Back to GetFilings.com
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, 2002
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 $11,075,496.
The aggregate market value of voting stock held by non-affiliates based upon the
closing Nasdaq sale price on November 11, 2002 was $28,470,191.
Number of shares outstanding on December 2, 2002 was 5,329,750 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its January 30, 2003 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 conventional male external
catheters. The full length and forward placement of the Wide Band adhesive 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 and patented forward-placement of the adhesive 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 Catheter provides site-specific delivery of nitrofurazone, a drug that
has been proven effective in preventing 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. All of the Personal Catheter designs are latex-free and PVC-free,
eliminating the allergen, toxin or disposal concerns commonly associated with
latex and PVC catheters.
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 silicone 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
-2-
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 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.
-3-
The Company sells its products in the United States under the Rochester
Medical brand name through a six-person direct sales force. The primary markets
for the Company's products are distributors, extended care facilities and
individual hospitals and healthcare institutions.
The Company relies on arrangements with medical product companies and
independent distributors to sell the Company's products in Europe and other
international markets. These arrangements are conducted under the Rochester
Medical brand name and under brands controlled by the medical product companies.
MANUFACTURING
The Company designs and builds custom equipment to implement its
manufacturing technologies and processes. The Company's manufacturing facilities
are located in Stewartville, Minnesota. The Company produces its Foley catheters
on one production line and its male external catheters on other lines. The
Company has constructed a separate manufacturing facility to house its liquid
encapsulation manufacturing operations, and has installed the FemSoft Insert and
intermittent catheter 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
Food and Drug Administration's ("FDA") 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.
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.
-4-
Research and development expense for fiscal years 2002, 2001 and 2000, was
$835,000, $1,062,000 and $1,008,000, 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, and its ability to attract and retain skilled
employees, 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 is 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, Mentor, Astra Tech AB and Coloplast. 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
-5-
relies upon trade secrets, know-how and continuing technological innovations to
develop and maintain its competitive position.
The Company owns 19 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 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.
-6-
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 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 is
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. The Company currently expects that
this clinical study will be completed within the next year. However, 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
-7-
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 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
-8-
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, 2002, the Company employed 177 full-time employees, of
whom 137 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 1, 2002 are as
follows:
NAME AGE POSITION
- ---- --- --------
Anthony J. Conway 58 Chairman of the Board, Chief Executive Officer,
President and Secretary
David A. Jonas 38 Chief Financial Officer and Treasurer
Philip J. Conway 46 Vice President, Production Technologies
Richard D. Fryar 55 Vice President, Research and Development
Dara Lynn Horner 44 Vice President, Marketing
Martyn R. Sholtis 43 Corporate Vice President
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
-9-
that have been assigned to the Company, of which to date 19 have resulted in
issued United States patents and 36 have resulted in issued foreign 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 and had
principal responsibility for the Company's operational activities. Since
November 2000, Mr. Jonas has 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. Since November 2001, he has had principal
responsibility for the Company's operational 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 19 have resulted in issued United States patents
and 36 have resulted in issued foreign 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 19 have resulted in
issued United States patents and 36 have resulted in issued foreign 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 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 Corporate Vice President. Mr. Sholtis is responsible for all
international and private label sales and for corporate business development
activities. 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.
-10-
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, 2002.
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 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
FISCAL 2002
First Quarter................................ $ 6.50 $ 4.05
Second Quarter............................... 6.23 4.90
Third Quarter................................ 6.25 4.50
Fourth Quarter............................... 7.85 5.35
-11-
EQUITY COMPENSATION PLAN INFORMATION AS OF SEPTEMBER 30, 2002
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
Equity compensation 1,017,000 $ 8.22 258,250
plans approved by
security holders(1)
Equity compensation 18,000 $13.88 32,000
plans not approved
by security
holders(2)
Total 1,035,000 $ 8.32 290,250
(1) Includes shares issuable under the Company's 1991 Stock Option Plan and 2001
Stock Incentive Plan.
(2) Includes shares issuable to persons other than full-time officers or
employees of the Company pursuant to the exercise of stock options granted under
the Company's 1995 Non-Statutory Stock Option Plan that do not qualify as
"incentive stock options" within the meaning of Section 422 of the Code.
HOLDERS
As of December 2, 2002, the Company had 133 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of September 30,
2002 and 2001 and for the three fiscal years ended September 30, 2002, 2001 and
2000 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, 2000, 1999 and 1998 and for the fiscal years ended September
30, 1999 and 1998 are derived from audited financial statements not included
herein.
