SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________________ to _______________
Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1613227
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ROCHESTER MEDICAL DRIVE,
STEWARTVILLE, MN 55976
(Address of principal executive offices) (Zip Code)
(507) 533-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES _X_ NO ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
5,349,500 Common Shares as of August 9, 1999.
<PAGE>
TABLE OF CONTENTS
ROCHESTER MEDICAL CORPORATION
REPORT ON FORM 10-Q
FOR QUARTER ENDED
JUNE 30, 1999
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- June 30, 1999 and September 30, 1998 .................3
Statements of Operations -- Three months ended June 30, 1999 and 1998;
Nine months ended June 30, 1999 and 1998 .............................4
Statements of Cash Flows -- Nine months ended June 30, 1999 and 1998 ...5
Notes to Financial Statements ..........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..............................................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ......11
PART II. OTHER INFORMATION ...................................................12
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ...................................... $ 6,243,545 $ 2,864,922
Marketable Securities .......................................... 8,077,002 13,545,271
Accounts Receivable ............................................ 1,096,358 1,955,048
Inventories .................................................... 2,358,306 2,209,599
Prepaid Expenses and Other Assets .............................. 234,663 489,001
------------- -------------
TOTAL CURRENT ASSETS .................................. 18,009,874 21,063,841
PROPERTY AND EQUIPMENT
Land and Buildings ............................................. 5,390,785 5,389,784
Equipment and Fixtures ......................................... 9,117,500 8,540,888
------------- -------------
14,508,285 13,930,672
Less: Accumulated Depreciation ................................. (3,116,966) (2,510,975)
------------- -------------
TOTAL PROPERTY AND EQUIPMENT ......................... 11,391,319 11,419,697
INTANGIBLE ASSETS
Patents, Less Accumulated Amortization ......................... 205,945 252,212
------------- -------------
TOTAL ASSETS ...................................................... $ 29,607,138 32,735,750
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ............................................... $ 406,863 766,304
Accrued Expenses ............................................... 584,823 1,051,717
------------- -------------
TOTAL CURRENT LIABILITIES ......................... 991,686 1,818,021
SHAREHOLDERS' EQUITY
Common Stock, no par value:
Authorized -- 20,000,000
Issued and Outstanding Shares -- 5,349,500
-- Jun., 1999 and 5,269,500 -- Sept., 1998 ........ 41,352,202 40,692,202
Accumulated Deficit ............................................ (12,736,750) (9,774,473)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ........................ 28,615,452 30,917,729
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY .......................... $ 29,607,138 32,735,750
============= =============
</TABLE>
Note -- The Balance Sheet at September 30, 1998 was derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Financial Statements
-3-
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ............................... $ 1,733,368 $ 2,488,842 $ 5,460,680 $ 6,766,812
COST OF SALES ........................... 1,375,701 1,744,229 4,215,435 4,668,609
------------ ------------ ------------ ------------
GROSS PROFIT ............................ 357,667 744,613 1,245,245 2,098,203
COSTS AND EXPENSES:
Marketing and Selling ................ 1,068,347 951,475 2,623,344 2,239,826
Research and Development ............. 238,877 339,370 747,994 1,061,840
General and Administrative ........... 458,084 407,613 1,368,746 1,122,658
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ....... 1,765,308 1,698,458 4,740,084 4,424,324
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS .................... (1,407,641) (953,845) (3,494,839) (2,326,121)
OTHER INCOME (EXPENSE):
Interest Income ...................... 174,776 226,344 532,562 630,786
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXP) ............. 174,776 226,344 532,562 630,786
------------ ------------ ------------ ------------
NET LOSS ................................ $ (1,232,865) $ (727,501) $ (2,962,277) $ (1,695,335)
============ ============ ============ ============
NET LOSS PER COMMON SHARE
(Basic and Diluted) ..................... $ (0.23) $ (0.14) $ (0.56) $ (0.33)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ............... 5,349,500 5,264,489 5,327,264 5,097,255
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
-4-
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss ..................................................... $ (2,962,277) $ (1,695,335)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 698,656 587,293
Changes in assets and liabilities:
Accounts Receivable .......................................... 858,689 212,646
Inventories .................................................. (148,707) (368,616)
Other Current Assets ......................................... 254,339 (36,543)
Accounts Payable ............................................. (359,439) 120,003
Other Current Liabilities .................................... (466,894) 4,797
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES ................ (2,125,633) (1,175,755)
INVESTING ACTIVITY
Capital Expenditures ......................................... (577,612) (1,772,069)
Patents ...................................................... (46,401) (33,991)
Sales (Purchases) of Marketable Securities, Net .............. 5,468,269 (10,390,025)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES ...................... 4,844,256 (12,196,085)
------------ ------------
FINANCING ACTIVITIES
Proceeds from Sale of Common Stock ........................... 660,000 15,995,003
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 660,000 15,995,003
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ........................................ 3,378,623 2,623,163
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ......................................... 2,864,922 1,191,428
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 6,243,545 $ 3,814,591
============ ============
</TABLE>
See Notes to Financial Statement
-5-
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements should
be read in conjunction with the financial statements and related notes included
in the Company's 1998 Form 10-K. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended June 30,1999 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1999.
