SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended
June 30, 1996
Commission file number: 0-18933
Rochester Medical Corporation
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Minnesota 41-1613227
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1500 Second Avenue N. W., Stewartville, MN 55976
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(507) 533-4203
ISSUER'S TELEPHONE NUMBER
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
4,127,500 Common Shares as of August 2, 1996.
Table of Contents
ROCHESTER MEDICAL CORPORATION
Report on Form 10-QSB
for quarter ended
June 30, 1996
Page
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1996 and
September 30, 1995 3
Statements of Operations - Three months
ended June 30, 1996 and 1995;
Nine months ended June 30, 1996 and 1995 4
Statements of Cash Flows - Nine months ended
June 30, 1996 and 1995 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 7
PART II OTHER INFORMATION 11
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
June 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 11,110,094 $ 551,142
Marketable Securities 6,913,483 2,354,199
Accounts Receivable 1,348,414 752,224
Employee Note Receivable 25,199 226,000
Inventories 1,093,833 766,144
Prepaid Expenses and Other Current Assets 59,135 153,466
------------ ------------
TOTAL CURRENT ASSETS 20,550,158 4,803,175
PROPERTY AND EQUIPMENT
Land and Buildings 881,489 757,338
Equipment and Fixtures 2,532,530 2,326,820
------------ ------------
3,414,019 3,084,158
Less: Accumulated Depreciation (1,387,466) (1,125,456)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 2,026,553 1,958,702
INTANGIBLE ASSETS
Patents, Less Accumulated Amortization 403,791 401,244
------------ ------------
TOTAL ASSETS $ 22,980,502 $ 7,163,121
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 424,544 $ 204,329
Accrued Compensation 112,633 115,834
Accrued Expenses 195,259 135,505
------------ ------------
TOTAL CURRENT LIABILITIES 732,436 455,668
LONG-TERM DEBT 3,249,375 3,035,625
SHAREHOLDERS' EQUITY Common Shares, no par value:
Authorized -- 20,000,000
Issued and Outstanding Shares--4,047,500
--June, 1996 and 2,724,000--Sept, 1995 23,946,911 7,729,518
Accumulated deficit (4,948,220) (4,057,690)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,998,691 3,671,828
------------ ------------
TOTAL LIABILITIES AND SHLDRS' EQUITY $ 22,980,502 $ 7,163,121
============ ============
Note - The Balance Sheet at September 30, 1995 was derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,710,603 $ 833,994 $ 3,753,254 $ 2,216,727
Cost Of Sales 1,119,326 658,800 2,599,363 1,703,279
----------- ----------- ----------- -----------
GROSS PROFIT 591,277 175,194 1,153,891 513,448
COSTS AND EXPENSE:
Marketing and Selling 388,485 254,409 940,747 660,350
Research and Development 422,974 67,560 819,547 297,830
General and Administrative 257,861 217,755 659,835 365,628
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,069,320 539,724 2,420,129 1,323,808
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (478,043) (364,530) (1,266,238) (810,360)
OTHER INCOME (EXPENSE):
Interest Income 229,984 7,278 589,624 35,154
Interest Expense (71,250) (10,130) (213,916) (30,400)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 158,734 (2,852) 375,708 4,754
----------- ----------- ----------- -----------
NET LOSS $ (319,309) $ (367,382) $ (890,530) $ (805,606)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (0.08) $ (0.14) $ (0.24) $ (0.30)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,047,500 2,686,040 3,786,200 2,671,347
=========== =========== =========== ===========
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (890,530) $ (805,606)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 339,240 283,950
Changes in assets and liabilities:
(Increase) Acounts Receivable (596,190) (82,585)
(Increase) Decrease Inventories (327,689) 18,076
(Increase) Decrease Other Current Assets 295,130 (103,730)
Increase (Decrease) Accounts Payable 220,215 (61,475)
Increase (Decrease) Other Current Liabilities 56,553 (8,091)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (903,271) (759,461)
INVESTING ACTIVITIES
Capital Expenditures (329,860) (209,717)
Patents (79,776) (41,190)
(Increase) Decrease Marketable Securities (4,559,284) 1,274,202
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTMENT ACTIVITIES (4,968,920) 1,023,295
FINANCING ACTIVITIES
Payments on Bank Mortgage Loan 0 (15,519)
Interest Expense Added To Note Payable 213,750 0
Exercise of Common Stock Warrants 0 92,400
