<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997
REGISTRATION NO. 333-36605
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 41-1613227
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
</TABLE>
ONE ROCHESTER MEDICAL DRIVE
STEWARTVILLE, MINNESOTA 55976
(507) 533-9600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
ANTHONY J. CONWAY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROCHESTER MEDICAL CORPORATION
ONE ROCHESTER MEDICAL DRIVE
STEWARTVILLE, MINNESOTA 55976
(507) 533-9600
FACSIMILE: (507) 533-9725
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
GEORGE H. FRISCH, ESQ. JONATHAN B. ABRAM, ESQ. RODD M. SCHREIBER, ESQ.
5030 WOODLAWN BOULEVARD DORSEY & WHITNEY LLP SKADDEN, ARPS, SLATE, MEAGHER &
MINNEAPOLIS, MINNESOTA 55417 220 SOUTH SIXTH STREET FLOM (ILLINOIS)
(612) 724-2929 MINNEAPOLIS, MINNESOTA 55402 333 WEST WACKER DRIVE
(612) 340-2600 CHICAGO, ILLINOIS 60606
(312) 407-0700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
PROSPECTUS
1,300,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the 1,300,000 shares of Common Stock, no par value per share (the
"Common Stock"), offered hereby are being sold by Rochester Medical Corporation
(the "Company"). The Common Stock is quoted on the Nasdaq National Market under
the symbol "ROCM." On November 3, 1997, the last reported sale price of the
Common Stock, as quoted on the Nasdaq National Market, was $16.25 per share. See
"Price Range of Common Stock."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PLACEMENT AGENT PROCEEDS TO
PUBLIC FEES(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total....................................... $ $ $
</TABLE>
(1) The Common Stock is being offered on an all or none basis by the Company to
selected institutional investors. Vector Securities International, Inc. (the
"Placement Agent") has been retained to act, on a best efforts basis, as
agent for the Company in connection with the arrangement of this
transaction. The Company has agreed to pay the Placement Agent a fee in
connection with the arrangement of this transaction and reimburse the
Placement Agent for certain out-of-pocket expenses. The Company has agreed
to indemnify the Placement Agent against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
(2) The termination date of the offering is , 1997, subject to
extension by mutual agreement of the Company and the Placement Agent. Prior
to the closing date of this best efforts, all or none offering, all investor
funds will promptly be placed in escrow with Citibank, N.A., as escrow agent
for the funds collected in connection with the offering (the "Escrow
Agent"), in an escrow account for the benefit of the investors. Upon receipt
of notice from the Escrow Agent that investors have affirmed purchase of the
Common Stock and deposited the requisite funds in the escrow account, the
Company will deposit with The Depository Trust Company ("DTC") the shares of
Common Stock to be credited to the accounts of the investors and will
collect the investor funds from the Escrow Agent. In the event that investor
funds are not received in the full amount necessary to satisfy the
requirements of the offering, all funds deposited with the Escrow Agent will
promptly be returned to the investors. See "Plan of Distribution."
(3) Before deducting expenses payable by the Company, estimated at $400,000.
------------------------
Vector Securities International, Inc.
The date of this Prospectus is , 1997
<PAGE>
[Inside Front Cover Artwork]
The Antibacterial Foley catheter is a silicone Foley catheter that incorporates
a broad-spectrum antibacterial agent, nitrofurazone, into the silicone matrix of
the outer and inner surfaces of the catheter in a formulation that gives
sustained release of the medication into and throughout the urethra and bladder
neck while the patient is catheterized. A clinical trial which evaluated 344
patients in acute care, intensive care and surgical settings demonstrated that
use of the Antibacterial Foley catheter yielded a three-fold reduction in the
incidence of bacterial catheter-induced urinary tract infections (" CUTI")
compared to the use of a silicone, non-medicated Foley catheter in patients who
were catheterized for one to seven days. Laboratory tests have shown the
imbedded nitrofurazone in the Antibacterial Foley catheter to inhibit the growth
of most bacteria known to cause bacterial CUTI, including some common
antibiotic-resistant strains.
The Antibacterial Foley catheter has not been cleared by the United States Food
and Drug Administration (the "FDA") or any foreign regulatory authority for
commercial distribution in the United States or elsewhere in the world and
cannot be marketed until the Company obtains such clearances. There can be no
assurance that the Antibacterial Foley catheter will be cleared by the FDA or
any foreign regulatory authority.
---------------------------
COMFORT SLEEVE-TM-, FEMSOFT-TM-, NATURAL CATHETER-TM-, PERSONAL
CATHETER-TM-, POP-ON-TM-, ROCHESTER MEDICAL-REGISTERED TRADEMARK-, AND
ULTRAFLEX-REGISTERED TRADEMARK- ARE TRADEMARKS OF THE COMPANY.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, AND THE FINANCIAL STATEMENTS AND NOTES THERETO, CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK
FACTORS." SPECIAL NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" FOR FACTORS RELATING TO SUCH STATEMENTS.
THE COMPANY
The Company develops, manufactures and markets innovative urinary continence
care products for urinary dysfunction management and urine drainage management.
The Company currently manufactures and markets a broad line of functionally and
technologically enhanced latex-free versions of standard continence care
products, including male external catheters, Foley catheters and intermittent
catheters. The Company is also developing innovative and technologically
advanced products designed to provide clinically and commercially attractive
solutions to continence care needs. The Company is conducting clinical trials
relating to the FEMSOFT insert, a soft, liquid-filled, conformable urethral
insert for managing female incontinence. In May 1997, the Company submitted a
510(k) pre-market notification (a "510(k)") to the United States Food and Drug
Administration (the "FDA") for the Antibacterial Foley catheter, which is
designed to reduce the incidence of bacterial catheter-associated urinary tract
infection ("CUTI"). The Company intends to expand the marketing and sales of
ROCHESTER MEDICAL brand products using the Company's dedicated sales force and,
simultaneously, to increase the distribution of private label products through
its existing strategic relationships. The Company believes that its proprietary
manufacturing technologies, including its liquid encapsulation techniques,
automated production processes and synthetic materials know-how, enable the
Company to manufacture products with innovative designs and features on a cost
effective basis.
The Company's urinary dysfunction management products address the two
primary types of chronic urinary dysfunction: urinary incontinence, the
inability to control one's urinary function, leading to involuntary and frequent
urine leakage; and urinary retention, an inability to voluntarily, spontaneously
and completely empty the bladder. The Company markets a broad line of latex-free
catheters for urinary dysfunction management, including male external catheters
for male urinary incontinence and intermittent catheters for male and female
urinary retention. The Company is developing the FEMSOFT insert for managing
female stress urinary incontinence, the most common form of urinary
incontinence. In February 1997, the Company commenced a multi-site clinical
trial of the FEMSOFT insert, which will involve 120 patients over a 12 month
period. The Company has reported to the FDA preliminary clinical trial results
through July 15, 1997. These preliminary clinical trial results cover 38
patients and 2,101 patient uses and indicate that use of the FEMSOFT insert
resulted in a significant reduction of incontinence episodes and a 94% rate of
patient satisfaction, as indicated by written questionnaire responses in which
patients expressed a desire to continue use of the FEMSOFT insert. As of July
15, 1997, 11 infections, six instances of minor external tissue trauma
associated with the patients' inexperience in application of the FEMSOFT insert
during the first week of use, and five patient withdrawals from the clinical
trials had been reported. The Company will be required to file a pre-market
approval application (a "PMA") to obtain FDA approval to market the FEMSOFT
insert in the United States.
Urinary dysfunction affects approximately 11 million women and two million
men in the United States. The consequences of urinary dysfunction, including
discomfort, depression, loss of mobility, social withdrawal and embarrassment
about appearance and odor, are significant and often result in a dramatic change
in quality of life. Urinary incontinence has medical consequences as well,
including predisposition to perineal rashes, pressure ulcers, urinary tract
infections and urosepsis. The medical consequences of urinary retention include
severe infection, kidney failure and death. Approximately $15 billion is spent
annually in the United States for the medical treatment and management of
urinary dysfunction. Of this amount, the Company estimates that $3 billion is
spent on management products, including devices,
3
<PAGE>
catheters and absorbents, and the remainder is spent on institutionalization and
medical treatments, including surgery, pharmaceuticals and behavior therapy. To
date, available medical treatments and management products have had limited
success in continence management. In a recent survey of incontinent individuals,
survey respondents reported an overall cure rate of less than 3% for all medical
treatments, and 62% of respondents reported they were dissatisfied with their
medical treatment for urinary incontinence.
The Company's urine drainage management products are used by medical
professionals on a temporary basis to monitor and manage urine drainage during
surgery, post-operative recovery and other forms of acute care. For urinary
drainage management, the Company markets a broad line of silicone Foley
catheters. The Company's Foley catheters are latex-free, eliminating the risk of
allergic reactions and reducing the potential for tissue damage, which can be
associated with latex use. These catheters incorporate advanced features, such
as smooth, seamless exteriors, which help to reduce the risk of irritation. The
Company is developing the Antibacterial Foley catheter, an advanced-design
catheter which provides sustained release of a broad-spectrum antibacterial
agent while the patient is catheterized. Clinical trials have demonstrated that
the Antibacterial Foley catheter provided a three-fold reduction in the
incidence of CUTI during the first seven days of catheterization, as compared to
other silicone Foley catheters. CUTI is a leading type of infection in
hospitals, resulting in approximately 900,000 infections annually in the United
States. CUTI develops in approximately 10% to 30% of patients with Foley
catheters. The cost of treating CUTI is estimated at over $600 million annually
in the United States or an average of $680 per case of CUTI.
Through an expanded sales force, the Company intends to promote awareness of
the key advantages of ROCHESTER MEDICAL brand products, including the FEMSOFT
insert and the Antibacterial Foley catheter, relative to competitive continence
care products. The sales force will focus on differentiating the Company's
products on the basis of quality, potential improved medical outcomes and cost
effectiveness. The Company intends to increase its penetration of the continence
care market further through distribution relationships with established medical
products companies, which provide the Company with broad access to the hospital,
long-term care, home care and physician markets. The Company supplies male
external catheters and Foley catheters to the ConvaTec division of E.R. Squibb &
Sons, Inc., a subsidiary of Bristol-Myers Squibb Company ("ConvaTec"), pursuant
to a distribution and co-development arrangement. Also, the Company supplies
Hollister, Incorporated ("Hollister") with its requirements of self-adhering,
latex-free male external catheters and is a supplier to Euromedical Industries
Sdn Bhd (a subsidiary of Allegiance Health Care Corporation) ("Allegiance
Euromedical") and Mentor Corporation ("Mentor").
The Company uses custom-designed and custom-built equipment, automated
program control and comprehensive performance testing to maintain product
quality. The Company recently obtained ISO 9001 certification and quality system
certification for the CE mark for its current Foley catheter and male external
catheter production lines. The Company has expanded its manufacturing facility
and is completing the installation of additional manufacturing equipment. The
Company has also constructed a new manufacturing facility to house its liquid
encapsulation manufacturing operations, including production capacity for the
FEMSOFT insert and other advanced design products. The Company believes that its
manufacturing technology is particularly well-suited to high unit volume
production and that its automated processes enable cost-effective production
through simplification and automation of traditional catheter manufacturing
techniques. The Company intends to use its proprietary capabilities in molding,
shaping and forming liquid encapsulated devices, as well as its antimicrobial
matrix and polymer and adhesive technologies, to develop other innovative
medical devices.
The Company was incorporated in Minnesota in April 1988. The Company's
principal executive offices are located at One Rochester Medical Drive,
Stewartville, Minnesota 55976, and its telephone number is (507) 533-9600.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................ 1,300,000 shares
Common Stock to be outstanding after this offering . . 5,433,500 shares(1)
Use of proceeds................................. For development and commercialization of
the Antibacterial Foley catheter and
FEMSOFT insert; expansion of the Company's
sales force; scale-up of manufacturing
facilities; research and development; and
working capital and other general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol................... ROCM
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................................. $ 1,393 $ 2,189 $ 3,131 $ 5,540 $ 7,615
Cost of sales.............................................. 1,254 1,716 2,448 3,788 4,869
--------- --------- --------- --------- ---------
Gross profit (loss)...................................... 139 473 683 1,752 2,746
Operating expenses:
Marketing and selling.................................... 259 574 858 1,351 2,210
Research and development................................. 268 210 358 1,182 1,451
General and administrative............................... 338 692 766 1,112 1,499
--------- --------- --------- --------- ---------
Total operating expenses............................... 865 1,476 1,982 3,645 5,160
--------- --------- --------- --------- ---------
Loss from operations....................................... (726) (1,003) (1,299) (1,893) (2,414)
Interest income............................................ 126 78 56 818 657
Interest expense........................................... (35) (39) (68) (285) (342)
--------- --------- --------- --------- ---------
Net loss................................................... $ (635) $ (964) $ (1,311) $ (1,360) $ (2,099)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per common share.................................. $ (.24) $ (.36) $ (.49) $ (.35) $ (.51)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares outstanding....... 2,660 2,660 2,682 3,867 4,132
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..................................... $ 4,639 $ 24,096
Working capital...................................................................... 7,081 26,539
Total assets......................................................................... 18,613 38,071
Long-term debt....................................................................... -- --
Accumulated deficit.................................................................. (7,516) (7,516)
Total shareholders' equity........................................................... 17,181 36,639
</TABLE>
- ------------------------------
(1) Based on 4,133,500 shares outstanding as of September 30, 1997. Excludes:
(a) 535,000 shares of Common Stock issuable upon exercise of outstanding
stock options, with a weighted average exercise price of $12.35 per share;
(b) 75,000 shares of Common Stock issuable upon exercise of outstanding
warrants, with a weighted average exercise price of $14.85 per share; and
(c) 209,000 shares of Common Stock reserved for future issuance under the
Company's stock option plans. See "Description of Capital Stock."
(2) Gives effect to the receipt of the net proceeds from the sale of 1,300,000
shares of Common Stock offered hereby at an assumed public offering price of
$16.25 per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS, POTENTIAL INVESTORS SHOULD CONSIDER THE FOLLOWING MATTERS
CAREFULLY WHEN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
SPECIAL NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" FOR FACTORS RELATING TO SUCH STATEMENTS.
PRODUCT DEVELOPMENT RISKS; LACK OF REGULATORY APPROVAL
The Company believes that its ability to increase revenues and to achieve
profitability and positive cash flow will depend, in part, upon its ability to
complete the development of, receive regulatory approval for, and successfully
market its products in development, particularly the Antibacterial Foley
catheter and FEMSOFT insert. The production and marketing of the Company's
products in development, including the Antibacterial Foley catheter and FEMSOFT
insert, and certain of the Company's ongoing research and development activities
are subject to regulation by numerous government authorities in the United
States and other countries. Neither the Antibacterial Foley catheter nor the
FEMSOFT insert has been authorized for commercial distribution in the United
States or any foreign country. Both products will require FDA authorization
before the Company may begin marketing them in the United States as well as
similar authorization from appropriate regulatory bodies in foreign
jurisdictions prior to commercialization in such jurisdictions. The process of
obtaining FDA and other domestic and foreign regulatory authorization is
unpredictable and often lengthy, and there can be no assurance that the FDA or
any other regulatory body will grant authorization for either the Antibacterial
Foley catheter or the FEMSOFT insert or any other product in a timely manner, if
at all. In May 1997, the Company submitted a 510(k) for the Antibacterial Foley
catheter to the FDA. There can be no assurance that the FDA will authorize
marketing of the Antibacterial Foley catheter, or that the FDA will not make
requests for additional information or clinical data that could result in a
significant delay in bringing the product to market. The Company intends to
submit a PMA for the FEMSOFT insert based on data to be derived from an ongoing
multi-site clinical trial. The clinical data obtained from this clinical trial
to date is preliminary. There can be no assurance that such trials when
completed will yield data that support the safety and efficacy of the FEMSOFT
insert or that such clinical trials, or continued development efforts, will not
identify significant technical, manufacturing, design or other obstacles that
could delay submitting a PMA. As a result, there can be no assurance that the
Company will submit a PMA with respect to the FEMSOFT insert in a timely manner,
if at all. If the FEMSOFT insert is not determined by the FDA to be safe and
effective, or if the Company otherwise fails to obtain FDA approval of either
the FEMSOFT insert or the Antibacterial Foley catheter, or if the Company
experiences a significant delay or unforeseen expenditure in the course of
attempting to obtain such approvals, scaling-up manufacturing, or marketing such
products, if approved, the Company could be materially adversely affected. See
"Business--Products," "--Marketing and Sales" and "--Government Regulation."
UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS
Much of the Company's ability to increase revenues and to achieve
profitability and positive cash flow will depend on the successful introduction
of its products in development, including the Antibacterial Foley catheter and
the FEMSOFT insert, which have not yet been commercially introduced and
represent new methods for urinary continence care. There can be no assurance
that these products will gain any significant degree of market acceptance among
physicians, healthcare payors and patients, even if regulatory and reimbursement
approvals are obtained. The Company believes that recommendations by physicians
and clinicians will be essential for the market acceptance of these products and
there can be no assurance that any such recommendations will be obtained. Broad
market acceptance of the Company's products in development, primarily the
FEMSOFT insert, may require the training of numerous physicians and clinicians,
and the time required to complete such training could result in a delay or
dampening of
6
<PAGE>
such market acceptance. Moreover, health care payors' approval of reimbursement
for the Company's products in development will be an important factor in
establishing market acceptance. Patient acceptance of these products will depend
on many factors, including physician recommendations, the degree, rate and
severity of potential complications, the cost and benefits compared to competing
products or alternative medical treatments, lifestyle implications, available
reimbursement and other considerations. 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 alternative 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 and Products in Development."
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, 1995, 1996 and 1997 were $1.3 million, $1.4 million and $2.1 million,
respectively. The Company had an accumulated deficit of approximately $7.5
million at September 30, 1997. The Company's ability to increase revenues and
achieve profitability and positive cash flow will depend in part upon the
Company's ability to complete development of, and successfully introduce, new
products, particularly the Antibacterial Foley catheter and FEMSOFT insert, of
which there can be no assurance. The Company expects to incur substantial
product development, clinical research and other expenses in connection with
obtaining final regulatory approval for, and commercialization of, the
Antibacterial Foley catheter, and with the clinical testing, development and
commercialization of the FEMSOFT insert, as well as for other new products and
products in development. In addition, the Company anticipates increased
operating expenses as it expands its sales and marketing organization. The
Company will also experience additional manufacturing expenses in connection
with the ongoing expansion and scale-up of capacity at its manufacturing
facilities. A substantial portion of the expenses associated with the expansion
and scale-up of the Company's manufacturing facilities are fixed in nature (i.e.
depreciation) and will reduce the Company's operating margin until such time, if
ever, as the Company is able to increase utilization of such expanded capacity.
As a result, the Company expects to incur substantial operating losses for the
foreseeable future and there can be no assurance that the Company will ever
generate substantial revenues or achieve or sustain profitability.
HIGHLY COMPETITIVE MARKETS; ALTERNATIVE TREATMENTS; TECHNOLOGICAL ADVANCEMENTS
The medical products market in general is, and the markets for urinary
continence care products in particular are, highly competitive. The Company's
ability to compete in the urinary continence care market depends primarily on
price, product quality and features, technical capability, breadth of product
line and distribution capabilities. Many of the Company's competitors have
greater name recognition than the Company and offer well known and established
products, some of which are less expensive than the Company's products. As a
result, even if the Company can demonstrate that its products provide greater
ease of use, lifestyle improvement or beneficial effects on medical outcomes
over the course of treatment, the Company may not be successful in capturing a
significant share of the market. In addition, many of the Company's competitors
offer broader product lines than the Company, which may be a competitive
advantage in obtaining contracts with healthcare purchasing groups. The Company
relies to a large extent on distribution relationships that include the
Company's products, both those sold under private label arrangements and those
marketed under the ROCHESTER MEDICAL brand, as part of broader product
offerings. There can be no assurance, however, that the Company will be able to
maintain such relationships or that they will be successful in inducing
significant purchasers to buy the Company's products. Additionally, many of the
Company's competitors have substantially more marketing and sales experience
than the Company and substantially greater resources to devote to such efforts.
Finally, other factors within and outside the Company's control will also affect
its ability to compete, including its product development and
7
<PAGE>
innovation capabilities, its ability to obtain required regulatory clearances,
its ability to protect the proprietary technology included in its products and
manufacturing processes, its manufacturing and marketing capabilities and its
ability to attract and retain skilled employees. There can be no assurance that
the Company will be able to compete against such competitors or against
potential competitors, or that competition in the Company's markets will not
result in pricing pressures that would adversely affect the Company's unit
prices and sales levels any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition to the Company's products, urinary continence care can be
managed with a variety of alternative medical treatments and management products
or techniques, including adult diapers and absorbent pads, surgery, behavior
therapy, pelvic muscle exercise, implantable devices, injectable materials and
other medical devices. Moreover, manufacturers of products similar to the
Company's are engaged in research to develop more advanced versions of current
products. Many of the companies that are engaged in such development work have
substantially greater capital resources than the Company and greater expertise
than the Company in research, development and regulatory matters. There can be
no assurance that the Company's products will be able to compete with existing
or future alternative products, techniques or therapies, or that advancements in
existing products, techniques or therapies will not render the Company's
products obsolete. Finally, the Company's urinary dysfunction products are
management options, not a permanent cure. The development of a cure for urinary
dysfunction would have a material adverse effect on the Company's business,
financial condition, and results of operations.
DEPENDENCE ON DISTRIBUTION ARRANGEMENTS
A significant portion of the Company's net sales to date have depended on
the Company's ability to provide products that meet the requirements of
ConvaTec, Mentor and the other medical product companies with which the Company
has private label or distribution arrangements, and on the sales and marketing
efforts of such entities. These arrangements are likely to continue to be a
significant portion of the Company's revenues in the future. Private label
arrangements with medical products companies accounted for approximately 79%,
82% and 78% of the Company's net sales for fiscal years 1995, 1996 and 1997,
respectively. The Company will also continue to establish distribution
arrangements with third parties for ROCHESTER MEDICAL brand products. There can
be no assurance that the Company's private label purchasers and other
distributors will be able to successfully market and sell the Company's
products, that they will devote sufficient resources to support the marketing of
any of the Company's products, or that they will market any of the Company's
products at prices which will permit such products to develop, achieve, or
sustain market acceptance. The failure of the Company's private label purchasers
or other distributors to effectively market the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, in addition to the restrictions and obligations
described below, the private label agreements impose certain obligations upon
the Company relating to, among others, delivery of commercial quantities of its
products, delivery of products in accordance with specifications, the
maintenance of product liability insurance and certain indemnification
obligations. The failure or inability of the Company to comply with the terms of
these agreements could permit the Company's private label purchasers and other
distributors to terminate their respective agreements. In addition, there can be
no assurance that any of these private label purchasers or other distributors
will perform its obligations under its respective agreement with the Company.
Any such termination or abandonment could have a material adverse effect on the
ability of the Company to market and sell its products.
The Company's distribution and co-development agreement with ConvaTec (the
"ConvaTec Agreement") grants ConvaTec, subject to obligations and limitations
imposed by certain of the Company's other distribution agreements, exclusive
private label rights to market, under ConvaTec brands, the Company's products
that, as of the date of the ConvaTec Agreement, were currently produced or in
development. The ConvaTec Agreement limits the Company's ability to distribute
such products through third parties other
8
<PAGE>
than under the ROCHESTER MEDICAL brand. Although ConvaTec's rights are exclusive
for certain products on a private label basis, ConvaTec is not subject to any
minimum purchase requirements. Prior to the distribution of any products, the
Company and ConvaTec must negotiate in good faith on packaging, quality control
specifications and pricing for each of those products. The ConvaTec Agreement
also grants ConvaTec rights of first and last refusal with respect to marketing
future products, developed after the date of the ConvaTec Agreement. Currently,
the Company and ConvaTec are in discussions regarding the status of the FEMSOFT
insert under the ConvaTec Agreement. The Company's position is that the FEMSOFT
insert is subject only to ConvaTec's rights of first and last refusal, while
ConvaTec has expressed its view that ConvaTec has exclusive rights to be the
private label distributor of the device, subject to agreement on transfer
prices. If the Company and ConvaTec are unable to reach agreement, these issues
may be resolved by arbitration. There can be no assurance as to the outcome of
any such arbitration.
The Company is also party to a private label agreement with Mentor pursuant
to which the Company grants Mentor a non-exclusive, paid-up, royalty free
license to make, use and sell the silicone external catheters that Mentor now
purchases from the Company. As a result, there can be no assurance that Mentor
will not begin to manufacture the silicone external catheter itself and
discontinue its purchase and marketing of the Company's product. Such
discontinuation could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, sales of the Company's products under its private label
arrangements compete with sales of the Company's ROCHESTER MEDICAL brand
products. Such competition might have an adverse effect on the Company's ability
to establish its ROCHESTER MEDICAL brand or on the Company's margins. See
"Business-- Marketing and Sales" and "--Private Label Distribution Agreements."
RISKS ASSOCIATED WITH MARKETING AND SALES OF ROCHESTER MEDICAL BRAND PRODUCTS
To date, the Company has depended to a significant extent on marketing its
continence care products under private label arrangements and has conducted
relatively limited domestic selling and marketing activities for its ROCHESTER
MEDICAL brand. A key element of the Company's business strategy is to pursue
sales growth of its ROCHESTER MEDICAL brand products, and to develop market
recognition for the brand to support the future market introduction of the
Antibacterial Foley catheter and FEMSOFT insert, as well as other products in
development. The Company is engaged in refining market strategies for its
current ROCHESTER MEDICAL brand products and in developing market strategies for
its planned ROCHESTER MEDICAL brand products. The Company also has established a
small domestic marketing and sales organization to implement its plans. One of
the challenges facing the Company in this respect is the need to structure its
marketing efforts to address the changing nature of the domestic healthcare
market. In particular, healthcare purchasing is becoming increasingly
centralized, which may put the Company at a disadvantage compared to companies
with a wider array of products. In addition, many purchasers of urine drainage
catheters prefer to purchase such catheters packaged in a tray, which is a
single container including a catheter and related accessories, such as
collection bags. The Company does not currently offer its urine drainage
catheters in trays, which can be a competitive disadvantage with potential
customers who prefer such packaging. Although the Company may address this
disadvantage in the future by offering its own catheter trays, the Company does
not currently have any supply arrangements for tray components. There can be no
assurance that the Company will succeed in marketing its products under the
ROCHESTER MEDICAL brand, developing an effective marketing and sales force, or
adapting its marketing efforts to changes in the domestic healthcare market.
Moreover, the FEMSOFT insert, if approved by the FDA and introduced
commercially, may require the Company to undertake extensive educational efforts
directed to physicians and clinicians and 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 "Business--Marketing
and Sales."
The Company has entered into collaborative arrangements with a number of
distributors providing for the marketing and sale of certain of the Company's
products in various international markets. In general,
9
<PAGE>
pursuant to these agreements, the Company is required to provide quantities of
its products for sale by its distributors, and the Company's distributors are
required to use their best efforts to market and sell the Company's products in
their respective markets. Any termination or abandonment by one or more of the
Company's distributors could have a material adverse impact on the ability of
the Company to market and sell its products. Furthermore, failure by the
Company's distributors to effectively market the Company's products in their
respective markets could have a material adverse effect on the Company. See
"Business--Marketing and Sales."
POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity, product education efforts, advertising and other working
capital and general corporate purposes. Although the Company believes that the
net proceeds of this offering, together with its existing resources and
anticipated cash flows from operations, will be sufficient to satisfy its
capital needs for at least 24 months following the offering, there can be no
assurance that the Company will not require additional financing before that
time. The Company's actual liquidity and capital requirements will depend on
numerous factors, including the timing of regulatory approvals, if any, for the
Antibacterial Foley catheter and FEMSOFT insert; the costs and timing of
expansion of sales and marketing activities; the amount of revenues from sales
of the Company's existing and new products; changes in, termination of, and the
success of, existing and new distribution arrangements; the cost of maintaining,
enforcing and defending patents and other intellectual property rights;
competing technological and market developments; developments relating to
regulatory and third party reimbursement matters; the cost and progress of the
Company's research and development efforts; and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborate relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. Failure to raise capital when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such financing, if
required, will be available on terms satisfactory to the Company, if at all. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON SINGLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent upon Dow Corning Corporation ("Dow Corning") and
General Electric Corporation ("GE") 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,
including the Company. The Company is also dependent on Shell Chemical Company
("Shell") for the primary raw materials for the polymer used in manufacturing
certain of the Company's male external catheters. To date, the Company has
fulfilled its requirements for nitrofurazone, which is used in the Antibacterial
Foley catheter, through a single distributor. Although the Company is aware of
other distributors who are able to supply nitrofurazone, the Company does not
currently have arrangements for alternative supplies. If the Company were to
lose its current suppliers of any of these materials, it would be required to
identify a new supplier for that material, repeat biocompatibility testing of
its products using the raw materials from the new supplier and might be required
to seek additional regulatory clearance. The loss of any such supplier or any
significant decrease or interruption in supply could interrupt the manufacture
of the Company's products and have a material adverse effect on the Company's
business, financial condition 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
10
<PAGE>
materials in certain medical devices. There can be no assurance that the
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 then-current products or its product
development activities. See "Business--Sources of Supply."
UNCERTAINTIES ASSOCIATED WITH NEW AND EXPANDED MANUFACTURING FACILITIES
The Company is completing installation of the equipment and components
necessary to equip a recently-constructed additional manufacturing facility.
This new facility, which will be devoted primarily to the manufacture of the
FEMSOFT insert, if approved, and certain other liquid encapsulation devices,
will consist, when completed, of approximately 52,000 square feet of office,
storage, manufacturing, chemical handling and clean room manufacturing space.
The Company has also recently expanded its current manufacturing facility to
increase production capacity for male external and Foley catheters, and is in
the process of installing equipment and components there. The Company has not
validated or obtained regulatory approval for either the new facility or the
expansion to the existing facility. The Company may encounter delays and
technical difficulties, along with associated cost over-runs, while installing
and testing, obtaining regulatory approval for, and beginning commercial
production on the new production lines, any of which could have a material
adverse effect on the Company. Additionally, there can be no assurance that the
new facilities will enable the Company to produce the quantities of products
required for commercialization in the United States and abroad. The inability to
produce products in such quantities or to utilize such new capacity fully, if,
for example, the FEMSOFT insert is not successfully developed, authorized by the
FDA and marketed, could have a material adverse effect on the Company. See
"Business--Properties."
EFFECTS OF 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, which may have 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
11
<PAGE>
requirements. The Company relies on its third-party 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."
DEPENDENCE 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 assurance 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 fixed 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. The Company is currently unable to assess the
eligibility of the FEMSOFT insert for reimbursement. 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 assurance 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. The Company is
aware that others, including UroMed Corporation ("UroMed"), a manufacturer of a
urethral insert, have obtained or are pursuing patent protection for various
aspects of the design, production and manufacturing of continence care products.
There can be no assurance that the Company's technology, current or future
products or activities will not be deemed to infringe upon the rights of others,
including but not limited to UroMed. 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 technology 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.
12
<PAGE>
The medical device industry is characterized by frequent and substantial
intellectual property litigation, particularly with respect to newly developed
technology. Litigation may be necessary to enforce patents issued to 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. The Company has received an opinion from patent counsel to
the effect that the FEMSOFT insert as configured, as of the date of the opinion,
does not infringe a United States patent held by UroMed. The opinion only
represents the reasoned professional judgment of the Company's patent counsel
and is not binding on any court or third party. This opinion of patent counsel
would not preclude an action for patent infringement by UroMed, and UroMed could
choose to bring an action alleging infringement of the UroMed patent at any time
in the future. Intellectual property litigation is complex and expensive, and
the outcome of such litigation is difficult to predict. Any such litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. As a result, a claim by a third party that the Company's current
products or products in development allegedly infringe its patent rights could
have a material adverse effect on the Company. Moreover, 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. If third party patents containing claims
affecting the Company's technology were issued and such claims were 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. See
"Business--Patents and Proprietary Rights."
POSSIBILITY OF PRODUCT LIABILITY LITIGATION; POSSIBLE INADEQUACY OF INSURANCE
The medical products industry is subject to substantial product liability
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 a
material adverse effect on the Company, including on market acceptance of its
products. The Company maintains general insurance policies that include coverage
for product liability claims. The policies are limited to an aggregate maximum
of $6 million per product liability claim, with an annual aggregate limit of $6
million under the policies. The Company may require increased product liability
coverage as new products are developed and commercialized. There can be no
assurance that liability claims will not exceed the coverage limits of the
Company's policies or that adequate insurance will continue to be available on
commercially reasonable terms, if at all. A product liability claim or other
claim with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON 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. Additionally, the Company is 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 Company
also depends on its ability to attract and retain additional highly qualified
management and technical personnel. Additionally, the Company's future success
depends on its ability to attract and retain skilled and unskilled production
personnel in accordance with future sales volumes. The Company faces intense
competition for qualified personnel in all of the
13
<PAGE>
aforementioned areas, and there can be no assurance that the Company will be
able to attract and retain such personnel. The loss of the services of one or
more of the current management group or the inability to hire additional
personnel as needed could impair the Company's ability to commercialize and
manufacture 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. See "Management."
FLUCTUATIONS IN QUARTERLY FINANCIAL PERFORMANCE
The Company may experience significant fluctuations in revenues and results
of operations on a quarter to quarter basis in the future. Quarterly operating
results may fluctuate due to numerous factors, including the timing of
regulatory approvals, if any, of the Antibacterial Foley catheter and FEMSOFT
insert, the timing and level of market acceptance, if any, of the Antibacterial
Foley catheter and FEMSOFT insert, the timing and level of expenditures
associated with new product development activities, the timing and level of
expenditures associated with expansion of sales and marketing activities and
overall operations, the Company's ability to cost-effectively expand
manufacturing capacity and maintain consistently acceptable yields in the
manufacture of continence care products, the success of the activities conducted
under private label arrangements, changes in demand for the Company's products
based on changes in third party reimbursement, competition, changes in
government regulation and other factors, the timing of significant orders from
and shipments to customers, and general economic conditions. These factors are
difficult to forecast, and these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Fluctuations in quarterly demand for products and order cancellations may
adversely affect the continuity of the Company's manufacturing operations,
increase uncertainty in operational planning, disrupt cash flow from operations
and contribute to the volatility of the Company's stock price. The Company's
expenses are based in part on the Company's expectations as to future revenue
levels and to a large extent are fixed in the short-term. If actual revenues do
not meet expectations, the Company's business, financial condition and results
of operations could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Potential Fluctuations in Quarterly Results."
POTENTIAL VOLATILITY OF STOCK PRICE
In recent years, the 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. Factors such as variations in the Company's financial performance,
changes in stock market analysts' recommendations regarding the Company,
announcements of technological innovations by the Company, its competitors or
providers of alternative products, therapies or results of clinical trials or
other regulatory or reimbursement developments relating to the Company could
cause the market price of the Common Stock to fluctuate substantially. Broad
market fluctuations, or other factors affecting the market prices of the stocks
of medical technology companies generally, may adversely affect the market price
of the Common Stock.
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECTS OF MINNESOTA LAW
Pursuant to the Company's Articles of Incorporation, the Board of Directors
has the 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 the 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
14
<PAGE>
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 Common Stock. See "Description of Capital Stock."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on the Common Stock and does
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in net tangible book value per share of
$9.57. Investors may also experience additional dilution as a result of the
exercise of outstanding stock options and warrants. See "Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this Prospectus
constitute "forward-looking statements" within the meaning of the Reform Act.
Such forward-looking statements may be identified by the use of terminology such
as "may," "will," "expect," "anticipate," "intend," "designed," "estimate,"
"should" or "continue" or the negatives thereof or other variations thereon or
comparable terminology. Such forward-looking statements involve known or unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the lack and uncertainty of regulatory
approval for the Company's products in development, primarily the Antibacterial
Foley catheter and FEMSOFT insert; the uncertainty of market acceptance of the
Antibacterial Foley catheter and FEMSOFT insert; the risks associated with the
Company's expanded reliance on sales of ROCHESTER MEDICAL brand products and the
Company's limited sales and marketing experience with ROCHESTER MEDICAL brand
product sales; the Company's history of losses and uncertainty of profitability;
the Company's dependence on a small number of private label distributors for the
majority of its sales; the Company's dependence on limited or single sources of
supply for critical raw materials; uncertainties associated with beginning
production on the Company's new liquid encapsulation manufacturing line and
expanded Foley catheter and male external catheter manufacturing lines; the
Company's highly competitive industry and risks that advances in alternative
treatments or products could make the Company's products obsolete; changes in,
or failure to comply with, government regulations; the uncertainty of third
party reimbursement for certain of the Company's products; the Company's
dependence on and the uncertainty of patent and proprietary technology
protection; possible product liability litigation; potential fluctuations in the
Company's quarterly results; the Company's dependence on key employees; general
economic and business conditions; and other factors referenced in this
Prospectus. See "Risk Factors."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Common Stock offered hereby are estimated to be $19.5 million, based on an
assumed offering price of $16.25 per share, after deducting the estimated
Placement Agent's fee and estimated offering expenses.
The Company intends to use the net proceeds, in part, as follows: $4.0
million for development and commercialization of the Antibacterial Foley
catheter and FEMSOFT insert; $4.0 million for expansion of the ROCHESTER MEDICAL
brand sales force; $3.0 million for scale-up of manufacturing facilities; and
$3.0 million for research and development. The Company intends to use the
remainder of the net proceeds for working capital and other general corporate
purposes. In addition, the Company may use a portion of net proceeds for the
acquisition of businesses, technologies and products that complement the
Company's business. The Company currently has no commitments or agreements with
respect to any future acquisitions. Pending use as described above, the net
proceeds from this offering will be invested in short-term, interest-bearing,
investment grade securities.
The amounts above are estimates, and the actual cost, timing and amount of
funds required for such uses by the Company will depend on, among other things,
the timing of regulatory approvals, if any, for the Antibacterial Foley catheter
and FEMSOFT insert; the costs and timing of expansion of sales and marketing
activities; the amount of revenues from sales of the Company's existing and new
products; changes in, termination of, and the success of, existing and new
distribution arrangements; the cost of maintaining, enforcing and defending
patents and other intellectual property rights; competing technological and
market developments; developments relating to regulatory and third party
reimbursement matters; the cost and progress of the Company's research and
development efforts; and other factors. The Board of Directors has broad
discretion in determining how the proceeds of this offering will be applied.
Based upon its current plans, the Company believes that the net proceeds of this
offering, together with its existing resources and anticipated cash flows from
operations, will be adequate to satisfy its capital needs for at least 24 months
following the offering. See "Risk Factors--Possible Need for Additional
Capital," "Special Note Regarding Forward-Looking Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
ROCM. The following table sets forth, for the periods indicated, the range of
high and low last sale prices for the Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter............................................................ $ 18.00 $ 12.88
Second Quarter........................................................... 15.25 14.00
Third Quarter............................................................ 22.25 15.25
Fourth Quarter........................................................... 18.50 15.75
FISCAL YEAR ENDED SEPTEMBER 30, 1997
First Quarter............................................................ $ 19.13 $ 15.25
Second Quarter........................................................... 21.00 16.00
Third Quarter............................................................ 16.25 12.25
Fourth Quarter........................................................... 18.00 12.75
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter (through November 3, 1997)................................. $ 17.75 $ 16.25
</TABLE>
The last reported sale price of the Common Stock on November 3, 1997 was
$16.25 per share. As of September 30, 1997, the Company had 115 shareholders of
record. Such number of record holders does not reflect shareholders who
beneficially own Common Stock in nominee or street name.
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<PAGE>
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock and does
not anticipate paying cash dividends in the foreseeable future.
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
$16.9 million, or $4.08 per share. Net tangible book value per share represents
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding. Without taking into account any changes in net
tangible book value after September 30, 1997, other than to give effect to the
receipt of the net proceeds from the sale of 1,300,000 shares of Common Stock
offered hereby at an assumed public offering price of $16.25 per share, the pro
forma net tangible book value of the Company as of September 30, 1997, would
have been $36.3 million, or $6.68 per share. This represents an immediate
increase in pro forma net tangible book value of $2.60 per share to existing
holders of Common Stock and immediate dilution of $9.57 per share to investors
purchasing shares of Common Stock in the offering. The following table
illustrates this per share dilution as of September 30, 1997:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................... $ 16.25
Net tangible book value per share as of September 30,
1997................................................... $ 4.08
Increase per share attributable to new investors......... 2.60
---------
Pro forma net tangible book value per share after the
offering................................................. 6.68
---------
Dilution per share to new investors........................ $ 9.57
---------
---------
</TABLE>
The foregoing assumes no exercise of warrants or options subsequent to
September 30, 1997. As of September 30, 1997, there were: (a) 535,000 shares of
Common Stock issuable upon exercise of outstanding stock options, with a
weighted average exercise price of $12.35 per share; (b) 75,000 shares of Common
Stock issuable upon exercise of outstanding warrants, with a weighted average
exercise price of $14.85 per share; and (c) 209,000 shares of Common Stock
reserved for issuance under the Company's stock option plans. To the extent that
such options or warrants are exercised, or such shares are issued, there will be
further dilution to new investors. See "Description of Capital Stock."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, on an actual basis and pro forma as adjusted to give effect
to the receipt by the Company of the estimated net proceeds from the sale of
1,300,000 shares of Common Stock offered hereby at an assumed public offering
price of $16.25, and after deducting the estimated Placement Agent's fees and
estimated offering expenses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................................................ $ -- $ --
--------- -----------
Shareholders' equity(1):
Common stock, no par value: 20,000,000 shares authorized; 4,133,500 shares issued and
outstanding, 5,433,500 issued and outstanding, as adjusted............................ 24,697 44,155
Accumulated deficit..................................................................... (7,516) (7,516)
--------- -----------
Total shareholders' equity............................................................ 17,181 36,639
--------- -----------
Total capitalization................................................................ $ 17,181 $ 36,639
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Based on 4,133,500 shares outstanding as of September 30, 1997. Excludes:
(a) 535,000 shares of Common Stock issuable upon exercise of outstanding
stock options, with a weighted average exercise price of $12.35 per share;
(b) 75,000 shares of Common Stock issuable upon exercise of outstanding
warrants, with a weighted average exercise price of $14.85 per share; and
(c) 209,000 shares of Common Stock reserved for future issuance under the
Company's stock option plans. See "Description of Capital Stock."
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data of the Company as of September 30,
1996 and 1997 and for the three fiscal years ended September 30, 1995, 1996 and
1997 are derived from, and are qualified by reference to, the financial
statements of the Company audited by Ernst & Young LLP, independent auditors,
included elsewhere in this Prospectus. The following selected financial data as
of September 30, 1993, 1994 and 1995 and for the fiscal years ended September
30, 1993 and 1994 are derived from audited financial statements not included
herein. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and Notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................................. $ 1,393 $ 2,189 $ 3,131 $ 5,540 $ 7,615
Cost of sales.............................................. 1,254 1,716 2,448 3,788 4,869
--------- --------- --------- --------- ---------
Gross profit (loss)...................................... 139 473 683 1,752 2,746
Operating expenses:
Marketing and selling.................................... 259 574 858 1,351 2,210
Research and development................................. 268 210 358 1,182 1,451
General and administrative............................... 338 692 766 1,112 1,499
--------- --------- --------- --------- ---------
Total operating expenses............................... 865 1,476 1,982 3,645 5,160
--------- --------- --------- --------- ---------
Loss from operations....................................... (726) (1,003) (1,299) (1,893) (2,414)
Interest income............................................ 126 78 56 818 657
Interest expense........................................... (35) (39) (68) (285) (342)
--------- --------- --------- --------- ---------
Net loss................................................... $ (635) $ (964) $ (1,311) $ (1,360) $ (2,099)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per common share.................................. $ (.24) $ (.36) $ (.49) $ (.35) $ (.51)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares outstanding....... 2,660 2,660 2,682 3,867 4,132
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $ 2,840 $ 1,370 $ 2,905 $ 17,408 $ 4,639
Working capital........................................... 3,669 2,822 4,348 18,861 7,081
Total assets.............................................. 6,428 5,631 7,163 23,888 18,613
Long-term debt............................................ 411 395 3,036 3,321 --
Accumulated deficit....................................... (1,783) (2,747) (4,058) (5,418) (7,516)
Total shareholders' equity................................ 5,744 4,815 3,672 19,231 17,181
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. SPECIAL
NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" FOR FACTORS RELATING TO SUCH STATEMENTS.
GENERAL
The Company designs, develops, manufactures and markets innovative urinary
continence care products for urinary dysfunction management and urine drainage
management. 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 also began marketing products
under the ROCHESTER MEDICAL brand.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the statements of operations of the Company expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER 30,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales:
Private label..................................................................... 79% 82% 78%
ROCHESTER MEDICAL brand........................................................... 21 18 22
----- ----- -----
Total net sales..................................................................... 100% 100% 100%
Cost of sales....................................................................... 78 68 64
----- ----- -----
Gross margin........................................................................ 22 32 36
Operating expenses:
Marketing and selling............................................................. 27 25 29
Research and development.......................................................... 11 21 19
General and administrative........................................................ 25 20 20
----- ----- -----
Total operating expenses............................................................ 63 66 68
----- ----- -----
Loss from operations................................................................ (41) (34) (32)
Interest income (expense), net...................................................... (1) 9 4
----- ----- -----
Net loss............................................................................ (42)% (25)% (28)%
----- ----- -----
----- ----- -----
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
NET SALES. Net sales increased 37% to $7.6 million in fiscal 1997, from
$5.5 million in the prior fiscal year. The increase was primarily due to growth
in sales of ROCHESTER MEDICAL brand products and increased sales to ConvaTec.
Sales of ROCHESTER MEDICAL brand products increased 68% to $1.7 million in
fiscal 1997 from $1.0 million in fiscal 1996, while sales to ConvaTec increased
188% to $1.9 million in fiscal 1997 from $643,000 in fiscal 1996. Other private
label sales increased 5% to $4.1 million in fiscal 1997 from $3.9 million in
fiscal 1996. Sales to ConvaTec, Hollister, Allegiance Euromedical and Mentor
accounted, respectively, for 24%, 10%, 4% and 30% of fiscal 1997 net sales
compared, respectively, to 12%, 12%, 19%, and 29% of fiscal 1996 net sales.
21
<PAGE>
GROSS MARGIN. The Company's gross margin as a percentage of net sales was
36% in fiscal 1997 compared to 32% for fiscal 1996. Fiscal 1997 gross margin
benefitted from manufacturing efficiencies associated with higher production
volumes. The Company expects gross margin to be reduced in future periods by
depreciation and other expenses associated with the expansion and scale-up of
the Company's manufacturing facilities. The Company expects to experience
reduced gross margin until such time, if ever, as the Company is able to
increase utilization of the expanded and scaled-up manufacturing facilities.
MARKETING AND SELLING. Marketing and selling expense increased 64% to $2.2
million in fiscal 1997 from $1.4 million in fiscal 1996. The increased expense
reflects expansion of the Company's domestic direct sales organization and
increased product promotion spending, in particular increased marketing and
selling activities for ROCHESTER MEDICAL brand products.
RESEARCH AND DEVELOPMENT. Research and development expense increased 23% to
$1.5 million in fiscal 1997 from $1.2 million in fiscal 1996, due to incremental
costs associated with clinical studies for new products, in particular the
FEMSOFT insert.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
35% to $1.5 million in fiscal 1997 from $1.1 million in fiscal 1996, due to
requirements for business and administrative infrastructure development to
support current and anticipated growth.
INTEREST INCOME (EXPENSE), NET. Interest income decreased to $657,000 for
fiscal 1997 from $818,000 for fiscal 1996, as a result of earnings on lower
levels of cash available for investment. Interest expense in fiscal 1997 and
fiscal 1996 related to the convertible note to ConvaTec (the "ConvaTec Debt")
that the Company repaid on September 30, 1997.
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. Sales to ConvaTec,
Hollister, Allegiance Euromedical 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 32% in fiscal 1996, compared to 22% 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 $1.4
million 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 employee relocation costs, 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 $1.2 million 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 new product
development. During fiscal 1996, the Company completed a major clinical study
for the Antibacterial Foley catheter and initiated a major clinical study for
the FEMSOFT insert.
22
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
45% to $1.1 million 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 the average
balance of 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 ConvaTec Debt
for an entire year.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in revenues and results
of operations on a quarter to quarter basis in the future. Quarterly operating
results will fluctuate due to numerous factors, including the timing of
regulatory approvals, if any, of the Antibacterial Foley catheter and FEMSOFT
insert, the timing and level of market acceptance, if any, of the Antibacterial
Foley catheter and FEMSOFT insert, the timing and level of expenditures
associated with new product development activities, the timing and level of
expenditure associated with expansion of sales and marketing activities and
overall operations, the Company's ability to cost-effectively expand
manufacturing capacity and maintain consistently acceptable yields in the
manufacture of continence care products, the success of the activities conducted
under private label arrangements, changes in demand for the Company's products
based on changes in third party reimbursement, competition, changes in
government regulation and other factors, the timing of significant orders from
and shipments to customers, and general economic conditions. These factors are
difficult to forecast, and these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Fluctuations in quarterly demand for products and order cancellations may
adversely affect the continuity of the Company's manufacturing operations,
increase uncertainty in operational planning, disrupt cash flow from operations
and contribute to the volatility of the Company's stock price. The Company's
expenses are based in part on the Company's expectations as to future revenue
levels and to a large extent are fixed in the short-term. If actual revenues do
not meet expectations, the Company's business, financial condition and results
of operations could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through public offerings
and private placements of its equity securities, and has raised approximately
$24.7 million in net proceeds from its inception through September 30, 1997. In
August 1995, the Company received $3.0 million of proceeds from the issuance of
the ConvaTec Debt. The Company repaid the ConvaTec Debt, including accrued
interest, for $3.7 million on September 30, 1997. The Company had an accumulated
deficit of approximately $7.5 million through September 30, 1997.
The Company's cash and marketable securities at September 30, 1997 were $4.6
million compared to $17.4 million at September 30, 1996, a net decrease of $12.8
million. The Company used $2.5 million of cash to fund operating activities
during fiscal 1997 and approximately $900,000 to fund operating activities
during fiscal 1996.
Cash of $6.9 million was used for capital expenditures during fiscal 1997,
relating to expansion of the existing production facility and construction of
the Company's new production and administrative facility. At September 30, 1997,
the Company had commitments for approximately $2.0 million of capital
expenditures, primarily relating to new production facilities.
Trade accounts receivable at September 30, 1997 increased 30% to $2.0
million as compared to $1.5 million at September 30, 1996, reflecting increased
sales and as a result of the timing of product orders and shipments during the
fourth quarter of fiscal 1997. Inventories increased 39% to $1.7 million as
23
<PAGE>
compared to $1.2 million at September 30, 1996, reflecting the Company's
decision to increase inventory to improve the Company's capability to fill
customer orders. Changes in other asset and liability balances relate primarily
to timing of expense recognition, including an increase of $351,000 of accrued
clinical project costs.
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity, product education efforts, advertising and other working
capital and general corporate purposes. Although the Company believes that the
net proceeds of this offering, together with its existing resources and
anticipated cash flows from operations, will be sufficient to satisfy its
capital needs for at least 24 months following the offering, there can be no
assurance that the Company will not require additional financing before that
time. The Company's actual liquidity and capital requirements will depend upon
numerous factors, including the timing of regulatory approvals, if any, for the
Antibacterial Foley catheter and FEMSOFT insert; the costs and timing of
expansion of sales and marketing activities; the amount of revenues from sales
of the Company's existing and new products; changes in, termination of, and the
success of, existing and new distribution arrangements; the cost of maintaining,
enforcing and defending patents and other intellectual property rights;
competing technological and market developments; developments related to
regulatory and third party reimbursement matters; the cost and progress of the
Company's research and development efforts; and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. Failure to raise capital when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such financing, if
required, will be available on terms satisfactory to the Company, if at all.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 130 "Reporting Comprehensive Income," which establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. The FASB also issued FASB Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which significantly
changes the way segment information is reported in annual financial statements
and also requires selected segment information in interim financial reports to
shareholders. Both statements are effective for fiscal years beginning after
December 15, 1997 and, based on current circumstances, the Company does not
believe the effect of adoption will be material to the financial statements.
24
<PAGE>
BUSINESS
INTRODUCTION
The Company develops, manufactures and markets innovative urinary continence
care products for urinary dysfunction management and urine drainage management.
The Company currently manufactures and markets a broad line of functionally and
technologically enhanced latex-free versions of standard continence care
products, including male external catheters, Foley catheters and intermittent
catheters. The Company is also developing innovative and technologically
advanced products designed to provide clinically and commercially attractive
solutions to continence care needs. The Company is conducting clinical trials
relating to the FEMSOFT insert, a soft, liquid-filled, conformable urethral
insert for managing female incontinence. In May 1997, the Company submitted a
510(k) to the FDA for the Antibacterial Foley catheter, which is designed to
reduce the incidence of bacterial CUTI. The Company intends to expand the
marketing and sales of ROCHESTER MEDICAL brand products using the Company's
dedicated sales force and, simultaneously, to increase the distribution of
private label products through its existing strategic relationships. The Company
believes that its proprietary manufacturing technologies, including its liquid
encapsulation techniques, automated production processes and synthetic materials
know-how, enable the Company to manufacture products with innovative designs and
features on a cost effective basis.
The Company's urinary dysfunction management products address the two
primary types of chronic urinary dysfunction: urinary incontinence, the
inability to control one's urinary function, leading to involuntary and frequent
urine leakage; and urinary retention, an inability to voluntarily, spontaneously
and completely empty the bladder. The Company markets a broad line of latex-free
catheters for urinary dysfunction management, including male external catheters
for male urinary incontinence and intermittent catheters for male and female
urinary retention. The Company is developing the FEMSOFT insert for managing
female stress urinary incontinence, the most common form of urinary
incontinence. In February 1997, the Company commenced a multi-site clinical
trial of the FEMSOFT insert, which will involve 120 patients over a 12 month
period. The Company has reported to the FDA preliminary clinical trial results
through July 15, 1997. These preliminary clinical trial results cover 38
patients and 2,101 patient uses and indicate that use of the FEMSOFT insert
resulted in a significant reduction of incontinence episodes and a 94% rate of
patient satisfaction, as indicated by written questionnaire responses in which
patients expressed a desire to continue use of the FEMSOFT insert. As of July
15, 1997, 11 infections, six instances of minor external tissue trauma
associated with the patients' inexperience in application of the FEMSOFT insert
during the first week of use, and five patient withdrawals from the clinical
trials had been reported. The Company will be required to file a PMA to obtain
FDA approval to market the FEMSOFT insert in the United States.
The Company's urine drainage management products are used by medical
professionals on a temporary basis to monitor and manage urine drainage during
surgery, post-operative recovery and other forms of acute care. For urinary
drainage management, the Company markets a broad line of silicone Foley
catheters. The Company's Foley catheters are latex-free, eliminating the risk of
allergic reactions and reducing the potential for tissue damage, which can be
associated with latex use. These catheters incorporate advanced features, such
as smooth, seamless exteriors, which help to reduce the risk of irritation. The
Company is developing the Antibacterial Foley catheter, an advanced-design
catheter which provides sustained release of a broad-spectrum antibacterial
agent while the patient is catheterized. Clinical trials have demonstrated that
the Antibacterial Foley catheter provide a three-fold reduction in the incidence
of CUTI during the first seven days of catheterization, as compared to other
silicone Foley catheters. CUTI is a leading type of infection in hospitals,
resulting in approximately 900,000 infections annually in the United States.
