-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GO93oyqq3jaPgTw3GBnWc7fUlPRqed9689qqU/qiywoZtG9IuAW6aIsCz1vDXNgu 0sbNE85TlRgcu5MNi2I2Kg== 0001047469-97-002633.txt : 19971105 0001047469-97-002633.hdr.sgml : 19971105 ACCESSION NUMBER: 0001047469-97-002633 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971104 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971104 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCHESTER MEDICAL CORPORATION CENTRAL INDEX KEY: 0000868368 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411613227 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-18933 FILM NUMBER: 97707618 BUSINESS ADDRESS: STREET 1: ONE ROCHESTER MEDICAL DR CITY: STEWARTVILLE STATE: MN ZIP: 55976 BUSINESS PHONE: 5075339600 MAIL ADDRESS: STREET 1: ONE ROCHESTER MEDICAL DR CITY: STEWARTVILLE STATE: MN ZIP: 55976 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): November 4, 1997 ROCHESTER MEDICAL CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Minnesota 0-18933 41-1613227 - ---------------------------- ------------ ------------------- (State or other jurisdiction (Commission (IRS employer of incorporation) file number) identification No.) One Rochester Medical Drive, Stewartville, Minnesota 55976 ---------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (507) 533-9600 -------------- Item 5. OTHER EVENTS. On October 15, 1997, Ernst & Young LLP, Rochester Medical Corporation's independent auditors, issued their report on the Company's financial statements for the fiscal year ended September 30, 1997. A copy of these financial statements and such auditors' report is filed herewith as Exhibit 99.1, which exhibit is hereby incorporated by reference in this Report as though set forth in full herein. Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (c) Exhibits. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. 99.1 Financial Statements and Auditors' Report for Fiscal Year Ended September 30, 1997. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: November 3, 1997 ROCHESTER MEDICAL CORPORATION By: /s/ ANTHONY J. CONWAY ---------------------------------- Anthony J. Conway President, Chief Executive Officer and Secretary EX-23.1 2 EXH. 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the filing of our Report as Exhibit 99.1 to the Company's Current Report on Form 8-K dated November 4, 1997 and to its incorporation by reference in the Company's Registration Statement on Form S-2, Registration Number 333-36605 and in the Company's Registration Statement on Form S-8, Registration Number 333-10261 pertaining to the Company's 1991 Stock Option Plan. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota November 4, 1997 EX-27 3 FDS
5 YEAR SEP-30-1997 JUL-01-1997 SEP-30-1997 1,191,428 3,447,461 2,029,194 62,000 1,653,733 8,513,601 11,625,414 1,856,980 18,613,373 1,432,400 0 0 0 24,697,199 0 18,613,373 7,615,439 7,615,439 4,869,646 10,029,972 0 (2,414,533) 341,753 0 0 0 0 0 0 (2,098,664) (0.51) (0.51)
EX-99.1 4 EXH. 99.1 REPORT OF INDEPENDENT AUDITORS Shareholders Rochester Medical Corporation We have audited the accompanying balance sheets of Rochester Medical Corporation as of September 30, 1996 and 1997, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rochester Medical Corporation at September 30, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Minneapolis, Minnesota October 15, 1997 1 ROCHESTER MEDICAL CORPORATION BALANCE SHEETS
SEPTEMBER 30, -------------------------- 1996 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................. $ 8,394,607 $ 1,191,428 Marketable securities...................... 9,013,522 3,447,461 Accounts receivable, less allowance for doubtful accounts ($50,000-- 1996; $62,000--1997)........................... 1,513,577 1,967,194 Inventories................................ 1,191,283 1,653,733 Prepaid expenses and other current assets................................... 84,194 253,785 ------------ ------------ Total current assets......................... 20,197,183 8,513,601 Property, plant and equipment: Land....................................... 60,001 161,001 Building................................... 755,074 2,277,825 Construction in progress................... 1,145,866 5,409,591 Equipment and fixtures..................... 2,783,641 3,776,997 ------------ ------------ 4,744,582 11,625,414 Less accumulated depreciation.............. (1,432,257) (1,855,980) ------------ ------------ Total property, plant and equipment.......... 3,312,325 9,769,434 Patents, less accumulated amortization ($313,937--1996; $428,736--1997)........... 378,232 330,338 ------------ ------------ Total assets................................. $ 23,887,740 $ 18,613,373 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 957,951 $ 457,565 Accrued compensation....................... 74,499 382,744 Accrued clinical costs..................... 59,545 410,450 Accrued expenses........................... 243,769 181,641 ------------ ------------ Total current liabilities.................... 1,335,764 1,432,400 Long-term debt............................... 3,320,625 -- Shareholders' equity: Common Stock, no par value: Authorized shares--20,000,000 Issued and outstanding shares--4,127,500--1996; 4,133,500--1997........................ 24,648,913 24,697,199 Accumulated deficit........................ (5,417,562) (7,516,226) ------------ ------------ Total shareholders' equity................... 19,231,351 17,180,973 ------------ ------------ Total liabilities and shareholders' equity... $ 23,887,740 $ 18,613,373 ------------ ------------ ------------ ------------
