10-K 1 rochester015173_10k.txt ROCHESTER MEDICAL CORPORATION FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ 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, 2001 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 ------------------ 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 $8,301,667. The aggregate market value of voting stock held by non-affiliates based upon the closing Nasdaq sale price on December 3, 2001 was $22,192,354. Number of shares outstanding on December 3, 2001 was 5,328,500 Common Shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for its January 24, 2002 Annual Meeting of Shareholders are incorporated by reference in Part III. ================================================================================ 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 care products for the extended care and acute care markets. The Company's extended care products include a line of male external catheters for managing male urinary incontinence and a line of intermittent catheters for managing both male and female urinary retention. It also includes the FEMSOFT(R) INSERT, a soft, liquid-filled, conformable urethral insert for managing female stress urinary incontinence in adult females. The Company's acute care products include a line of standard Foley catheters and its RELEASE-NF(R) CATHETER, an antibacterial Foley catheter to reduce the incidence 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. EXTENDED 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 four models of silicone male external catheters: the ULTRAFLEX(R), POP-ON(R), WIDE BAND(R) and NATURAL(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. The NATURAL catheter is a non-adhesive version of the Company's male external catheter. 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. INTERMITTENT CATHETERS. The Company's PERSONAL CATHETERS(R) are a line of disposable intermittent catheters manufactured from silicone. The Company produces the PERSONAL CATHETERS in three lengths for male, female, and pediatric use and in multiple diameters. The Company produces three distinct versions of the PERSONAL CATHETER: the basic Standard PERSONAL CATHETER, the Antibacterial PERSONAL CATHETER and the Hydrophilic PERSONAL CATHETER. The Antibacterial PERSONAL 2 CATHETER releases an anti-infection agent to help prevent urinary tract infections. The Hydrophilic PERSONAL CATHETER becomes extremely slippery when moistened, providing a very low friction surface for ease and comfort during insertion and removal. 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 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 anatomical variations 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. ACUTE CARE PRODUCTS FOLEY CATHETERS. 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 Company also offers standard Foley catheters in a 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 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 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 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 3 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 brands owned by such companies. Private label arrangements 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 five-person direct sales force. The primary markets for the Company's products are individual hospitals and healthcare institutions, distributors and extended care facilities. 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 and intermittent 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, intermittent 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. 4 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 2001, 2000 and 1999, was $1,062,000, $1,008,000 and $1,052,000, 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 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 5 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 6 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, the FEMSOFT INSERT, and the 7 RELEASE-NF CATHETER. In order to maintain certification, the Company is required to pass annual facilities audit inspections conducted by EU inspectors. 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 has received Medicare reimbursement for the FEMSOFT INSERT, and several private health insurance plans also offer this 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 The Company supplies a number of medical product companies with products on a private label basis. EMPLOYEES As of September 30, 2001, the Company employed 156 full-time employees, of whom 122 were in manufacturing, and the remainder in marketing and sales, research and development and administration. The Company is not a party to any collective bargaining agreement and believes its employee relations are good. 8 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of December 1, 2001 are as follows: NAME AGE POSITION ---- --- -------- Anthony J. Conway 57 Chairman of the Board, Chief Executive Officer, President and Secretary David A. Jonas 37 Chief Financial Officer and Treasurer Philip J. Conway 45 Vice President, Production Technologies Richard D. Fryar 54 Vice President, Research and Development Dara Lynn Horner 43 Vice President, Marketing Martyn R. Sholtis 42 Vice President, International and Private Label Sales 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. DAVID A. JONAS has served as the Company's Treasurer since November 2000 and