SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1996
Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
MINNESOTA 41-1613227
State of Incorporation IRS Employer Identification No.
1500 SECOND AVENUE N. W.
STEWARTVILLE, MINNESOTA 55976
Address of Principal Executive Offices
Telephone Number: 507/533-4203
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
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 has been
subject to such filing requirements for the past 90 days. Yes |X| No
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.|_|
The issuer's revenues for its most recent fiscal year were $5,540,408
The aggregate market value of voting stock held by non-affiliates based upon the
closing NASDAQ sale price on December 13, 1996 was $57,288,000.
Number of shares outstanding on December 13, 1996 was 4,128,500 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its January 16, 1997 Annual Meeting
of Shareholders are incorporated by reference in Part III.
Sequentially Numbered Pages: 55 Index to Exhibits on Page: 45
PART I
ITEM 1. BUSINESS
OVERVIEW
Rochester Medical Corporation (the "Company") designs, develops, manufactures
and markets innovative, disposable, latex-free continence care products and
other urological devices of highest quality and value that are intended to
provide improved medical outcomes at reduced overall treatment costs. The
Company uses its proprietary manufacturing processes and materials and design
expertise to develop and manufacture innovative devices cost effectively. The
Company holds several patents covering certain of its products and manufacturing
technologies and processes.
The Company currently manufactures and markets a line of leading edge male
external catheters for the management of male urinary incontinence and a line of
leading edge silicone Foley catheters for urinary catheterization to manage
elimination of urinary waste.
The Company has developed significant devices intended to provide new treatment
modalities and improved medical outcomes at lower overall treatment costs. These
include the Company's Antibacterial Foley catheter to reduce the incidence of
catheter induced urinary tract bacterial infections, and the Company's
FEMSOFT(TM) female continence insert for managing incontinence in active women.
Both of these products are currently undergoing processes necessary to obtain
FDA marketing approval.
The Company has also developed and obtained FDA marketing approval for several
advanced feature catheters which the Company believes will provide enhanced
medical outcomes at treatment costs which are competitive or favorable to
current overall treatment costs. These advanced feature catheters include the
FEMSOFT continuous drain catheter for management of certain female incontinence
conditions; a COMFORT SLEEVE(R) Foley Catheter, a proprietary improvement to
standard Foley catheters; and an intermittent PERSONAL CATHETER(TM) for periodic
urinary self-catheterization. The Company intends to conduct clinical preference
testing of these products before they are introduced into the market.
The Company manufactures catheters and other urological devices from silicone
and other synthetic polymers which offer medical advantages compared with
latex-based products. Latex-based products typically irritate and damage urinary
tissues, may cause allergic reactions, and have recently begun to become the
subject of medical malpractice and products liability lawsuits. The Company's
proprietary manufacturing technologies and processes simplify and automate
traditional catheter manufacturing techniques to reduce the Company's
manufacturing costs. The Company's proprietary liquid encapsulation technology
permits the Company to manufacture high volumes of innovative devices having
soft, liquid filled, conformable shapes that are preferable to rigid devices for
insertion into the urethra. The Company's proprietary technology also allows the
Company to incorporate a sustained release antibacterial agent into the devices.
The Company markets its products domestically and internationally under its own
ROCHESTER MEDICAL(R) brand and through private label agreements with large
manufacturers and marketers of medical devices, including its strategic alliance
with ConvaTec, a Bristol-Myers Squibb Company ("ConvaTec").
The Company was incorporated in Minnesota in April, 1988. Through fiscal 1992,
the Company was a development stage company, engaged primarily in the
development of its silicone Foley and male external catheters and of its
proprietary manufacturing technologies. In fiscal 1992, the Company began
commercial sales of silicone male external catheters under a private label
arrangement with Mentor Corporation ("Mentor"). In fiscal 1993, the Company
introduced its silicone Foley catheter and began marketing activities under its
own ROCHESTER MEDICAL brand. From fiscal 1993 through fiscal 1995, the Company
expanded its Foley and male external catheter product offerings, entered into
further private label arrangements for distribution of its products, increased
its marketing activities for its ROCHESTER MEDICAL brand and continued research
and development activities for its significant and advanced feature devices. In
August 1995, the Company entered into a development and marketing agreement with
ConvaTec, under which ConvaTec has worldwide rights, subject to the Company's
existing agreements, to market the Company's existing and future products under
the ConvaTec brand. At the same time, the Company retains worldwide rights to
market its products under the ROCHESTER MEDICAL brand. The Company and ConvaTec
also may agree to work cooperatively to develop additional incontinence and
urological products. As part of this relationship, ConvaTec invested $3 million
in the Company in the form of a convertible loan. ConvaTec has an extensive
sales organization in the United States and approximately 70 other countries.
During fiscal 1996, the Company continued sales growth across its product lines
and expanded its male external and Foley catheter product offerings. The Company
also continued to develop and prepare for the introduction of its significant
and advanced feature products. During the year, the Company completed a major
clinical study of its Antibacterial Foley catheter, and began preparations for
submitting a 510-k notification to seek FDA marketing approval for that device.
The Company also announced development of its new FEMSOFT(TM) female continence
insert, obtained FDA approval to conduct clinical studies of that device, and
began enrolling institutions to perform the studies. The Company also began
construction of a 52,000 square foot manufacturing and office facility
principally to house its FEMSOFT manufacturing operations, and began a 12,000
square foot expansion of its current manufacturing facility to provide
additional male external and Foley catheter manufacturing capacity.
URINARY INCONTINENCE
In the urinary system, the kidneys filter waste products from the circulatory
system, creating urine to remove the waste. Urine drains from the kidneys into
the bladder, which serves as a reservoir until emptied through urination. As the
bladder fills, the bladder is relaxed while the urinary sphincter contracts to
prevent urination. During urination, the urinary sphincter relaxes as the
bladder contracts to evacuate urine through the bladder neck and urethra.
Under various circumstances, such as a malfunction in the urinary system,
individuals may become unable to properly manage the release of their urine. In
addition, under other circumstances, such as during or following surgery, it may
be desirable for medical professionals to manage the functioning of an
individual's urinary system. The occurrence of these situations has led to the
introduction of products and treatments designed to capture or control the
release of urine. These products include incontinence and urological devices,
which generally have application in three major categories: incontinence,
surgery and other medical procedures, and other urological conditions.
A malfunction of any part of the urinary system can cause urinary incontinence,
a condition involving the involuntary loss of urine. The Company believes that
urinary incontinence is more prevalent among women as compared to men primarily
because women suffer significant pelvic trauma during pregnancy and childbirth,
women do not have a prostate to aid in closing the urethra, and women have far
shorter urethras (and hence less muscular pressure to close the urethra). There
are three primary forms of urinary incontinence:
* STRESS INCONTINENCE is the involuntary loss of urine caused by an
increase in abdominal pressure during common activities, such as
laughing, sneezing, coughing, lifting or even standing up. The most
common cause of stress incontinence is a significant displacement of
the urethra and bladder neck during exertion. In women, stress
incontinence is primarily caused by pregnancy and childbirth. Stress
incontinence represents approximately 50% of all cases of
incontinence.
* URGE INCONTINENCE is the involuntary loss of urine due to an
unwanted bladder contraction which is associated with a strong,
uncontrollable desire to urinate. Urge incontinence is often
associated with neurological damage from strokes, Alzheimer's
Disease, multiple sclerosis and other conditions.
* OVERFLOW INCONTINENCE is the involuntary loss of urine when the
amount of urine produced exceeds the bladder's capacity. Overflow
incontinence is caused by a loss of bladder muscle tone due to
disease or trauma, including diabetes, spinal cord injury, prostate
cancer or pelvic surgery.
The consequences of urinary incontinence, including depression, discomfort and
embarrassment about appearance and odor, are significant and often result in a
dramatic change in the quality of life. Urinary incontinence sufferers may have
symptoms of more than one form of urinary incontinence and often may use a
variety of treatments to manage their condition. Treatment options for
incontinence include adult diapers and other absorbent products, male external
catheters, Foley catheters, pharmaceuticals, surgery, implantable devices,
injectable materials and electrical stimulation and biofeedback.
SURGERY AND OTHER MEDICAL PROCEDURES. During surgery, post-operative recovery
and certain other medical procedures, it is often necessary for medical
professionals to monitor the flow of urine and manage urinary functions.
Typically, Foley catheters that continuously drain the bladder are placed in
these patients for limited time periods. HHS has reported estimates that as many
as one out of four hospital patients in acute care settings undergoes this type
of short-term urinary catheterization.
OTHER UROLOGICAL CONDITIONS. A number of other urological conditions may require
the management of the elimination of urine from the body. Individuals suffering
from urinary retention are unable to empty their bladders and require an
alternative method of completely excreting urine. Other urological procedures,
such as resection of the prostate, require the irrigation of the bladder
post-operatively. Additionally, urine specimens may need to be obtained in
circumstances where normally voided specimens are not obtainable or desirable.
These urological conditions may be treated using Foley catheters or intermittent
catheters that are periodically inserted to drain the bladder and then removed.
MARKETS AND MARKET TRENDS
The management of urinary incontinence and other urological conditions as well
as the management of urinary functions in connection with surgery,
post-operative recovery and certain other medical procedures result in
significant healthcare costs. A 1994 report by the United States Department of
Health and Human Services ("HHS") estimates that approximately 10 million people
in the United States suffer from urinary incontinence and estimates the direct
costs of caring for persons with urinary incontinence in the United States
exceed $10 billion annually. A more recent (1996) report by Medical Data
International, Inc., places the number of persons suffering from urinary
incontinence in the United States at 13 million to 15 million, and estimates the
costs of care at more than $15 billion annually, Both reports estimate that
women comprise approximately 80% of persons suffering from urinary incontinence
in the United States. In addition to the costs associated with urinary
incontinence, many surgery, post-operative recovery and other medical procedures
require medical intervention in the form of short term urinary catheterization
to manage urinary functions, also resulting in substantial healthcare costs. HHS
has reported estimates that as many as one out of four hospital patients in
acute care settings undergoes such short-term urinary catheterization. Moreover,
HHS estimates that 40% of all hospital acquired infections, which entail
substantial additional treatment costs and increased risks of mortality, are a
direct result of such short-term urinary catheterization. HHS has also reported
that more than 100,000 patients in American nursing homes have long-term
catheters in place.
An aging United States population is resulting in an increase in urinary
incontinence, surgeries and other urological conditions. According to US Census
estimates, the segment of the US population 50 years of age and older is
projected to grow 26% between 1990 and 2000 from approximately 65 million to 80
million individuals. Although aging does not cause urinary incontinence, the
condition is more prevalent among the elderly because they have a greater
incidence of disorders that cause urinary incontinence. Medical researchers have
estimated that 15% to 30% of persons over age 60, and a substantial percentage
of nursing home residents, require treatment for urinary incontinence.
Similarly, aging is associated with an increased incidence of conditions
requiring surgery and causing other urological conditions that are managed with
urinary catheterization.
The healthcare market in the United States is currently undergoing broad changes
brought on by the rapid introduction and application of managed care. The
changes are characterized by the pervasive consolidation and integration of
medical providers, payors and practitioners into integrated delivery networks,
consolidated buying groups and large hospital chains which generally operate on
the basis of significantly discounted fees and costs against large volumes of
services and products. These managed care groups seek to deliver comprehensive,
cost-effective health care through a system that influences the cost and
utilization of services and monitors delivery performance. Typically, managed
care organizations select products primarily on the basis of cost where
competitive products are functionally equivalent. Furthermore, to control costs
associated with the management of purchases and inventories, managed care
organizations are consolidating and restructuring their purchasing patterns
typically to purchase under competitively bid supply contracts from a small
number of suppliers with broad product offerings in order reduce administrative
costs, further consolidate procurement volumes and leverage purchasing power to
obtain favorable inventory management services.
As in the overall healthcare market, the market for incontinence and urological
products has been affected by increasing pressure to control healthcare costs
and by the growing influence of managed care organizations. In a managed care
environment, most purchases of commodity type medical products, for which
functionally equivalent products are widely available, are made principally on
the basis of lowest cost. Moreover, these commodity type products are frequently
furnished through broad product offerings suitable for large, group purchases.
Innovative medical products, however, which provide improved patient outcomes at
reduced overall treatment costs and for which functionally equivalent products
are not available, may still be purchased by managed care institutions outside
the constraints of competitively bid supply contracts.
In an effort to constrain costs while yet providing improved patient outcomes,
medical device manufacturers are focusing on improving product materials and
features. These manufacturers are attempting to control production costs by
developing cost effective production techniques. In addition, efforts by third
party payors to control healthcare costs are increasing the use of home
healthcare which requires devices that may be more easily used by patients. In
response to this trend, medical device manufacturers are focusing on devices
that may be self-administered by the patient. In response to the trend toward
competitively bid group purchase contracts, manufacturers and distributors of
disposable medical products are seeking to furnish suitable products through
arrangements that include a broad range of related products.
Quality of life concerns relating to urinary incontinence, such as depression,
discomfort and embarrassment about appearance and odor, have created a demand
for innovative medical products and procedures to replace the widespread use of
adult diapers as the principal means of managing urinary incontinence in an
aging population.
Concerns about patient outcomes, together with more recent occurrences of
latex-related products liability and medical malpractice lawsuits, have caused
hospitals and other healthcare providers to investigate cost-competitive
alternatives to latex-based incontinence and urological devices. Historically,
latex has been the most commonly used material for incontinence and urological
devices. Latex, however, contains natural proteins and allergens that may often
irritate and damage the surrounding tissue and can cause allergic reactions.
Latex catheters can be more harmful and uncomfortable to use than products made
from synthetic materials because latex is cytotoxic (damaging to tissue) and
because crystals of urine salt form more easily on the surface of latex
catheters. This can make withdrawal of latex catheters cause painful tissue
trauma, and can also result in the development of permanent strictures (scar
tissue) inside the urethra. Latex allergies are now recognized by healthcare
providers and, increasingly, by trial lawyers and the general public as a
significant, and sometimes life-threatening problem for some patients. A number
of latex allergy support groups and one law firm now maintain their own internet
web pages offering information about latex allergies.
Other concerns regarding patient outcomes and treatment costs, including
catheter induced urinary tract infection ("CUTI"), and the prevalence of CUTI
bacterial strains that have grown resistant to systemic antibiotics, have led to
a growing demand for innovative incontinence and urological devices that address
these concerns while providing overall savings in treatment costs.
BUSINESS STRATEGY
The Company's objective is to become a leading developer and worldwide marketer
of innovative continence care products of highest quality and value. The Company
intends to achieve this objective by continuing to utilize its proprietary
technology, manufacturing and materials expertise to develop and manufacture a
broad range of disposable latex-free incontinence and urological catheters and
other urological devices that are cost competitive and that provide improved
medical outcomes and enhanced treatment of urological conditions. The Company
intends to market these devices appropriately to the various industry segments,
including managed care organizations, which consume disposable urological
devices of the kind that are or may be offered by the Company.
PRODUCTS
The Company produces and is developing a broad range of disposable latex-free
incontinence and other urological devices. The Company's current products and
certain of its products in development are listed in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
PRODUCT APPLICATIONS STATUS
CURRENT PRODUCTS
Male External Catheters: Management of male incontinence Marketed
NATURAL Catheter products
POP-ON Catheter
WIDE BAND Catheter
ULTRAFLEX Catheter
Foley Catheter Surgery and post-operative recovery Marketed
Standard Incontinence management products
Pediatric Management of other urological
3-way conditions
PERSONAL Catheter Periodic self-catheterization 510(k) clearance
for retention management received / preference
testing pending
FEMSOFT Continuous Drain Catheter Female incontinence management 510(k)clearance
Replacement for standard Foley received / preference
catheter testing to be scheduled
COMFORT SLEEVE Foley Catheter Surgery and post-operative recovery 510(k) clearance
Incontinence management received / preference
Management of other urological conditions testing to be scheduled
PRODUCTS IN DEVELOPMENT
Antibacterial Foley Catheter Surgery and post-operative recovery Clinical trials
Incontinence management complete / pending
Management of other urological 510(k) notification
conditions
Reduce the incidence of CUTI
FEMSOFT Female Continence Insert Female incontinence management IDE approved /
In clinical trials
FEMSOFT valved catheter Female incontinence management In development
Management of other urological
conditions
</TABLE>
ULTRAFLEX(R), NATURAL CATHETER(TM), POP-ON(TM), WIDE BAND(TM), PERSONAL
CATHETER(TM), FEMSOFT(TM), COMFORT SLEEVE(R), and ROCHESTER MEDICAL(R) are
trademarks of the Company.
CURRENT PRODUCTS
The Company currently manufactures and markets a broad line of male external
catheters for the management of male urinary incontinence, including its
ULTRAFLEX, NATURAL, POP-ON and WIDE BAND male external catheters.
The Company currently manufactures and markets a broad offering of leading edge
silicone Foley catheters in all standard adult and pediatric sizes for urinary
catheterization to manage elimination of urinary waste.
The Company has developed its Antibacterial Foley catheter to reduce the
incidence of catheter induced urinary tract bacterial infections. This device
incorporates an antibacterial agent into the silicone matrix forming the
catheter, and releases the antibacterial agent into the urethra on a sustained
basis. Recently completed clinical trials of the Antibacterial Foley catheter
show in a large, random, prospective and blinded study that it significantly
reduced the incidence of bacterial infections, without adverse reactions, in
newly catheterized hospital patients who were catheterized from one to seven
days, a period typical of approximately 90% of all hospital catheterizations.
The Company is currently preparing a 510-k submission to the Food and Drug
Administration ("FDA") to obtain clearance to market the Antibacterial Foley
Catheter.
The Company has developed its FEMSOFT female continence insert for managing
incontinence in active women. This device builds on the Company's proprietary
liquid encapsulation technology and supports, rather than obstructs, normal
urethral functions. The device 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 Company has received FDA approval of a clinical study protocol
to conduct clinical trials of the FEMSOFT female continence insert, and the
Company has enrolled medical institutions to conduct the clinical trials which
are scheduled to begin in early 1997. Upon receipt of data derived from these
trials, the Company intends to file a Premarket Approval (PMA) application with
the FDA for this device.