CUTI develops in approximately 10% to 30% of patients with Foley catheters. The
cost of treating CUTI is estimated at over $600 million annually in the United
States or an average of $680 per case of CUTI.
25
<PAGE>
THE CONTINENCE CARE MARKET
URINARY SYSTEM AND CONTINENCE CARE
In a normally functioning 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. Urinary continence, or the appropriate storage and release of
urine, is controlled by the bladder neck and the urinary sphincter, which
surrounds the bladder neck and urethra, acting together as a valve. 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.
Urinary dysfunction may result from a malfunction of any part of the system.
Urinary continence care involves both the treatment and management of urinary
dysfunction and the temporary management of a normally functioning urinary
system during surgery, post-operative recovery and other forms of acute care.
URINARY DYSFUNCTION
Urinary dysfunction affects approximately 11 million women and two million
men in the United States. Urinary dysfunction can be characterized as either
incontinence or retention. Urinary incontinence is the inability to control
one's urinary function, leading to involuntary and frequent urine leakage from
the bladder. Urinary retention is the inability to voluntarily, spontaneously
and completely empty one's bladder, preventing urine flow even though the
bladder continues to fill.
The consequences of urinary dysfunction, including depression, discomfort
and embarrassment about appearance and odor, are significant and often result in
a dramatic change in quality of life. Urinary dysfunction often results in loss
of self-esteem, an increased dependence on caregivers, a loss of mobility and
social withdrawal and isolation. In addition, urinary dysfunction has been
associated with a number of physical effects, including a predisposition to
perineal rashes, pressure ulcers, urinary tract infections, urosepsis, falls and
fractures. In the elderly, urinary dysfunction is a major cause of
institutionalization into a nursing home.
URINARY INCONTINENCE. Urinary incontinence may result from one or more
conditions: weakened pelvic muscles; pelvic organic prolapse; tumors or other
cancers and cancer treatments; prostate surgery; pelvic trauma; spinal cord
damage; and medications. These diverse conditions cause 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. Among women, stress
incontinence is primarily due to a weakening of the pelvic muscles caused
by pregnancy and childbirth.
- URGE INCONTINENCE is the involuntary loss of urine due to an involuntary
bladder contraction which is associated with a strong, uncontrollable
desire to urinate.
- OVERFLOW INCONTINENCE is the involuntary loss of urine when the amount of
urine produced exceeds the bladder's capacity.
Stress incontinence or mixed stress and urge incontinence represent over 50%
of all cases of urinary incontinence and over 60% of cases among women. While
urinary incontinence is present at all ages, the prevalence of urinary
incontinence increases with age. Urinary incontinence affects more than 50% of
the more than 1.5 million nursing home residents in the United States. Among
persons older than 60 years of age, other than nursing home residents, the
prevalence of urinary incontinence ranges from 15% to 35%, with women having
twice the prevalence of men. In the population between 15 and 64 years of age,
the prevalence of urinary incontinence ranges from 1.5% to 5% of men and from
10% to 30% of women.
26
<PAGE>
URINARY RETENTION. Individuals suffering from urinary retention are unable
to empty their bladders voluntarily. This condition may have serious medical
consequences, including severe infection, kidney failure and death. Urinary
retention is commonly caused by neurogenic bladder, an inability of the bladder
to contract in a normal manner to initiate voiding, and urinary tract
obstruction, a blockage of the bladder neck or urethra which prevents the normal
passage of urine. Neurogenic bladder is often a result of spinal cord injury,
diabetes, Parkinson's Disease, multiple sclerosis and other nervous system
trauma. Urinary tract obstructions are primarily due to drug side effects,
surgery and congenital abnormalities. Urinary retention patients often
experience a combination of incontinence and retention.
CURRENT TREATMENTS FOR AND MANAGEMENT OF URINARY DYSFUNCTION
Approximately $15 billion is spent annually in the United States for the
medical treatment and management of urinary dysfunction. Of this amount, the
Company estimates that $3 billion is spent annually on management products and
devices and the remainder is spent on institutionalization and medical
treatments, including surgery, pharmaceuticals and behavior therapies. To date,
available medical treatments and management products have had limited success in
continence management. In a recent survey of incontinent individuals, survey
respondents reported an overall cure rate of less than 3% for all medical
treatments, and 56% of respondents reported that their medical treatments
produced no improvement in, or worsened, their condition. Additionally, 62% of
respondents reported that they were dissatisfied with their medical treatment
for urinary incontinence.
The primary medical treatments for urinary dysfunction management are
discussed below.
BEHAVIORAL THERAPIES. Behavioral therapies for stress incontinence include
bladder training and habit modification, pelvic muscle exercise, biofeedback and
electrical stimulation. All such therapies are used primarily to treat female
stress incontinence. Although these therapies are non-invasive and often result
in some patient improvement, they typically do not provide a complete cure for
urinary incontinence and require significant patient involvement. The success of
many behavioral therapies depends on following rigid voiding schedules and
strenuous exercise programs on a daily basis. Many patients are unable or
unwilling to comply with these schedules and programs over the long term.
SURGERY. Surgery is used primarily to treat stress incontinence and
includes artificial urinary sphincter implantations for patients with intrinsic
sphincter deficiency (the inability of the urinary sphincter to contract
sufficiently to maintain continence) and bladder neck suspension surgery to
stabilize the urethra for patients with hypermobility (a significant
displacement of the urethra during exertion, which accounts for a majority of
stress incontinence cases). These surgeries are expensive, involve risks of
failure and complications, including urinary retention, and are highly invasive,
requiring general anesthesia and several weeks or months for full recovery.
Another surgical treatment, indicated primarily for patients with intrinsic
sphincter deficiency, is the injection of urethral bulking agents into the area
around the urethra to create a mild obstruction. Although less invasive than
other surgeries, urethral bulking agents are relatively expensive, and the
procedure must be repeated periodically due to bioabsorption of the bulking
agents. In addition, surgery to treat urinary retention may be performed to
remove urethral obstructions, although these obstructions often return.
PHARMACEUTICALS. Pharmaceutical treatments primarily manage urge
incontinence by blocking involuntary bladder contractions. Pharmaceutical
treatments provide symptomatic relief rather than curing the underlying
condition and require long-term use. Drug treatments for urinary incontinence
may cause adverse effects, including drowsiness, dryness of the mouth,
dizziness, constipation and urinary retention.
The primary management products for urinary dysfunction are discussed below.
ABSORBENTS. The most prevalent incontinence management products are adult
absorbents, including adult diapers and absorbent pads, either disposable or
reusable. Adult absorbents are used because they provide needed protection and
can be easily self-administered without seeing a physician. Disadvantages of
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the adult absorbents include lack of control over urine flow and corresponding
discomfort from wetness, skin irritations and rash; embarrassment about
appearance and odor; perceived social stigma; inconvenience; and significant
compromise of freedom of lifestyle. Retail sales of adult absorbents in the
United States during 1995 were estimated to exceed $2.5 billion.
FOLEY CATHETERS. Foley catheters, or in-dwelling catheters (as more fully
described below), are used on a limited basis to manage urinary dysfunction. The
United States Department of Health and Human Services ("HHS") has reported that
more than 100,000 residents in nursing homes in the United States have long-term
Foley catheters in place to manage urinary dysfunction. The use of Foley
catheters to manage urinary dysfunction may cause urethral irritation and tissue
erosion due to catheter movement.
The Company believes that over 90% of the Foley catheters sold worldwide are
made of latex. Although latex has certain attractive physical characteristics
and cost advantages, latex contains natural proteins and allergens that may
irritate and damage the surrounding tissue. Latex catheters may be less
comfortable to use than synthetic catheters because crystals of urine salt can
form more easily on the surface of latex catheters. These crystals 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.
Healthcare providers now recognize that latex can also cause allergic reactions
that may be life-threatening for some patients. Concerns about latex allergies
among healthcare workers and the general population have also increased in
recent years. It has been reported that 10% to 15% of healthcare workers are
sensitive to latex healthcare products. As a result, healthcare institutions are
increasingly attempting to limit their workers' exposure to latex.
On September 30, 1997, the FDA issued final rules that require labeling of
latex medical devices to warn of possible allergic reactions. The final rules
require that all medical devices containing natural rubber latex be labeled with
the warning "Caution: This Product Contains Natural Rubber Latex Which May Cause
Allergic Reactions." The FDA will also require the removal of all claims that
latex medical devices are hypoallergenic from the labeling of these devices.
Manufacturers have until September 30, 1998 to comply with the new rules.
MALE EXTERNAL CATHETERS. Male external catheters are disposable devices for
the 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 penis 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. Male external catheters are designed to
be self-administered. These catheters are used primarily in home care settings
and long-term care facilities. Potential drawbacks of male external catheters
are leakage, skin irritation, inconvenience and reduced mobility. The Company
believes that approximately 75% of male external catheters sold worldwide are
made of latex, which results in many of the disadvantages associated with latex
products described above.
URETHRAL INSERTS AND BLADDER NECK SUPPORT PROSTHESES. The bladder neck and
urethra are delicate structures of mucous membranes and muscle that manage the
flow of fluids from the body. The urethra is a narrow, ribbon shaped canal,
which in females gradually twists and curves slightly from the bladder neck to
the exterior opening. As a result of the urethra's structure and sensitive
tissues, any rigid, nonconformable device that is inserted into the urethra has
the potential to distort the urethra's shape, cause muscle erosion and irritate
or damage the urethral tissues and make them more susceptible to infection.
Recently, urethral inserts and bladder neck support prostheses for female stress
incontinence have been introduced to the market. Currently marketed urethral
inserts occlude the female urethra to manage incontinence. Bladder neck support
prostheses manage incontinence by lifting the bladder neck and urethra through
pressure applied from the device in the vaginal cavity.
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INTERMITTENT CATHETERIZATION. Intermittent catheterization is the preferred
management modality for patients with urinary retention. Intermittent
catheterization involves the use of a straight catheter inserted through the
urethra into the bladder to achieve voiding. Patients using intermittent
catheterization often must perform this procedure every three to six hours. This
procedure can be uncomfortable, is associated with an increased incidence of
urinary tract infection, and in some patients may result in severe urethral
irritation. As an adjunct to medical treatments, primarily behavioral therapies,
intermittent catheterization increasingly is being recommended to manage urinary
incontinence.
URINE DRAINAGE MANAGEMENT
During surgery, post-operative recovery and certain other acute care
settings, it is often necessary for medical professionals to monitor the flow of
urine, and manage the urinary functions, of patients with normally functioning
urinary systems. Typically, urine drainage management is accomplished by placing
a Foley catheter in these patients. HHS has reported estimates that as many as
one out of four hospital patients in acute care settings undergoes a short-term
Foley catheterization. The Company believes over 90% of such patients require a
Foley catheter for seven days or less. The Company estimates that sales of Foley
catheters and related accessories in the United States were $240 million in
1995.
The Foley catheter is an in-dwelling catheter that provides continuous
drainage of the bladder. 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. A Foley catheter is inserted primarily by healthcare professionals
and is not designed for self-administration.
The regular use of Foley catheterization for urinary drainage management is
associated with CUTI. CUTI is primarily caused by bacteria that migrate through
the urethra into the bladder along the outside of the catheter. The Company and
other industry sources estimate that 10% to 30% of patients with Foley catheters
develop a CUTI. Hospitals have reported that cases of CUTI account for 40% of
hospital-acquired infections, or approximately 900,000 infections each year.
CUTI prolongs patients' recovery time and increases mortality risk. The direct
cost of treating these infections is estimated at over $600 million annually in
the United States, or an average $680 per case of CUTI, which is substantially
greater than the cost of a Foley catheter. Moreover, increases in the number of
antibiotic-resistant strains of bacteria has raised the level of concern
regarding CUTI. In particular, as a result of these concerns, many physicians
are reluctant to prescribe antibiotics prophylactically to control CUTI.
ROCHESTER MEDICAL SOLUTIONS
The Company currently manufactures and markets functionally and
technologically enhanced versions of standard continence care products,
including Foley catheters, male external catheters and intermittent catheters.
The Company is also developing innovative and technologically advanced products
designed to provide clinically and commercially attractive solutions to the
limitations of current continence care. The Company's products are designed to
advance the quality of continence care by providing improved medical outcomes on
a cost effective basis. The Company believes that its proprietary manufacturing
technologies, including its liquid encapsulation techniques, automated
production processes and synthetic materials know-how, enable the Company to
manufacture products with innovative designs and features.
The Company believes that its current products and products in development,
including the Antibacterial Foley catheter and FEMSOFT insert, offer some or all
of the following benefits.
- IMPROVED MEDICAL OUTCOMES. The Company's products are designed to improve
the medical outcome of continence care as compared to many current
continence care devices. The Company's
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Foley catheters are designed to reduce irritation and damage to the
urethra that can lead to infection, while its male external catheters are
intended to reduce the incidence of tissue damage, in part through the
Company's materials technology. The Company's soft and pliable FEMSOFT
insert and advanced-design products are designed to reduce irritation and
tissue erosion in the urethra by conforming to the movement of the urethra
during normal activities. The Antibacterial Foley catheter is designed to
reduce bacterial CUTI.
- IMPROVED PATIENT SATISFACTION. Each of the Company's products is designed
to improve patient satisfaction and comfort. The Company's silicone male
external catheters are odor-free and have greater gas permeability than
catheters made from other materials. The Company believes these catheters
may reduce skin irritation and increase patient comfort. In addition, the
Company's male external catheters incorporate proprietary adhesive
technologies, which create better adherence to the skin, reduce leakage
and give the wearer greater confidence. The Company's liquid encapsulation
technology enables it to produce soft, pliable devices, such as the
FEMSOFT insert and other advanced design products, that are more
comfortable for the patient to use. In addition, the FEMSOFT insert
requires no collection bags or absorbent pads or liners, which can cause
embarrassment, restrict mobility and compromise lifestyle.
- ELIMINATION OF RISK OF LATEX REACTIONS. The Company manufactures all of
its products from silicone, a non-toxic, biocompatible and hypoallergenic
material, or other non-latex synthetic materials, thereby eliminating the
risk of latex reactions in patients and caregivers. The use of non-latex
materials in the Company's products also protects against the irritation
and discomfort that is sometimes associated with the use of latex-based
products.
- EASE OF USE. The Company's self-administered products are designed to be
easy to use and convenient for the patient. The Company's male external
catheters are transparent, permitting visual skin inspection without
removal of the catheters and aiding proper placement of the catheters. The
FEMSOFT insert is designed to be easily inserted and removed by most women
following proper training. It requires no inflation, deflation, syringes
or valving mechanisms.
- COST EFFECTIVENESS. The Company has designed its products to include
features intended to reduce the incidence of tissue trauma or other
adverse consequences of continence care, which may increase the total cost
of patient treatment. The Company believes that these features position
its products as cost effective alternatives for patients and caregivers.
For example, the Company believes that the Antibacterial Foley catheter
will lower overall patient costs by reducing the incidence of bacterial
CUTI among the relevant patient population.
- QUALITY. The Company seeks to manufacture quality continence care
products using superior materials, program controlled production
processes, comprehensive quality control testing and innovative product
designs.
BUSINESS STRATEGY
The Company's objective is to become a leading developer and worldwide
marketer of innovative continence care products of high quality and value. The
Company's strategy is to offer a broad range of continence care products,
including products for urinary dysfunction management and urinary drainage
management. Key elements of the Company's business strategy include:
- FOCUS ON COMMERCIALIZING ANTIBACTERIAL FOLEY CATHETER AND FEMSOFT
INSERT. The Company is focused on manufacturing scale-up and marketing
and sales preparation for introduction of the Antibacterial Foley
catheter, if the Company receives clearance from the FDA. The Company is
also focused on continuing clinical testing of the FEMSOFT insert in
preparation for submitting a PMA to the FDA, and is installing a
production line for the FEMSOFT insert and other liquid encapsulation
products. Once these product development programs are completed, the
Company intends to
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increase its focus on the development and commercialization of the
Company's other advanced design products.
- AGGRESSIVELY PURSUE SALES GROWTH OF ROCHESTER MEDICAL BRAND PRODUCTS. To
date, the majority of the Company's sales have been made through private
label arrangements. The Company's strategy is to place increased emphasis
on promotion of ROCHESTER MEDICAL brand products in order to develop
market recognition of the brand. Through an expanded sales force and
related marketing activities, the Company intends to promote awareness of
the key advantages of the Company's ROCHESTER MEDICAL brand products over
competitive continence care products. The sales force will focus its
efforts on the relatively small number of significant buying groups,
dealers, distributors, institutions and home care providers that control a
substantial portion of product purchases in the Company's target markets.
In order to penetrate these purchasers, the Company's sales force focuses
on differentiating the Company's products on the basis of quality,
improved medical outcomes and cost effectiveness. The Company intends to
emphasize the sale of the FEMSOFT insert and Antibacterial Foley catheter
through the ROCHESTER MEDICAL brand. The Company will also continue to
expand its network of international distributors of ROCHESTER MEDICAL
brand products.
- UTILIZE PROPRIETARY TECHNOLOGIES TO EXPAND PRODUCT OFFERINGS. The Company
will continue development of disposable, latex-free continence care
products using its proprietary technologies. The Company will seek to
apply its capabilities in molding, shaping, and forming liquid
encapsulated devices under programmed controls to develop new devices that
are softer and more comfortable for the patient. The Company also intends
to pursue opportunities to develop other continence care products using
its antimicrobial matrix and polymer and adhesives technologies. In the
longer term, the Company intends to explore opportunities for the
development of innovative medical devices for other markets, such as fecal
incontinence, ostomy and gastro-intestinal tubes, which will benefit from
the softer, more conformable devices that can be produced using the
Company's liquid encapsulation technologies.
- LEVERAGE STRENGTHS IN AUTOMATED MANUFACTURING TECHNOLOGY. The Company
seeks to use its proprietary manufacturing processes, materials expertise,
custom designed equipment and technical know-how to simplify and automate
traditional manufacturing techniques for continence care products. In
order to manufacture high quality products at competitive costs, the
Company concurrently designs and develops new products and the processes
and equipment to manufacture them. The Company's manufacturing technology
is well suited to high-unit volume production of disposable devices on a
cost effective basis. The Company believes that controlling the cost of
the device is an important factor in the market for disposable devices.
- CAPITALIZE ON CONVATEC RELATIONSHIP AND OTHER PRIVATE LABEL
ARRANGEMENTS. The Company's growth strategy includes increasing its share
of the continence care market through its relationship with ConvaTec and
other private label arrangements. The Company will continue to work
closely with ConvaTec to increase sales under their strategic alliance and
to increase the Company's access to worldwide markets. In addition, the
Company, subject to the rights of ConvaTec, will continue to distribute
its products under private label arrangements with other established
medical products companies.
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PRODUCTS AND PRODUCTS IN DEVELOPMENT
The Company has the following disposable, latex-free continence care devices
in the market or in development for urinary dysfunction and urine drainage
management:
<TABLE>
<CAPTION>
ROCHESTER MEDICAL PRODUCTS AND PRODUCTS IN DEVELOPMENT
- -------------------------------------------------------------------------------------------
PRODUCT PRIMARY APPLICATION STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
URINARY DYSFUNCTION:
FEMSOFT insert Management of female In development/in a
incontinence multi-site clinical trial
Male external catheters Management of male Marketed product line
incontinence
PERSONAL CATHETER Intermittent Marketed product line
self-catheterization for
urine retention management
URINE DRAINAGE:
Antibacterial Foley Reduction of the incidence of In development/clinical trial
catheter bacterial CUTI in surgery completed/510(k) submitted
and post-operative recovery
urine drainage management
Foley catheters Surgery and post-operative Marketed product line
recovery urine drainage
management
OTHER ADVANCED DESIGN PRODUCTS:
COMFORT SLEEVE Long-term urine drainage 510(k) clearance received/
Foley catheter management not currently marketed
Female catheter Surgery and post-operative 510(k) clearance received/
recovery urine drainage not currently marketed
management; female
incontinence management
Female valved Female incontinence In development
catheter management
</TABLE>
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URINARY DYSFUNCTION
FEMSOFT INSERT
The FEMSOFT insert is a disposable device currently in clinical trials for
the management of stress incontinence in active women. It is a soft, conformable
urethral insert that assists the female urethra and bladder neck to control the
involuntary loss of urine. The device can be simply inserted, worn and removed
for voiding by most women. It requires no inflation, deflation, syringes or
valving mechanisms. For a depiction of the FEMSOFT insert, see the inside front
cover of this Prospectus.
PRODUCT DESCRIPTION. The FEMSOFT insert consists of a small cylindrical,
liquid-filled silicone membrane, approximately two inches in length. The
membrane has a bulb-shaped portion near the tip and an oval-shaped tab at the
end that remains outside the urethra. The tip of the device is inserted into the
urethra by use of a disposable applicator which resides in a central tube
extending the length of the device. As the device is inserted, the pressure from
the urethra compresses the bulb causing the liquid to move toward the external
end of the device. When the bulb portion enters the bladder, the pressure
exerted by the urethra causes the liquid to refill the bulb portion which seats
the device in the bladder neck and urethra. The user removes and discards the
disposable applicator, allowing the urethra to resume its natural curve and
shape. The silicone tab of the insert remains outside the urethra after
insertion. When a user needs to void, the tab is pulled to remove the insert;
the device is discarded and another inserted.
The FEMSOFT insert is designed such that incidental pressures on the bladder
caused by normal activity, which are typically the immediate causes of stress
incontinence, improve the seal created by the device in the bladder neck,
thereby helping to prevent leakage. Steady pressure from a contracting bladder,
as during voluntary urination, will compress the bulb and expel the device,
thereby providing further ease of use and minimizing the possibility of harm in
persons who may be unable to otherwise remove the device due to injury or loss
of consciousness.
TARGET MARKET. The Company believes the FEMSOFT insert will provide
significant advantages in the management of female stress incontinence. The
FEMSOFT insert is a minimally invasive device that provides a patient with
effective control of her urinary function and eliminates the need for collection
bags and pads or liners that can cause embarrassment, restrict mobility and
compromise lifestyle. In addition, the soft, liquid-filled silicone membrane of
the FEMSOFT insert has been designed to conform to the irregular shape of the
urethra and follow the movements of the urethra during normal activities,
thereby helping to reduce chafing, abrasion and leakage. The FEMSOFT insert has
also been designed to provide a variable, supportive pressure to the muscles of
the urethra and bladder neck, while reducing tissue erosion and loss of muscle
tone. Although intended principally for the management of female stress
incontinence, the FEMSOFT insert may also be suitable for the management of some
conditions of urge incontinence or mixed stress and urge incontinence.
The FEMSOFT insert will be a prescription device that will require the
patient to visit her physician. Before a patient begins using the FEMSOFT
insert, the physician will fit the patient with the proper size and instruct the
patient on proper application of the FEMSOFT insert. The Company anticipates
manufacturing the device in combinations of three widths to provide a proper
fit.
CLINICAL TRIAL PROGRAM. The FEMSOFT insert requires PMA approval by the FDA
before it may be marketed commercially. A clinical trial of the FEMSOFT insert
is being conducted at eight sites in the United States under an Investigational
Device Exemption ("IDE") application approved by the FDA. The clinical trial
protocol contemplates 120 patients studied over a 12 month period. Eighty-seven
patients are currently enrolled in the clinical trial. The Company submitted an
interim report to the FDA dated July 15, 1997. This report noted that 38
patients had used the FEMSOFT insert an aggregate of 2,101 times. In the trial,
each patient compared urine leakage and incontinence episodes during periods of
use of the device and periods of non-use.
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The Company believes the initial data contained in the interim report
demonstrates that use of the FEMSOFT insert results in a significant reduction
in the rate of incontinence episodes. The Company also believes that the FEMSOFT
insert has been well tolerated by the patients' urethral tissue and no negative
effects on that tissue were noted on follow-up pelvic or cystoscopic
examinations. In response to a written questionnaire, 94% of the patients have
reported a desire to continue use of the FEMSOFT insert. When asked whether they
had experienced urine leakage with the insert in place, 88.4% responded never or
rarely, 4% answered occasionally and 5.8% responded frequently. A total of 22
adverse events have been reported in the clinical trials, including 11 reported
infections and six instances of minor external tissue trauma associated with the
patients' inexperience in application of the FEMSOFT insert during the first
week of use. Five patients have withdrawn from the clinical trial, of whom one
withdrew due to recurrent infections. The Company believes the reported adverse
events represent the anticipated effects associated with the use of the FEMSOFT
insert. These results are preliminary and may not necessarily be indicative of
the final results of the clinical trial.
The Company is continuing the multi-site FEMSOFT insert clinical trial to
collect the data necessary to submit a PMA regarding the FEMSOFT insert to the
FDA. The Company intends to submit a PMA based on the data to be derived from
the continuing clinical trial. The timing of this submission will depend on the
progress and results of the clinical trial and the Company's determination that
it has gathered sufficient data for a submission. The process for obtaining FDA
approval is unpredictable and often lengthy and there can be no assurance that
the FDA will grant approval in a timely manner, if at all. Even if regulatory
approval is obtained, there can be no assurance that the FEMSOFT insert will
perform as designed or will be successfully marketed. See "Risk Factors--Product
Development Risks; Lack of Regulatory Approval" and "--Government Regulation."
MALE EXTERNAL CATHETERS
The Company manufactures and markets three types of silicone male external
catheters: the ULTRAFLEX, POP-ON and WIDE BAND catheters. The ULTRAFLEX catheter
has adhesive positioned midway down a standard length catheter sheath. 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. It
is designed to accommodate patients who have retracted penises or other physical
impediments to using standard length male external catheters. In addition, the
Company believes the POP-ON catheter may be used as an alternative to standard
length catheters.
The Company's WIDE BAND self-adhering male external 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 marketed. The recently introduced WIDE BAND
catheter is designed to reduce the adhesive failure and resulting leakage that
may occur with male external catheters due to normal activities, which is a
common complaint among users of male external catheters. In light of this
advantage, the Company intends to focus its male external catheter marketing
efforts on this product.
All of the Company's male external catheters are produced in five sizes for
better patient fit. The Company believes that its silicone male external
catheters have advantages compared both to latex catheters and to other
non-latex catheters. Silicone is a non-toxic, biocompatible and hypoallergenic
material that eliminates the risks of latex-related skin irritation. Silicone
catheters are also odor free and have greater gas permeability than catheters
made from other materials, including latex. Gas permeability reduces skin
irritation and damage from catheter use and thereby increases patient comfort.
Unlike latex male external catheters, the Company's silicone catheters are
transparent, permitting visual skin inspection without removal of the catheters
and aiding proper placement of the catheters. The Company's catheters also have
a kink-proof funnel design to ensure uninterrupted urine flow. The self-adhering
technology of the Company's catheters eases application of the catheters and
provides a strong bond to the skin for greater patient confidence and prolonged
wear. Finally, unlike the processes used by manufacturers of
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competitive catheters, the Company's proprietary manufacturing processes enable
it to manufacture its POP-ON catheter with sufficient adhesive strength in a
shorter sheath.
The Company sells silicone male external catheters under the ROCHESTER
MEDICAL brand and to private label customers. The WIDE BAND male external
catheter is currently sold only under the ROCHESTER MEDICAL brand.
The Company also manufactures and sells male external catheters made from a
proprietary non-latex, non-silicone material to certain private label customers.
These catheters use the same self-adhesive technology as the Company's silicone
male external catheters. Like the silicone male external catheters, the
non-silicone catheters eliminate the risk of latex reactions and latex-related
skin irritations. The non-silicone catheters also are odor free.
PERSONAL CATHETER
The Company's PERSONAL CATHETER is a disposable intermittent catheter
manufactured from two different silicones, with a stiff core catheter tube and a
softer outer cover. This construction provides sufficient stiffness for ease of
insertion, while the softer cover is designed to 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. The Company produces the PERSONAL CATHETER in
three lengths and multiple diameters. The Company introduced the PERSONAL
CATHETER in May 1997 and markets it under the ROCHESTER MEDICAL brand.