Proceeds from Sale of Common Stock 16,217,393 0
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 16,431,143 76,881
------------ ------------
INCREASE IN CASH AND
CASH EQUIVALENTS 10,558,952 340,715
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 551,142 96,179
CASH AND CASH EQUIVALENTS AT
------------ ------------
END OF PERIOD $ 11,110,094 $ 436,894
============ ============
See Notes to Financial Statements
</TABLE>
ROCHESTER MEDICAL CORPORATION
Notes to Financial Statements (Unaudited)
June 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principes for complete
financial statements. These financial statements should be read in
conjunction with the financial statments and related notes included in
the Company's 1995 Form 10-KSB. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the nine month period ending June 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending
September 30, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Rochester Medical Corporation (the "Company") manufactures and
markets leading edge male external catheters for the management of male urinary
incontinence and leading edge silicone Foley catheters for urinary
catheterization. The Company has also developed several advanced feature
catheters which the Company believes will provide improved medical outcomes and
which are in various stages of commercialization. The Company recently developed
its FemSoft(TM) urethral assist insert for managing stress incontinence in
active women. This new device, which builds on the Company's proprietary liquid
encapsulation technology, is designed to support, rather than obstruct normal
urethral functions and is intended to provide a new treatment modality for
stress incontinence. The new FemSoft(TM) urethral assist insert is a soft and
conformable insert having a reciprocal fluid transfer design which permits it to
be simply inserted, worn, and removed for voiding; all without inflation,
deflation, syringes, or valving mechanisms. The FemSoft(TM) urethral assist
insert may also be expelled by voluntary voiding. The Company markets its
products under its own Rochester Medical(R) brand and under existing private
label arrangements, including a strategic marketing alliance with ConvaTec, a
division of the Bristol-Myers Squibb Company.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated,
certain items from the statements of operations of the Company expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30 June 30
---------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
Private Label 86% 84% 81% 79%
Rochester Medical Brand 14% 16% 19% 21%
---- ---- ---- ----
Total Net Sales 100% 100% 100% 100%
Cost of Sales 65% 79% 69% 77%
---- ---- ---- ----
Gross Margin 35% 21% 31% 23%
Operating Expenses
Marketing and Selling 23% 31% 25% 30%
Research and Development 25% 8% 22% 13%
General and Administrative 15% 26% 18% 16%
---- ---- ---- ----
Total Operating Expenses 63% 65% 65% 59%
Loss From Operations (28%) (41%) (34%) (36%)
Interest Income (Expense) Net 9% - % 10% - %
---- ---- ----
Net Loss (19%) (44%) (24%) (36%)
</TABLE>
THREE MONTH AND NINE MONTH PERIODS ENDED JUNE 30, 1996 AND JUNE 30, 1995
NET SALES. Net Sales increased 105% to $1,710,603 for the third
quarter of fiscal 1996 from $833,994 for the third quarter of fiscal 1995,
reflecting growth in both private label and Company branded sales. The increase
in private label sales is due primarily to increased sales to Mentor and to
Baxter. Total sales to Mentor, Baxter, and Hollister, respectively, comprised
approximately 37% of net sales, 22% of net sales, and 10% of net sales for the
quarter compared to 27%, 16%, and 20% of net sales for the comparable quarter of
the prior year. Sales of Rochester Medical(R) brand products grew at a rate of
76% during the current quarter, and represented a relatively modest proportion
of product mix due to the strong private label sales.
Net Sales increased 69% to $3,753,254 for the nine months ended
June 30, 1996, from $2,216,727 for the comparable nine months of the prior year.
Sales of Rochester Medical(R) brand products grew at a rate of 48% during the
current nine months over last year's comparable period. Factors affecting
product mix are consistent with those discussed above for the third quarter.
Total sales to Mentor, Baxter and Hollister comprised, respectively,
approximately 25%, 22%, and 14% of net sales for the current nine month period,
compared to approximately 10%, 21%, and 27% of net sales for the comparable
period of the prior year.
