SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended
March 31, 1997
Commission file number: 0-18933
Rochester Medical Corporation
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Minnesota 41-1613227
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
One Rochester Medical Drive, Stewartville, MN 55976
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(507) 533-9600
ISSUER'S TELEPHONE NUMBER
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
4,133,500 Common Shares as of May 1, 1997.
Total Number of Pages: 20 Index to Exhibits on Page: 11
Table Of Contents
ROCHESTER MEDICAL CORPORATION
Report on Form 10-QSB
for quarter ended
March 31, 1997
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- March 31, 1997 and 3
September 30, 1996
Statements of Operations -- Three months ended 4
March 31, 1997 and 1996;
Six months ended March 31, 1997 and 1996
Statements of Cash Flows -- Six months ended 5
March 31, 1997 and 1996
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
PART II OTHER INFORMATION 10
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
March 31, September 30,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,835,612 $ 8,394,607
Marketable Securities 10,401,888 9,013,522
Accounts Receivable 1,381,660 1,513,577
Inventories 1,359,364 1,191,283
Prepaid Expenses And Other Assets 79,675 84,194
------------ ------------
TOTAL CURRENT ASSETS 16,058,199 20,197,183
PROPERTY AND EQUIPMENT
Land and Buildings 3,654,392 815,075
Equipment and Fixtures 4,490,482 3,929,507
------------ ------------
8,144,874 4,744,582
Less: Accumulated Depreciation (1,643,757) (1,432,257)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 6,501,117 3,312,325
INTANGIBLE ASSETS
Patents, Less Accumulated Amortization 367,804 378,232
------------ ------------
TOTAL ASSETS $ 22,927,120 $ 23,887,740
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 476,913 $ 957,951
Accrued Compensation 178,121 74,499
Accrued Expenses 440,937 303,314
------------ ------------
TOTAL CURRENT LIABILITIES 1,095,971 1,335,764
LONG-TERM DEBT 3,463,125 3,320,625
SHAREHOLDERS' EQUITY
Common Stock, no par value:
Authorized--20,000,000
Issued and Outstanding Shares--4,133,500
--Mar, 1997 and 4,127,500--Sep, 1996 24,717,413 24,648,913
Accumulated Deficit (6,349,389) (5,417,562)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,368,024 19,231,351
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 22,927,120 $ 23,887,740
============ ============
</TABLE>
Note - The Balance Sheet at September 30, 1996 was derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Financial Statements
<TABLE>
<CAPTION>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,743,537 $ 1,084,653 $ 3,471,377 $ 2,042,651
Cost Of Sales 1,097,518 788,736 2,184,334 1,480,038
----------- ----------- ----------- -----------
GROSS PROFIT 646,019 295,917 1,287,043 562,613
COSTS AND EXPENSE:
Marketing and Selling 449,596 271,768 972,612 552,263
Research and Development 385,341 268,171 797,266 396,573
General and Administrative 343,743 290,547 687,488 401,973
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,178,680 830,486 2,457,366 1,350,809
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (532,661) (534,569) (1,170,323) (788,196)
OTHER INCOME (EXPENSE):
Interest Income 176,531 229,131 380,908 359,641
Interest Expense (71,162) (71,390) (142,412) (142,666)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXP) 105,369 157,741 238,496 216,975
----------- ----------- ----------- -----------
NET LOSS $ (427,292) $ (376,828) $ (931,827) $ (571,221)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (0.10) $ (0.09) $ (0.23) $ (0.16)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,131,100 4,047,500 4,129,600 3,656,300
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (931,827) $ (571,221)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 266,701 200,600
Changes in operating assets and liabilities:
Accounts Receivable 131,917 (99,694)
Inventories (168,081) (114,102)
Other Current Assets 4,519 246,018
Accounts Payable (481,038) (10,601)
Other Current Liabilities 241,245 (468)
------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES (936,564) (349,468)
INVESTING ACTIVITIES
Capital expenditures (3,400,292) (247,462)
Patents (44,773) (55,866)
Purchase of Marketable Securities (1,388,366) (4,449,816)
------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (4,833,431) (4,753,144)
FINANCING ACTIVITIES
Interest Expense Added To Note Payable 142,500 142,500
Proceeds from Sale of Common Stock 68,500 16,217,393
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 211,000 16,359,893
------------ ------------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (5,558,995) 11,257,281
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 8,394,607 551,142
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,835,612 $ 11,808,423
============ ============
</TABLE>
See Notes to Financial Statements
ROCHESTER MEDICAL CORPORATION
Notes to Financial Statements (Unaudited)
March 31, 1997
NOTE A - - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements should
be read in conjunction with the financial statements and related notes included
in the Company's 1996 Form 10-KSB. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company designs, develops, manufactures and markets disposable
latex-free continence care and other urological devices. The Company markets its
products under its own ROCHESTER MEDICAL(R) brand and through private label
arrangements, including its strategic marketing alliance with ConvaTec, a
division of the Bristol-Myers Squibb Company.