-12-
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,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
Statements of Operations Data:
Net sales ................... $ 11,076 $ 8,302 $ 7,860 $ 7,341 $ 9,518
Cost of sales ............... 7,888 6,304 6,151 5,602 6,604
-------- ------- ------- ------- -------
Gross profit .............. 3,188 1,998 1,709 1,739 2,914
Operating expenses:
Marketing and selling ....... 2,196 2,545 4,589 3,944 3,191
Research and development .... 835 1,062 1,008 1,052 1,384
General and administrative .. 1,763 1,730 2,238 1,863 1,445
-------- ------- ------- ------- -------
Total operating expenses .. 4,794 5,337 7,835 6,859 6,020
-------- ------- ------- ------- -------
Loss from operations .......... (1,606) (3,339) (6,126) (5,120) (3,106)
Interest income, net .......... 212 384 595 719 848
-------- ------- ------- ------- -------
Net loss ...................... $ (1,394) $(2,995) $(5,531) $(4,401) $(2,258)
======== ======= ======= ======= =======
Net loss per common share -
basic and diluted............ $ (.26) $ (.55) $ (1.04) $ (.83) $ (.44)
Weighted average number of
common shares outstanding.... 5,329 5,339 5,341 5,333 5,141
AS OF SEPTEMBER 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash, cash equivalents and
marketable securities .. $ 4,464 $ 5,748 $ 8,859 $ 13,246 $ 16,410
Working capital .......... 8,523 8,319 10,329 15,486 19,245
Total assets ............. 19,636 19,659 23,254 28,702 32,736
Long-term debt ........... -- -- -- -- --
Accumulated deficit ...... (24,056) (22,661) (19,706) (14,175) (9,774)
Total shareholders' equity $ 17,144 $ 18,455 $ 21,573 $ 27,177 $ 30,918
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.
-13-
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,
--------------------------------
2002 2001 2000
------ ------ ------
Total net sales ............ 100% 100% 100%
Cost of sales .............. 71 76 78
------ ------ ------
Gross margin ............... 29 24 22
Operating expenses:
Marketing and selling .... 20 30 58
Research and development . 8 13 13
General and administrative 16 21 29
------ ------ ------
Total operating expenses ... 44 64 100
Loss from operations ....... (15) (40) (78)
Interest income, net ....... 2 5 8
------ ------ ------
Net loss ................... (13)% (35)% (70)%
====== ====== ======
FISCAL YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2001
Net Sales. Net sales increased 33% to $11.1 million in fiscal 2002 from
$8.3 million in the prior fiscal year. Domestic sales increased 52% compared to
the prior fiscal year, with growth of 10% in Rochester Medical brand product
sales and growth of 123% in sales to domestic private label customers.
International sales increased 15% in fiscal 2002 compared to the prior fiscal
year, primarily due to growth in European markets, with growth of 30% in
Rochester Medical brand product sales and growth of 5% in sales to international
private label customers.
Gross Margin. The Company's gross margin was 29% in fiscal 2002 compared
to 24% in fiscal 2001. The Company's increase in gross margin in fiscal 2002 was
due to increased utilization of production capacity and increased efficiencies
in manufacturing.
Marketing and Selling. Marketing and selling expense decreased 14% to $2.2
million in fiscal 2002 from $2.5 million in fiscal 2001. Decrease in expense is
primarily due to nonrecurring expenses for the development of marketing
materials related to the FemSoft Insert in fiscal 2001 and a reduction in the
size of the Company's sales force.
Research and Development. Research and development expense decreased 21%
to $0.8 million in fiscal 2002 from $1.1 million in fiscal 2001. The decrease in
research and development expense primarily reflects a reduction in costs of the
FemSoft Insert clinical trials related to stage of completion.
General and Administrative. General and administrative expense increased
2% to $1.8 million in fiscal 2002 from $1.7 million in fiscal 2001. The increase
in general and administrative expense is primarily related to an overall
increase in the level of insurance premiums, property taxes, Nasdaq fees and
fees for legal, audit and tax-related services.
-14-
Interest Income. Interest income decreased 45% to $212,000 in fiscal 2002
from $384,000 in fiscal 2001. 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 2002.
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 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.
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 $4.5
million at September 30, 2002 compared with $5.8 million at September 30, 2001.
The September 30, 2002 total includes a corporate bond from Pacific Gas &
Electric ("PG&E") with a carrying value of $920,000 on September 30, 2002. This
bond matured December 24, 2001 and, although
-15-
PG&E remains current on its interest payment obligations, the principal amount
of this bond has not yet been paid. On April 6, 2001, PG&E filed for Chapter 11
bankruptcy protection. Recently, PG&E and the State of California asked PG&E's
creditors to vote on two separate reorganization proposals. A certification of
the results of voting was filed with the U.S. Bankruptcy Court for the Northern
District of California on September 9, 2002. However, as of September 30, 2002,
the bankruptcy court had not confirmed either plan of reorganization. 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
actuality of payments. However, the Company currently believes that it will
realize the full value of this investment.