NOTE B -- EARNINGS (LOSS) PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share." This Statement replaces previously reported primary and
fully diluted earnings per share (EPS) with basic and diluted EPS. Unlike
primary EPS, basic EPS excludes any dilutive effects of options, warrants and
convertible debt. Diluted EPS is very similar to the previously reported fully
diluted EPS. For the nine-month periods ended June 30, 1999 and 1998, there is
no difference between basic and diluted net loss per share or between basic and
net loss per share as previously reported. Common equivalent shares from stock
options and convertible debt are excluded as their effects are antidilutive.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain
items from the statements of operations of the Company expressed as a percentage
of net sales.
Three Months Nine Months
Ended Ended
June 30, June 30,
---------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
Total Net Sales .................. 100% 100% 100% 100%
Cost of Sales .................... 79% 70% 77% 69%
----- ----- ----- -----
Gross Margin ................. 21% 30% 23% 31%
Operating Expenses
Marketing and Selling ........ 62% 38% 48% 33%
Research and Development ..... 14% 14% 14% 16%
General and Administrative ... 26% 16% 25% 17%
----- ----- ----- -----
Total Operating Expenses ......... 102% 68% 87% 66%
Loss From Operations ............. (81%) (38%) (64%) (34%)
Interest Income (Expense) Net .... 10% 9% 10% 9%
----- ----- ----- -----
Net Loss ......................... (71%) (29%) (54%) (25%)
===== ===== ===== =====
-7-
<PAGE>
THREE MONTH AND NINE MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998
NET SALES. Net sales for the third quarter of fiscal 1999 decreased 30% to
$1,733,000 from $2,489,000 for the comparable quarter of last fiscal year. The
sales decrease resulted from significantly lower private label sales, due
primarily to the discontinuation of orders from Mentor Corporation and lower
sales to ConvaTec. Sales of Rochester Medical brand products in the third
quarter of fiscal 1999 were higher than the comparable quarter of last fiscal
year, with increases in both domestic and international sales.
Net sales for the nine months ended June 30, 1999 decreased 19% to
$5,460,680 from $6,766,812 for the comparable nine-month period of last fiscal
year. Primary factors leading to the decline in nine-month sales results are the
lower private label sales and comparably lower international sales during the
first half of the current fiscal year.
Because of the decrease in net sales during the nine-month period ended
June 30, 1999 and the continuing effects of the discontinuation of Mentor sales,
the Company expects that total net sales for fiscal 1999 will be lower than last
year, and that its net loss for fiscal 1999 also will increase as a result of
lower sales levels.
GROSS MARGIN. The Company's gross margin as a percentage of net sales for
the third quarter of fiscal 1999 was 21% compared to 30% for the comparable
quarter of last fiscal year. The current quarter's margin reflects costs
associated with underutilized production capacity due to lower sales. Costs
associated with increased capacity are anticipated to continue until the Company
achieves sufficient sales to absorb the additional capacity.
The Company's gross margin as a percentage of net sales for the nine months
ended June 30, 1999 was 23% compared to 31% for the comparable nine-month period
of last fiscal year. Factors related to the decline in the nine-month margin are
generally consistent with those discussed above for the current quarter.