as its Chief Financial Officer since May 2001. From June 1, 1998 until May 2001, Mr. Jonas served as the Company's Controller. From August 1999 until October 2001, Mr. Jonas served as the Company's Director of Operations. Mr. Jonas has had principal responsibility for the Company's operational activities since August 1999, and since November 2000 has also had principal responsibility for the Company's financial activities. Prior to joining the Company, Mr. Jonas was employed in various financial, financial management and operational management positions with Polaris Industries, Inc. from January 1989 to June 1998. Mr. Jonas holds a BS degree in Accounting from the University of Minnesota and 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 joined the Company in November 1998 and serves as the Company's Vice President of Marketing. From November 1998 until November 1999, Ms. Horner served as Marketing Director for the Company's FEMSOFT INSERT product line. Ms. Horner has principal responsibility for management of the Company's marketing activities. From 1990 until joining the 9 Company in 1998, Ms. Horner was employed by Lake Region Manufacturing, Inc., a medical device manufacturer, most recently as Marketing Director. MARTYN R. SHOLTIS joined the Company in April 1992 and serves as the Company's Vice President of International and Private Label Sales. Mr. Sholtis' responsibilities include the development of the Company's relationships with the Company's private label and international customers. From 1985 to 1992 Mr. Sholtis was employed by Sherwood Medical, a company that manufactured and sold a variety of disposable medical products including urological catheters, most recently as Regional Sales Manager for the Nursing Care Division. 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, 2001. 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 2000 First Quarter ................................... $10.156 $ 6.25 Second Quarter .................................. 12.375 7.00 Third Quarter ................................... 12.25 7.625 Fourth Quarter .................................. 9.375 5.875 FISCAL 2001 First Quarter ................................... $ 7.00 $ 4.00 Second Quarter .................................. 5.766 4.188 Third Quarter ................................... 6.55 4.281 Fourth Quarter .................................. 6.25 3.50 HOLDERS As of December 3, 2001, the Company had 129 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. 10 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company as of September 30, 2001 and 2000 and for the three fiscal years ended September 30, 2001, 2000 and 1999 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, 1999, 1998 and 1997 and for the fiscal years ended September 30, 1998 and 1997 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.
FISCAL YEARS ENDED SEPTEMBER 30, ---------------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Statements of Operations Data: Net sales ....................... $ 8,302 $ 7,860 $ 7,341 $ 9,518 $ 7,615 Cost of sales ................... 6,304 6,151 5,602 6,604 4,869 -------- -------- -------- -------- -------- Gross profit ................... 1,998 1,709 1,739 2,914 2,746 Operating expenses: Marketing and selling ........... 2,545 4,589 3,944 3,191 2,210 Research and development ........ 1,062 1,008 1,052 1,384 1,451 General and administrative ...... 1,730 2,238 1,863 1,445 1,499 -------- -------- -------- -------- -------- Total operating expenses ....... 5,337 7,835 6,859 6,020 5,160 -------- -------- -------- -------- -------- Loss from operations ............. (3,339) (6,126) (5,120) (3,106) (2,414) Interest income .................. 384 595 719 848 657 Interest expense ................. -- -- -- -- (342) -------- -------- -------- -------- -------- Net loss ......................... $ (2,955) $ (5,531) $ (4,401) $ (2,258) $ (2,099) ======== ======== ======== ======== ======== Net loss per common share -- basic and diluted ............... $ (.55) $ (1.04) $ (.83) $ (.44) $ (.51) Weighted average number of common shares outstanding ....... 5,339 5,341 5,333 5,141 4,132 AS OF SEPTEMBER 30, ---------------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Balance Sheet Data: Cash, cash equivalents and marketable securities .......... $ 5,748 $ 8,859 $ 13,246 $ 16,410 $ 4,639 Working capital ................. 8,319 10,329 15,486 19,245 7,081 Total assets .................... 19,659 23,254 28,702 32,736 18,613 Long-term debt .................. -- -- -- -- -- Accumulated deficit ............. (22,661) (19,706) (14,175) (9,774) (7,516) Total shareholders' equity ...... $ 18,455 $ 21,573 $ 27,177 $ 30,918 $ 17,181
11 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 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. 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, ------------------------------ 2001 2000 1999 ---- ---- ---- Total net sales ..................... 100% 100% 100% Cost of sales ....................... 76 78 76 ---- ---- ---- Gross margin ........................ 24 22 24 Operating expenses: Marketing and selling .............. 30 58 54 Research and development ........... 13 13 14 General and administrative ......... 21 29 26 ---- ---- ---- Total operating expenses ............ 64 100 94 Loss from operations ................ (40) (78) (70) Interest income, net ................ 5 8 10 ---- ---- ---- Net loss ............................ (35)% (70)% (60)% ==== ==== ====
