal 2009 from $759,000 in 2008. Net income was
impacted by our increased strategic investment in sales and
marketing programs and increased costs in research and
development of new products. Additionally, we experienced a
challenging economic environment in fiscal 2009 in which
customers in all geographic regions in which we operate reduced
or deferred purchases of our products.
32
Liquidity
and Capital Resources
We have historically financed our operations primarily through
public offerings and private placements of our equity
securities, and have raised approximately $40.7 million in
net proceeds since our inception.
Our cash, cash equivalents and marketable securities were
$35.5 million at September 30, 2010 compared with
$36.3 million at September 30, 2009. The decrease in
cash primarily resulted from cash used for capital expenditures,
stock repurchases, and debt repayments offset by cash provided
by operations. As of September 30, 2010, we had
$31.0 million invested in marketable securities. The
marketable securities primarily consist of $25.7 million
invested in U.S. treasury bills and $3.1 million
invested in mutual funds and $2.2 million in CDs. Our
investments in marketable securities are subject to interest
rate risk and the value thereof could be adversely affected due
to movements in interest rates. Our investment choices, however,
are conservative and are intended to reduce the risk of loss or
any material impact on our financial condition. We are currently
reporting an unrealized loss of $413,000 related to the mutual
fund as a result of the recent fluctuations in the credit
markets impacting the current market value. We currently
consider these unrealized losses to be temporary.
We generated a net $3.1 million of cash in operating
activities during the year compared with $1.7 million for
the same period last year, with the primary difference being
decreased levels of inventory balances at the end of 2010. Cash
flow provided by operating activities in 2010 was comprised of
net loss of $254,000 increased by a decrease in net working
capital components and increased by net non-cash charges of
$3.6 million, including depreciation and amortization of
$2.1 million and stock-based compensation of
$1.5 million. Significant working capital changes are as
follows:
|
|
|
|
|
a $1,481,000 increase in accounts receivable reflecting
increasing sales activity over prior year.
|
|
|
|
a $410,000 decrease in inventory as a result of increased sales
in the fourth quarter of fiscal 2010.
|
|
|
|
a $173,000 increase in deferred income taxes.
|
|
|
|
a $229,000 decrease in prepaid expenses and other current assets.
|
|
|
|
a $270,000 increase in accounts payable reflecting timing of
payments.
|
|
|
|
a $267,000 increase in other current liabilities including
normal business expense accruals.
|
During fiscal 2010, our working capital position, excluding cash
and marketable securities, decreased by $198,000. Accounts
receivable balances increased $1,481,000 during the fiscal year
primarily due to increased sales at the end of the fourth
quarter. Inventories as of September 30, 2010 decreased
$410,000 over fiscal 2009 as a result of increased sales
volumes. Changes in other asset and liability balances related
to timing differences.
Investing activities, primarily capital expenditures and the
purchase of marketable securities, used net cash of
$2.8 million in fiscal 2010.
Financing activities, primarily long term debt payments and
share repurchases, used net cash of $2.3 million in fiscal
2010.
In June 2006, in conjunction with the asset purchase agreement
with Coloplast, we entered into an unsecured loan note deed with
Coloplast with an outstanding principal amount of $5,340,000.
The promissory note is non-interest bearing payable and due in
five equal installments of $1,068,000 payable annually on
June 2. We have imputed interest on the note at 6.90% and
reflect a net liability of $1,018,053 on our balance sheet as of
September 30, 2010. The final installment is due in June
2011.
In February 2009, we entered into a $14,000,000 credit facility
with UBS Financial. The credit facility consists of a revolving
line of credit of up to $14,000,000 with interest accruing
monthly at a floating rate based on the quoted one-month LIBOR
rate plus 1.25%. In January 2010, the aggregate funds available
under the credit facility was increased from $14,000,000 to
$25,000,000. As of September 30, 2010 we had an outstanding
balance of $1,660,616 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.
33
We currently believe that our existing resources and anticipated
cash flows from operations will be sufficient to satisfy our
capital needs for the foreseeable future. However, our actual
liquidity and capital requirements will depend upon numerous
factors, including the costs, method and timing of expansion of
sales and marketing activities; the amount of revenues from
sales of our existing and new products; changes in, termination
of, and the success of, existing and new distribution
arrangements; the cost of maintaining, enforcing and defending
patents and other intellectual property rights; competing
technological and market developments; developments related to
regulatory and third party reimbursement matters; the cost and
progress of our research and development efforts; opportunities
for growth through acquisition, joint venture or other business
combinations, if any; and other factors. Our ability to obtain
financing for acquisitions or other general corporate and
commercial purposes will depend on our operating and financial
performance and is also subject to prevailing economic and
financial conditions and to business and other factors beyond
our control. Recently, global credit markets and the financial
services industry have been experiencing a period of
unprecedented turmoil characterized by the bankruptcy, failure
or sale of various financial institutions, a general tightening
of credit, and an unprecedented level of market intervention
from the United States and other governments. These events have
adversely affected the U.S. and world economy, and may
adversely affect the availability and cost of financing. In the
event that additional financing is needed, we may seek to raise
additional funds through public or private financing,
collaborative relationships or other arrangements. Any
additional equity financing may be dilutive to shareholders, and
debt financing, if available, may involve significant
restrictive covenants. Collaborative arrangements, if necessary
to raise additional funds, may require us to relinquish our
rights to certain of our technologies, products or marketing
territories. Failure to raise capital when needed could have a
material adverse effect on our business, financial condition and
results of operations. There can be no assurance that such
financing, if required, will be available on terms satisfactory
to us, if at all.
Disclosures
about Contractual Obligations and Commercial
Commitments
The following table summarizes our contractual commitments and
commercial obligations that affect our financial condition and
liquidity position as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4 - 5 years
|
|
|
years
|
|
|
Long term debt, including interest
|
|
$
|
2,678,668
|
|
|
$
|
2,678,668
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Unrecognized tax benefits under
FIN 48(1)
|
|
|
46,327
|
|
|
|
|
|
|
|
46,327
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
548,273
|
|
|
|
275,075
|
|
|
|
273,198
|
|
|
|
|
|
|
|
|
|
Purchase obligations (general operating)
|
|
|
1,776,515
|
|
|
|
1,776,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
5,049,783
|
|
|
$
|
4,730,258
|
|
|
$
|
319,525
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Item 8 of Part II of this
Form 10-K,
Financial Statements and Supplementary Data
Note 8 Income Taxes. |
Off-Balance
Sheet Arrangements
As of September 30, 2010, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
New
Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board
(FASB) issued ASU
No. 2010-09,
Amendments to Certain Recognition and Disclosure
Requirements, that amends guidance on subsequent
events. This amendment removes the requirement for SEC filers to
disclose the date through which an entity has evaluated
subsequent events. However, the date-disclosure exemption does
not relieve management of an SEC filer from its responsibility
34
to evaluate subsequent events through the date on which
financial statements are issued. This standard became effective
for us in the second quarter of fiscal 2010. The adoption of
this standard did not have a material impact on our consolidated
financial statements.
In January 2010, the FASB issued ASU
No. 2010-02,
Accounting and Reporting for Decreases in Ownership of
a Subsidiary a Scope Clarification, that
clarifies which transactions are subject to the guidance on
decrease in ownership and expands the disclosure requirements
for the deconsolidation of a subsidiary or the derecognition of
a group of assets. This ASU clarifies that the scope of the
decrease in ownership guidance applies to (1) a subsidiary
or group of assets that is a business or nonprofit activity,
(2) a subsidiary that is a business or nonprofit activity
that is transferred to an equity method investee or joint
venture, and (3) an exchange of a group of assets that
constitutes a business or nonprofit activity for a
noncontrolling interest in an entity. This ASU expands the
disclosure requirements to include disclosure of the fair value
techniques used, the nature of any continuing involvement and
whether the transaction was with a related party. This standard
became effective for us in the second quarter of fiscal 2010 and
is retrospectively effective for transactions that occurred
after October 1, 2009. We have not entered into any
transactions that result in a decrease in ownership within the
scope of this standard. Therefore, the adoption of this standard
did not have an impact on our consolidated financial statements.
In January 2010, the FASB issued ASU
No. 2010-06,
Improving Disclosures about Fair Value
Measurements, that requires entities to make new
disclosures about recurring or nonrecurring fair-value
measurements and provides clarification of existing disclosure
requirements. For assets and liabilities that are measured at
fair value on a recurring basis, the ASU requires disclosure of
significant transfers between Levels 1 and 2, and transfers
into and out of Level 3 of the fair value hierarchy and the
reasons for those transfers. Significant transfers into each
level must be disclosed and discussed separately from transfers
out of each level. Significance is judged with respect to
earnings, total assets, total liabilities or total equity. An
accounting policy must be determined and disclosed as to when
transfers between levels are recognized; (1) actual date,
(2) beginning of period or (3) end of period. The ASU
amends the reconciliation of the beginning and ending balances
of Level 3 recurring fair value measurements to present
information about purchases, sales, issuances and settlements on
a gross basis rather than as a net number. The ASU amends
ASC 820 to require fair value measurement disclosures for
each class of assets and liabilities and clarifies that a
description of the valuation technique and inputs used to
measure fair value is required for both recurring and
nonrecurring fair value measurements. This standard became
effective for our fiscal year ending September 30, 2010,
except for the requirement to provide the Level activity of
purchases, sales, issuances and settlement on a gross basis,
which will be effective beginning in the first quarter of fiscal
year 2011. Since this standard impacts disclosure requirements
only, its adoption will not have a material impact on our
consolidated financial statements.