GROSS MARGIN. The Company's gross margin as a percentage of net
sales was 35% for the third quarter of fiscal 1996 compared with 21% for the
third quarter of fiscal 1995. The Company's gross margin during the current
quarter benefited from increased efficiencies attributable to increased
production volumes for both private label and branded product sales.
The Company's gross margin as a percentage of net sales was 31%
for the nine months ended June 30, 1996 compared with 23% for the nine months
ended June 30, 1995. Factors affecting gross margin for the nine month period
are consistent with those discussed above for the third quarter.
MARKETING AND SELLING. Marketing and selling expense increased
53% to $388,485 for the third quarter of fiscal 1996 from $254,409 for the third
quarter of fiscal 1995 due to increased personnel costs and promotional expenses
for branded products. Marketing and selling expense rate decreased to 23% of net
sales in the current quarter from 31% of net sales for the comparable prior
quarter reflecting the impact of 105% sales growth.
Marketing and selling expense increased 43% to $940,747 for the
nine months ended June 30, 1996 from $660,350 for the nine months ended June 30,
1995. The increased expense reflects personnel and product promotion costs as
discussed above for the current quarter. Marketing and selling expense rate
decreased to 25% of net sales in the current nine month period from 30% of net
sales for the comparable prior nine month period due to increased sales.
RESEARCH AND DEVELOPMENT. Research and development expense
increased 526% to $422,974 for the third quarter of fiscal 1996 from $67,560 for
the third quarter of fiscal 1995. The increase is due to the addition of a new
Director of Clinical and Regulatory Affairs and expenditures related to clinical
testing of the Company's new FemSoft(TM) urethral assist device, as well as
other of the Company's products in development. Research and development expense
rate increased to 25% of net sales in the current quarter from 8% for the
comparable prior quarter.
Research and development expense increased 175% to $819,547 for
the nine months ended June 30, 1996 from $297,830 for the nine months ended June
30, 1995, due to the factors discussed above for the third quarter. Research and
development expense rate increased to 22% of net sales in the current nine month
period from 13% for the comparable prior nine month period.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 18% to $257,861 for the third quarter of fiscal 1996 from $217,755 for
the third quarter of fiscal 1995. The expense increase relates to the
development of administrative structures, primarily personnel and systems.
General and administrative expense rate decreased to 15% of net sales in the
current quarter from 26% of net sales for the comparable quarter of the prior
year.
General and administrative expense increased 80% to $659,835 for
the nine months ended June 30, 1996 from $365,628 for the nine months ended June
30, 1995. The increased expense primarily reflects key personnel costs and
administrative development factors noted above for the current quarter. General
and administrative expense rate increased to 18% of net sales in the current
nine month period from 16% of net sales for the comparable nine month period of
the prior year.
INTEREST INCOME (EXPENSE). Interest income increased to $229,984
for the third quarter of fiscal 1996 from $7,278 for the third quarter of fiscal
1995, and to $589,624 for the nine months ended June 30, 1996, from $35,154 for
the nine months ended June 30, 1995, as a result of earnings on cash invested in
December 1995 from the proceeds of the Company's public offering. Interest
expense increased to $71,250 for the third quarter of fiscal 1996 from $10,130
for the third quarter of fiscal 1995, and $213,916 for the nine months ended
June 30, 1996, from $30,400 for the nine months ended June 30, 1995. The
increase in expense is a result of interest due on the $3 million convertible
subordinated loan from ConvaTec made in August 1995, and the elimination of
interest payments on a mortgage loan that was repaid from the proceeds of the
ConvaTec loan.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities at June 30, 1996
were $18,023,577 compared to $2,905,341 at September 30, 1995, a net increase of
$15,118,236. Net proceeds of $16,217,393 from a public stock offering in the
first quarter of the current fiscal year represent the primary source of the
additional liquidity.
Cash of $903,271 was used to fund operating activities during the
nine month period ended June 30, 1996. Essentially all of this amount relates to
the net operating loss for the nine month period, exclusive of non-cash
depreciation and amortization expenses.
Trade accounts receivable and inventory balances at June 30,
1996, increased $596,190 (79%) and $327,689 (42%) respectively, from September
30, 1995. Receivable balances reflect the increase in sales levels, and the
inventory build is in preparation for anticipated future sales.