URINE DRAINAGE
ANTIBACTERIAL FOLEY CATHETER
The Company's Antibacterial Foley catheter is a silicone Foley catheter that
incorporates all of the advantages of the Company's other marketed Foley
catheters (as described below) and has been designed to reduce the incidence of
bacterial CUTI. The Antibacterial Foley catheter incorporates a broad-spectrum
antibacterial agent, nitrofurazone, into the silicone matrix of the outer and
inner surfaces of the catheter in a formulation that gives sustained release of
the medication into and throughout the urethra and bladder neck while the
patient is catheterized. For a depiction of the Antibacterial Foley catheter,
see the inside front cover of this Prospectus.
Nitrofurazone, which has been used for over 40 years, is effective against
both gram-positive and gram-negative bacteria. Laboratory tests conducted by the
University of Minnesota and funded by the Company have shown the imbedded
nitrofurazone in the Antibacterial Foley catheter to inhibit the growth of most
bacteria known to cause bacterial CUTI, including some common
antibiotic-resistant bacterial strains.
The Company funded a prospective, randomized, double-blinded clinical trial
of the Antibacterial Foley catheter at the University of Wisconsin which
evaluated 344 patients in acute care, intensive care and surgical settings. This
completed clinical trial demonstrated that use of the Antibacterial Foley
catheter yielded a three-fold reduction in the incidence of bacterial CUTI
compared to use of a silicone, non-medicated Foley catheter in patients who were
catheterized for one to seven days, a period that is typical of approximately
90% of all hospital Foley catheterizations. The Antibacterial Foley catheter was
well-tolerated by the patients using it, and no complications or attributable
side-effects or systemic absorption of nitrofurazone were observed. The clinical
study was designed and carried out by Dennis G. Maki, M.D., 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.
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In May 1997, the Company submitted a 510(k) for the Antibacterial Foley
catheter based upon the University of Wisconsin clinical trial and the
University of Minnesota tests. Unless the Company obtains FDA clearance, the
product cannot be marketed in the United States. There can be no assurance that
the Company will obtain such FDA clearance in a timely manner or at all. Even if
regulatory clearance is obtained, there can be no assurance that the
Antibacterial Foley catheter will perform as designed or will be successfully
marketed. See "Risk Factors--Product Development Risks; Lack of Regulatory
Approval."
The Company believes that the three-fold reduction in the incidence of
bacterial CUTI and the associated improved patient outcomes as indicated in the
Antibacterial Foley catheter clinical trials may provide potentially significant
cost savings to hospitals and other purchasers of urinary catheters and enable
the Company to position the Antibacterial Foley catheter as a premium product in
the market. The Company intends to sell the Antibacterial Foley catheter under
the ROCHESTER MEDICAL brand. The Company may also market the Antibacterial Foley
catheter through ConvaTec depending on the negotiation of mutually satisfactory
pricing terms. See "--Private Label Distribution Agreements."
FOLEY CATHETERS
The Company offers Foley catheters in a standard two lumen version and in a
three lumen version for irrigation of the urinary tract. These Foley catheters
are available in all standard adult and pediatric sizes as well as in
specialized pediatric sizes. All of the Company's silicone Foley catheters
eliminate the risk of the allergic reactions and tissue irritation and damage
that is sometimes associated with latex Foley catheters. The Company's Foley
catheters are transparent which enables healthcare professionals to observe
urine flow. The Company's standard Foley catheters also feature solid, rounded
tips for ease of insertion and smooth, proportional eyes for ease of insertion
and maximum drainage. Unlike the manufacturing processes used by producers of
competing silicone Foley catheters, in which the balloon portion is formed by
hand in a separate procedure involving gluing and burnishing, the Company's
automated manufacturing processes allow the Company to integrate the balloon
into the structure of the Foley catheter, resulting in a smoother, more uniform
exterior that may help reduce irritation to urinary tissue.
The Company's standard Foley catheters are packaged in single catheter
strips and sold under the ROCHESTER MEDICAL brand and under private label
arrangements. In addition, the Company sells its standard Foley catheters in
bulk under private label arrangements for packaging in kits with tubing,
collection bags and other associated materials. The Company's standard silicone
Foley catheters are priced competitively compared to a substantial majority of
Foley catheters sold in the United States.
OTHER ADVANCED DESIGN PRODUCTS
COMFORT SLEEVE FOLEY CATHETER
The COMFORT SLEEVE Foley catheter has a flexible, liquid-filled sheath
encasing the urethral section of the catheter tube, and is made from silicone
using the Company's liquid encapsulation technologies. The Company believes that
its COMFORT SLEEVE Foley catheter can provide improved patient comfort as
compared to other Foley catheters. Its liquid-filled urethral section is softer
and more pliable than other Foley catheters and its design permits the catheter
tube to move and rotate independently of the flexible encasing sheath, lessening
abrasion and irritation to the urethra during use. The Company believes these
features may be particularly beneficial to long-term catheterized patients,
including nursing home residents. The Company also believes that the COMFORT
SLEEVE Foley catheter can reduce the leakage sometimes associated with other
Foley catheters because the liquid-filled sheath of the COMFORT SLEEVE Foley
catheter conforms to the shape of the urethra.
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. Prior to introducing the COMFORT SLEEVE Foley catheter, the Company
intends to conduct clinical preference testing with several leading physicians
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and medical institutions in order to determine appropriate usage protocols and
patient preferences. The Company has not yet scheduled clinical preference
testing for the COMFORT SLEEVE Foley catheter.
FEMALE CATHETER
The female catheter is a disposable self-retaining urinary catheter designed
to continuously empty the bladder. The female catheter can be self-administered
to manage all forms of female incontinence. The female catheter can also be used
by medical professionals for urine drainage management during surgery and
post-operative recovery. The female catheter has been designed to be easy and
convenient for the patient to use. It consists of a silicone lumen surrounded by
a soft, liquid-filled silicone sleeve. To position the female catheter, the user
inserts a catheter through the urethra into the bladder. The user compresses a
self-contained liquid-filled reservoir 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 female
catheter is then attached to any standard collection device. To deflate and
remove the female catheter, the shroud is easily pulled off the sleeve to allow
the liquid to flow back into the reservoir. The female catheter may be inserted
once daily, and the Company believes a majority of urinary incontinence
sufferers can safely position the catheter and inflate it after appropriate
training. Beyond its applications for urinary incontinence, the female catheter
may function as a more comfortable, less expensive replacement for some uses of
standard Foley catheters by women. The Company has received FDA 510(k) marketing
clearance for the female catheter but has not commenced marketing. 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.
The Company has not yet scheduled clinical testing of the female catheter. In
addition, while the Company currently can produce limited quantities of the
female catheter for testing and other purposes, the Company must complete the
installation and testing of its new automated production facility before
beginning production of commercial quantities of the female catheter.
FEMALE VALVED CATHETER
The Company is developing a female valved catheter that will use the same
construction and be administered in the same manner as the female catheter. The
female valved catheter is intended for use as a daily disposable device for
controlled periodic urine drainage throughout the day without removal. This
catheter would provide users with increased convenience because the device would
not require an exterior collection bag. The Company believes that the female
valved catheter may also be used throughout the day as an alternative in some
circumstances to intermittent catheterization. The female 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.
The Company has not yet scheduled such clinical testing for this catheter. There
can be no assurance that the female valved catheter may be successfully
developed or that clinical tests of the female valved catheter will support the
safety and efficacy of the catheter or that the FDA will approve the marketing
of the catheter in a timely manner, if at all. See "Risk Factors--Product
Development Risk; Lack of Regulatory Approval."
TECHNOLOGY
The Company uses proprietary, automated manufacturing technologies and
processes to manufacture continence care devices cost effectively. The
production of the Company's products also depends on its materials expertise and
know-how in the formulation of silicone and advanced polymer products. The
Company's proprietary liquid encapsulation technology enables it to manufacture
innovative products, such as its FEMSOFT insert and COMFORT SLEEVE Foley and
female catheters, that have soft, conformable, liquid-filled reservoirs, which
cannot be manufactured using conventional technologies. Using this liquid
encapsulation technology, the Company can mold and form liquid encapsulated
devices in a variety of
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shapes and sizes in an automated process. The Company's manufacturing
technologies and materials know-how also allow the Company to incorporate a
sustained release antibacterial agent into its products. The Company believes
that its manufacturing technology is particularly well-suited to high unit
volume production and that its automated processes enable cost-effective
production. The Company further believes that its manufacturing and materials
expertise, particularly its proprietary liquid encapsulation technology is
applicable to a variety of medical applications. The Company plans to consider,
commensurate with its resources, future research and development activities to
investigate opportunities provided by the Company's technology and know-how.
The Company believes that its proprietary manufacturing processes, materials
expertise, custom designed equipment and technical know-how allow it to simplify
and further automate traditional catheter manufacturing techniques to reduce the
Company's manufacturing costs. In order to manufacture high quality products at
competitive costs, the Company concurrently designs and develops new products
and the processes and equipment to manufacture them.
MARKETING AND SALES
To date, the majority of the Company's revenues have been derived from sales
of its products under private label arrangements with medical products
companies, and such arrangements, especially the arrangement with ConvaTec, are
likely to account for a significant portion of the Company's revenues in the
foreseeable future. However, the Company has begun to focus its marketing
efforts on gaining increased market recognition and sales of ROCHESTER MEDICAL
brand products. In particular, assuming it receives FDA approval, the Company
intends to focus on marketing and selling its Antibacterial Foley catheter and
the FEMSOFT insert under the ROCHESTER MEDICAL brand.
SALES AND MARKETING OF ROCHESTER MEDICAL BRAND PRODUCTS. The Company
directly sells ROCHESTER MEDICAL brand products in the domestic market,
primarily to key accounts consisting of significant buying groups, dealers,
distributors, institutions and home care providers. The Company believes that
purchasing power in the healthcare market is being centralized in these large
purchasers of healthcare products, and that there is an opportunity to market
effectively to a large portion of the domestic continence care market with a
limited, focused sales organization by marketing to these significant
purchasers. The Company's sales force focuses on differentiating the Company's
products on the basis of quality, the potential for improved medical outcomes
and cost effectiveness.
The Company's North American sales organization currently consists of a
director of sales, six regional managers and one sales representative. The
Company is in the process of recruiting sales representatives for each of the
regions. This direct domestic sales force is supported by a small, centralized
customer service and telesales staff. For international sales of ROCHESTER
MEDICAL brand products, the Company has developed and continues to build a
network of independent distributors. The Company currently has arrangements
covering 38 countries.
The Company believes that the introduction and marketing of the FEMSOFT
insert, if FDA marketing approval is received, will differ significantly from
that of its other products. The Company currently anticipates that this strategy
will require significant physician and clinician education efforts and
substantial consumer oriented media advertising. The educational efforts
directed to clinicians may include personal visits and demonstrations; the
preparation and presentation of instructions for the prescription, sizing and
use of the FEMSOFT insert and for follow-on procedures for patient care and
monitoring; and the preparation of written, audio and video materials for
clinicians to use for patient education purposes.
CONVATEC AND OTHER PRIVATE LABEL ARRANGEMENTS. The Company sells certain of
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.
Under the ConvaTec Agreement, and under a separate agreement predating the
ConvaTec Agreement, the Company
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supplies male external and Foley catheters to ConvaTec, a division of a
subsidiary of Bristol-Myers Squibb Company. ConvaTec 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. ConvaTec has an extensive sales organization in
the United States and approximately 70 other countries. ConvaTec resells the
Company's products 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 with silicone Foley catheters. The Company supplies
Mentor with silicone male external catheters, which Mentor resells under its own
brand. See "--Private Label Distribution Agreements."
MANUFACTURING
The Company designs and builds custom equipment to implement its
manufacturing technologies and processes. The Company's manufacturing facilities
are 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 has expanded its current manufacturing facility and is currently
completing the installation of additional manufacturing equipment for its male
external and Foley catheter products. The Company has also constructed a new
manufacturing facility to house its liquid encapsulation manufacturing
operations. The Company is currently in the process of installing the
manufacturing line for this facility.
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
recently obtained ISO 9001 certification and quality system certification for
the CE mark for its Foley catheter and male external catheter production lines.
The Company will be required to obtain additional ISO 9001 and CE mark
certifications for the new liquid encapsulation manufacturing line through a
separate qualification process.
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 Quality System Regulation for current good
manufacturing practices ("GMP").
In connection with the PMA for the FEMSOFT insert, the Company will be
required to establish that its new liquid encapsulation manufacturing facility
complies with GMP. In 1995, the FDA conducted a routine inspection of the
Company's existing manufacturing facility, in which the Company's facility,
documentation and quality control systems were evaluated and no substantial
matters of non-compliance with 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 depends on Dow Corning and GE for
raw materials used in the manufacture of its silicone male external Foley and
intermittent catheters. The loss of either of these suppliers, or a material
interruption of deliveries from either one, could have a material adverse effect
on the Company. 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 or GE could be replaced by silicone from other suppliers, and
the Company has located and evaluated other potential
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suppliers. In the event that the Company had to replace Dow Corning or GE,
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 for raw materials for the polymer used in
manufacturing the Company's non-silicone male external catheters. During 1994, a
disruption in Shell's production of these materials caused the Company to
curtail production of these 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 non-silicone male external catheters,
and might be required to obtain additional regulatory clearances.
To date, the Company has fulfilled its requirements for nitrofurazone, which
is used in its Antibacterial Foley catheter, through a single distributor.
Although the Company is aware of other distributors who are able to supply
nitrofurazone, the Company does not currently have arrangements for alternative
supplies. In the event that the Company had to replace its supplier, the Company
would be required to repeat biocompatibility testing of its products using the
materials from the new supplier, which may disrupt the timing of the Company's
introduction of its Antibacterial Foley catheter, and might also require
additional regulatory clearances. There can be no assurance that alternative
sources will be available on reasonable terms, if at all.
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. See
"Risk Factors--Dependence on Single or Limited Sources of Supply."
RESEARCH AND DEVELOPMENT
The Company believes that its ability to add new products to its existing
continence care product line 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's principal research and development efforts are currently
directed toward bringing the Antibacterial Foley catheter through the 510(k)
process, as well as on completing clinical trials of the FEMSOFT insert. The
Company is also focused on installing and testing standard and customized
components for its automated liquid encapsulation line in its new manufacturing
facility and on installing and testing equipment for the expansion of its
current male external and Foley catheter manufacturing operations. In the
future, the Company also intends to perform clinical studies for its other
advanced design catheter products that have obtained FDA clearance and other
products in development.
COMPETITION
The continence management market is highly competitive. The Company believes
that the primary competitive factors include price, product quality, technical
capability, breadth of product line and distribution capabilities. The Company's
ability to compete is 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
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it will be important for the Company to differentiate its products in order to
attract large customers, such as healthcare buying groups, distributors,
dealers, institutions and home care organizations.
The Company's products compete with a number of alternative products and
treatments for continence management. The Company's ability to compete with
these alternative methods for urinary continence management depends on the
relative market acceptance of alternative products and therapies and the
technological advances in these alternative products and therapies. 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 continence management devices
under the Company's own brand with larger, multi-product medical device
manufacturers and distributors such as ConvaTec, C.R. Bard, Inc., Allegiance
Euromedical, Kendall Healthcare Products Company, Sherwood Medical Company,
Hollister and Mentor. In order to compete in the developing managed care
environment in the United States, 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 recently introduced female
incontinence devices for the daily management of female incontinence that will
likely compete with the FEMSOFT insert and certain other of the Company's
products. Many of the competitive alternative products to the Company's
catheters are distributed by larger competitors including Johnson & Johnson
Personal Products Company, Kimberly-Clark Corporation and Proctor & Gamble
Company (for adult diapers and absorbent pads), and C.R. Bard, Inc. (for
injectable materials). Many of 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.
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 14 United States patents and a number of foreign patents
that generally relate to certain of the Company's catheters and devices and
certain of the Company's production processes. In addition, the Company owns a
number of pending United States and 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.
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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 Company is aware that others, including
UroMed, a manufacturer of a urethral insert, have obtained or are pursuing
patent protection for various aspects of the design, production and
manufacturing of continence care products. The medical device industry is
characterized by frequent and substantial intellectual property litigation,
particularly with respect to newly developed technology. The Company has
received an opinion from patent counsel to the effect that the FEMSOFT insert as
configured, as of the date of the opinion, does not infringe a United States
patent held by UroMed. The opinion only represents the reasoned professional
judgment of the Company's patent counsel and is not binding on any court or
third party. This opinion of patent counsel would not preclude an action for
patent infringement by UroMed, and UroMed could choose to bring an action
alleging infringement of the UroMed patent at any time in the future.
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 currently 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
Company's products 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 seeks to maintain the confidentiality of this
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. See "Risk Factors-- Dependence on Patents and
Proprietary Rights."
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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 from the FDA market authorization to distribute a
new medical device by filing a 510(k) to establish that the device is
"substantially equivalent" to medical devices legally marketed in the United
States prior to the Medical Device Amendments of 1976. A manufacturer may also
seek market authorization for a new medical device through the more rigorous 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
authorization pursuant to 510(k)s filed by the Company. The Company has
submitted a 510(k) for the Antibacterial Foley catheter based upon the clinical
data derived from the University of Wisconsin clinical trial and the University
of Minnesota study. Following this submission, the Company has received and
responded to an FDA letter requesting additional information and providing
comments on the Company's submission. The Company is currently waiting for an
action by the FDA. The FDA may 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 authorization 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 authorization for
certain of its devices. The Company has received approval of an IDE application
to conduct multi-site clinical studies of its FEMSOFT insert, which commenced in
early 1997. Upon receipt of the clinical data to be derived from that study, the
Company plans to submit the FEMSOFT insert for FDA marketing authorization
through the PMA application process. A PMA application must be supported by
extensive data, including preclinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device.
Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review the FDA will
"file" the application. The FDA has 180 days to review a PMA application,
although the review of such an application more often occurs over a protracted
time period, and generally takes approximately two years or more from the date
of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which pre-market approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the filing. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of an
application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
The Company intends to pursue the PMA process for the female valved
catheter, personnel and budgetary constraints permitting. Other products that
the Company may consider for development, if and when developed, will require
marketing authorization by the FDA.
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
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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
substantial matters of non-compliance were reported to the Company. In
connection with the PMA for the FEMSOFT insert, if any, the Company will be
required to establish that its new liquid encapsulation manufacturing facility
complies with GMP. As a medical device manufacturer, the Company is further
required to comply with FDA requirements regarding the reporting of adverse
events 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. FDA regulations also 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 enforcement proceedings to detain or seize products,
issue a recall, enjoin future violations and assess civil and criminal penalties
against the manufacturer, its officers and employees.
The Company may become subject to future legislation and regulations
concerning the manufacture and marketing of medical devices. Such future
legislation and regulations could increase the cost and time necessary to begin
marketing new products and could affect the Company in other respects not
currently 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 ("KU 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 has
recently obtained ISO 9001 certification and quality system certification for
the CE mark for its currently marketed products. 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 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
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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 Antibacterial Foley catheter, will also be eligible for third party
reimbursement. The Company is currently unable to assess eligibility of the
FEMSOFT insert 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. See "Risk Factors--Dependence on Third Party
Reimbursement."
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 ConvaTec
Agreement, which grants ConvaTec, subject to obligations and limitations imposed
by certain of the Company's other distribution agreements, worldwide rights to
market the Company's products that, as of the date of the Agreement, were
currently produced or in development ("Products in Development") under
ConvaTec's brand. At the same time, the Company retains worldwide rights to
market its products under the ROCHESTER MEDICAL brand.
The ConvaTec Agreement provides that ConvaTec will purchase all of its
requirements of certain of the Company's products from the Company. However, the
ConvaTec 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 ConvaTec 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 materials 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 currently supplies ConvaTec with silicone male external
catheters and Foley catheters. As the Company's Products in Development become
available for commercial sale in the future, the ConvaTec Agreement calls for
the Company and ConvaTec to negotiate in good-faith on packaging, quality
control specifications and pricing for each of those products. To maintain its
marketing rights to those Products in Development, 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 products. In addition, the
Company and ConvaTec may agree to work cooperatively to develop additional
incontinence and urology products. The Company is obligated to offer ConvaTec a
right of first refusal to market all products developed after the date of the
ConvaTec Agreement ("Future Products"). In addition, prior to entering into a
distribution agreement for any Future 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 Company and ConvaTec are currently in discussions regarding the status
of the FEMSOFT insert under the ConvaTec Agreement. The Company's position is
that the FEMSOFT insert is a Future Product that is subject only to ConvaTec's
rights of first refusal and last offer. ConvaTec has expressed its view that the
FEMSOFT insert is a Product in Development and therefore subject to ConvaTec's
exclusive rights to be the private label distributor of the FEMSOFT insert. If
the Company and ConvaTec are unable to reach agreement, these issues will be
resolved by arbitration under the terms of the ConvaTec Agreement.
The ConvaTec Agreement has an initial term expiring August 31, 2000.
ConvaTec may, at its option, renew the ConvaTec Agreement for an additional
five-year term, and may thereafter renew the ConvaTec
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<PAGE>
Agreement for up to five additional one-year renewal periods through August 31,
2010. Either party may terminate the ConvaTec Agreement only upon the other
party's material breach of the ConvaTec Agreement, bankruptcy or insolvency, or
inability to perform under the ConvaTec Agreement for a period of more than six
months. The ConvaTec 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.
Under a separate agreement, the Company supplies ConvaTec with tape-on
non-silicone 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 may be terminated at any
time, upon six months written notice given by ConvaTec without cause, or by the
Company if ConvaTec fails to make certain agreed minimum purchases.
Sales of products to ConvaTec represented 12% of the Company's revenues in
fiscal 1996 and 24% of revenues in fiscal 1997.
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. As a part of its agreement with Hollister, the
Company has agreed to restrict its ability to sell self-adhering non-silicone
male external catheters on a private label basis to other manufacturers and
distributors for distribution outside of the United States and Canada. The
parties recently agreed to a four-year extension of the original agreement
beginning May 1, 1998 and expiring April 30, 2002. During that period, Hollister
is subject to a minimum purchase requirement of four million non-silicone
catheters at the rate of at least one million catheters per year. Sales of
products to Hollister represented 12% of the Company's revenues in fiscal 1996
and 10% of revenues in fiscal 1997.
ALLEGIANCE EUROMEDICAL. Under a two-year agreement which expired on
November 30, 1996, the Company was the exclusive supplier to Allegiance
Euromedical of Allegiance Euromedical's requirements of silicone Foley
catheters, and Allegiance Euromedical 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). Allegiance Euromedical was also a non-exclusive
distributor of silicone Foley catheters for all other territories. Recently, the
parties amended and restated their original agreement to eliminate and phase out
Allegiance Euromedical's exclusive distribution rights and eliminate Allegiance
Euromedical 's minimum purchase obligations. Allegiance Euromedical is now a
worldwide distributor of the Company's silicone Foley catheters. The amended and
restated agreement expires November 30, 1999. Sales of products to Allegiance
Euromedical represented 19% of the Company's revenues in fiscal 1996 and 4% of
revenues in fiscal 1997.
MENTOR. The Company sells silicone male external catheters to Mentor
pursuant to a Male External Catheter License, Sales and Distribution Agreement,
as modified in September 1995 (the "MEC Agreement"). Additionally, the Company
granted to Mentor a non-exclusive, paid-up, royalty free license to make, use
and sell silicone male external catheters that the Company currently sells to
Mentor. The Company also granted Mentor a non-exclusive, paid-up, royalty free
license to use for any purpose all technical know-how and/or trade secrets
disclosed by the Company to Mentor pursuant to or in connection with the MEC
Agreement which relate to the manufacture of silicone male external catheters.
In connection with such licenses, upon Mentor's request, the Company is required
to assist, consult, and cooperate with Mentor in the assembly, design,
engineering, manufacturing, inspection, and servicing of the catheters and
components thereof, as well as assist in the selection of the necessary and
proper plant layout, machinery, tools, equipment, and production flow for the
economical manufacture of the catheters and their components by Mentor. Mentor
must reimburse the Company for any costs incurred in providing such cooperation
and assistance.
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The license to manufacture, use and sell silicone male external catheters
may be assigned only in connection with Mentor's sale or disposition of its
external catheter product line, or in connection with the merger, consolidation,
or similar corporate reorganization of Mentor or the sale of all or
substantially all of its assets. Mentor may sublicense the license to use
technical know-how and/or trade secrets only for purposes other than the
manufacture of the catheter to persons who agree to maintain the confidentiality
of the Company's know-how and trade secrets.
Sales of products to Mentor represented 29% of the Company's revenues in
fiscal 1996 and 30% of revenues in fiscal 1997.
EMPLOYEES
As of September 30, 1997, the Company employed 117 full-time employees, of
whom 87 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.
PROPERTIES
The Company recently constructed a 52,000 square foot manufacturing and
office facility on an approximately 28 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 insert and other
advanced design products, and will also house the Company's administrative
offices. The Company currently occupies the office portion of the new facility
and is installing the manufacturing line.
The Company's male external and Foley catheter manufacturing facility
consists of a 30,000 square foot manufacturing and office building, including
10,000 square feet for expanded male external and Foley catheter production
capacity that was recently completed, located on a 3.5 acre site owned by the
Company in the Stewartville Industrial Park, Stewartville, Minnesota. The
facility currently provides approximately 28,000 square feet of manufacturing
and research and laboratory space and 2,000 square feet of office space.
A part of the Company's properties is subject to certain financing
arrangements. See Note 8 of Notes to Financial Statements.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Anthony J. Conway.......................... 53 Chairman of the Board, Chief Executive Officer, President and
Secretary
Philip J. Conway........................... 41 Vice President, Operations and Director
Richard D. Fryar........................... 50 Vice President, Research and Development and Director
Alfred T. Mannino.......................... 48 Senior Vice President
Martyn R. Sholtis.......................... 38 Vice President, Sales and Marketing
Brian J. Wierzbinski....................... 39 Chief Financial Officer and Treasurer
Darnell L. Boehm (1)(2).................... 48 Director
Peter R. Conway............................ 43 Director
Roger W. Schnobrich (1)(2)................. 67 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
ANTHONY J. CONWAY, a founder of the Company, has served as Chairman of the
Board, Chief Executive Officer, President and Secretary 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 14 have resulted in issued United States patents.
PHILIP J. CONWAY, a founder of the Company, has served as Vice President,
Operations and as a director 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 14 have resulted in issued United States patents.
RICHARD D. FRYAR, a founder of the Company, has served as Vice President,
Research and Development and as a director 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 14 have resulted in
issued United States patents.
ALFRED T. MANNINO has served as the Company's Senior Vice President since
August 1996, and served as its Executive Vice President from November 1994 to
August 1996. Mr. Mannino is generally responsible for marketing the Company's
products. 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
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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, 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 alliance
with ConvaTec. From 1985 to April 1992, Mr. Sholtis was employed by Sherwood
Medical Company, 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 Inc., 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.
DARNELL L. BOEHM has served as a director of the Company since October 1995.
Since 1986, Mr. Boehm has served as a Director and the Chief Financial Officer
and Secretary of Aetrium, Inc., a manufacturer of electromechanical equipment
for handling and testing semiconductor devices. From October 1988 to March 1993,
Mr. Boehm served as the Acting President of Genesis Labs, Inc., a manufacturer
of medical diagnostic products. He is also the principal of Darnell L. Boehm &
Associates, a management consulting firm.
PETER R. CONWAY has served as a director of the Company since May 1988. He
has been a director and the Chairman and Chief Executive Officer of Halcon
Corporation, a manufacturer of quality office furniture, of which he was a
co-founder, since 1978. From 1979 to 1985, Mr. Peter Conway served as a director
of Arcon.