Cautionary
Statement Regarding Forward Looking Information
Statements other than historical information contained herein
constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements may be identified by the use of
terminology such as believe, may,
will, expect, anticipate,
predict, intend, designed,
estimate, should or continue
or the negatives thereof or other variations thereon or
comparable terminology. Such forward-looking statements involve
known or unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements, or
industry results, to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among
other things, the following:
|
|
|
|
|
the uncertainty of market acceptance of new product
introductions;
|
|
|
|
the uncertainty of gaining new strategic relationships;
|
|
|
|
the uncertainty of timing of revenues from private label sales
(particularly with respect to international customers);
|
|
|
|
the uncertainty of successfully establishing our separate
Rochester Medical brand identity;
|
|
|
|
the uncertainty of successfully integrating and growing our U.K.
operations;
|
35
|
|
|
|
|
the risks associated with operating an international business,
including the impact of foreign currency exchange rate
fluctuations;
|
|
|
|
FDA and other regulatory review and response times;
|
|
|
|
the securing of Group Purchasing Organization contract
participation;
|
|
|
|
the uncertainty of gaining significant sales from secured GPO
contracts;
|
|
|
|
the impact of continued healthcare cost containment;
|
|
|
|
new laws related to healthcare availability, healthcare reform,
payment for healthcare products and services or the marketing
and distribution of products, including legislative or
administrative reforms to the U.S. Medicare and Medicaid
systems or other U.S. or international reimbursement
systems;
|
|
|
|
changes in the tax or environmental laws or standards affecting
our business;
|
|
|
|
and other risk factors listed from time to time in our SEC
reports, including, without limitation, the section entitled
Risk Factors in Item 1A of this
Form 10-K.
|
Managements
Report on Internal Control over Financial Reporting
Management of the company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those
policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the companys
internal control over financial reporting as of
September 30, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes
that the company maintained effective internal control over
financial reporting as of September 30, 2010.
Our independent auditor has audited our consolidated financial
statements and the effectiveness of internal controls over
financial reporting as of September 30, 2010 as stated in
their reports on pages 39 and 40.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Our primary financial instrument market risk results from
fluctuations in interest rates. Our cash is invested in bank
deposits and money market funds denominated in U.S. dollars
and British pounds. The carrying value of these cash equivalents
approximates fair market value. Our investments in marketable
securities are subject to interest rate risk and the value
thereof could be adversely affected due to movements in interest
rates. Our investment
36
choices, however, are conservative in light of current economic
conditions, and include primarily U.S. treasury bills to
reduce the risk of loss or any material impact on our financial
condition. Our revolving line of credit bears interest at a
floating rate based on the quoted one-month LIBOR rate plus
1.25%. As of September 30, 2010 we had an outstanding
balance of $1,660,616 under the revolving line of credit.
In future periods, we believe a greater portion of our revenues
could be denominated in currencies other than the
U.S. dollar, thereby increasing our exposure to exchange
rate gains and losses on
non-U.S. currency
transactions. Sales through our subsidiary, Rochester Medical
Limited, are denominated in British pounds, and fluctuations in
the rate of exchange between the U.S. dollar and the
British pound could adversely affect our financial results.
Otherwise, we do not believe our operations are currently
subject to significant market risks for interest rates, foreign
currency exchange rates, commodity prices or other relevant
market price risks of a material nature. We do not currently use
derivative financial instruments to manage interest rate risk or
enter into forward exchange contracts to hedge exposure to
foreign currencies, or any other derivative financial
instruments for trading or speculative purposes. In the future,
if we believe an increase in our currency exposure merits
further review, we may consider entering into transactions to
mitigate that risk.
37
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
Rochester
Medical Corporation
Consolidated
Financial Statements
Years
Ended September 30, 2010, 2009 and 2008
|
|
|
|
|
Page
|
|
|
|
39-40
|
Audited Financial Statements
|
|
|
|
|
41
|
|
|
42
|
|
|
43
|
|
|
44
|
|
|
45
|
38
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rochester Medical Corporation
We have audited the accompanying consolidated balance sheet of
Rochester Medical Corporation (a Minnesota corporation) and
subsidiary (collectively, the Company) as of
September 30, 2010 and 2009 and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended September 30, 2010. Our
audits of the basic financial statements included the financial
statement schedule listed in the index appearing under
Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Rochester Medical Corporation and subsidiary as of
September 30, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2010 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Rochester Medical Corporations internal control over
financial reporting as of September 30, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated December 10, 2010 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Minneapolis, Minnesota
December 10, 2010
39
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rochester Medical Corporation
We have audited Rochester Medical Corporations (a
Minnesota corporation) internal control over financial reporting
as of September 30, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Rochester Medical
Corporations management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on
Rochester Medical Corporations internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Rochester Medical Corporation maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2010, based on criteria
established in Internal Control Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Rochester Medical Corporation as
of September 30, 2010 and 2009, and the related
consolidated statements of operations, shareholders equity
and comprehensive income (loss), and cash flows and financial
statement schedule for each of the three years in the period
ended September 30, 2010, and our report dated
December 10, 2010 expressed an unqualified opinion on those
financial statements and financial statement schedule.
Minneapolis, Minnesota
December 10, 2010
40
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,545,907
|
|
|
$
|
6,365,584
|
|
Marketable securities
|
|
|
30,967,007
|
|
|
|
29,896,740
|
|
Accounts receivable, less allowance for doubtful accounts
($54,048 2010; $63,369 2009)
|
|
|
7,858,540
|
|
|
|
6,418,656
|
|
Inventories, net
|
|
|
9,240,291
|
|
|
|
9,710,234
|
|
Prepaid expenses and other current assets
|
|
|
846,899
|
|
|
|
1,076,183
|
|
Deferred income tax asset
|
|
|
872,849
|
|
|
|
1,153,964
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
54,331,493
|
|
|
|
54,621,361
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
695,872
|
|
|
|
702,120
|
|
Buildings
|
|
|
7,301,551
|
|
|
|
7,145,768
|
|
Equipment and fixtures
|
|
|
18,543,813
|
|
|
|
16,954,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,541,236
|
|
|
|
24,802,607
|
|
Less accumulated depreciation
|
|
|
(16,523,997
|
)
|
|
|
(15,118,799
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
10,017,239
|
|
|
|
9,683,808
|
|
Deferred income tax asset
|
|
|
1,175,052
|
|
|
|
768,874
|
|
Goodwill
|
|
|
4,561,781
|
|
|
|
4,648,165
|
|
Intangible assets, less accumulated amortization
($2,747,745 2010; $2,120,096 2009)
|
|
|
5,351,620
|
|
|
|
6,017,944
|
|
Patents, less accumulated amortization ($1,268,907
2010; $1,207,316 2009)
|
|
|
229,106
|
|
|
|
224,815
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
75,666,291
|
|
|
$
|
75,964,967
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,016,058
|
|
|
$
|
1,755,472
|
|
Accrued compensation
|
|
|
1,458,652
|
|
|
|
1,176,949
|
|
Accrued expenses
|
|
|
610,570
|
|
|
|
350,403
|
|
Current maturities of debt
|
|
|
2,641,233
|
|
|
|
2,786,622
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,726,513
|
|
|
|
6,069,446
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
46,327
|
|
|
|
55,889
|
|
Long-term debt, less current maturities
|
|
|
|
|
|
|
1,019,735
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
46,327
|
|
|
|
1,075,624
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value:
|
|
|
|
|
|
|
|
|
Authorized shares 40,000,000
|
|
|
|
|
|
|
|
|
Issued and outstanding shares: (12,072,452 2010;
12,190,367 2009)
|
|
|
57,200,531
|
|
|
|
56,840,856
|
|
Retained earnings
|
|
|
14,578,678
|
|
|
|
14,832,213
|
|
Accumulated other comprehensive loss
|
|
|
(2,885,758
|
)
|
|
|
(2,853,172
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
68,893,451
|
|
|
|
68,819,897
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
75,666,291
|
|
|
$
|
75,964,967
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net sales
|
|
$
|
41,442,680
|
|
|
$
|
34,798,829
|
|
|
$
|
35,191,949
|
|
Cost of sales
|
|
|
21,739,014
|
|
|
|
17,973,314
|
|
|
|
18,483,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19,703,666
|
|
|
|
16,825,515
|
|
|
|
16,707,964
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
11,868,737
|
|
|
|
10,327,396
|
|
|
|
9,498,596
|
|
Research and development
|
|
|
1,235,367
|
|
|
|
1,241,095
|
|
|
|
1,044,205
|
|
General and administrative
|
|
|
6,391,003
|
|
|
|
6,006,906
|
|
|
|
