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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
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.)
ONE ROCHESTER MEDICAL DRIVE,
STEWARTVILLE, MN 55976
(Address of principal executive offices)
(507) 533-9600
(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:
5,349,500 Common Shares as of February 9, 1999.
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TABLE OF CONTENTS
ROCHESTER MEDICAL CORPORATION
REPORT ON FORM 10-Q
FOR QUARTER ENDED
DECEMBER 31, 1998
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- December 31, 1998 and September 30, 1998 ................. 3
Statements of Operations -- Three months ended December 31, 1998 and 1997 .. 4
Statements of Cash Flows -- Three months ended December 31, 1998 and 1997 .. 5
Notes to Financial Statements .............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... 7
PART II. OTHER INFORMATION .................................................... 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
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DECEMBER 31, SEPTEMBER 30,
1998 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ........................... $ 123,688 $ 2,864,922
Marketable Securities ............................... 15,547,747 13,545,271
Accounts Receivable ................................. 2,108,591 1,955,048
Inventories ......................................... 2,298,210 2,209,599
Prepaid Expenses And Other Assets ................... 233,406 489,002
------------- ------------
TOTAL CURRENT ASSETS ............................... 20,311,642 21,063,841
PROPERTY AND EQUIPMENT
Land and Buildings .................................. 5,390,785 5,389,785
Equipment and Fixtures .............................. 8,836,489 8,540,888
------------- ------------
14,227,273 13,930,672
Less: Accumulated Depreciation ...................... (2,755,725) (2,510,975)
------------- ------------
TOTAL PROPERTY AND EQUIPMENT ....................... 11,471,549 11,419,697
INTANGIBLE ASSETS
Patents, Less Accumulated Amortization .............. 245,968 252,212
------------- ------------
TOTAL ASSETS ......................................... $ 32,029,158 $ 32,735,750
============= ============
LIABILITIES ANDSHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable .................................... $ 606,198 $ 766,304
Accrued Expenses .................................... 698,961 1,051,717
------------- ------------
TOTAL CURRENT LIABILITIES .......................... 1,305,159 1,818,021
SHAREHOLDERS' EQUITY
Common Stock, no par value:
Authorized -- 20,000,000
Issued and Outstanding Shares -- 5,334,500
-- Dec., 1998 and 5,269,500 -- Sept., 1998 ......... 41,228,452 40,692,202
Accumulated Deficit ................................. (10,504,452) (9,774,473)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY ......................... 30,724,000 30,917,729
------------- ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............. $ 32,029,158 $ 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
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ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
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1998 1997
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NET SALES ........................... $2,345,995 $1,855,287
COST OF SALES ....................... 1,755,960 1,271,320
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GROSS PROFIT ........................ 590,035 583,967
COSTS AND EXPENSES:
Marketing and Selling .............. 830,323 632,611
Research and Development ........... 220,643 298,155
General and Administrative ......... 444,951 326,871
---------- ----------
TOTAL OPERATING EXPENSES .......... 1,495,917 1,257,637
---------- ----------
LOSS FROM OPERATIONS ................ (905,882) (673,670)
OTHER INCOME (EXPENSE):
Interest Income .................... 175,903 172,652
TOTAL OTHER INCOME (EXP) .......... 175,903 172,652
---------- ----------
NET LOSS ............................ $ (729,979) $ (501,018)
========== ==========
NET LOSS PER COMMON SHARE
(Basic and Diluted) ................ $ (0.14) $ (0.11)
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .......... 5,288,353 4,771,163
========== ==========
</TABLE>
See Notes to Financial Statements
4
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ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------
1998 1997
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OPERATING ACTIVITIES
Net Loss .............................................. $ (729,979) $ (501,017)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ....................... 275,639 198,312
Changes in assets and liabilities:
Accounts Receivable ................................ (153,543) 498,302
Inventories ........................................ (88,611) (315,400)
Other Current Assets ............................... 255,596 (139,703)
Accounts Payable ................................... (160,106) (35,175)
Other Current Liabilities .......................... (352,757) 300,401
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NET CASH (USED IN) OPERATING ACTIVITIES ........... (953,761) 5,720
INVESTING ACTIVITY
Capital expenditures ................................ (296,601) (725,400)
Patents ............................................. (24,645) (9,195)
Marketable Securities ............................... (2,002,477) (16,039,290)
------------ -------------
NET CASH (USED IN) INVESTING ACTIVITIES ........... (2,323,723) (16,773,885)
FINANCING ACTIVITIES
Proceeds from Sale of Common Stock .................. 536,250 15,887,003
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NET CASH PROVIDED BY FINANCING ACTIVITIES ......... 536,250 15,887,003
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(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ..................................... (2,741,234) (881,162)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................................. 2,864,922 1,191,428
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 123,688 $ 310,266
============ =============
</TABLE>
See Notes to Financial Statements
5
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ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1998
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 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-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 three month period ended December 31, 1998 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 three-month periods ended December 31, 1998 and 1997, 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.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company develops, manufactures and markets a broad line of innovative,
technologically enhanced latex-free urinary continence care products to the home
care and hospital care markets. The Company markets its products under its own
ROCHESTER MEDICAL(R) brand and through private label arrangements.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain
items from the statements of operations of the Company expressed as a percentage
of net sales.