MARKETING AND SELLING. Marketing and selling expense for the third quarter
of fiscal 1999 increased 12% to $1,068,000 from $951,000 for the comparable
quarter of last fiscal year. The increase in marketing and selling expense is
due to promotional activities as part of the Company's sales campaign for the
RELEASE NF(TM) catheter. The Company anticipates that marketing and selling
expenses will increase in future periods as the Company expands its promotional
and market development activities related to Rochester Medical brand products,
particularly the Company's RELEASE NF(TM) catheter and FEMSOFT(R) INSERT.
Marketing and selling expense for the nine months ended June 30, 1999
increased 17% to $2,623,000 from $2,240,000 for the comparable nine-month period
of last fiscal year. Factors affecting the comparative nine-month expense levels
are generally consistent with those discussed above for the current quarter.
RESEARCH AND DEVELOPMENT. Research and development expense for the third
quarter of fiscal 1999 decreased 30% to $239,000 from $339,000 for the
comparable quarter of last fiscal year. The decrease in research and development
expense primarily reflects a reduction in accruals for costs
-8-
<PAGE>
of the FemSoft(R) Insert clinical trials related to stage of completion.
Research and development expense for the nine months ended June 30, 1999
decreased 30% to $748,000 from $1,062,000 for the comparable nine-month period
of last fiscal year. Factors affecting the comparative nine-month expense levels
are generally consistent with those discussed above for the current quarter.
GENERAL AND ADMINISTRATIVE. General and administrative expense for the
third quarter of fiscal 1999 increased 12% to $458,000 from $408,000 for the
comparable quarter of last fiscal year. The increase in general and
administrative expense is related to upgrading of business systems and general
increases in administrative support costs.
General and administrative expense for the nine months ended June 30, 1999
increased 22% to $1,369,000 from $1,123,000 for the comparable nine-month period
of last fiscal year. Factors affecting the comparative nine-month expense levels
are generally consistent with those discussed above for the current quarter.
INTEREST INCOME. Interest income for the third quarter of fiscal 1999
decreased 23% to $175,000 from $226,000 for the comparable quarter of last
fiscal year. The decrease in interest income reflects the comparatively lower
average level of invested cash balances in the current quarter due to the
utilization of cash for operations and capital expenditures.
Interest income for the nine months ended June 30, 1999 decreased 16% to
$533,000 from $631,000 for the comparable nine-month period of last fiscal year.
The decrease reflects a comparatively lower average level of invested cash
balances for the current quarter as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities were
$14,321,000 at June 30, 1999 compared with $16,410,000 at September 30, 1998.
The Company used a net $2,126,000 of cash from operating activities during the
quarter, primarily reflecting the net loss before non-cash depreciation.
During the nine-month period ended June 30, 1999, the Company's working
capital position, excluding cash and marketable securities, decreased by a net
$138,000. Accounts receivable balances decreased 44% or $859,000 during this
period as a result of receivable collections and lower sales in the current
quarter. Inventories increased 7% or $149,000 during the recent nine-month
period, which management expects will be absorbed by future customer orders.
Other current assets decreased 52% or $254,000 during the recent nine-month
period as a result of the collection of miscellaneous receivables. Current
liabilities decreased 45% or $826,000 during the recent nine-month period,
reflecting a reduction in raw material purchase volumes related to lower sales
levels and payment of clinical trial and accrued compensation obligations.
Changes in other asset and liability balances during the recent nine-month
period related to timing of expense recognition.