The Company has also developed several advanced feature catheters which the
Company believes will provide enhanced medical outcomes at treatment costs that
are competitive or favorable to current overall treatment costs. These include a
line of FEMSOFT continuous drain and valved catheters for management of certain
female incontinence conditions; a COMFORT SLEEVE(TM) Foley Catheter, a
proprietary improvement to standard Foley catheters; and its intermittent
PERSONAL CATHETER(TM) for periodic urinary self-catheterization. The Company has
obtained marketing clearance from the FDA to market the PERSONAL CATHETER, the
FEMSOFT continuous drain catheter, the COMFORT SLEEVE Foley catheter. The
Company intends to conduct clinical preference testing of these products before
they are introduced to the market.
MALE EXTERNAL CATHETERS. Male external catheters are disposable devices for the
daily management of male incontinence. The male external catheter consists of a
condom-like sheath that tapers into a cone and funnel. The sheath is unrolled
upon the male member and adheres by means of an adhesive, either contained as a
part of the wall of the sheath ("self-adhering") or provided by a separate strip
of adhesive tape ("tape-on"). The male external catheter drains through an
attached tube into a leg bag which is periodically emptied. Typically, the male
external catheter is removed and discarded daily. Though the devices may be
applied by healthcare professionals, male external catheters are designed for
self-administration. These catheters are used primarily in home care settings
and long-term care facilities.
The Company manufactures and markets four types of latex-free male external
catheters: the NATURAL, POP-ON, WIDE BAND and ULTRAFLEX catheters. The NATURAL
catheter is a self-adhering male external catheter made from silicone, a
non-toxic, biocompatible and hypoallergenic material that eliminates the risks
of latex allergy reactions, including skin irritation. The NATURAL catheter is
odor free and has greater gas permeability than other catheters on the market.
Gas permeability allows the skin to "breathe" which is beneficial during
extended contact with a catheter and also permits greater patient comfort. The
Company's self-adhering NATURAL catheter allows ease of application and provides
a strong bond to the skin for greater patient confidence and increased duration
of wear. Unlike latex male external catheters, the NATURAL catheter is
transparent, permitting visual skin inspection without removal of the catheter
and aiding proper placement of the catheter. The Company's kink-proof funnel
design ensures uninterrupted urine flow. The NATURAL catheter is produced in
five sizes for a better patient fit. The Company markets its NATURAL catheter
under its own brand, and markets versions of the NATURAL catheter under private
label arrangements. See "Private Label Distribution Agreements."
The Company's POP-ON self-adhering male external catheter is made from silicone
and has all of the same advantages as the Company's NATURAL catheter. In
addition, however, the POP-ON catheter has a sheath that is shorter than that of
a standard male external catheter and has adhesive applied to the full length of
the sheath. Typically, self-adhering male external catheters position the
adhesive midway down the catheter sheath. The Company's proprietary
manufacturing technology does not constrain the location of the adhesive on the
sheath, enabling the manufacture of a catheter with sufficient adhesive strength
in a shorter sheath. The POP-ON male external catheter is designed to
accommodate patients who have retracted male members or other physical
impediments to using standard length male external catheters. In addition, the
Company believes the POP-ON catheter may be used by patients as a way to vary
the position of the catheter's adhesive on the user, thereby reducing adhesive
induced irritation. The POP-ON catheter is available in five sizes and is
marketed under the Company's brand.
The Company's WIDE BAND self-adhering male external catheter is made from
silicone and has all of the same advantages as the Company's NATURAL catheter.
In addition, however, the WIDE BAND catheter, which is of standard length, has
an adhesive band which extends over the full length of the sheath, providing
approximately 70% more adhesive coverage than other male external catheters
currently on the market. This innovation is again permitted by the Company's
manufacturing technology which does not constrain the location of the adhesive
on the sheath. The WIDE BAND catheter is designed to address the single most
prevalent complaint regarding male external catheters, being the adhesive
failure and resulting leakage that often occur due to normal activities which
incrementally loosen the adhesive and ultimately permit leakage. The WIDE BAND
catheter, also available in five sizes, was commercially introduced by the
Company in October 1996, and is currently marketed under the Company's brand.
The Company's ULTRAFLEX male external catheter is made from its proprietary
ULTRAFLEX elastomeric material, a non-toxic and biocompatible material that
eliminates the risk of latex allergy reactions. The ULTRAFLEX catheter provides
some of the same beneficial features as the Company's NATURAL catheter. The
Company offers its ULTRAFLEX catheter in five sizes at prices competitive to
latex male external catheters. The ULTRAFLEX catheter is marketed under the
Company's own brand and under private label distribution.
See "Private Label Distribution Agreements."
FOLEY CATHETER. The Foley catheter is an in-dwelling catheter that provides
continuous drainage of the bladder and is primarily used in connection with
surgery and other medical procedures and for incontinence and retention
management. A Foley catheter consists of a tube (the "catheter tube") with
interior conduits ("lumens") and an inflatable balloon portion near one end. The
balloon end of the Foley catheter is inserted through the urethra into the
bladder. A sterile saline solution is injected into the balloon lumen to inflate
the balloon inside the bladder and prevent the catheter from being withdrawn.
Urine drains through eyelets in the tip of the catheter into the drain lumen,
which is connected by tubing to an external collection device, such as a leg
bag. The Foley catheter is removed from the body by opening the valve on the
balloon lumen and aspirating the saline with a syringe, which deflates the
balloon and allows the catheter to be withdrawn through the urethra. A Foley
catheter is inserted primarily by healthcare professionals and is not designed
for self-use.
The Company's silicone Foley catheter avoids the irritation and discomfort which
can result from the cytotoxic effects (tissue damage) caused by latex-based
Foley catheters. This catheter also avoids allergic reactions in latex sensitive
patients. In addition, the Company's silicone Foley catheter can reduce
irritation to urinary tissue because silicone minimizes encrustation of urine
salt crystals and bacterial secretions on the catheter and does not absorb body
fluids or swell as may be the case with latex catheters. The Company's automated
manufacturing process integrates the balloon into the structure of the Foley
catheter, resulting in a smoother, more uniform exterior that may help reduce
irritation to urinary tissue. The balloon portion of competing silicone Foley
catheters is formed by hand in a separate procedure involving gluing and
burnishing. The Company's Foley catheter features solid, rounded tips for ease
of insertion and smooth, proportional eyes for ease of insertion and maximum
drainage. The Company's Foley catheter is made of transparent silicone which
permits observation of urine flow by healthcare professionals. The Company's
Foley catheter is packaged in single catheter strips and sold under the
Rochester Medical brand name and under private label arrangements. In addition,
the Company sells its Foley catheter in bulk under private label arrangements
for packaging in kits with tubing, collection bags and other materials used with
the Foley catheter. The Company's Foley catheter is offered in a standard two
lumen version and in a three lumen version for irrigation of the urinary tract.
The Company offers Foley catheters in all standard adult and pediatric sizes as
well as in specialized pediatric sizes. The Company's silicone Foley catheter is
priced competitively compared to a substantial majority of latex catheters sold
in the United States. See "Private Label Distribution Agreements."
PERSONAL CATHETER. Intermittent catheters are disposable catheters that have a
single lumen to drain the bladder and are used primarily in periodic
self-catheterization for retention management. The Company's proprietary
technology permits the PERSONAL CATHETER to be manufactured from two different
silicones, with a stiff core catheter tube and a softer outer cover. The Company
believes this construction will provide sufficient stiffness for ease of
insertion, while the softer cover will reduce tissue irritation during
insertion. Most competitive intermittent catheters are made from thermoplastics,
which become stiffer when cool and more flexible when warm and which also tend
to deform if bent for any length of time, as when carried in a purse or pocket.
The PERSONAL CATHETER is not sensitive to normal temperature variations and does
not deform if bent for storage. Although the PERSONAL CATHETER is intended to be
sold for a single use, the Company believes it is easier to clean and better
able than comparable thermoplastic catheters to withstand a common cleaning
technique, clean intermittent catheterization, that enables the reuse of
intermittent catheters. The Company intends to produce the PERSONAL CATHETER in
three lengths and multiple diameters.
The Company has not commenced marketing its PERSONAL CATHETER, although the
Company has received marketing clearance from the FDA. Before commercial
introduction of this catheter, the Company intends to participate with ConvaTec
in joint clinical preference tests with several leading physicians and medical
institutions to determine appropriate usage protocols and patient preferences.
The clinical preference testing for the PERSONAL CATHETER is expected to occur
during the coming months. There can be no assurance, however, that these tests
will be completed during calendar 1997, or that the results of these tests will
not require modification to the design or manufacture of the PERSONAL CATHETER
and delay the introduction of the product into the market.
FEMSOFT CONTINUOUS DRAIN CATHETER. The FEMSOFT continuous drain catheter is a
disposable self-administered catheter utilizing the Company's proprietary liquid
encapsulation technology that is designed for the daily management of female
incontinence. The FEMSOFT continuous drain catheter is a self-retaining catheter
that consists of a silicone lumen of variable length surrounded by a soft,
liquid-filled silicone sleeve. To position the FEMSOFT continuous drain
catheter, the user inserts a catheter of prescribed length through the urethra
into the bladder. The user compresses a self-contained liquid-filled reservoir
at the exterior end of the catheter to move the liquid through the catheter
sleeve to inflate an expandable portion of the catheter positioned inside the
bladder. A soft shroud covers the reservoir to prevent the liquid from flowing
back to the reservoir and to maintain inflation of the catheter. The FEMSOFT
continuous drain catheter is then attached to any standard collection device. To
deflate and remove the FEMSOFT continuous drain catheter, the shroud is easily
pulled off the sleeve to allow the liquid to flow back into the reservoir.
The FEMSOFT continuous drain catheter has been designed to be easy to use and
convenient for the patient. The FEMSOFT continuous drain catheter may be
inserted once daily, and the Company believes a majority of urinary incontinence
sufferers can safely position the catheter and inflate it using the
liquid-filled reservoir. The soft and conformable, liquid-filled silicone sleeve
of the FEMSOFT continuous drain catheter is designed to reduce tissue irritation
and minimize by-pass leakage. The FEMSOFT continuous drain catheter is designed
to manage all forms of urinary incontinence by continuously emptying the
bladder. Beyond its applications for urinary incontinence, the FEMSOFT
continuous drain catheter may function as a more comfortable, less expensive
replacement for some uses of standard Foley catheters by women.
The Company has received 510-k marketing clearance from the FDA for the FEMSOFT
continuous drain catheter, but the Company has not commenced marketing the
catheter. Before commercial introduction of this catheter, the Company intends
to conduct clinical preference tests with several leading physicians and medical
institutions to determine appropriate usage protocols and patient preferences.
While the Company currently can produce limited quantities of the FEMSOFT
continuous drain catheter for testing and other purposes, the Company must
complete the construction of its new manufacturing facility before beginning
production of commercial quantities of the catheter. The Company has not yet
scheduled clinical testing of the catheter. See "Facilities" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMFORT SLEEVE FOLEY CATHETER. The Company has developed and patented its
COMFORT SLEEVE Foley catheter, a Foley catheter with a flexible, liquid-filled
sheath encasing the urethral section of the catheter tube. The COMFORT SLEEVE
Foley catheter utilizes the Company's proprietary liquid encapsulation
technology to provide improved comfort compared with standard Foley catheters
because its liquid-filled urethral section is softer and more pliable than
ordinary Foley catheters. The design of the COMFORT SLEEVE Foley catheter also
permits the catheter tube to move and rotate independently of the flexible
encasing sheath, lessening abrasion and irritation to the urethra during use. In
addition, since neither the urethra nor its openings are round, but are rather
flat or ribbon shaped, leakage often occurs from the bladder along the exterior
of the catheter tube in a standard Foley catheter. The COMFORT SLEEVE Foley
catheter is designed to reduce leakage because the flexible sheath will conform
to the shape of the urethra. The Company manufactures the COMFORT SLEEVE Foley
catheter from silicone, which provides the same medical advantages as the
Company's standard silicone Foley catheters.
Although the Company has received 510-k marketing clearance from the FDA to
market the COMFORT SLEEVE Foley catheter, the Company has not commenced
marketing that device. Prior to introducing the COMFORT SLEEVE Foley catheter,
the Company intends to conduct clinical preference testing with several leading
physicians and medical institutions in order to determine appropriate usage
protocols and patient preferences. The Company has not yet scheduled clinical
preference testing for this device. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PRODUCTS IN DEVELOPMENT
ANTIBACTERIAL FOLEY CATHETER. The Company's Antibacterial Foley catheter
recently completed a year-long clinical study at the University of Wisconsin.
The clinical study, involving over 400 patients in a prospective, randomized
investigator-blinded clinical trial, found the Company's Antibacterial Foley
catheter to have a significantly lower rate of catheter associated urinary tract
bacterial infection than a standard, non-medicated Foley catheter in newly
catheterized patients who are catheterized from one to seven days, a period that
is typical of approximately 90% of all hospital catheterizations. The clinical
study was designed and carried out by Dennis G. Maki, MD, Professor of Medicine
and Head of the Section of Infectious Diseases in the Department of Medicine of
the University of Wisconsin Medical School, and Hospital Epidemiologist. The
results of the clinical study followed the published findings from earlier IN
VITRO (laboratory) testing that the Antibacterial Foley catheter is effective
against most bacterial strains that are associated with catheter linked
infections, including many strains that are resistant to systemic antibiotics.
Based upon these findings, the Company is presently preparing a 510-k submission
to the FDA seeking approval to market the Antibacterial Foley catheter. See
"Government Regulation."
Catheter induced urinary tract infection is a common problem among patients
receiving Foley catheterization in both hospital and chronic care settings. The
Center for Disease Control has reported that hospital related CUTI prolongs
hospital stays by an estimated 2.4 to 4.5 days and results in significantly
increased costs and risks of mortality. CUTI is thought to be primarily caused
by bacteria that migrate through the urethra into the bladder along the outside
of a catheter. The catheter-urethral interface provides a favorable environment
for bacterial growth because the bacteria are insulated by the catheter wall
from the normal flushing effect of urination. Antibiotics that are administered
to prevent or control CUTI may control the bacterial infection in the bladder,
but are generally unable to affect bacterial colonies in the urethra since these
are insulated by the catheter wall from the antibiotics contained in the
evacuating urine.
The Antibacterial Foley catheter is designed to reduce the incidence or severity
of CUTI and to lessen the need for antibiotics routinely administered to
catheterized patients to treat CUTI. The Antibacterial Foley catheter
incorporates nitrofurazone, an antibacterial agent, into the silicone matrix
which forms the body of the catheter. Nitrofurazone is a synthetic antibacterial
nitrofuran derivative, which is most commonly used topically as an adjunctive
therapy to control infection in severe burn cases, and also for prevention of
infection of skin graft and donor sites. A related nitrofuran compound is a
commonly prescribed oral medicine for CUTI.
FEMSOFT FEMALE CONTINENCE INSERT. The Company has developed the FEMSOFT female
continence insert as a new treatment modality for the daily management of female
stress incontinence in active women. The FEMSOFT female continence insert
utilizes the Company's proprietary liquid encapsulation technology to form a
soft, conformable insert that is designed to assist the weakened muscles of the
urethra and bladder neck to maintain urethral closure. The device is simply
inserted, worn and removed for voiding. It requires no inflation, deflation,
syringes, or valving mechanisms. Although intended principally for the
management of female stress incontinence, the FEMSOFT female continence insert
may also be suitable for the treatment of intrinsic sphincter deficiency and for
the management of some conditions of urge incontinence.
The female urethra is a narrow, ribbon shaped, gradually twisting and slightly
curved membranous canal, about an inch and a half in length and quarter of an
inch in diameter (undilated) extending from the neck of the bladder to the
exterior opening (meatus urinarius). The urethra consists of a lining of mucous
membrane, a layer of spongy tissue and blood vessels, and a surrounding circular
stratum of muscle fibers. The bladder neck is a bundle of muscles surrounding
the juncture of the urethra and the bladder. The bladder is a muscular sac. The
relaxed bladder serves as a reservoir, while the muscles of the bladder neck and
urethra remain slightly contracted to retain the urethra in a closed state.
During voiding, the bladder contracts to exert pressure on the contained fluid,
while at the same time the muscles of the bladder neck and urethra relax to
permit the hydraulic pressure exerted by the contracting bladder to expel the
fluid. The embarrassing leakage referred to as "stress incontinence" occurs when
incidental pressures exerted by the bladder during such acts as coughing,
sneezing, standing up, etc., overcome the muscular pressures exerted by the
weakened bladder neck and urethra, thereby permitting urine to be involuntarily
expelled.
Recognizing the natural fluid management purposes of the urinary system, the
FEMSOFT female continence insert uses fluid to assist the urinary system to
function properly by providing a fluid filled membrane to complement the natural
muscular actions of the bladder neck and urethra. The FEMSOFT female continence
insert consists of a fluid filled silicone membrane, approximately two inches in
length and of generally cylindrical shape. The fluid filled membrane has a bulb
shaped portion near the insertion end, and an oval shaped flange at the end
remaining outside the body. The device has a tiny central tube extending from
the flange end to the insertion tip to house a removable plastic stylet used
during insertion. During insertion, the tip of the FEMSOFT female continence
insert is inserted into the external aperture of the urethra (meatus urinarius)
and is gently inserted through the urethra. The coordinate pressures from the
urethra and from the movement of the stylet elongate the silicone membrane and
slightly compress the bulb causing the fluid to expand the membrane toward the
flange end. When the partially compressed bulb portion emerges through the
bladder neck, the pressures exerted by the urethra and by movement of the stylet
cause the fluid to flow back into the bulb portion to seat the device in the
bladder neck and urethra, while the soft, oval shaped flange is enclosed by the
outer tissues (labia). The user then simply removes and discards the insertion
stylet, allowing the urethra to resume its natural curve and shape.