During the quarter ended March 31, 1997, the Company increased sales
and marketing activities over the prior year for its currently marketed product
lines, began marketing its intermittent PERSONAL(TM) catheter, and continued
preparations to begin marketing additional products already having FDA marketing
approval. The Company has also revised and extended its private label supply
agreements with Allegiance Euromedical. The Company commenced a multi-site
clinical study of its FEMSOFT(TM) female continence insert, filed a 510(k)
Notification relating to its Antibacterial Foley catheter, and continued
preparations for introducing those devices to market. The Company's
manufacturing facility and quality control procedures were audited for
compliance with ISO 9001 standards, and the Company was advised that it would be
recommended for certification. The Company occupied its new office and FEMSOFT
manufacturing facility, and continued installation of its FEMSOFT production
line and construction of an expansion to increase manufacturing capacity for its
currently marketed product lines.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated,
certain items from the statements of operations of the Company expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31 March 31
------------- ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
Private Label.......................... 73% 82% 80% 77%
ROCHESTER MEDICAL Brand................ 27% 18% 20% 23%
---- --- ---- ----
Total Net Sales............................. 100% 100% 100% 100%
Cost of Sales............................... 63% 73% 63% 72%
---- ---- ---- ----
Gross Margin................................ 37% 27% 37% 28%
Operating Expenses
Marketing and Selling.................. 26% 25% 28% 27%
Research and Development............... 22% 25% 23% 19%
General and Administrative............. 20% 27% 20% 21%
---- ---- ---- ----
Total Operating Expenses.................... 68% 77% 71% 67%
Loss From Operations........................ (31%) (50%) (34%) (39%)
Interest Income (Expense) Net............... 6% 15% 7% 11%
---- ---- ---- ----
Net Loss.................................... (25%) (35%) (27%) (28%)
==== ==== ==== ====
</TABLE>
THREE MONTH AND SIX MONTH PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1996
NET SALES. Net Sales increased 61% to $1,743,537 for the second quarter
of fiscal 1997 from $1,084,653 for the second quarter of fiscal 1996, due to
growth in both private label and Company branded sales. Private label sales
showed an overall increase of 44%, with collective sales volumes to ConvaTec,
Mentor and Hollister nearly double the sales in the comparable quarter of the
prior year. This collective increase was partially offset by relatively low
sales to Allegiance during the contract renewal process involving a significant
change in product and packaging specifications from bulk product to packaged and
sterilized product. Sales of ROCHESTER MEDICAL brand products increased 135%
over the comparable quarter of the prior year due primarily to a renewed focus
on domestic field sales and stocking orders from international distributors.
Net Sales increased 70% to $3,471,377 for the six months ended March
31, 1997, from $2,042,651 for the comparable six months of the prior year.
Private label and ROCHESTER MEDICAL brand sales showed overall growth rates of
75% and 28%, respectively, over the comparable six months of the prior year.
Factors affecting growth during the six months are consistent with those
discussed above for the second quarter, with the growth rate for ROCHESTER
MEDICAL brand products being slowed during the first quarter while the domestic
field sales force was being restructured and repositioned to address fundamental
changes in the purchasing and distribution practices within the domestic health
care industry.
GROSS MARGIN. The Company's gross margin as a percentage of net sales
was 37% for the second quarter of fiscal 1997 compared with 27% for comparable
quarter of the prior year. The Company's gross margin during the current quarter
is in line with recent trend and shows marked improvement over the comparable
prior year's quarter primarily due to efficiencies gained through higher
production volumes.
The Company's gross margin as a percentage of net sales was 37% for
the six months ended March 31, 1997 compared with 28% for comparable period last
year. Factors affecting margins and margin development during the current six
months are consistent with those described above for the current quarter.
MARKETING AND SELLING. Marketing and selling expense increased 65% to
$449,596 for the second quarter of fiscal 1997 from $271,768 for the comparable
quarter last year. The increased expense is primarily related to additional
marketing and selling personnel to develop ROCHESTER MEDICAL brand sales and to
develop programs for introduction of the Company's advanced products. Additional
personnel include a National Sales Director, a Director of Marketing, and
personnel in field sales, marketing support and customer service. The Company
also continues to progressively increase its promotional activities, including
direct marketing, attendance at trade shows, product samples and related
programs.
Marketing and selling expense increased 76% to $972,612 for the six
months ended March 31, 1997 from $552,263 for comparable period last year.
Factors affecting overall growth in expenses for the current six month period
are consistent with those described above for the current quarter. The rate of
increase during the current six months also reflects comparatively higher
promotional costs in the first quarter related to trade shows and direct
marketing activities.
RESEARCH AND DEVELOPMENT. Research and development expense increased
44% to $385,341 for the second quarter of fiscal 1997 from $268,171 for the
comparable quarter last year, due to increased clinical testing activities,
primarily for the FEMSOFT female continence insert. A portion of the increase
also relates to preparation of the Company's 510(K) Notification for its
Antibacterial Foley catheter following completion of clinical testing during the
first quarter of fiscal 1997.