-9-
<PAGE>
The Company believes that its capital resources on hand at June 30, 1999,
together with revenues from sales, will be sufficient to satisfy its working
capital requirements for the foreseeable future as described in the Liquidity
and Capital Resources portion of Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's Annual Report on
Form 10-K (Part II, Item 6) for the fiscal year ended September 30, 1998.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs which were written
using two digits rather than four to determine the applicable year. The Year
2000 issue may also affect computer chips embedded in computer hardware and
machinery, which process data-sensitive information. Any computer programs and
hardware or equipment that have date-sensitive software or chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions to operations, including
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
The Company utilizes a variety of computer programs, primarily purchased
software, for its systems of manufacturing, distribution and administration. The
Company has made inquiries of its vendors who provide the Company with computer
programs and equipment, including hardware and software used in the Company's
automated manufacturing processes. The Company has also utilized the services of
an outside consultant to assist the Company with an inventory and assessment of
its computer programs and equipment and the implementation of a Year 2000
remediation plan. The Company has completed the inventory, assessment and
implementation phases of its Year 2000 review. Based upon results of this review
to date and upon certifications and assurances received from its software
vendors, the Company has not identified any material Year 2000 compliance issues
related to its core hardware and software systems, manufacturing systems, or
communications systems. The Company has implemented its Year 2000 remediation
plan at a total cost of approximately $75,000, including costs associated with
the replacement of computer hardware and software and consulting services to
implement the same. Now that the year 2000 remediation plan has been
implemented, the Company intends to test its software programs to verify that
these programs are Year 2000 compliant.
The Company has made inquiry to each of its material suppliers, such as
banks, payroll processors and vendors who must address their own Year 2000
issues. To date, none of these inquiries has identified any definite Year 2000
issues. The failure of these companies to be Year 2000 compliant may affect the
ability of the Company, among other things, to obtain critical supplies or
receive payment on outstanding invoices. Depending on the extent of such issues,
this could have a material adverse effect on the Company's results of operations
and liquidity.
The Company has used its own personnel to make inquiries to vendors and to
conduct the Year 2000 assessment process. Although the Company estimates that
the total cost of its Year 2000 review will not exceed $100,000, specific
factors that might require material expenditures not now anticipated by the
Company include, but are not limited to, the availability and cost of trained
personnel, the validity of certifications and assurances furnished by software
and hardware vendors, the effectiveness of software upgrades received by the
Company from its software vendors, the results of the ongoing Year 2000 review
and similar uncertainties.
-10-
<PAGE>
Based upon the results of the inventory, assessment and implementation
phases of its year 2000 review, the Company believes that any Year 2000 issues
will not have a material effect on the Company's business and a contingency plan
is not necessary at this time. However, the Company intends to develop
contingency plans, as appropriate, once it has completed testing of its software
programs. Moreover, the Company intends to follow up with its material suppliers
and establish contingency plans where Year 2000 compliance on the part of these
suppliers cannot be assured.
FORWARD-LOOKING STATEMENTS
Statements other than historical information contained herein constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be identified
by the use of terminology such as "may," "will," "expect," "anticipate,"
"predict," "intend," "designed," "estimate," "should" or "continue" or the
negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known or unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: the lack and uncertainty of regulatory approval or market acceptance
for the Company's products in development, primarily the FEMSOFT(R) INSERT; the
uncertainty of market acceptance of the RELEASE NF(TM) catheter and the
FEMSOFT(R) INSERT; the risks associated with the Company's expanded reliance on
sales of Rochester Medical brand products as well as other risk factors listed
from time to time in the Company's SEC reports, including, without limitation,
the sections entitled "Business Outlook" and "Risk Factors" in the Company's
Annual Report on Form 10-K (Part II, Item 6) for the year ended September 30,
1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which would
require disclosure under this item.
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<PAGE>
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:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCHESTER MEDICAL CORPORATION
Date: August 12, 1999 By: /s/ Anthony J. Conway
---------------------------
Anthony J. Conway
CHIEF EXECUTIVE OFFICER
Date: August 12, 1999 By: /s/ Brian J. Wierzbinski
---------------------------
Brian J. Wierzbinski
CHIEF FINANCIAL OFFICER
-13-
<PAGE>
EXHIBIT INDEX
Page
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27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,243,545
<SECURITIES> 8,077,002
<RECEIVABLES> 1,138,928
<ALLOWANCES> 42,570
<INVENTORY> 2,358,306
<CURRENT-ASSETS> 18,009,874
<PP&E> 14,508,285
<DEPRECIATION> 3,116,966
<TOTAL-ASSETS> 29,607,138
<CURRENT-LIABILITIES> 991,686
<BONDS> 0
0
0
<COMMON> 41,352,202
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,607,138
<SALES> 5,460,680
<TOTAL-REVENUES> 5,460,680
<CGS> 4,215,435
<TOTAL-COSTS> 8,955,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (3,494,839)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,962,277)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