6,658,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,495,107
|
|
|
|
17,575,397
|
|
|
|
17,200,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
208,559
|
|
|
|
(749,882
|
)
|
|
|
(492,839
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
239,171
|
|
|
|
283,195
|
|
|
|
1,239,689
|
|
Other income (expense)
|
|
|
|
|
|
|
1,200,442
|
|
|
|
(88,642
|
)
|
Interest expense
|
|
|
(177,401
|
)
|
|
|
(259,341
|
)
|
|
|
(477,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
61,770
|
|
|
|
1,224,296
|
|
|
|
673,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
270,329
|
|
|
|
474,414
|
|
|
|
180,648
|
|
Income tax benefit (expense)
|
|
|
(523,864
|
)
|
|
|
(365,742
|
)
|
|
|
578,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(253,535
|
)
|
|
$
|
108,672
|
|
|
$
|
759,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
(.02
|
)
|
|
$
|
.01
|
|
|
$
|
.06
|
|
Net income (loss) per common share diluted
|
|
$
|
(.02
|
)
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
12,181,549
|
|
|
|
12,045,313
|
|
|
|
11,815,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
12,181,549
|
|
|
|
12,639,853
|
|
|
|
12,577,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at September 30, 2007
|
|
|
11,690,886
|
|
|
$
|
50,150,739
|
|
|
$
|
13,964,438
|
|
|
$
|
393,748
|
|
|
$
|
64,508,925
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
759,103
|
|
|
|
|
|
|
|
759,103
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,456,869
|
)
|
|
|
(1,456,869
|
)
|
Tax effect on unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,890
|
|
|
|
138,890
|
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(324,450
|
)
|
|
|
(324,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(883,326
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
1,364,491
|
|
|
|
|
|
|
|
|
|
|
|
1,364,491
|
|
Stock based compensation
|
|
|
|
|
|
|
1,364,561
|
|
|
|
|
|
|
|
|
|
|
|
1,364,561
|
|
Stock option exercises
|
|
|
245,700
|
|
|
|
1,343,878
|
|
|
|
|
|
|
|
|
|
|
|
1,343,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
11,936,586
|
|
|
|
54,223,669
|
|
|
|
14,723,541
|
|
|
|
(1,248,681
|
)
|
|
|
67,698,529
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
108,672
|
|
|
|
|
|
|
|
108,672
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,624,527
|
)
|
|
|
(1,624,527
|
)
|
Tax effect on unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,587
|
|
|
|
142,587
|
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,551
|
)
|
|
|
(122,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,495,819
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
562,308
|
|
|
|
|
|
|
|
|
|
|
|
562,308
|
|
Stock based compensation
|
|
|
|
|
|
|
1,330,220
|
|
|
|
|
|
|
|
|
|
|
|
1,330,220
|
|
Common stock repurchased
|
|
|
(110,653
|
)
|
|
|
(1,058,041
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,058,041
|
)
|
Stock option exercises
|
|
|
364,434
|
|
|
|
1,782,700
|
|
|
|
|
|
|
|
|
|
|
|
1,782,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
12,190,367
|
|
|
|
56,840,856
|
|
|
|
14,832,213
|
|
|
|
(2,853,172
|
)
|
|
|
68,819,897
|
|
Net income (loss) for the year
|
|
|
|
|
|
|
|
|
|
|
(253,535
|
)
|
|
|
|
|
|
|
(253,535
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,457
|
)
|
|
|
(117,457
|
)
|
Tax effect on unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,814
|
)
|
|
|
(46,814
|
)
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,685
|
|
|
|
131,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286,121
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
39,970
|
|
|
|
|
|
|
|
|
|
|
|
39,970
|
|
Stock based compensation
|
|
|
|
|
|
|
1,481,102
|
|
|
|
|
|
|
|
|
|
|
|
1,481,102
|
|
Common stock repurchased
|
|
|
(132,915
|
)
|
|
|
(1,202,339
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,202,339
|
)
|
Stock option exercises
|
|
|
15,000
|
|
|
|
40,942
|
|
|
|
|
|
|
|
|
|
|
|
40,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
12,072,452
|
|
|
$
|
57,200,531
|
|
|
$
|
14,578,678
|
|
|
$
|
(2,885,758
|
)
|
|
$
|
68,893,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(253,535
|
)
|
|
$
|
108,672
|
|
|
$
|
759,103
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,407,963
|
|
|
|
1,234,081
|
|
|
|
1,209,554
|
|
Amortization
|
|
|
694,925
|
|
|
|
692,756
|
|
|
|
717,009
|
|
Stock based compensation
|
|
|
1,481,102
|
|
|
|
1,330,220
|
|
|
|
1,364,561
|
|
Deferred income taxes
|
|
|
(172,627
|
)
|
|
|
196,545
|
|
|
|
(528,535
|
)
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
404,959
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,481,287
|
)
|
|
|
(657,793
|
)
|
|
|
(841,382
|
)
|
Inventories
|
|
|
409,967
|
|
|
|
(1,101,735
|
)
|
|
|
(604,318
|
)
|
Prepaid expenses and other current assets
|
|
|
228,520
|
|
|
|
(62,859
|
)
|
|
|
(655,116
|
)
|
Accounts payable
|
|
|
269,679
|
|
|
|
(320,632
|
)
|
|
|
1,096,684
|
|
Income tax payable
|
|
|
265,874
|
|
|
|
(60,034
|
)
|
|
|
(415,671
|
)
|
Other current liabilities
|
|
|
267,041
|
|
|
|
325,055
|
|
|
|
(110,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,117,622
|
|
|
|
1,684,276
|
|
|
|
2,396,521
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,763,869
|
)
|
|
|
(1,171,788
|
)
|
|
|
(1,609,741
|
)
|
Patents
|
|
|
(65,882
|
)
|
|
|
(57,685
|
)
|
|
|
(26,915
|
)
|
Purchase of marketable securities
|
|
|
(66,622,304
|
)
|
|
|
(55,358,876
|
)
|
|
|
(76,658,063
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
65,683,722
|
|
|
|
53,853,269
|
|
|
|
78,444,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(2,768,333
|
)
|
|
|
(2,735,080
|
)
|
|
|
149,584
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in short-term debt
|
|
|
600,000
|
|
|
|
2,000,000
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(1,765,124
|
)
|
|
|
(3,940,120
|
)
|
|
|
(2,169,233
|
)
|
Repurchase of common stock
|
|
|
(1,202,339
|
)
|
|
|
(1,058,041
|
)
|
|
|
|
|
Excess tax benefit from exercises of stock options
|
|
|
39,979
|
|
|
|
562,308
|
|
|
|
959,523
|
|
Net proceeds from issuance of common stock from option exercises
|
|
|
40,942
|
|
|
|
1,782,700
|
|
|
|
1,343,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,286,542
|
)
|
|
|
(653,153
|
)
|
|
|
134,167
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
117,576
|
|
|
|
(438,459
|
)
|
|
|
(843,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(1,819,677
|
)
|
|
|
(2,142,416
|
)
|
|
|
1,836,644
|
|
Cash and cash equivalents at beginning of year
|
|
|
6,365,584
|
|
|
|
8,508,000
|
|
|
|
6,671,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,545,907
|
|
|
$
|
6,365,584
|
|
|
$
|
8,508,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
109,779
|
|
|
$
|
443,791
|
|
|
$
|
476,577
|
|
Cash paid for income taxes
|
|
|
264,743
|
|
|
|
313,640
|
|
|
|
785,000
|
|
The accompanying notes are an integral part of these
financial statements.
44
|
|
1.
|
Description
of Business and Basis of Presentation
|
Rochester Medical Corporation develops, manufactures and markets
a broad line of innovative, technologically enhanced urinary
continence and urine drainage care products for the home care
and acute/extended care markets. The Company currently
manufactures and markets standard continence care products,
including male external catheters, Foley catheters and
intermittent catheters and innovative and technologically
advanced products such as its FemSoft Insert, StrataNF
catheter and antibacterial and hydrophilic intermittent
catheters. The Company markets its products under its
Rochester Medical brand, and also supplies its products
to several large medical product companies for sale under brands
owned by these companies, which are referred to as private label
sales.
The Companys fiscal year end is September 30. The
accompanying financial statements include the accounts of
Rochester Medical Corporation and Rochester Medical Limited, its
wholly owned subsidiary in the United Kingdom, together
which are herein referred to as the Company.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Significant
items subject to estimates and assumptions include the valuation
allowances for inventories and accounts receivable, fair value
assumptions related to investments, deferred income tax assets
and stock-based compensation. Actual results could differ from
those estimates.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of Rochester Medical Corporation and its wholly owned
subsidiary. All material intercompany accounts and transactions
are eliminated in consolidation.
Cash
Equivalents
The Company considers all highly liquid investments with a
remaining maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents includes balances in
foreign accounts totaling $4.1 million and
$4.2 million at September 30, 2010 and 2009
respectively. The Company maintains its cash in bank deposit
accounts which, at times, may exceed the insurance limits of the
Federal Deposit Insurance Corporation. The Company has not
experienced any losses in such accounts.
Marketable
Securities
As of September 30, 2010, the Company has
$31.0 million invested in high quality, investment grade
debt securities, primarily consisting of $25.7 million
invested in U.S. treasury bills and $3.1 million
invested in a mutual fund and $2.2 million in CDs.
The Company is currently reporting an unrealized loss of
$412,583 related to the mutual fund as a result of the recent
fluctuations in the credit markets impacting the current market
value. The Company currently considers these unrealized losses
to be temporary.
Marketable securities are classified as available for sale and
are carried at fair value, with unrealized gains or losses
included as a separate component of shareholders equity.
The cost and fair value of
available-for-sale
securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Loss
|
|
|
Fair Value
|
|
|
September 30, 2010
|
|
$
|
31,379,590
|
|
|
$
|
(412,583
|
)
|
|
$
|
30,967,007
|
|
September 30, 2009
|
|
$
|
30,441,008
|
|
|
$
|
(544,268
|
)
|
|
$
|
29,896,740
|
|
45
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Losses recognized are recorded in Other expense, in the
consolidated statements of operations. Gains and losses from the
sale of investments are calculated based on the specific
identification method.
