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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1999
Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
MINNESOTA 41-1613227
State of Incorporation IRS Employer Identification No.
ONE ROCHESTER MEDICAL DRIVE
STEWARTVILLE, MINNESOTA 55976
Address of Principal Executive Offices
Telephone Number: (507) 533-9600
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and has been
subject to such filing requirements for the past 90 days. Yes __X__ No ____
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. _____
The issuer's revenues for its most recent fiscal year were $7,340,870.
The aggregate market value of voting stock held by non-affiliates based upon
the closing Nasdaq sale price on November 8, 1999 was $36,482,000.
Number of shares outstanding on December 10, 1999 was 5,349,500 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its February 2, 2000 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Rochester Medical Corporation (the "Company") develops, manufactures and
markets a broad line of innovative, technologically enhanced latex-free urinary
continence and urine drainage management care products to the home care and
acute/extended care markets. The Company's home care products include its
FEMSOFT(R) INSERT, a soft, liquid-filled, conformable urethral insert for
managing female stress urinary incontinence in adult females, a line of male
external catheters for managing male urinary incontinence and a line of
intermittent catheters for managing male and female urinary retention. The
Company's acute/extended care products include a line of standard Foley
catheters and the advanced RELEASE-NF (TM) CATHETER, an antibacterial Foley
catheter for the prevention of hospital acquired urinary tract infection
("UTI").
The Company markets its products under its own ROCHESTER MEDICAL(R) brand
through a direct field sales force in the United States and independent
distributors in international markets. The Company also supplies its products
to several large medical product companies for sale under brands owned by these
companies.
THE CONTINENCE CARE MARKET
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.
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.
In hospitals and certain other acute care settings, it is often necessary
for medical professionals to monitor and manage the urinary functions of
patients using a Foley catheter. The Company estimates that sales of Foley
catheters and related accessories in the United States are currently
approximately $240 million per year. The regular use of Foley catheterization
is associated with hospital acquired UTI, which is primarily caused by bacteria
that migrate through the urethra along the outside of Foley catheters into the
bladder. Hospital acquired UTI has been shown to have a significant impact on
increasing morbidity and mortality of hospitalized patients. The cost of
treating these infections is estimated at approximately $1 billion annually in
the United States.
The Company believes that approximately 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. 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. As a result, healthcare institutions are increasingly attempting to
limit their workers' and patients' exposure to latex, and some are establishing
entirely latex-free operating rooms. New FDA rules now require labeling of
latex medical devices to warn of possible allergic reactions. The 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 new rules also require deletion of labeling claims
stating that latex medical devices are hypoallergenic.
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HOME CARE PRODUCTS
MALE EXTERNAL CATHETERS. The Company's male external catheters are
self-care, disposable devices for managing male urinary incontinence. The
Company manufactures and markets three models of silicone male external
catheters: the ULTRAFLEX(R), "POP-ON"(R) and WIDE BAND(R) catheters. The
UltraFlex catheter has adhesive positioned midway down the 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 require shorter-length external
catheters. The Company's WIDE BAND self-adhering male external catheter 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 WIDE BAND catheter is designed to reduce adhesive
failure and the resulting leakage, which is a common complaint among users of
male external catheters.
All models of the Company's male external catheters are produced in five
sizes for better patient fit. The Company's male external catheters are made
from silicone, a non-toxic and biocompatible material that eliminates the risks
of latex-related skin irritation. Silicone catheters are also odor free and
have greater air permeability than catheters made from other materials,
including latex. Air permeability reduces skin irritation and damage from
catheter use and thereby increases patient comfort. 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 simplifies
application of the catheters and provides a strong bond to the skin for greater
patient confidence and improved wear.
The Company also manufactures and sells male external catheters made from
a proprietary non-latex, non-silicone material to certain private label
customers. Certain of these catheters use the same self-adhesive technology as
the Company's silicone male external catheters. Like the silicone male external
catheters, these non-silicone catheters eliminate the risk of latex reactions
and latex-related skin irritations. The non-silicone catheters also are odor
free.
PERSONAL CATHETER(TM). 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. The Company produces the PERSONAL
CATHETER in three lengths for male, female and pediatric use and multiple
diameters.
FEMSOFT INSERT. The FEMSOFT INSERT is a disposable device for the
management of stress urinary 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.
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 reducing leakage without chafing or abrasion of the delicate tissues of
the urethra.
The FEMSOFT INSERT is a prescription device that requires a woman to visit
her physician. The physician will fit the patient with the proper size and
instruct the patient on proper application of the FEMSOFT INSERT.
The Company received U.S. Food and Drug Administration ("FDA") approval of
the FEMSOFT INSERT Premarket Approval ("PMA") application on September 30,
1999. The Company expects to begin commercial introduction of the FEMSOFT
INSERT during the second quarter of fiscal 2000.
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ACUTE/EXTENDED CARE PRODUCTS
RELEASE-NF CATHETER. The Company's RELEASE-NF CATHETER is a silicone Foley
catheter that has been designed to reduce the incidence of hospital acquired
UTI. Using patented technology, the RELEASE-NF CATHETER incorporates
nitrofurazone, an effective broad-spectrum antibacterial agent, into the
structure of the catheter permitting sustained release of a controlled dosage
directly into the urinary tract to prevent the onset of infection. The
RELEASE-NF CATHETER received marketing authorization from the FDA in January
1998 pursuant to a 510(k) premarket notification submission. Clinical trials,
funded by the Company, have demonstrated that use of the RELEASE-NF CATHETER
yielded a six-fold reduction in the incidence of hospital acquired UTI compared
to use of a silicone, non-medicated Foley catheter. Study patients were
catheterized for one to five days, a period that is typical of approximately
90% of all hospital Foley catheterizations. The RELEASE-NF CATHETER was
well-tolerated by the patients using it, and no complications or attributable
side-effects were observed.
FOLEY CATHETERS. The Company offers Foley catheters in a standard two
lumen version for urinary drainage management and in a three lumen version for
irrigation of the urinary tract. These Foley catheters are available in all
standard adult and pediatric sizes. All of the Company's silicone Foley
catheters eliminate the risk of the allergic reactions and tissue irritation
and damage associated with latex Foley catheters. The Company's Foley catheters
are transparent which enables healthcare professionals to observe urine flow.
Unlike the manufacturing processes used by producers of competing silicone
Foley catheters, in which the balloon is made separately and attached by hand
in a separate process involving gluing, 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 sterile 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.
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, 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 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, may be applicable
to a variety of other devices for medical applications. The Company plans to
consider, commensurate with its financial and personnel 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 male external catheters and standard Foley catheters to medical
products companies for resale under
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brands owned by such companies. In fiscal 1999, the Company experienced a
significant reduction in sales under these arrangements due to one customer
that switched to its own production of silicone male external catheter and
another customer that significantly reduced its order volume. These private
label arrangements, however, are likely to continue to account for a
significant portion of the Company's revenues in the foreseeable future,
particularly in international markets where the Company does not maintain a
direct sales presence.
The Company sells its products in the United States under the ROCHESTER
MEDICAL brand name through a nine-person direct sales force. This sales force
is organized into six regions across the country and is primarily responsible
for sales of the Company's products other than the FEMSOFT INSERT. The primary
markets for the Company's products are individual hospitals and healthcare
institutions, distributors and extended care facilities.
The Company is planning a phased introduction of FEMSOFT INSERT in three
metropolitan areas, Denver, Detroit and Iowa City, including the Quad-Cities of
Iowa and Illinois, which were among the primary clinical study locations for
the insert. The nine-person sales force will be expanded to include a staff
dedicated to marketing and selling the FEMSOFT INSERT. The marketing of the
FEMSOFT INSERT will require significant physician and clinician education
efforts and substantial media advertising to consumers. The Company has formed
a distribution and customer service program for the FEMSOFT INSERT with
Healthcare Delivery Systems ("HDS"), a business unit of McKesson Corporation.
Under this program, HDS will administer a centralized resource center for
customer service, product information and nationwide distribution of the
FEMSOFT INSERT.
The Company relies on arrangements with medical product companies and
independent distributors to sell the Company's products in Europe and other
international markets. These arrangements are conducted under the ROCHESTER
MEDICAL brand name and under brands controlled by the medical product
companies.
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 other
lines. The Company has constructed a separate manufacturing facility to house
its liquid encapsulation manufacturing operations, and has installed the
FEMSOFT INSERT manufacturing line in 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.
The Company has obtained ISO 9001 certification and CE mark quality system
certification for its Foley catheter, male external catheter, and FEMSOFT
INSERT production lines.
The Company's manufacturing facility has been designed to accommodate the
specialized requirements for the manufacture of medical devices, including the
FDA's requirements for Quality System Regulation ("QSR").
SOURCES OF SUPPLY
The Company obtains certain raw materials and components for a number of
its products from a sole supplier or limited number of suppliers. The loss of
such a supplier or suppliers, or a material interruption of deliveries from
such a supplier or suppliers, could have a material adverse effect on the
Company. The Company believes that in most, if not all, cases the Company has
identified other potential suppliers. In the event that the Company had to
replace a supplier, however, the Company may be required to repeat
biocompatibility and other testing of its products using the material from the
new supplier and may be required to obtain additional regulatory clearances.