See accompanying notes. 2 ROCHESTER MEDICAL CORPORATION STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, ---------------------------------------- 1995 1996 1997 ------------ ------------ ------------ Net sales......................................... $ 3,130,746 $ 5,540,408 $ 7,615,439 Cost of sales..................................... 2,447,353 3,788,584 4,869,646 ------------ ------------ ------------ Gross profit...................................... 683,393 1,751,824 2,745,793 Operating expenses: Marketing and selling........................... 858,458 1,351,443 2,209,747 Research and development........................ 358,004 1,181,569 1,450,883 General and administrative...................... 765,546 1,111,905 1,499,696 ------------ ------------ ------------ Total operating expenses.......................... 1,982,008 3,644,917 5,160,326 ------------ ------------ ------------ Loss from operations.............................. (1,298,615) (1,893,093) (2,414,533) Other income (expense): Interest income................................. 55,836 818,387 657,622 Interest expense................................ (68,238) (285,166) (341,753) ------------ ------------ ------------ Net loss.......................................... $ (1,311,017) $ (1,359,872) $ (2,098,664) ------------ ------------ ------------ ------------ ------------ ------------ Net loss per common share......................... $ (.49) $ (.35) $ (.51) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding..................................... 2,681,510 3,866,764 4,131,600 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. 3 ROCHESTER MEDICAL CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK ACCUMULATED -------------------------- DEFICIT SHARES AMOUNT (DEDUCTION) TOTAL ------------ ------------ ------------- ------------- Balance September 30, 1994........................ 2,664,000 $ 7,561,518 $ (2,746,673) $ 4,814,845 Exercise of common stock warrants............... 60,000 168,000 -- 168,000 Net loss for the year........................... -- -- (1,311,017) (1,311,017) ------------ ------------ ------------- ------------- Balance September 30, 1995........................ 2,724,000 7,729,518 (4,057,690) 3,671,828 Common stock issued in public offering.......... 1,323,500 16,199,395 -- 16,199,395 Exercise of common stock warrants............... 80,000 720,000 -- 720,000 Net loss for the year........................... -- -- (1,359,872) (1,359,872) ------------ ------------ ------------- ------------- Balance at September 30, 1996..................... 4,127,500 24,648,913 (5,417,562) 19,231,351 Exercise of common stock options................ 6,000 48,286 -- 48,286 Net loss for the year........................... -- -- (2,098,664) (2,098,664) ------------ ------------ ------------- ------------- Balance at September 30, 1997..................... 4,133,500 $ 24,697,199 $ (7,516,226) $ 17,180,973 ------------ ------------ ------------- ------------- ------------ ------------ ------------- -------------
See accompanying notes. 4 ROCHESTER MEDICAL CORPORATION STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- OPERATING ACTIVITIES Net loss............................................................. $ (1,311,017) $ (1,359,872) $ (2,098,664) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................................... 345,466 477,682 538,523 Changes in operating assets and liabilities: Accounts receivable............................................ (33,734) (761,353) (453,617) Inventories.................................................... 201,892 (425,139) (462,450) Other current assets........................................... (193,110) 295,272 (169,591) Accounts payable............................................... 52,584 753,622 (500,386) Other current liabilities...................................... 2,424 126,474 597,022 ------------- ------------- ------------- Net cash used in operating activities................................ (935,495) (893,314) (2,549,163) INVESTING ACTIVITIES Capital expenditures................................................. (224,256) (1,725,841) (6,880,833) Patents.............................................................. (93,249) (82,452) (66,905) Purchase of marketable securities.................................... (1,888,217) (17,220,523) (18,388,824) Sales and maturities of marketable securities........................ 1,553,815 9,815,605 23,954,885 ------------- ------------- ------------- Net cash used in investing activities................................ (651,907) (9,213,211) (1,381,677) FINANCING ACTIVITIES Proceeds from note payable........................................... 3,000,000 -- -- Interest expense added to note payable............................... 35,625 285,000 341,826 Proceeds from sale of common stock................................... -- 16,199,395 48,286 Payments on long-term debt........................................... (415,665) -- (3,662,451) Exercise of common stock warrants.................................... 168,000 720,000 -- ------------- ------------- ------------- Net cash provided by (used in) financing activities.................. 2,787,960 17,204,395 (3,272,339) ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents..................... 1,200,558 7,097,870 (7,203,179) Cash and cash equivalents at beginning of period..................... 96,179 1,296,737 8,394,607 ------------- ------------- ------------- Cash and cash equivalents at end of period........................... $ 1,296,737 $ 8,394,607 $ 1,191,428 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes. 5 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. BUSINESS ACTIVITY Rochester Medical Corporation (the "Company") develops, manufactures and markets innovative urinary continence care products for urinary dysfunction management and urine drainage management. The Company currently manufactures and markets a broad line of functionally and technologically enhanced latex-free versions of standard continence care products, including male external catheters, Foley catheters and intermittent catheters. The Company is also developing innovative and technologically advanced products designed to provide clinically and commercially attractive solutions to continence care needs. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. MARKETABLE SECURITIES Marketable securities are classified as available for sale and consist of US Treasury Bills and certificates of deposit. At September 30, 1996 and 1997, the market value of marketable securities approximates cost. MANUFACTURING AND SALES The Company manufactures and sells its products to a full range of companies in the medical industry on a worldwide basis. There is a concentration of sales to larger medical wholesalers and distributors. The Company performs periodic credit evaluations of its customers' financial condition. The Company requires irrevocable letters of credit on sales to certain foreign customers. Receivables generally are due within 30 days. Credit losses relating to customers consistently have been within management expectations. INVENTORIES Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is based on estimated useful lives of 4-35 years computed using the straight-line method. PATENTS Capitalized costs include costs incurred in connection with making patent applications for the Company's products and are amortized on a straight-line basis over eight years. The Company periodically reviews its patents for impairment of value. Any adjustment from the analysis is charged to operations. 6 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to operations as incurred. Research and development costs include clinical testing costs, certain salary and related expenses, other labor costs, materials and an allocation of certain overhead expenses. INCOME TAXES Income taxes are accounted for under the liability method. STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPAIRMENT OF LONG-LIVED ASSETS The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding during the period. Common equivalent shares from stock options and convertible debt are excluded from the computation as their effect is antidilutive. In February 1997, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 128, "Earnings Per Share". This Statement replaces the presentation of primary earnings per share (EPS) with basic EPS and also requires dual presentation of basic and diluted EPS for entities with complex capital structures. This statement is effective for financial statements for periods ending after December 15, 1997. For the year ended September 30, 1997, there is no difference between the basic loss per share under Statement No. 128 and net loss per share as reported. RECLASSIFICATIONS Certain reclassifications have been made to the 1996 financial statements to conform to the 1997 presentation. 7 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 3. ADVERTISING COSTS The Company incurred advertising expenses of $104,000, $151,000, and $185,000 for the years ended September 30, 1995, 1996 and 1997, respectively. All advertising costs are charged to operations as incurred. 4. INVENTORIES Inventories are summarized as follows:
SEPTEMBER 30, -------------------- 1996 1997 --------- --------- Raw materials........................................ $ 878,885 $1,019,021 Work-in-process...................................... 264,729 504,120 Finished goods....................................... 147,669 222,592 Reserve for inventory obsolescence................... (100,000) (92,000) --------- --------- $1,191,283 $1,653,733 --------- --------- --------- ---------
5. SHAREHOLDERS' EQUITY STOCK OPTIONS In January 1992, shareholders approved the 1991 Stock Option Plan (the Plan) in which 700,000 shares have been authorized for issuance under the Plan. Under terms of the Plan, the Board of Directors may grant employee incentive stock options equal to fair market value of the Company's Common Stock or employee non-qualified options at a price which cannot be less than 85% of the fair market value. Automatic non-employee director options are also covered under the Plan, under which 1,000 shares are granted at fair market value to non-employee directors on the date of each of the Company's Annual Meetings. In September 1995, the Board of Directors approved the 1995 Non-Statutory Stock Option Plan, which authorized the issuance of up to 50,000 shares of Common Stock. In September 1995, Medical Advisory Board members were granted options to purchase 12,000 shares of the Company's Common Stock at an exercise price of $15.75 per share. 8 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 5. SHAREHOLDERS' EQUITY (CONTINUED) Option activity is summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE RESERVED FOR OPTIONS PRICE PER GRANT OUTSTANDING SHARE ------------- ------------- ------------- Balance as of September 30, 1994.......................... 93,000 207,000 $ 8.02 Options granted......................................... (9,500) 9,500 15.50 Approval of non-statutory stock options................. 50,000 -- -- ------------- ------------- Balance as of September 30, 1995.......................... 133,500 216,500 8.35 Options granted......................................... (253,000) 253,000 14.32 Increase in authorized shares........................... 400,000 -- -- ------------- ------------- Balance as of September 30, 1996.......................... 280,500 469,500 11.57 Options granted......................................... (79,000) 79,000 17.26 Options exercised....................................... -- (6,000) 11.42 Options canceled........................................ 7,500 (7,500) 15.70 ------------- ------------- Balance as of September 30, 1997.......................... 209,000 535,000 $ 12.35 ------------- ------------- ------------- -------------
The weighted average fair value of options granted in 1996 and 1997 was $5.66 and $6.62 per share, respectively. The exercise price of options outstanding at September 30, 1997 ranged from $6.75 to $20.00 per share as summarized in the following table:
WEIGHTED WEIGHTED AVERAGE AVERAGE RANGE OF NUMBER REMAINING NUMBER EXERCISE EXERCISE OUTSTANDING CONTRACTUAL EXERCISABLE PRICE PER PRICES AT 9/30/97 LIFE AT 9/30/97 SHARE - -------------- ----------- ----------- ----------- ------------- $6.75 - $10.75 202,000 1.3 years 109,250 $ 7.93 11.00 - 15.50 222,000 3.6 years 75,500 13.76 15.75 - 20.00 111,000 4.3 years 8,000 17.41 ----------- ----------- 535,000 3.4 years 192,750 $ 10.60 ----------- ----------- ----------- -----------
The number of stock options exercisable at September 30, 1996 and 1997 was 32,750 and 105,625 at a weighted average exercise price of $8.69 and $9.75 per share, respectively. The Company has elected to follow Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value 9 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 5. SHAREHOLDERS' EQUITY (CONTINUED) method of Statement 123. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.51%; volatility factor of the expected market price of the Company's common stock of .34 and a weighted average expected life of the option of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information is as follows:
YEAR ENDED SEPTEMBER 30, 1996 1997 ----------- ---------- Pro forma net loss................................. ($1,516,751) $(2,441,970) Pro forma net loss per common share................ $ (.39) $ (.59)
These pro forma amounts may not be indicative of future years' amounts since the statement provides for a phase in of option values beginning with those granted in fiscal 1996. WARRANTS In connection with the November 1995 public offering, the Company sold to the underwriters for a nominal purchase price five year warrants to purchase 75,000 shares of Common Stock at $14.85 per share. The warrants can be exercised any time through November 2000. 10 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 6. INCOME TAXES Deferred income taxes are due to temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred income taxes are as follows:
SEPTEMBER 30, ---------------------------- 1996 1997 ------------- ------------- Deferred assets: Net operating loss............................................ $ 2,123,000 $ 2,710,000 Allowance for uncollectible accounts.......................... 17,000 21,000 Inventory reserves............................................ 34,000 31,000 Accrued expenses.............................................. 4,000 17,000 ------------- ------------- Subtotal........................................................ 2,178,000 2,779,000 Deferred liability: Depreciation and amortization................................. 315,000 318,000 ------------- ------------- Net deferred income tax assets.................................. 1,863,000 2,461,000 Valuation allowance............................................. (1,863,000) (2,461,000) ------------- ------------- Net deferred income taxes....................................... $ -- $ -- ------------- ------------- ------------- -------------
The Company will be subject to federal income taxes when operations become profitable. The Company's tax operating loss carryforwards of approximately $7,970,000 can be carried forward to offset future taxable income, limited due to changes in ownership under the net operating loss limitation rules, and expire in years 2003 through 2012. 7. LONG-TERM DEBT Long-term debt consisted of a $3 million convertible loan and accrued interest with ConvaTec (see Note 12). The loan was unsecured and was due August 11, 2000. Interest on the loan was payable at a rate of 9.75% at maturity together with the principal amount. On September 30, 1997, the Company repaid the note and accrued interest in its entirety. 8. COMMITMENTS MINNESOTA TECHNOLOGIES INCORPORATED On September 30, 1992, Minnesota Technologies Incorporated ("MTI"), a Minnesota non-profit development organization, provided the Company a grant of $100,000 for the purpose of developing the automated production of Foley catheters. Under the terms of the MTI grant, the Company has agreed to repay MTI the amount of the grant together with 8% simple interest at the rate of 2.5% of gross sales of Foley catheters. The Company has further agreed to convey to MTI all rights in any intellectual property, including the manufacturing equipment and any patents issued with respect thereto, upon occurrence of any of the following events: 11 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 8. COMMITMENTS (CONTINUED) 1. The Company dissolves, becomes inoperative, or abandons the intellectual property relating to the automated production of Foley catheters: or 2. More than 25% of its manufacturing or production facilities relating to Foley catheters are located outside the State of Minnesota before August 17, 1999. The grant was accounted for as a reduction in the cost of the equipment. Royalties earned by MTI are charged to operations as royalty expense. Royalty expense totaled $33,000 in 1995, $53,000 in 1996 and $23,000 in 1997. The Company has repaid the grant and accrued interest as of September 30, 1997. CITY OF STEWARTVILLE On September 28, 1995, the Company and the City of Stewartville, Minnesota ("City") entered into a Contract for Private Development ("City Agreement") and agreed to enter into an Assessment Agreement and Assessment Certification ("Assessment Agreement") relating to the development of the Company's proposed manufacturing facility. In connection therewith, the Company also agreed to use its best efforts to create 55 new full-time jobs in the City by December 31, 1998, and to pay real estate taxes without contest in accordance with the Assessment Agreement. Under the City Agreement, the City sold to the Company a 20 acre parcel of land for $60,000, and installed roads, utilities and certain public improvements benefiting the land. The Company has constructed a new 52,000 square foot facility. On December 23, 1996, the Company purchased an additional 8.38 acre parcel of land from the City for $100,000 to be used for future expansion of manufacturing facilities. At September 30, 1997, the Company had commitments of approximately $2,000,000 for capital expenditures, primarily related to new production facilities. 9. LEASES Rent expense from operating leases for the years ended September 30, 1995, 1996, and 1997 was $57,000, $60,000, and $69,000, respectively. 