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1998 1997
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Net Sales
Private Label ........................ 74% 73%
Rochester Medical Brand .............. 26% 27%
--- ---
Total Net Sales ..................... 100% 100%
Cost of Sales ......................... 75% 69%
--- ---
Gross Margin .......................... 25% 31%
Operating Expenses:
Marketing and Selling ................ 35% 34%
Research and Development ............. 9% 16%
General and Administrative ........... 19% 17%
--- ---
Total Operating Expenses ............ 63% 67%
Loss From Operations .................. (38%) (36%)
Interest Income (Expense) Net ......... 7% 9%
--- ---
Net Loss ............................ (31%) (27%)
=== ===
FISCAL QUARTERS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET SALES. Net sales increased 26% to $2,346,000 for the first quarter of
fiscal 1999 from $1,855,000 for the comparable quarter last year. Sales of
Rochester Medical brand products increased 25%, with strong growth in domestic
sales partly offset by lower sales in international markets. Sales to private
label customers increased 28%. The Company anticipates lower private label sales
in future quarters due primarily to the suspension of purchases by Mentor
Corporation which has elected to manufacture silicone male external catheters.
As a result of anticipated lower private label sales, the Company expects
overall second fiscal quarter sales to be significantly lower than the second
quarter of the prior fiscal year, and also expects some effect in future
periods.
GROSS MARGIN. The Company's gross margin was 25% for the first quarter of
fiscal 1999 compared with 31% for the same period last year. The current
quarter's gross margin reflects costs associated with increased production
capacity, which are anticipated to continue until the Company achieves
sufficient sales to absorb the additional capacity. The Company anticipates that
marketing and selling expenses will continue to increase in future periods as
the Company focuses on the sale of Rochester Medical brand products, including
its Advanced products.
MARKETING AND SELLING. Marketing and selling expense for the current
quarter increased 31% to $830,000 from $633,000 for the comparable quarter last
year due to expansion of the Company's direct sales force and addition of
marketing and sales management personnel.
RESEARCH AND DEVELOPMENT. Research and development expense decreased 26% to
$221,000 in the first quarter of fiscal 1999 from $298,000 for the comparable
quarter last year. The decrease reflects a reduction in accruals for costs for
FemSoft(R) Insert clinical trials related to stage of completion.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
36% to $445,000 in the first quarter of fiscal 1999 from $327,000 for the
comparable quarter last year. The increase in expense primarily reflects the
costs of new business systems.
7
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INTEREST INCOME AND (EXPENSE). Interest income remained relatively
constant for the comparative first quarters due to the comparability of average
invested cash balances throughout the quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities were
$15,671,000 at December 31, 1998 compared with $16,410,000 at September 30,
1998. The Company used a net $954,000 of cash from operating activities during
the quarter, primarily reflecting the net loss before non-cash depreciation and
$513,000 of reduction in current liabilities. The Company made $297,000 of
capital expenditures, and received $536,000 of proceeds upon the exercise of
stock options. Changes in other asset and liability balances relate to timing of
expense recognition and reflect normal operating activities.
The Company believes that its capital resources on hand at December 31,
1998, 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 that process data-sensitive
information which are embedded in computer hardware and machinery. 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. In
addition, certain of the Company's plant and manufacturing equipment contains
date-sensitive memory chips. The Company is presently conducting an assessment
of its computer programs and equipment. 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 is also utilizing the services of a consultant to assist the Company
with its assessment. Based upon results of that assessment 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,
and has not identified any material costs that it will be required to incur to
remedy any Year 2000 compliance issues. The Company anticipates that it will be
able to complete the assessment and implement any necessary modifications during
calendar 1999. If for any reason, however, the ongoing assessment discovers that
any of the Company's computer programs or equipment have other components that
are not Year 2000 compliant and the Company is unable to implement necessary
modifications on a cost-effective or timely basis, the Company could experience
a significant operational issue that could have a material impact on the
operations of the Company. Such impacts could include disruptions in one or more
of the Company's manufacturing processes resulting in delays in production and
the Company's inability to manufacture and deliver product to fulfill customer
orders.