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RESEARCH AND DEVELOPMENT
The Company believes that its ability to add new products to its existing
continence care product lines is important to the Company's future success.
Accordingly, the Company is engaged in ongoing research and development to
develop and introduce new products which provide additional features and
functionality. In the future, consistent with market opportunities and the
Company's financial and personnel resources, the Company intends to perform
clinical studies for other of its products in development.
Research and development expense for fiscal years 1999, 1998 and 1997, was
$1,052,000, $1,384,000 and $1,451,000, respectively.
COMPETITION
The continence care 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, to establish new
distribution relationships and to secure participation in purchase contracts
with group purchasing organizations. The Company believes that it will be
important for the Company to differentiate its products in order to attract
large customers, such as distributors, dealers, institutions and home care
organizations.
The Company's products compete with a number of alternative products and
treatments for continence care. The Company's ability to compete with these
alternative methods for urinary continence care 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 continence care devices such as the Company's
products.
The Company competes directly for sales of continence care devices under
the Company's own brand with larger, multi-product medical device manufacturers
and distributors such as ConvaTec, C.R. Bard, Inc., Maersk Medical, Kendall
Healthcare Products Company, Hollister and Mentor. Many of the competitive
alternative products or therapies to the Company's products 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
products or 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 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 17 United States patents and a number of corresponding
foreign patents that generally relate to certain of the Company's catheters and
devices and certain of the
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Company's production processes. In addition, the Company owns a number of
pending United States and corresponding foreign patent applications. The
Company may file additional patent applications for certain of the Company's
current and proposed products and processes in the future.
There can be no assurance that the Company's patents will be of sufficient
scope or strength to provide meaningful protection of the Company's products
and technologies. The coverage sought in a patent application can be denied or
significantly reduced before the patent is issued. In addition, there can be no
assurance that the Company's patents will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company.
Should attempts be made to challenge, invalidate or circumvent the
Company's patents in the United States Patent and Trademark Office and/or
courts of competent jurisdiction, including administrative boards or tribunals,
the Company may have to participate in legal or quasi-legal proceedings
therein, to maintain, defend or enforce its rights in these patents. Any legal
proceedings to maintain, defend or enforce the Company's patent rights can be
lengthy and costly, with no guarantee of success. There also can be no
assurance that the Company will file additional patent applications or that
additional patents will issue from the Company's pending patent applications.
A claim by third parties that the Company's current products or products
under development allegedly infringe their patent rights could have a material
adverse effect on the Company. The Company is aware that others 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. 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 or abroad which, if ultimately granted, might be
infringed in such country 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 in such country 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 the measures
taken by the Company 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
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superior to the Company's. Finally, as with patent rights, legal action to
enforce trade secret rights can be lengthy and costly, with no guarantee of
success.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding foreign agencies. In the United States, the medical devices
manufactured and sold by the Company are subject to laws and regulations
administered by the FDA, including regulations concerning the prerequisites to
commercial marketing, the conduct of clinical investigations, compliance with
QSR and labeling.
A manufacturer may seek from the FDA market authorization to distribute a
new medical device by filing a 510(k) Premarket Notification ("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 Premarket Approval ("PMA") application
process, which requires the FDA to determine that the device is safe and
effective for the purposes intended.
The Company received FDA marketing authorization for its FEMSOFT INSERT on
September 30, 1999 pursuant to a PMA. As a condition of FDA approval of the
Company's PMA filing based on interim clinical study results, the Company will
be required to complete the current clinical study of the FEMSOFT INSERT and
submit the additional data to the FDA for its further consideration to
determine whether such approval should be continued. There can be no assurance
that these additional data will be sufficient in the FDA's opinion to permit
continued marketing of the device even though the PMA filing for the FEMSOFT
INSERT was initially approved by the FDA. All of the Company's other marketed
products have received FDA marketing authorization pursuant to 510(k)
notifications.
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 QSR. These regulations require that the
Company manufacture its products and maintain its documents in a prescribed
manner with respect to design, manufacturing, testing and quality control
activities. 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 can
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"), medical devices must display a CE mark before they may be imported or
sold. In order to obtain and maintain the CE mark, the Company must comply with
the Medical Device Directive and pass an initial and annual facilities audit
inspections to ISO 9001 by an EU inspection agency. The Company has obtained
ISO 9001 quality system certification for the CE mark for its currently
marketed standard products and the FEMSOFT INSERT. The Company is pursuing CE
mark certification for the RELEASE-NF CATHETER. In order to maintain
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certification, if granted, the Company will be required to pass annual
facilities audit inspections conducted by EU inspectors. There can be no
assurance, however, that the Company will be able to obtain or maintain all
necessary 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.
THIRD PARTY REIMBURSEMENT
In the United States, healthcare providers that purchase medical devices
generally rely on third party payors, such as Medicare, Medicaid, private
health insurance plans and managed care organizations, to reimburse all or a
portion of the cost of the devices. The Medicare program is funded and
administered by the federal government, while the Medicaid program is jointly
funded by the federal government and the states, which administer the program
under general federal oversight. The Company believes its currently marketed
products, including the RELEASE-NF CATHETER, are generally eligible for
coverage under these third party reimbursement programs. The Company is
currently in the process of assessing eligibility of the FEMSOFT INSERT for
reimbursement. The competitive position of certain of the Company's products
may be partially dependent upon the extent of reimbursement for its products.
The federal government and certain state governments are currently
considering a number of proposals to reform the Medicare and Medicaid health
care reimbursement system. The Company is unable to evaluate what legislation
may be drafted and whether or when any such legislation will be enacted and
implemented. Certain of the proposals, if adopted, could have an adverse effect
on the Company's business, financial condition and results of operations.
In foreign countries, the policies and procedures for obtaining third
party payment of reimbursement for medical devices vary widely. Compliance with
such procedures may delay or prevent the eligibility of the Company's branded
and/or private label products for reimbursement, and have an adverse effect on
the Company's ability to sell its branded or private label products in a
particular foreign country.
PRIVATE LABEL DISTRIBUTION AGREEMENTS
CONVATEC. In April 1998, the Company and ConvaTec entered into a Revised
and Restated Distribution Agreement (the "Revised ConvaTec Agreement"), which
grants ConvaTec certain rights to market the Company's Foley catheters and male
external catheters under the ConvaTec brand. The Revised ConvaTec Agreement
provides, subject to certain existing obligations and limitations, that the
Company will not appoint any other private label distributor for silicone male
external catheters in Central America, South America, Australia, Japan, New
Zealand, South Africa, Israel, Iran, Iraq, Lebanon, Oman, Saudi Arabia, Syria,
United Arab Emirates and Yemen. ConvaTec has non-exclusive rights to distribute
the Company's products in other markets.
The Revised ConvaTec Agreement does not include any minimum purchase
requirements or require that ConvaTec market any or all of the Company's
products. The ConvaTec Agreement also provides in the event that the Company is
unable to supply ConvaTec's requirements for products under certain
circumstances, ConvaTec will have a license to the Company's technologies for
purposes of manufacturing such products for ConvaTec.
The Revised ConvaTec Agreement has an initial term expiring April 30,
2006, and may be renewed for successive annual extensions thereafter. Either
party may terminate the Revised ConvaTec Agreement upon the other party's
material breach of the Revised ConvaTec Agreement, bankruptcy or insolvency, or
inability to perform under the Revised ConvaTec Agreement for a period of more
than six months.
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Sales of products to ConvaTec represented 16% of the Company's revenues in
fiscal 1999 and 25% of revenues in fiscal 1998.
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 term
of the agreement commenced May 1, 1998 and expires 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 7% of the Company's revenues in
fiscal 1999 and 7% of revenues in fiscal 1998.
MENTOR. The Company has sold 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"). In fiscal 1999, Mentor
discontinued purchases of male external catheters from the Company under the
MEC Agreement after it began to manufacture its own silicone male external
catheters. The Company does not anticipate that Mentor will resume any material
purchases under the MEC Agreement in fiscal 2000. Sales of products to Mentor
represented 10% of the Company's revenues in fiscal 1999 and 21% of revenues in
fiscal 1998.
EMPLOYEES
As of September 30, 1999, the Company employed 135 full-time employees, of
whom 98 were in manufacturing, and the remainder in marketing and sales,
research and development and administration. The labor market for medical
device manufacturing personnel has tightened in Minnesota, and particularly in
the Rochester area where the Company's manufacturing facilities are located.
This has resulted in upward pressure on wages for production workers but has
not, to date, adversely affected the Company's ability to hire and retain
capable manufacturing personnel. The Company is not a party to any collective
bargaining agreement and believes its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 20, 1999 are as
follows:
NAME AGE POSITION
- ---- --- --------
Anthony J. Conway 55 Chairman of the Board, Chief Executive Officer,
President and Secretary
Brian J. Wierzbinski 41 Executive Vice President, Chief Financial Officer,
and Treasurer
Philip J. Conway 43 Vice President, Production Technologies
Richard D. Fryar 52 Vice President, Research and Development
Dara Lynn Horner 41 Vice President, Marketing
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 17 have resulted in issued United States patents.