Research and development expense increased 101% to $797,266 for the six
months ended March 31, 1997 from $396,573 for the comparable six month period
last year. Factors affecting overall growth rate for the current six month
period are consistent with those described above for the current quarter. The
comparatively higher rate of increase for the current six month period reflects
the addition of a Director of Clinical and Regulatory Affairs in the second
fiscal quarter of fiscal 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 18% to $343,743 for the second quarter of fiscal 1997 from $290,547
for the comparable quarter of the prior year. The increase is due primarily to
project costs for implementation of new business systems, ISO certification
process costs, and additional personnel costs associated with general business
development.
General and administrative expense increased 71% to $687,488 for the
six months ended March 31, 1997 from $401,973 for the comparable six month
period last year. Factors affecting overall growth in expenses for the current
six month period are consistent with those described above for the current
quarter. The comparatively higher rate of increase for the six current month
period reflects the addition of a Chief Financial Officer in the second quarter
of fiscal 1996.
INTEREST INCOME (EXPENSE). Interest income decreased 33% to $176,531
for the second quarter of fiscal 1997 from $229,131 for the comparable quarter
of last year. The decrease is a result of the reduction of the Company's cash
and investment balances from funding operating requirements and capital
expenditures for construction of new and expanded facilities. Interest expense
remained constant at $71,162 for the second quarter of fiscal 1997 compared with
$71,390 for the same period last year, consisting of interest on the $3 million
principal balance on the convertible note payable to ConvaTec.
Interest income increased 6% to $380,908 for the six months ended March
31, 1997, from $359,641 for the comparable six month period last year. The
increase in interest income relates to comparatively higher cash and investment
balances during the current six month period versus the prior year. Cash and
investment balances have been impacted significantly during these periods by the
December 1995 receipt of $16.2 million in net proceeds from the Company's public
offering and the timing of capital outlays in the current fiscal year for
facilities construction and expansion projects. Interest expense remained
constant at $142,412 for the six months ended March 31, 1997 compared with
$142,666 for the same period last year, consisting of interest on the $3 million
principal balance on the convertible note payable to ConvaTec.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities were $13,237,500 at March
31, 1997 compared to $17,408,129 at September 30, 1996, a decrease of
$4,170,629. The Company used $936,564 of cash to finance operating activities
during the first six months of 1997, compared to $349,468 in the comparable six
month period last year, an increase of $587,096 of cash used. Increased expense
levels during the six month period are well within management's expectations,
and reflect the Company's continuing commitment to the investments required to
bring its advanced technologies to market.
Trade receivable balances are down from year end levels as a result of
collection initiatives, while inventories increased moderately in preparation
for future sales. Increases in accounts payable and accrued expenses are related
to business growth and also reflect certain payments on new plant construction.
Capital expenditures were $3,400,292 for the six months ended March 31,
1997, compared with $247,462 in the comparable period last year. The capital
expenditure rate has increased sharply during the current six month period,
almost exclusively related to construction activities on the new manufacturing
and office facility and expansion of the current manufacturing facility.
The Company believes that its capital resources on hand at March 31,
1997, together with revenues from sales, will be sufficient to satisfy its
working capital requirements for the foreseeable future as described in the
Liquidity and Capital Resources portion of Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's Annual Report
on Form 10-KSB (Part II, Item 6) for the fiscal year ended September 30, 1996.
BUSINESS OUTLOOK
The following discussion contains forward looking statements that
involve risks and uncertainties, including the timing of purchases by customers,
manufacturing capacities for both current products and new products, the timing
of clinical preference testing and product introductions, FDA review and
response times, the timing and ultimate outcome of clinical tests, the scope and
effect of patent opinions, results of final ISO certification review, as well as
other risk factors listed from time to time in the Company's SEC reports,
including, without limitation, the sections entitled "Business Outlook" and
"Risk Factors" in the Company's Annual Report on Form 10-KSB (Part II, Item 6)
for the year ended September 30, 1996.
The Company anticipates continued growth in both private label and
branded product sales during the last half of the current fiscal and into fiscal
1998. Slower sales to Allegiance during the first half of the current year are
expected to return during this period to more normal levels following the
revision and extension of the Allegiance private label agreement and as
Allegiance consumes previously acquired inventory stocks. Through December of
1996, the Company furnished Allegiance with its requirements of silicone Foley
catheters in bulk for packaging and sterilization by Allegiance for sale in
exclusive territories. Under the revised agreement, extending through November
30, 1999, the Company will furnish Allegiance with its requirements of silicone
Foley catheters, packaged and sterile for resale on a non-exclusive basis.
The Company anticipates continued growth in branded product sales in
both domestic and overseas markets as a result of renewed sales and marketing
focus, increased sales efforts, and the recent successful introduction of the
Company's WIDEBAND(TM) male external catheter. In addition, the Company's
PERSONAL(TM) intermittent catheter was introduced last month to augment its
currently marketed product lines, and the Company has begun to develop marketing
plans for introduction of its FEMSOFT continuous drain catheter, already having
FDA marketing approval, as a replacement for Foley catheters for female
patients.