The Company used a net $741,000 of cash in operating activities during
the year. Investing activities, primarily capital expenditures, used net cash of
$694,000 in fiscal 2002.
During the fiscal quarter ended June 30, 2002, the Company entered into an
agreement with Coloplast granting Coloplast exclusive marketing and distribution
rights with respect to the Company's Release-NF Foley catheters in certain
geographic areas. Coloplast paid the Company $1,000,000 for these exclusive
rights. In accordance with generally accepted accounting principles, the Company
recognized $50,000 of this amount in fiscal 2002 and the remaining amount not
recognized in previous periods constitutes deferred revenue which will be
recognized over the term of the agreement.
During the fiscal quarter ended March 31, 2002, the Company entered into a
$1,000,000 revolving line of credit with U.S. Bank National Association. As of
September 30, 2002, the Company had no amounts outstanding under this line of
credit.
During fiscal 2002, the Company's working capital position, excluding cash
and marketable securities, increased by a net $1,488,000. Accounts receivable
balances increased 27% or $406,000 during the fiscal year as a result of
increased sales in the fourth quarter. Inventories increased 70% or $1,479,000
during the year. Other current assets increased 23% or $41,000 as a result of an
increase in miscellaneous receivables. Current liabilities increased 36% or
$438,000 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
2002, the Company did not repurchase any shares of common stock.
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
-16-
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.
CRITICAL ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower of cost or market determined using the
first-in, first-out (FIFO) method. The Company's policy is to establish an
excess and obsolete reserve for its products in excess of the expected demand
for such products. At September 30, 2002, this reserve was $100,000, which was
equal to the amount of the reserve at September 30, 2001.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts, which is
calculated by a combination of specific account identification as well as
percentages of past due balances. At September 30, 2002, this allowance was
$64,629 compared to $60,498 at September 30, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued Statement 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement 144, which replaces
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," requires long-lived assets to be measured
at the lower of carrying amount or fair value less the cost to sell. Statement
144 also broadens disposal transactions reporting related to discontinued
operations. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company will adopt Statement
144 in fiscal 2003 and does not expect the adoption to have a material impact on
the Company's financial statements.
-17-
RISK FACTORS
LIMITED REVENUES; HISTORY OF LOSSES AND POTENTIAL 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, 2002, 2001 and 2000 were $1.4 million, $3.0 million and $5.5
million, respectively. The Company had an accumulated deficit of approximately
$24.1 million at September 30, 2002. 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, there can be
no assurance that the Company will ever generate substantial revenues or achieve
or sustain profitability. Even if the Company achieves profitability in a
particular fiscal period in the future, the Company may experience net losses in
subsequent fiscal periods.
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.
DEPENDENCE ON A SMALL NUMBER OF CUSTOMERS
We depend on a relatively small number of customers for a significant
portion of our net sales. Our five largest customers in fiscal 2002 represented
approximately 41% of our total net sales. We expect to continue to depend upon a
relatively small number of customers for a significant percentage of our net
sales. Because our major customers represent such a large part of our business,
the loss of any of our major customers could negatively impact our business.
Our major customers may not continue to purchase products from us at
current levels or at all. In the past, we have lost customers due to our
customers' changes in technology preferences, customers' shifting production of
products to internal facilities and the acquisition of our customers. We may
lose customers in the future for similar reasons. We may not be able to expand
our customer base to make up any sales shortfalls if we lose a major customer.
Our
-18-
attempts to diversify our customer base and reduce our reliance on particular
customers may not be successful.
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.
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
-19-
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 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
-20-
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 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.