ROGER W. SCHNOBRICH has served as a director of the Company since October
1995. Mr. Schnobrich has been a partner with the law firm of Hinshaw &
Culbertson since 1997. Prior to joining Hinshaw & Culbertson, Mr. Schnobrich was
a partner in the law firm of Popham, Haik, Schnobrich and Kaufman Ltd. for more
than five years. Mr. Schnobrich serves as a director of Developed Technology
Resource Inc., a company that invests in business, technology and infrastructure
in the former Soviet Union.
Messrs. Anthony J. Conway, Philip J. Conway and Peter R. Conway are
brothers.
The Compensation Committee of the Board of Directors has power and authority
to recommend compensation for the Company's executive officers. The Audit
Committee has oversight over the process of auditing the Company's internally
prepared financial statements, and is charged with reviewing any potential
conflicts of interest. Mr. Anthony J. Conway serves ex officio as a member of
each committee.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the Common Stock of the
Company by (i) the Company's Chief Executive Officer and each other officer
whose total annual salary and bonus exceeded $100,000 for the fiscal year ended
September 30, 1997; (ii) each person who, to the knowledge of the Company, owned
beneficially more than five percent of such stock; (iii) each director; and (iv)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNERSHIP
BENEFICIALLY ----------------------------------
NAME OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ -------------------- ----------------- ---------------
<S> <C> <C> <C>
Anthony J. Conway (2)(3).................................... 428,150 10.4% 7.9%
Philip J. Conway (2)(3)(4).................................. 241,200 5.8 4.4
Richard D. Fryar (2)........................................ 174,800 4.2 3.2
Peter R. Conway (3)(5)...................................... 90,700 2.2 1.7
Alfred T. Mannino (2)(6).................................... 66,000 1.6 1.2
Martyn R. Sholtis (2)(7).................................... 47,050 1.1 *
Roger W. Schnobrich (8)..................................... 27,000 * *
Darnell L. Boehm (9)........................................ 23,000 * *
Brian J. Wierzbinski (2)(10)................................ 21,000 * *
All directors and executive officers as a group (9
persons).................................................. 1,118,900 26.0% 20.0%
</TABLE>
- ------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes general voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable within
60 days of September 30, 1997, are deemed to be outstanding for the purpose
of computing the percentage of the person holding such options or warrants,
but are not deemed outstanding for computing the percentage of any other
person. Unless otherwise noted, shares are subject to the sole voting and
investment power of the indicated person.
(2) The address of each executive officer of the Company is One Rochester
Medical Drive, Stewartville, Minnesota 55976.
(3) Messrs. Anthony J. Conway, Peter R. Conway and Philip J. Conway are
brothers.
(4) Includes 1,000 shares held in an IRA for the benefit of Mr. Philip J.
Conway, and 1,000 shares held in an IRA for the benefit of his wife, as to
which he disclaims beneficial ownership.
(5) Includes 18,500 shares issuable upon exercise of currently exercisable
options at prices ranging from $8.25 to $20.00 per share. Mr. Peter R.
Conway's address is 501 Old Territorial Road, Chatfield, Minnesota 55923.
(6) Includes 60,000 shares issuable upon exercise of currently exercisable
options at a price of $8.25 per share.
(7) Includes 45,000 shares issuable upon exercise of currently exercisable
options at prices ranging from $6.75 to $14.75 per share.
(8) Includes 12,000 shares held in an IRA for the benefit of Mr. Schnobrich.
Also includes 14,500 shares issuable upon exercise of currently exercisable
options at prices ranging from $13.00 to $20.00 per share. Mr. Schnobrich's
address is 3300 Piper Jaffray Tower, Minneapolis, Minnesota 55402.
(9) Includes 1,500 shares held for the benefit of a minor child. Includes also
14,500 shares issuable upon exercise of currently exercisable options at
prices ranging from $13.00 to $20.00 per share. Mr. Boehm's address is
19330 Bardsley Place, Monument, Colorado 80132.
(10) Includes 20,000 shares issuable upon exercise of currently exercisable
options at $14.38 per share.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized stock consists of 20,000,000 shares of capital
stock without par value. As of September 30, 1997, there were 4,133,500 shares
of Common Stock outstanding, held of record by 115 shareholders. All shares of
capital stock issued by the Company shall be shares of Common Stock, unless the
Company's Board of Directors establishes one or more classes or series of
capital stock having other rights and preferences.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters on which shareholders are entitled or
permitted to vote. There is no cumulative voting for the election of directors.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of Common Stock are entitled to receive ratably such dividends as
may lawfully be declared by the Board of Directors out of funds legally
available therefor and to share pro rata in any other distribution to the
holders of Common Stock. See "Dividend Policy." Holders of Common Stock have no
preemptive or subscription rights. There are no conversion rights, redemption
rights, sinking fund provisions or fixed dividend rights with respect to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the shares of Common Stock to be issued upon completion of
the offering will be fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to establish by resolution
different classes or series of stock and to fix the rights, preferences and
privileges, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any class or series or the designation of such
class or series without any further vote or action by the shareholders. Although
there is no current intention to do so, the issuance of a class or series of
stock with certain special rights or privileges could have the effect of
delaying, deferring or preventing a change in control of the Company which may
adversely affect the voting and other rights of the holders of Common Stock. See
"Risk Factors--Possible Issuances of Preferred Stock; Anti-Takeover Effects of
Minnesota Law."
WARRANTS
The Company has issued warrants to purchase a total of 75,000 shares of
Common Stock at an exercise price of $14.85 per share to Dain Bosworth
Incorporated and Robert W. Baird & Co. Incorporated. These warrants were granted
in connection with services provided for a securities offering in November 1995.
Such warrants are currently exercisable and expire on November 20, 2000.
The holders of the warrants (the "Warrantholders") have registration rights
pursuant to an agreement with the Company. Under this agreement, if the Company
proposes to register any of its securities under the Securities Act, the
Warrantholders are entitled, subject to certain restrictions and exceptions, to
include such warrants or shares of Common Stock in such registration. The
Company is required to bear all registration and selling expenses (other than
underwriters' discounts and commissions and fees of special counsel to the
Warrantholders) in such offering. In addition, the Warrantholders are entitled,
on one occasion only, to demand that the Company prepare and file a registration
statement at the Company's expense and to require the Company to use its best
efforts to effect such registration, subject to certain conditions and
limitations. The Warrantholders have waived their registration rights in
connection with this offering.
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<PAGE>
STATE LAW PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility, to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions 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.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20% or
more of the voting stock then outstanding. Section 302A.671 requires approval of
any such acquisition by a majority vote of the shareholders of the Company prior
to its consummation. In general, shares acquired in the absence of such approval
are denied voting rights and are redeemable at their then-fair market value by
the Company within 30 days after the acquiring person has failed to give a
timely information statement to the Company or the date the shareholders voted
not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder that purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors before the interested shareholder's share acquisition date.
INDEMNIFICATION OF CERTAIN PERSONS
Minnesota law and the Company's Bylaws provide that the Company shall, under
certain circumstances and subject to certain limitations, indemnify any person
made or threatened to be made a party to a proceeding by reason of that person's
former or present official capacity with the Company against judgments,
penalties, fines, settlements and reasonable expenses. Any such person is also
entitled, subject to certain limitations, to payment or reimbursement of
reasonable expenses in advance of the final disposition of the proceeding.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank,
Minnesota, National Association.
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<PAGE>
PLAN OF DISTRIBUTION
The Common Stock is being offered for sale by the Company on a best efforts,
all or nothing basis, to selected institutional investors. Vector Securities
International, Inc., the Placement Agent, has been retained pursuant to a
placement agency agreement to act as the exclusive agent for the Company in
connection with the arrangement of offers and sales of the Common Stock on a
best efforts basis.
The Placement Agent is not obligated to and does not intend to itself take
(or purchase) any of the shares of Common Stock. It is anticipated that the
Placement Agent will obtain indications of interest from potential investors for
the amount of the offering and that effectiveness of the Registration Statement
will not be requested until indications of interest have been received for the
amount of the offering. No investor funds will be accepted until indications of
interest have been received for the amount of the offering, and no investor
funds will be accepted prior to effectiveness of the Registration Statement.
Notifications of intentions to purchase and definitive prospectuses will be
distributed to all investors at the time of pricing, informing investors of the
closing date, which will be scheduled for three business days after pricing.
After the Registration Statement is declared effective and prior to the closing
date, all investor funds will promptly be placed in escrow with Citibank, N.A.,
as Escrow Agent, in an escrow account established for the benefit of the
investors. The Escrow Agent will invest such funds in accordance with Rule
15c2-4 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Prior to the closing date, the Escrow Agent will advise the
Company that payment for the purchase of the shares of Common Stock offered
hereby has been affirmed by the investors and that the investors have deposited
the requisite funds in the escrow account at the Escrow Agent. Upon receipt of
such notice, the Company will deposit with DTC the shares of Common Stock to be
credited to the respective accounts of the investors. Investor funds, together
with interest thereon, if any, will be collected by the Company through the
facilities of the Escrow Agent on the closing date. The offering will not
continue after the closing date. In the event that investor funds are not
received in the full amount necessary to satisfy the requirements of the
offering, all funds deposited in the escrow account will promptly be returned.
The Company has agreed (i) to pay to the Placement Agent 6% of the gross
proceeds of this offering as the selling commission, (ii) to indemnify the
Placement Agent against certain liabilities, including liabilities under the
Securities Act and (iii) to reimburse the Placement Agent for up to $125,000 for
certain expenses incurred by it in connection with the offering.
On January 12, 1997, the Placement Agent and the Company entered into an
agreement under which the Placement Agent will provide certain strategic
advisory services to the Company in return for standard up-front fees and fees
related to any specific transactions consummated by the Company. As a retainer
fee pursuant to the strategic advisory services agreement, on March 15, 1997,
the Company paid the Placement Agent $75,000.
The Company has agreed not to issue, and certain officers and directors of
the Company have agreed that they will not, directly or indirectly, offer, sell,
contract to sell, or grant any option, right or warrant to purchase or otherwise
dispose of, any shares of Common Stock or any securities convertible into or
exercisable for, or any rights to purchase or acquire, Common Stock for a period
of 90 days from the date of this Prospectus, without the prior written consent
of the Placement Agent.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal matters
will be passed upon for the Placement Agent by Skadden, Arps, Slate, Meagher &
Flom (Illinois), Chicago, Illinois. Skadden, Arps, Slate, Meagher & Flom
(Illinois) will rely as to matters of Minnesota law on the opinion of Dorsey &
Whitney LLP.
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<PAGE>
EXPERTS
The financial statements of the Company as of September 30, 1996 and 1997
and for each of the three years in the period then ended appearing in this
Prospectus and the related registration statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
The statements in this Prospectus under the captions "Risk
Factors--Dependence on Patents and Proprietary Rights" and "Business--Patents
and Proprietary Rights" have been reviewed and approved by Merchant, Gould,
Smith, Edell, Welter & Schmidt, P.A., patent counsel for the Company, as experts
on such matters, and are included herein in reliance upon that review and
approval.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10007 and
1400 Northwestern Atrium Center, 500 Madison Street, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission; the address of this site is
http:// www.sec.gov. Reports, proxy statements and other information can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street N.W., Washington, D.C. 20006, which supervises the Nasdaq
National Market, on which the Common Stock is traded.
The Company has filed a Registration Statement on Form S-2, under the
Securities Act, including amendments thereto, relating to the shares of Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted as permitted by the rules and regulations of
the Commission. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete, and
in each instance, reference is made to the copy of such contract or document (if
any) filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information with
respect to the Company and the shares of Common Stock offered hereby, reference
is made to the Registration Statement and the exhibits and schedules thereto. A
copy of the Registration Statement, including exhibits and schedules thereto,
may be inspected by anyone without charge at the Commission's principal office
in Washington, D.C. and copies of all or any part thereof may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (File No. 0-18933) are incorporated in and made a part of this
Prospectus by reference:
(i) The Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1996;
(ii) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 31, 1996, March 31, 1997 and June 30, 1997; and
(iii) The Company's Current Reports on Form 8-K dated October 13, 1997 (filed
October 14, 1997) and November 4, 1997 (filed November 4, 1997).
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<PAGE>
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents referred to above or elsewhere herein which have been incorporated by
reference in this Prospectus, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates by reference). Written requests for such copies
should be directed to Rochester Medical Corporation, One Rochester Medical
Drive, Stewartville, Minnesota 55976, Attention: Corporate Secretary, telephone
number (507) 533-9600.
55
<PAGE>
ROCHESTER MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Audited Financial Statements
Balance Sheets..................................................................... F-3
Statements of Operations........................................................... F-4
Statement of Shareholders' Equity.................................................. F-5
Statements of Cash Flows........................................................... F-6
Notes to Financial Statements...................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders
Rochester Medical Corporation
We have audited the accompanying balance sheets of Rochester Medical
Corporation as of September 30, 1996 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. 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 1997, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
October 15, 1997
F-2
<PAGE>
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 8,394,607 $ 1,191,428
Marketable securities...................... 9,013,522 3,447,461
Accounts receivable, less allowance for
doubtful accounts ($50,000-- 1996;
$62,000--1997)........................... 1,513,577 1,967,194
Inventories................................ 1,191,283 1,653,733
Prepaid expenses and other current
assets................................... 84,194 253,785
------------ ------------
Total current assets......................... 20,197,183 8,513,601
Property, plant and equipment:
Land....................................... 60,001 161,001
Building................................... 755,074 2,277,825
Construction in progress................... 1,145,866 5,409,591
Equipment and fixtures..................... 2,783,641 3,776,997
------------ ------------
4,744,582 11,625,414
Less accumulated depreciation.............. (1,432,257) (1,855,980)
------------ ------------
Total property, plant and equipment.......... 3,312,325 9,769,434
Patents, less accumulated amortization
($313,937--1996; $428,736--1997)........... 378,232 330,338
------------ ------------
Total assets................................. $ 23,887,740 $ 18,613,373
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 957,951 $ 457,565
Accrued compensation....................... 74,499 382,744
Accrued clinical costs..................... 59,545 410,450
Accrued expenses........................... 243,769 181,641
------------ ------------
Total current liabilities.................... 1,335,764 1,432,400
Long-term debt............................... 3,320,625 --
Shareholders' equity:
Common Stock, no par value:
Authorized shares--20,000,000
Issued and outstanding
shares--4,127,500--1996;
4,133,500--1997........................ 24,648,913 24,697,199
Accumulated deficit........................ (5,417,562) (7,516,226)
------------ ------------
Total shareholders' equity................... 19,231,351 17,180,973
------------ ------------
Total liabilities and shareholders' equity... $ 23,887,740 $ 18,613,373
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales......................................... $ 3,130,746 $ 5,540,408 $ 7,615,439
Cost of sales..................................... 2,447,353 3,788,584 4,869,646
------------ ------------ ------------
Gross profit...................................... 683,393 1,751,824 2,745,793
Operating expenses:
Marketing and selling........................... 858,458 1,351,443 2,209,747
Research and development........................ 358,004 1,181,569 1,450,883
General and administrative...................... 765,546 1,111,905 1,499,696
------------ ------------ ------------
Total operating expenses.......................... 1,982,008 3,644,917 5,160,326
------------ ------------ ------------
Loss from operations.............................. (1,298,615) (1,893,093) (2,414,533)
Other income (expense):
Interest income................................. 55,836 818,387 657,622
Interest expense................................ (68,238) (285,166) (341,753)
------------ ------------ ------------
Net loss.......................................... $ (1,311,017) $ (1,359,872) $ (2,098,664)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share......................... $ (.49) $ (.35) $ (.51)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares
outstanding..................................... 2,681,510 3,866,764 4,131,600
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------------- DEFICIT
SHARES AMOUNT (DEDUCTION) TOTAL
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance 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 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
Exercise of common stock options................ 6,000 48,286 -- 48,286
Net loss for the year........................... -- -- (2,098,664) (2,098,664)
------------ ------------ ------------- -------------
Balance at September 30, 1997..................... 4,133,500 $ 24,697,199 $ (7,516,226) $ 17,180,973
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................. $ (1,311,017) $ (1,359,872) $ (2,098,664)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 345,466 477,682 538,523
Changes in operating assets and liabilities:
Accounts receivable............................................ (33,734) (761,353) (453,617)
Inventories.................................................... 201,892 (425,139) (462,450)
Other current assets........................................... (193,110) 295,272 (169,591)
Accounts payable............................................... 52,584 753,622 (500,386)
Other current liabilities...................................... 2,424 126,474 597,022
------------- ------------- -------------
Net cash used in operating activities................................ (935,495) (893,314) (2,549,163)
INVESTING ACTIVITIES
Capital expenditures................................................. (224,256) (1,725,841) (6,880,833)
Patents.............................................................. (93,249) (82,452) (66,905)
Purchase of marketable securities.................................... (1,888,217) (17,220,523) (18,388,824)
Sales and maturities of marketable securities........................ 1,553,815 9,815,605 23,954,885
------------- ------------- -------------
Net cash used in investing activities................................ (651,907) (9,213,211) (1,381,677)
FINANCING ACTIVITIES
Proceeds from note payable........................................... 3,000,000 -- --
Interest expense added to note payable............................... 35,625 285,000 341,826
Proceeds from sale of common stock................................... -- 16,199,395 48,286
Payments on long-term debt........................................... (415,665) -- (3,662,451)
Exercise of common stock warrants.................................... 168,000 720,000 --
------------- ------------- -------------
Net cash provided by (used in) financing activities.................. 2,787,960 17,204,395 (3,272,339)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents..................... 1,200,558 7,097,870 (7,203,179)
Cash and cash equivalents at beginning of period..................... 96,179 1,296,737 8,394,607
------------- ------------- -------------
Cash and cash equivalents at end of period........................... $ 1,296,737 $ 8,394,607 $ 1,191,428
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BUSINESS ACTIVITY
Rochester Medical Corporation (the "Company") develops, manufactures and
markets innovative urinary continence care products for urinary dysfunction
management and urine drainage management. The Company currently manufactures and
markets a broad line of functionally and technologically enhanced latex-free
versions of standard continence care products, including male external
catheters, Foley catheters and intermittent catheters. The Company is also
developing innovative and technologically advanced products designed to provide
clinically and commercially attractive solutions to continence care needs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
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
U.S. Treasury Bills and certificates of deposit. At September 30, 1996 and 1997,
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 4-35 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.
F-7
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Research and development costs include clinical testing costs, certain salary
and related expenses, other labor costs, materials and an allocation of certain
overhead expenses.
INCOME TAXES
Income taxes are accounted for under the liability method.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES" ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
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 using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options and convertible debt are excluded from the computation as their effect
is antidilutive. In February 1997, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 128, "Earnings Per Share." This statement
replaces the presentation of primary earnings per share (EPS) with basic EPS and
also requires dual presentation of basic and diluted EPS for entities with
complex capital structures. This statement is effective for financial statements
for periods ending after December 15, 1997. For the year ended September 30,
1997, there is no difference between the basic loss per share under Statement
No. 128 and net loss per share as reported.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
F-8
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
3. ADVERTISING COSTS
The Company incurred advertising expenses of $104,000, $151,000, and
$185,000 for the years ended September 30, 1995, 1996 and 1997, respectively.
All advertising costs are charged to operations as incurred.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Raw materials........................................ $ 878,885 $1,019,021
Work-in-process...................................... 264,729 504,120
Finished goods....................................... 147,669 222,592
Reserve for inventory obsolescence................... (100,000) (92,000)
--------- ---------
$1,191,283 $1,653,733
--------- ---------
--------- ---------
</TABLE>
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS
In January 1992, shareholders approved the 1991 Stock Option Plan (the Plan)
in which 700,000 shares have been authorized for issuance under the Plan. Under
terms of the Plan, the Board of Directors may grant employee incentive stock
options equal to 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.
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 per share.
F-9
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
5. SHAREHOLDERS' EQUITY (CONTINUED)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
RESERVED FOR OPTIONS PRICE PER
GRANT OUTSTANDING SHARE
------------- ------------- -------------
<S> <C> <C> <C>
Balance as of September 30, 1994.......................... 93,000 207,000 $ 8.02
Options granted......................................... (9,500) 9,500 15.50
Approval of non-statutory stock options................. 50,000 -- --
------------- -------------
Balance as of September 30, 1995.......................... 133,500 216,500 8.35
Options granted......................................... (253,000) 253,000 14.32
Increase in authorized shares........................... 400,000 -- --
------------- -------------
Balance as of September 30, 1996.......................... 280,500 469,500 11.57
Options granted......................................... (79,000) 79,000 17.26
Options exercised....................................... -- (6,000) 11.42
Options canceled........................................ 7,500 (7,500) 15.70
------------- -------------
Balance as of September 30, 1997.......................... 209,000 535,000 $ 12.35
------------- -------------
------------- -------------
</TABLE>
The weighted average fair value of options granted in 1996 and 1997 was
$5.66 and $6.62 per share, respectively. The exercise price of options
outstanding at September 30, 1997 ranged from $6.75 to $20.00 per share as
summarized in the following table:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER REMAINING NUMBER EXERCISE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISABLE PRICE PER
PRICES AT 9/30/97 LIFE AT 9/30/97 SHARE
- -------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$6.75 - $10.75 202,000 1.3 years 109,250 $ 7.93
11.00 - 15.50 222,000 3.6 years 75,500 13.76
15.75 - 20.00 111,000 4.3 years 8,000 17.41
----------- -----------
535,000 3.4 years 192,750 $ 10.60
----------- -----------
----------- -----------
</TABLE>
The number of stock options exercisable at September 30, 1996 and 1997 was
32,750 and 105,625 at a weighted average exercise price of $8.69 and $9.75 per
share, respectively.
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value
F-10
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
5. SHAREHOLDERS' EQUITY (CONTINUED)
method of Statement 123. The fair value of these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 5.51%; volatility
factor of the expected market price of the Company's common stock of .34 and a
weighted average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
-----------------------
1996 1997
----------- ----------
<S> <C> <C>
Pro forma net loss................................. ($1,516,751) $(2,441,970)
Pro forma net loss per common share................ $ (.39) $ (.59)
</TABLE>
These pro forma amounts may not be indicative of future years' amounts since
the statement provides for a phase in of option values beginning with those
granted in fiscal 1996.
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 through November 2000.
F-11
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
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 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Deferred assets:
Net operating loss............................................ $ 2,123,000 $ 2,710,000
Allowance for uncollectible accounts.......................... 17,000 21,000
Inventory reserves............................................ 34,000 31,000
Accrued expenses.............................................. 4,000 17,000
------------- -------------
Subtotal........................................................ 2,178,000 2,779,000
Deferred liability:
Depreciation and amortization................................. 315,000 318,000
------------- -------------
Net deferred income tax assets.................................. 1,863,000 2,461,000
Valuation allowance............................................. (1,863,000) (2,461,000)
------------- -------------
Net deferred income taxes....................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company will be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately
$7,970,000 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 2012.
7. LONG-TERM DEBT
Long-term debt consisted of a $3,000,000 convertible loan and accrued
interest with ConvaTec (see Note 12). The loan was unsecured and was due August
11, 2000. Interest on the loan was payable at a rate of 9.75% at maturity
together with the principal amount. On September 30, 1997, the Company repaid
the note and accrued interest in its entirety.
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% simple 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, including 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
F-12
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
8. COMMITMENTS (CONTINUED)
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 $33,000 in 1995, $53,000 in 1996 and $23,000 in 1997. The
Company has repaid the grant and accrued interest as of September 30, 1997.
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. In connection therewith, the Company 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. Under the City Agreement, the City sold to the Company a
20 acre parcel of land for $60,000, and installed roads, utilities and certain
public improvements benefiting the land. The Company has constructed a new
52,000 square foot facility. On December 23, 1996, the Company purchased an
additional 8.38 acre parcel of land from the City for $100,000 to be used for
future expansion of manufacturing facilities.
At September 30, 1997, the Company had commitments of approximately
$2,000,000 for capital expenditures, primarily related to new production
facilities.
9. LEASES
Rent expense from operating leases for the years ended September 30, 1995,
1996, and 1997 was $57,000, $60,000, and $69,000, 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 of a member of the board of
directors of the Company. During the years ended September 30, 1995, 1996, and
1997, the Company incurred legal fees and expenses of approximately $124,000,
$83,000, and $90,000, respectively, to such counsel for services rendered in
connection with litigation and for general legal services. 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 at $402,000. A payment of $86,000 was made in fiscal 1996 and
$316,000 was paid in fiscal 1997. The chief executive officer of Halcon, Inc. is
a 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.
F-13
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
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 of 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 and products in development. The Company is obligated
to offer ConvaTec rights of first and last refusal to market all products
developed after the date of the Distribution Agreement. 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. A 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.
F-14
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
13. SIGNIFICANT CUSTOMERS
Significant customers, measured as a percentage of sales, are summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Significant customers:
Allegiance Euromedical................................................. 19% 19% 4%
ConvaTec............................................................... 5% 12% 24%
Hollister.............................................................. 25% 12% 10%
Mentor................................................................. 14% 29% 30%
-- -- --
Total.................................................................... 63% 72% 68%
-- -- --
-- -- --
</TABLE>
F-15
<PAGE>
[Inside back cover]
The Company manufactures and markets three types of silicone self-adhering male
external catheters. The UltraFlex-Registered Trademark- catheter has adhesive
positioned midway down a standard length catheter sheath. The Pop-On-TM-
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. The Wide
Band-TM- catheter has an adhesive band which extends over the full length of a
standard length catheter sheath, providing approximately 70% more adhesive
coverage than other male external catheters currently marketed.
The Company offers silicone Foley catheters in a standard two lumen version and
in a three lumen version for irrigation of the urinary tract. These Foley
catheters are available in all standard adult and pediatric sizes as well as in
specialized pediatric sizes. The Company's automated manufacturing processes
allow the Company to integrate the balloon into the structure of the Foley
catheter, resulting in a smoother, more uniform exterior that may help reduce
irritation to urinary tissue.
The Company's Personal Catheter-TM- is a disposable intermittent catheter
manufactured from two different silicones, with a stiff core catheter tube and a
softer outer cover. This construction provides sufficient stiffness for ease of
insertion, while the softer outer cover is designed to reduce tissue irritation
during insertion.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING, OTHER THAN THOSE MADE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE PLACEMENT AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 6
Special Note Regarding Forward-Looking
Statements..................................... 15
Use of Proceeds.................................. 16
Price Range of Common Stock...................... 17
Dividend Policy.................................. 18
Dilution......................................... 18
Capitalization................................... 19
Selected Financial Data.......................... 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 21
Business......................................... 25
Management....................................... 48
Principal Shareholders........................... 50
Description of Capital Stock..................... 51
Plan of Distribution............................. 53
Legal Matters.................................... 53
Experts.......................................... 54
Available Information............................ 54
Incorporation of Certain Information by
Reference...................................... 54
Index to Financial Statements.................... F-1
</TABLE>
1,300,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
Vector Securities International, Inc.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses (which do not include Placement Agent fees)
will be paid by the Company in connection with the issuance and distribution of
the securities registered hereby. All such expenses, except for the SEC, NASD
and Nasdaq fees, are estimated.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 6,599
NASD filing fee.................................................. 2,678
Nasdaq National Market additional listing fee.................... 17,500
Legal fees and expenses.......................................... 100,000
Accounting fees and expenses..................................... 50,000
Blue Sky fees and expenses....................................... 5,000
Transfer Agent's and Registrar's fees............................ 5,000
Escrow Agent's fees.............................................. 5,000
Printing and engraving expenses.................................. 60,000
Placement Agent expenses......................................... 125,000
Miscellaneous.................................................... 23,223
---------
Total........................................................ $ 400,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in certain
instances. A decision as to required indemnification is made by a disinterested
majority of the Board of Directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of the Board, by special legal
counsel, by the shareholders or by a court.