10. RELATED PARTY TRANSACTIONS The Company's corporate legal counsel is the brother-in-law of the CEO and President, the Vice President of Operations and of a member of the board of directors of the Company. During the years ended September 30, 1995, 1996, and 1997 the Company incurred legal fees and expenses of approximately $124,000, $83,000, and $90,000, respectively to such counsel for services rendered in connection with litigation and for general legal services. Management believes the fees paid for the services rendered to the Company were on terms at least as favorable to the Company as could have been obtained from an unrelated party. The chairman and chief executive officer of Mentor Corporation is the brother of the CEO and President, the Vice President of Operations, and a member of the board of directors of the Company (see Note 11). The Company entered into an agreement with Halcon, Inc. to purchase office furniture valued for $402,000. A payment of $86,000 was made in fiscal 1996 and $316,000 was paid in fiscal 1997. The chief executive officer of Halcon, Inc. is a director of the Company and the brother of the CEO and President and the Vice President of Operations of the Company. Management believes that the terms of the agreement are at least as favorable to the Company as could have been obtained from an unrelated party. 12 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 11. MENTOR AGREEMENT AND RELATED LITIGATION In April 1991, the Company entered into an exclusive license, sales and distribution agreement ("MEC Agreement") for external catheters with Mentor Corporation (Mentor) for which the Company received a non-refundable license fee of $500,000. The agreement granted Mentor sales exclusivity for silicone external catheters in North and South America, Africa, Australia, and Western Europe and a patent license permitting Mentor to manufacture the catheter itself. On September 11, 1995, the Company and Mentor entered into a settlement agreement to conclude all pending litigation among Mentor, the Company and certain of the Company's officers. As part of the settlement agreement, the Company waived certain monetary claims against Mentor, which resulted in a write-off of approximately $115,000 of accounts receivable from Mentor in the fourth quarter of fiscal 1995. The Company previously wrote off $100,000 of Mentor accounts receivable in the third quarter of fiscal 1995. The settlement agreement also provided that Mentor purchase all of the Company's inventory of silicone male external catheters held for sale to Mentor at an agreed upon transfer price. This sale resulted in approximately $160,000 of net sales to Mentor during the fourth quarter of fiscal 1995. As part of the settlement agreement, Mentor's sales exclusivity was terminated. 12. CONVATEC AGREEMENT On August 11, 1995, the Company entered into a Distribution and Co-Development Agreement (the "Distribution Agreement") with ConvaTec, a division of E.R. Squibb & Sons, Inc., a wholly-owned subsidiary of Bristol-Myers Squibb Company ("ConvaTec"), for the purpose of marketing and distributing the Company's incontinence and urological devices. Under the Distribution Agreement, the Company has granted ConvaTec, subject to obligations and limitations imposed by the Company's other distribution agreements, worldwide rights to market the Company's current products and products in development. The Company is obligated to offer ConvaTec rights of first and last refusal to market all products developed after the date of the Distribution Agreement. Under the Distribution Agreement, the Company retains worldwide marketing rights to its products under the Rochester Medical brand. The Distribution Agreement has a five year term expiring August 31, 2000. ConvaTec may, at its option, renew the Distribution Agreement for an additional five year term, and thereafter, renew the Distribution Agreement for up to five additional one year renewal periods. A party may terminate the Distribution Agreement only upon the other party's material breach of the Distribution Agreement, bankruptcy or insolvency, or an inability to perform under the Distribution Agreement for a period of more than six months. The Distribution Agreement may not be terminated in the event that a third party acquires the Company. The Company has agreed to indemnify ConvaTec against certain liabilities, including any patent infringement claims by third parties. 13 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 13. SIGNIFICANT CUSTOMERS Significant customers, measured as a percentage of sales, are summarized as follows:
SEPTEMBER 30, ------------------------------------- 1995 1996 1997 ----- ----- ----- Significant customers: Allegiance Euromedical................................................. 19% 19% 4% ConvaTec............................................................... 5% 12% 24% Hollister.............................................................. 25% 12% 10% Mentor................................................................. 14% 29% 30% -- -- -- Total.................................................................... 63% 72% 68% -- -- -- -- -- --
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