When seated, the soft, fluid filled membrane conforms to the natural contours of
the urethra and bladder neck, while gently reciprocating the tiny movements of
the urethra caused by normal physical activities. The fluid filled membrane
provides a responsive structure against which the urethra and bladder neck may
contract to the extent of their contractile capacity in order to maintain
closure against the force of incidental hydraulic pressures exerted by the
bladder during such acts as coughing, sneezing, standing up, etc. In addition,
such incidental hydraulic pressures also tend to slightly compress the bulb,
causing the remainder of the device to press back against the bladder neck and
urethra, further assisting them to maintain closure. At the cessation of the
incidental pressures, the normal pressure of the urethra and bladder neck cause
the device to return to its at-rest position. Steady pressure from the
contracting bladder, as during voluntary voiding, will compress the bulb, move
the fluid toward the flange end, and expel the device. The device may also be
removed by grasping the flange and slowly withdrawing the device in a manner
reciprocal to its insertion.
The Company believes the FEMSOFT female continence insert provides significant
advantages over occlusive and catheter devices that the Company is aware of,
including ease of use, comfort, and conformance to the body's natural functions.
The FEMSOFT female continence insert may be simply inserted and removed without
inflation, deflation, syringes or valving mechanisms associated with other
devices. The FEMSOFT female continence insert is composed of a soft, fluid
filled silicone membrane that conforms to the irregular shape of the urethra and
that reciprocates the movements of the urethra during normal activities. The
Company believes that rigid, plastic devices such as beads or inflatable inserts
tend to distort the natural shape of the urethra and to chafe and abrade the
delicate mucousal and vesicular tissues of the urethra during periods of
exercise such as walking, running, rising, sitting, etc. The FEMSOFT female
continence insert is also designed to provide a variable, supportive pressure to
the muscles of the urethra and bladder neck. The Company also believes that
devices such as catheters or inflatable plastic inserts which inflate within the
urethra and bladder neck tend to cause those muscles to eventually lose natural
muscle tone. The FEMSOFT female continence insert is also designed to be
expelled naturally under steady pressure from the bladder, thereby providing a
further ease of use and minimizing the possibility of acute retention and urine
reflux into the kidneys in persons who may be unable to otherwise remove the
device due to injury or loss of consciousness.
The FEMSOFT female continence insert requires FDA marketing clearance before it
may be marketed commercially. The Company has received FDA approval for a
multi-site clinical study of the device and has enrolled medical institutions to
perform the study. The study is scheduled to begin in early 1997 and to be
conducted during that year. The Company intends to submit the data to be derived
from the clinical study for the FDA's consideration in the form of a Premarket
Approval Application ("PMA"). Concurrently with clinical testing in the United
States, the Company may also conduct clinical tests of the FEMSOFT female
continence insert in certain foreign countries. See "Research and Development"
and "Government Regulation."
FEMSOFT VALVED CATHETER. The Company is also developing a valved device based on
the FEMSOFT continuous drain catheter. This device also utilizes the Company's
proprietary liquid encapsulation technology and has the same soft, liquid-filled
sleeve and self-contained fluid reservoir as the FEMSOFT continuous drain
catheter and is administered in the same manner. As a result, the FEMSOFT valved
catheter is designed to provide the same ease of use and reduction in tissue
irritation as the FEMSOFT continuous drain catheter. The valved version is
intended for use as a daily disposable device for controlled periodic drainage
throughout the day without removal, and to provide users with increased
convenience because the device does not require exterior collection bags,
allowing a more natural lifestyle. The valved version may also be used
throughout the day as an alternative in some circumstances to intermittent
catheterization that is performed several times a day, with consequent
reductions in the number of devices necessary to perform such daily functions
and, potentially in the reduction of risks of infection resulting from the
repeated introduction of a foreign body into the urethra and bladder. The
FEMSOFT valved catheter requires further research and development and will
require significant clinical testing before marketing clearance may be applied
for and received from the FDA. Upon the completion of further product
development and testing, the Company intends to make an appropriate filing(s)
with the FDA related to the FEMSOFT valved catheter. See "Government Regulation"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MARKETING AND SALES
The Company markets its current products, including male external and Foley
catheters primarily under private label arrangements to medical products
companies, including the Company's strategic relationship with ConvaTec. The
Company also markets these products under the Company's own ROCHESTER MEDICAL
brand domestically through its own sales force and through distributors in
overseas markets. The Company is presently increasing its marketing and sales
force to address the US market for both the Company's Current and in
anticipation of future ROCHESTER MEDICAL brand products. The Company supplements
its direct selling efforts in the US though arrangements with select independent
medical sales representatives.
The Company also seeks to increase awareness among health care professionals of
the Company's products and to establish the Company as a leading provider of
continence care and related products. The Company has established a medical
advisory board, in part to assist in the design of, and selection of sites for,
clinical testing and to identify leading healthcare professionals to conduct
these trials. The Company will continue to sponsor clinical trials conducted by
physicians and nurses and to encourage their presentation of the clinical data
at medical symposia and publication of clinical articles in medical journals.
The Company also attends leading national trade shows, advertises in selected
medical and trade journals, and develops educational materials regarding
urological conditions and the Company's products.
CONVATEC RELATIONSHIP. In August 1995, the Company entered into a distribution
and co-development agreement with ConvaTec (the "Distribution Agreement").
ConvaTec, a division of a subsidiary of Bristol-Myers Squibb Company, is a
leading global manufacturer and marketer of ostomy and modern wound care
products and a comprehensive provider of skin care, infection control,
contamination control and incontinence care products. Under the Distribution
Agreement, ConvaTec has worldwide rights, subject to the Company's existing
agreements, to market the Company's current products, products in development
and certain future products under the ConvaTec brand. The Company retains
worldwide rights to market its products under the ROCHESTER MEDICAL brand, but
its ability to distribute its products through third parties other than under
the ROCHESTER MEDICAL brand is significantly limited by the Distribution
Agreement. The Company and ConvaTec also may agree to work cooperatively to
develop additional urology and incontinence products. As part of this
relationship, ConvaTec invested $3 million in the Company in the form of a
convertible senior secured loan. ConvaTec has an extensive sales organization in
the United States and approximately 70 other countries. See "Private Label
Distribution Agreements."
PRIVATE LABEL ARRANGEMENTS. The Company primarily markets its current products,
including male external and Foley catheters, under private label arrangements to
established medical products companies that provide the Company with commercial
distribution of its products, a large sales force and broad access to the
hospital, long-term care, home care and physician markets. The Company supplies
male external and Foley catheters to ConvaTec under the Distribution Agreement
and under a separate agreement predating the Distribution Agreement, which
products ConvaTec resells under its own brands. The Company is the exclusive
supplier of Hollister's requirements of self-adhering non-latex male external
catheters which Hollister resells under its own brand. The Company currently
supplies Allegiance Euromedical (formerly Baxter Euromedical) with silicone
Foley catheters. The Company supplies Mentor with its requirements of silicone
male external catheters, which Mentor resells under its own brand. See "Private
Label Distribution Agreements."
MANUFACTURING
The Company uses proprietary, automated manufacturing technologies and processes
to cost effectively manufacture incontinence and urological devices. The Company
designs and builds custom equipment to implement its manufacturing technologies
and processes. The Company believes that its proprietary manufacturing
processes, materials expertise, custom designed equipment and technical know-how
allow it to manufacture innovative products, such as its FEMSOFT products with
self-contained liquid-filled reservoirs, which cannot be manufactured using
conventional technologies, while at the same time simplifying and further
automating traditional catheter manufacturing techniques to reduce the Company's
manufacturing costs. These technologies also allow the Company to incorporate a
sustained release antibacterial agent into its products. In order to manufacture
high quality products at competitive costs, the Company concurrently designs and
develops new products and the processes to manufacture them.
The Company's manufacturing facility is located in Stewartville, Minnesota. The
Company produces its Foley catheters on one production line and its male
external catheters on a second line. The Company is presently expanding its
current manufacturing facility in anticipation of increased sales of its male
external and Foley catheter products. The Company is also constructing a new
manufacturing and office facility primarily to house its liquid encapsulation
manufacturing operations for its FEMSOFT products and COMFORT SLEEVE Foley
catheter.
The Company maintains a comprehensive quality assurance and quality control
program, which includes documentation of all material specifications, operating
procedures, equipment maintenance and quality control test methods. To control
the quality of its finished product, the Company uses ongoing statistical
process control systems during the manufacturing process and comprehensive
performance testing of finished goods. Each Foley catheter's balloon function is
tested, and each male external catheter is visually inspected. The Company has
implemented a program to obtain ISO 9001 certification and quality system
certification for the CE mark. The Company's manufacturing facility has been
designed to accommodate the specialized requirements for the manufacture of
medical devices, including the FDA's regulations concerning good manufacturing
practices ("GMP"). In 1995, the FDA conducted a routine inspection of the
Company's manufacturing facility, in which the Company's facility, documentation
and quality control systems were determined to be satisfactory and no violations
of GMP were raised with the Company. In 1996, the Minnesota Pollution Control
Agency awarded the Company public recognition for its environmental compliance
program and procedures.
See "Government Regulation."
SOURCES OF SUPPLY
The Company obtains certain raw materials and components for a number of its
products from single suppliers. The Company is presently dependent upon Dow
Corning for raw materials used in the manufacture of its silicone male external
Foley and intermittent catheters. The loss of this supplier could have a
material adverse effect upon the Company's sales of those products. Although the
Company considers its relationship with Dow Corning to be satisfactory, Dow
Corning is currently in bankruptcy proceedings and there can be no assurance
that Dow Corning will continue to manufacture silicone or to supply silicone to
medical device manufacturers, such as the Company. The Company believes that
most, if not all, of the silicone it currently purchases from Dow Corning could
be replaced by silicone from other suppliers, and the Company has located and
evaluated other potential suppliers. In the event that the Company had to
replace Dow Corning, however, the Company would be required to repeat
biocompatibility testing of its products using the silicone from the new
supplier, which may result in disruption of the Company's production of
catheters, and might be required to obtain additional regulatory clearances.
The Company is dependent on Shell Chemical Company ("Shell") for raw materials
for the ULTRAFLEX polymer used in manufacturing certain of the Company's male
external catheters. During 1994, a disruption in Shell's production of these
materials caused the Company to curtail production of ULTRAFLEX catheters during
the fourth quarter of fiscal 1994. Although the Company adjusted to the
disruption by reformulating this product, the future loss of raw materials from
this supplier could have a material adverse effect on the Company. In the event
that the Company had to replace Shell, however, the Company would be required to
repeat biocompatibility testing of its products using the materials from the new
supplier, which may result in disruption of the Company's production of
ULTRAFLEX male external catheters, and might be required to obtain additional
regulatory clearances.
The Company believes there are adequate alternative sources of supply available
for the Company's other raw material requirements. In order to minimize the
possibilities of disruption in the production of its products, the Company has
begun to conduct routine sourcing and testing of raw materials, including
silicone and other polymers, in order to provide alternate sources of raw
materials in the event of supply shortages from its current suppliers.
RESEARCH AND DEVELOPMENT
The Company believes that its ability to add new products to its array of
incontinence and urological devices is important to the Company's future
success. Accordingly, the Company is engaged in ongoing research and development
to introduce new products which provide additional features and functionality.
The Company also believes that its manufacturing and materials expertise,
particularly its proprietary liquid encapsulation technology used to produce its
FEMSOFT devices, are applicable to a variety of medical applications. The
Company plans to consider, commensurate with its resources, future research and
development activities to investigate these additional opportunities. In
addition, the Company and ConvaTec have agreed they may cooperate to develop new
products. See "Private Label Distribution Agreements."
The Company's principal research and development efforts are currently focused
on bringing its Antibacterial Foley catheter through the FDA 510-k process based
on the results of recently completed clinical studies, as well as on conducting
a major clinical trial of its FEMSOFT female continence insert during 1997. The
Company is also focused on designing and purchasing standard and customized
componentry for its automated liquid encapsulation line that will be installed
in its new manufacturing facility for manufacture of its FEMSOFT devices, and on
specifying and acquiring equipment for the expansion of its current male
external and Foley catheter manufacturing operations.
The Company also intends to complete clinical studies for its other products
that have obtained FDA clearance and for its other products in development. Due
to staffing and budgetary constraints, however, the Company has deferred some
research and development activities and clinical studies for these other
products. To partially address these circumstances, the Company and ConvaTec
have agreed to conduct a joint clinical preference test of the Company's
PERSONAL CATHETER which is scheduled to occur during 1997. The Company intends
in the future, commensurate with its resources, to conduct clinical studies of
its FEMSOFT valved catheter, to conduct clinical preference testing of its
FEMSOFT continuous drain catheter and COMFORT SLEEVE Foley catheter, to collect
data for applicable FDA submissions, to conduct other research and development
activities, and to accumulate scientific data regarding products already being
marketed.
COMPETITION
The incontinence and urological product markets are highly competitive. The
Company believes that the primary competitive factors include price, product
quality and features (including the beneficial effects of the product on medical
outcomes over the course of treatment), technical capability, breadth of product
line and distribution capabilities. The Company's ability to compete in these
markets will also be affected by its product development and innovation
capabilities, its ability to obtain regulatory clearances, its ability to
protect the proprietary technology of its products and manufacturing processes,
its marketing capabilities, its ability to attract and retain skilled employees,
and, for products sold in managed care environments, its ability to maintain
current distribution relationships and establish new distribution relationships.
The Company believes that its principal competitive advantages are its
innovative products, the effectiveness of its products in improving patient
outcomes, its proprietary, cost-efficient manufacturing technologies and
processes, the price competitiveness of its current products, its established
distribution relationships and its product development personnel.
In the incontinence market, the Company's products compete with a number of
alternative products and treatments for the management of urinary incontinence.
Adult diapers and other forms of absorbent pads that capture urine upon leakage
are the primary products used to control mild forms of urinary incontinence.
Non-invasive treatments for incontinence include bladder and habit training,
pelvic muscle exercises, biofeedback and electrical stimulation to strengthen
pelvic muscles. Surgery may also be performed to repair damaged muscles or to
implant an artificial urinary sphincter. In a recently introduced technique,
implants, primarily collagen, are injected into the tissue surrounding the
urethra to add bulk to the tissue and improve bladder functioning by increasing
urethral resistance and strengthening the urinary sphincter. Pessaries, or
vaginal inserts, are devices for treating stress incontinence that are used to
support the bladder neck and urethra by applying pressure through the
neighboring vaginal cavity. Drug therapies are also used to treat incontinence
by acting on the nerve receptors associated with the bladder neurotransmitter
system. Drug treatment is appropriate for treating urge incontinence (which is
related to the functioning of the nervous system) but is not appropriate for
managing stress incontinence (which is not related to the functioning of the
nervous system). The Company's ability to compete with these alternative methods
for treating urinary incontinence depends on the relative market acceptance of
alternative therapies for incontinence management and the technological advances
in these alternative treatments. Any development of a broad-based and effective
cure for a significant form of incontinence could have a material adverse effect
on sales of incontinence management devices such as the Company's products.
The Company competes directly for sales of incontinence and urological devices
under the Company's own brand with larger, multi-product medical device
manufacturers and distributors such as ConvaTec, C. R. Bard, Inc., Allegiance
Healthcare Corporation ("Allegiance", formerly Baxter Healthcare Corporation),
Kendall Healthcare Products Company, Sherwood Medical Company, Hollister and
Mentor. In order to compete in the developing managed care environment in the
US, the Company also supplies various male external and Foley catheters to
certain of these competitors (ConvaTec, Allegiance, Mentor and Hollister) who
market such devices under their own brands as a part of their broader product
lines. UroMed has recently introduced a female incontinence device for the daily
management of female incontinence that will likely compete with certain of the
Company's FEMSOFT products. Many of the competitive alternative products to the
Company's catheters are distributed by larger competitors including Johnson &
Johnson Personal Products Company, Kimberley-Clark Corporation and Proctor &
Gamble Company (for adult diapers and absorbent pads), and C. R. Bard, Inc. (for
injectable materials). Many of the Company's competitors, potential competitors
and providers of alternative therapies have significantly greater financial,
manufacturing, marketing, distribution and technical resources and experience
than the Company. 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 continue to conduct research, seek patent protection and
establish arrangements for commercializing products in this market. Such
products may compete directly with any products which may be offered by the
Company. Finally, competitors in the medical device industry have in the past
and may in the future employ litigation to gain a competitive advantage.
PATENTS AND PROPRIETARY RIGHTS
The Company's success may depend in part on its ability to obtain patent
protection for its products and manufacturing processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company may seek patents on certain features of its products and
technology based on the Company's 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. The Company also relies upon trade secrets, know-how and continuing
technological innovations to develop and maintain its competitive position.
The Company owns 11 United States patents, with one additional United States
patent noticed to issue, and 9 foreign patents. These patents protect certain of
the Company's catheters and devices and certain of the Company's production
processes. Some of the Company's products and production processes may be
covered by claims in more than one of these patents. In addition, the Company
owns a number of pending United States patent applications and a number of
pending foreign patent applications. The Company may file additional patent
applications for certain of the Company's current and proposed products and
processes in the future.
There can be no assurance that the Company's patents will be of sufficient scope
or strength to provide meaningful protection of the Company's 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 the Company's patents will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company. Should attempts be made to
challenge, invalidate or circumvent the Company's patents in the United States
Patent and Trademark Office and/or courts of competent jurisdiction, including
administrative boards or tribunals, the Company may have to participate in legal
or quasi-legal proceedings therein, to maintain, defend or enforce its rights in
these patents. Any legal proceedings to maintain, defend or enforce the
Company's patent rights can be lengthy and costly, with no guarantee of success.
There also can be no assurance that the Company will file additional patent
applications or that additional patents will issue from the Company's pending
patent applications.
A claim by third parties that the Company's current products or products under
development allegedly infringe their patent rights could have a material adverse
effect on the Company. 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 substantial expense to
the Company and significant diversion of the efforts of the Company's technical
and management personnel. An adverse determination in any such proceeding could
subject the Company 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 the Company to cease using such technology.
There can be no assurance that if such licenses were obtainable, they would be
obtainable at costs reasonable to the Company. If forced to cease using such
technology, there can be no assurance that the Company would be able to develop
or obtain alternate technology. Additionally, if third party patents containing
claims affecting the Company's technology are issued and such claims are
determined to be valid, there can be no assurance that the Company would be able
to obtain licenses to such patents at costs reasonable to the Company, 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 the Company from manufacturing, using or
selling certain of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
There also can be no assurance that any third party does not presently have, has
not applied for, or might not in the future apply for, additional patents in the
United States which, if ultimately granted, might be infringed by any of the
FEMSOFT devices as currently configured or any other product of the Company and
provide the basis for an infringement action against the Company.