BRIAN J. WIERZBINSKI has served as the Company's Chief Financial Officer
since February 1996, as its Treasurer since September 1997, as a Director since
February 1998 and as its
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Executive Vice President since August 1999. Since February 1996, Mr.
Wierzbinski has had principal responsibility for management of the Company's
financial and administrative activities, and since August 1999, Mr. Wierzbinski
has also had primary functional responsibility for the Company's sales and
production activities. From 1986 until joining the Company in 1996, Mr.
Wierzbinski was employed in various financial and financial management
capacities by Ecolab, Inc., most recently as Asia Pacific Vice President,
planning and control. Prior to joining Ecolab, Mr. Wierzbinski was employed for
six years in various audit and audit management capacities by KPMG Peat
Marwick. Mr. Wierzbinski is a certified public accountant.
PHILIP J. CONWAY, a founder of the Company, has served as Vice President
of Production Technologies of the Company since August 1999 and as a Director
of the Company since May 1988. From 1988 to July 1999, Mr. Philip Conway served
as Vice President of Operations of the Company. Mr. Philip Conway is
responsible for plant design as well as new product and production processes,
research, design and development 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 17 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 17 have resulted in
issued United States patents.
DARA LYNN HORNER has served as Marketing Director for the Company's
FEMSOFT INSERT product line since November 1998, and as Vice President of
Marketing of the Company since November 1999. Ms. Horner has principal
responsibility for management of the Company's marketing activities. From 1990
until joining the Company in 1998, Ms. Horner was employed by Lake Region
Manufacturing, Inc., a medical device manufacturer, most recently as Marketing
Director. From 1980 to 1998, she was employed in various marketing and sales
capacities with, respectively, Medtronic, Inc., West Central Tribune, and Blue
Cross-Blue Shield of Minnesota.
Messrs. Anthony J. Conway, Philip J. Conway and Peter R. Conway, a
director of the Company, are brothers.
ITEM 2. PROPERTIES
The Company's administrative offices and liquid encapsulation
manufacturing facilities occupy a 52,000 square foot manufacturing and office
facility on a 28 acre site owned by the Company and located in an industrial
park in Stewartville, Minnesota. The Company's male external and Foley catheter
manufacturing facilities consists of a 34,000 square foot manufacturing and
office building located on a nearby 3.5 acre site owned by the Company in the
same industrial park.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended September 30, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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.
HIGH LOW
-------- -------
FISCAL 1998
First Quarter .......................... $ 17.875 $ 11.875
Second Quarter ......................... 16.000 13.125
Third Quarter .......................... 15.375 14.000
Fourth Quarter ......................... 15.000 8.000
FISCAL 1999
First Quarter .......................... $ 15.250 $ 9.625
Second Quarter ......................... 15.500 9.250
Third Quarter .......................... 12.250 9.500
Fourth Quarter ......................... 12.313 8.375
HOLDERS
As of December 10, 1999, the Company had 121 shareholders of record. Such
number of record holders does not reflect shareholders who beneficially own
Common Stock in nominee or street name.
The Company has paid no cash dividends on its Common Stock, and it does
not intend to pay cash dividends on its Common Stock in the future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of September 30,
1999 and 1998 and for the three fiscal years ended September 30, 1999, 1998 and
1997 are derived from, and should be read together with, the financial
statements of the Company audited by Ernst & Young LLP, independent auditors,
included elsewhere in this Form 10-K. The following selected financial data as
of September 30, 1997, 1996 and 1995 and for the fiscal years ended September
30, 1996 and 1995 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 Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ............................ $ 7,341 $ 9,518 $ 7,615 $ 5,540 $ 3,131
Cost of sales ........................ 5,602 6,604 4,869 3,788 2,448
--------- --------- --------- --------- ---------
Gross profit ........................ 1,739 2,914 2,746 1,752 683
Operating expenses:
Marketing and selling ................ 3,944 3,191 2,210 1,351 858
Research and development ............. 1,052 1,384 1,451 1,182 358
General and administrative ........... 1,863 1,445 1,499 1,112 766
--------- --------- --------- --------- ---------
Total operating expenses ............ 6,859 6,020 5,160 3,645 1,982
--------- --------- --------- --------- ---------
Loss from operations .................. (5,120) (3,106) (2,414) (1,893) (1,299)
Interest income ....................... 719 848 657 818 56
Interest expense ...................... -- -- (342) (285) (68)
--------- --------- --------- --------- ---------
Net loss .............................. $ (4,401) $ (2,258) $ (2,099) $ (1,360) $ (1,311)
========= ========= ========= ========= =========
Net loss per common share --
basic and diluted .................... $ (.83) $ (.44) $ (.51) $ (.35) $ (.49)
Weighted average number of
common shares outstanding ............ 5,333 5,141 4,132 3,867 2,682
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Balance Sheet Data:
Cash, cash equivalents and
Marketable securities ............... $ 13,246 $ 16,410 $ 4,639 $ 17,408 $ 2,905
Working capital ...................... 15,486 19,245 7,081 18,861 4,348
Total assets ......................... 28,702 32,736 18,613 23,888 7,163
Long-term debt ....................... -- -- -- 3,321 3,036
Accumulated deficit .................. (14,175) (9,774) (7,516) (5,418) (4,058)
--------- --------- --------- --------- ---------
Total shareholders' equity ........... $ 27,177 $ 30,918 $ 17,181 $ 19,231 $ 3,672
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements other than historical information contained herein constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be
identified by the use of terminology such as "may," "will," "expect,"
"anticipate," "predict," "intend," "designed," "estimate," "should" or
"continue" or the negatives thereof or other variations thereon or comparable
terminology. The forward-looking statements involve known or unknown risks,
uncertainties and other factors which may cause the
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<PAGE>
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. Factors
that might cause such differences include, but are not limited to, those
discussed in the section entitled "Risk Factors" below.
GENERAL
The Company designs, develops, manufactures and markets urinary continence
care products for sale to the home care and hospital care markets. Through
fiscal 1992, the Company was a development stage company, engaged primarily in
the development of its products and manufacturing operations 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:
FISCAL YEARS ENDED
SEPTEMBER 30,
------------------------
1999 1998 1997
---- ---- ----
Total net sales ..................... 100% 100% 100%
Cost of sales ....................... 76 69 64
--- --- ---
Gross margin ........................ 24 31 36
Operating expenses:
Marketing and selling .............. 54 34 29
Research and development ........... 14 15 19
General and administrative ......... 26 15 20
--- --- ---
Total operating expenses ............ 94 64 68
Loss from operations ................ (70) (33) (32)
Interest income, net ................ 10 9 4
--- --- ---
Net loss ............................ (60)% (24)% (28)%
=== === ===
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales decreased 23% to $7.3 million in fiscal 1999 from
$9.5 million in the prior fiscal year. Domestic sales decreased 31% in fiscal
1999 from the prior fiscal year, with growth of 41% in ROCHESTER MEDICAL brand
product sales offset by a 50% decline in sales to domestic private label
customers, primarily Mentor and ConvaTec. International sales decreased 6% in
fiscal 1999 from the prior fiscal year compared with the prior year, with 45%
growth in European markets offset by a 25% decline in all other international
markets.
GROSS MARGIN. The Company's gross margin was 24% in fiscal 1999 compared
to 31% in fiscal 1998. The fiscal 1999 margin primarily reflects costs
associated with continuing underutilized production capacity due to lower
sales. Costs associated with increased capacity are anticipated to continue
until such time as, if ever, the Company achieves sufficient sales to absorb
the additional capacity.
MARKETING AND SELLING. Marketing and selling expense increased 24% to $3.9
million in fiscal 1999 from $3.2 million in fiscal 1998. The increase in
expense is due to promotional activities for the RELEASE-NF CATHETER and market
introduction preparation for the FEMSOFT INSERT. The Company anticipates that
marketing and selling expenses will increase in future periods as the Company
expands its promotional and market development activities related to Rochester
Medical brand products, particularly the Company's FEMSOFT INSERT.
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<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense decreased 24%
to $1.1 million in fiscal 1999 from $1.4 million in fiscal 1998. The decrease
in research and development expense primarily reflects a reduction in accruals
for costs of the FEMSOFT INSERT clinical trials related to stage of completion.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
29% to $1.9 million in fiscal 1999 from $1.4 million in fiscal 1998. The
increase in general and administrative expense is related to upgrading of
business systems, including the Year 2000 compliance program, and general
increases in administrative support costs.