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2000 NET SALES. Net sales increased 6% to $8.3 million in fiscal 2001 from $7.9 million in the prior fiscal year. Domestic sales decreased 11% compared to the prior fiscal year, with growth of 11% in ROCHESTER MEDICAL brand product sales offset by a 33% decline in sales to domestic private label customers, primarily ConvaTec. International sales increased 29% in fiscal 2001 compared to the prior fiscal year, primarily due to growth in European markets. GROSS MARGIN. The Company's gross margin was 24% in fiscal 2001 compared to 22% in fiscal 2000. The Company's gross margin was substantially similar in fiscal 2001 and fiscal 2000 primarily due to relatively stable utilization of production capacity. MARKETING AND SELLING. Marketing and selling expense decreased 45% to $2.5 million in fiscal 2001 from $4.6 million in fiscal 2000. Decrease in expense is primarily due to nonrecurring expenses for the development of marketing materials related to the FEMSOFT INSERT in fiscal 2000 and a reduction in the size of the Company's sales force. RESEARCH AND DEVELOPMENT. Research and development expense increased 5% to $1.1 million in fiscal 2001 from $1.0 million in fiscal 2000. The increase in research and development expense primarily reflects increased development costs associated with the Company's hydrophilic intermittent catheter offset by a reduction in accruals for costs of the FEMSOFT INSERT clinical trials related to stage of completion. GENERAL AND ADMINISTRATIVE. General and administrative expense decreased 23% to $1.7 million in fiscal 2001 from $2.2 million in fiscal 2000. The decrease in general and 12 administrative expense is related to one-time costs in fiscal 2000 associated with the terminated transaction with Maersk Medical, as well as one-time costs related to severance expenses associated with a reduction in personnel. INTEREST INCOME. Interest income decreased 35% to $384,000 in fiscal 2001 from $595,000 in fiscal 2000. The decrease in interest income reflects the comparatively lower average level of invested cash balances in the current fiscal year due to the utilization of cash for operations and capital expenditures as well as generally lower interest rates in fiscal 2001. FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 NET SALES. Net sales increased 7% to $7.9 million in fiscal 2000 from $7.3 million in the prior fiscal year. Domestic sales were flat compared to the prior fiscal year, with growth of 17% in ROCHESTER MEDICAL brand product sales offset by a 13% decline in sales to domestic private label customers, primarily Mentor and ConvaTec. International sales increased 18% in fiscal 2000 compared to the prior fiscal year, primarily due to growth in European markets. GROSS MARGIN. The Company's gross margin was 22% in fiscal 2000 compared to 24% in fiscal 1999. The fiscal 2000 margin primarily reflects costs associated with continuing underutilized production capacity. 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 16% to $4.6 million in fiscal 2000 from $3.9 million in fiscal 1999. The increase in expense is due to promotional activities for the FEMSOFT INSERT. The Company anticipates that marketing and selling expenses will decrease in fiscal 2001 because fiscal 2000 included nonrecurring expenses for the development of marketing materials related to the FEMSOFT INSERT and due to a reduction in the size of the Company's sales force. RESEARCH AND DEVELOPMENT. Research and development expense decreased 4% to $1.0 million in fiscal 2000 from $1.1 million in fiscal 1999. 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 20% to $2.2 million in fiscal 2000 from $1.9 million in fiscal 1999. The increase in general and administrative expense in fiscal 2000 is related to one-time costs associated with the terminated transaction with Maersk Medical, as well as one-time costs related to severance expenses associated with a reduction in personnel. INTEREST INCOME. Interest income decreased 17% to $595,000 in fiscal 2000 from $719,000 in fiscal 1999. The decrease in interest income reflects the comparatively lower average level of invested cash balances in the current fiscal year due to the utilization of cash for operations and capital expenditures. 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 since its inception. The Company's cash, cash equivalents and marketable securities were $5.8 million at September 30, 2001 compared with $8.9 million at September 30, 2000. The September 30, 2001 total includes a corporate bond from Pacific Gas & Electric ("PG&E") with a carrying value of $845,000 on September 30, 2001, which matures December 24, 2001. On April 6, 2001, PG&E filed for Chapter 11 bankruptcy protection. While PG&E's management has stated their intent to pay their creditors, the numerous political and economic factors influencing the California utility market coupled with PG&E's bankruptcy filing could potentially impact the timing and/or ultimate realization of payments. However, the Company currently believes that it will realize the full value of this investment. The Company used a net $2.7 million of cash in operating activities 13 during the year. Investing activities, primarily sales of marketable securities, provided net cash of $1,354,000 in fiscal 2001, offset in part by capital expenditures of $225,000. During fiscal 2001, the Company's working capital position, excluding cash and marketable securities, increased by a net $1,102,000. Accounts receivable balances increased 49% or $492,000 during the fiscal year as a result of increased sales in the fourth quarter. Inventories increased 11% or $207,000 during the year. Other current assets decreased 29% or $74,000 as a result of the collection of miscellaneous receivables. Current liabilities decreased 28% or $478,000 during the year. 