The Company adopted the accounting standards which are now part
of Accounting Standards Codification (ASC) 820, Fair Value
Measurements and Disclosures, for financial assets and
liabilities that are re-measured and reported at fair value at
each reporting period. Fair value is defined as the price that
would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. ASC 820 requires that fair value
measurements be classified and disclosed using one of the
following three categories:
Level 1. Quoted prices (unadjusted) in
active markets for identical assets or liabilities;
Level 2. Inputs other than Level 1
that are observable, either directly or indirectly, such as
quoted prices in active markets for similar assets or
liabilities; quoted prices for identical or similar assets in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities; or
Level 3. Inputs that are unobservable for
the asset or liability and that are significant to the fair
value of the assets or liabilities.
The adoption of these standards did not have a material impact
on the Companys consolidated financial statements. The
Company has determined that the values given to its marketable
securities are appropriate and are measured using Level 1
inputs.
Fair
Value of Financial Instruments
The carrying amounts of all financial instruments, including
cash, accounts receivable, accounts payable and accrued expenses
approximate their fair values because of the short maturity of
these instruments. The carrying amounts of the Companys
long-term debt approximates fair value based on rates offered to
the Company for debt.
Concentration
of Credit
The Company manufactures and sells its products to a full range
of companies in the medical industry on a worldwide basis. There
is a concentration of sales to larger medical wholesalers and
distributors. The Company performs periodic credit evaluations
of its customers financial condition. The Company requires
irrevocable letters of credit on sales to certain foreign
customers. Receivables generally are due within 30 to
60 days.
Accounts
Receivable
The Company grants credit to customers in the normal course of
business, but generally does not require collateral or any other
security to support its receivables. The Company maintains an
allowance for doubtful accounts for potential credit losses.
Uncollectible accounts are written-off against the allowance
when it is deemed that a customer account is uncollectible.
Accounts outstanding longer than the contractual payment terms
are considered past due. The Company determines its allowances
by considering a number of factors, including the length of time
accounts receivables are past due, the Companys previous
loss history, the customers current ability to pay its
obligation to the Company, and the condition of the general
economy and the industry as a whole. The Company writes off
accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the
allowance for doubtful accounts. Accounts receivable balances
written off have been within managements expectations.
Inventories
Inventories, consisting of material, labor and manufacturing
overhead, are stated at the lower of cost
(first-in,
first-out method) or market.
46
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property,
Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is based on estimated
useful lives of 4-10 years for equipment and fixtures and
25-35 years
for buildings computed using the straight-line method. Additions
and improvements that extend the lives of the assets are
capitalized while expenditures for repairs and maintenance are
expensed as incurred.
Intangible
Assets
Intangible assets consist primarily of purchased trademarks, a
supply agreement, and customer relationships and are amortized
using the straight-line method, as appropriate, over their
estimated useful lives, ranging from 5 to 20 years. The
Company reviews these intangible assets for impairment as
changes in circumstance or the occurrence of events suggest the
remaining value may not be recoverable. No impairment loss was
recognized in the fiscal years ended September 30, 2010,
2009 and 2008.
Goodwill
The Company records as goodwill the excess of purchase price
over the fair value of the identifiable net assets acquired as
prescribed by ASC 350, Goodwill and Other Intangible
Assets. Under ASC 350, goodwill and intangibles with
indefinite useful lives are not amortized. ASC 350 also
requires, at a minimum, an annual assessment of the carrying
value of goodwill and other intangibles with indefinite useful
lives. If the carrying value of goodwill or an intangible asset
exceeds its fair value, an impairment loss shall be recognized.
The Company tests annually for impairment on the anniversary
date of the acquisition of the asset, which is currently June
2nd of each fiscal year, or more frequently if events and
circumstances indicate that the asset might be impaired. The
recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge would be
recognized by the amount that the carrying amount of the asset
exceeds the fair value of the asset. The Company performed
annual goodwill impairment testing by comparing the market value
of the Companys assets at June 2, 2010 to the net
book value of its equity, and concluded that the goodwill was
not impaired. No impairment loss was recognized in the fiscal
years ended September 30, 2010, 2009 and 2008. The change
in value of goodwill in any of the periods presented is entirely
related to the change in foreign currency exchange rates in the
United Kingdom.
Long-Lived
Assets
The Company reviews its long-lived assets for impairment as
prescribed by ASC 360, Property, Plant, and Equipment,
whenever events or changes in circumstances indicate that
its carrying value of long-lived assets may not be recoverable.
Long-lived assets are considered not recoverable when the
carrying amount of a long-lived asset (asset group) exceeds the
sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset (asset group). If it
is determined that a long-lived asset (asset group) is not
recoverable, an impairment loss is recorded equal to the excess
of the carrying amount of the long-lived asset (asset group)
over the long-lived assets (asset groups) fair
value. Fair value is the amount at which the long-lived asset
(asset group) could be bought or sold in a current transaction
between a willing buyer and seller, other than in a forced or
liquidation sale. No impairment loss was recognized in the
fiscal years ended September 30, 2010, 2009 and 2008.
Foreign
Currency Translation
The financial statements of the Companys
non-U.S. subsidiary
are translated into U.S. dollars in accordance with
ASC 830, Foreign Currency Matters. Under
ASC 830, the assets and liabilities of certain
non-U.S. functional
currencies are other than the U.S. dollar are translated at
current rates of exchange. Revenue and expense items are
translated at the average exchange rates. The resulting
translation adjustments are recorded directly into accumulated
other comprehensive income (loss).
47
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Patents
Capitalized costs include costs incurred in connection with
making patent applications for the Companys products and
are amortized on a straight-line basis over eight years. The
Company periodically reviews its patents for impairment of
value. No impairment loss was recognized in the fiscal years
ended September 30, 2010, 2009 and 2008.
Revenue
Recognition
The Company has standard contract terms with all non
Group Purchase Organization customers, which include our
independent distributors, of FOB shipping point; as such, sales
are recognized upon shipment. Group Purchase Organization
customers have terms of FOB destination per the agreement and
thus sales are recognized upon delivery of goods to the
customer. Revenue is recognized when title and risk of ownership
have passed, the price to the buyer is fixed and determinable
and recoverability is reasonably assured. For all Group Purchase
Organization customer orders shipped within the last five
working days of a quarter, the Company monitors the shipping
tracking number for such shipments to verify receipt by the
customer. If the Company is able to verify receipt by the
customer by the end of the month, the sale is recognized.
Payment terms for all customers range from prepayment to
60 days. Customers cannot return unsold products unless the
Company has authorized such return for warranty claims. The
Company does not grant significant price concessions to its
customers.
The Company warrants that the products it sells to its customers
will conform to the description and specifications furnished by
the Company, and that the products will be free from defects in
material and workmanship. In the event of a warranty claim, the
customer is responsible for shipping the product(s) back to the
Company, freight prepaid. If the failure of the product is due
to a breach of warranty, the Company may repair or replace the
defective product(s) at its option and return the repaired or
replaced product(s) to the customer, freight prepaid. This is
the limit of the Companys warranty liability, and this
warranty is made in lieu of all other written or unwritten
express or implied warranties. Historically, due to the nature
of use of the Companys products and low replacement cost,
the Companys warranty exposure has been immaterial.
Other than the Companys limited warranty obligation, the
Company does not have significant post-shipment obligations to,
or significant acceptance provisions with, its customers,
including its distributors.
Shipping
and Handling
Shipping and handling billed to customers is recorded as
revenue. Shipping and handling costs are recorded within cost of
goods sold.
Research
and Development Costs
Research and development costs are charged to operations as
incurred. Research and development costs include clinical
testing costs, certain salary and related expenses, other labor
costs, materials and an allocation of certain overhead expenses.
Income
Taxes
Income taxes are accounted for under the liability method.
Deferred income taxes are provided for temporary differences
between financial reporting and tax bases of assets and
liabilities. The Company records a valuation allowance to reduce
the carrying value of its net deferred tax assets to the amount
that is more likely than not to be realized. For fiscal 2010,
the Company recorded a valuation allowance of $47,000 related to
Minnesota R&D credit carryovers as the Company believes it
is more likely than not that the deferred tax asset will not be
utilized in future years. The Company has not recorded a
valuation allowance on any other net deferred tax assets because
there is sufficient future projected income to sustain that the
deferred tax assets will more likely than not be able to be
realized.
48
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
It is the Companys practice to recognize penalties
and/or
interest to income tax matters in income tax expenses. As of
September 30, 2010, the Company did not have a material
amount of accrued interest or penalties related to unrecognized
tax benefits.
The Company is subject to income tax examinations in the
U.S. federal jurisdiction, as well as in the
United Kingdom and various state jurisdictions. The
Internal Revenue Service (IRS) completed an examination of the
Companys income tax return for the fiscal year ended
September 30, 2007 and a settlement was reached in
September 2009. The Company reduced its reserves in accordance
with ASC 740, Income Taxes for unrecognized tax
benefits as a result of the settlement reached with the IRS.
Advertising
Costs
The Company incurred advertising expenses of $1,600,000,
$929,000 and $946,000 for the years ended September 30,
2010, 2009 and 2008, respectively. All advertising costs are
charged to operations as incurred.