INTEREST INCOME. Interest income decreased 15% to $719,000 in fiscal 1999
from $848,000 in fiscal 1998. The decrease in interest income reflects the
comparatively lower average level of invested cash balances in the current
quarter due to the utilization of cash for operations and capital expenditures.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1997
NET SALES. Net sales increased 25% to $9.5 million in fiscal 1998 from
$7.6 million in the prior fiscal year. The increase results from sales growth
in both ROCHESTER MEDICAL brand and private label products. Sales of ROCHESTER
MEDICAL brand products increased 40% to $2.4 million in fiscal 1998 from $1.7
million in fiscal 1997, reflecting growth of 62% in domestic sales and 16% in
international sales. Virtually all of the domestic growth in branded sales was
from sales of the Company's standard products, for which marketing efforts have
been progressively increased by the recently expanded field sales force. Sales
to private label customers increased 20% to $7.1 million in fiscal 1998 from
$6.0 million in fiscal 1997. Sales to ConvaTec, Mentor and Hollister accounted
for 25%, 21% and 7%, respectively, of fiscal 1998 net sales compared to 24%,
30% and 10%, respectively, in fiscal 1997.
GROSS MARGIN. The Company's gross margin was 31% in fiscal 1998 compared
to 36% for fiscal 1997. The gross margin rate has been adversely impacted by
expansion of production facilities and support operations, shift in product mix
toward lower margin products and increases in production wage rates. The
Company expects continued downward pressure on gross margins in future periods
associated with additional depreciation and other capacity expansion and
production scale-up costs. The trend of reduced margins is expected to continue
until such time, if ever, the Company is able to increase utilization of the
expanded manufacturing facilities, and increase sales levels of its higher
margin RELEASE-NF CATHETER product line.
MARKETING AND SELLING. Marketing and selling expense increased 44% to $3.2
million in fiscal 1998 from $2.2 million in fiscal 1997. The increased expense
is due primarily to market introduction costs for the RELEASE-NF CATHETER,
expansion of the domestic field sales force and costs associated with the
addition of two new sales and marketing management personnel.
RESEARCH AND DEVELOPMENT. Research and development expense decreased 5% to
$1.4 million in fiscal 1998 compared to $1.5 million in fiscal 1997. The
primary activity affecting research and development expense levels is the
ongoing clinical testing for the FEMSOFT INSERT.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
4% to $1.4 million in fiscal 1998 from $1.5 million in fiscal 1997. The
decrease in administrative expense reflects efforts to contain costs, including
deferral of planned business system development expenditures until fiscal 1999.
INTEREST INCOME (EXPENSE), NET. Net interest income increased to $848,000
in fiscal 1998 compared to $316,000 in fiscal 1997. The increase in net
interest income in fiscal 1998 is a result of investment of net proceeds from
the Company's November 1997 public stock offering and repayment of a
convertible note to ConvaTec (See "Liquidity and Capital Resources").
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
$40.7 million in net proceeds
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<PAGE>
since its inception. In August 1995, the Company received proceeds of $3.0
million from issuance of a convertible note to ConvaTec. The Company repaid the
ConvaTec note on September 30, 1997, with accrued interest, for a total amount
of $3.7 million.
The Company's cash, cash equivalents and marketable securities were $13.2
million at September 30, 1999 compared with $16.4 million at September 30,
1998. The Company used a net $3.0 million of cash from operating activities
during the year, primarily reflecting the net loss before non-cash
depreciation.
During fiscal 1999, the Company's working capital position, excluding cash
and marketable securities, decreased by a net $596,000. Accounts receivable
balances decreased 30% or $585,000 during the fiscal year as a result of
receivable collections and lower sales. Inventories decreased by 7% or $162,000
during the year, which management expects will be temporarily offset by
increased stocking under the Year 2000 contingency plan. Other current assets
decreased 29% or $141,000 as a result of the collection of miscellaneous
receivables. Current liabilities decreased 16% or $293,000 during the year,
reflecting a reduction in raw material purchase volumes related to lower sales
levels and payment of clinical trial obligations. Changes in other asset and
liability balances related to timing of expense recognition.
In December 1999, the Board of Directors authorized a stock repurchase
program. Up to one million shares of the Company's outstanding common stock may
be repurchased under the program. Purchases may be made from time to time at
prevailing prices in the open market and through other customary means. No time
limit has been placed on the duration of the stock repurchase program and it
may be conducted over an extended period of time as business and market
conditions warrant. The Company also may discontinue the stock repurchase
program at any time. The repurchased shares will be available for reissuance
pursuant to employee stock option plans and for other corporate purposes. The
Company intends to fund such repurchases with currently available funds.
Although the Company believes that its existing resources and anticipated
cash flows from operations will be sufficient to satisfy its capital needs for
approximately the next two years, 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 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 YEAR 2000
The Year 2000 issue is the result of computer programs which were written
using two digits rather than four to determine the applicable year. The Year
2000 issue may also affect computer chips embedded in computer hardware and
machinery, which process date-sensitive information. Any computer programs and
hardware or equipment that have date-sensitive software or chips may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions to operations,
including temporary inability to process transactions, send invoices or engage
in similar normal business activities.
16
<PAGE>
The Company utilizes a variety of computer programs, primarily purchased
software, for its systems of manufacturing, distribution and administration.
The Company has made inquiries of its vendors who provide the Company with
computer programs and equipment, including hardware and software used in the
Company's automated manufacturing processes. The Company has also utilized the
services of an outside consultant to assist the Company with an inventory and
assessment of its computer programs and equipment and the implementation of a
Year 2000 remediation plan. The Company has completed the inventory,
assessment, implementation and testing phases of its Year 2000 review. Based
upon results of this review to date and upon certifications and assurances
received from its software and other vendors, the Company has not identified
any material Year 2000 compliance issues related to its core hardware and
software systems, manufacturing systems, or communications systems. The Company
has implemented its Year 2000 remediation plan at a total cost of approximately
$85,000, including costs associated with the replacement of PC computer
hardware and software and consulting services to implement the same.
The Company has made inquiry to each of its material suppliers, such as
banks, payroll processors and vendors who must address their own Year 2000
issues. To date, none of these inquiries has identified any definite Year 2000
issues. The failure of these companies to be Year 2000 compliant may affect the
ability of the Company, among other things, to obtain critical supplies or
receive payment on outstanding invoices. Depending on the extent of such
issues, this could have a material adverse effect on the Company's results of
operations and liquidity.
The Company has used its own personnel to make inquiries to vendors and to
conduct the Year 2000 assessment process. While the Company's Year 2000
compliance program is essentially completed, and although the Company estimates
that the total cost of its Year 2000 review will not exceed $100,000, specific
factors that might require material expenditures not now anticipated by the
Company include, but are not limited to, the availability and cost of trained
personnel, the validity of certifications and assurances furnished by software
and hardware vendors, the effectiveness of software upgrades received by the
Company from its software vendors, the results of the ongoing Year 2000 review
and similar uncertainties. The Company has made contingency plans to provide
reasonable assurance as to continued supply of key materials and services,
where appropriate, from its key vendors.
RISK FACTORS
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 new products, primarily the RELEASE-NF CATHETER and the FEMSOFT INSERT. Both
of these products 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. Market acceptance
of these products, if it occurs, may require lengthy hospital evaluations and/or
the training of numerous physicians and clinicians, which could delay or dampen
any such market acceptance. Moreover, approval of reimbursement for the
Company's products, competing products or alternative medical treatments, and
the Company's pricing policies will be important factors in determining market
acceptance of these products. 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.
RISKS ASSOCIATED WITH MARKETING AND SALES OF ROCHESTER MEDICAL BRAND PRODUCTS
The Company's success will depend on its ability to overcome established
market positions of competitors and to establish its own market presence under
the ROCHESTER MEDICAL brand name. One of the challenges facing the Company in
this respect is the Company's ability to compete with
17
<PAGE>
companies that offer a wider array of products to hospitals and medical care
institutions, distributors and end users. The Company may also find it
difficult to sell its products due to the limited recognition of its brand
name.
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, 1997, 1998 and 1999 were $2.1 million, $2.3 million and $4.4 million,
respectively. The Company had an accumulated deficit of approximately $14.2
million at September 30, 1999. 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/or successfully introduce, new
products, particularly the RELEASE-NF CATHETER and FEMSOFT INSERT, of which
there can be no assurance. The Company expects to incur substantial expenses for
commercialization of the RELEASE-NF CATHETER, and for 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
and activities. A substantial portion of the expenses associated with 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 its 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. 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, and may adversely affect the Company's ability to obtain contracts with
such purchasing groups. 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. There can be no
assurance that the Company will be able to compete successfully against such
competitors.
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.
Manufacturers of these products or techniques are engaged in research to
develop more advanced versions of current products and techniques. 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.
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 medical
product companies that resell or distribute the Company's products, and on the
sales and marketing efforts of such entities. Arrangements with these entities
are likely to continue to be a significant portion of the Company's revenues in
the future. There can be no assurance that the Company's purchasers and
distributors will be able to successfully market and sell the Company's
products, that they will
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<PAGE>
devote sufficient resources to support the marketing of any of the Company's
products, that they will market any of the Company's products at prices which
will permit such products to develop, achieve, or sustain market acceptance, or
that they will not develop alternative sources of supply. The failure of the
Company's purchasers and distributors to continue to purchase products from the
Company at levels reasonably consistent with their prior purchases or to
effectively market the Company's products could have a material adverse effect
on the Company's business, financial condition and results of operations.
POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company intends to expend substantial funds for expansion of sales and
marketing activities, product education efforts, advertising and other working
capital and general corporate purposes. Although the Company believes its
existing resources and anticipated cash flows from operations will be sufficient
to satisfy its capital needs for approximately the next two years, 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 costs and timing of expansion of sales and
marketing activities; the amount of revenues from sales of the Company's
existing and new products, including the RELEASE-NF CATHETER and FEMSOFT INSERT;
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. 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.
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
timely, if at all, for the Company's products in development, 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 design, 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.
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
19
<PAGE>
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax 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.
DEPENDENCE ON THIRD PARTY REIMBURSEMENT
The Company's products are purchased by medical care institutions 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
in the process of assessing 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.
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. 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.
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.
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
20
<PAGE>
Company, or to determine the ownership, scope or validity of the proprietary
rights of the Company and others. 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.
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 $7
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.
21
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's operations are not currently subject to market risks for
interest rates, foreign currency exchange rates, commodity prices or other
relevant market price risks of a material nature.
ITEM 8. FINANCIAL STATEMENTS
ROCHESTER MEDICAL CORPORATION
FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
PAGE
-----
Report of Independent Auditors ................................... 23
Audited Financial Statements ..................................... 24-34
Balance Sheets .................................................. 24
Statements of Operations ........................................ 25
Statement of Shareholders' Equity ............................... 26
Statements of Cash Flows ........................................ 27
Notes to Financial Statements ................................... 28
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders
Rochester Medical Corporation
We have audited the accompanying balance sheets of Rochester Medical
Corporation as of September 30, 1999 and 1998, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended September
30, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Minneapolis, Minnesota
October 22, 1999
23
<PAGE>
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 4,216,814 $ 2,864,922
Marketable securities .......................................... 9,029,296 13,545,271
Accounts receivable, less allowance for doubtful accounts
($59,466 -- 1999; $50,000 -- 1998) ............................ 1,369,662 1,955,048
Inventories, net ............................................... 2,047,820 2,209,599
Prepaid expenses and other current assets ...................... 347,860 489,001
------------ ------------
Total current assets ............................................ 17,011,452 21,063,841
Property, plant and equipment:
Land ........................................................... 169,707 169,707
Buildings ...................................................... 5,221,078 5,220,078
Construction in progress ....................................... 1,699,440 3,373,888
Equipment and fixtures ......................................... 7,638,733 5,167,000
------------ ------------
14,728,958 13,930,673
Less accumulated depreciation .................................. (3,257,233) (2,510,975)
------------ ------------
Total property, plant and equipment ............................. 11,471,725 11,419,697
Patents, less accumulated amortization ($641,516 -- 1999;
$550,441 -- 1998) .............................................. 219,218 252,212
------------ ------------
Total assets .................................................... $ 28,702,395 $ 32,735,750
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 689,475 $ 766,304
Accrued compensation ........................................... 556,329 523,612
Accrued clinical costs ......................................... 45,214 294,495
Accrued expenses ............................................... 234,371 233,610
------------ ------------
Total current liabilities ....................................... $ 1,525,389 $ 1,818,021
============ ============
Shareholders' equity:
Common Stock, no par value:
Authorized shares -- 20,000,000
Issued and outstanding shares; (5,349,500 -- 1999;
5,269,500 -- 1998) ............................................ $ 41,352,202 $ 40,692,202
Accumulated deficit ............................................. (14,175,196) (9,774,473)
------------ ------------
Total shareholders' equity ...................................... 27,177,006 30,917,729
------------ ------------
Total liabilities and shareholders' equity ...................... $ 28,702,395 $ 32,735,750
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales .......................................... $ 7,340,870 $ 9,518,311 $ 7,615,439
Cost of sales ...................................... 5,602,042 6,604,201 4,869,646
----------- ----------- -----------
Gross profit ....................................... 1,738,828 2,914,110 2,745,793
Operating expenses:
Marketing and selling ............................. 3,943,589 3,190,642 2,209,747
Research and development .......................... 1,052,090 1,384,210 1,450,883
General and administrative ........................ 1,863,194 1,445,167 1,499,696
----------- ----------- -----------
Total operating expenses ........................... 6,858,873 6,020,019 5,160,326
Loss from operations ............................... (5,120,045) (3,105,909) (2,414,533)
Other income (expense):
Interest income ................................... 719,322 847,662 657,622
Interest expense .................................. -- -- (341,753)
----------- ----------- -----------
Net loss ........................................... $(4,400,723) $(2,258,247) $(2,098,664)
=========== =========== ===========
Net loss per common share -- basic and diluted ..... $ (.83) $ (.44) $ (.51)
=========== =========== ===========
Weighted average number of common shares
outstanding ....................................... 5,332,868 5,140,670 4,131,600
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 .......... 4,133,500 $ 24,697,199 $ (7,516,226) $ 17,180,973
Common Stock issued in public
offering ............................. 1,125,000 15,862,253 -- 15,862,253
Exercise of common stock options ...... 11,000 132,750 -- 132,750
Net loss for the year ................. -- -- (2,258,247) (2,258,247)
------------ ------------ ------------ ------------
Balance at September 30, 1998 .......... 5,269,500 40,692,202 (9,774,473) 30,917,729
Exercise of common stock options ...... 80,000 660,000 -- 660,000
Net loss for the year ................. -- -- (4,400,723) (4,400,723)
------------ ------------ ------------ ------------
Balance at September 30, 1999 .......... 5,349,500 $ 41,352,202 $(14,175,196) $ 27,177,006
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................. $ (4,400,723) $ (2,258,247) $ (2,098,664)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ....................... 837,331 776,699 538,523
Changes in operating assets and liabilities:
Accounts receivable ................................ 585,386 12,146 (453,617)
Inventories ........................................ 161,779 (555,866) (462,450)
Other current assets ............................... 141,141 (235,216) (169,591)
Accounts payable ................................... (76,829) 308,740 (500,386)
Other current liabilities .......................... (215,803) 76,882 597,022
------------ ------------ ------------
Net cash used in operating activities ................. (2,967,718) (1,874,862) (2,549,163)
INVESTING ACTIVITIES
Capital expenditures .................................. (798,285) (2,305,258) (6,880,833)
Patents ............................................... (58,081) (43,579) (66,905)
Purchase of marketable securities ..................... (54,892,037) (50,871,767) (18,388,824)
Sales and maturities of marketable securities ......... 59,408,013 40,773,957 23,954,885
------------ ------------ ------------
Net cash provided by (used in) investing activities ... 3,659,610 (12,446,647) (1,381,677)
FINANCING ACTIVITIES
Interest expense added to note payable ................ -- 341,826
Proceeds from sale of Common Stock .................... 660,000 15,995,003 48,286
Payments on long-term debt ............................ -- -- (3,662,451)
------------ ------------ ------------
Net cash provided by (used in) financing
activities ........................................... 660,000 15,995,003 (3,272,339)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents .......................................... 1,351,892 1,673,494 (7,203,179)
Cash and cash equivalents at beginning of period ..... 2,864,922 1,191,428 8,394,607
------------ ------------ ------------
Cash and cash equivalents at end of period ............ $ 4,216,814 $ 2,864,922 $ 1,191,428
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 are carried
at cost which approximates fair value as determined by published market data.
The balance at September 30, 1999 consists of $8,000,000 of bonds maturing from
2000 to 2001 and $1,000,000 of commercial paper. At September 30, 1998, the
balance consisted entirely of U.S. Treasury Bills and certificates of deposit.
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. Sales of products are
recorded upon shipment. 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.
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. Deferred income
taxes are provided for temporary differences between financial reporting and tax
bases of assets and liabilities.
28
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Fully diluted and basic net loss
per share are the same because the effect of common equivalent shares from stock
options and convertible debt are excluded from the computation as their effect
is antidilutive.
3. ADVERTISING COSTS
The Company incurred advertising expenses of $779,000, $414,000 and
$185,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
All advertising costs are charged to operations as incurred.
4. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30,
--------------------------
1999 1998
---------- ----------
Raw materials ................................... $ 652,229 $1,351,628
Work-in-process ................................. 1,058,716 630,945
Finished goods .................................. 445,605 277,059
Reserve for inventory obsolescence .............. (108,730) (50,033)
---------- ----------
$2,047,820 $2,209,599
========== ==========
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS
In August 1998, the 1991 Stock Option Plan (the Plan) was amended to
increase by 300,000 shares the number of shares authorized for issuance to
1,000,000 shares. 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
29
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
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.