The Company has also filed a 510(K) Premarket Notification seeking FDA
marketing approval for the Company's Antibacterial Foley catheter. The filing is
based on the recently concluded clinical tests conducted at the University of
Wisconsin which show a three-fold reduction in catheter induced bacterial
urinary tract infections as compared to a control catheter in a large,
prospective, randomized, double-blinded study. In addition to a lower rate of
bacterial infections, the patient group using the Antibacterial catheter had a
lower number of infections from bacterial strains likely to be resistant to
antibiotics. The Company expects FDA review of the filing will proceed in due
course. The Company has also retained a consultant to assist the Company in the
process of obtaining CE mark certification necessary for sale of the
Antibacterial Foley catheter in the European Common Market.
The Company's clinical tests of its FEMSOFT female continence insert
began at the first clinical site in January with the enrollment of patients in
an initial six week screening protocol, and with patients first receiving a
FEMSOFT insert for use in February. Enrollment and screening is currently in
process at eight clinical sites, with patients receiving the FEMSOFT insert for
use as they complete the screening process. The Company is also developing the
data necessary for CE mark certification, and expects to submit its CE mark
application concurrently with its PMA (Premarket Approval) submission to the
FDA. The Company has received an opinion from its patent counsel to the effect
that the FEMSOFT female continence insert does not infringe certain patents of
which the Company is aware.
The Company's manufacturing facility and quality control procedures for
its currently marketed products were audited for compliance with ISO 9001
standards and CE Mark eligibility, and the Company was advised that it would be
recommended for certification. The Company expects to receive certification
following final review. The Company occupied new administrative and
manufacturing facility in April, and began installing FEMSOFT manufacturing
equipment in the new facility. The Company expects the equipment to be
substantially installed by July, when the Company intends to begin testing and
validating manufacturing processes necessary to move from laboratory to
manufacturing scale production. The Company is also expanding its manufacturing
capacity for male external catheters with a plant expansion and installation of
a second production line. The new manufacturing line is expected to become
operational later this year.
The Company continues to explore the prospect of additional financing
to expand future marketing activities which may be necessary to properly bring
its Antibacterial Foley catheter and FEMSOFT female continence insert to market,
if and as those products receive FDA marketing approval, as well as for research
and development activities necessary to bring other of its products in
development to market.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting on January 16, 1997, in Minneapolis
Minnesota. The Company solicited proxies and filed its definitive proxy
statement with the Commission pursuant to Regulation 14A. The matters voted upon
at the meeting and the votes cast were as follows:
(a) ELECTION OF DIRECTORS
For Withhold Authority
--- ------------------
Darnell L. Boehm 3,674,489 1,150
Anthony J. Conway 3,672,789 2,850
Peter R. Conway 3,674,489 1,150
Philip J. Conway 3,674,489 1,150
Richard D. Fryar 3,674,489 1,150
Roger W. Schnobrich 3,674,489 1,150
(b) APPROVAL OF AMENDMENT TO STOCK OPTION PLAN
For: 2,380,461 Against: 129,240 Abstain: 15,075
(c) APPROVAL OF ERNST & YOUNG AS ACCOUNTANTS
For: 3,674,164 Against: 1,000 Abstain: 475
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.12 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)
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Rochester Medical Corporation
Date: May 5, 1997 By: /s/ Anthony J. Conway
-------------------------
Anthony J. Conway
Chief Executive Officer,
Date: May 5, 1997 By: /s/ Brian J. Wierzbinski
-------------------------
Brian J. Wierzbinski
Chief Financial Officer
Exhibits
Page
10.12 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)
27 Financial Data Schedule
AMENDED AND RESTATED
SUPPLY AND DISTRIBUTION AGREEMENT
This Amended and Restated Supply and Distribution Agreement ("Restated
Agreement") is made with effect from December 1,1996, between Rochester Medical
Corporation, 1500 2nd Avenue Northwest, Stewartville, MN 55976 ("Rochester") and
Euromedical Industries Sdn Bhd, with offices at P.0, Box 515 11900 Bayan Lepas,
Penang, Malaysia ("EI").
Rochester and EI are parties to a Supply and Distribution Agreement
dated as effective April 14, 1994 (the "Original Agreement"); and
Rochester and EI desire to amend and restate their Original Agreement
in order, INTER ALIA, to eliminate EI's minimum purchase obligations, to
eliminate and phase out EI's exclusive distribution rights, to provide for
Rochester furnishing EI with packaged product for distribution by EI and
customers supplied by EI, to restrict Rochester from dealing directly with EI's
customers identified by this Restated Agreement, and for other purposes;
1. SUPPLY AND DISTRIBUTION OF PRODUCTS
1.1 Rochester agrees to supply EI and EI agrees to distribute the
Standard 100% Silicone Foley Catheters described on Exhibit A
(the "Products"). As used herein, "Products" expressly
excludes Rochester's Antibacterial Foley Catheter, its Comfort
Sleeve(R) Foley Catheter, its Hand Actuated Retention Catheter
in both continuous drain and valved configurations, and any
other of its products not specifically identified on Exhibit
A.