Provisions regarding indemnification of officers and directors of the
Registrant to the extent permitted by Section 302A.521 are contained in the
Registrant's Restated Bylaws (Exhibit 4.2 hereto, which is incorporated herein
by reference).
Under the Placement Agent Agreement (Exhibit 1.1 hereto, which is
incorporated herein by reference), the Placement Agent has agreed to indemnify,
under certain conditions, the Company, its directors, certain of its officers
and persons who control the Company within the meaning of the Securities Act of
1933, as amended, against certain liabilities.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Placement Agency Agreement. (Filed herewith.)
4.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-2, Registration Number 33-97788.)
4.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-18, Registration Number 33-36362-C.)
4.3 Amendment to Restated Bylaws of the Company, effective September 27, 1995. (Incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-2, Registration Number 33-97788.)
4.4 Form of the Company's Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-18, Registration Number 33-36362-C.)
4.5 Form of Escrow Agreement. (Filed herewith.)
5.1 Opinion of Dorsey & Whitney LLP as to the legality of the Common Stock offered hereby (including
consent). (Previously filed.)
10.1 Agreement, contractual (non-state employee) services, dated September 27, 1989, between the Company and
Greater Minnesota Corporation. (Incorporated by reference to Exhibit 10.2 to 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 to 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 and the
Housing and Redevelopment Authority for the City of Stewartville. (Incorporated by reference to Exhibit
10.4 to Registrant's Registration Statement on Form S-18, Registration Number 33-36362-C.)
10.4 The Company's 1991 Stock Option Plan as amended. (Incorporated by reference to Exhibit 4.5 to
Registrant's Registration Statement on Form S-8, Registration Number 333-10261.)
10.5 Employment Agreement, dated August 31, 1990, between the Company and Anthony J. Conway. (Incorporated by
reference to Exhibit 10.13 to 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 Philip J. Conway. (Incorporated by
reference to Exhibit 10.14 to Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C.)
10.7 Employment Agreement, dated August 31, 1990, between the Company and Richard D. Fryar. (Incorporated by
reference to Exhibit 10.15 to Registrant's Registration Statement on Form S-18, Registration Number
33-36362-C.)
10.8 Employment Agreement, dated April 21, 1991, between the Company 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.)
10.9 Employment Agreement Addendum, dated June 13, 1994, between the Company 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.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.10 Employment Agreement, dated September 29, 1994, between the Company and Alfred T. Mannino. (Incorporated
by reference to Exhibit 10.15 to Registrant's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994.)
10.11 Employment Agreement, dated February 1, 1996, between the Company and Brian J. Wierzbinski.
(Incorporated by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1996.)
10.12 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 to Registrant's Registration
Statement on Form S-1, Registration Number 33-40934.)
10.13 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) to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1994.)
10.14 First Amendment to Amended UF Catheter Exclusive OEM/Private Label Agreement dated May 7, 1997, between
the Company and Hollister Incorporated. (Incorporated by reference to Exhibit 10.13 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
10.15 Amended and Restated Supply and Distribution Agreement dated March 19, 1997, between the Company and
Euromedical Industries Sdn Bhd (a subsidiary of Allegiance Health Care Corporation). (Incorporated by
reference to Exhibit 10.12 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.)
10.16 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 Company. (Incorporated by reference to Exhibit 4.11
to Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995.)
10.17 Distribution and Co-Development Agreement, dated August 11, 1995, between E.R. Squibb & Sons, Inc.
(through its ConvaTec division) and the Company. (Incorporated by reference to Exhibit 10-22 to
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995.)
10.18 Security Agreement, dated as of August 11, 1995, by and between the Company and E.R. Squibb & Sons, Inc.
(through its ConvaTec division). (Incorporated by reference to Exhibit 10-23 to Registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1995.)
23.1 Consent of Ernst & Young LLP. (Filed herewith.)
23.2 Consent of Dorsey & Whitney LLP. (Included in Exhibit 5.1.)
23.3 Consent of Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A. (Previously filed.)
24.1 Powers of attorney. (Previously filed.)
</TABLE>
- ------------------------
(b) Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the
II-3
<PAGE>
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stewartville, State of Minnesota, on November 3, 1997.
<TABLE>
<S> <C> <C>
ROCHESTER MEDICAL CORPORATION
By: /s/ ANTHONY J. CONWAY
-----------------------------------------
Anthony J. Conway
CHIEF EXECUTIVE OFFICER, PRESIDENT, AND
SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed by the following persons in the
capacities indicated on November 3, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
President, Chief Executive
/s/ ANTHONY J. CONWAY Officer, Secretary, and
- ------------------------------ Director (Principal
Anthony J. Conway Executive Officer)
Chief Financial Officer
/s/ BRIAN J. WIERZBINSKI and Treasurer
- ------------------------------ (Principal Financial and
Brian J. Wierzbinski Accounting Officer)
*
- ------------------------------ Director
Darnell L. Boehm
*
- ------------------------------ Director
Peter R. Conway
*
- ------------------------------ Director
Philip J. Conway
*
- ------------------------------ Director
Richard D. Fryar
*
- ------------------------------ Director
Roger W. Schnobrich
*By: /s/ ANTHONY J. CONWAY
-------------------------
Anthony J. Conway
ATTORNEY-IN-FACT
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders
Rochester Medical Corporation
We have audited the accompanying balance sheets of Rochester Medical
Corporation as of September 30, 1996 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997 and have issued our report thereon dated
October 15, 1997. Our audits also included the financial statement schedule
listed in Item 16 of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 15, 1997
S-1
<PAGE>
ROCHESTER MEDICAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ADDITIONS/
BALANCE AT PROVISIONS
BEGINNING (CHARGED TO BALANCE AT
OF YEAR EXPENSE) DEDUCTIONS END OF YEAR
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997......................................................... $ 50,000 $ 12,000 $ -- $ 62,000
1996......................................................... 25,000 25,000 -- 50,000
1995......................................................... 14,000 11,000 -- 25,000
</TABLE>
S-2
<PAGE>
ROCHESTER MEDICAL CORPORATION
1,300,000 shares of Common Stock, no par value per share
PLACEMENT AGENCY AGREEMENT
November __, 1997
Vector Securities International, Inc.
1751 Lake Cook Road
Deerfield, Illinois 60015
Ladies and Gentlemen:
Rochester Medical Corporation, a Minnesota corporation (the "Company"),
proposes to issue and sell 1,300,000 shares (the "Shares") of common stock, no
par value per share (the "Common Stock"), to certain investors (collectively,
the "Investors"). The Company desires to engage you as its exclusive placement
agent (the "Placement Agent") in connection with such issuance and sale. The
Common Stock is more fully described in the Registration Statement (as
hereinafter defined).
The Company wishes to confirm its agreements with you as the Placement
Agent as follows:
1. AGREEMENT TO ACT AS PLACEMENT AGENT.
On the basis of the representations, warranties and agreements of the
Company contained herein and subject to all the terms and conditions of this
Agreement, the Placement Agent agrees to act as the Company's exclusive
placement agent in connection with the issuance and sale, on a best efforts
basis, by the Company of the Shares to the Investors. The Company shall pay to
the Placement Agent 6.0% of the gross proceeds received by the Company from the
sale of the Shares as set forth on the cover page of the Prospectus (as
hereinafter defined). Such fee shall be in addition to, but not in lieu of, any
fees, expenses or other consideration, if any, which may be owing by the Company
to the Placement Agent under the strategic advisory services agreement dated
January 12, 1996 (the "Advisory Agreement") between the Company and the
Placement Agent relating to the Company's retention of the Placement Agent as a
strategic advisor to the Company.
<PAGE>
2. DELIVERY AND PAYMENT.
Concurrently with the execution and delivery of this Agreement, the
Company, the Placement Agent and Citibank, N.A., as escrow agent (the "Escrow
Agent"), shall enter into an Escrow Agreement substantially in the form of
Exhibit A attached hereto (the "Escrow Agreement"), pursuant to which an escrow
account will be established, at the Company's expense, for the benefit of the
Investors (the "Escrow Account"). Prior to the Closing Date (as defined below),
(i) each of the Investors will deposit an amount equal to the Price to Public
per Share as shown on the cover page of the Prospectus (as hereinafter defined)
multiplied by the number of Shares purchased by it in the Escrow Account, and
(ii) the Escrow Agent will notify the Company and the Placement Agent in writing
whether the Investors have deposited in the Escrow Account funds in the amount
equal to the proceeds of the sale of all of the Shares offered hereby (the
"Requisite Funds"). At 10:00 a.m., New York City time, on _____________, 1997,
or at such other time on such other date as may be agreed upon by the Company
and the Placement Agent but in no event prior to the date on which the Escrow
Agent shall have received all of the Requisite Funds (such date is hereinafter
referred to as the "Closing Date"), the Escrow Agent will release the Requisite
Funds from the Escrow Account for collection by the Company and the Placement
Agent as provided in the Escrow Agreement and the Company shall deliver the
Shares to the Investors, which delivery may be made through the facilities of
The Depository Trust Company. The closing (the "Closing") shall take place at
the office of Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 West Wacker
Drive, Chicago, Illinois 60606. All actions taken at the Closing shall be deemed
to have occurred simultaneously.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the Placement
Agent shall request by written notice to the Company. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company agrees to make such certificates available for inspection at least 24
hours prior to delivery to the Investors.
3. REGISTRATION STATEMENT AND PROSPECTUS.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-2
(No. 333-36605) covering the registration of the Shares under the Securities
Act of 1933, as amended (the "1933 Act"), including the related preliminary
prospectus, or prospectuses, and either (A) has prepared and filed, prior to
the effective date of such registration statement, an amendment to such
registration statement, including a final prospectus or (B) if the Company
has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations
of the Commission under the 1933 Act (the "1933 Act Regulations"), will
prepare and file a prospectus, in accordance with the provisions of Rule 430A
and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after
execution and delivery of this Agreement. Additionally, if the Company has
2
<PAGE>
elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the
Company will prepare and file a term sheet (a "Term Sheet") in accordance
with the
provisions of Rule 434 and Rule 424(b), promptly after execution and delivery
of this Agreement. The information, if any, included in such prospectus or
in such Term Sheet, that was omitted from such registration statement at the
time it became effective but that is deemed to be part of such registration
statement at the time it becomes effective (a) pursuant to paragraph (b) of
Rule 430A, is referred to herein as the "Rule 430A Information," or (b)
pursuant to paragraph (d) of Rule 434, is referred to herein as the "Rule 434
Information." Each prospectus used before the time such registration
statement became effective, and any prospectus that omitted, as applicable,
the Rule 430A Information or the Rule 434 Information that was used after
effectiveness and prior to the execution and delivery of this Agreement is
herein called a "Preliminary Prospectus." Such registration statement,
including the exhibits and schedules thereto, if any, and the documents
incorporated by reference therein pursuant to Item 12 of Form S-2 under the
1933 Act, the Rule 430A Information or the Rule 434 Information, is herein
called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as
the "Rule 462(b) Registration Statement," and after such filing the term
Registration Statement shall include the Rule 462(b) Registration Statement.
The final prospectus, including the documents incorporated by reference
therein pursuant to Item 12 of Form S-2 under the 1933 Act, in the form first
furnished to the Placement Agent for use in connection with the offering of
the Shares is herein referred to as the "Prospectus." If Rule 434 is relied
upon, the term "Prospectus" shall refer to the preliminary prospectus last
furnished to the Placement Agent in connection with the offering of the
Shares, together with the Term Sheet, and all references to the date of the
Prospectus shall mean the date of the Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any Preliminary
Prospectus, the Prospectus or any Term Sheet or any amendment or supplement
to any of the foregoing shall be deemed to include the copy, if any, filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
All references in this Agreement to financial statements and
schedules and other information which are "contained," "included" or "stated"
in the Registration Statement, any Preliminary Prospectus or the Prospectus
(or other references of like import) shall be deemed to mean and include all
such financial statements and schedules and other information which are or
are deemed to be incorporated by reference in the Registration Statement, any
Preliminary Prospectus or the Prospectus, as the case may be; and all
references in this Agreement to amendments or supplements to the Registration
Statement, such Preliminary Prospectus or the Prospectus shall be deemed to
mean and include the filing of any document under the Securities Exchange Act
of 1934, as amended (the "1934 Act") which is incorporated by reference in
the Registration Statement, Preliminary Prospectus or the Prospectus, as the
case may be.
3
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents, warrants and covenants to the Placement Agent that:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS.
(i) When the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto becomes
effective, at the date of the Prospectus, if different, and at the Closing
Date the Registration Statement, the Rule 462(b) Registration Statement and
any amendments and supplements thereto complied or will comply in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus
and any supplements or amendments thereto will not at the date of the
Prospectus, at the date of any such supplements or amendments, or at the
Closing Date include an untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. If
Rule 434 is used, the Company will comply with the requirements of Rule 434
and the Prospectus shall not be "materially different," as such term is used
in Rule 434, from the Prospectus included in the Registration Statement at
the time it became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus relating to the Placement Agent made in
reliance upon and in conformity with information furnished to the Company in
writing by the Placement Agent expressly for use in the Registration
Statement or Prospectus. The Company has not distributed any offering
materials in connection with the offering or sale of the Shares other than
the Registration Statement, each Preliminary Prospectus, the Prospectus, the
Term Sheet, if applicable, or any other materials, if any, permitted by the
1933 Act or the 1933 Act Regulations.
(ii) Each Preliminary Prospectus and the prospectus filed as
part of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied
when so filed in all material respects with the requirements of the 1933 Act
Regulations.
(b) INCORPORATION BY REFERENCE. The documents incorporated or
deemed to be incorporated by reference in the Registration Statement or the
Prospectus at the time they were filed with the Commission complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations thereunder (the "1934 Act Regulations") and, when read together
with the other information in the Prospectus, on the date the Prospectus was
issued
4
<PAGE>
and on the Closing Date, did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(c) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and related notes and supporting schedules included in the
Registration Statement and the Prospectus are independent public accountants
with respect to the Company as required by the 1933 Act and the 1933 Act
Regulations.
(d) FINANCIAL STATEMENTS. The financial statements and related notes
and supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the dates
indicated and the results of its operations for the periods specified; except as
otherwise stated in the Registration Statement, said financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. The financial information and statistical data with respect to the
Company set forth in the Prospectus are, to the extent applicable, prepared on
an accounting basis consistent with such financial statements.
(e) NO MATERIAL ADVERSE CHANGE. Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
except as otherwise stated therein, (i) there has been no material adverse
change or, to the knowledge of the Company, any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company, whether or not arising in the ordinary course of business, (ii) there
have been no transactions entered into by the Company, other than those in the
ordinary course of business which are material with respect to the Company and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock. The Company has no
material contingent obligations which are not disclosed in the Registration
Statement.
(f) GOOD STANDING OF THE COMPANY. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Minnesota with corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this Agreement
and the Escrow Agreement. The Company is and at the Closing Date will be duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except where
the failure to so qualify would not, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, on the earnings,
business affairs or business prospects of the Company.
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(g) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under "Capitalization" (except for subsequent issuances, if any,
pursuant to this Agreement or pursuant to reservations, agreements, employee
or director benefit plans or the exercise of convertible securities referred
to in the Prospectus); the shares of issued and outstanding capital stock of
the Company have been duly authorized and validly issued and are fully paid
and non-assessable and have not been issued in violation of or are not
otherwise subject to any preemptive or other similar rights; the description
of the securities of the Company in the Registration Statement and the
Prospectus including the Shares, when issued, is, and at the Closing Date
will be, complete and accurate in all respects; the certificates evidencing
the Shares are in due and proper form under Minnesota law; the authorized
capital stock of the Company, including the Shares, conforms to all
statements relating thereto contained in the Prospectus; and the issuance of
the Shares is not subject to preemptive or similar rights. There are no
outstanding subscriptions, options, warrants, convertible or exchangeable
securities or other rights granted to or by the Company to purchase shares of
Common Stock or other securities of the Company and there are no commitments,
plans or arrangements to issue any shares of Common Stock or any security
convertible into or exchangeable for Common Stock, in each case other than as
described in the Prospectus.
(h) ENVIRONMENTAL LAWS. Except as disclosed in the Registration
Statement and except as would not, singly or in the aggregate, reasonably be
expected to have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company, (A) the Company is in compliance with all applicable Environmental
Laws, (B) the Company has all permits, authorizations and approvals required
under any applicable Environmental Laws and is in compliance with the
requirements of such permits, authorizations and approvals, (C) there are no
pending or, to the knowledge of the Company, threatened Environmental Claims
against the Company and (D) to the knowledge of the Company, under applicable
law, there are no circumstances with respect to any property or operations of
the Company that are reasonably likely to form the basis of an Environmental
Claim against the Company.
For purposes of this Agreement, the following terms shall have
the following meanings: "Environmental Law" means any United States (or
other applicable jurisdictions) Federal, state, local or municipal statute,
law, rule, regulation, ordinance, code, policy or rule of common law and any
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgement, relating to the
environment, health, safety or any chemical, material or substance, exposure
to which is prohibited, limited or regulated by any governmental authority.
"Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigations or proceedings relating in any way
to any Environmental Law.
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(i) ABSENCE OF DEFAULTS AND CONFLICTS. The Company is not in
violation of its charter or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, deed, trust, note, lease,
sublease, voting agreement, voting trust, or other instrument or agreement to
which the Company is a party or by which it may be bound, or to which any of
the property or assets of the Company is subject; and the execution, delivery
and performance of this Agreement and the Escrow Agreement and the
consummation of the transactions contemplated herein and therein and
compliance by the Company with its obligations hereunder and thereunder have
been duly authorized by all necessary corporate action and will not conflict
with or constitute a breach of, or default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets
of the Company pursuant to, any contract, indenture, mortgage, loan
agreement, deed, trust, note, lease, sublease, voting agreement, voting trust
or other instrument or agreement to which the Company is a party or by which
it may be bound, or to which any of the property or assets of the Company is
subject, nor will such action result in any violation of the provisions of
the charter or bylaws of the Company or any applicable statute, law, rule,
regulation, ordinance, decision, directive or order.
(j) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees
of the Company exists or, to the knowledge of the Company, is threatened; and
the Company is not aware of any existing or threatened labor disturbance by
the employees of any of its principal suppliers, manufacturers or contractors
which might, singly or in the aggregate, be expected to result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company.
(k) ABSENCE OF PROCEEDINGS. There is no action, suit or proceeding
before or by any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company, threatened, against or
affecting the Company, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which, singly or in the
aggregate, might reasonably be expected to result in any material adverse
effect on the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company, or which, singly or in the
aggregate, might materially and adversely affect the properties or assets
thereof or which might materially and adversely affect the consummation of
this Agreement or the Escrow Agreement; and there are no contracts or
documents of the Company which are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations which
have not been so filed.
(l) POSSESSION OF INTELLECTUAL PROPERTY. The Company owns or is
licensed to use all patents, patent applications, inventions, trademarks,
trade names, applications for registration of trademarks, service marks,
service mark applications, copyrights, know-how, manufacturing processes,
formulae, trade secrets, licenses and rights in any thereof and any other
intangible property and assets (herein called the "Proprietary Rights") which
are material to the business of the Company as now conducted and as proposed
to be conducted, in each
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case as described in the Prospectus. The description of the Proprietary
Rights in the Prospectus is correct in all material respects and fairly and
correctly describes the Company's rights with respect thereto. The Company
does not have any knowledge of, and the Company has not given or received any
notice of, any pending conflicts with or infringement of the rights of others
with respect to any Proprietary Rights or with respect to any license of
Proprietary Rights. No action, suit, arbitration, or legal, administrative
or other proceeding, or investigation is pending, or, to the knowledge of the
Company, threatened, which involves any Proprietary Rights. Except as
described in the Prospectus, the Company is not subject to any judgment,
order, writ, injunction or decree of any court or any Federal, state, local,
foreign or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, or any arbitrator, or has entered
into or is a party to any contract which restricts or impairs the use of any
such Proprietary Rights in a manner which would have a material adverse
effect on the use of any of the Proprietary Rights. To the knowledge of the
Company, no Proprietary Rights used by the Company, and no services or
products sold by the Company, conflict with or infringe upon any proprietary
rights available to any third party. The Company has not received written
notice of any pending conflict with or infringement upon such third-party
proprietary rights. Except for the Male External Catheter License, Sales and
Distribution Agreement, dated April 24, 1991, between the Company and Mentor
Corporation, the Company has not entered into any consent, indemnification,
forbearance to sue or settlement agreement with respect to Proprietary Rights
other than in the ordinary course of business. No claims have been asserted
by any person with respect to the validity of the Company's ownership or
right to use the Proprietary Rights and, except as specifically described in
the Prospectus, to the knowledge of the Company, there is no reasonable basis
for any such claim to be successful. The Proprietary Rights are valid and
enforceable and no registration relating thereto has lapsed, expired or been
abandoned or cancelled or is the subject of cancellation or other adversarial
proceedings, and all applications therefore are pending and are in good
standing. The Company has complied, in all material respects, with its
contractual obligations relating to the protection of the Proprietary Rights
used pursuant to licenses. To the knowledge of the Company, no person is
infringing on or violating the Proprietary Rights owned or used by the
Company.
(m) ABSENCE OF FURTHER REQUIREMENTS. No registration,
authorization, approval, qualification or consent of any court or
governmental authority or agency is necessary in connection with the
offering, issuance or sale of the Shares hereunder or pursuant to the Escrow
Agreement, except such as may be required under the 1933 Act or the 1933 Act
Regulations or state securities or Blue Sky laws (or such as may be required
by the National Association of Securities Dealers, Inc. ("NASD")).
(n) POSSESSION OF LICENSES AND PERMITS. The Company possesses and
is operating in compliance with all material licenses, certificates,
consents, authorities, approvals and permits (collectively, "permits") from
all state, Federal, foreign and other regulatory agencies or bodies necessary
to conduct the businesses now operated by it, and the Company has not
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received any notice of proceedings relating to the revocation or modification
of any such permit or any circumstance which would lead it to believe that
such proceedings are reasonably likely.
(o) AUTHORIZATION OF AGREEMENTS. This Agreement and the Escrow
Agreement have been duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by the other parties hereto and thereto,
constitute valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, except as rights to indemnity and
contribution hereunder and thereunder may be limited by (i) Federal or state
securities laws or the public policy underlying such laws, (ii) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally or (iii) general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law).
(p) REGISTRATION RIGHTS. Except as described in the Prospectus,
there are no persons with registration or other similar rights to have any
securities registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(q) ABSENCE OF ORDER. No order preventing or suspending the use of
any Preliminary Prospectus has been issued and no proceedings for that purpose
are pending, threatened, or, to the knowledge of the Company, contemplated by
the Commission; and to the knowledge of the Company, no order suspending the
offering of the Shares in any jurisdiction designated by the Placement Agent
pursuant to this Agreement has been issued and, to the knowledge of the Company,
no proceedings for that purpose have been instituted or threatened or are
contemplated.
(r) TITLE TO PROPERTY. The Company has good and marketable title to
its properties, free and clear of all material security interests, mortgages,
pledges, liens, charges, encumbrances, claims and equities of record, except
such as are described in the Prospectus or do not substantially affect the value
or use of such properties. The properties of the Company are, in the aggregate,
in good repair (reasonable wear and tear excepted), and suitable for their
respective uses. Any real properties held under lease by the Company are held
by it under valid, subsisting and enforceable leases with such exceptions as are
not material and do not interfere with the conduct of the business of the
Company.
(s) ACCOUNTING. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to assets is
permitted only in accordance with management's general or specific authorization
and (iv) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
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(t) COMPLIANCE WITH LAW. The Company has conducted and is conducting
its business in compliance with all applicable Federal, state, local and foreign
statutes, laws, rules, regulations, ordinances, codes, decisions, decrees,
directives and orders, except where the failure to do so would not, singly or in
the aggregate, have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business affairs or business prospects of the
Company.
(u) ABSENCE OF PAYMENT. To the best of the Company's knowledge,
neither the Company nor any employee or agent of the Company has made any
payment of funds of the Company or received or retained any funds in violation
of any law, rule or regulation, which payment, receipt or retention of funds is
of a character required to be disclosed in the Prospectus.
(v) INVESTMENT COMPANY ACT. The Company is not now, and after sale
of the Shares to be sold by it hereunder and application of the net proceeds
from such sale as described in the Prospectus under the caption "Use of
Proceeds" will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(w) COMPLIANCE WITH SECURITIES LAWS. All offers and sales of capital
stock of the Company prior to the date hereof were at all relevant times duly
registered or exempt from the registration requirements of the 1933 Act and were
duly registered or subject to an available exemption from the registration
requirements of the applicable state securities or Blue Sky laws.
(x) REGISTRATION OF COMMON STOCK. The Common Stock is registered
pursuant to Section 12(g) of the 1934 Act. The Shares have been duly authorized
for quotation on the Nasdaq National Market (the "Nasdaq"). The Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the 1934 Act or delisting the Common
Stock from the Nasdaq, nor has the Company received any notification that the
Commission or the Nasdaq is contemplating terminating such registration or
listing.
(y) ABSENCE OF CERTAIN ACTIONS. Neither the Company nor, to its
knowledge, any of its officers, directors or affiliates has taken, and at the
Closing Date, neither the Company nor, to its knowledge, any of its officers,
directors or affiliates will have taken, directly or indirectly, any action
which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Shares.
(z) INSURANCE. The Company maintains insurance of the types and in
amounts adequate for its business and consistent with insurance coverage
maintained by similar companies in similar businesses, including but not limited
to, insurance covering clinical trial liability, product liability and real and
personal property owned or leased against theft,
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damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
(aa) TAXES. The Company has filed all material tax returns
required to be filed, which returns are true and correct in all material
respects and the Company is not in default in the payment of any taxes,
including penalties and interest, assessments, fees and other charges, shown
thereon due or otherwise assessed, other than those being contested in good
faith and for which adequate reserves have been provided or those currently
payable without interest which were payable pursuant to said returns or any
assessments with respect thereto.
(bb) FDA REGULATION. Except as described in the Prospectus, to
the Company's knowledge, there are no rulemaking or similar proceedings before
the United States Food and Drug Administration (the "FDA") or comparable
Federal, state, local or foreign government bodies which involve or affect the
Company, which, if the subject of an action unfavorable to the Company, could
reasonably be expected to involve a prospective material adverse change in or
effect on the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company.
(cc) CERTAIN AGREEMENTS. The Company has not received any
communication (whether written or oral) relating to the termination or
threatened termination or modification or threatened modification of any
material consulting, licensing, distribution, marketing, research and
development, cooperative or any similar agreement, including, without
limitation, the collaborative research, license and distribution agreements
described in the section of the Prospectus entitled "Private Label
Distribution Agreements." Each such agreement is in effect substantially as
described in such section of the Prospectus.
(dd) CERTAIN EMPLOYEE ACTIONS. To the knowledge of the
Company, if any full-time employee has entered into any non-competition,
non-disclosure, confidentiality or other similar agreement with any party
other than the Company, such employee is neither in violation thereof nor is
expected to be in violation thereof as a result of the business conducted or
expected to be conducted by the Company as described in the Prospectus or
such person's performance of his obligations to the Company; and the Company
has not received written notice that any consultant or scientific advisor of
the Company is in violation of any non-competition, non-disclosure,
confidentiality or similar agreement.
5. AGREEMENTS OF THE COMPANY.
The Company covenants and agrees with the Placement Agent as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company will notify the Placement Agent immediately, and confirm the notice
in writing, (i) of the effectiveness of the Registration Statement and any
amendment thereto, (ii) of the
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receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the suspension of qualification of the Shares
for offering or sale in any jurisdiction or the initiation of any proceedings
for such purpose and (v) during the period when the Prospectus is required to
be delivered under the 1933 Act or the 1934 Act, of any change, or any event
or occurrence which could reasonably be expected to result in such a change,
in the Company's condition, financial or otherwise, or the earnings, business
affairs or business prospects of the Company or the happening of any event,
including the filing of any information, documents or reports pursuant to the
1934 Act, that makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus in order to state a material fact
required by the 1933 Act or the 1933 Act Regulations to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectus to comply with the 1933 Act,
the 1933 Act Regulations or any other law. The Company shall use its best
efforts to prevent the issuance of any stop order or order suspending the
qualification or exemption of the Shares under any state securities or Blue
Sky laws, and, if at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption of the Shares under any state
securities or Blue Sky laws, the Company shall use every reasonable effort to
obtain the withdrawal or lifting of such order at the earliest possible time.
