<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 4, 1997
ROCHESTER MEDICAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Minnesota 0-18933 41-1613227
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS employer
of incorporation) file number) identification No.)
One Rochester Medical Drive, Stewartville, Minnesota 55976
----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (507) 533-9600
--------------
<PAGE>
Item 5. OTHER EVENTS.
On October 15, 1997, Ernst & Young LLP, Rochester Medical Corporation's
independent auditors, issued their report on the Company's financial statements
for the fiscal year ended September 30, 1997. A copy of these financial
statements and such auditors' report is filed herewith as Exhibit 99.1, which
exhibit is hereby incorporated by reference in this Report as though set forth
in full herein.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
99.1 Financial Statements and Auditors' Report for Fiscal Year Ended
September 30, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: November 3, 1997 ROCHESTER MEDICAL CORPORATION
By: /s/ ANTHONY J. CONWAY
----------------------------------
Anthony J. Conway
President, Chief Executive
Officer and Secretary
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the filing of our Report as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated November 4, 1997 and to its incorporation by
reference in the Company's Registration Statement on Form S-2, Registration
Number 333-36605 and in the Company's Registration Statement on Form S-8,
Registration Number 333-10261 pertaining to the Company's 1991 Stock Option
Plan.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
November 4, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,191,428
<SECURITIES> 3,447,461
<RECEIVABLES> 2,029,194
<ALLOWANCES> 62,000
<INVENTORY> 1,653,733
<CURRENT-ASSETS> 8,513,601
<PP&E> 11,625,414
<DEPRECIATION> 1,856,980
<TOTAL-ASSETS> 18,613,373
<CURRENT-LIABILITIES> 1,432,400
<BONDS> 0
0
0
<COMMON> 24,697,199
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,613,373
<SALES> 7,615,439
<TOTAL-REVENUES> 7,615,439
<CGS> 4,869,646
<TOTAL-COSTS> 10,029,972
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (2,414,533)
<INTEREST-EXPENSE> 341,753
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,098,664)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
<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
1
<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.
2
<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.
3
<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.
4
<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.
5
<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 US
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.
6
<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.
7
<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.
8
<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
9
<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.
10
<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 million 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:
11
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
8. COMMITMENTS (CONTINUED)
1. The Company dissolves, becomes inoperative, or abandons the intellectual
property relating to the automated production of Foley catheters: or
2. More than 25% of its manufacturing or production facilities relating to
Foley catheters are located outside the State of Minnesota before August
17, 1999.
The grant was accounted for as a reduction in the cost of the equipment.
Royalties earned by MTI are charged to operations as royalty expense. Royalty
expense totaled $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 for $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.
12
<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.
13
<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>
14