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. During fiscal 2001, the Company repurchased 10,400 shares of common stock for $46,976. 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. 14 RISK FACTORS 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, 2001, 2000 and 1999 were $3.0 million, $5.5 million and $4.4 million, respectively. The Company had an accumulated deficit of approximately $22.7 million at September 30, 2001. The Company's ability to increase revenues and achieve profitability and positive cash flow over the next several years will depend primarily upon market acceptance of, and achievement of material sales from, the Company's intermittent catheters, the RELEASE-NF CATHETER and the FEMSOFT INSERT, of which there can be no assurance. 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 through increased sales of its new products. 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. 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 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. UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS The Company has several new products, including the hydrophilic and antibacterial intermittent catheters, the RELEASE-NF CATHETER, and the FEMSOFT INSERT, that represent new methods and improvements 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 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. 15 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. POSSIBLE NEED FOR ADDITIONAL CAPITAL 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 16 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 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 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 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 17 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. 18 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, 2001, 2000 AND 1999 PAGE ----- Report of Independent Auditors ..................................... 20 Audited Financial Statements ....................................... 21-30 Balance Sheets .................................................... 21 Statements of Operations .......................................... 22 Statement of Shareholders' Equity ................................. 23 Statements of Cash Flows .......................................... 24 Notes to Financial Statements ..................................... 25 19 REPORT OF INDEPENDENT AUDITORS Shareholders Rochester Medical Corporation We have audited the accompanying balance sheets of Rochester Medical Corporation as of September 30, 2001 and 2000, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2001. 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 auditing standards generally accepted in the United States. 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, 2001, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota October 19, 2001 20 ROCHESTER MEDICAL CORPORATION BALANCE SHEETS
SEPTEMBER 30, ----------------------------- 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 1,842,796 $ 3,204,161 Marketable securities ....................................... 3,904,840 5,654,442 Accounts receivable, less allowance for doubtful accounts ($60,498 - 2001; $62,567 - 2000) ........................... 1,499,337 1,007,432 Inventories, net ............................................ 2,099,226 1,892,455 Prepaid expenses and other current assets ................... 177,105 251,328 ------------ ------------ Total current assets ......................................... 9,523,304 12,009,818 Property, plant and equipment: Land ........................................................ 194,133 169,707 Buildings ................................................... 5,260,404 5,250,720 Equipment and fixtures ...................................... 10,175,200 9,984,496 ------------ ------------ 15,629,737 15,404,923 Less accumulated depreciation ............................... (5,682,089) (4,351,235) ------------ ------------ Total property, plant and equipment .......................... 9,947,648 11,053,688 Patents, less accumulated amortization ($750,997 - 2001; $710,492 - 2000) ............................................ 188,345 190,717 ------------ ------------ Total assets ................................................. $ 19,659,297 $ 23,254,223 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................ $ 383,145 $ 799,737 Accrued compensation ........................................ 585,976 530,276 Accrued expenses ............................................ 234,991 351,192 ------------ ------------ Total current liabilities .................................... 1,204,112 1,681,205 Shareholders' equity: Common Stock, no par value: Authorized shares - 20,000,000 Issued and outstanding shares; (5,328,500 - 2001; 5,338,900 - 2000) .......................................... 41,249,003 41,279,359 Accumulated deficit .......................................... (22,660,988) (19,706,341) Unrealized loss on available-for-sale securities ............. (132,830) -- ------------ ------------ Total shareholders' equity ................................... 18,455,185 21,573,018 ------------ ------------ Total liabilities and shareholders' equity ................... $ 19,659,297 $ 23,254,223 ============ ============