Stock-Based
Compensation
Stock-based compensation expense includes: (a) compensation
expense for all stock-based compensation awards granted prior
to, but not yet vested as of, October 1, 2005, based on
grant-date fair value estimated in accordance with the
accounting provisions that are now part of ASC 718,
Compensation-Stock Compensation; and
(b) compensation expense for all stock-based compensation
awards granted subsequent to October 1, 2005, based on
grant-date fair value estimated in accordance with the
provisions of ASC 718, recognized utilizing the accelerated
expense attribution method for awards with graded vesting. The
Company recorded approximately $1,481,000, $1,330,000 and
$1,365,000 ($959,000, $878,000 and $887,000 net of tax) of
related stock-based compensation expense for the years ended
September 30, 2010, 2009 and 2008, respectively.
Net
Income (Loss) Per Share
Net income (loss) per common share is calculated in accordance
with ASC 260, Earnings Per Share. The Companys
basic net income (loss) per common share is computed by dividing
net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted net income per
common share is computed by dividing net income by the weighted
average number of common shares outstanding during the period,
increased to include dilutive potential common shares issuable
upon the exercise of stock options that were outstanding during
the period. For periods of net loss, diluted net loss per common
share equals basic net loss per common share because common
stock equivalents are not included in periods where there is a
loss, as they are antidilutive. A reconciliation of the
numerator and denominator in the basic and diluted net income
(loss) per share calculation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(253,535
|
)
|
|
$
|
108,672
|
|
|
$
|
759,103
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share
weighted average shares outstanding
|
|
|
12,181,549
|
|
|
|
12,045,313
|
|
|
|
11,815,904
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
594,540
|
|
|
|
761,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common share
weighted average shares outstanding
|
|
|
12,181,549
|
|
|
|
12,639,853
|
|
|
|
12,577,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options of 230,000 and 5,000 for fiscal years
2009 and, 2008, respectively, have been excluded from the
diluted net income (loss) per common share calculations because
their exercise prices were greater than the average market price
of the Companys common stock.
49
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended September 30, 2010, diluted net loss per
common share equals basic net loss per common share because
common stock equivalents are not included in periods where there
is a net loss, as they are antidilutive.
Business
Segment
The Company conducts its business within one business segment
which is defined as developing, manufacturing and marketing
urinary continence and urinary drainage care products.
New
Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board
(FASB) issued ASU
No. 2010-09,
Amendments to Certain Recognition and Disclosure
Requirements, that amends guidance on subsequent
events. This amendment removes the requirement for SEC filers to
disclose the date through which an entity has evaluated
subsequent events. However, the date-disclosure exemption does
not relieve management of an SEC filer from its responsibility
to evaluate subsequent events through the date on which
financial statements are issued. This standard became effective
for the Company in the second quarter of fiscal 2010. The
adoption of this standard did not have a material impact on the
Companys consolidated financial statements.
In January 2010, the FASB issued ASU
No. 2010-02,
Accounting and Reporting for Decreases in Ownership of
a Subsidiary a Scope Clarification, that
clarifies which transactions are subject to the guidance on
decrease in ownership and expands the disclosure requirements
for the deconsolidation of a subsidiary or the derecognition of
a group of assets. This ASU clarifies that the scope of the
decrease in ownership guidance applies to (1) a subsidiary
or group of assets that is a business or nonprofit activity,
(2) a subsidiary that is a business or nonprofit activity
that is transferred to an equity method investee or joint
venture, and (3) an exchange of a group of assets that
constitutes a business or nonprofit activity for a
noncontrolling interest in an entity. This ASU expands the
disclosure requirements to include disclosure of the fair value
techniques used, the nature of any continuing involvement and
whether the transaction was with a related party. This standard
became effective for the Company in the second quarter of fiscal
2010 and is retrospectively effective for transactions that
occurred after October 1, 2009. The Company has not entered
into any transactions that result in a decrease in ownership
within the scope of this standard. Therefore, the adoption of
this standard did not have an impact on the Companys
consolidated financial statements.
In January 2010, the FASB issued ASU
No. 2010-06,
Improving Disclosures about Fair Value
Measurements, that requires entities to make new
disclosures about recurring or nonrecurring fair-value
measurements and provides clarification of existing disclosure
requirements. For assets and liabilities that are measured at
fair value on a recurring basis, the ASU requires disclosure of
significant transfers between Levels 1 and 2, and transfers
into and out of Level 3 of the fair value hierarchy and the
reasons for those transfers. Significant transfers into each
level must be disclosed and discussed separately from transfers
out of each level. Significance is judged with respect to
earnings, total assets, total liabilities or total equity. An
accounting policy must be determined and disclosed as to when
transfers between levels are recognized; (1) actual date,
(2) beginning of period or (3) end of period. The ASU
amends the reconciliation of the beginning and ending balances
of Level 3 recurring fair value measurements to present
information about purchases, sales, issuances and settlements on
a gross basis rather than as a net number. The ASU amends
ASC 820 to require fair value measurement disclosures for
each class of assets and liabilities and clarifies that a
description of the valuation technique and inputs used to
measure fair value is required for both recurring and
nonrecurring fair value measurements. This standard became
effective for the Companys fiscal year ending
September 30, 2010, except for the requirement to provide
the Level activity of purchases, sales, issuances and settlement
on a gross basis, which will be effective beginning in the first
quarter of fiscal year 2011. Since this standard impacts
disclosure requirements only, its adoption will not have a
material impact on the Companys consolidated financial
statements.
50
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During fiscal 2009, the Company recorded $1,200,000 of other
income, consisting primarily of a cash settlement from Covidien
Ltd. when the Company reached a settlement with Covidien Ltd.,
Tyco International (US) Inc. and Tyco Health Care Group, L.P.,
with respect to the lawsuit it initiated in February 2004
against certain GPOs and individual defendants alleging
anti-competitive conduct against the defendants in the markets
for standard and anti-infection Foley catheters as well as
urethral catheters. Under the settlement agreement, Covidien
Ltd. paid the Company $3,500,000 (net $1,000,000 after payment
of attorneys fees and expenses) and was dismissed from the
lawsuit.
During fiscal 2008, the Company recorded a foreign currency
transaction loss of $89,000 related to the note payable to
Coloplast A/S.
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
1,756,313
|
|
|
$
|
1,983,279
|
|
Work-in-process
|
|
|
3,233,644
|
|
|
|
3,863,824
|
|
Finished goods
|
|
|
4,375,798
|
|
|
|
3,989,555
|
|
Reserve for inventory obsolescence
|
|
|
(125,464
|
)
|
|
|
(126,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,240,291
|
|
|
$
|
9,710,234
|
|
|
|
|
|
|
|
|
|
|
Intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
Estimated Lives
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Trademarks
|
|
8 to 15
|
|
$
|
5,423,000
|
|
|
$
|
1,755,762
|
|
|
$
|
3,667,238
|
|
|
$
|
5,423,000
|
|
|
$
|
1,350,586
|
|
|
$
|
4,072,414
|
|
Supply agreement
|
|
5
|
|
|
634,000
|
|
|
|
549,470
|
|
|
|
84,530
|
|
|
|
634,000
|
|
|
|
422,670
|
|
|
|
211,330
|
|
Customer relationships
|
|
20
|
|
|
2,042,365
|
|
|
|
442,513
|
|
|
|
1,599,852
|
|
|
|
2,081,040
|
|
|
|
346,840
|
|
|
|
1,734,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
$
|
8,099,365
|
|
|
$
|
2,747,745
|
|
|
$
|
5,351,620
|
|
|
$
|
8,138,040
|
|
|
$
|
2,120,096
|
|
|
$
|
6,017,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these assets was as follows:
|
|
|
|
|
Year ended September 30, 2010
|
|
$
|
633,335
|
|
Year ended September 30, 2009
|
|
|
632,661
|
|
Year ended September 30, 2008
|
|
|
625,299
|
|
Estimated annual amortization expense for these assets over the
next five years is as follows:
|
|
|
|
|
2011
|
|
$
|
592,000
|
|
2012
|
|
|
507,000
|
|
2013
|
|
|
507,000
|
|
2014
|
|
|
476,000
|
|
2015
|
|
|
414,000
|
|
51
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases many of its automobiles for its sales staff
in the United Kingdom for various terms under long-term,
non-cancelable operating lease agreements. The leases expire at
various dates through 2014. In the normal course of business, it
is expected that these leases will be replaced by leases on
other vehicles as the lease terms expire.
Lease expense totaled $378,000, $312,000 and $245,000 during
fiscal 2010, 2009 and 2008, respectively.
The following is a schedule by fiscal year of future minimum
rental payments required under the operating lease agreements:
|
|
|
|
|
2011
|
|
$
|
275,000
|
|
2012
|
|
|
205,000
|
|
2013
|
|
|
67,000
|
|
2014
|
|
|
1,000
|
|
Stock
Options
The Rochester Medical Corporation 1991 Stock Option Plan
authorized the issuance of up to 2,000,000 shares of common
stock. Per the terms of the 1991 Stock Option Plan, as of
April 20, 2001, no new stock options may be granted under
the 1991 Stock Option Plan. As of September 30, 2010, there
were 135,700 options outstanding under this plan.