1.2 The Products and their packaging ("Packaging") shall exactly
conform to the specifications agreed between EI and Rochester
(the "Specifications"). Any change to the Specifications shall
be subject to the written approval of both parties; provided,
however, that Rochester may include applicable patent numbers
on the Packaging upon issuance to Rochester of patents
covering the Products.
1.3 The Products shall be supplied in finished sterile form and
packaged in Packaging in accordance with the Specifications;
provided, however, that the parties acknowledge that EI may at
its options, from time to time, purchase unsterilized Products
packaged only in a clear inner liner, or may purchase the
Products in bulk, non-sterile, with or without a valve, upon
such terms and conditions as the parties may reasonably agree
in the future.
1.4 EI and Rochester expressly intend that Rochester shall furnish
EI with Product that is packaged for resale by EI under EI's
own brand and marks and shall also furnish EI with Product
that is packaged for resale by EI's customers under brands and
marks owned by such customers of EI, respectively. All such
packaging shall be in accordance with the Specifications.
1.5 From time to time during the term of this Restated Agreement,
EI may identify customers in addition to those presently
supplied by EI, and Rochester will supply Products for EI's
additional customers appropriately packaged in accordance with
the Specifications as reasonably agreed and amended from time
to time by EI and Rochester.
1.6 For each Contract Year (as subsequently defined) of this
Agreement. EI shall purchase from Rochester all of EI's
requirements of Products and shall give Rochester the first
right to manufacture any other silicone Foley catheters;
provided, however, that EI may purchase Products or other
silicone Foley catheters from a third party to the extent that
(i) Rochester is unable to fulfill all of EI's forecast
requirements of Products or silicone Foley catheters within
the period covered by any forecast because of insufficient
manufacturing capacity, insufficient technical capability, or
inability to meet required quality standards, or (ii)
Rochester is unable to supply Products or silicone Foley
catheters meeting the specifications of new customers
identified by EI pursuant to Section 1.5. EI shall have no
obligation to purchase any minimum amount of Product from
Rochester during the term of this Restated Agreement.
2. TERRITORY; EXCLUSIVITY AND NON-COMPETITION
2.1 EI shall be Rochester's non-exclusive, worldwide distributor
for the Products in all countries.
2.2 Rochester shall not, for the term of this Restated Agreement,
either (i) directly supply Product or (ii) directly solicit
sales of Product to any customer of EI for whom Rochester
packages any Product. For purposes hereof, "directly" includes
any action taken by Rochester on its own behalf and excludes
any action taken by any distributor of Rochester's products
that is not owned or controlled by Rochester or under common
ownership or control with Rochester. For purposes hereof, "any
customer of EI" excludes former customers of EI who have
discontinued purchasing any Product for at least six (6)
continuous months.
3. PRICES, SHIPMENT AND PAYMENT TERMS
3.1 EI shall purchase the Products at the prices the parties shall
agree upon by separate writing. The prices so agreed shall
remain fixed through December 31, 1997. During the last
calendar quarter of 1997, and during the last calendar quarter
of 1998, the parties shall undertake good faith negotiations,
in light of then prevailing market conditions, regarding
pricing to be effective from January 1 until December 31 next
following. If the parties are unable to reach agreement by the
last day of December of any such calendar quarter, this
Restated Agreement shall terminate on the last day of June
next following.
3.2 Payment for Products purchased by EI shall be made by bank
transfer in US Dollars net, 60 days from the date of invoice.
3.3 All prices are quoted FOB Rochester's facility, Minnesota. EI
shall take title to and assume the Risk of loss of the
Products once they are loaded onto EI's nominated carrier at
such facility,
3.4 EI shall pay all normal freight charges, provided, however,
that Rochester shall ship Products by air freight when
necessary to meet its obligations under Section 4.2, or to
replace Products pursuant to Section 9 of this Restated
Agreement and in such cases shall bear pay the excess cost of
air freight over normal shipping charges.
3.5 The terms of this Restated Agreement shall have precedence
over any conflicting terms included in either party's standard
terms and conditions which may be attached to orders placed or
accepted under this Restated Agreement.
4. FORECASTING ORDERING AND MINIMUMS
4.1 On or before March 31, 1997 for the initial year, EI shall
prepare a non-binding forecast of EI's orders for Products to
be ordered through November 30, 1997; for each subsequent
year, EI shall prepare on or before October 31 of each year a
non-binding forecast of EI's orders for Products during the
twelve month period beginning December 1 through November 30
of the following year. The first nine-month period and each
subsequent twelve-month period shall be referred to as a
"Contract Year". This forecast shall be updated at least once
every ninety (90) days.
4.2 EI will place orders with Rochester from time to time in
amounts which are reasonably consistent with its forecast.
Rochester will acknowledge orders from EI within two working
days. Sterilized Products will be ready for pick up not more
than 60 days following receipt of order, and unsterilized
Products will be available for pick up not more than 45 days
following receipt of order. Rochester will advise EI
immediately of any back orders.
5. STOCK RECALLS
5.1 EI will maintain a sufficient stock of packaged Products to
meet anticipated market demand, including the requirements of
EI's customers who resell the Products under their own marks
and brands.