The 1995 Non-Statutory Stock Option Plan authorizes 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. In April 1999, one member of
the Medical Advisory Board was granted options to purchase 6,000 shares of the
Company's Common Stock at an exercise price of $10.125 per share.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
AVERAGE
SHARES WEIGHTED EXERCISE
RESERVED OPTIONS PRICE PER
FOR GRANT OUTSTANDING SHARE
--------- ----------- ---------
<S> <C> <C> <C>
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
Options granted ..................................... (226,000) 226,000 14.90
Options exercised ................................... -- (11,000) 12.07
Options canceled .................................... 27,000 (27,000) 14.13
Increase in authorized shares ....................... 300,000 -- --
-------- -------- --------
Balance as of September 30, 1998 .................... 310,000 723,000 $ 13.09
Options granted ..................................... (173,500) 173,500 11.40
Options exercised ................................... -- (80,000) 8.25
Options canceled .................................... 70,000 (70,000) 13.80
-------- -------- --------
Balance as of September 30, 1999 .................... 206,500 746,500 $ 13.15
======== ======== ========
</TABLE>
The weighted average fair value of options granted in 1999 and 1998 was
$11.40 and $14.90 per share, respectively. The exercise price of options
outstanding at September 30, 1999 ranged from $6.75 to $20.00 per share as
summarized in the following table:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING EXERCISABLE EXERCISE PRICE
RANGE OF EXERCISE PRICES AT 9/30/99 CONTRACTUAL LIFE AT 9/30/99 PER SHARE
- ------------------------ ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$6.75 -- $10.75 .......... 203,500 6.7 years 101,000 $ 7.71
10.76 -- 14.75 ........... 387,750 5.6 years 192,750 13.99
14.76 -- 20.00 ........... 155,250 7.3 years 73,250 16.66
------- -------
746,500 6.3 years 367,000 $ 12.80
======= =======
</TABLE>
The number of stock options exercisable at September 30, 1999, 1998 and
1997 was 367,000, 307,500 and 192,750 at a weighted average exercise price of
$12.80, $9.68 and $11.19 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
30
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
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 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 6.08%; volatility factor of the expected
market price of the Company's common stock of .524 and a weighted average
expected life of the option of seven 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,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss .......................... $ (5,934,181) $ (3,796,025) $ (3,102,702)
Pro forma net loss per common share ......... $ (1.11) $ (.74) $ (.75)
</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 1997.
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.
31
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
SEPTEMBER 30,
---------------------------
1999 1998
----------- -----------
Deferred assets:
Net operating loss ............................ $ 5,466,000 $ 3,496,000
Research and development credits .............. 143,000 123,000
Allowance for uncollectible accounts .......... 22,000 17,000
Inventory reserves ............................ 40,000 17,000
Inventory capitalization ...................... 37,000 46,000
Accrued expenses .............................. 61,000 31,000
----------- -----------
Subtotal ...................................... 5,769,000 3,750,000
Deferred liability:
Depreciation and amortization ................. 386,000 350,000
----------- -----------
Net deferred income tax assets ................ 5,383,000 3,380,000
Valuation allowance ........................... (5,383,000) (3,380,000)
----------- -----------
Net deferred income taxes ..................... $ -- $ --
=========== ===========
The Company will be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately
$14,925,000 can be carried forward to offset future taxable income, may be
limited due to changes in ownership under the net operating loss limitation
rules, and expire in years 2005 through 2019.
7. LEASES
Rent expense from operating leases for the years ended September 30, 1999,
1998, and 1997 was $5,000, $7,000 and $69,000, respectively.
8. RELATED PARTY TRANSACTIONS
The brother-in-law of the CEO and President, the Vice President of
Production Technologies and a member of the board of directors of the Company
has performed legal services for the Company. During the years ended September
30, 1999, 1998, and 1997, the Company incurred legal fees and expenses of
approximately $46,000, $71,000 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 Company entered into an agreement with Halcon, Inc. to purchase office
furniture valued at $406,000. During the years ended September 30, 1999, 1998
and 1997, payments made under this agreement were $2,500, $4,000 and $316,000,
respectively. 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
Production Technologies 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.
The Company contracts with Petersen Blacksmith Company for the fabrication
of customized, proprietary manufacturing equipment used in the Company's
automated production lines. During 1999, 1998 and 1997, the Company paid
Petersen Blacksmith Company the sum of $46,000, $231,000 and $252,000,
respectively. Michael Petersen, the proprietor of Petersen Blacksmith
32
<PAGE>
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
Company, is the brother-in-law of a Director and Vice President, Research and
Development 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.
9. 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.
In April 1998, the Company and ConvaTec entered into a Revised and Restated
Distribution Agreement (the "Revised Agreement") which grants ConvaTec limited
territorial rights to market certain of the Company's standard male external
catheter and Foley catheter products under the ConvaTec name. In addition to
retaining worldwide marketing rights for Rochester Medical brand products, the
Revised Agreement provides the Company exclusive marketing rights for its
advanced products and products in development.
10. SIGNIFICANT CUSTOMERS
Significant customers, measured as a percentage of sales, are summarized as
follows:
SEPTEMBER 30,
-----------------------
1999 1998 1997
---- ---- ----
Significant customers:
ConvaTec ................................... 16% 25% 24%
Hollister .................................. 7 7 10
Maersk ..................................... 18 15* 4*
Mentor ..................................... 10 21 30
-- -- --
Total ........................................ 51 68% 68%
== == ==
- ------------------
* 1998 and 1997 includes sales to Euromedical Industries SdN., which was
acquired by Maersk in July of 1998.
In May 1998, Mentor advised the Company of its intention to manufacture its
own silicone male external catheters under the royalty-free license it holds
from the Company. There have been no sales of male external catheters to Mentor
since the first quarter of fiscal 1999.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
1999, and "Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
1999.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed herewith in Item 8.
(i) Balance Sheets as of September 30, 1999 and 1998.
(ii) Statements of Operations for the years ended September 30,
1999, 1998 and 1997.
(iii) Statement of Shareholders' Equity for the years ended
September 30, 1999 and 1998.
(iv) Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997.
(v) Notes to financial statements at September 30, 1999.
(a)(2) Financial Statement Schedules. None
(b) Exhibits
The following exhibits are submitted herewith:
3.1 Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 4.1 of Registrant's
Registration Statement on Form S-2, Registration Number
33-97788).
3.2 Restated Bylaws of the Company. (Incorporated by reference to
Exhibit 3.2 of Registrant's Registration Statement on Form
S-18, Registration Number 33-36362-C).
3.3 Amendment to Restated Bylaws of the Company. (Incorporated by
reference to Exhibit 4.3 of Registrant's Registration
Statement on Form S-2, Registration Number 33-97788).
34
<PAGE>
4.1 Specimen of Common Stock Certificate. (Incorporated by
reference to Exhibit 4.4 of Registrant's Annual Report on Form
10-KSB for fiscal year ended September 30, 1995).
4.2 The Company's 1991 Stock Option Plan as amended (Incorporated
by reference to Exhibit 4.5 of Registrant's Registration
Statement on Form S-8, Registration Number 333-10261).
4.3 Amendment to the Company's 1991 Stock Option Plan as amended
(Incorporated by reference to Exhibit 4.3 of Registrant's
Annual Report on Form 10-K for fiscal year ended September 30,
1998).
10.1 Employment Agreement, dated August 31, 1990 between the
Company and Anthony J. Conway. (Incorporated by reference to
Exhibit 10.13 of Registrant's Registration Statement on Form
S-18, Registration Number 33-36362-C).
10.2 Employment Agreement, dated August 31, 1990 between the
Company and Philip J. Conway. (Incorporated by reference to
Exhibit 10.14 of Registrant's Registration Statement on Form
S-18, Registration Number 33-36362-C).
10.3 Change of Control Agreement dated December 4, 1998, between
the Company and Philip J. Conway (Incorporated by reference to
Exhibit 10.3 of Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1998).
10.4 Employment Agreement, dated August 31, 1990 between the
Company and Richard D. Fryar. (Incorporated by reference to
Exhibit 10.15 of Registrant's Registration Statement on Form
S-18, Registration Number 33-36362-C).
10.5 Change of Control Agreement dated December 4, 1998, between
the Company and Richard D. Fryar (Incorporated by reference to
Exhibit 10.5 of Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1998).
10.6 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).
10.7 Change of Control Agreement dated December 4, 1998, between
the Company and Brian J. Wierzbinski (Incorporated by
reference to Exhibit 10.7 of Registrant's Annual Report on
Form 10-K for fiscal year ended September 30, 1998).
10.8 Employment Agreement, dated November 16, 1998 between the
Company and Dara Lynn Horner.*
10.9 Male External Catheter License, Sales and Distribution
Agreement dated April 24, 1991, between the Company and Mentor
Corporation. (Incorporated by reference to Exhibit 10.7 of
Registrants Registration Statement on Form S-1, Registration
Number 33-40934).
10.10 Amended UF Catheter Exclusive OEM/Private Label Agreement
dated March 18, 1994, between the Company and Hollister
Incorporated. (Incorporated by reference to Exhibit (a)(i) of
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1994).
10.11 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 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
35
<PAGE>
10.12 Revised and Restated Distribution Agreement, dated as of May
6, 1998, between the Company and E. R. Squibb & Sons, Inc.
(through its ConvaTec division). (Incorporated by reference to
Exhibit 10.17 of Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).
23 Consent of Ernst & Young LLP.*
24 Power of Attorney.*
27 Financial Data Schedule.*
- ---------------------
* Filed herewith.