The 2001 Stock Incentive Plan authorized the issuance of up to
2,000,000 shares of common stock pursuant to grants of
incentive stock options, non-qualified options or restricted
stock. As of January 28, 2010, no new awards may be granted
under the 2001 Stock Incentive Plan. As of September 30,
2010, there were 1,334,000 options outstanding under this plan.
On January 28, 2010, the Companys shareholders
approved the Rochester Medical Corporation 2010 Stock Incentive
Plan. The 2010 Stock Incentive Plan authorizes the issuance of
up to 1,000,000 shares of common stock pursuant to grants
of incentive stock options, non-incentive stock options, stock
appreciation rights, restricted stock, restricted stock units,
dividend equivalents, performance awards, stock awards, and
other stock-based awards. Per the terms of the 2010 Stock
Incentive Plan, awards may be granted with a term no longer than
ten years. The vesting schedule and other terms of the awards
granted under the 2010 Stock Incentive Plan will be determined
by the Compensation Committee of the Board of Directors at the
time of the grant. As of September 30, 2010, there were
797,000 shares that remained available for issuance under
the 2010 Stock Incentive Plan, and there were 203,000 options
outstanding under this plan.
52
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Option activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Shares
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Reserved
|
|
|
Options
|
|
|
Price Per
|
|
|
Contract
|
|
|
|
For Grant
|
|
|
Outstanding
|
|
|
Share
|
|
|
Life
|
|
|
Balance as of September 30, 2007
|
|
|
564,000
|
|
|
|
1,777,334
|
|
|
$
|
5.90
|
|
|
|
5.73 years
|
|
Options granted
|
|
|
(204,500
|
)
|
|
|
204,500
|
|
|
|
11.14
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(245,700
|
)
|
|
|
5.57
|
|
|
|
|
|
Options canceled
|
|
|
27,000
|
|
|
|
(27,000
|
)
|
|
|
20.91
|
|
|
|
|
|
1991, 1995 Plan options canceled and not reissuable
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
384,500
|
|
|
|
1,709,134
|
|
|
|
6.34
|
|
|
|
5.70 years
|
|
Options granted
|
|
|
(217,000
|
)
|
|
|
217,000
|
|
|
|
11.29
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(364,434
|
)
|
|
|
4.83
|
|
|
|
|
|
Options canceled
|
|
|
67,000
|
|
|
|
(67,000
|
)
|
|
|
11.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
234,500
|
|
|
|
1,494,700
|
|
|
|
7.21
|
|
|
|
5.74 years
|
|
2010 Option Plan approved
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(203,000
|
)
|
|
|
203,000
|
|
|
|
12.27
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
2.73
|
|
|
|
|
|
Options canceled
|
|
|
7,500
|
|
|
|
(7,500
|
)
|
|
|
11.78
|
|
|
|
|
|
Options expired
|
|
|
2,500
|
|
|
|
(2,500
|
)
|
|
|
11.78
|
|
|
|
|
|
2001 Plan options canceled and not reissuable
|
|
|
(244,500
|
)
|
|
|
|
|
|
|
9.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
|
797,000
|
|
|
|
1,672,700
|
|
|
$
|
7.83
|
|
|
|
5.31 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options exercisable at end of period
|
|
|
|
|
|
|
1,227,700
|
|
|
$
|
6.79
|
|
|
|
4.28 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of stock options exercisable at September 30,
2010, 2009 and 2008 was 1,227,700, 1,062,075 and 1,264,384 at a
weighted average exercise price of $6.79, $6.04 and $5.36 per
share, respectively.
At September 30, 2010, the aggregate intrinsic value of
options outstanding was $5,927,084, and the aggregate intrinsic
value of options exercisable was $5,490,189. Total intrinsic
value of options exercised was $52,801 for the year ended
September 30, 2010.
As of September 30, 2010, $1,250,814 of unrecognized
compensation costs related to non-vested awards is expected to
be recognized over a weighted average period of approximately
thirteen months.
53
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average fair value of options granted in 2010, 2009
and 2008 was $7.14, $6.70 and $6.86 per share, respectively. The
exercise price of options outstanding at September 30, 2010
ranged from $2.17 to $18.02 per share as summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
Exercise Price
|
|
|
|
|
|
Exercise Price
|
|
|
|
Number
|
|
|
Average
|
|
Per Share
|
|
|
Number
|
|
|
Per Share
|
|
Range of
|
|
Outstanding
|
|
|
Remaining
|
|
Total Options
|
|
|
Exercisable
|
|
|
Options
|
|
Exercise Prices
|
|
at 9/30/10
|
|
|
Contractual Life
|
|
Outstanding
|
|
|
at 9/30/10
|
|
|
Exercisable
|
|
|
$0.00 $5.00
|
|
|
671,200
|
|
|
|
2.3 years
|
|
|
$
|
3.20
|
|
|
|
631,200
|
|
|
$
|
3.40
|
|
$5.01 $10.00
|
|
|
150,000
|
|
|
|
5.4 years
|
|
|
|
5.91
|
|
|
|
150,000
|
|
|
|
5.91
|
|
$10.01 $15.00
|
|
|
846,500
|
|
|
|
7.7 years
|
|
|
|
11.79
|
|
|
|
442,750
|
|
|
|
11.83
|
|
$15.01 $20.00
|
|
|
5,000
|
|
|
|
6.5 years
|
|
|
|
18.02
|
|
|
|
3,750
|
|
|
|
18.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,672,700
|
|
|
|
5.3 years
|
|
|
$
|
7.83
|
|
|
|
1,227,700
|
|
|
$
|
6.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.
The Black-Scholes option pricing model was used to estimate the
fair value of stock-based awards with the following
weighted-average assumptions for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
48
|
%
|
|
|
53
|
%
|
Risk-free interest rate
|
|
|
3.15
|
%
|
|
|
2.30
|
%
|
Expected holding period (in years)
|
|
|
8.46
|
|
|
|
8.17
|
|
Weighted-average grant-date fair value
|
|
$
|
7.14
|
|
|
$
|
6.70
|
|
The risk-free rate is based on a treasury instrument whose term
is consistent with the expected life of the Companys stock
options. The expected volatility, holding period, and
forfeitures of options are based on historical experience.
54
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes are due to temporary differences between
the carrying values of certain assets and liabilities for
financial reporting and income tax purposes, in addition to
certain tax carryforwards. Significant components of deferred
income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
18,088
|
|
|
$
|
20,457
|
|
Inventory reserves
|
|
|
41,810
|
|
|
|
43,010
|
|
Inventory capitalization
|
|
|
480,742
|
|
|
|
506,438
|
|
Accrued expenses
|
|
|
97,785
|
|
|
|
114,855
|
|
Nonqualified option expense
|
|
|
1,216,560
|
|
|
|
936,176
|
|
Restricted stock expense
|
|
|
146,716
|
|
|
|
111,360
|
|
Capital loss carryforward
|
|
|
36,805
|
|
|
|
|
|
Charitable contributions
|
|
|
40,774
|
|
|
|
20,996
|
|
Research and development credits
|
|
|
46,977
|
|
|
|
194,783
|
|
Net operating loss
|
|
|
544,525
|
|
|
|
342,577
|
|
ASC 320 unrealized loss
|
|
|
146,673
|
|
|
|
197,678
|
|
Valuation allowance
|
|
|
(46,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax deferred assets
|
|
|
2,770,478
|
|
|
|
2,488,330
|
|
Deferred income tax liability:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
722,577
|
|
|
|
565,492
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
2,047,901
|
|
|
$
|
1,922,838
|
|
|
|
|
|
|
|
|
|
|
The deferred tax amounts above have been classified in the
accompanying balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current assets
|
|
$
|
872,849
|
|
|
$
|
1,153,964
|
|
Noncurrent assets
|
|
|
1,175,052
|
|
|
|
768,874
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,047,901
|
|
|
$
|
1,922,838
|
|
|
|
|
|
|
|
|
|
|
The Company records a valuation allowance to reduce the carrying
value of its net deferred tax assets to the amount that is more
likely than not to be realized. For fiscal 2010, the Company
recorded a valuation allowance of $47,000 related to Minnesota
R&D credit carryovers as the Company believes it is more
likely than not that the deferred tax asset will not be utilized
in future years. The Company has not recorded a valuation
allowance on any other net deferred tax assets because there is
sufficient future projected income to sustain that the deferred
tax assets will more likely than not be able to be realized.