The Company also relies on proprietary manufacturing processes and techniques,
materials expertise and trade secrets applicable to the manufacture of its
products. The Company believes that these proprietary rights may provide it with
a competitive advantage as important, if not more important, to the Company as
patent protection. The Company seeks to maintain the confidentiality of this
proprietary information by requiring employees who work with proprietary
information to sign confidentiality agreements and by limiting the access of
outside parties to such proprietary information. There can be no assurance,
however, that these measures will provide the Company with adequate protection
of its proprietary information or with adequate remedies in the event of
unauthorized use or disclosure. In addition, there can be no assurance that the
Company's competitors will not independently develop or otherwise gain access to
processes, techniques or trade secrets that are similar or superior to the
Company's. 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 the Company's 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 the
Company 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 GMP and labeling.
A manufacturer may seek FDA clearance to distribute a new medical device by
filing a 510(k) pre-market 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 FDA clearance to market a new medical device through the more rigorous
Premarket Approval Application ("PMA") process, which requires the FDA to
determine that the device is safe and effective for the purposes intended.
All of the Company's currently marketed products have received FDA marketing
clearance pursuant to 510(k) pre-market notifications filed by the Company. The
Company is presently preparing to resubmit a 510(k) pre-market notification for
the Company's Antibacterial Foley catheter based upon the clinical data derived
from the recently completed University of Wisconsin clinical study and in
accordance with the FDA's published guidance for 510-k notifications relating to
bactericidal Foley catheters. In response to an earlier submission, the FDA had
requested additional information which the Company has now obtained from the
clinical study. Upon the Company's resubmission, however, the FDA may
nonetheless require further information, such as additional test data, before
making a determination regarding substantial equivalence. The FDA may also
determine that the proposed device is not substantially equivalent and require
the Company to file a PMA application for this device. There can be no assurance
that the Company will receive FDA clearance to market the Antibacterial Foley
catheter or that market introduction of the Antibacterial Foley catheter will
not be delayed.
The Company has yet to apply for and receive FDA marketing clearance for its
certain of its FEMSOFT devices. The Company has received approval of an IDE
application to conduct multi-site clinical studies of its FEMSOFT female
continence insert, which are scheduled to commence in early 1997. Upon receipt
of the clinical data to be derived from that study, the Company plans to submit
the FEMSOFT female continence insert for FDA marketing approval through the PMA
application process The Company intends to pursue a similar IDE and PMA process
for the FEMSOFT valved catheter, personnel and budgetary constraints permitting.
Other products that the Company may consider for development, if and when
developed, will also likely require submission to the FDA under a 510-k, IDE
and/or PMA process.
The Company is also required to register with the FDA as a medical device
manufacturer. As such, the Company's manufacturing facilities are inspected on a
routine basis for compliance with GMP. These regulations require that the
Company manufacture its products and maintain its documents in a prescribed
manner with respect to manufacturing, testing and quality control activities.
The Company underwent its latest GMP inspection by the FDA in July 1995, and no
violations were reported to the Company. As a medical device manufacturer, the
Company is further required to comply with FDA requirements regarding the
reporting of allegations of death or serious injury associated with the use of
its medical devices, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to recur. Other
FDA requirements govern product labeling and prohibit a manufacturer from
marketing an approved device for unapproved applications. If the FDA believes
that a manufacturer is not in compliance with the law, it can institute
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.
The Company may become subject to future legislation and regulations concerning
the manufacture and marketing of medical devices. This could increase the cost
and time necessary to begin marketing new products and could affect the Company
in other respects not presently foreseeable. The Company cannot predict the
effect of possible future legislation and regulations.
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 approval. These
differences may affect the efficiency and timeliness of international market
introduction of the Company's products. For countries in the European Union
("EU"), in January 1995, CE Mark certification procedures became available for
medical devices, the successful completion of which would allow certified
devices to be placed on the market in all EU countries. After June 1998, medical
devices may not be sold in EU countries unless they display the CE Mark. In
order to obtain and maintain the CE mark, the Company must comply with the EU
Medical Device Directive ("EU Directive") and pass an initial and annual
facilities audit inspections by an EU inspection agency. The EU Directive
requires compliance with ISO 9001 and other specified standards. The Company
underwent a facilities pre-audit inspection by an EU inspector in September
1996, and is scheduled for the full facilities audit inspection in March 1997.
Upon passing that inspection and EU approval of its application, the Company
will be eligible to identify products manufactured at that location (male
external and Foley catheters) with the CE mark. In order to maintain
certification, if granted, the Company will be required to pass annual
facilities audit inspections conducted by EU inspectors. The certification is
site specific, and the Company will undergo a similar certification process for
its new FEMSOFT manufacturing facility. There can be no assurance, however, that
the Company will be able to obtain or maintain regulatory approvals or
clearances, including CE mark certification, for its products in foreign
countries.
In addition, international sales of medical devices manufactured in the United
States that have not been approved by the FDA for marketing in the United States
are subject to FDA export requirements. These require that the Company 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
country's medical device laws, and, under some circumstances, may require the
Company to apply to the FDA for permission to export a device to that country.
Under certain of the Company's international distribution agreements, the other
parties have agreed to bear the burdens and costs of obtaining applicable export
and international regulatory approvals. The Company has agreed to cooperate
where necessary in obtaining such approval.
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. The Company believes its currently marketed products are generally
eligible for coverage under these third party reimbursement programs, and that
its COMFORT SLEEVE Foley catheter, PERSONAL catheter and Antibacterial Foley
catheter, will also be eligible for third party reimbursement. The Company is
currently unable to assess eligibility of the FEMSOFT devices for reimbursement.
As a result, the competitive position of certain of the Company's products may
be partially dependent upon the extent of reimbursement for its products.
The federal government and certain state governments are currently considering a
number of proposals to reform the Medicare and Medicaid health care
reimbursement system. The Company is unable to evaluate what legislation may be
drafted and whether or when any such legislation will be enacted and
implemented. Certain of the proposals, if adopted, could have an adverse effect
on the Company's business, financial condition and results of operations.
PRIVATE LABEL DISTRIBUTION AGREEMENTS
CONVATEC. On August 11, 1995, the Company entered into the Distribution
Agreement, which grants ConvaTec, subject to obligations and limitations imposed
by the Company's other distribution agreements, worldwide rights to market the
Company's current products, products in development and certain future products
under ConvaTec's brand. At the same time, the Company retains worldwide rights
to market its products under the ROCHESTER MEDICAL brand. As part of this
relationship, ConvaTec invested $3 million in the Company in the form of a
convertible senior secured loan (the "Loan Agreement") to the Company.
The Distribution Agreement provides that ConvaTec will purchase all of its
requirements of certain of the Company's products from the Company, although the
Distribution Agreement does not include any minimum purchase requirements or
require that ConvaTec market any or all of the Company's products. The Company
will provide all manufacturing and packaging of the Company's products for
ConvaTec. The Distribution Agreement provides, however, in the event that the
Company is unable to supply ConvaTec's requirements for products for any reason
other than a shortage of raw material and the Company is unable to find a
suitable replacement in a commercially reasonable time, ConvaTec will be deemed
to have a license to the Company's technologies for purposes of manufacturing
products for ConvaTec. The Company presently supplies ConvaTec under the
Distribution Agreement with silicone male external catheters and Foley
catheters. As the Company's other products become available for commercial sale
in the future, the Company and ConvaTec must agree on packaging, quality control
specifications and pricing for each of those other products. In addition, the
Company and ConvaTec may agree to work cooperatively to develop additional
incontinence and urology products.
To maintain its marketing rights to additional products the Company may offer
commercially, ConvaTec is obligated to make good faith efforts to market such
additional products within 18 months following the Company's first commercial
sale of any such product. The Company is obligated to offer ConvaTec a right of
first refusal to market all additional products, and prior to entering into a
distribution agreement for any such product with a third party, the Company must
offer ConvaTec a final opportunity to market such product on terms no less
favorable to ConvaTec than those offered to the third party.
The Distribution Agreement has an initial term expiring August 31, 2000.
ConvaTec may, at its option, renew the Distribution Agreement for an additional
five-year term, and may thereafter renew the Distribution Agreement for up to
five additional one-year renewal periods. Either party may terminate the
Distribution Agreement only upon the other party's material breach of the
Distribution Agreement, bankruptcy or insolvency, or inability to perform under
the Distribution Agreement for a period of more than six months. The
Distribution Agreement may not be terminated in the event that a third party
acquires the Company. The Company has agreed to indemnify ConvaTec against
certain liabilities, including any patent infringement claims by third parties.
Any breach by the Company of the Distribution Agreement also constitutes a
breach of the Loan Agreement.
Under a separate agreement, the Company supplies ConvaTec with tape-on ULTRAFLEX
male external catheters. This agreement has an initial term expiring September
1999 and is subject to automatic annual renewals cancelable on six months notice
by either party. The agreement is terminable for a material breach. It may also
be terminated any time after September 1996, upon six months written notice
given by ConvaTec without cause, or given by the Company if ConvaTec fails to
make certain agreed minimum purchases.
HOLLISTER. The Company is the exclusive supplier of Hollister's requirements of
self-adhering non-latex male external catheters which Hollister resells under
its own brand. The Company's agreement with Hollister extends through April 30,
1998, subject to extension through good faith negotiations. As a part of its
agreement with Hollister, the Company has agreed to restrict its ability to sell
self-adhering ULTRAFLEX male external catheters on a private label basis to
other manufacturers and distributors for distribution outside of the United
States and Canada.
ALLEGIANCE EUROMEDICAL. Under a two year agreement which expired on November 30,
1996, the Company was the exclusive supplier to Allegiance Healthcare Sdn Bhd
("Allegiance Euromedical", a subsidiary of Allegiance Healthcare Corporation,
formerly Baxter Healthcare Corporation) of Allegiance's requirements of silicone
Foley catheters, and Allegiance was the exclusive distributor of the Company's
standard silicone Foley catheters in Japan, Canada, Western Europe and the
Balkans (subject to grandfather rights for the Company's pre-existing foreign
distributors), and Allegiance was also a non-exclusive distributor of silicone
Foley catheters for all other territories. The Company and Allegiance are
presently negotiating the terms for an extension of their agreement. Allegiance
continues to purchase Foley catheters from the Company during these
negotiations.
MENTOR. Pursuant to a Male External Catheter License, Sales and Distribution
Agreement, as modified in September 1995 (the "MEC Agreement"), Mentor has the
continuing, non-exclusive right worldwide to sell the Company's silicone male
external catheters, and the Company is obligated to fulfill Mentor's
requirements for such products providing Mentor is not itself manufacturing
them. The MEC Agreement also grants Mentor a paid-up, royalty free patent
license and technology license which allow Mentor to manufacture silicone male
external catheters or use the technology for any other purpose.
EMPLOYEES
As of November 16, 1996, the Company employed 118 full-time employees, of whom
95 were in manufacturing, and the remainder in marketing and sales, research and
development and administration. The Company is not a party to any collective
bargaining agreement and believes its employee relations are good.
ITEM 2. PROPERTIES
The Company's present male external and Foley catheter manufacturing facility
consists of a 20,000 square foot manufacturing and office building located on a
3.5 acre site owned by the Company in the Stewartville Industrial Park,
Stewartville, Minnesota. The facility presently provides approximately 18,000
square feet of manufacturing and research and laboratory space and 2,000 square
feet of office space. The Company is presently undertaking to add to this
building an additional 10,000 square feet for expanded male external and Foley
catheter production capacity.
The Company is presently constructing a 52,000 square foot manufacturing and
office facility on an approximately 20 acre site owned by the Company and
located in the Stewartville Industrial Park adjacent to the Company's present
manufacturing facilities. This new facility will house the Company's automated
liquid encapsulation production capacity for its FEMSOFT and COMFORT SLEEVE
devices, and will also house the Company's administrative offices. The Company
expects to occupy this new facility in the spring of 1997, and to commence
production activities at these facilities in mid 1997.
The Company currently leases and has agreed to purchase, subject to favorable
environmental reports, a 15,000 square foot office and warehouse facility
located on an 8.6 acre site in the Stewartville Industrial Park adjacent to the
Company's current facilities. The Company presently utilizes these facilities
for offices for its marketing and sales personnel, and for warehouse and storage
space.
The Company intends to prepare a master facilities analysis and plan to assess
its facilities requirements for future expansion. The Company believes its
current facilities together with the new facilities currently being added or
expanded are sufficient for the Company's purposes for the foreseeable future.
A part of the Company's properties is subject to certain financing
arrangements. See Footnote 8 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently quoted on the NASDAQ National Market
under the symbol ROCM. Prior to November 15, 1995, the Company's Common Stock
was quoted on the NASDAQ Small Cap Market. The following table sets forth, for
the fiscal years ended September 30, 1995 and 1996, respectively, the range of
high and low bid quotations for the Common Stock as reported by the NASDAQ
National Market since November 15, 1995, and by the NASDAQ SmallCap Market prior
to that date. Such information prior to November 15, 1995, represents prices
between dealers, without mark-up, mark-down or commission, and does not
necessarily represent actual transactions.
HIGH LOW
FISCAL 1995:
First Quarter $13.75 $ 8.50
Second
Quarter 19.25 13.25
Third Quarter 19.25 18.75
Fourth
Quarter 21.00 14.25
FISCAL 1996
First Quarter $18.00 $12.50
Second
Quarter 15.25 13.75
Third Quarter 22.50 14.75
Fourth
Quarter 18.50 15.75
HOLDERS
As of December 13, 1996, there were 4,128,500 shares of Common Stock
outstanding, held of record by 112 shareholders. Such record holders do not
reflect shareholders who beneficially own Common Stock in nominee or street
name.
The Company has paid no cash dividends on its Common Stock, and it does not
intend to pay cash dividends on its Common Stock in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company designs, develops, manufactures and markets disposable latex-free
incontinence and urological catheters and other urological devices. Through
fiscal 1992, the Company was a development stage company, engaged primarily in
the development of its products and manufacturing processes and systems. In
fiscal 1992, the Company began commercial sales under a private label
arrangement. In fiscal 1993, the Company began marketing products under its own
ROCHESTER MEDICAL brand.
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:
FISCAL YEAR ENDED SEPTEMBER 30,
1994 1995 1996
Net Sales:
Private label 81.4% 79.2% 81.9%
ROCHESTER MEDICAL brand 18.6% 20.8% 18.1%
Total net sales 100.0% 100.0% 100.0%
Cost of sales 78.4% 78.2% 68.4%
Gross margin 21.6% 21.8% 31.6%
Operating Expenses:
Marketing and selling 26.2% 27.4% 24.4%
Research and development 9.6 % 11.4% 21.3%
General and administrative 31.6% 24.4% 20.1%
Total operating expenses 67.4% 63.2% 65.8%
Loss from operations (45.8)% (41.5)% (34.2)%
Interest income (expense), net 1.8 0.0% 9.6%
Net loss (44.0)% (41.5)% (24.6)%
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995
NET SALES. Net sales increased 77% to $5.5 million in fiscal 1996 from $3.1
million in fiscal 1995, due to increased sales in both private label and
ROCHESTER MEDICAL brand product lines. Private label sales increased 83% due to
stronger order volumes from Mentor and Allegiance Euromedical, as well as growth
from initial sales under the ConvaTec strategic alliance. A portion of 1996
sales volumes to Mentor represented inventory replenishment which is not
expected to recur in fiscal 1997. Sales to ConvaTec, Hollister, Allegiance and
Mentor accounted, respectively for 12%, 12%, 19% and 29% of fiscal 1996 net
sales compared, respectively to 5%, 25%, 19% and 14% of fiscal 1995 net sales.
GROSS MARGIN. The Company's gross margin as a percentage of net sales improved
to 31.6% in fiscal 1996, compared to 21.8% for fiscal 1995, due primarily to
efficiencies gained through increasing production volumes and labor
productivity. Additionally, certain nonrecurring costs were incurred in fiscal
1995 for product reformulation and litigation settlement.
MARKETING AND SELLING. Marketing and selling expenses increased 57% to
$1,351,000 in fiscal 1996 from $858,000 in fiscal 1995. The increased expense
levels reflect overall increases in marketing and selling activities for
ROCHESTER MEDICAL brand products, including the addition of a Vice President of
International Sales, recruiting and relocation costs of National Sales Manager
and Director of Marketing positions, commissions on incremental ROCHESTER
MEDICAL brand sales and other marketing and sales activities to establish and
expand the ROCHESTER MEDICAL brand. These activities include customer service
and support, direct marketing, attendance at trade shows, product samples and
other promotional programs.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 230% to
$1,182,000 in fiscal 1996 from $358,000 in fiscal 1995, due to expanded clinical
testing activities, the addition of a Director of Clinical and Regulatory
Affairs position, and funding requirements for the FEMSOFT product group. During
fiscal 1996, the Company completed a major clinical study for the Antibacterial
Foley catheter and initiated a major clinical study for the newly developed
FEMSOFT female continence insert.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 45% to
$1,112,000 in fiscal 1996 from $766,000 in fiscal 1995, due to the addition of a
Chief Financial Officer, project costs for implementation of new business
systems, and the CE mark/ISO certification process, and additional
administrative personnel and professional fees associated with general business
development.
INTEREST INCOME (EXPENSE) NET. Interest income increased to $818,000 in fiscal
1996 from $56,000 in fiscal 1995, due to the increase in average marketable
securities purchased with the proceeds from the Company's public offering in
November 1995. Interest expense increased to $285,000 in fiscal 1996 from
$68,000 in fiscal 1995, due to interest on the convertible senior secured loan
from Convatec for an entire year.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
NET SALES. Net sales increased 43% to $3.1 million in fiscal 1995 from $2.2
million in fiscal 1994, primarily due to increased private label sales of Foley
catheters and from higher sales of ROCHESTER MEDICAL brand products. Private
label sales increased 39% in fiscal 1995, primarily as a result of increased
sales of Foley catheters to Allegiance, partially offset by decreased sales of
silicone male external catheters to Mentor. Sales of ROCHESTER MEDICAL brand
products increased 60% in fiscal 1995 due to higher sales of ULTRAFLEX male
external catheters and Foley catheters.