SEE ACCOMPANYING NOTES. 21 ROCHESTER MEDICAL CORPORATION STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Net sales ......................................... $ 8,301,667 $ 7,860,132 $ 7,340,870 Cost of sales ..................................... 6,304,173 6,151,195 5,602,042 ----------- ----------- ----------- Gross profit ...................................... 1,997,494 1,708,937 1,738,828 Operating expenses: Marketing and selling ............................ 2,545,284 4,588,874 3,943,589 Research and development ......................... 1,061,985 1,008,431 1,052,090 General and administrative ....................... 1,729,261 2,237,985 1,863,194 ----------- ----------- ----------- Total operating expenses .......................... 5,336,530 7,835,290 6,858,873 Loss from operations .............................. (3,339,036) (6,126,353) (5,120,045) Other income (expense): Interest income .................................. 384,389 595,208 719,322 ----------- ----------- ----------- Net loss .......................................... $(2,954,647) $(5,531,145) $(4,400,723) =========== =========== =========== Net loss per common share -- basic and diluted .... $ (.55) $ (1.04) $ (.83) =========== =========== =========== Weighted average number of common shares outstanding ...................................... 5,338,541 5,341,243 5,332,868 =========== =========== ===========
SEE ACCOMPANYING NOTES. 22 ROCHESTER MEDICAL CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK UNREALIZED ----------------------------- ACCUMULATED LOSS SHARES AMOUNT DEFICIT ON SECURITIES TOTAL ------------ ------------ ------------ ------------- ------------ 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 Stock Repurchase .................. (10,600) (72,843) -- -- (72,843) Net loss for the year ............. -- -- (5,531,145) -- (5,531,145) ------------ ------------ ------------ ------------ ------------ Balance at September 30, 2000 ...... 5,338,900 41,279,359 (19,706,341) -- 21,573,018 Net loss for the year ............. -- -- (2,954,647) -- (2,954,647) Unrealized loss on available-for-sale securities ....................... -- -- -- (132,830) (132,830) ------------ ------------ ------------ ------------ ------------ Subtotal -- comprehensive loss ............................. (3,087,477) Stock Repurchase .................. (10,400) (46,976) -- -- (46,976) Valuation of stock options granted for services ............. -- 16,620 -- -- 16,620 ------------ ------------ ------------ ------------ ------------ Balance at September 30, 2001 ...... 5,328,500 $ 41,249,003 $(22,660,988) $ (132,830) $ 18,455,185 ============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES. 23 ROCHESTER MEDICAL CORPORATION STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 30, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Net loss ............................................... $ (2,954,647) $ (5,531,145) $ (4,400,723) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................... 1,371,359 1,162,978 837,331 Valuation of stock options granted for services ....... 16,620 -- -- Changes in operating assets and liabilities: Accounts receivable .................................. (491,905) 362,230 585,386 Inventories .......................................... (206,771) 155,365 161,779 Other current assets ................................. 74,223 96,532 141,141 Accounts payable ..................................... (416,592) 110,262 (76,829) Other current liabilities ............................ (60,501) 45,554 (215,803) ------------ ------------ ------------ Net cash used in operating activities .................. (2,668,214) (3,598,224) (2,967,718) INVESTING ACTIVITIES Capital expenditures ................................... (224,814) (675,965) (798,285) Patents ................................................ (38,133) (40,475) (58,081) Purchase of marketable securities ...................... (7,285,274) (23,570,342) (54,892,037) Sales and maturities of marketable securities .......... 8,902,046 26,945,196 59,408,013 ------------ ------------ ------------ Net cash provided by investing activities .............. 1,353,825 2,658,414 3,659,610 FINANCING ACTIVITIES Sale (purchase) of Common Stock ........................ (46,976) (72,843) 660,000 ------------ ------------ ------------ Net cash provided by (used in) financing activities ............................................ (46,976) (72,843) 660,000 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents ........................................... (1,361,365) (1,012,653) 1,351,892 Cash and cash equivalents at beginning of year ......... 3,204,161 4,216,814 2,864,922 ------------ ------------ ------------ Cash and cash equivalents at end of year ............... $ 1,842,796 $ 3,204,161 $ 4,216,814 ============ ============ ============