(c) Registrant filed no Report on Form 8-K during its fourth fiscal quarter.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ROCHESTER MEDICAL CORPORATION
Dated: December 17, 1999 By: /s/ ANTHONY J. CONWAY
-------------------------------------
Anthony J. Conway
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE
--------- -----
/s/ ANTHONY J. CONWAY Chairman of the Board, President,
- ------------------------------ Chief Executive Officer, and Secretary
Anthony J. Conway (PRINCIPAL EXECUTIVE OFFICER)
/s/ BRIAN J. WIERZBINSKI Executive Vice President, Chief Financial
- ------------------------------ Officer, Treasurer and Director
Brian J. Wierzbinski (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
* Vice President, Production Technologies
- ------------------------------ and Director
Philip J. Conway
* Vice President, Research and Development
- ------------------------------ and Director
Richard D. Fryar
* Director
- ------------------------------
Darnell L. Boehm
* Director
- ------------------------------
Peter R. Conway
* Director
- ------------------------------
Roger W. Schnobrich
*By /s/ BRIAN J. WIERZBINSKI Dated: December 17, 1999
--------------------------
Brian J. Wierzbinski
ATTORNEY-IN-FACT
37
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
- ------- ----
10.8 Employment Agreement, dated November 16, 1998 between the Company
and Dara Lynn Horner ...........................................
23 Consent of Ernst & Young LLP ....................................
24 Power of Attorney ...............................................
27 Financial Data Schedule .........................................
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the 16th of November, 1998, by
and between Rochester Medical Corporation, a Minnesota corporation (the
"Company"), and Dara Lynn Horner ("Employee").
WHEREAS, the Company and the Employee desire to record the terms of
Employee's employment by the Company;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. TERM OF EMPLOYMENT. Subject to the terms and conditions of this
Agreement, the Company hereby employs Employee and Employee hereby accepts
employment for the period commencing November 16, 1998, and continuing
thereafter until the employment is terminated according to the provisions of
this Agreement.
2. DUTIES. During the term of this Agreement, Employee shall perform
the duties of Marketing Director, Femsoft(R) Product Line, and such additional
duties as may be prescribed from time to time by the Board of Directors, the
Company's Chief Executive Officer or the Company's Vice President Marketing and
Sales.
3. BASE SALARY; OTHER COMPENSATION.
3.1 Base Salary. The Corporation shall pay Employee an initial Base
Salary ("Base Salary") of Ninety Five Thousand Dollars ($95,000) per annum
commencing November 16, 1998. The Base Salary shall be paid according to the
Corporation's regular payroll procedure, in equal increments not less frequently
than monthly. The Base Salary shall be subject to annual review and merit
increase adjustment in accordance with the Corporation's customary practices, as
may be then in effect, for salary planning and administration.
3.2 Incentive Bonuses. Employee shall be entitled to receive an initial
bonus payment in the amount of Seven Thousand Five Hundred Dollars ($7,500)
payable with her first regular payroll. Employee shall also be eligible to
participate in the Corporation's bonus incentive plan with a targeted bonus
("Bonus") determined in accordance with the Corporation's Executive Bonus
Program. The targets and performance necessary to earn the Bonus or any portion
thereof shall be set annually by the Corporation; provided, that the Bonus
payable to Employee for the Corporation's
<PAGE>
Dara Lynn Horner
Employment Agreement
November 16, 1998
fiscal quarter ending December 31, 1998, shall be in the amount of Eighteen
Thousand Five Hundred Dollars ($18,500).
3.3 Relocation Allowance. Upon Employee's election to relocate to the
Rochester, Minnesota area, then in addition to any other compensation to which
Employee may be entitled by this agreement, the Corporation shall pay Employee a
Relocation Allowance (the "Relocation Allowance") consisting of (i) all direct
moving costs and expenses incurred by Employee in connection with Employee's
associated relocation to the Rochester, Minnesota, area, (ii) reimbursement of
all realtor's commissions and closing costs paid by Employee in connection with
the sale of his present home, (iii) reimbursement of closing costs paid by
Employee in connection with the purchase of his new home, (iv) reimbursement of
all expenses for meals and lodging, not to exceed eight days, in connection with
Employee's travel to the Rochester, Minnesota, area for purposes of finding a
new home, and (v) income tax gross-up to the extent any payments to or on behalf
of employee hereunder are taxable as income to Employee.
3.4 Temporary Housing Allowance. Until Employee elects to relocate to
the Rochester, Minnesota area, the Corporation shall pay Employee a Temporary
Housing Allowance consisting of (i) housing allowance in amount of Seven Hundred
Dollars ($700) per month through and including September 2000, and (ii) to the
extent Employee's rent and utilities exceed Seven Hundred Dollars ($700) per
month, an additional amount sufficient to pay all monthly utility charges.
3.5 Incentive Stock Option. In addition to any other compensation to
which Employee may be entitled by this agreement, Employee shall be entitled to
receive an Incentive Stock Option for Twenty Thousand (20,000) shares of the
Corporation under the Corporation's 1991 Stock Option Plan according to the
Incentive Stock Option Agreement appended hereto as Exhibit 1. The exercise
price of the Incentive Stock Option shall be fair market value, as determined
according to the 1991 Stock Option Plan, as of the close of business on the date
of grant by the Corporation's Board of Directors. Employee acknowledges
receiving a copy of the 1991 Stock Option Plan.
4. BENEFITS.
4.1 Vacation. During each year of employment, Employee will be entitled
to reasonable vacations, holidays and sick leave in accordance with the
Company's standard policies as may be adopted or amended from time to time
hereafter. Employee shall be entitled to four (4) weeks' vacation during each of
the Company's fiscal years, prorated for any part of a fiscal year. Vacations
shall be at such time or times and for such periods as Company and Employee
shall agree; provided that vacations must be taken by Employee during the year
earned or be forfeited.
2
<PAGE>
Dara Lynn Horner
Employment Agreement
November 16, 1998
4.2 Benefit Programs, Insurance. Employee shall be entitled to
participate in customary employee benefit programs as may be from time to time
determined by the Board of Directors including, but not limited to, life
insurance, hospitalization, surgical and major medical coverage, and long-term
disability as are or may be made available from time to time to other salaried
employees of the Company.
4.3 Expenses. Employee shall be reimbursed weekly against expense
reports for ordinary and necessary expenses incurred in the performance of her
duties.
5. TERMINATION.
5.1 Events of Termination. This Agreement may be terminated upon the
occurrence of any one of the following events:
(a) Voluntary. Employee may terminate this Agreement at any time during
the term of this Agreement by giving two weeks' prior written notice of
termination to the Company.
(b) Involuntary Without Cause. The Company may terminate this Agreement
at any time during the term of this Agreement by giving 30 days' prior
written notice of termination to the Employee.
(c) Death or Disability. This Agreement shall automatically terminate
upon the death or permanent disability of the Employee. For the
purposes of this Agreement, Employee shall be deemed permanently
disabled if any ailment, illness or other incapacity prevents her from
performing her duties as specified in this Agreement for a period of
three consecutive months or for an aggregate of three months in any
twelve month period from the date of this Agreement.
5.2 Consequences of Termination. In the event of the termination of
this Agreement, Employee or her estate, as the case may be, shall be entitled to
Base Salary and the Commissions earned by her prior to the date of termination
as provided herein computed on a pro rata basis to and including such date of
termination. In addition, Employee shall also be reimbursed for her reasonable
business expenses incurred prior to the date of termination.
6. NON-COMPETITION; INVENTIONS.
6.1 Definitions. For purposes of this Section 6, the following words
and phrases have the meanings ascribed to them, respectively.
3
<PAGE>
Dara Lynn Horner
Employment Agreement
November 16, 1998
(a) "Confidential Information" means all formulas, processes, customer
lists, computer user identifiers and passwords, and all purchasing,
engineering, accounting, marketing and other information that is
proprietary to the Company and not generally known or readily
ascertainable by proper means, relating to research, development,
manufacture or sale of the Company's products, as well as formulas,
processes and other information received by the Company from third
parties under an obligation of secrecy. All information disclosed to
Employee or to which Employee has access during the period of her
employment, which she has reasonable basis to believe to be
Confidential Information, or which is treated by the Company as being
Confidential Information, shall be presumed to be Confidential
Information.
(b) "Inventions" means all formulas, processes, discoveries,
improvements, ideas and works of authorship, whether patentable or
copyrightable or not, which Employee learns, has access to, has a part
in developing, first conceives or first reduces to practice alone or
with others (1) that are developed on the Company's time, or (2) that
relate directly to the Company's business or actual or anticipated
research, or (3) for which any of the Company's property, including
Confidential Information, is used or (4) that result from any of
Employee's work for the Company.
6.2 Disclosure and Assignment. Except as provided elsewhere in this
Agreement, Employee shall treat as for the Company's sole benefit and fully and
promptly disclose to the Company, without additional compensation, all ideas,
discoveries, inventions and improvements, whether patentable or not, which,
while the Employee is employed by the Company, are made, conceived or reduced to
practice by Employee, alone or with others, during or after usual working hours,
either on or off the job, and Employee hereby assigns to the Company all such
ideas, discoveries, inventions and improvements to be the Company's exclusive
property.