GROSS MARGIN. The Company's gross margin as a percentage of net sales was 21.8%
in fiscal 1995 compared with 21.6% in fiscal 1994. The Company's gross margin in
1995 benefited from manufacturing efficiencies resulting from higher production
volumes, which were offset by the effect of the sale of silicone male external
catheters to Mentor in settlement of certain litigation, by a write off of
$100,000 for potential inventory obsolescence related to silicone male external
catheters and by increased raw material costs and overhead expenses. The Company
also incurred development and increased production expenses during fiscal 1995
related to a reformulation of its ULTRAFLEX polymer necessitated by raw material
shortages due to a fire at a supplier's manufacturing facility.
MARKETING AND SELLING. Marketing and selling expenses increased 49% to $858,000
in fiscal 1995 from $574,000 in fiscal 1994. These increased expenses primarily
reflect the addition of an Executive Vice President, and two additional sales
representatives, engaging independent manufacturer's representatives and
increasing marketing and sales efforts to establish and expand the ROCHESTER
MEDICAL brand, including direct marketing and customer service, attendance at
trade shows and product sample programs.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 70% to
$358,000 in fiscal 1995 from $210,000 in fiscal 1994, due primarily to increased
clinical testing expenses for the Antibacterial Foley catheter and continuing
development of the FEMSOFT devices.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 11% to
$766,000 in fiscal 1995 from $692,000 in fiscal 1994, primarily due to
write-offs in fiscal 1995 of $215,000 of accounts receivable in settlement of
certain litigation, offset in part, by a decrease in legal expenses.
INTEREST INCOME (EXPENSE), NET. Interest income decreased 28% to $56,000 in
fiscal 1995 from $78,000 in fiscal 1994, due to a reduction in average
marketable securities held by the Company. Interest expense increased 75% to
$68,000 in fiscal 1995 from $39,000 in fiscal 1994, due to higher interest rates
on the Company's outstanding mortgage loan and the accrual of interest on the
convertible senior secured loan from ConvaTec.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through public offerings and
private placements of its equity securities, and has raised $24,649,000 in net
proceeds from its inception through September 30, 1996. In August 1995, the
Company received $3,000,000 of net proceeds from a five year convertible loan
agreement with ConvaTec in connection with the Distribution Agreement between
the Company and ConvaTec. Interest on this loan is not payable until maturity,
and accumulated interest is subject to conversion with the loan principle into
the Company's common stock at the price of $19.00 per share. The Company has
incurred an accumulated deficit of approximately $5.4 million through September
30, 1996.
The Company's cash and marketable securities at September 30, 1996 were
$17,408,000 compared to $2,905,000 at September 30, 1995, an increase of
$14,503,000. Total net proceeds of $16,919,000 were generated in connection with
the Company's November 1995 public offering, including $720,000 from exercise of
previously outstanding warrants.
Cash of $893,000 was used to fund operating activities in fiscal 1996 compared
to $935,000 in fiscal 1995. Essentially all of this amount relates to the net
operating loss for the fiscal year, exclusive of non-cash depreciation and
amortization charges. Trade receivable balances reflect the increase in sales
levels, and the inventory build is in preparation for future sales. The officer
note receivable of $226,000 outstanding at September 30, 1995, was repaid in
full during fiscal 1996. Increases in accounts payable and accrued expenses are
related to business growth and also reflect payments due on new plant
construction.
Capital expenditures were $1,726,000 in fiscal 1996 compared to $224,000 in
fiscal 1995, increasing sharply as initial outlays for the new manufacturing and
office facility were made in the latter part of the fiscal year. Patent
expenditures were $82,000 in fiscal 1996 compared to $93,000 in fiscal 1995,
relating primarily to filings on the Company's new FEMSOFT products.
The Company's capital resources on hand at September 30, 1996, together with
expected revenue from product sales, will be sufficient to finance its operating
and investment requirements for the foreseeable future. Capital outlays of up to
$9 million are planned for fiscal 1997, primarily related to development of
production infrastructure, including completion of the Company's new production
facility for its advanced liquid encapsulation products and for expansion of the
Company's existing production facility to support anticipated growth in sales of
current product lines.
Management is also presently evaluating potential additional capital
requirements to introduce and accelerate market development for two of its high
potential new products, the Antibacterial Foley catheter and the FEMSOFT female
continence insert. The Company believes both products may provide important
benefits over current treatment modalities, but will require substantial
educational, clinical and public awareness initiatives to support introduction.
The FEMSOFT female continence insert, unlike most of the Company's other
products which are marketed to clinicians and institutional care organizations,
will be marketed through clinicians with extensive media advertising directed
toward the consumer. The Company may require substantial additional capital to
finance these marketing activities if and as the Antibacterial Foley catheter
and the FEMSOFT female continence insert are brought to market. The Company is
also evaluating additional capital requirements necessary to conduct and manage
clinical testing and clinical preference testing of other of its products,
including the FEMSOFT valved catheter, the FEMSOFT continuous drain catheter,
and the COMFORT SLEEVE Foley catheter, and for the costs of introducing those
products to market.
BUSINESS OUTLOOK
The following discussion, as well as certain information presented elsewhere in
this Form 10-KSB, contains forward looking statements that involve risks and
uncertainties, including acceptance of the Company's products, the timing of
purchases by customers, continuity of private label business relationships,
effectiveness of marketing and sales strategies for the Company's products,
manufacturing capacities for both current products and new products, the timing
of clinical testing and product introductions, FDA review and response times, as
well as other risk factors listed from time to time in the Company's period
reports filed with the Securities Exchange Commission, including the Risk
Factors presented after this discussion.
Consolidation and integration in the domestic health care industry have tended
to favor growth of the Company's private label sales over growth of branded
sales for products manufactured with standard technologies, such as the products
the Company currently markets. This is partially due to inherent advantages
large, established medical supply companies have in the area of market access,
where broad contracts for standard medical supplies are becoming more prevalent.
The Company is presently refining market strategies for its current products and
developing market strategies for its innovative new products which respond to
the conditions and incentive systems in the evolving domestic healthcare market.
As a result of these refinements, the Company anticipates accelerated growth in
domestic branded sales and continuing growth in international branded sales.
The Company also anticipates continuing growth of its private label business,
which depends in part on successful negotiations and renewal of certain private
label contracts, and continuing purchases by private label customers. Mentor
holds a patent license which would permit it to manufacture the silicone male
external catheter which it presently purchases from the Company. Mentor has not
indicated that it intends to commence manufacturing that product itself, and the
Company anticipates that fiscal 1997 sales to Mentor will be comparable to
fiscal 1996 sales, notwithstanding Mentor's significant inventory replenishment
during 1996.
Sales growth has consumed most of the Company's excess manufacturing capacity
for certain of its currently marketed products. With anticipation of continuing
sales growth, estimated in excess of 50% for fiscal 1997, the Company is
undertaking to expand manufacturing capacity for its current products in
addition to the new headquarters and liquid encapsulation production facility
presently under construction. The Company expects to occupy its new headquarters
and have its liquid encapsulation facility operational by mid-1997. The
expansion of the existing production facility is scheduled for completion in
late 1997.
The Company's principal research and development efforts during 1997 will be
devoted to obtaining market introduction of its Antibacterial Foley catheter and
FEMSOFT female continence insert. These efforts will include securing FDA
marketing approval for the Antibacterial Foley catheter based upon the favorable
results of a major clinical study recently completed at the University of
Wisconsin; conducting a major multi-site clinical study of the FEMSOFT female
continence insert pursuant to the Investigational Plan recently approved by the
FDA; preparing to submit a PMA application for the FEMSOFT female continence
insert based upon those clinical results when obtained; and specifying,
obtaining and installing manufacturing equipment and adopting and refining
manufacturing protocols necessary to manufacture the FEMSOFT female continence
insert cost effectively in commercial quantities. In addition, the Company and
ConvaTec are coordinating efforts for a joint clinical preference test of the
Company's PERSONAL CATHETER, which has already received FDA marketing approval.
The Company plans to conduct clinical preference testing of its FEMSOFT
continuous drain catheter and COMFORT SLEEVE Foley Catheter, which have already
received FDA marketing approval, and of its FEMSOFT valved catheter which still
requires FDA marketing approval as permitted by the Company's budgetary and
staffing considerations. The Company also plans to continue limited research and
development activities for new product innovations.
The Company expects to incur operating losses for the foreseeable future. The
Company anticipates for fiscal 1997 that marketing and selling expenses will
continue to increase as the Company expands its marketing and sales staff and
prepares for the commercial introduction of the Antibacterial Foley catheter and
its FEMSOFT female continence insert; that research and development expenses
will continue at approximately current levels as the Company conducts a major
clinical study for its FEMSOFT female continence insert; and that general and
administrative expense will increase as the Company continues to install
administrative infrastructure to support expanded operations and occupies its
new manufacturing and office facilities. Given these anticipated expenditures,
the Company expects a net loss of approximately $3 million for fiscal 1997.
RISK FACTORS
UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS
Many of the Company's products, including the Antibacterial Foley catheter and
FEMSOFT female continence insert, as well as the FEMSOFT continuous drain
catheter, the FEMSOFT valved catheter, the COMFORT SLEEVE Foley catheter and the
PERSONAL CATHETER, have not yet been commercially introduced into the
incontinence and urological markets. There can be no assurance that these
products will gain any significant degree of market acceptance or that users
will accept these products as preferable to alternative products or methods of
treatment. The Company believes that recommendations by physicians will be
essential for the development and successful marketing of these products and
there can be no assurance that any such recommendations will be obtained. In
addition, the Company has not yet determined pricing for these products, and the
Company's pricing policies could adversely impact market acceptance of these
products as compared to competing products and treatments. Any of the foregoing
factors, or other factors, could limit or detract from market acceptance of
these products. Insufficient market acceptance of these products could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Products."
DEPENDENCE ON PRIVATE LABEL ARRANGEMENTS
The Company's success depends to a significant extent on third party private
label arrangements. Private label arrangements with medical products companies
accounted for approximately 81%, 79% and 82% of the Company's net sales for
fiscal 1994, 1995 and 1996, respectively. The Company's agreement with Mentor
grants Mentor a patent license to manufacture the silicone external catheter
which Mentor now purchases from the Company, and Mentor could manufacturer that
product itself. The Company's strategic relationship with ConvaTec grants
ConvaTec, subject to obligations and limitations imposed by the Company's other
distribution agreements, worldwide rights to market the Company's current
products, products in development and certain future products under the ConvaTec
brand. Under this agreement, the Company retains worldwide rights to market its
products under the ROCHESTER MEDICAL brand, but limits its ability to distribute
its products through third parties other than under the ROCHESTER MEDICAL brand.
ConvaTec is not subject to any minimum purchase requirements. Moreover, with
regard to products the Company may introduce in the future, the Company and
ConvaTec must agree on certain terms before commencement of sales of those
products to ConvaTec. There can be no assurance that ConvaTec will continue to
place orders for products with the Company, or that it will continue to market
the Company's products. The Company is presently negotiating with Allegiance to
extend their distribution agreement. Although Allegiance continues to purchase
from the Company during these negotiations, there can be no assurance that the
Company and Allegiance with reach agreement, or that Allegiance will continue to
purchase from the Company. As a result, a significant portion of the Company's
net sales depends on the Company's ability to provide products that meet the
requirements of ConvaTec, Mentor, Allegiance, and the Company's other medical
products distributors and on the sales and marketing efforts of such
distributors. In addition, there can be no assurance that the Company will be
able to operate profitably with respect to products delivered under these
agreements. See "Business -- Marketing and Sales" and " -- Private Label
Distribution Agreements."
DEVELOPMENT OF ROCHESTER MEDICAL BRAND DISTRIBUTION
A key element of the Company's business strategy is to expand sales of its
ROCHESTER MEDICAL brand products, and to develop market recognition for the
brand to support the future market introduction of its Antibacterial Foley
catheter and FEMSOFT female continence insert, as well as other of the Company's
products in development. To date, the Company has primarily marketed its
incontinence and urological devices under private label arrangements and has
conducted relatively limited domestic selling and marketing activities for its
ROCHESTER MEDICAL brand. The Company is presently refining market strategies for
its current products and developing market strategies for its new products which
respond to the conditions and incentive systems in the evolving domestic
healthcare market. The Company has also restructured its marketing efforts to
address these developing conditions and systems, and has begun to recruit and
employ a domestic marketing and sales organization to implement its plans. There
can be no assurance, however, that the Company will be able to successfully
adapt its marketing of ROCHESTER MEDICAL brand products to these developing
changes in the domestic healthcare market, or develop an effective marketing and
sales force, or successfully market its products under the ROCHESTER MEDICAL
brand. The FEMSOFT female continence insert, moreover, will require the Company
to undertake extensive educational efforts directed to clinicians and to conduct
significant media advertising directed to consumers. The Company has no previous
experience with such educational efforts or consumer oriented media advertising,
and there can be no assurance that the Company will be successful in such
activities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Marketing and Sales."
DEPENDENCE ON AND NEED TO EXPAND KEY PERSONNEL
The Company is dependent upon Anthony J. Conway, the Company's Chief Executive
Officer and President, and upon Philip J. Conway and Richard D. Fryar, Vice
Presidents of the Company, who together perform the substantial majority of the
Company's research and development efforts as well as perform various management
functions. The Company is also dependent on the services of Brian J.
Wierzbinski, the Company's Chief Financial Officer, as well as on the services
of certain of the Company's marketing and sales personnel. The loss of services
of any of these individuals could impair the Company's ability to commercialize
its products or to develop new products and could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company has an ongoing need to expand its management and sales and marketing
personnel. The Company is currently conducting a search for a person to serve as
its principal marketing and sales officer, which position is currently unfilled.
Such individuals are in high demand and are often subject to competing offers.
The inability to hire a principal marketing and sales officer or other personnel
as needed may have a material adverse effect on the Company.
HIGHLY COMPETITIVE MARKETS AND PRODUCT OBSOLESCENCE
The incontinence and urological device industry is highly competitive. In order
to compete successfully against other urological products, the Company must
maintain competitive pricing and effectively demonstrate the beneficial effect
of its products on medical outcomes over the course of treatment. Additionally,
for the products the Company currently markets, the Company must maintain
distribution relationships that include the Company's products as a part of
broader product offerings to managed care organizations. Competition in the
Company's markets may result in pricing pressures that may adversely affect unit
prices and sales levels. Many of the Company's competitors have substantially
greater capital resources and name recognition than the Company. These
competitors may also have greater expertise than the Company in research and
development, manufacturing, marketing and sales and regulatory matters and may
have broader product lines that are a competitive advantage in obtaining
contracts with purchasing groups. There is no assurance that the Company will be
able to compete against such competitors and potential competitors in terms of
research and development, manufacturing, marketing and sales capabilities. In
addition, the Company competes in mature markets in which many of the Company's
competitors have well known and established products. Although the Company
believes that its products offer certain medical and technological advantages
over its competitors' currently marketed products, earlier entrants in the
market often obtain and maintain significant market share relative to later
entrants such as the Company. Additionally, the medical conditions that can be
managed using the Company's products also may be managed using a variety of
alternative products or techniques, including adult diapers and absorbent pads,
surgery, behavior therapy and pelvic muscle exercise, implantable devices and
injectable materials, and other medical devices. There is no assurance that the
Company's products will be able to replace such alternative products or
techniques or that advancements in these alternative products or techniques will
not make the Company's products obsolete.
LIMITED REVENUES; HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES
The Company has generated only limited revenues to date and has experienced net
losses since its inception. Net losses for the fiscal years ended September 30,
1994, 1995 and 1996 were $964,000, $1,311,000 and $1,360,000, respectively. The
Company had an accumulated deficit of approximately $5.4 million at September
30, 1996. The Company expects to incur substantial product development, clinical
research and other expenses in connection with the clinical testing, development
and commercialization of its FEMSOFT female continence insert and for its
Antibacterial Foley catheter, as well as for other of its new products and
products in development, including its FEMSOFT continuous drain catheter,
FEMSOFT valved catheter, COMFORT SLEEVE Foley catheter, and the PERSONAL
CATHETER, and for other new products. In addition, the Company anticipates
increased operating expenses as it expands its sales and marketing organization.
As a result, the Company expects to incur substantial operating losses for the
foreseeable future. The Company may also experience unanticipated additional
manufacturing expenses as it increases production levels. There is no assurance
that the Company will ever generate substantial revenues or achieve
profitability.
FLUCTUATIONS IN QUARTERLY FINANCIAL PERFORMANCE
The Company has experienced, and expects to continue to experience fluctuations
in quarterly results, due to the timing of new product releases and the timing
of purchases by private label customers. In addition, variations in the
Company's sales mix between ROCHESTER MEDICAL brand sales and private label
sales, have caused, and may in the future cause, fluctuations in gross margins.
Variations in the mix of sales among Foley catheters, male external catheters
and other products to be commercially introduced by the Company have caused, and
may in the future cause, fluctuations in gross margins.
MANUFACTURING PRODUCTS FOR CLINICAL TESTING PURPOSES
The Company has installed a small, computer controlled, semi-automatic
manufacturing line (the "Pilot-line") that it uses in conjunction with its
automated Foley catheter manufacturing line for development and testing of the
manufacturing processes and techniques applicable to the manufacture of its new
products. The Company also uses the Pilot-line to produce limited quantities of
its products in development for clinical and preference testing purposes. To the
extent that volume and production limits of Pilot-line may prevent the Company
from timely production of sufficient quantities of its products in development
for clinical trial and clinical preference testing purposes, such trials and
tests may be delayed, with consequent delays in market introduction or
regulatory approvals for such products.
NEED FOR ADDITIONAL CAPITAL
The Company may require substantial additional capital to finance major
marketing efforts for its new FEMSOFT female continence insert and for its
Antibacterial Foley catheter if and as those devices are brought to market.