SEE ACCOMPANYING NOTES. 24 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. BUSINESS ACTIVITY Rochester Medical Corporation (the "Company") develops, manufactures and markets a broad line of innovative, technologically enhanced latex-free urinary continence and urine drainage care products for the home care and acute/extended care markets. The Company currently manufactures and markets standard continence care products, including male external catheters, Foley catheters and intermittent catheters and innovative and technologically advanced products such as its FEMSOFT INSERT, RELEASE-NF catheter and hydrophilic intermittent catheter. 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 fair value, with unrealized gains or losses included in accumulated other comprehensive income as a separate component of shareholders' equity. At September 30, 2001 and 2000, the balance consists of corporate bonds with contractual maturities of three months to three years. The amortized cost and estimated market value of available-for-sale securities are as follows: AMORTIZED UNREALIZED ESTIMATED COST LOSS MARKET VALUE --------- ---------- ------------ September 30, 2001 ................ $4,037,670 $132,830 $3,904,840 September 30, 2000 ................ 5,654,442 -- 5,654,442 The total includes a corporate bond from Pacific Gas & Electric ("PG&E") with a carrying value of $845,000 on September 30, 2001, which matures December 24, 2001. On April 6, 2001, PG&E filed for Chapter 11 bankruptcy protection. While PG&E's management has stated their intent to pay their creditors, the numerous political and economic factors influencing the California utility market coupled with PG&E's bankruptcy filing could potentially impact the timing and/or ultimate realization of payments. However, the Company currently believes that it will realize the full value of this investment. 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 25 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. REVENUE RECOGNITION The Company recognizes revenue upon shipment of the product. 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. 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 $359,000, $1,347,000 and $779,000 for the years ended September 30, 2001, 2000 and 1999, respectively. All advertising costs are charged to operations as incurred. 26 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES Inventories are summarized as follows: SEPTEMBER 30, -------------------------- 2001 2000 ---------- ---------- Raw materials ............................. $ 675,234 $ 771,468 Work-in-process ........................... 892,736 766,466 Finished goods ............................ 631,256 452,640 Reserve for inventory obsolescence ........ (100,000) (98,119) ---------- ---------- $2,099,226 $1,892,455 ========== ========== 5. SHAREHOLDERS' EQUITY STOCK OPTIONS In February 2001, the Company's shareholders approved the 2001 Stock Incentive Plan. Under the terms of the 2001 Stock Incentive Plan, 500,000 shares are authorized for issuance pursuant to grants of incentive stock options and non-qualified options. In August 1998, the 1991 Stock Option 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 1991 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. Per the terms of the 1991 Plan, as of April 20, 2001, no new stock options may be granted under the 1991 Plan. 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:
AVERAGE SHARES WEIGHTED EXERCISE RESERVED OPTIONS PRICE PER FOR GRANT OUTSTANDING SHARE ---------- ---------- ---------- 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 Options granted ............................. (155,000) 155,000 7.84 Options canceled ............................ 124,375 (124,375) 13.34 ---------- ---------- ---------- Balance as of September 30, 2000 ............ 175,875 777,125 12.07 Options granted ............................. (404,000) 404,000 5.02 Options canceled ............................ 217,875 (217,875) 11.81 Options canceled (1991 Plan) ................ (12,750) -- -- Increase in authorized shares ............... 500,000 -- -- ---------- ---------- ---------- Balance as of September 30, 2001 ............ 477,000 963,250 $ 9.16 ========== ========== ==========
27 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY (CONTINUED) The weighted average fair value of options granted in 2001, 2000 and 1999 was $2.91, $4.90 and $7.48 per share, respectively. The exercise price of options outstanding at September 30, 2001 ranged from $4.50 to $20.00 per share as summarized in the following table:
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OUTSTANDING REMAINING EXERCISABLE EXERCISE PRICE RANGE OF EXERCISE PRICES AT 9/30/01 CONTRACTUAL LIFE AT 9/30/01 PER SHARE ------------------------ ----------- ---------------- ----------- ---------------- $0.01 -- $5.00............ 219,000 9.3 years 30,000 $ 4.94 5.01 -- 10.00 ........... 405,250 6.5 years 159,500 7.64 10.01 -- 15.00 ........... 223,000 4.8 years 178,500 13.56 15.01 -- 20.00 ........... 116,000 5.5 years 103,750 16.57 ------- ------- 963,250 6.6 years 471,750 $ 11.67 ======= =======
The number of stock options exercisable at September 30, 2001, 2000 and 1999 was 471,750, 468,625 and 367,000 at a weighted average exercise price of $11.67, $12.88 and $12.80 per share, respectively. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value 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 3.53%, 6.08% and 6.08% for fiscal 2001, 2000 and 1999, respectively; volatility factor of the expected market price of the Company's common stock of .559, .528 and .524 for fiscal 2001, 2000 and 1999, respectively; and a weighted average expected life of the option of 6.6 years, 7 years and 7 years for fiscal 2001, 2000 and 1999, respectively. 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:
YEAR ENDED SEPTEMBER 30, ------------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Pro forma net loss ........................ $ (4,308,736) $ (6,803,649) $ (5,934,181) Pro forma net loss per common share ....... $ (.81) $ (1.27) $ (1.11)
28 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, ------------------------------ 2001 2000 ------------ ------------ Deferred assets: Net operating loss carryforward ...................... $ 8,864,000 $ 7,484,000 Research and development credit carryforward ......... 202,000 164,000 Allowance for uncollectible accounts ................. 22,000 23,000 Inventory reserves ................................... 37,000 36,000 Inventory capitalization ............................. 108,000 68,000 Accrued expenses ..................................... 42,000 116,000 ------------ ------------ Subtotal ............................................. 9,275,000 7,891,000 Deferred liability: Depreciation and amortization ........................ 543,000 346,000 ------------ ------------ Net deferred income tax assets ....................... 8,732,000 7,545,000 Valuation allowance .................................. (8,732,000) (7,545,000) ------------ ------------ Net deferred income taxes ............................ $ -- $ -- ============ ============
The Company will be subject to federal income taxes when operations become profitable. The Company's net operating loss carryforwards of approximately $23,956,000 can be carried forward to offset future taxable income, subject to the limitation of Internal Revenue Code Section 382. The net operating loss carryforward will expire at different times beginning in 2005. 7. 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, 2001, 2000 and 1999, the Company incurred legal fees and expenses of approximately $24,000, $16,000 and $46,000, 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 contracts with Petersen Blacksmith Company for the fabrication of customized, proprietary manufacturing equipment used in the Company's automated production lines. During 2001, 2000 and 1999, the Company paid Petersen Blacksmith Company the sum of $20,000, $56,000 and $46,000, respectively. Michael Petersen, the proprietor of Petersen Blacksmith 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. 29 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. SIGNIFICANT CUSTOMERS Significant customers, measured as a percentage of sales, are summarized as follows:
SEPTEMBER 30, ------------------------ 2001 2000 1999 ---- ---- ---- Significant customers: ConvaTec ....................................... 6% 16% 16% Hollister ...................................... 8 9 7 Maersk ......................................... 10 15 18 Mentor ......................................... 1 1 10 ---- ---- ---- Total ............................................ 25% 41% 51% ==== ==== ====
9. EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan covering employees meeting certain eligibility requirements. The Company currently does not match employee contributions. 10. QUARTERLY RESULTS (UNAUDITED) Summary data relating to the results of operations for each quarter of the years ended September 30, 2001 and 2000 follows (in thousands, except per share amounts):
THREE MONTHS ENDED -------------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ Fiscal year 2001 Net sales ......................... $ 1,856 $ 2,103 $ 2,152 $ 2,191 Gross profit ...................... 563 504 378 552 Loss from operations .............. (958) (756) (846) (779) Net Loss .......................... (833) (652) (764) (706) Net Loss per common share ........ $ (.16) $ (.12) $ (.14) $ (.13) Fiscal year 2000 Net sales ......................... $ 2,008 $ 2,046 $ 2,111 $ 1,695 Gross profit ...................... 483 446 492 288 Loss from operations .............. (1,499) (1,413) (1,500) (1,714) Net Loss .......................... (1,334) (1,266) (1,352) (1,579) Net Loss per common share ........ $ (.25) $ (.24) $ (.25) $ (.30)
30 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, 2001, 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, 2001. 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, 2001. 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, 2001. 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, 2001 and 2000. (ii) Statements of Operations for the years ended September 30, 2001, 2000 and 1999. (iii) Statement of Shareholders' Equity for the years ended September 30, 2001 and 2000. (iv) Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999. (v) Notes to financial statements at September 30, 2001. (a)(2) Financial Statement Schedules. Schedule II -- Valuation and Qualifying Accounts Financial statement schedules other than those listed have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes. (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). 31 3.3 Amendment to Restated Bylaws of the Company. (Incorporated by reference to Exhibit 4.3 of Registrant's Registration Statement on Form S-2, Registration Number 33-97788). 4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.4 of Registrant's Annual Report on Form 10-KSB for fiscal year ended September 30, 1995). 