55
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income (loss) before taxes and the provision (benefit) for
taxes for the years ended September 30, 2010, 2009, and
2008 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
584,963
|
|
|
$
|
1,155,518
|
|
|
$
|
317,024
|
|
Non-U.S.
|
|
|
(314,634
|
)
|
|
|
(681,104
|
)
|
|
|
(136,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before taxes
|
|
|
270,329
|
|
|
|
474,414
|
|
|
|
180,648
|
|
Provision for taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit)
|
|
|
552,085
|
|
|
|
622,512
|
|
|
|
(230,078
|
)
|
Deferred tax expense (benefit)
|
|
|
609
|
|
|
|
(163,393
|
)
|
|
|
(363,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
552,694
|
|
|
|
459,119
|
|
|
|
(593,254
|
)
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
|
|
|
|
|
1,857
|
|
|
|
40,238
|
|
Deferred tax expense (benefit)
|
|
|
(28,524
|
)
|
|
|
(95,234
|
)
|
|
|
(25,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
(28,524
|
)
|
|
|
(93,377
|
)
|
|
|
14,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for taxes
|
|
$
|
524,170
|
|
|
$
|
365,742
|
|
|
$
|
(578,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the statutory federal income tax rate
and the effective income tax rate for the years ended September
30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
4
|
|
|
|
6
|
|
|
|
28
|
|
Foreign taxes
|
|
|
31
|
|
|
|
29
|
|
|
|
52
|
|
Tax exempt interest
|
|
|
|
|
|
|
|
|
|
|
(142
|
)
|
Incentive stock options
|
|
|
66
|
|
|
|
28
|
|
|
|
59
|
|
Change in valuation allowance and utilization of net operating
loss carryforward
|
|
|
17
|
|
|
|
|
|
|
|
|
|
R&D credits
|
|
|
(15
|
)
|
|
|
(38
|
)
|
|
|
(310
|
)
|
Change in reserves
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
129
|
|
Rate adjustment on deferred taxes
|
|
|
18
|
|
|
|
|
|
|
|
(109
|
)
|
DPAD
|
|
|
(10
|
)
|
|
|
8
|
|
|
|
(70
|
)
|
Other
|
|
|
53
|
|
|
|
12
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
194
|
%
|
|
|
77
|
%
|
|
|
(320
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 1, 2007, the Company adopted amendments to
ASC 740, Income Taxes, which clarify the accounting
for uncertainty in tax positions recognized in the financial
statements. These provisions create a single model to address
uncertainty in tax positions and clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the
financial statements. ASC 740 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. At the adoption date, October 1, 2007, the
Company did not have a material liability under ASC 740 for
unrecognized tax benefits. As of September 30, 2010, the
Company has
56
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognized approximately $46,000 for unrecognized tax benefits.
If the Company were to prevail on all unrecognized tax benefits
recorded at September 30, 2010, the total gross
unrecognized tax benefit totaling approximately $46,000 would
benefit the Companys effective tax rate if recognized.
It is the Companys practice to recognize penalties
and/or
interest to income tax matters in income tax expenses. As of
September 30, 2010, the Company did not have a material
amount of accrued interest or penalties related to unrecognized
tax benefits.
The Company is subject to income tax examinations in the
U.S. Federal jurisdiction, as well as in the
United Kingdom and various state jurisdictions. The
Internal Revenue Service completed an examination of our income
tax return for the fiscal year ended September 30, 2007,
and a settlement was reached in September 2009. The Company
reduced its reserves during the year ended September 30,
2009 in accordance with ASC 740, Income Taxes for
unrecognized tax benefits as a result of the settlement reached
with the IRS.
A reconciliation of the beginning and ending amount of
unrecognized tax benefit is as follows:
|
|
|
|
|
Balance at October 1, 2009
|
|
$
|
55,889
|
|
Increases/(decreases) as a result of tax positions taken during
a prior period
|
|
|
(22,495
|
)
|
Increases/(decreases) as a result of tax positions taken during
the current period (including interest)
|
|
|
12,933
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
46,327
|
|
|
|
|
|
|
Significant customers, measured as a percentage of sales, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Significant customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollister
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
Coloplast and Coloplast subsidiaries
|
|
|
14
|
|
|
|
10
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24
|
%
|
|
|
22
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Employee
Benefit Plan
|
The Company has a 401(k) plan covering employees meeting certain
eligibility requirements. The Company currently matches employee
contributions at a rate of 50% with a maximum match of 2.5% of
salary. The total matching expense for the years ended
September 30, 2010, 2009 and 2008 was $134,196, $136,497
and $120,536, respectively. The Company also makes contributions
to the Group Personal Pension Scheme for the benefit of the
employees of its U.K. subsidiary.
57
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Sales related to customers in the United States, Europe and the
rest of the world are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
16,820,676
|
|
|
$
|
14,446,788
|
|
|
$
|
14,143,490
|
|
Europe
|
|
|
23,658,534
|
|
|
|
18,794,401
|
|
|
|
19,107,071
|
|
Rest of world
|
|
|
963,470
|
|
|
|
1,557,640
|
|
|
|
1,941,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,442,680
|
|
|
$
|
34,798,829
|
|
|
$
|
35,191,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales are attributed to countries based upon the address to
which the Company ships products, as set forth on the
customers purchase order.
Long-lived assets, excluding deferred income tax assets of the
Company are located in the United States and Europe as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,649,092
|
|
|
$
|
12,936,346
|
|
Europe
|
|
|
7,510,656
|
|
|
|
7,638,386
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,159,748
|
|
|
$
|
20,574,732
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Line of
Credit and Long-Term Debt
|
In June 2006, in conjunction with an asset purchase agreement
with Coloplast A/S, the Company entered into an unsecured loan
note deed with Coloplast with an outstanding principal amount of
$5,340,000. The promissory note is non-interest bearing and
payable in five equal annual installments of $1,068,000 payable
annually on June 2. The Company has imputed interest on the
note at 6.90% which reflected the Companys cost of
borrowing at the date of the purchase agreement and the discount
is being amortized over the life of the note. The liability
balance was $1,018,053 and $1,927,910 at September 30, 2010
and 2009, respectively. The final installment is due June 2011.
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 1.25%. On January 6, 2010, the
aggregate funds available under the credit facility was
increased from $14,000,000 to $25,000,000. As of
September 30, 2010, the Company had an outstanding balance
of $1,660,616 under the revolving line of credit. The
Companys obligations under the credit facility are payable
on demand and are secured by its investments in marketable
securities held at UBS.
|
|
13.
|
Share
Repurchase Program
|
On March 3, 2009, the Company announced its intention to
repurchase some of its outstanding common shares pursuant to its
previously authorized share repurchase program. Up to
2,000,000 shares may be repurchased from time to time on
the open market, or pursuant to negotiated or block
transactions, in accordance with applicable Securities and
Exchange Commission regulations. During the three months ended
September 30, 2010, 132,915 shares were repurchased.
During fiscal 2010, the Company repurchased 132,915 shares
of common stock pursuant to this program at an average price of
$9.05 per share. Total cash consideration for the repurchased
58
ROCHESTER
MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares was approximately $1,200,000. As of September 30,
2010, there remained 1,715,092 shares that may be purchased
under the program.
|
|
14.
|
Quarterly
Results (Unaudited)
|
Summary data relating to the results of operations for each
quarter of the years ended September 30, 2010 and 2009
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
Fiscal year 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,232
|
|
|
$
|
9,845
|
|
|
$
|
10,244
|
|
|
$
|
11,121
|
|
Gross profit
|
|
|
4,613
|
|
|
|
4,659
|
|
|
|
5,042
|
|
|
|
5,390
|
|
Income (loss) from operations
|
|
|
(298
|
)
|
|
|
(202
|
)
|
|
|
275
|
|
|
|
433
|
|
Net income (loss) before taxes
|
|
|
(310
|
)
|
|
|
(226
|
)
|
|
|
294
|
|
|
|
513
|
|
Net income (loss) per common share basic
|
|
$
|
(.01
|
)
|
|
$
|
(.03
|
)
|
|
$
|
.01
|
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(.01
|
)
|
|
$
|
(.03
|
)
|
|
$
|
.01
|
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,436
|
|
|
$
|
8,445
|
|
|
$
|
8,909
|
|
|
$
|
9,009
|
|
Gross profit
|
|
|
3,925
|
|
|
|
4,414
|
|
|
|
4,184
|
|
|
|
4,303
|
|
Income (loss) from operations
|
|
|
(325
|
)
|
|
|
(90
|
)
|
|
|
(161
|
)
|
|
|
(173
|
)
|
Net income (loss) before taxes
|
|
|
(40
|
)
|
|
|
864
|
|
|
|
(176
|
)
|
|
|
(172
|
)
|
Net income (loss) per common share basic
|
|
$
|
.00
|
|
|
$
|
.03
|
|
|
$
|
(.01
|
)
|
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
.00
|
|
|
$
|
.03
|
|
|
$
|
(.01
|
)
|
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
ITEM 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures. As of the end of the period covered
by this report (the Evaluation Date) we carried out an
evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 as amended (the
Exchange Act)). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is
(i) recorded, processed, summarized and reported within the
time periods specified in the Commissions rules and forms,
and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control Over
Financial Reporting. Managements report on
our internal control over financial reporting is contained in
Item 7 above. The report of Grant Thornton LLP on our
internal control over financial reporting is contained in
Item 8 above.
Changes in Internal Control Over Financial
Reporting. During our fourth fiscal quarter,
there was no significant change made in our internal control
over financial reporting (as defined in
Rule 13(a) 15(f) under the Exchange Act) that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
Other
Information
|
None.
60
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information with respect to the Board of Directors contained
under the heading Election of Directors, the
information contained under the heading Section 16(a)
Beneficial Ownership Reporting Compliance and the
information contained under the heading Corporate
Governance Board Meetings and Committees
Audit Committee in the Proxy Statement for Annual Meeting
of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended September 30, 2010, is incorporated herein by
reference. Information with respect to our executive officers is
provided in Part I, Item 1.
We have adopted a code of ethics in compliance with applicable
rules of the Securities and Exchange Commission that applies to
all of our employees, including our principal executive officer,
our principal financial officer and our principal accounting
officer or controller, or persons performing similar functions.