6.3 Further Documents. Employee will acknowledge and deliver promptly
without charge all documents to the Company, and will do such other acts as may
be necessary in the Company's opinion to obtain and maintain patents (including
divisional, reissued or extended Letters Patent) or copyrights and to vest the
entire right and title in the Company to such patents, copyrights and Inventions
in all countries.
4
<PAGE>
Dara Lynn Horner
Employment Agreement
November 16, 1998
6.4 Confidentiality. Employee will not use or disclose any Confidential
Information, either during or after employment by the Company, except as
required by her duties to the Company, and Employee acknowledges and understands
that the obligation to maintain the confidentiality of the Company's
Confidential Information is unconditional and shall not be excused by any
conduct on the part of the Company except its prior voluntary disclosure of the
information. Upon termination of employment, Employee agrees that (a) all
Confidential Information, including all copies, excerpts and summaries in her
possession or control (whether prepared by the Company, the Employee or others),
and also all other Company property, including keys, credit cards, software,
reports and the like, shall be left with the Company and (b) Employee will stop
use of all Confidential Information. Employee shall not at any time during the
term of this Agreement or thereafter, or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation
in any manner whatsoever any information concerning any matters affecting or
relating to the business of the Company, including without limiting the
generality of the foregoing, any of its customers, the prices it obtains or has
obtained from the sale of, or at which it sells or has sold, its products, or
any other information concerning the business of the Company, its manner of
operation, its plans, processes, or other data without regard to whether all of
the foregoing matters will be deemed confidential, material, or important, the
parties hereto stipulating that as between them, the same are important,
material, and confidential and gravely affect the effective and successful
conduct of the business of the Company, and the Company's good will, and that
any breach of the terms of this Section 6 shall be a material breach of this
Agreement.
6.5 Limitation; First Refusal. The obligations of Section 6.2 and 6.3
shall not apply to any ideas, discoveries, inventions and improvements for which
no equipment, supplies, facility or trade secret information of the Company was
used, and which was developed entirely on Employee's own time, and (1) which
does not relate (a) directly to the business of the Company or (b) to the
Company's actual or demonstrably anticipated research or development, or (2)
which does not result from any work performed by Employee for the Company.
Employee will, nonetheless, promptly disclose all such ideas, discoveries,
inventions and improvements to the Company and offer to the Company the right of
first refusal to enter into a license or purchase agreement covering the subject
idea, discovery, invention or improvement on terms mutually agreed to by
Employee and the Company. In the event the Company and Employee cannot agree on
terms and Employee receives an offer to enter into a license or purchase
agreement with some other party on terms more favorable to that other party than
the terms offered to the Company, then the Company shall have the right and
Employee shall have the obligation to offer to the Company the idea, discovery,
invention or improvement on such favorable terms. When such an offer is made to
the Company pursuant to the preceding sentence, it must be accepted by the
Company
5
<PAGE>
Dara Lynn Horner
Employment Agreement
November 16, 1998
within thirty (30) days; or if not accepted, the right of first refusal
hereunder as to that offer shall terminate.
NOTICE: SECTION 6 HEREOF REQUIRES EMPLOYEE TO ASSIGN RIGHTS TO
INVENTIONS TO THE COMPANY OR ITS SUCCESSORS. MINNESOTA STATUTES SS. 181.78
LIMITS THE SCOPE OF AGREEMENTS REQUIRING THE INVENTIONS BE ASSIGNED TO
EMPLOYERS. THE STATUTE STATES THAT SUCH ASSIGNMENT AGREEMENTS DO NOT APPLY:
"TO AN INVENTION FOR WHICH NO EQUIPMENT, SUPPLIES, FACILITY OR TRADE
SECRET INFORMATION OF THE EMPLOYER WAS USED AND WHICH WAS DEVELOPED
ENTIRELY ON THE EMPLOYEE'S OWN TIME, AND (1) WHICH DOES NOT RELATE (a)
DIRECTLY TO THE BUSINESS OF THE EMPLOYER OR (b) TO THE EMPLOYER'S
ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (2)
WHICH DOES NOT RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE
EMPLOYER.
PLEASE NOTE THAT SECTION 6 OF THIS AGREEMENT USES THESE STATUTORY TERMS
TO DEFINE THE INVENTIONS WHICH ARE NOT AUTOMATICALLY ASSIGNED TO THE COMPANY BUT
INSTEAD ARE SUBJECT TO A RIGHT OF FIRST REFUSAL IN FAVOR OF THE COMPANY.
6.6 Assistance to the Company. Employee shall give the Company, at the
Company's expense, all assistance the Company reasonably requires to perfect,
protect, and exercise the rights to all ideas, discoveries, inventions or
improvements acquired by the Company pursuant to the assignment provisions or
the right of first refusal provisions of this Section 6.
6.7 Remedies. The Employee's obligations set forth in Section 6 of this
Agreement shall continue to be binding upon Employee, notwithstanding the
termination of her employment with the Company for any reason whatsoever. Such
obligations shall be deemed and construed as separate agreements independent of
any other provisions of this Agreement. The existence of any claim or cause of
action by Employee against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company or
any or all of such obligations. It is expressly agreed that the remedy at law
for the breach of any such obligation is inadequate and that temporary and
permanent injunctive relief shall be available to prevent the breach or any
threatened breach thereof, without the necessity of proof of actual damages.
7. NOTICES. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid, with return receipt requested.
Personal delivery to the Company shall mean personal delivery to the Chief
Executive Officer of the Company. Mailed notices
6
<PAGE>
Dara Lynn Horner
Employment Agreement
November 16, 1998
shall be addressed to the respective addresses shown below. Either party may
change its address for notice by giving written notice according to the terms of
this Section 7.
(a) If to Employee:
Dara Lynn Horner
5105 Stony Bridge Court
Minnetonka, Minnesota 55345
(b) If to the Company:
Rochester Medical Company
One Rochester Medical Drive
Stewartville, Minnesota 55976
Attention: Chief Executive Officer
8. GENERAL PROVISIONS.
8.1 Law Governing. This Agreement shall be governed by and construed
according to the laws of the State of Minnesota, except the conflicts of laws
provisions thereof.
8.2 Invalid Provisions. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and still be legal, valid or enforceable.
8.3 Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. No terms, conditions, warranties, other than those contained herein, and
no amendments or modifications hereto shall be binding unless made in writing
and signed by the parties hereto.
7
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Dara Lynn Horner
Employment Agreement
November 16, 1998
8.4 Binding Effect. This Agreement shall extend to and be binding upon
and inure to the benefit of the parties hereto, their respective heirs,
representatives, successors and assigns. This Agreement may not be assigned by
Employee.
8.5 Waiver. The waiver by either party hereto of a breach of any term
or provision of this Agreement shall not operate or be construed as a waiver of
a subsequent breach of the same provision by any party or of the breach of any
other term or provision of this Agreement.
8.7 Titles. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing any word,
clause, paragraph, or provision of this Agreement.
8.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement as of the date and year first written above.
"Employee" Rochester Medical Corporation
/s/ Dara Lynn Horner By: /s/ Anthony Conway
- --------------------------------- -----------------------------------
Dara Lynn Horner Anthony Conway,
Chief Executive Officer
8
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-10261) pertaining to the 1991 Stock Option Plan of Rochester Medical
Corporation, of our report dated October 22, 1999, with respect to the financial
statements of Rochester Medical Corporation included in this Annual Report (Form
10-K) for the year ended September 30, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 13, 1999
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Anthony J. Conway and Brian J.
Wierzbinski, with full power to each to act without the other, his or her true
and lawful attorney-in-fact and agent with full power of substitution, for him
or her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K of Rochester Medical Corporation (the
"Company") for the Company's fiscal year ended September 30, 1999, and any or
all amendments to said Annual Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, and to file the same with such other authorities as
necessary, granting unto each such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
each such attorney-in-fact and agent, or his substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on this 5th
day of December, 1999, by the following persons.
/s/ ANTHONY J. CONWAY /s/ DARNELL L. BOEHM
----------------------------- -----------------------------
Anthony J. Conway Darnell L. Boehm
/s/ BRIAN WIERZBINSKI /s/ PETER CONWAY
----------------------------- -----------------------------
Brian Wierzbinski Peter Conway
/s/ PHILIP CONWAY /s/ ROGER SCHNOBRICH
---------------------------- -----------------------------
Philip Conway Roger Schnobrich
/s/ RICHARD FRYAR
----------------------------
Richard Fryar
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 4,216,814
<SECURITIES> 9,029,296
<RECEIVABLES> 1,429,128
<ALLOWANCES> 59,466
<INVENTORY> 2,047,820
<CURRENT-ASSETS> 17,011,452
<PP&E> 14,728,958
<DEPRECIATION> 3,257,233
<TOTAL-ASSETS> 28,702,395
<CURRENT-LIABILITIES> 1,525,389
<BONDS> 0
0
0
<COMMON> 41,352,202
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,702,395
<SALES> 7,340,870
<TOTAL-REVENUES> 7,340,870
<CGS> 5,602,042
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<NET-INCOME> (4,400,723)
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