5.2 Rochester will repurchase from EI at the price paid by EI to
Rochester any Products which become obsolete, outdated or
unsaleable through any fault of Rochester. "Fault" does not
include new products which Rochester has or may develop;
provided, however, that Rochester shall have given EI
reasonable notice of Rochester's intention to market new
products that might compete with any of the Products. EI
expressly acknowledges having received notice of Rochester's
Antibacterial Foley Catheter, its Comfort Sleeve(R) Foley
Catheter, and its Hand Actuated Retention Catheter in both
continuous drain and valved configurations.
5.3 In the event that Rochester or EI recalls any Products or
Products incorporating the Products sold or distributed by EI
solely because the Products are believed to be defective or to
violate any provision of applicable law, then (i) if the
defect or violation is due to any act or omission of
Rochester, then Rochester shall bear all costs and expenses of
such recall, including the cost of notifying customers and
costs associated with the shipment of recalled Product from
customers to Rochester or EI, or (ii) if the defect or
violation is due to any act or omission of EI, then EI shall
bear all costs and expenses of such recall, including the cost
of notifying customers and costs associated with the shipment
of recalled Product from customers to Rochester or EI,
6. REGULATORY RESPONSIBILITY
Rochester represents and warrants that it has obtained all necessary
approvals from the FDA or equivalent regulatory authority to sell the
Products in the USA and all other countries where Rochester has
existing business, including but not limited to compliance with the
requirements of the European Community Medical Device Directive. If EI
needs to obtain regulatory approval for itself to sell the Products in
any country, then Rochester shall cooperate with EI in obtaining such
approval.
7. MANUFACTURE AND QUALITY CONTROL
7.1 All Products shall meet the Specifications, shall be
manufactured in accordance with Good Manufacturing Practice
("GMP") for Medical Devices established by the United States
Food and Drug Administration as provided under 21 U.S.C.
3600)(f), and shall be subjected to quality control inspection
by Rochester in accordance with quality control standards
including without limitation process controls, as established
by Rochester and approved by EI.
7.2 EI shall have the right to review and approve Rochester's
production and quality control procedures, including without
limitation Rochester's internal assembly procedures and
procedures for testing subassemblies at different stages of
assembly, and Rochester's engineering, assembly and testing
documentation for the Products, and to visit Rochester's
facilities at reasonable times with a representative of
Rochester present in order to assure satisfaction of the
requirements of this Restated Agreement. EI shall be deemed to
approve Rochester's production and quality control procedures
complying with ISO 9001 and CM 4601.
7.3 Rochester will notify EI immediately of any inspection of its
facilities by a federal, state or local regulatory agency that
results in advice of noncompliance with GMP, CE Mark, or
similar regulatory requirements; will furnish EI with the
results of such inspection; and will furnish EI with advice of
corrective actions, and the results thereof, taken by
Rochester to achieve such compliance.
8. GUARANTY
Rochester guarantees that all Products sold to EI are, as of the date
of shipment or delivery, not adulterated or misbranded within the
meaning of the United States Federal Food, Drug and Cosmetics Act or
amendments thereto, and any similar federal, state or local laws or
regulations, and are not articles which may not, under the provisions
of such laws, be introduced into interstate commerce.
9. WARRANTIES, DEFECTS
9.1 Rochester warrants that the Products comply with the
Specifications.
9.2 Rochester warrants that the Products and their parts and their
Packaging are fit for their intended purpose and free from
defects due to design, materials or workmanship and that each
Product is identifiable to a particular hatch number.
9.3 Any Product that EI or a customer of EI finds to be
non-conforming or defective due to any fault of Rochester may
be returned to Rochester with a statement of the defect, and
Rochester shall repair or replace the Product free of charge
to EI. In addition, Rochester shall reimburse EI for labor or
travel costs that EI has incurred following authorization from
Rochester, which shall not be unreasonably withheld, to
investigate a claim of non-conformance or defect. Nothing in
this clause shall operate to exclude or restrict the liability
of Rochester for negligence causing death or personal injury.
9.4 ROCHESTER is generally knowledgeable with respect to the
patent rights of third parties relating to Foley catheters,
and has conducted such inquiry and investigation, consisting
of a review of prior American and European art for purposes of
determining patentability, as it deemed reasonably necessary
for the purpose of determining whether the present or
presently intended manufacture, sale and/or use of the
Products infringes any patent or technology of any third
party. ROCHESTER has not been advised of any infringement upon
any patent or other intellectual property rights belonging to
any other person or entity caused by the present or presently
intended manufacture, sale and/or use of the Products. To the
best of Rochester's knowledge, based upon such inquiry and
investigation, the present or presently intended manufacture,
sale and/or use of the Products does not infringe any patent
or technology of any third party.
9.5 Rochester agrees to indemnify and hold EI harmless against any
losses, claims, damages or liabilities to third parties to
which EI may become subject insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise
or are based upon a claim that EI's sale and/or use of the
Products infringe the patent rights of any third party.