(b) FILING OF AMENDMENTS. The Company will give the Placement
Agent notice of its intention to prepare or file any amendment to the
Registration Statement (including any post-effective amendment), any Rule
462(b) Registration Statement, any Term Sheet or any amendment or supplement
to the Prospectus (including any revised prospectus or Term Sheet and
preliminary prospectus which the Company proposes for use by the Placement
Agent in connection with the offering of the Shares which differs from the
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus or Term Sheet and
preliminary prospectus is required to be filed pursuant to Rule 424(b)),
whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the
Placement Agent with copies of any Rule 462(b) Registration Statement, Term
Sheet, amendment or supplement within a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file any such
Rule 462(b) Registration Statement, Term Sheet, amendment or supplement or
use any such prospectus to which the Placement Agent or counsel for the
Placement Agent shall reasonably object in a timely fashion.
(c) REGISTRATION STATEMENT DELIVERY. The Company has or will
furnish to the Placement Agent and its counsel, without charge, as many
signed and conformed copies of the Registration Statement hereof as
originally filed and each amendment thereto (including
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exhibits filed therewith or incorporated by reference therein) as the
Placement Agent may reasonably request.
(d) PROSPECTUS DELIVERY. The Company will furnish to the Placement
Agent, without charge, from time to time during the period when the Prospectus
is required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the Prospectus (as amended or supplemented) as the Placement Agent may
reasonably request for the purposes contemplated by the 1933 Act, the 1934 Act,
the 1933 Act Regulations or the 1934 Act Regulations.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If, at any time when a Prospectus relating to
the Shares is required to be delivered in connection with sales of the
Shares, under the 1933 Act, the 1934 Act, the 1933 Act Regulations or the
1934 Act Regulations, any event shall occur or condition shall exist as a
result of which it is necessary, in the reasonable opinion of counsel for the
Placement Agent or for the Company, to amend the Registration Statement or
amend or supplement the Prospectus in order that the fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances existing at the time it is delivered to a purchaser, or
if it shall be necessary, in the opinion of such counsel, at any such time to
amend the Registration Statement or amend or supplement the Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 5(b) of this Agreement, such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements and
the Company will furnish to the Placement Agent such number of copies of such
amendment or supplement as the Placement Agent may reasonably request.
(f) DELIVERY OF CERTAIN INFORMATION. During the period of five
years hereafter, the Company will furnish to the Placement Agent (i) as soon
as available, a copy of each report of the Company mailed to stockholders or
filed with the Commission and (ii) from time to time such other information
concerning the Company as the Placement Agent may reasonably request.
(g) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with counsel to the Placement Agent, to qualify the
Shares for offering and sale under the applicable securities or Blue Sky laws
of such states and other jurisdictions of the United States (if required) as
the Placement Agent may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the effective
date of the Registration Statement and any Rule 462(b) Registration
Statement; PROVIDED, HOWEVER, that the Company shall not be obligated to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. In each jurisdiction in which the Shares have been so qualified,
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the Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(h) RULE 158. The Company will make generally available to holders
of its securities, as soon as may be practicable, but in no event later than
45 days after the period covered thereby, a consolidated earnings statement
(in form complying with the provisions of Rule 158 of the 1933 Act
Regulations) for a period of 12 months beginning not later than the first day
of the Company's fiscal quarter next following the "effective date" (as
defined in said Rule 158) of the Registration Statement.
(i) USE OF PROCEEDS. The Company will apply the net proceeds from
the offering and sale of the Shares in the manner set forth in the Prospectus
under the caption "Use of Proceeds."
(j) RULE 430A INFORMATION. If, at the time that the Registration
Statement becomes effective, any Rule 430A Information or Rule 434
Information shall have been omitted therefrom, then immediately following the
execution of this Agreement, the Company will prepare, and file or transmit
for filing with the Commission in accordance with Rule 430A or Rule 434 and
Rule 424(b), copies of a Prospectus or Term Sheet containing such Rule 430A
Information and Rule 434 Information, respectively, or, if required by Rule
430A, a post-effective amendment to the Registration Statement (including an
amended Prospectus), containing such Rule 430A Information.
(k) 1934 ACT COMPLIANCE. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
Section 13, 14 or 15 of the 1934 Act within the time periods required by the
1934 Act and the 1934 Act Regulations.
(l) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days
from the date of the Prospectus, the Company will not, without the prior
written consent of the Placement Agent, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any share of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or, except pursuant to registration rights held by each of Dain
Bosworth Incorporated and Robert W. Baird & Co. Incorporated under warrants
dated November 1995, file any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A)
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the Shares to be sold hereunder, (B) any shares of Common Stock issued by the
Company upon the exercise of an option or warrant or the conversion of
security outstanding on the date hereof and referred to in the Prospectus,
(C) any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to existing employee benefit plans of the Company referred
to or incorporated by reference in the Prospectus or (D) any shares of Common
Stock issued pursuant to any non-employee director stock plan.
(m) "LOCK-UP LETTERS". The Company has furnished or will furnish to
you "lock-up" letters, in form and substance satisfactory to you, signed by each
of its current officers and directors and each of its stockholders owning 5% or
more of its capital stock as may be designated by you.
(n) CERTAIN CORRESPONDENCE. The Company will supply the Placement
Agent with copies of all correspondence to and from, and all documents issued to
and by, the Commission in connection with the registration of the Shares under
the 1933 Act.
(o) DELIVERY OF INTERIM FINANCIAL STATEMENTS. Prior to the Closing
Date, the Company shall furnish to the Placement Agent, as soon they have been
prepared, copies of any unaudited interim consolidated financial statements of
the Company, for any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(p) PRESS RELEASES. Prior to the Closing Date, the Company will
issue no press release or other communications directly or indirectly and
hold no press conference with respect to the Company, the condition,
financial or otherwise, or the earnings, business affairs or business
prospects of the Company, or the offering of the Shares, without the prior
written consent of the Placement Agent unless in the judgment of the Company
and its counsel, and after notification to the Placement Agent, such press
release or communication is required by law.
(q) CERTAIN ACTIONS. The Company has not and will not at any time,
directly or indirectly, take any action designed to, or which might
reasonably be expected to, cause or result in, or which will constitute,
stabilization or manipulation of the price of the Shares to facilitate the
sale or resale of any of the Shares.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless (i) the
Placement Agent and (ii) each person, if any, who controls the Placement
Agent within the meaning of Section 15 of the 1933 Act (any of the persons
referred to in this clause (ii) being hereinafter referred to as a
"controlling person") and (iii) the respective directors, officers, partners
and employees of the Placement Agent or any controlling person (any person
referred to in clause
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(i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Person")
to the fullest extent lawful, from and against any and all losses, claims,
damages, liabilities and expenses whatsoever (including, without limitation,
all reasonable costs of pursuing, investigating and defending any claim, suit
or action or any investigation or proceeding by any governmental agency or
body, commenced or threatened, including the reasonable fees and expenses of
counsel to any Indemnified Person), directly or indirectly caused by, related
to, based upon or arising out of or in connection with any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereto, including the Rule 430A Information and
Rule 434 Information, if applicable, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading or caused by, related to, based
upon, arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
or the Prospectus (or any amendment or supplement thereto) or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except insofar as
such losses, claims, damages, liabilities or expenses arise out of or are
based upon any untrue statement or omission or alleged untrue statement or
omission which has been made therein or omitted therefrom in reliance upon
and in conformity with the information relating to the Placement Agent
furnished in writing to the Company by or on behalf of the Placement Agent
expressly for use in connection therewith; PROVIDED, HOWEVER, that the
indemnification contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of the Placement Agent
(or related Indemnified Person) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares to any person if a
copy of the Prospectus shall not have been delivered or sent to such person
within the time required by the 1933 Act or the 1933 Act Regulations, and the
untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such Preliminary Prospectus was corrected in
the Prospectus (or any amendment or supplement thereto), provided that the
Company has delivered the Prospectus to the Placement Agent in requisite
quantity on a timely basis to permit such delivery or sending.
(b) If any action, suit or proceeding shall be brought against any
Indemnified Person in respect of which indemnity may be sought against the
Company, such Indemnified Person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties") in writing,
and such indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Indemnified
Person shall have the right to employ separate counsel in any such action,
suit or proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified
Person unless (i) the indemnifying parties have agreed in writing to pay such
fees and expenses, (ii) the indemnifying parties have failed to assume the
defense and employ counsel or (iii) the named parties to any such action,
suit, investigation or proceeding (including any impleaded parties) include
both such Indemnified Person and the indemnifying parties and representation
of such Indemnified Person and any
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indemnifying party by the same counsel would, in the reasonable judgment of
the Indemnified Person, be inappropriate due to actual or potential differing
interests between them (in which case the indemnifying party shall not have
the right to assume the defense of such action, suit or proceeding on behalf
of such Indemnified Person). It is understood, however, that the
indemnifying parties shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses
of only one separate firm of attorneys (in addition to any local counsel) at
any time for all such Indemnified Persons not having actual or potential
differing interests with you or among themselves, which firm shall be
designated in writing by the Placement Agent, and that all such fees and
expenses shall be reimbursed as they are incurred. The indemnifying parties
shall not be liable for any settlement of any such action, suit or proceeding
effected without their written consent, which consent shall not be
unreasonably withheld, but if settled with such written consent, or if there
be a final judgment for the plaintiff in any such action, suit or proceeding,
the indemnifying parties agree to indemnify and hold harmless any Indemnified
Person, to the extent provided in the preceding paragraph, from and against
any loss, claim, damage, liability or expense by reason of such settlement or
judgment.
(c) The Placement Agent agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement and
any person who controls the Company within the meaning of Section 15 of the
1933 Act, to the same extent as the foregoing indemnity from the Company to
each Indemnified Person, but only with respect to information relating to the
Placement Agent furnished in writing by or on behalf of the Placement Agent
expressly for use in the Registration Statement, the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto. If any
action, suit, investigation or proceeding shall be brought against the
Company, any of its directors, any such officer or any such controlling
person based on the Registration Statement, the Prospectus or any Preliminary
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against the Placement Agent pursuant to this
paragraph (c), the Placement Agent shall have the rights and duties given to
the Company by paragraph (b) above, and the Company, its directors, any such
officer and any such controlling person shall have the rights and duties
given to the Indemnified Persons by paragraph (a) above.
(d) If the indemnification provided for in this Section 6 is
unavailable to, or insufficient to hold harmless, an indemnified party under
paragraphs (a) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Placement Agent on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law or judicial determination, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company
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on the one hand and the Placement Agent on the other hand, as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Placement Agent on the other hand shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total agency fees received by the Placement Agent, in each case as set forth
in the table on the cover page of the Prospectus or, if Rule 434 is used, the
corresponding location on the Term Sheet. The relative fault of the Company
on the one hand and the Placement Agent on the other hand shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand
or by the Placement Agent on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The indemnity and contribution obligations of any
person set forth herein shall be in addition to any liability or obligation
such person may otherwise have to any indemnified party.
(e) The Company and the Placement Agent agree that it would not be
just and equitable if contribution pursuant to this Section 6 were determined
by a pro rata allocation or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to
in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating any claim
or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 6, the Placement Agent (or any of its related
Indemnified Persons) shall not be required to contribute (whether pursuant to
subsection (a) or (c) or otherwise) any amount in excess of the agency fees
applicable to the Shares placed by the Placement Agent. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(f) No indemnifying party shall, without the prior written consent
of the Indemnified Person, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any Indemnified Person is or
could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement includes an unconditional
release of such Indemnified Person from all liability on claims that are the
subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 6 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 6 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on
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behalf of any Indemnified Person, the Company, its directors or officers or
any person controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder and (iii) any termination of this Agreement.
7. CONDITIONS TO THE OBLIGATIONS OF THE PLACEMENT AGENT.
The obligations of the Placement Agent hereunder are subject to the
following conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective on the date hereof; no
stop order suspending the effectiveness of the Registration Statement shall
have been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission. If the Company has elected to rely upon Rule
430A, Rule 430A Information previously omitted from the effective
Registration Statement pursuant to Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) within the prescribed time
period and the Company shall have provided evidence satisfactory to the
Placement Agent of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A. If the Company
has elected to rely upon Rule 434, a Term Sheet shall have been transmitted
to the Commission for filing pursuant to Rule 424(b) within the prescribed
time period.
(b) The Placement Agent shall have received:
(i) The favorable opinion dated as of the Closing Date, of
Dorsey & Whitney LLP, special counsel for the Company, in form and
substance satisfactory to counsel for the Placement Agent, to the effect
that:
A. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Minnesota.
B. The Company has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus and to enter into
and perform its obligations under this Agreement.
C. To their knowledge, the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, except
where failure to be so qualified would not have a material adverse effect on
the Company.
D. The Company has authorized and outstanding
capital stock as described in the Prospectus, and the shares of issued and
outstanding capital stock of the
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Company, including the Common Stock, have been duly authorized and validly
issued and are fully paid and non-assessable and, to their knowledge, have
not been issued in violation of or are not otherwise subject to any
preemptive rights or other similar rights. The capital stock of the Company,
including the Shares, conforms in all material respects to the descriptions
thereof contained in the Prospectus.
E. The Shares have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
non-assessable; and the issuance of the Shares is not subject to preemptive
or, to their knowledge, other similar rights.
F. To their knowledge, except as described in the
Prospectus, there are no outstanding options, warrants or other rights
granted to or by the Company to purchase shares of Common Stock or other
securities of the Company and there are no commitments, plans or arrangements
to issue any shares of Common Stock or other securities.
G. This Agreement and the Escrow Agreement have
been duly authorized by all requisite corporate action, executed and,
delivered by the Company and, assuming their due authorization, execution and
delivery by the other parties hereto and thereto, constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as rights to indemnity and contribution
hereunder and thereunder may be limited by (i) Federal or state securities
laws or the public policy underlying such laws, (ii) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally or (iii) general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity
or at law).
H. At the time the Registration Statement became
effective and at the Closing Date, the Registration Statement (other than the
financial statements and supporting schedules and other financial information
included therein, as to which no opinion need be rendered) complied as to
form in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations.
I. The documents incorporated by reference in the
Prospectus (other than the financial statements and supporting schedules and
other financial information included therein, as to which no opinion need be
rendered), when they became effective or were filed with the Commission, as
the case may be, complied as to form in all material respects with the
requirements of the 1933 Act or the 1934 Act, as applicable, and the rules
and regulations of the Commission thereunder.
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J. The form of certificate used to evidence each of
the Shares is in due and proper form and complies with all applicable
requirements of the Minnesota Business Corporation Act as in effect on the
date of such opinion.
K. To their knowledge, there are no legal or
governmental proceedings pending or threatened which, individually or in the
aggregate, are required to be disclosed in the Registration Statement other
than those disclosed therein.
L. The information in the Prospectus under
"Business--Government Regulation," "Business--Litigation," "Management" and
"Description of Capital Stock" to the extent that it constitutes matters of
law, summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by them and is correct in all material
respects and fairly and correctly presents the information called for with
respect thereto.
M. To their knowledge, there are no contracts,
indentures, mortgages, loan agreements, deeds, trusts, notes, leases,
subleases, voting trusts, voting agreements or other instruments or
agreements required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, the descriptions thereof or
references thereto are correct; and to their knowledge, no default exists in
the due performance or observance of any material obligation, agreement,
covenant or condition (other than any financial test, covenant or conditions
as to which such counsel may express no opinion) contained in any contract,
agreement or other instrument of the Company included in Exhibits 10.12
through 10.15 and 10.17 of the Registration Statement.
N. No authorization, approval, consent or order of
any court or governmental authority or agency is required in connection with
the offering, issuance or sale of the Shares pursuant to this Agreement or
the compliance by the Company with the provisions of this Agreement or the
Escrow Agreement, except such as may be required under the 1933 Act or the
1933 Act Regulations or state securities or Blue Sky laws or such as may be
required by the NASD; and the execution, delivery and performance of this
Agreement and the Escrow Agreement and the consummation of the transactions
contemplated herein or therein and the compliance by the Company with its
obligations hereunder or thereunder will not conflict with or constitute a
breach of, or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
pursuant to, any contract, indenture, mortgage, loan agreement, note, deed,
trust, lease, sublease, voting trust, voting agreement or other instrument or
agreement known to such counsel to which the Company is a party or by which
it may be bound, or to which any of the property or assets of the Company is
subject (except that such counsel need express no opinion as to compliance
with financial tests or covenants), nor will such action result in any
violation of the provisions of the charter or bylaws of the Company, or any
applicable statute, law, rule,
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regulation, ordinance, code, decision, directive or order known to such
counsel and applicable to the Company.
O. Except as described in the Prospectus, to their
knowledge, there are no persons with registration or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
P. The Registration Statement has become effective
under the 1933 Act; any required filing of the Prospectus, and any
supplements thereto or the Term Sheet, pursuant to Rule 424(b), has been made
in the manner and within the time period required; and to their knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
part thereof has been issued and no proceedings therefor have been instituted
or are pending or contemplated under the 1933 Act;
(ii) The favorable opinion, dated as of the Closing
Date, of George H. Frisch, Attorney at Law, counsel for the
Company, in form and substance satisfactory to counsel for the
Placement Agent, to the effect that:
A. To his knowledge, the Company possesses and is
in compliance with all permits issued by the appropriate regulatory body or
agency, including the FDA and any foreign regulatory agency performing
similar functions, necessary to conduct the businesses now operated by it,
except where the failure to so possess or comply with any permit would not
have, singly or in the aggregate, a material adverse effect on the business
or condition, financial or otherwise, of the Company. To his knowledge,
there are no proceedings, pending or threatened, which if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect
on the business or condition, financial or otherwise, of the Company.
B. To his knowledge, the Company is in compliance
with, and conducts its businesses in conformity with, all applicable laws and
regulations relating to the operation of its business as described in the
Registration Statement, except to the extent that any failure to so comply or
conform would not have a material adverse effect upon the business or
condition, financial or otherwise, of the Company.
(iii) The favorable opinion, dated as of the Closing Date,
of Merchant, Gould, Smith, Edell, Welter & Schmidt, patent counsel
for the Company, in form and substance satisfactory to counsel for
the Placement Agent, to the effect that:
A. To the best of their knowledge, the information
in the Prospectus (i) under the caption "Risk Factors -- Dependence on
Patents and Proprietary Rights" and (ii) under the caption "Business --
Patents and Proprietary Rights" to the extent that it constitutes matters of
law, summaries of legal matters, documents or proceedings or legal
conclusions, has been reviewed by them and is correct in all material
respects and fairly and correctly presents the information called for with
respect thereto.
B. To the best of their knowledge, except as
otherwise disclosed in the Prospectus, the Company owns or possesses
sufficient licenses or other rights to use all necessary patents, inventions
and trademarks (collectively, the "Patent Rights" and
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the "Trademark Rights") to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.
C. To the best of their knowledge, except as
otherwise disclosed in the Prospectus, there are no legal or governmental
proceedings, relating to any Patent Rights or Trademark Rights owned or used
by the Company, pending against the Company; there are no legal or
governmental proceedings, relating to a third party's Patent Rights or
Trademark Rights, pending against the Company, and neither they nor the
Company have received any notice directly from any person or governmental
authority threatening such proceedings and, to the best of our knowledge, no
such proceedings have been threatened.
D. To the best of their knowledge, the Company is
not infringing or otherwise violating any Patent Rights or Trademark Rights
of others, and there are no infringements or violations by others of any
Patent Rights or Trademark Rights owned or used by the Company, which in the
judgment of such counsel could affect materially the use thereof by the
Company.
E. To the best of their knowledge, the U.S. patents
and patent applications listed on Exhibit 1, attached thereto, are not being
and have not been subject to any re-issue, re-examination, opposition,
revocation proceedings, declaratory judgment action or any similar action.
F. To the best of their knowledge, all pertinent
prior art references known to the Company or its counsel during the
prosecution of the patents and applications, listed on Exhibit 1, attached
thereto, were disclosed to the USPTO and to the best of counsel's knowledge,
neither such counsel nor the Company made any misrepresentation to, or
concealed any material fact from the USPTO during such prosecution.
G. To the best of their knowledge, as to each U.S.
patent and patent application listed on Exhibit 1, attached hereto, there is
an assignment by each of the named inventors to the Company. The assignments
by the named inventors have been submitted to the United States Patent and
Trademark Office ("USPTO") and those assignments have been recorded in the
USPTO's title records.
H. The Company's pending U.S. patent applications
listed on Exhibit 1 thereto, have been prepared and filed in the USPTO in a
form and with accompanying papers that are acceptable to the USPTO for the
purposes of according each such application in condition for eventual
examination of the merits as to patentability. As to each of such
applications, they are not aware of any material defect of form in
preparation or filing and said patent applications are being diligently
prosecuted.
I. As to certain of the Company's U.S. patents and
patent applications listed on Exhibit 1 thereto, foreign applications based
on certain of these U.S.
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patents and patent applications have been filed in the appropriate patent
offices and are presently pending.
J. To the best of our knowledge, the foreign
applications referenced in paragraph (I) above are owned by the Company and
are being diligently prosecuted by a law firm or agency in the foreign nation
or region where said foreign application has been filed. To the best of
their knowledge, there are no material defects of form in the preparation or
filing of the foreign applications.
K. To the best or their knowledge, there are not
any asserted or unasserted claims of any persons relating to the scope or
ownership of the U.S. patents and patent applications listed on Exhibit 1
hereto or the foreign applications based thereon, as referenced in paragraph
(I) above, and there are not any liens that have been filed against any of
said U.S. patents, patent applications, and foreign applications based
thereon.
L. Nothing has come to their attention that leads
them to believe that, with respect to patents, trademarks or other
proprietary information or know-how owned or used by the Company which are
the subject of the foregoing opinions, the Registration Statement, at the
time it became effective, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading or that the Prospectus, as of its
date or at the Closing Date, incuded or includes any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(iv) The favorable opinion, dated as of the Closing
Date, of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel
for the Placement Agent, with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such
other related matters as the Placement Agent may reasonably request.
(v) In giving their opinions required by subsections
(b)(i), (b)(ii) and (b)(iv), respectively, of this Section 8,
Dorsey & Whitney LLP, George H. Frisch, Attorney at Law and
Skadden, Arps, Slate, Meagher & Flom (Illinois) shall each
additionally state that nothing has come to their attention that
leads them to believe that the Registration Statement (except for
financial statements and schedules and other financial information
included therein, as to which counsel need make no statement), at
the time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus (except for financial statements
and schedules and other financial information included therein, as
to which counsel need make no statement), as of its date (unless
the term "Prospectus" refers to a prospectus which has been
provided to the Placement Agent by the Company for use in
connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration
Statement becomes effective, in which case at the time it is first
provided to the Placement Agent for such use) or at the Closing
Date included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading.
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(c) (i) There shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or, to
the knowledge of the Company, any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company, whether or not arising in the ordinary course of business, (ii) the
representations and warranties of the Company in Section 4 hereof shall be
true and correct with the same force and effect as though expressly made at
and as of the Closing Date, except to the extent that any such representation
or warranty relates to a specific date, (iii) the Company shall have complied
in all material respects with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Closing Date, (iv)
no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the Commission and (v) the Representatives shall
have received a certificate, dated the Closing Date and signed by the
President or any Vice President and the chief financial or accounting officer
of the Company to the effect set forth in clauses (i), (ii), (iii) and (iv)
above.
(d) At the time of the execution of this Agreement, the
Placement Agent shall have received from Ernst & Young LLP a letter dated
such date, in form and substance satisfactory to the Placement Agent,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
(e) The Placement Agent shall have received from Ernst &
Young LLP a letter, dated as of the Closing Date, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection
(d) of this Section, except that the specified date referred to shall be a
date not more than three business days prior to the Closing Date.
(f) The Shares shall have been approved for quotation on
the Nasdaq.
(g) At the date of this Agreement, the Placement Agent
shall have received lock-up agreements in form and substance satisfactory to
the Placement Agent signed by the persons listed on Schedule B hereto.
(h) Counsel for the Placement Agent shall have been
furnished with such documents and opinions as they may require for the
purpose of enabling them to pass upon the issuance and sale of the Shares as
herein contemplated and related proceedings, or in order to evidence the
accuracy of any of the representations or warranties or the fulfillment of
any of the conditions herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Shares as herein
contemplated shall be satisfactory in form and substance to the Placement
Agent and counsel for the Placement Agent.
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(i) The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the placement agency terms and
arrangements.
8. EXPENSES.
Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company agrees to pay the
following costs and expenses and all other costs and expenses incident to the
performance by it of its obligations hereunder, including but not limited to
the costs and expenses of or relating to: (i) the preparation, printing or
reproduction, and filing with the Commission of the Registration Statement
(including financial statements and exhibits thereto), each preliminary
prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight and charges for counting and packaging) of such copies of the
Registration Statement, each preliminary prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for
use in connection with the offering and sale of the Shares; (iii) the
preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the original
issuance and sale of the Shares; (iv) the quotation of the Shares on the
Nasdaq; (v) the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of the several states as provided
in Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the Placement Agent relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental
Blue Sky Memoranda and such registration and qualification); (vi) the filing
fees and the reasonable fees and expenses of counsel for the Placement Agent
incident to securing any required review by the NASD; (vii) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company and (viii) the fees and
expenses of the Escrow Agent under the Escrow Agreement. The Company shall
reimburse the Placement Agent for all its travel, legal and other
out-of-pocket expenses incurred in connection with the engagement hereunder,
up to a maximum of $125,000. Such expenses shall be in addition to, but not
in lieu of, any fees, expenses or other consideration owing by the Company to
the Placement Agent under the Advisory Agreement.
9. EFFECTIVE DATE OF AGREEMENT.
This Agreement shall become effective: (i) upon the execution and
delivery hereof by or on behalf of the parties hereto; or (ii) if, at the
time this Agreement is executed and delivered, it is necessary for the
Registration Statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification
of the effectiveness of the Registration Statement or such post-effective
amendment has been released by the Commission. Until such time as this
Agreement shall have become effective, it may be terminated by the Company,
by notifying you in writing, or by you by notifying the Company in writing.
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10. TERMINATION.
(a) The Placement Agent may terminate this Agreement, by
notice to the Company, at any time at or prior to the Closing Date (i) if
there has been, since the date of this Agreement or since the respective
dates as of which information is given in the Registration Statement, any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company, whether
or not arising in the ordinary course of business, (ii) if there has occurred
any change in the financial markets in the United States or elsewhere or any
outbreak of hostilities or escalation thereof or other calamity or crisis the
effect of which is such as to make it, in your judgement, impracticable or
inadvisable to market the Shares or to enforce contracts for the sale of the
Shares, (iii) if trading in the Common Stock has been suspended by the
Commission, or if trading generally on the American Stock Exchange, the New
York Stock Exchange or in the over-the-counter markets has been suspended, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by such exchange or markets or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by either Federal, New York or Illinois
authorities, (iv) the enactment, publication, decree or other promulgation of
any Federal or state statute, regulation, rule or order of any court or other
governmental authority which in your judgement materially and adversely
affects or may materially and adversely affect the business or operations of
the Company or (v) the taking of any action by any Federal, state or local
government or agency in respect of its monetary or fiscal affairs which in
your judgement has a material adverse effect on the securities markets in the
United States, and would in your judgement make it impracticable or
inadvisable to market the Shares or to enforce any contract for the sale
thereof. Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
(b) The obligations of the parties under this Agreement
shall be automatically terminated in the event that the Requisite Funds have
not been deposited by the Investors into the Escrow Account by the close of
business on the date scheduled for the Closing.