Unlike its other products which are marketed directly and through private label
arrangements to physicians, nurses, home care operators, hospitals and
purchasing groups, the FEMSOFT female continence insert will be marketed through
educational efforts directed at clinicians and through media advertising
directed to consumers. The Antibacterial Foley catheter will also require
educational efforts directed toward physicians, health care professionals,
hospitals and managed care providers. The Company also requires additional
capital to conduct research and development activities necessary to bring other
of its products to market, including the FEMSOFT continuous drain catheter and
the COMFORT SLEEVE Foley catheter, which have received FDA marketing approval
but which require clinical preference testing before market introduction, and
the FEMSOFT valved catheter which requires significant clinical testing before
FDA marketing approval may be sought. The Company will also require additional
capital to finance the introduction of those products to the market. In the
absence of additional financing, it is likely that the Company's new products,
including the FEMSOFT female continence insert and for the Antibacterial Foley
catheter will be introduced to the market at a gradual pace through educational
activities and media advertising commensurate with the Company's available
resources.
GOVERNMENT REGULATION
The Company's 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 for
the Company's future products on a timely basis, if at all, or that FDA review
will not involve delays that would adversely affect the Company's 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. The Company 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 the Company's 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, with possible retroactive effect, will not
adversely affect the Company. The FDA and various state agencies inspect the
Company and its facilities from time to time to determine whether the Company is
in compliance with regulations relating to medical device manufacturing
companies, including regulations concerning manufacturing, testing, quality
control and product labeling practices. A determination that the Company is 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. See "Business -- Government Regulation."
A portion of the Company's revenues are dependent upon sales of its 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. The Company relies upon independent foreign distributors to comply
with certain foreign regulatory requirements. The inability or failure of the
Company or such foreign distributors to comply with varying foreign regulations
or the imposition of new regulations could restrict the sale of the Company's
products internationally and thereby adversely affect the Company's business,
financial condition and results of operations. See "Business -- Government
Regulation."
LIMITATIONS ON THIRD PARTY REIMBURSEMENT
The Company's products are purchased by hospitals and other users, which bill
various third party payors, such as government health programs, private health
insurance plans, managed care organizations and other similar programs, for the
health care products and services provided to their patients. Payors may deny
reimbursement if they determine that a product used in a procedure was not used
in accordance with established payor protocols regarding cost-efficient
treatment methods, was used for an unapproved indication or was not otherwise
covered. Third party payors are increasingly challenging the prices charged for
medical products and services and, in some instances, have pressured medical
suppliers to lower their prices. The Company is unable to predict what changes
will be made in the reimbursement methods used by third party health care
payors. There can be no assurances that treatments utilizing the Company's
products will be considered cost effective by third party payors, that
reimbursement for such treatments will be available or, if available, that payor
reimbursement levels will not adversely affect the Company's ability to sell its
products on a profitable basis. Moreover, Medicare, Medicaid and private third
party payors may limit reimbursement for disposable devices such as those
manufactured by the Company by implementing fee schedules or by allowing
reimbursement for only a set number of devices per month. In addition,
healthcare costs have risen significantly over the past decade, and there have
been and may continue to be proposals by legislators, regulators and third party
payors to curb these costs. Failure by users of the Company's products to obtain
reimbursement from third party payors, changes in third party payors' policies
towards reimbursement for the Company's products or legislative action limiting
reimbursement for certain procedures or products could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Third Party Reimbursement."
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company's success may depend in part on its ability to obtain patent
protection for its products and manufacturing processes, to preserve its 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 assurances can be given that the scope of any patent
protection under the Company's current patents, or under any patent the Company
might obtain in the future, will exclude competitors or provide competitive
advantages to the Company; that any of the Company's 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 the Company. Litigation,
which could result in substantial cost to and diversion of effort by the
Company, may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the ownership,
scope or validity of the proprietary rights of the Company and others.
Furthermore, there can be no assurance that others have not developed or will
not develop similar products or manufacturing processes, duplicate any of the
Company's products or manufacturing processes, or design around the Company's
patents. The Company also relies upon unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent techniques
or otherwise gain access to the Company's proprietary technology or disclose
such technology or that the Company can ultimately protect meaningful rights to
such unpatented proprietary technology.
The Company is aware that UroMed possesses a United States patent that relates
to a device for the management of female incontinence. Prior to the Company's
development of its FEMSOFT female continence insert, the Company received an
opinion from its patent counsel, Merchant, Gould, Smith, Edell, Welter &
Schmidt, P.A., to the effect that, at the time the opinion was given, the
FEMSOFT continuous drain catheter, valved catheter, and occlusive plug did not
infringe the UroMed patent. The Company has not sought a further opinion from
its patent counsel regarding the FEMSOFT female continence insert. The Company
has not received any notice of a claim of patent infringement from UroMed,
although it is possible that UroMed could choose to bring an action against the
Company alleging infringement of the UroMed patent at any time in the future.
Because the opinion of counsel that the Company has received with respect to the
UroMed patent is not binding on a court and because of the complex legal and
factual questions involved in patent litigation, there can be no assurance that
if UroMed brought an infringement action against the Company a court would find
the UroMed patent to be either invalid or not infringed. There can be no
assurance that any redesign of any of the FEMSOFT devices to circumvent a claim
of infringement would be commercially acceptable or would necessarily circumvent
such a claim.
A claim by UroMed or by other third parties that the Company's current products
or products under development allegedly infringe their patent rights could have
a material adverse effect on the Company. 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 substantial expense to the Company and significant diversion of the efforts
of the Company's technical and management personnel. An adverse determination in
any such proceeding could subject the Company 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 the Company to cease
using such technology. There can be no assurance that if such licenses were
obtainable, they would be obtainable at costs reasonable to the Company. If
forced to cease using such technology, there can be no assurance that the
Company would be able to develop or obtain alternate technology. Additionally,
if third party patents containing claims affecting the Company's technology are
issued and such claims are determined to be valid, there can be no assurance
that the Company would be able to obtain licenses to such patents at costs
reasonable to the Company, 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
the Company from manufacturing, using or selling certain of its products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
There also can be no assurance that UroMed or any other party does not presently
have, has not applied for, or might not in the future apply for, additional
patents in the United States which, if ultimately granted, might be infringed by
any of the FEMSOFT devices as currently configured or any other product of the
Company and provide the basis for an infringement action against the Company.
See "Business -- Patents and Proprietary Rights."
DEPENDENCE ON SINGLE SOURCES OF SUPPLY
The Company is dependent upon Dow Corning Corporation ("Dow Corning") for raw
materials used in the manufacture of certain of its silicone products. Dow
Corning is currently in bankruptcy proceedings and there can be no assurance
that Dow Corning will continue to manufacture silicone or to supply silicone to
medical device manufacturers, such as the Company. The Company is also dependent
on Shell Chemical Company for the primary raw materials for the ULTRAFLEX
polymer used in manufacturing certain of the Company's male external catheters.
If the Company were to lose either supplier, it would be required to identify a
new supplier, repeat biocompatibility testing of its products using the raw
materials from the new supplier and may be required to seek additional
regulatory clearance. While the Company routinely seeks to identify and evaluate
alternate sources of supply, the loss of either such supplier could interrupt
the manufacture of the Company's products and have a material adverse effect on
the Company's business, financial conditions and results of operations.
Moreover, the significance of product liability litigation to suppliers of raw
materials used in the manufacture of medical devices has caused such suppliers
to carefully evaluate the use of those raw materials in certain medical devices.
While the Company's current use of such raw materials is acceptable to its
suppliers, there is no assurance that Company's suppliers might not in the
future change their policies regarding raw materials usage, or that such a
change, if it occurred, might not adversely affect production of the Company's
current products or its product development activities. See "Business -- Sources
of Supply."
ADDITIONAL MANUFACTURING FACILITIES
The Company is presently constructing, and has begun to specify and purchase
equipment and componentry necessary to equip an additional manufacturing
facility near the site of the Company's current facility, primarily for the
manufacture of the FEMSOFT female continence insert and certain other devices.
The new facility will consist of approximately 52,000 square feet of office,
storage, manufacturing, chemical handling and clean room manufacturing space
containing, among other equipment, an automated liquid encapsulation production
line, a liquid injection molding machine, packaging equipment and miscellaneous
support equipment. The Company may encounter delays in the construction of the
new facility and technical difficulties in the development of a new production
line and the establishment of commercial production of these new products. The
Company is also expanding its current manufacturing facility to expand
production capacity for male external and Foley catheters. No assurance can be
given that there will not be delays or cost over-runs relating to either of
these new facilities that could have a material adverse effect on the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Facilities."
PRODUCT LIABILITY; ADEQUACY OF INSURANCE
The medical products industry is subject to substantial litigation, and the
Company faces an inherent business risk of exposure to product liability claims
in the event that the use of its products is alleged to have resulted in adverse
effects to a patient. Although the Company has not experienced any product
liability claims to date, any such claims could have an adverse effect on the
Company. The Company maintains general insurance policies which 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 $6
million under the policies. There can be no assurance that liability claims will
not exceed the coverage limits of such policy or that such insurance will
continue to be available on commercially reasonable terms, if at all.
Consequently, 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 the business, financial condition and results of operations of the
Company.
POTENTIAL VOLATILITY OF STOCK PRICE
Factors such as variations in the Company's financial performance and
announcements of technological innovations by the Company, its competitors or
providers of alternative products could cause the market price of the Company's
common stock to fluctuate substantially. Moreover, stock markets have
experienced price and volume fluctuations that have particularly affected
medical technology companies, resulting in changes in the market prices of the
stocks of many companies which may not have been directly related to the
operating performance of those companies. Such broad market fluctuations may
adversely affect the market price of the Company's common stock.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers of the Company own beneficially approximately
25% of the Company's outstanding common stock. Accordingly, these shareholders,
individually and as a group, may be able to influence the outcome of shareholder
votes, including votes concerning the election of directors, the adoption or
amendment of provisions in the Company's Articles of Incorporation and Bylaws
and the approval of certain mergers or other similar transactions, such as sales
of substantially all of the Company's assets. Such control by existing
shareholders could have the effect of delaying, deferring or preventing a change
in control of the Company. See "Management -- Security Ownership of Certain
Beneficial Owners and Management" of the Company's Proxy for its 1997 annual
meeting of shareholders that is incorporated by reference in this Form 10-KSB.
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF MINNESOTA LAW
Pursuant to the Company's Articles of Incorporation, the Board of Directors has
authority to fix the rights, preferences, privileges and restrictions, including
voting rights, of unissued shares of the Company's capital stock and to issue
such stock without any further vote or action by the shareholders. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be created and
issued in the future. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company. In
addition, certain provisions of Minnesota law applicable to the Company could
have the effect of discouraging certain attempts to acquire the Company, which
could deprive the Company's shareholders of opportunities to sell their shares
of Common Stock at prices higher than prevailing market prices and may also have
a depressive effect on the market price of the Company's Common Stock.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. In addition, the
terms of the convertible loan the Company received from ConvaTec restrict the
circumstances under which the Company can pay cash dividends and the aggregate
amounts of such cash dividends.
ITEM 7. FINANCIAL STATEMENTS
ROCHESTER MEDICAL CORPORATION
FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Page
Report of Independent Auditors 33
Audited Financial Statements
Balance Sheets 34
Statements of Operations 35
Statement of Shareholders' Equity 36
Statements of Cash Flows 37
Notes to Financial Statements 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rochester Medical Corporation
We have audited the accompanying balance sheets of Rochester Medical Corporation
as of September 30, 1996 and 1995, and the related statements of operations,
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rochester Medical Corporation
at September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 18, 1996
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,394,607 $ 1,296,737
Marketable securities 9,013,522 1,608,604
Accounts receivable, less allowance for doubtful
accounts
($50,000 -- 1996; $25,000 -- 1995) 1,513,577 752,224
Note receivable, officer -- 226,000
Inventories 1,191,283 766,144
Prepaid expenses and other current assets 84,194 153,466
Total current assets 20,197,183 4,803,175
Property and equipment:
Land 60,001 1
Buildings 755,074 757,337
Construction in progress 1,145,866 --
Equipment and fixtures 2,783,641 2,326,820
4,744,582 3,084,158
Less accumulated depreciation (1,432,257) (1,125,456)
Total property and equipment 3,312,325 1,958,702
Intangible assets:
Patents, less accumulated amortization
($313,937 -- 1996; $208,473 -- 1995) 378,232 401,244
Total assets $23,887,740 $ 7,163,121
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 957,951 $ 204,329
Accrued compensation 74,499 115,834
Accrued expenses 303,314 135,505
Total current liabilities 1,335,764 455,668
Long-term debt 3,320,625 3,035,625
Shareholders' equity
Common Stock, no par value:
Authorized shares -- 20,000,000
Issued and outstanding shares -- 4,127,500 -- 1996;
2,724,000 -- 1995 24,648,913 7,729,518
Accumulated deficit (5,417,562) (4,057,690)
Total shareholders' equity 19,231,351 3,671,828
Total liabilities and shareholders' equity $23,887,740 $ 7,163,121
</TABLE>
SEE ACCOMPANYING NOTES.
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
Net sales $ 5,540,408 $ 3,130,746
Cost of sales 3,788,584 2,447,353
Gross profit 1,751,824 683,393
Costs and expense:
Marketing and selling 1,351,443 858,458
Research and development 1,181,569 358,004
General and administrative 1,111,905 765,546
Total operating expenses 3,644,917 1,982,008
Loss from operations (1,893,093) (1,298,615)
Other income (expense):
Interest income 818,387 55,836
Interest expense (285,166) (68,238)
Net loss $(1,359,872) $(1,311,017)
Net loss per common share $ (0.35) $ (0.49)
Weighted average number of common shares
outstanding 3,866,764 2,681,510
</TABLE>
SEE ACCOMPANYING NOTES.
ROCHESTER MEDICAL CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK DEFICIT
SHARES AMOUNT (DEDUCTION) TOTAL
<S> <C> <C> <C> <C>
Balance at September 30, 1994 2,664,000 $ 7,561,518 $(2,746,673) $ 4,814,845
Exercise of common stock warrants 60,000 168,000 168,000
Net loss for the year (1,311,017) (1,311,017)
Balance at September 30, 1995 2,724,000 7,729,518 (4,057,690) 3,671,828
Common stock issued in public
offering 1,323,500 16,199,395 16,199,395
Exercise of common stock warrants 80,000 720,000 720,000
Net loss for the year (1,359,872) (1,359,872)
Balance at September 30, 1996 4,127,500 $24,648,913 $(5,417,562) $19,231,351
</TABLE>
SEE ACCOMPANYING NOTES.
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,359,872) $(1,311,017)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 477,682 345,466
Changes in operating assets and liabilities:
Accounts receivable (761,353) (33,734)
Inventories (425,139) 201,892
Other current assets 295,272 (193,110)
Accounts payable 753,622 52,584
Other current liabilities 126,474 2,424
Net cash used in operating activities (893,314) (935,495)
INVESTING ACTIVITIES
Capital expenditures (1,725,841) (224,256)
Patents (82,452) (93,249)
Purchase of investments (17,220,523) (1,888,217)
Sales and maturities of investments 9,815,605 1,553,815
Net cash used in investing activities (9,213,211) (651,907)
FINANCING ACTIVITIES
Proceeds from note payable -- 3,000,000
Interest expense added to note payable 285,000 35,625
Proceeds from sale of common stock 16,199,395 --
Payments on bank mortgage loan -- (415,665)
Exercise of common stock warrants 720,000 168,000
Net cash provided by financing activities 17,204,395 2,787,960
Increase in cash and cash equivalents 7,097,870 1,200,558
Cash and cash equivalents at beginning of year 1,296,737 96,179
Cash and cash equivalents at end of year $ 8,394,607 $ 1,296,737
</TABLE>
SEE ACCOMPANYING NOTES
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BUSINESS ACTIVITY
Rochester Medical Corporation (the "Company") designs, manufactures and markets
disposable latex free incontinence and urological catheters and other urological
devices. The Company currently manufactures and markets male external catheters
for the management of male urinary incontinence and silicone Foley catheters for
urinary catheterization to eliminate urinary waste.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are classified as available for sale and consist of US
Treasury Bills and certificates of deposit. At September 30, 1996 and 1995, the
market value of marketable securities approximates cost.
MANUFACTURING AND SALES
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 days. Credit losses relating to customers
consistently have been within management expectations.
INVENTORIES
Inventories, consisting of material, labor and manufacturing overhead, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is based on estimated useful lives of 4 - 25 years computed using
the straight-line method.
PATENTS
Capitalized costs include costs incurred in connection with making patent
applications for the Company's products and are amortized on a straight-line
basis over eight years. The Company periodically reviews its patents for
impairment of value. Any adjustment from the analysis is charged to operations.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred. Research
and development costs include 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.
USE OF ESTIMATES
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.
Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss for the period by the
weighted average number of shares of Common Stock outstanding during the period.
Outstanding stock options and warrants and convertible debt are not included in
the computation because they are anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
3.ADVERTISING COSTS
The Company incurred advertising expenses of $234,000 and $104,000 for the years
ended September 30, 1996 and 1995, respectively. All advertising costs are
charged to operations as incurred.
4. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30,
1996 1995
Raw materials $ 878,885 $ 429,790
Work-in-process 264,729 294,702
Finished goods 147,669 141,652
Reserve for inventory obsolescence (100,000) (100,000)
$1,191,283 $ 766,144
5. SHAREHOLDERS' EQUITY
WARRANTS
In connection with the March 1990 sale of Common Stock, the Company issued five
year warrants to the placement agent to purchase 24,000 shares of Common Stock
at $2.50 per share. In May 1995, the placement agent exercised these warrants.
In connection with the November 1990 initial public offering, the Company issued
five year warrants to the underwriter to purchase 36,000 shares of Common Stock
at $3.00 per share. The underwriter exercised 10,800 of the warrants in May 1995
and 25,200 in August 1995.
In connection with the July 1991 public offering, the Company sold to the
underwriters for a nominal purchase price five year warrants to purchase 80,000
shares of Common Stock at $9.00 per share. In July 1996, the underwriter
exercised these warrants.
In connection with the November 1995 public offering, the Company sold to the
underwriters for a nominal purchase price five year warrants to purchase 75,000
shares of Common Stock at $14.85 per share. The warrants can be exercised any
time after November 1996 through November 2000.