Promptly after EI's receipt of notice of the commencement of
any action of or the intent to commence any action, EI will,
if a claim in respect thereof is to be made against Rochester,
notify Rochester in writing of the commencement thereof or of
the intent to commence an action, as the case may be, and
omission so to notify Rochester will relieve Rochester from
any liability hereunder as to the particular item for which
indemnification is then being sought. In case any such action
is brought against EI, and it notifies Rochester of the
commencement thereof, Rochester will be entitled to
participate therein and, to the extent that it may wish, to
assume the defense thereof, with counsel who shall be to the
reasonable satisfaction of EI, and after notice from Rochester
to EI of Rochester's election so to assume the defense
thereof, Rochester will not be liable to EI party under this
Statement of Indemnification Rights for any legal or other
expenses subsequently incurred by EI in connection with the
defense thereof. Rochester shall not be liable to EI on
account of any settlement of any claim or action effected
without the consent of Rochester. Rochester shall not be
liable to EI for any lost opportunity or consequential damages
due to EI's inability to sell the Products in any jurisdiction
in which EI's sale of the Products would infringe any patent
or intellectual property owned by any third party; provided,
however, that EI shall be entitled to return to Rochester all
inventory rendered unsalable as a result of such patent or
intellectual property infringement claim, or Rochester will
issue EI a credit for this inventory.
10. CONFIDENTIALITY
All technical and commercial information, data regarding processes and
know-how ("Confidential Information") disclosed by either EI or
Rochester to the other shall remain the property of the disclosing
party. The party receiving the Confidential Information shall keep all
Confidential Information as confidential and shall not use it for any
purpose other than as may be expressly permitted under this Restated
Agreement. Such receiving party shall not disclose such Confidential
Information except to such person who both (i) needs to know the
Confidential Information for a proper purpose under this Restated
Agreement and (ii) acknowledges in writing that the Confidential
Information may not be used or disclosed except in conformance with the
requirements of this Restated Agreement.
11. TRADEMARKS-PACKAGING
11.l Rochester shall package the Products in the Packaging in
accordance with the Specifications for sale by EI and EI's
customers, who shall have the right to sell the Products under
their own trademarks, brands and labels.
11.2 Rochester shall acquire no right or interest by reason of this
Restated Agreement in any trademarks or trade names used by EI
or by its customers in connection with the marketing or sale
of the Products; and shall be deemed by reason of this
Restated Agreement to have only such rights respecting such
trademarks and trade names as may be necessary to produce the
Packaging as set forth in the Specifications.
12. LIABILITY: INSURANCE
12.1 Rochester shall indemnify and hold EI harmless from any and
all damage or expense, including reasonable attorney's fees
and disbursements arising from acts and/or omissions of
Rochester or its agents including, but not limited to , any
and all claims arising from third parties in connection with
alleged negligence in the design or manufacture of the
Products or their parts or their Packaging, or in connection
with a breach of any of the warranties contained in Section 9,
Section 10, or Section 18.2 of this Restated Agreement.
12.2 EI shall hold Rochester harmless from any and all claims
arising from acts and/or omissions of EI including, without
limitation, any and all claims arising from third parties in
connection with alleged negligence in the distribution or sale
of the Products.
12.3 Rochester and EI warrant, respectively, that they each carry
product liability insurance for the Products being sold under
the Restated Agreement.
12.4 Neither party shall be liable to the other for any incidental
or consequential damages under this Restated Agreement.
13. TERM
This Restated Agreement shall remain in effect for an initial term
which shall end on November 30, 1999 (the "Initial Term") and
thereafter may be renewed on such terms as the parties may in good
faith agree.
14. TERMINATION
This Restated Agreement may be terminated at any time:
(a) by written notice from either party to the other in the event
of a breach by the other party of any of the terms of this
Restated Agreement, which breach shall not be remedied within
forty five (45) days from receipt of a written notice to that
effect, or
(b) by written notice from either party to the other in the event
of the insolvency of either party or its inability to pay its
debts in the ordinary course of business or the judicial
appointment of a liquidator, receiver or administrator.
(c) Upon prior written notice ("Termination Notice") given by
either party to the other no sooner that January 1, 1998,
which shall specify a date ("Termination Date") at least six
(6) months following the date such Termination Notice was
given, in which event this Restated Agreement shall terminate
on the Termination Date specified in the Termination Notice.
15. ASSIGNMENT
Any and all rights of either party under this Restated Agreement may be
assigned by such party to any company owned by or under common ultimate
ownership with such party upon written notification thereof to the
other, or, as part of the sale, transfer or assignment to a third party
of such party or of that portion of the business or assets of such
party that manufactures, adds value to or distributes the Products.
16. ENTIRE AGREEMENT; AMENDMENT; SAVINGS
This Restated Agreement constitutes the entire agreement between the
parties and may be amended only by written agreement of the parties.