Changes in other asset and liability balances are insignificant
and relate primarily to timing of expense recognition.
Capital expenditures of $329,860 were made during the current
nine month period, primarily related to expansion of the existing production
facility and initial expenditures on a new production facility. Patent
expenditures of $79,776 relate to filings on the Company's new FemSoft(TM)
products.
BUSINESS OUTLOOK
The following discussion contains forward looking statements that
involve risks and uncertainties, including the timing of purchases by customers,
manufacturing capacities for both current products and new products, the timing
of clinical preference testing and product introductions, and FDA review and
response times, as well as other risk factors listed from time to time in the
Company's SEC reports and filings, including, without limitation, the section
entitled "Risk Factors" in the Company's Annual Report on Form 10-KSB (Part II,
Item 6) for the year ended September 30, 1995, and in the Company's Prospectus
dated July 25, 1996.
Consolidation and integration in the domestic health care
industry have tended to favor growth of private label sales over growth in sales
of branded products. The Company is engaged in strategic planning to identify
appropriate market opportunities for its current products and for its newer
products in development. The Company intends to develop and refine marketing
strategies for each of its products, and to structure its domestic sales and
marketing organization to address these market trends. The Company's continuing
sales growth of private label products partly depends upon continuing purchases
by Mentor Corporation. Mentor holds a patent license from the company which
would permit Mentor to commence manufacturing the silicone male external
catheter which it presently purchases from the Company. However, the Company has
not been advised by Mentor that it intends to establish a facility to
manufacture such product itself.
Sales growth has consumed much of the Company's excess
manufacturing capacity for certain of its current products. The Company
presently anticipates continuing sales growth for such products, including
growth which may result from future purchases by ConvaTec, as well as by other
of the Company's customers. As a result, the Company is presently planning to
expand it manufacturing capacities for such products. Unseasonable weather
conditions and delays in receiving federally required permits caused temporary
construction delays for the Company's new manufacturing and office facilities.
The Company presently expects to occupy the new facilities and to commence
manufacturing operations at the new facilities by mid 1997.
The Company recently filed its Investigational Plan with the FDA
for its new FemSoft(TM) urethral assist insert and expects to begin clinical
testing of this new device by calendar year end, with the results to be
submitted to the FDA during 1997 as a part of a PMA application for that device.
The Company and ConvaTec are currently finalizing arrangements for joint
clinical preference testing of the intermittent Personal(TM) catheter, the
Comfort Sleeve(TM) Foley catheter, and the FemSoft(TM) continuous drain
catheter, and the Company anticipates that clinical preference testing of those
products will begin in the coming months. Each of those products has already
received marketing approval from the FDA, and the clinical preference testing
will be conducted for marketing related purposes. The Company is presently
completing clinical testing of its Medicated Foley catheter at the University of
Wisconsin Medical School, and expects that the results of those tests will be
announced by calendar year end. If the results are favorable, the Company
intends to resubmit a 510-K marketing approval application for the Medicated
Foley catheter to the FDA.
The FDA recently proposed labeling regulations requiring medical
products containing latex to be marked as such and prohibiting such products
from being labeled as "hypoallergenic." The Company believes the proposed FDA
regulations, if adopted, may have a beneficial effect on the Company's future
sales.
The Company anticipates significant capital requirements in the
near future in order to finance expanded manufacturing facilities and equipment
for its current products and for its new FemSoft(TM) female incontinence product
line, to continue its marketing efforts, including the expansion of its
marketing and sales operations, to conduct clinical testing for products in
development, and to bring such products to market.
The Company's current cash resources should be sufficient to
finance these requirements for the foreseeable future; however, management
intends to pursue appropriate debt financing alternatives for new production
facilities and equipment. Management also intends to evaluate the additional
capital requirements occasioned by the Company's development of its new
FemSoft(TM) urethral assist device, and to consider such additional debt or
equity financing as may be necessary or appropriate for the commercialization of
that product.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Rochester Medical Corporation
Date: August 2, 1996 By: /s/ Anthony J. Conway
---------------------
Anthony J. Conway
Chief Executive Officer,
Date: August 2, 1996 By: /s/ Brian J. Wierzbinski
------------------------
Brian J. Wierzbinski
Chief Financial Officer