STOCK OPTIONS
In January 1992, shareholders approved the 1991 Stock Option Plan (the Plan)
which authorized the issuance of up to 180,000 shares of Common Stock. In 1994,
the authorized shares in the Plan were increased to 300,000. In 1996, the
authorized shares in the Plan were increased to 700,000. Under terms of the
Plan, the Board of Directors may grant employee incentive stock options equal to
the fair market value of the Company's Common Stock or employee non-qualified
options at a price which cannot be less than 85% of the fair market value.
Automatic non-employee director options are also covered under the Plan, under
which 1,000 shares are granted at fair market value to non-employee directors on
the date of each of the Company's Annual Meetings.
A summary of the activity relating to the 1991 Plan follows:
<TABLE>
<CAPTION>
SHARES
RESERVED OPTIONS PRICE PER
FOR GRANT OUTSTANDING EXERCISABLE SHARE
<S> <C> <C> <C> <C>
Balance as of September 30, 1994 . 93,000 207,000 3,000 $ 6.75 - $10.75
Options granted or became exercisable (9,500) 9,500 29,750 6.75 - 18.50
Approval of non-statutory stock options 50,000 -- -- --
Balance as of September 30, 1995 133,500 216,500 32,750 6.75 - 18.50
Options granted or became exercisable (253,000) 253,000 72,875 13.75 - 16.25
Increase in authorized shares 400,000 -- -- --
Balance as of September 30, 1996 280,500 469,500 105,625 $ 6.75 - $18.50
</TABLE>
Total number of shares reserved for warrants, options and convertible notes was
999,770 at September 30, 1996.
In September 1995, the Board of Directors approved the 1995 Non-Statutory Stock
Option Plan, which authorized the issuance of up to 50,000 shares of Common
Stock. In September 1995, Medical Advisory Board members were granted options to
purchase 12,000 shares of the Company's Common Stock at an exercise price of
$15.75 share.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This
statement will be effective for the Company in 1997. The Company has not
determined the impact of the new statement on its financial statements.
6. INCOME TAXES
Deferred income taxes are due to temporary differences between the carrying
values of certain assets and liabilities for financial reporting and income tax
purposes. Significant components of deferred income taxes as of September 30,
1996 and 1995 are as follows:
SEPTEMBER 30,
1996 1995
Deferred assets:
Net operating loss $ 2,174,000 $ 1,745,000
Accrued vacation 4,000 4,000
Subtotal 2,178,000 1,749,000
Deferred liability:
Depreciation and amortization 315,000 294,000
Net deferred income tax
assets 1,863,000 1,455,000
Valuation allowance (1,863,000) (1,455,000)
Net deferred income taxes $ -- $ --
The Company will be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately
$6,394,000 can be carried forward to offset future taxable income, limited due
to changes in ownership under the net operating loss limitation rules, and
expire in years 2003 through 2010.
7. LONG-TERM DEBT
Long-term debt consists of a $3 million convertible loan and accrued interest of
$320,625 and $35,625 at September 30, 1996 and 1995, respectively, with ConvaTec
(see Note 12). The loan is unsecured, bears interest at 9.5% and is due August
11, 2000. Interest on the loan is payable at maturity together with the
principal amount. The loan and any accrued interest may be repaid at any time
without penalty upon 60 days prior notice. At maturity, the Company has the
option of repaying a portion of the loan through credits against ConvaTec's
future purchases as long as the Distribution Agreement remains in place. Prior
to repayment, ConvaTec may convert the outstanding balance of the loan, together
with any accrued interest, into shares of Common Stock of the Company at a
conversion price of $19.00 per share. The Loan Agreement includes certain
anti-dilution provisions for ConvaTec's conversion rights and provides certain
registration rights with respect to the shares of Common Stock issued upon
conversion of the loan. A material breach or termination of the Distribution
Agreement will, among other causes, result in a default under the Loan
Agreement.
8. COMMITMENTS
MINNESOTA TECHNOLOGIES INCORPORATED
On September 30, 1992, Minnesota Technologies Incorporated ("MTI"), a Minnesota
non-profit development organization, provided the Company a grant of $100,000
for the purpose of developing the automated production of Foley catheters. Under
the terms of the MTI grant, the Company has agreed to repay MTI the amount of
the grant together with 8% interest at the rate of 2.5% of gross sales of Foley
catheters. The Company has further agreed to convey to MTI all rights in any
intellectual property related to the development of the manufacturing equipment
and any patents issued with respect thereto, upon occurrence of any of the
following events:
1. The Company dissolves, becomes inoperative, or abandons the
intellectual property relating to the automated production of Foley
catheters; or
2. More than 25% of its manufacturing or production facilities relating
to Foley catheters are located outside the State of Minnesota before
August 17, 1999.
The grant was accounted for as a reduction in the cost of the equipment.
Royalties earned by MTI are charged to operations as royalty expense. Royalty
expense totaled $52,653 in 1996 and $33,200 in 1995.
CITY OF STEWARTVILLE
On September 28, 1995, the Company and the City of Stewartville, Minnesota
("City") entered into a Contract for Private Development ("City Agreement") and
agreed to enter into an Assessment Agreement and Assessment Certification
("Assessment Agreement") relating to the development of the Company's proposed
manufacturing facility. Under the City Agreement, the City has sold to the
Company a 20 acre parcel of land for $60,000, and has agreed to install roads,
utilities and certain public improvements benefiting the land. The Company has
begun to construct a new 52,000 square foot facility, and has also agreed to use
its best efforts to create 55 new full-time jobs in the City by December 31,
1998, and to pay real estate taxes without contest in accordance with the
Assessment Agreement.
MEDICAL TESTING OF DEVELOPMENTAL PRODUCTS
In September 1996, the Company entered into a research agreement with Affiliated
Research Centers, Inc., Chicago, Illinois relating to the FEMSOFT female
continence insert. Under the terms of the agreement, the Company has agreed to
pay Affiliated Research Centers, Inc. $410,544, of which $212,468 was paid and
expensed at September 30, 1996.
9. LEASES
The Company has operating leases for vehicles and certain office equipment. Rent
expense for the periods ended September 30, 1996 and 1995 was $59,949 and
$56,600, respectively.
10. RELATED PARTY TRANSACTIONS
The Company's corporate legal counsel is the brother-in-law of the CEO and
President, the Vice President of Operations and a member of the board of
directors of the Company. During the years ended September 30, 1996 and 1995,
the Company incurred legal fees and expenses of approximately $83,000 and
$124,000, respectively, to such counsel for services rendered. Management
believes the fees paid for the services rendered to the Company were on terms at
least as favorable to the Company as could have been obtained from an unrelated
party.
The chairman and chief executive officer of Mentor Corporation is the brother of
the CEO and President, the Vice President of Operations, and a member of the
board of directors of the Company (see Note 11).
The Company entered into an agreement with Halcon, Inc. to purchase office
furniture valued for $258,000. A payment of $86,000 was made in fiscal 1996. The
chief executive officer of Halcon, Inc. is the director of the Company and the
brother of the CEO and President and the Vice President of Operations of the
Company. Management believes that the terms of the agreement are at least as
favorable to the Company as could have been obtained from an unrelated party.
As part of an employment agreement, the Company agreed to loan the Executive
Vice President of the Company $226,000 to assist in purchasing a residence.
The loan and was repaid in fiscal 1996.
11. MENTOR AGREEMENT AND RELATED LITIGATION
In April 1991, the Company entered into an exclusive license, sales and
distribution agreement ("MEC Agreement") for external catheters with Mentor
Corporation (Mentor) for which the Company received a non-refundable license fee
of $500,000. The agreement granted Mentor sales exclusivity for silicone
external catheters in North and South America, Africa, Australia, and Western
Europe and a patent license permitting Mentor to manufacture the catheter
itself.
On September 11, 1995, the Company and Mentor entered into a settlement
agreement to conclude all pending litigation among Mentor, the Company and
certain of the Company's officers. As part of the settlement agreement, the
Company waived certain monetary claims against Mentor, which resulted in a
write-off of approximately $115,000 of accounts receivable from Mentor in the
fourth quarter of fiscal 1995. The Company previously wrote off $100,000 of
Mentor accounts receivable in the third quarter of fiscal 1995. The settlement
agreement also provided that Mentor purchase all of the Company's inventory of
silicone male external catheters held for sale to Mentor at an agreed upon
transfer price. This sale resulted in approximately $160,000 of net sales to
Mentor during the fourth quarter of fiscal 1995. As part of the settlement
agreement, Mentor's sales exclusivity was terminated.
12. CONVATEC AGREEMENT
On August 11, 1995, the Company entered into a Distribution and Co-Development
Agreement (the "Distribution Agreement") with ConvaTec, a division of E.R.
Squibb & Sons, Inc., a wholly-owned subsidiary to Bristol-Myers Squibb Company
("ConvaTec"), for the purpose of marketing and distributing the Company's
incontinence and urological devices. Under the Distribution Agreement, the
Company has granted ConvaTec, subject to obligations and limitations imposed by
the Company's other distribution agreements, worldwide rights to market the
Company's current products, products in development and certain future products
under ConvaTec's brands. Under the Distribution Agreement, the Company retains
worldwide marketing rights to its products under the Rochester Medical brand.
The Distribution Agreement has a five year term expiring August 31, 2000.
ConvaTec may, at its option, renew the Distribution Agreement for an additional
five year term, and thereafter, renew the Distribution Agreement for up to five
additional one year renewal periods. Either party may terminate the Distribution
Agreement only upon the other party's material breach of the Distribution
Agreement, bankruptcy or insolvency, or an inability to perform under the
Distribution Agreement for a period of more than six months. The Distribution
Agreement may not be terminated in the event that a third party acquires the
Company. The Company has agreed to indemnify ConvaTec against certain
liabilities, including any patent infringement claims by third parties.
13. SIGNIFICANT CUSTOMERS
Significant customers, measured as a percentage of sales, are summarized as
follows:
SEPTEMBER 30,
1996 1995
Significant Customers
Baxter-Allegiance 19% 19%
Convatec 12 5
Hollister 12 25
Mentor 29 14
Total 72% 63%
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated herein by reference to portions of 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, 1996.
ITEM 9A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE POSITION
Anthony J. Conway 52 Chief Executive Officer, President,
Secretary and Treasurer
Philip J. Conway 40 Vice President, Operations
Richard D. Fryar 49 Vice President, Research and Development
Alfred T. Mannino 47 Senior Vice President
Martyn R. Sholtis 37 Vice President, Sales and Marketing
Brian J. Wierzbinski 38 Chief Financial Officer
ANTHONY J. CONWAY, a founder of the Company, has served as Chairman of the
Board, Chief Executive Officer and President of the Company since May 1988. In
addition to his duties as Chief Executive Officer, Mr. Anthony Conway actively
contributes to the Company's research and development and design activities.
From 1979 to March 1988, he was President, Secretary and Treasurer of Arcon
Corporation ("Arcon"), a company that he co-founded in 1979 to develop,
manufacture and sell latex-based male external catheters and related medical
devices. Prior to founding Arcon, Mr. Anthony Conway worked for twelve years for
International Business Machines Corporation ("IBM") in various research and
development capacities. Mr. Anthony Conway is one of the named inventors on
numerous patent applications that have been assigned to the Company, of which to
date 11 have resulted in issued United States patents.
PHILIP J. CONWAY, a founder of the Company, has served as a Director and as Vice
President of Operations of the Company since May 1988. Mr. Philip Conway is
responsible for overseeing plant design and operation, and is also active in the
Company's research and development and design activities. From 1979 to March
1988, Mr. Philip Conway served as Plant and Production Manager of Arcon, a
company that he co-founded. Prior to joining Arcon, Mr. Philip 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
the Company, of which to date 11 have resulted in issued United States patents.
RICHARD D. FRYAR, a founder of the Company, has served as a Director and as Vice
President of Research and Development of the Company since May 1988. Mr. Fryar
is responsible for overseeing the Company's research and development and
regulatory affairs activities. From 1984 to March 1988, Mr. Fryar was employed
by Arcon, a company that he co-founded, in research and development capacities.
From 1969 to 1984, he was employed by IBM in various research and development
capacities. He is one of the named inventors on numerous patent applications
that have been assigned to the Company, of which to date have resulted in issued
United States patents.
ALFRED T. MANNINO has served as the Company's Senior Vice President since
August, 1996, and previously as its Executive Vice President from November 1994.
Mr. Mannino is generally responsible for strategic market planning for the
Company's FEMSOFT female continence insert. From 1991 to 1994 he served as Vice
President of Sales and Marketing of Dacomed Corporation, a company that produces
and sells incontinence and impotence devices and diagnostic equipment. Mr.
Mannino has over 26 years of experience in sales and marketing management of
incontinence related products.
MARTYN R. SHOLTIS has served as Vice President of Sales and Marketing of the
Company since April 1992. Mr. Sholtis' responsibilities include the sales and
marketing of ROCHESTER MEDICAL brand products in international markets and the
management of the Company's private label relationships, including its strategic
alliance with ConvaTec. From 1985 to April 1992 Mr. Sholtis was employed by
Sherwood Medical, a company that manufactures and sells Foley catheters and a
variety of other urologic and hospital-based medical products, most recently as
Regional Sales Manager for the Nursing Care Division, with responsibility for
twelve states in the midwest region.
BRIAN J. WIERZBINSKI has served as the Company's Chief Financial Officer since
February 1996, with principal responsibility for management of the Company's
financial and administrative affairs. From 1986 until joining the Company in
1996, Mr. Wierzbinski was employed in various financial and financial management
capacities by Ecolab, Inc., most recently as Asia Pacific Vice President,
planning and control. Prior to joining Ecolab, Mr. Wierzbinski was employed for
six years in various audit and audit management capacities by KPMG Peat Marwick.
Mr. Wierzbinski is a certified public accountant and holds a BA degree in
accounting and business administration from St. Johns University, Collegeville,
Minnesota.
The Company's executive officers are employed pursuant to annually renewing
employment agreements which continue until terminated by either the Company or
the employee. Under each respective agreement, employment continues unless
terminated by the employee or by the Company. Each such agreement contains
confidentiality and assignment of invention provisions benefiting the Company,
and the employment agreements with Messrs. Conways and Fryar also contain
non-competition provisions benefiting the Company. Excepting the provision of
certain life and disability insurance benefits to Mr. Sholtis, the Company has
no separate retirement, pension, profit sharing, or insurance plans for its
officers. The Company may in the future adopt such plans and may also adopt a
compensation plan substantially increasing officers' salaries based upon
performance of the Company.
ITEM 9B. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Incorporated herein by reference to portions of 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, 1996.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference to portions of 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, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to portions of 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, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to portions of 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, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed herewith in Item 7.
(i) Balance Sheets as of September 30, 1996 and 1995.
(ii) Statements of Operations for the years ended September 30, 1996 and
1995.
(iii) Statement of Shareholders' Equity for the years ended September 30,
1996 and 1995.
(iv) Statements of Cash Flows for the years ended September 30, 1996 and
1995.
(v) Notes to financial statements at September 30, 1996.
(a)(2) The following exhibits are submitted herewith:
3.1 Articles of Incorporation of the Company, as amended. (Incorporated by
reference to Exhibit 4.1 of Registrant's Registration Statement on Form
S-2, Registration Number 33-97788).
3.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2
of Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C).
3.3 Amendment to Restated Bylaws of the Company. (Incorporated by reference to
Exhibit 4.3 of Registrant's Registration Statement on Form S-2,
Registration Number 33-97788).
4.1 Specimen of Common Stock Certificate. (Incorporated by reference to
Exhibit 4.4 of Registrant's Annual Report on Form 10-KSB for fiscal
year ended September 30, 1995.
10.1 Agreement, contractual (non-state employee) dated September 27, 1989,
between the Company and the Greater Minnesota Corporation. (Incorporated
by reference to Exhibit 10.2 of Registrant's Registration Statement on
Form S-18, Registration Number 33-36362-C).
10.2 Contract for Private Development dated October 11, 1989 between the
Company and the City of Stewartville, Minnesota. (Incorporated by
reference to Exhibit 10.3 of Registrant's Registration Statement on Form
S-18, Registration Number 33-36362-C).
10.3 Indenture dated October 19, 1989 between the Company and the City of
Stewartville, Minnesota. (Incorporated by reference to Exhibit 10.4 of
Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C).
10.4 Employment Agreement, dated August 31, 1990 between the Company and
Anthony J. Conway. (Incorporated by reference to Exhibit 10.13 of
Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C).
10.5 Employment Agreement, dated August 31, 1990 between the Company and
Philip J. Conway. (Incorporated by reference to Exhibit 10.14 of
Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C).
10.6 Employment Agreement, dated August 31, 1990 between the Company and
Richard D. Fryar. (Incorporated by reference to Exhibit 10.15 of
Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C).
10.7 Employment Agreement dated April 21, 1991 between the Registrant and
Martyn R. Sholtis. (Incorporated by reference to Exhibit 10.19 to
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1992).
10.8 Employment Agreement Addendum dated June 13, 1994 between the Registrant
and Martyn R. Sholtis. (Incorporated by reference to Exhibit 10.15 to
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994).
10.9 Employment Agreement dated September 29, 1994 between the Registrant
and Alfred T. Mannino. (Incorporated by reference to Exhibit 10.16 to
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994).
10.10 Employment Agreement dated February 1, 1996 between the Registrant and
Brian J. Wierzbinski.*
10.11 Male External Catheter License, Sales and Distribution Agreement dated
April 24, 1991, between the Company and Mentor Corporation. (Incorporated
by reference to Exhibit 10.7 of Registrants Registration Statement on Form
S-1, Registration Number 33-40934).
10.12 Amended UF Catheter Exclusive OEM/Private Label Agreement dated March 18,
1994, between the Company and Hollister Incorporated. (Incorporated by
reference to Exhibit (a)(i) of Registrant's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1994).
10.13 Supply and Distribution Agreement dated April 14, 1994, between the
Company and Euromedical Industries Sdn Bhd (a wholly owned subsidiary of
Baxter Health Care Corporation). (Incorporated by reference to Exhibit
(a)(ii) of Registrant's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1994).