We have posted a copy of the code of ethics on our website at
www.rocm.com. We intend to disclose any amendments to, or
waivers from, any provision of the code of ethics by posting
such information on such website.
|
|
ITEM 11.
|
Executive
Compensation
|
The information contained under the heading Executive
Compensation in the Proxy Statement for Annual Meeting of
Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended September 30, 2010, (except for the information set
forth under the subcaption Compensation Committee Report
on Executive Compensation) is incorporated herein by
reference.
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
(a) Equity Compensation Plans. The following table provides
information related to our equity compensation plans as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
|
|
|
|
|
|
for future issuance
|
|
|
|
Number of securities
|
|
|
|
|
|
under equity
|
|
|
|
to be issued upon
|
|
|
Weighted-average
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
(excluding securities
|
|
|
|
outstanding options,
|
|
|
outstanding options,
|
|
|
reflected in column
|
|
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
(a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security
holders(1)
|
|
|
1,672,700
|
|
|
$
|
7.83
|
|
|
|
797,000
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,672,700
|
|
|
$
|
7.83
|
|
|
|
797,000
|
|
|
|
|
(1) |
|
Includes shares issuable under our 1991 Stock Option Plan, 2001
Stock Incentive Plan and 2010 Stock Incentive Plan. |
(b) Security Ownership. The information contained under the
heading Security Ownership of Certain Beneficial Owners
and Management in the Proxy Statement for Annual Meeting
of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended September 30, 2010, is incorporated herein by
reference.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information contained under the heading Certain
Relationships and Related Transactions in the Proxy
Statement for Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission within 120 days of
the close of the fiscal year ended September 30, 2010, is
incorporated herein by reference.
61
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The information contained under the heading Audit
Committee Report and Payment of Fees to Auditors in the
Proxy Statement for Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days
of the close of the fiscal year ended September 30, 2010,
is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) The following financial statements are filed herewith in
Item 8.
(i) Consolidated Balance Sheets as of September 30,
2010 and 2009.
(ii) Consolidated Statements of Operations for the years
ended September 30, 2010, 2009 and 2008.
(iii) Consolidated Statement of Shareholders Equity
and Comprehensive Income (Loss) for the years ended
September 30, 2010, 2009 and 2008.
(iv) Consolidated Statements of Cash Flows for the years
ended September 30, 2010, 2009 and 2008.
(v) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
Financial statement schedules other than those listed have been
omitted since they are not required or are not applicable or the
required information is shown in the financial statements or
related notes.
(b) Exhibits
The following exhibits are submitted herewith:
|
|
|
3.1
|
|
Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 of
Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 2006).
|
3.2
|
|
Amended and Restated Bylaws of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 of
Registrants Current Report on
Form 8-K
filed on June 12, 2009).
|
4.1
|
|
Specimen of Common Stock Certificate. (Incorporated by reference
to Exhibit 4.4 of Registrants Annual Report on
Form 10-KSB
for fiscal year ended September 30, 1995).
|
10.1
|
|
The Companys 1991 Stock Option Plan as amended
(Incorporated by reference to Exhibit 4.5 of
Registrants Registration Statement on
Form S-8,
Registration Number
333-10261).
|
10.2
|
|
Amendment to the Companys 1991 Stock Option Plan as
amended (Incorporated by reference to Exhibit 4.3 of
Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 1998).
|
10.3
|
|
Employment Agreement, dated August 31, 1990 between the
Company and Anthony J. Conway. (Incorporated by reference to
Exhibit 10.13 of Registrants Registration Statement
on
Form S-18,
Registration Number
33-36362-C).
|
10.4
|
|
Employment Agreement, dated August 31, 1990 between the
Company and Philip J. Conway. (Incorporated by reference to
Exhibit 10.14 of Registrants Registration Statement
on
Form S-18,
Registration Number
33-36362-C).
|
10.5
|
|
Change of Control Agreement dated December 4, 1998, between
the Company and Philip J. Conway (Incorporated by reference to
Exhibit 10.3 of Registrants Annual Report on
Form 10-K
for fiscal year ended September 30, 1998).
|
10.6
|
|
Change of Control Agreement dated November 21, 2000,
between the Company and Anthony J. Conway. (Incorporated by
reference to Exhibit 10.6 of the Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2000).
|
10.7
|
|
Change of Control Agreement dated November 21, 2000,
between the Company and Martyn R. Sholtis. (Incorporated by
reference to Exhibit 10.9 of the Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2000).
|
62
|
|
|
10.8
|
|
Change of Control Agreement dated November 21, 2000,
between the Company and David A. Jonas. (Incorporated by
reference to Exhibit 10.10 of the Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2000).
|
10.9
|
|
The Companys 2001 Stock Incentive Plan. (Incorporated by
reference to Exhibit 10.1 of Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2006).
|
10.10
|
|
Form of Incentive Stock Option Agreement. (Incorporated by
reference to Exhibit 10.10 of Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2006).
|
10.11
|
|
Form of Non-Incentive Stock Option Agreement. (Incorporated by
reference to Exhibit 10.11 of Registrants Annual
Report on
Form 10-K
for fiscal year ended September 30, 2006).
|
10.12
|
|
Form of Restricted Stock Award (Incorporated by reference to
Exhibit 10.2 of the Registrants Current Report on
Form 8-K
filed on November 21, 2006).
|
10.13
|
|
The Companys Fiscal 2009 Management Incentive Plan.
(Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on
Form 8-K
filed on December 24, 2008).
|
10.14
|
|
The Companys Fiscal 2010 Management Incentive Plan.
(Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on
Form 8-K
filed on November 19, 2009).
|
10.15
|
|
Agreement, dated May 17, 2006, between Coloplast A/S,
Coloplast Limited, Mentor Medical Limited, the Company and
Rochester Medical Limited (Incorporated by reference to
Exhibit 10.1 of the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
10.16
|
|
Asset Purchase Agreement, dated May 27, 2006, by and
between Mentor Corporation and the Company (Incorporated by
reference to Exhibit 10.4 of the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
|
10.17
|
|
Rochester Medical Corporation 2010 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 of the
registrants Current Report on
Form 8-K
filed on February 1, 2010)
|
10.18
|
|
Form of 2010 Stock Incentive Plan Incentive Stock Option
Agreement for employees (incorporated by reference to
Exhibit 10.2 of the registrants Current Report on
Form 8-K
filed on February 1, 2010)
|
10.19
|
|
Form of 2010 Stock Incentive Plan Non-Incentive Stock Option
Agreement for employees (incorporated by reference to
Exhibit 10.3 of the registrants Current Report on
Form 8-K
filed on February 1, 2010)
|
10.20
|
|
Form of 2010 Stock Incentive Plan Non-Incentive Stock Option
Agreement for directors (incorporated by reference to
Exhibit 10.4 of the registrants Current Report on
Form 8-K
filed on February 1, 2010)
|
21*
|
|
Subsidiaries of the Company
|
23.1*
|
|
Consent of Grant Thornton LLP.
|
24*
|
|
Power of Attorney.
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
|
32.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(b).
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(b).
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Management contract or compensatory plan or arrangement required
to be filed as an exhibit to
Form 10-K
pursuant to Item 15(c) of
Form 10-K. |
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Rochester Medical Corporation
|
|
|
|
By:
|
/s/ Anthony
J. Conway
|
Anthony J. Conway
Chairman of the Board, President and,
Chief Executive Officer
Dated: December 10, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Anthony
J. Conway
Anthony J. Conway
|
|
Chairman of the Board, President and Chief Executive Officer
(principal executive officer)
|
|
|
|
/s/ David
A. Jonas
David A. Jonas
|
|
Director, Chief Financial Officer, Treasurer and Secretary
(principal financial and accounting officer)
|
|
|
|
*
Darnell
L. Boehm
|
|
Director
|
|
|
|
*
Roger
W. Schnobrich
|
|
Director
|
|
|
|
*
Benson
Smith
|
|
Director
|
|
|
|
|
|
*By
|
|
David A. Jonas
David
A. Jonas
Attorney-in-Fact
|
|
|
Dated: December 10, 2010
64
ROCHESTER
MEDICAL CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COL. A
|
|
COL. B
|
|
|
COL. C
|
|
|
COL. D
|
|
|
COL. E
|
|
|
|
|
|
|
|
|
Additions
|
|
|
(1), (2)
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other Accounts
|
|
|
Deductions
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Describe
|
|
|
Describe
|
|
|
Period
|
|
|
Year ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
63,369
|
|
|
$
|
32,543
|
|
|
$
|
|
|
|
$
|
41,864
|
|
|
$
|
54,048
|
|
Allowance for inventory obsolescence
|
|
|
126,424
|
|
|
|
63,456
|
|
|
|
|
|
|
|
64,416
|
|
|
|
125,464
|
|
Year ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
65,202
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,833
|
|
|
$
|
63,369
|
|
Allowance for inventory obsolescence
|
|
|
121,951
|
|
|
|
52,512
|
|
|
|
|
|
|
|
48,039
|
|
|
|
126,424
|
|
Year ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
57,913
|
|
|
$
|
10,807
|
|
|
$
|
|
|
|
$
|
3,518
|
|
|
$
|
65,202
|
|
Allowance for inventory obsolescence
|
|
|
117,027
|
|
|
|
104,196
|
|
|
|
|
|
|
|
99,272
|
|
|
|
121,951
|
|
|
|
|
(1) |
|
Uncollectible accounts written off net of recoveries |
|
(2) |
|
Obsolete inventory written off against the allowance |
65
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
24
|
|
|
Power of Attorney
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(b)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(b)
|
66