(c) If this Agreement is terminated pursuant to this
Section 10, such termination shall be without liability of any party to any
other party except as provided in Section 8 and provided further that
Sections 6 and 8 shall survive such termination and remain in full force and
effect.
11. INFORMATION FURNISHED BY THE PLACEMENT AGENT.
The statements set forth in Note 2 on the cover page and in the
first and second paragraphs under the caption "Plan of Distribution" in any
Preliminary Prospectus and in the Prospectus constitute the only information
furnished by the Placement Agent as such information is referred to in
Sections 5(a) and 7 hereof.
27
<PAGE>
12. NOTICES.
Notice given pursuant to any of the provisions of this Agreement
shall be in writing and, unless otherwise specified, shall be mailed or
delivered (a) if to the Company, at the office of the Company, One Rochester
Medical Drive, Stewartville, Minnesota 55976, Attention: Anthony J. Conway or
(b) if to the Placement Agent, at the office of Vector Securities
International, Inc., 1751 Lake Cook Road, Deerfield, Illinois 60015,
Attention: Syndicate. Any such notice shall be effective only upon receipt.
Any notice under Section 6 may be made by facsimile or telephone, but if so
made shall be subsequently confirmed in writing.
13. SURVIVAL.
The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and the
Placement Agent set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the
Company, any of its officers or directors, the Placement Agent or any
controlling person referred to in Section 6 hereof and (ii) delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 4, 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
14. SUCCESSORS.
This Agreement shall inure to the benefit of and shall be binding
upon the Placement Agent, the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that
(i) the indemnification and contribution contained in Sections 6(a) and (d)
of this Agreement shall also be for the benefit of the directors, officers,
employees and agents of the Placement Agent and any person or persons who
control the Placement Agent within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act and (ii) the indemnification and contribution
contained in Sections 6(c) and (d) of this Agreement shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act. No Investor shall be deemed a successor because of such purchase.
15. HEADINGS.
28
<PAGE>
Section headings in this Agreement are for convenience of reference
only, do not constitute a part of this Agreement, and shall not affect its
interpretation.
16. CHANGES.
This Agreement may not be modified or amended except pursuant to an
instrument in writing signed by the Company and the Placement Agent.
17. APPLICABLE LAW.
The validity and interpretations of this Agreement, and the terms
and conditions set forth herein, shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
any provisions relating to conflicts of laws.
18. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicate hereof,
whereupon it will become a binding agreement between the Company and the
Placement Agent in accordance with its terms.
Very truly yours,
ROCHESTER MEDICAL CORPORATION
By:
------------------------------------
Name:
Title:
The foregoing Placement Agency
Agreement is hereby confirmed
and accepted as of the date
first above written.
VECTOR SECURITIES INTERNATIONAL, INC.
By:
------------------------------------
Name:
Title:
30
<PAGE>
EXHIBIT 1
FORM OF ESCROW AGREEMENT
ESCROW AGREEMENT, dated as of November __, 1997, by and
among ROCHESTER MEDICAL CORPORATION, a Minnesota corporation (the "Company"),
VECTOR SECURITIES INTERNATIONAL, INC. (the "Placement Agent"), and Citibank,
N.A., a national banking institution incorporated under the laws of the
United States of America (the "Escrow Agent").
WHEREAS, the Company proposes to sell an aggregate of
1,300,000 shares of its common stock, no par value per share (the "Shares"),
for an aggregate of $_________________, all as described in the Company's
registration statement on Form S-2 (Registration No. 333-36605) (which,
together with all amendments or supplements thereto is referred to herein as
the "Registration Statement");
WHEREAS, the Shares are being offered by the Company to
investors whom the Placement Agent has introduced to the Company, pursuant to
registration under the Securities Act of 1933, as amended, and pursuant to
registration or exemptions from registration under state securities laws;
WHEREAS, the offering of the Shares will terminate on
______________, 1997 (the "Final Closing Date") and, if subscriptions for the
total number of Shares being offered pursuant to the Registration Statement
have not been received by the Company on or before the Final Closing Date, no
Shares will be sold and all payments made by subscribers will be refunded by
the Escrow Agent with interest earned thereon, if any; and
WHEREAS, with respect to all subscription payments
received from subscribers, the Company proposes to establish an escrow
account with the Escrow Agent at its Private Banking Office, 120 Broadway,
Second Floor, New York, New York 10271.
NOW, THEREFORE, it is agreed as follows:
1. ESTABLISHMENT OF ESCROW. The Escrow Agent hereby agrees to
receive and disburse the proceeds from the offering of the Shares and any
interest earned thereon in accordance herewith.
2. DEPOSIT OF ESCROWED PROPERTY. The Placement Agent, on
behalf of the subscribers for the Shares, shall from time to time, but in no
event later than 12:00 noon on the date following receipt by the Placement
Agent, cause to be wired to or deposited with, or, cause the subscribers for
the Shares to wire or deposit with, the Escrow Agent funds or checks of the
subscribers delivered in payment for the Shares (the "Escrowed Property").
Any checks delivered
<PAGE>
to the Escrow Agent pursuant to the terms hereof shall be made payable to or
endorsed to the order of the Escrow Agent. The Escrow Agent upon receipt of
such checks shall present such checks for payment to the drawee-bank under
such checks. Any checks not honored by the drawee-bank thereunder after the
first presentment for payment shall be returned to the Placement Agent, on
behalf of such subscriber, in the same manner notices are delivered pursuant
to Section 6. Upon receipt of funds or checks from the Placement Agent, the
Escrow Agent shall credit such funds and the amount of such checks to a
non-interest-bearing account (the "Escrow Account") held by the Escrow Agent.
If following the credit of the amount of any check to the Escrow Account such
check is dishonored, the Escrow Agent, if such dishonored check amount shall
have been invested pursuant to Section 3, shall liquidate to the extent of
such dishonored check amount such investments and debit the Escrow Account
for the amount of such dishonored check plus, if any, the amount of interest
and other income earned with respect to any investment of such dishonored
check amount.
3. INVESTMENT OF ESCROWED PROPERTY. The Escrow Agent on the
second business day ("business day" defined for purposes of this Escrow
Agreement as any day which is not a Saturday, a Sunday or a day on which
banks or trust companies in the City and State of New York are authorized or
obligated by law, regulation or executive order to remain closed) succeeding
(unless such deposit is made in federal or other immediately available or
"same day" funds, in which case, on the business day next succeeding) the
credit of any subscription proceeds to the Escrow Account pursuant to Section
2 and until release of such proceeds in accordance with the terms hereof,
shall deposit such proceeds in a Citibank Market Deposit Account, pursuant to
Rule 15c2-4 promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, in accordance with the terms set
forth on Exhibit A hereto (made a part of this Escrow Agreement as if herein
set forth). The Escrow Agent shall in no event be liable for any loss
resulting from any change in interest rates applicable to proceeds invested
pursuant to this Section. Interest on proceeds invested pursuant to this
Section shall accrue from the date of investment of such proceeds until the
termination of such investment pursuant to the terms hereof and shall be paid
as set forth in Section 5.
4. LIST OF SUBSCRIBERS. The Placement Agent shall furnish or
cause to be furnished to the Escrow Agent, at the time of each deposit of
funds or checks pursuant to Section 2, a list, substantially in the form of
Exhibit B hereto, containing the name of, the address of, the number of
Shares subscribed for by, the subscription amount delivered to the Escrow
Agent on behalf of, and the social security or taxpayer identification
number, if applicable, of, each subscriber whose funds are being deposited,
and to which is attached a completed W-9 form (or, in the case of any
subscriber who is not a United States citizen or resident, a W-8 form) for
each listed subscriber. The Escrow Agent shall notify the Placement Agent and
the Company of any discrepancy between the subscription amounts set forth on
any list delivered pursuant to this Section 4 and the subscription amounts
received by the Escrow Agent. The Escrow Agent is authorized to revise such
list to reflect the actual subscription amounts received and the release of
any subscription amounts pursuant to Section 5.
2
<PAGE>
5. WITHDRAWAL OF SUBSCRIPTION AMOUNTS.
(a) If the Escrow Agent shall receive a notice,
substantially in the form of Exhibit C hereto (an "Offering Termination
Notice"), from the Company, the Escrow Agent shall (i) promptly after receipt
of such Offering Termination Notice and the clearance of all checks received
by the Escrow Agent as Escrowed Property, liquidate any investments that
shall have been made pursuant to Section 3 and send to each subscriber listed
on the list held by the Escrow Agent pursuant to Section 4 whose total
subscription amount shall not have been released pursuant to paragraph (b) or
(c) of this Section 5, in the manner set forth in paragraph (d) of this
Section 5, a check to the order of such subscriber in the amount of the
remaining subscription amount held by the Escrow Agent as set forth on such
list held by the Escrow Agent, and (ii) promptly after the fourth business
day of the month immediately following the month in which the investments
made pursuant to Section 3 were terminated pursuant to this paragraph, send,
in the manner set forth in paragraph (e) of this Section 5, a check to the
order of each such subscriber in the amount of interest and other income
earned and not yet paid with respect to any investment of such subscriber's
funds. The Escrow Agent shall notify the Company and the Placement Agent of
the distribution of such funds to the subscribers.
(b) In the event that (i) the Shares have been
subscribed for and funds in respect thereof shall have been deposited with
the Escrow Agent on or before the Final Closing Date and (ii) no Offering
Termination Notice shall have been delivered to the Escrow Agent, the Company
and the Placement Agent, shall deliver to the Escrow Agent a joint notice,
substantially in the form of Exhibit D hereto (a "Closing Notice"),
designating the date on which Shares are to be sold and delivered to the
subscribers thereof (the "Closing Date"), which date shall not be earlier
than the clearance of any checks received by the Escrow Agent as Escrowed
Property, the proceeds of which are to be distributed on such Closing Date,
and identifying the subscribers and the number of Shares to be sold to each
thereof on such Closing Date, not less than two (2) nor more than seven (7)
business days prior to such Closing Date. The Escrow Agent, after receipt of
such Closing Notice and the clearance of such checks:
(i) on or prior to the Closing Date identified in such
Closing Notice, shall liquidate any investments that shall have
been made pursuant to Section 3 to the extent of the subscription
amount to be distributed pursuant to the immediately succeeding
clause (ii);
(ii) on such Closing Date, pay to the Company and the
Placement Agent, in federal or other immediately available funds
and otherwise in the manner specified by the Company in such
Closing Notice, an amount equal to the aggregate of the
subscription amounts paid by the subscribers identified in such
Closing Notice for the Shares to be sold on such Closing Date as
set forth on the list held by the Escrow Agent pursuant to Section
4; and
3
<PAGE>
(iii) promptly after the fourth business day of the
month immediately following the month in which the investments made
pursuant to Section 3 were terminated pursuant to such Closing
Notice, shall send, in the manner set forth in paragraph (e) of
this Section 5, a check to the order of each subscriber identified
in such Closing Notice in the amount of interest and other income
earned and not yet paid with respect to any investment of each such
subscriber's funds distributed on such Closing Date. At the time of
such transfer, the Escrow Agent shall identify in writing to the
Company and the Placement Agent the amount of the interest earned
for the account of each subscriber and the date such subscription
was received.
(c) If at any time and from time to time prior to the
release of any subscriber's total subscription amount pursuant to paragraph
(a) or (b) of this Section 5 from escrow, the Company shall deliver to the
Escrow Agent a notice, substantially in the form of Exhibit E hereto (a
"Subscription Termination Notice"), to the effect that any or all of the
subscriptions of such subscriber have been rejected by the Company (a
"Rejected Subscription"), the Escrow Agent (i) promptly after receipt of such
Subscription Termination Notice and, if such subscriber delivered a check in
payment of its Rejected Subscription, after the clearance of such check,
shall liquidate, to the extent of the sum of such subscriber's Rejected
Subscription amount as set forth in the Subscription Termination Notice, any
investments that shall have been made pursuant to Section 3 and send to such
subscriber, in the manner set forth in paragraph (e) of this Section 5, a
check to the order of such subscriber in the amount of such Rejected
Subscription amount, and (ii) promptly after the fourth business day of the
month immediately following the month in which the investments made pursuant
to Section 3 were terminated pursuant to this paragraph, shall send to such
subscriber, in the manner set forth in paragraph (e) of this Section 5, a
check to the order of such subscriber in the amount of interest and other
income earned and not yet paid with respect to any investment of such
subscriber's Rejected Subscription amount. At the time of such transfer, the
Escrow Agent shall identify in writing to the Company and the Placement Agent
the amount of the interest earned for the account of each subscriber and the
date such subscription was received.
(d) On a date following the transfer of any interest
earned for the account of each subscriber pursuant to Section 5(a), (b) or
(c), but not later than January 31, 1998, the Escrow Agent shall provide
each subscriber with tax form 1099 setting forth the amount of such interest.
(e) For the purposes of this Section 5, any check that
the Escrow Agent shall be required to send to any subscriber shall be sent to
such subscriber by first class mail, postage prepaid, at such subscriber's
address furnished to the Escrow Agent pursuant to Section 4.
6. NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be (a)
delivered by hand or (b) sent by mail, registered or certified, with proper
postage prepaid, and addressed as follows:
4
<PAGE>
if to the Company, to:
Rochester Medical Corporation
One Rochester Medical Drive
Stewartville, Minnesota 55976
Attention: President
with a copy to:
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Attention: Jonathan B. Abram
if to the Placement Agent, to:
Vector Securities International, Inc.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Attention: Syndicate
with a copy to:
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
Attention: Rodd M. Schreiber, Esq.
if to the Escrow Agent, to:
Citibank, N.A.
Private Banking
120 Broadway, Second Floor
New York, New York 10271
Attention: John P. Howard
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in the above-referenced manner. All such
notices and communications, if mailed, shall be effective when deposited in
the mails, except that notices and communications to the Escrow Agent and
notices of changes of address shall not be effective until received.
5
<PAGE>
7. CONCERNING THE ESCROW AGENT. To induce the Escrow Agent to act
hereunder, it is further agreed by the Company and Placement Agent that:
(a) The Escrow Agent shall not be under any duty to give
the Escrowed Property held by it hereunder any greater degree of care than it
gives its own similar property and shall not be required to invest any funds
held hereunder except as directed in this Escrow Agreement. Uninvested funds
held hereunder shall not earn or accrue interest.
(b) This Escrow Agreement expressly sets forth all the
duties of the Escrow Agent with respect to any and all matters pertinent
hereto. No implied duties or obligations shall be read into this Escrow
Agreement against the Escrow Agent. The Escrow Agent shall not be bound by
the provisions of any agreement among the other parties hereto except this
Escrow Agreement.
(c) The Escrow Agent shall not be liable, except for its
own gross negligence or willful misconduct, and, except with respect to
claims based upon such gross negligence or willful misconduct that are
successfully asserted against the Escrow Agent, and the other parties hereto
shall jointly and severally indemnify and hold harmless the Escrow Agent (and
any successor Escrow Agent) from and against any and all losses, liabilities,
claims, actions, damages and expenses, including reasonable attorneys' fees
and disbursements, arising out of and in connection with this Escrow
Agreement. Without limiting the foregoing, the Escrow Agent shall in no event
be liable in connection with its investment or reinvestment of any cash held
by it hereunder in good faith, in accordance with the terms hereof, including
without limitation any liability for any delays (not resulting from gross
negligence or willful misconduct) in the investment or reinvestment of the
Escrowed Property, or any loss of interest incident to any such delays.
(d) The Escrow Agent shall be entitled to rely upon any
order, judgment, certification, demand, notice, instrument or other writing
delivered to it hereunder without being required to determine the
authenticity or the correctness of any fact stated therein or the propriety
or validity of the service thereof. The Escrow Agent may act in reliance upon
any instrument or signature believed by it in good faith to be genuine and
may assume, if in good faith, that any person purporting to give notice or
receipt or advice or make any statement or execute any document in connection
with the provisions hereof has been duly authorized to do so.
(e) The Escrow Agent may act pursuant to the advice of
counsel with respect to any matter relating to this Escrow Agreement and
shall not be liable for any action taken or omitted in good faith and in
accordance with such advice.
(f) The Escrow Agent does not have any interest in the
Escrowed Property deposited hereunder but is serving as escrow holder only.
Any payments of income from the Escrow Account shall be subject to
withholding regulations then in force with respect to
6
<PAGE>
United States taxes. The parties hereto will provide the Escrow Agent with
appropriate W-9 forms for tax I.D., number certification, or non-resident
alien certifications.
This paragraph (f) and paragraph (c) of this Section
7 shall survive notwithstanding any termination of this Escrow Agreement or
the resignation of the Escrow Agent.
(g) The Escrow Agent makes no representation as to the
validity, value, genuineness or the collectibility of any security or other
document or instrument held by or delivered to it.
(h) The Escrow Agent shall not be called upon to advise
any party as to the wisdom of selling or retaining or taking or refraining
from any action with respect to any securities or other property deposited
hereunder.
(i) The Escrow Agent (and any successor escrow agent) at
any time may be discharged from its duties and obligations hereunder by the
delivery to it of notice of termination signed by both the Company and the
Placement Agent or at any time may resign by giving written notice to such
effect to the Company and the Placement Agent. Upon any such termination or
resignation, the Escrow Agent shall deliver the Escrowed Property to any
successor escrow agent jointly designated by the other parties hereto in
writing, or to any court of competent jurisdiction if no such successor
escrow agent is agreed upon, whereupon the Escrow Agent shall be discharged
of and from any and all further obligations arising in connection with this
Escrow Agreement. The termination or resignation of the Escrow Agent shall
take effect on the earlier of (i) the appointment of a successor (including a
court of competent jurisdiction) or (ii) the day that is 30 days after the
date of delivery: (A) to the Escrow Agent of the other parties' notice of
termination or (B) to the other parties hereto of the Escrow Agent's written
notice of resignation. If at that time the Escrow Agent has not received a
designation of a successor escrow agent, the Escrow Agent's sole
responsibility after that time shall be to keep the Escrowed Property safe
until receipt of a designation of successor escrow agent or a joint written
disposition instruction by the other parties hereto or any enforceable order
of a court of competent jurisdiction.
(j) The Escrow Agent shall have no responsibility for
the contents of any writing of any third party contemplated herein as a means
to resolve disputes and may rely without any liability upon the contents
thereof.
(k) In the event of any disagreement among or between
the other parties hereto and/or the subscribers of the Shares resulting in
adverse claims or demands being made in connection with the Escrowed
Property, or in the event that the Escrow Agent in good faith is in doubt as
to what action it should take hereunder, the Escrow Agent shall be entitled
to retain the Escrowed Property until the Escrow Agent shall have received
(i) a final and non-appealable order of a court of competent jurisdiction
directing delivery of the Escrowed
7
<PAGE>
Property or (ii) a written agreement executed by the other parties hereto and
consented to by the subscribers directing delivery of the Escrowed Property,
in which event the Escrow Agent shall disburse the Escrowed Property in
accordance with such order or agreement. Any court order referred to in (i)
above shall be accompanied by a legal opinion by counsel for the presenting
party satisfactory to the Escrow Agent to the effect that said court order is
final and non-appealable. The Escrow Agent shall act on such court order and
legal opinion without further question.
(l) As consideration for its agreement to act as Escrow
Agent as herein described, the Company agrees to pay the Escrow Agent the fee
set forth on Exhibit F hereto (made a part of this Escrow Agreement as if
herein set forth). In addition, the Company agrees to reimburse the Escrow
Agent for all reasonable expenses, disbursements and advances incurred or
made by the Escrow Agent in performance of its duties hereunder (including
reasonable fees, expenses and disbursements of its counsel).
(m) All parties hereto irrevocably (i) submit to the
jurisdiction of any New York State or federal court sitting in
New York City in any action or proceeding arising out of or relating to
this Escrow Agreement, (ii) agree that all claims with respect to such action
or proceeding shall be heard and determined in such New York State or
federal court and (iii) waive, to the fullest extent possible, the defense of
an inconvenient forum. The other parties hereby consent to and grant any
such court jurisdiction over the persons of such parties and over the
subject matter of any such dispute and agree that delivery or mailing of
process or other papers in connection with any such action or proceeding in
the manner provided herein above, or in such other manner as may be permitted
by law, shall be valid and sufficient service thereof.
(n) No printed or other matter in any language
(including, without limitation, the Registration Statement, the Prospectus,
notices, reports and promotional material) which mentions the Escrow Agent's
name or the rights, powers, or duties of the Escrow Agent shall be issued by
the other parties hereto or on such parties' behalf unless the Escrow Agent
shall first have given its specific written consent thereto. The Escrow Agent
hereby consents to the use of its name and the reference to the escrow
arrangement in the Registration Statement and in the Prospectus.
8. MISCELLANEOUS.
(a) This Escrow Agreement shall be binding upon and
inure solely to the benefit of the parties hereto and their respective
successors and assigns, heirs, administrators and representatives, and the
subscribers of the Shares and shall not be enforceable by or inure to the
benefit of any other third party except as provided in paragraph (i) of
Section 7 with respect to the termination of, or resignation by, the Escrow
Agent. No party may assign any of its rights or obligations under this Escrow
Agreement without the written consent of the other parties.
8
<PAGE>
(b) This Escrow Agreement shall be construed in
accordance with and governed by the internal law of the State of New York
(without reference to its rules as to conflicts of law).
(c) This Escrow Agreement may only be modified by a
writing signed by all of the parties hereto and consented to by the
subscribers of the Shares adversely affected by such modifications. No waiver
hereunder shall be effective unless in a writing signed by the party to be
charged.
(d) This Escrow Agreement shall terminate upon the
payment pursuant to Section 5 of all amounts held in the Escrow Account.
(e) The section headings herein are for convenience only
and shall not affect the construction thereof. Unless otherwise indicated,
references to Sections are to Sections contained herein.
(f) This Escrow Agreement may be executed in one or more
counterparts but all such separate counterparts shall constitute but one and
the same instrument; PROVIDED THAT, although executed in counterparts, the
executed signature pages of each such counterpart may be affixed to a single
copy of this Agreement which shall constitute an original.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Escrow Agreement to be executed as of the day and year first above written.
ROCHESTER MEDICAL CORPORATION
By:
----------------------------------------
Name:
Title:
VECTOR SECURITIES INTERNATIONAL, INC.
By:
----------------------------------------
Name:
Title:
CITIBANK, N.A.
By:
----------------------------------------
Name:
Title:
10
<PAGE>
EXHIBIT A
CITIBANK INSURED MARKET DEPOSIT ACCOUNTS
Deposits/Withdrawals may be made to the Citibank Market
Deposit Account ("MDA") established under the Escrow Agreement to which this
Exhibit is attached only through the Escrow Account. All transaction and
balance reporting of the MDA will be included as part of the Escrow Account
Statement. Activity in the MDA will be reflected as the equivalent of dollars
on deposit in a Citibank Market Deposit Account. Deposits/Withdrawals to the
MDA will be made only as permitted by the Escrow Agreement to which this
Exhibit is attached. The MDA has certain regulatory restrictions as well as
some minimum requirements:
1. By regulation, Citibank, N.A. is required to reserve the right
to require seven days' prior notice of any withdrawals of funds from an
account; provided, however, that, if Citibank, N.A. elects to exercise its
right to require seven days' prior notice, it shall exercise such right as to
all such accounts established.
2. Rates will be determined by Citibank, N.A. and can be
determined by calling your custody account officer.
3. Balances up to $100,000 (total on deposit at Citibank, N.A.)
are FDIC-insured.
A-1
<PAGE>
EXHIBIT B
SUMMARY OF CASH RECEIVED
NEW PARTICIPANT DEPOSIT
B-1
<PAGE>
EXHIBIT C
[FORM OF OFFERING TERMINATION NOTICE]
November __, 1997
Citibank, N.A.
Private Banking
120 Broadway, Second Floor
New York, New York, 10271
Attention: John P. Howard
Dear Mr. Howard:
Pursuant to Section 5(a) of the Escrow Agreement dated as
of November _____, 1997 (the "Escrow Agreement") among Rochester Medical
Corporation, (the "Company"), Vector Securities International, Inc. and you,
the Company hereby notifies you of the termination of the offering of the
Shares (as that term is defined in the Escrow Agreement) and directs you to
make payments to subscribers as provided for in Section 5(a) of the Escrow
Agreement.
Very truly yours,
ROCHESTER MEDICAL CORPORATION
By:
----------------------------
Name:
Title:
VECTOR SECURITIES INTERNATIONAL, INC.
By:
----------------------------
Name:
Title:
C-1
<PAGE>
EXHIBIT D
FORM OF CLOSING NOTICE
November __, 1997
Citibank, N.A.
Private Banking
120 Broadway, Second Floor
New York, New York 10271
Attention: John P. Howard
Ladies and Gentlemen:
Pursuant to Section 5(b) of the Escrow Agreement dated as
of November __, 1997 (the "Escrow Agreement"), among Rochester Medical
Corporation (the "Company"), Vector Securities International, Inc. and you,
the Company hereby certifies that it has received subscriptions for the
Shares (as that term is defined in the Escrow Agreement) and the Company will
sell and deliver Shares to the subscribers thereof at a closing to be held on
____________, 1997 (the "Closing Date"). The names of the subscribers
concerned, the number of Shares subscribed for by each of such subscribers
and the related subscription amounts are set forth on Schedule I annexed
hereto.
Please accept these instructions as standing instructions
for the closing to be held on the Closing Date. The parties hereto certify
that they do not wish to have a call back regarding these instructions. The
parties hereto further certify that their instructions may be transmitted to
you via facsimile.
We hereby request that the aggregate subscription amount
be paid to you, the Placement Agent and us as follows:
1. To the Company, $_________;
2. To Vector Securities International, Inc., $_________; and
3. To the Escrow Agent, $_________.
D-1
<PAGE>
These instructions may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of
which together shall constitute one and the same instrument.
Very truly yours,
ROCHESTER MEDICAL CORPORATION
By:
-------------------------------------
Name:
Title:
VECTOR SECURITIES INTERNATIONAL, INC.
By:
-------------------------------------
Name:
Title:
D-2
<PAGE>
SCHEDULE I
Name of Number of Subscription
Subscriber Shares Amount
- ------------ ----------- ---------------
D-3
<PAGE>
EXHIBIT E
FORM OF SUBSCRIPTION TERMINATION NOTICE
Citibank, N.A.
Private Banking
120 Broadway, Second Floor
New York, New York 10271
Attention: John P. Howard
Dear Mr. Howard:
Pursuant to Section 5(c) of the Escrow Agreement dated as
of November __, 1997 (the "Escrow Agreement") among Rochester Medical
Corporation (the "Company"), Vector Securities International, Inc. and you,
the Company hereby notifies you that the following subscription(s) have been
rejected:
Name of Amount of Subscribed Dollar Amount of
SUBSCRIBER SHARES REJECTED REJECTED SUBSCRIPTION
- ------------ ---------------------- -------------------------
Very truly yours,
ROCHESTER MEDICAL CORPORATION
By:
-----------------------------------
Name:
Title:
E-1
<PAGE>
EXHIBIT F
Fee to Escrow Agent: $5000.00
F-1
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated October 15,
1997 included in Amendment No. 3 to the Registration Statement (Form S-2 No.
333-36605) and related Prospectus of Rochester Medical Corporation dated
November 4, 1997.
We also consent to the incorporation by reference herein of our reports
dated October 15, 1997 with respect to the financial statements and schedule of
Rochester Medical Corporation included in its Current Report on Form 8-K dated
November 4, 1997 filed with the Securities and Exchange Commission.
We also consent to the incorporation be reference herein of our report dated
October 18, 1996 with respect to the financial statements of Rochester Medical
Corporation included in its Annual Report on Form 10KSB filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 4, 1997