10.14 Convertible Senior Secured Loan Agreement, dated as of August 11, 1995,
by and between E. R. Squibb & Sons, Inc. (through its ConvaTec
division) and the Registrant. (Incorporated by reference to Exhibit
4.11 of Registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1995).
10.15 Distribution and Co-Development Agreement, dated as of August 11, 1995,
between the Registrant and E. R. Squibb & Sons, Inc. (through its
ConvaTec division). (Incorporated by reference to Exhibit 10.23 of
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1995).
11 Computation of Per Share Loss.*
23 Consent of Ernst & Young LLP.*
27 Financial Data Schedule.*
* Filed herewith.
(b) Registrant filed no Report on Form 8-K during its fourth fiscal quarter.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on this 19th day of December, 1996.
ROCHESTER MEDICAL CORPORATION
By: /S/ ANTHONY J. CONWAY
Anthony J. Conway
PRESIDENT
Pursuant to the requirements of the Exchange Act, this Report has been signed
below by the following persons in the capacities and on the dates indicated.
/s/ ANTHONY J. CONWAY Dated December 19, 1996
Anthony J. Conway
Chairman of the Board, President and Director
(Principal Executive Officer)
/s/ BRIAN J. WIERZBINSKI Dated December 19, 1996
Brian J. Wierzbinski
Chief Financial Officer
(Principal Financial Officer)
/s/ DARNELL L. BOEHM Dated December 19, 1996
Darnell L. Boehm, a Director
/s/ PETER R. CONWAY Dated December 19, 1996
Peter R. Conway, a Director
/s/ PHILIP J. CONWAY, Dated December 19, 1996
Philip J. Conway, a Director
/s/ RICHARD D. FRYAR Dated December 19, 1996
Richard D. Fryar, a Director
/s/ ROGER W. SCHNOBRICH Dated December 19, 1996
Roger W. Schnobrich, a Director
INDEX TO EXHIBITS
EXHIBIT PAGE
10.10 Employment Agreement dated February 1, 1996
between the Registrant and Brian J. Wierzbinski ................ 48
11 Computation of Per Share Loss .................................. 53
23 Consent of Ernst & Young LLP ................................... 54
27 Financial Data Schedule ........................................ 54
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into this first day of February, 1996, by and
between Rochester Medical Corporation, a Minnesota corporation (the
"Corporation"), and Brian J. Wierzbinski ("Employee").
WHEREAS, the Corporation and the Employee desire to record the terms of
Employee's employment by the Corporation;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein and for other good and valuable consideration, the parties agree as
follows:
1. TERM OF EMPLOYMENT. Subject to the terms and conditions of this Agreement,
the Corporation hereby employs Employee and Employee hereby accepts employment
for the period commencing February 19, 1996, and continuing thereafter until the
employment is terminated according to the provisions of this Agreement.
2. DUTIES. During the term of this Agreement, Employee shall perform the
duties of Chief Financial Officer and such additional duties as may be
prescribed from time to time by the Board of Directors or the Chief Executive
Officer of the Corporation.
3. BASE SALARY, COMMISSION, BONUS AND OTHER COMPENSATION.
3.1 BASE SALARY. The Corporation shall pay Employee an initial Base
Salary ("Base Salary") of One Hundred Thousand Dollars ($100,000) per annum
commencing February 19, 1996. The Base Salary shall be paid according to the
Corporation's regular payroll procedure, in equal increments not less
frequently than monthly. The Base Salary shall be subject to annual review
and merit increase adjustment in accordance with the Corporation's customary
practices, as may be then in effect, for salary planning and administration.
3.2 INCENTIVE BONUS. In addition to the Base Salary, Employee shall be
entitled to an incentive bonus (the "Bonus") targeted at 25% of Base Salary.
The amount and timing of payment of the Bonus shall be mutually agreed by
the Corporation and Employee and is intended to take effect during the
Corporation's fiscal year beginning October 1, 1996.
3.3 RELOCATION ALLOWANCE. In addition to any other compensation to which
Employee may be entitled by this agreement, the Corporation shall pay
Employee a Relocation Allowance (the "Relocation Allowance"). The Relocation
Allowance shall cover all costs and expenses associated with relocation
including (i) Employee's accountable out-of-pocket expenses in connection
with Employee's relocation to the Rochester, Minnesota area, (ii) points and
fees associated with financing the purchase of Employee's new home in the
Rochester, Minneosta area, (iii) the difference, not to exceed $15,000, by
which the sale price of Employee's current home is less than $260,000, (iv)
the additional sum of $8,500 for non-accountable expenses which Employee may
incur as a result of relocation to the Rochester, Minnesota area, and (v)
all associated tax liabilities incurred by Employee in connection with the
Relocation Allowance.
3.4 INCENTIVE STOCK OPTION. In addition to any other compensation to
which Employee may be entitled by this agreement, Employee shall be entitled
to receive an Incentive Stock Option for Eighty Thousand (80,000) shares of
the Corporation under the Corporation's 1991 Stock Option Plan according to
the Incentive Stock Option Agreement appended hereto as Exhibit 1.
4. BENEFITS.
4.1 VACATION. During each year of his employment, Employee shall be
entitled to three weeks annual vacation and to reasonable holidays and sick
leave. Vacations shall be taken by Employee during the year earned at such
time or times and for such periods as Corporation and Employee shall agree.
4.2 BENEFIT PROGRAMS, INSURANCE. Employee shall be entitled to
participate in customary employee benefit programs as may be from time to
time determined by the Board of Directors including, but not limited to,
life insurance, hospitalization, surgical and major medical coverage, and
long-term disability as are or may be made available from time to time to
other salaried employees of the Corporation. The Corporation currently
provides salaried employees with health insurance coverage under a policy
issued by Great West Insurance Company.
5. TERMINATION.
5.1 EVENTS OF TERMINATION. This Agreement may be terminated upon the
occurrence of any one of the following events:
(a) VOLUNTARY. Employee may terminate this Agreement at any time
during the term of this Agreement by giving 30 days prior written notice
of termination to the Board.
(b) INVOLUNTARY WITHOUT CAUSE. The Corporation may terminate this
Agreement without cause by 30 days written notice to Employee.
(c) INVOLUNTARY WITH CAUSE. The Corporation may terminate this
Agreement immediately for cause for (i) Employee's material breach of any
agreement with the Corporation, (ii) Employee's deliberate, willful or
gross misconduct in the performance or Employee's duties on behalf of the
Corporation, or (iii) Employee's being charged with a crime punishable by
imprisonment
(d) DEATH. This Agreement shall automatically terminate upon the
death of the Employee.
(e) DISABILITY. This Agreement shall automatically terminate upon the
permanent disability of Employee. For the purposes of this Agreement,
Employee shall be deemed permanently disabled if any ailment, illness or
other incapacity prevents him from performing his duties as specified in
this Agreement for a period of three consecutive months or for an
aggregate of three months in any twelve month period from the date of
this Agreement.
5.2 CONSEQUENCES OF TERMINATION.
(a) In the event of the termination of this Agreement in accordance
with Subparagraph 5.1(a) or 5.1(c) above, Employee shall be entitled to
Base Salary and Bonus earned by him prior to the date of termination as
provided herein computed on a pro rata basis to and including such date
of termination. In addition, Employee shall also be reimbursed for his
reasonable business expenses incurred prior to the date of termination.
(b) If the Corporation terminates this Agreement without cause
pursuant to Subparagraph 5.1(b) above, Employee shall be entitled to
receive Base Salary and Bonus earned by him prior to the date of
termination as provided herein computed on a pro rata basis to and
including such date of termination and, in addition, as liquidated
damages for, and in lieu of, any and all damages which he may incur as a
result of such termination severance payments consisting of (i) regular
installment payments of Base Salary for a period of six (6) months
following termination. and, (ii) in addition, if Employee is unable,
using good faith efforts, to obtain suitable employment during that
initial six (6) month period following termination, Employee shall
thereafter continue to receive regular installments of Base salary until
he obtains suitable employment or for a period six (6) additional months,
which ever first occurs; it being understood that the maximum period to
which Employee is entitled to any salary continuation shall not exceed
twelve months following termination.
(c) In the event this Agreement is terminated due to the death
(pursuant to Subparagraph 5.1(d)) or disability (pursuant to Subparagraph
5.1(e)) of Employee, Employee (or his estate) shall be entitled to the
base salary earned by him prior to the date of termination as provided
herein computed on a pro rata basis to and including such date of
termination plus any cash bonus payable with respect to the fiscal year
of death or disability according to normal payment procedures of the
Corporation.
6. NON-COMPETITION; INVENTIONS.
6.1 DEFINITIONS. For purposes of this Section 6, the following words and
phrases have the meanings ascribed to them, respectively:
(a) "Confidential Information" means all formulas, processes,
customer lists, computer user identifiers and passwords, and all
purchasing, engineering, accounting, marketing and other information that
is proprietary to the Corporation and not generally known or readily
ascertainable by proper means, relating to research, development,
manufacture or sale of the Corporation's products, as well as formulas,
processes and other information received by the Corporation from third
parties under an obligation of secrecy. All information disclosed to
Employee or to which Employee has access during the period of his
employment, which he has reasonable basis to believe to be Confidential
Information, or which is treated by the Corporation as being Confidential
Information, shall be presumed to be Confidential Information.
(b) "Inventions" means all formulas, processes, discoveries,
improvements, ideas and works of authorship, whether patentable or
copyrightable or not, which Employee learns, has access to, has a part in
developing, first conceives or first reduces to practice, alone or with
others (1) that are developed on the Corporation's time, or (2) that
relate directly to the Corporation's business or actual or
anticipated research, or (3) for which any of the Corporation's property,
including Confidential Information, is used, or (4) that result from any
of Employee's work for the Corporation.
6.2. DISCLOSURE AND ASSIGNMENT. Except as provided elsewhere in this
Agreement, Employee shall treat as for the Corporation's sole benefit and
fully and promptly disclose to the Corporation, without additional
compensation, all ideas, discoveries, inventions and improvements, whether
patentable or not, which, while the Employee is employed by the Corporation,
are made conceived or reduced to practice by Employee, alone or with others,
during or after usual working hours, either on or off the job, and Employee
hereby assigns to the Corporation all such ideas, discoveries, inventions
and improvements to be the Corporation's exclusive property.
6.3 FURTHER DOCUMENTS. Employee will acknowledge and deliver promptly
without charge all documents to the Corporation, and will do such other acts
as may be necessary in the Corporation's opinion to obtain and maintain
patents (including divisional, reissued or extended Letters Patent) or
copyrights and to vest the entire right and title in the Corporation to such
patents, copyrights and Inventions in all countries.
6.4 CONFIDENTIALITY. Employee will not use or disclose any Confidential
Information, either during or after employment by the Corporation, except as
required by his duties to the Corporation, and Employee acknowledges and
understands that the obligation to maintain the confidentiality of the
Corporation's Confidential Information is unconditional and shall not be
excused by any conduct on the part of the Corporation except its prior
voluntary disclosure of the information. Upon termination of employment,
Employee agrees that (a) all Confidential Information, including all copies,
excerpts and summaries in his possession or control (whether prepared by the
Corporation, the Employee or others), and also all other the Corporation
property, including keys, credit cards, software, reports and the like,
shall be left with the Corporation and (b) Employee will stop use of all
Confidential Information. Employee shall not at any time during the term of
this Agreement or thereafter, or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or
corporation in any manner whatsoever any information concerning any matters
affecting or relating to the business of the Corporation, including without
limiting the generality of the foregoing, any of its customers, the prices
it obtains or has obtained from the sale of, or at which it sells or has
sold, its products, or any other information concerning the business of the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the foregoing matters will be deemed
confidential, material, or important, the parties hereto stipulating that as
between them, the same are important, material, and confidential and gravely
affect the effective and successful conduct of the business of the
Corporation, and the Corporation's good will, and that any breach of the
terms of this Section 6 shall be a material breach of this Agreement.
6.5 LIMITATION; FIRST REFUSAL. The obligations of Section 6.2 and 6.3
shall not apply to any ideas, discoveries, inventions and improvements for
which no equipment, supplies, facility or trade secret information of the
Corporation was used, and which was developed entirely on Employee's own
time, and (1) which does not relate (a) directly to the business of the
Corporation or (b) to the Corporation's actual or demonstrably anticipated
research or development, or (2) which does not result from any work
performed by Employee for the Corporation. Employee will, nonetheless,
promptly disclose all such ideas, discoveries, inventions and improvements
to the Corporation and offer to the Corporation the right of first refusal
to enter into a license or purchase agreement covering the subject idea,
discovery, invention or improvement on terms mutually agreed to by Employee
and the Corporation. In the event the Corporation and Employee cannot agree
on terms and Employee receives an offer to enter into a license or purchase
agreement with some other party on terms more favorable to that other party
than the terms offered to the Corporation, then the Corporation shall have
the right and Employee shall have the obligation to offer to the Corporation
the idea, discovery, invention or improvement on such favorable terms. When
such an offer is made to the Corporation pursuant to the preceding sentence,
it must be accepted by the Corporation within thirty (30) days; or if not
accepted, the right of first refusal hereunder as to that offer shall
terminate.
NOTICE: SECTION 6 HEREOF REQUIRES EMPLOYEE TO ASSIGN RIGHTS TO
INVENTIONS TO THE CORPORATION OR ITS SUCCESSORS. MINNESOTA STATUTES
S.181.78 LIMITS THE SCOPE OF AGREEMENTS REQUIRING THE INVENTIONS BE
ASSIGNED TO EMPLOYERS. THE STATUTE STATES THAT SUCH ASSIGNMENT AGREEMENTS
DO NOT APPLY:
"TO AN INVENTION FOR WHICH NO EQUIPMENT, SUPPLIES, FACILITY OR TRADE
SECRET INFORMATION OF THE EMPLOYER WAS USED AND WHICH WAS DEVELOPED
ENTIRELY ON THE EMPLOYEE'S OWN TIME, AND (1) WHICH DOES NOT RELATE (a)
DIRECTLY TO THE BUSINESS OF THE EMPLOYER OR (b) TO THE EMPLOYER'S ACTUAL
OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (2) WHICH DOES NOT
RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER."
PLEASE NOTE THAT SECTION 6 OF THIS AGREEMENT USES THESE STATUTORY TERMS
TO DEFINE THE INVENTIONS WHICH ARE NOT AUTOMATICALLY ASSIGNED TO THE
CORPORATION BUT INSTEAD ARE SUBJECT TO A RIGHT OF FIRST REFUSAL IN FAVOR OF
THE CORPORATION.
6.6. ASSISTANCE TO THE CORPORATION. Employee shall give the Corporation,
at the Corporation's expense, all assistance the Corporation reasonably
requires to perfect, protect, and exercise the rights to all ideas,
discoveries, inventions or improvements acquired by the Corporation pursuant
to the assignment provisions or the right of first refusal provisions of
this Section 6.
6.7 REMEDIES. The Employee's obligations set forth in Section 6 of this
Agreement shall continue to be binding upon Employee, notwithstanding the
termination of his employment with the Corporation for any reason
whatsoever. Such obligations shall be deemed and construed as separate
agreements independent of any other provisions of this Agreement. The
existence of any claim or cause of action by Employee against the
Corporation, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Corporation or any or all of
such obligations. It is expressly agreed that the remedy at law for the
breach of any such obligation is inadequate and that temporary and permanent
injunctive relief shall be available to prevent the breach or any threatened
breach thereof, without the necessity of proof of actual damages.
7. NOTICES. Any notices to be given hereunder by either party to the other may
be effected either by personal delivery in writing or by mail, registered or
certified, postage prepaid, with return receipt requested. Personal delivery to
the Corporation shall mean personal delivery to the Chief Executive Officer of
the Corporation. Mailed notices shall be addressed to the respective addresses
shown below. Either party may change its address for notice by giving written
notice according to the terms of this Section 7.
(a) If to Employee:
Brian J. Wierzbinski
4215 Honeysuckle Court
Vadnais Heights, Minnesota 55127
(b) If to the Corporation:
Rochester Medical Corporation
1500 Second Avenue N. W.
Stewartville, Minnesota 55976
Attention: Chairman of the Board
8. GENERAL PROVISIONS.
8.1 LAW GOVERNING. This Agreement shall be governed by and construed
according to the laws of the State of Minnesota.
8.2 INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provision there shall be added automatically as a part of this
Agreement a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and still be legal, valid or
enforceable.
8.3 ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
of the parties and supersedes all prior agreements or understandings,
whether written or oral, with respect to the subject matter hereof. No
terms, conditions, warranties, other than those contained herein, and no
amendments or modifications hereto shall be binding unless made in writing
and signed by the parties hereto.
8.4 BINDING EFFECT. This Agreement shall extend to and be binding upon
and inure to the benefit of the parties hereto, their respective heirs,
representatives, successors and assigns. This Agreement may not be
assigned by Employee.
8.5 WAIVER. The waiver by either party hereto of a breach of any term or
provision of this Agreement shall not operate or be construed as a waiver of
a subsequent breach of the same provision by any party or of the breach of
any other term or provision of this Agreement.
8.7 TITLES. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing any word,
clause, paragraph, or provision of this Agreement.
8.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Corporation and Employee have executed this Agreement as
of the date and year first written above.
"Employee" Rochester Medical Corporation
/s/ BRIAN J. WIERZBINSKI By: /s/ ANTHONY J. CONWAY
Brian J. Wierzbinski Anthony J. Conway,
Chief Executive Officer
EXHIBIT 11.1
ROCHESTER MEDICAL CORPORATION
COMPUTATION OF LOSS PER SHARE
YEAR ENDED SEPTEMBER 30,
1996 1995
Primary and fully diluted:
Average shares
outstanding 3,866,764 2,681,510
Net loss $(1,359,872) $(1,311,017)
Per share amount $ (0.35) $ (0.49)
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-10261) pertaining to the 1991 Stock Option Plan of
Rochester Medical Corporation, of our report dated October 18, 1996, with
respect to the financial statements of Rochester Medical Corporation included
in this annual Report (Form 10-KSB) for the year ended September 30, 1996.
ERNST & YOUNG LLP
Minneapolis, Minnesota
December 18, 1996
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<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
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