This Restated Agreement supersedes the Original Agreement in its
entirety; provided, that all rights, obligations, duties and
liabilities of the parties, respectively, under the Original Agreement
shall be preserved to the extent necessary to enforce any executory or
monetary obligation of a party relating to Products sold and delivered
by Rochester to EI, or by EI to its customers, prior to the effective
date of this Restated Agreement
17. FORCE MAJEURE
Any delay or failure in the performance of any obligation under this
Restated Agreement by either party shall be excused if caused by
occurrences beyond such party's reasonable control.
18. GOVERNING LAW
18.1 This Restated Agreement shall be governed by the laws of the
State of Minnesota, excluding the Conflicts of Laws provisions
thereof.
18.2 Rochester represents (i) that it has the requisite experience
and expertise to provide the Products, parts and Packaging
under this Restated Agreement, and (ii) that its sale and
delivery of the Products under this Restated Agreement comply
in all material respects to all applicable legal and
regulatory requirements of the United States, the North
American Free Trade Agreement countries, the European Common
Market, the European Free Trade Association and of Japan,
including but not limited to compliance with export control
laws. Rochester represents that it will use its best efforts
to take all necessary measures, including obtaining any
required permits, licenses or approvals, including export
licenses.
18.3 The Parties agree to attempt to settle any claim, controversy
or dispute in connection with, arising out of or relating to
this Restated Agreement or the performance, enforcement,
breach, termination, application or validity hereof (herein,
"Controversy") through good faith negotiations in the spirit
of mutual cooperation. If those attempts fail, the Controversy
will be mediated by a mutually acceptable mediator to be
chosen by the parties within 45 days after written notice by
the Party demanding mediation. Neither party may unreasonably
withhold consent of the selection of the mediator and the
parties will share the costs of mediation equally, The parties
may agree to replace mediation with some form of Alternative
Dispute resolution (ADR). such as neutral fact-finding or a
mini-trial. Any Controversy which cannot be resolved by the
parties through mediation or another form of ADR within six
months of the date of the initial written demand for mediation
may then, and only then, be submitted for arbitration. Any
Controversy that is not settled by mediation as hereinbefor
provided shall be submitted to arbitration. Such arbitration
proceedings shall be held in Minneapolis, Minnesota, in
accordance with the Minnesota Uniform Arbitration Act, with
each party appointing one arbitrator and the two arbitrators
thus chosen appointing a third, neutral arbitrator, who shall
be appointed by the court upon application of either party if
the two chosen arbitrators fail to agree on a third, neutral
arbitrator. The arbitrators shall furnish the parties with a
written decision setting forth findings of fact, conclusions
of law and an order; and (ii) a stenographic record shall be
made of the arbitration proceedings. In addition to any
monetary award that may be given, the arbitrators may order or
direct either party to do any act required of it by this
Restated Agreement or to refrain from the doing of any act or
practice that is contrary to this Restated Agreement. This
agreement to arbitrate shall be specifically enforceable. Each
party shall bear its own costs and expense in any such
proceedings, but the arbitrators may, in their discretion and
consistent with this Restated Agreement, award costs and
attorneys' fees to either or both of the parties.
19. NOTICES
All notices required under this Restated Agreement shall be delivered
by hand, by courier, or by registered post to the addressee at its
address mentioned above, to the attention of the President.
Executed by:
ROCHESTER EI
By: /s/ Anthony J. Conway By: /s/ Michael Alexander
--------------------------------- --------------------------------
Title: President Title: Product Manager
--------- ---------------
Date: March 18, 1997 Date: March 19, 1997
-------------- --------------
ATTACHMENTS
Exhibits to Attach
A. PRODUCTS
Exhibit A
Rochester
Description French Size Balloon Size Part Number
----------- ----------- ------------ -----------
2-Way Standard Pediatric 6 1.5cc 1-4206
8 3cc 1-4208
10 3cc 1-4210
2-Way Standard 12 5cc 1-4212
14 5cc 1-4214
16 5cc 1-4216
18 5cc 1-4218
20 5cc 1-4220
22 5cc 1-4222
24 5cc 1-4224
2-Way Standard 16 30cc 2-4216
18 30cc 2-4218
20 30cc 2-4220
22 30cc 2-4222
24 30cc 2-4224
26 30cc 2-4226
3-Way Standard 18 5cc 3-4518
20 5cc 3-4520
22 5cc 3-4522
24 5cc 3-4524
26 5cc 3-4526
3-Way Standard 18 30cc 3-4318
20 30cc 3-4320
22 30cc 3-4322
24 30cc 3-4324
26 30 3-4326
- ---------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,835,612
<SECURITIES> 10,401,888
<RECEIVABLES> 1,437,660
<ALLOWANCES> 56,000
<INVENTORY> 1,359,364
<CURRENT-ASSETS> 16,058,199
<PP&E> 8,144,874
<DEPRECIATION> 1,643,757
<TOTAL-ASSETS> 22,927,120
<CURRENT-LIABILITIES> 1,095,971
<BONDS> 0
0
0
<COMMON> 24,717,413
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,927,120
<SALES> 3,471,377
<TOTAL-REVENUES> 3,471,377
<CGS> 2,184,334
<TOTAL-COSTS> 4,641,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,170,323)
<INTEREST-EXPENSE> 142,412
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (931,827)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