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 Change of Control Agreement dated November 21, 2000, between the Company and Anthony J. Conway. (Incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000). 10.7 Change of Control Agreement dated November 21, 2000, between the Company and Dara Lynn Horner. (Incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000). 10.8 Employment Agreement, dated November 16, 1998 between the Company and Dara Lynn Horner. (Incorporated by reference to Exhibit 10.8 of Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1999.) 10.9 Change of Control Agreement dated November 21, 2000, between the Company and Martyn R. Sholtis. (Incorporated by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000). 10.10 Change of Control Agreement dated November 21, 2000, between the Company and David A. Jonas. (Incorporated by reference to Exhibit 10.10 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000). 32 10.11 The Company's 2001 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-8, Registration Number 333-62592). 23 Consent of Ernst & Young LLP.* 24 Power of Attorney* -------------------------- * Filed herewith. (c) Registrant filed no Report on Form 8-K during its fourth fiscal quarter. 33 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 12, 2001 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/ DAVID A. JONAS Chief Financial Officer and Treasurer ----------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) David A. Jonas * 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 * Director ----------------------------- Benson Smith *By /s/ DAVID A. JONAS Dated: December 12, 2001 ----------------------------- David A. Jonas ATTORNEY-IN-FACT 34 ROCHESTER MEDICAL CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
---------------------------------------------------------------------------------------------------------- COL. A. COL. B COL. C COL. D COL. E ---------------------------------------------------------------------------------------------------------- ADDITIONS ---------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES -- DESCRIBE -- DESCRIBE PERIOD ----------- ---------- ---------- -------------- ----------- ---------- Year ended September 30, 2001: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ....................... $ 62,567 $ 3,000 -- $ 5,069(1) $ 60,498 Allowance for inventory obsolescence ................... 98,118 4,615 -- 2,733(2) 100,000 Allowance for inventory valuation ...................... 200,849 -- -- 69,359(3) 131,490 Year ended September 30, 2000: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ....................... $ 59,466 $ 12,000 -- $ 8,899(1) $ 62,567 Allowance for inventory obsolescence ................... 108,729 14,000 -- 24,611(2) 98,118 Allowance for inventory valuation ...................... -- 200,849(3) -- -- 200,849 Year ended September 30, 1999: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ....................... $ 50,000 $ 10,000 -- $ 534(1) $ 59,466 Allowance for inventory obsolescence ................... 50,034 60,000 -- 1,305(2) 108,729 Allowance for inventory valuation ...................... -- -- -- -- --
------------------ (1) Uncollectable accounts written off net of recoveries (2) Obsolete disposed of net of recoveries (3) Valuation of inventory at lower of cost or market INDEX TO EXHIBITS EXHIBIT PAGE ------- ---- 3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-2, Registration Number 33-97788) ...................................................... 3.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 of Registrant's Registration Statement on Form S-18, Registration Number 33-36362-C) ................................ 3.3 Amendment to Restated Bylaws of the Company. (Incorporated by reference to Exhibit 4.3 of Registrant's Registration Statement on Form S-2, Registration Number 33-97788) ..................... 4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.4 of Registrant's Annual Report on Form 10-KSB for fiscal year ended September 30, 1995) .......................... 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 Change of Control Agreement dated November 21, 2000, between the Company and Anthony J. Conway. (Incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000) .......................... 10.7 Change of Control Agreement dated November 21, 2000, between the Company and Dara Lynn Horner. (Incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000) .......................... 10.8 Employment Agreement, dated November 16, 1998 between the Company and Dara Lynn Horner. (Incorporated by reference to Exhibit 10.8 of Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1999) .......................... 10.9 Change of Control Agreement dated November 21, 2000, between the Company and Martyn R. Sholtis. (Incorporated by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000) .......................... EXHIBIT PAGE ------- ---- 10.10 Change of Control Agreement dated November 21, 2000, between the Company and David A. Jonas. (Incorporated by reference to Exhibit 10.10 of the Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 2000) .......................... 10.11 The Company's 2001 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-8, Registration Number 333-62592) .................... 23 Consent of Ernst & Young LLP* .................................. 24 Power of Attorney* .............................................