In addition, 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 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. Other than such personnel expenses,
the Company estimates that it has spent approximately $10,000, primarily for
consulting services. The Company cannot now estimate the costs it may be
required to incur in order to resolve any such compliance issues which may be
disclosed as a
8
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result of its assessment procedures being conducted by the Company. Specific
factors that might cause such 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 assessment and
similar uncertainties. The Company currently has no contingency plans in place
in the event issues are encountered with Year 2000 compliance. The Company
intends to further evaluate the status of Year 2000 compliance in March 1999 and
determine at that time whether a contingency plan is necessary.
BUSINESS OUTLOOK
The following discussion contains forward looking statements that involve
risks and uncertainties, including the Company's dependence on a small number of
private label customers, the uncertainty of market acceptance of the Release NF
(TM) catheter and the FemSoft(R) Insert, the risks and uncertainties associated
with the Company's increased emphasis on Rochester Medical brand products, and
the uncertainty of obtaining regulatory approval for the FemSoft Insert, 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.
The Company anticipates continued growth in domestic sales of Rochester
Medical(R) brand products, and is refining its marketing strategies for branded
products in overseas markets. The Company intends to focus its principal
marketing and sales efforts on the development of branded product sales,
including its Release NF (TM) anti-infection catheter and, assuming receipt of
FDA approval, its FemSoft(R) Insert. The Company intends to continue to fulfill
all current private label contracts, but does not intend as part of its core
business strategy to actively seek new private label customers. The Company
anticipates a significant decline in private label sales for the immediate
future due primarily to the suspension of purchases by Mentor Corporation.
The RELEASE NF anti-infection catheter is currently undergoing testing and
evaluation at a number of hospitals, and is scheduled to begin similar
evaluations at a number of other hospitals. The Company also continues its
efforts to secure Group Purchasing Organization (GPO) contracts under which the
Company may offer the RELEASE NF catheter to a group's member hospitals. The
timing and extent of RELEASE NF catheter sales will be significantly influenced
by the results of such hospital evaluations and GPO coverage for the product.
The Company continues to obtain favorable scientific data from in vitro tests of
the RELEASE NF catheter against clinical isolates of both multi-drug resistant
and antibiotic susceptible bacteria responsible for most catheter induced
urinary tract infections, including a direct comparison with a competitive
infection control latex catheter.
In January 1999, the Company submitted its Premarket Approval Application
(PMA) for the FEMSOFT Insert. The PMA is based on clinical results from
extensive in-patient testing of 150 women at eight clinical centers in the
United States. The clinical study shows results for 50 women who have already
completed the yearlong test protocol as well as for the remainder of the test
group who continue in various stages of testing. Women using the FEMSOFT Insert
reported a high level of satisfaction as measured by ease of its use, comfort,
and desire to continue using the device. Side effects or complications were
minimal, with an overall risk of urinary tract infection of about one infection
in three years. Scientifically measured Quality of Life (QOL) was significantly
improved for the study participants compared to their baseline evaluation. The
Company believes its FEMSOFT PMA submission conforms to the protocols agreed to
by the Company and the FDA in a pre-submission meeting held in November, 1998,
but the Company cannot predict the timing or results of the FDA review process.
Assuming FDA approval, the Company will begin marketing the FEMSOFT Insert under
the Rochester Medical brand.
9
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not Applicable. The Company has made no sales of unregistered securities
during the period covered by this Report.
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
10
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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: February 11, 1999 By: /S/ ANTHONY J. CONWAY
------------------------------------
Anthony J. Conway
CHIEF EXECUTIVE OFFICER
Date: February 11, 1999 By: /S/ BRIAN J. WIERZBINSKI
------------------------------------
Brian J. Wierzbinski
CHIEF FINANCIAL OFFICER
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 123,688
<SECURITIES> 15,547,747
<RECEIVABLES> 2,161,591
<ALLOWANCES> 53,000
<INVENTORY> 2,298,210
<CURRENT-ASSETS> 20,311,642
<PP&E> 14,227,273
<DEPRECIATION> 2,755,725
<TOTAL-ASSETS> 32,029,158
<CURRENT-LIABILITIES> 1,305,159
<BONDS> 0
0
0
<COMMON> 41,228,452
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,029,158
<SALES> 2,345,995
<TOTAL-REVENUES> 2,345,995
<CGS> 1,755,960
<TOTAL-COSTS> 3,251,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (905,882)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (729,979)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