-21-
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's investments generally consist of debt securities with
contractual maturities of one year or less. Therefore, the Company does not
believe its operations are currently subject to significant 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, 2002, 2001 AND 2000
PAGE
----
Report of Independent Auditors.......................................... 23
Audited Financial Statements............................................ 24-36
Balance Sheets....................................................... 24
Statements of Operations............................................. 25
Statement of Shareholders' Equity.................................... 26
Statements of Cash Flows............................................. 27
Notes to Financial Statements........................................ 28
-22-
REPORT OF INDEPENDENT AUDITORS
Shareholders
Rochester Medical Corporation
We have audited the accompanying balance sheets of Rochester Medical
Corporation as of September 30, 2002 and 2001, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 2002. 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, 2002, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 2002,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 18, 2002
-23-
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
SEPTEMBER 30,
-------------
2002 2001
---- ----
ASSETS:
Current assets:
Cash and cash equivalents ............................... $ 411,618 $ 1,842,796
Marketable securities ................................... 4,052,389 3,904,840
Accounts receivable, less allowance for doubtful accounts
($64,629 - 2002; $60,498 - 2001) ..................... 1,905,442 1,499,337
Inventories, net ........................................ 3,577,931 2,099,226
Prepaid expenses and other current assets ............... 218,183 177,105
------------ ------------
Total current assets ....................................... 10,165,563 9,523,304
Property, plant and equipment:
Land .................................................... 194,133 194,133
Buildings ............................................... 5,315,002 5,260,404
Equipment and fixtures .................................. 10,680,442 10,175,200
------------ ------------
16,189,577 15,629,737
Less accumulated depreciation ........................... (6,928,052) (5,682,089)
------------ ------------
Total property, plant and equipment ........................ 9,261,525 9,947,648
Patents, less accumulated amortization ($796,264 - 2002;
$750,997 - 2001) ........................................ 209,078 188,345
------------ ------------
Total assets ............................................... $ 19,636,166 $ 19,659,297
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ........................................ $ 633,934 $ 383,145
Accrued compensation .................................... 559,779 585,976
Accrued expenses ........................................ 348,522 234,991
Deferred revenue ........................................ 100,000 --
------------ ------------
Total current liabilities .................................. 1,642,235 1,204,112
Long-term liabilities:
Deferred revenue ........................................ 850,000 --
Shareholders' equity:
Common Stock, no par value:
Authorized Shares - 20,000,000
Issued and outstanding shares; (5,329,250 - 2002;
5,328,500 - 2001) .................................... 41,253,128 41,249,003
Accumulated deficit ........................................ (24,055,793) (22,660,988)
Unrealized loss on available-for-sale securities ........... (53,404) (132,830)
------------ ------------
Total shareholders' equity ................................. 17,143,931 18,455,185
------------ ------------
Total liabilities and shareholders' equity ................. $ 19,636,166 $ 19,659,297
============ ============
See accompanying notes.
-24-
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------
2002 2001 2000
---- ---- ----
Net sales .............................. $ 11,075,496 $ 8,301,667 $ 7,860,132
Cost of sales .......................... 7,887,893 6,304,173 6,151,195
------------ ------------ ------------
Gross profit ........................... 3,187,603 1,997,494 1,708,937
Operating expenses:
Marketing and selling ............... 2,196,426 2,545,284 4,588,874
Research and development ............ 834,568 1,061,985 1,008,431
General and administrative .......... 1,763,341 1,729,261 2,237,985
------------ ------------ ------------
Total operating expenses ............... 4.794,335 5,336,530 7,835,290
Loss from operations ................... (1,606,732) (3,339,036) (6,126,353)
Other income (expense):
Interest income, net ................ 211,927 384,389 595,208
------------ ------------ ------------
Net loss ............................... (1,394,805) (2,954,647) (5,531,145)
============ ============ ============
Net loss per common share -
basic and diluted ................... $ (.26) $ (.55) $ (1.04)
============ ============ ============
Weighted average number of common shares
outstanding ......................... 5,328,531 5,338,541 5,341,243
============ ============ ============
See accompanying notes.
-25-
ROCHESTER MEDICAL CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK UNREALIZED LOSS ON
------------ ACCUMULATED AVAILABLE-FOR-SALE
SHARES AMOUNT DEFICIT SECURITIES TOTAL
------ ------ ------- ---------- -----
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
Net loss for the year .......... -- -- (1,394,805) -- (1,394,805)
Unrealized gain on
available-for-sale securities -- -- -- 79,426 79,426
---------- ------------ ------------ ------------ ------------
Subtotal - comprehensive loss .. -- -- -- -- (1,315,379)
Stock Option Exercise .......... 750 4,125 -- -- 4,125
---------- ------------ ------------ ------------ ------------
Balance at September 30, 2002 ..... 5,329,250 $ 41,253,128 $(24,055,793) $ (53,404) $ 17,143,931
========== ============ ============ ============ ============
See accompanying notes.
-26-
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net loss .......................................... (1,394,805) (2,954,647) (5,531,145)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ............... 1,291,230 1,371,359 1,162,978
Valuation of stock options granted for
services ................................. -- 16,620 --
Changes in operating assets and liabilities:
Accounts receivable ....................... (406,105) (491,905) 362,230
Inventories ............................... (1,478,705) (206,771) 155,365
Other current assets ...................... (41,078) 74,223 96,532
Accounts payable .......................... 250,789 (416,592) 110,262
Deferred revenue .......................... 950,000 -- --
Other current liabilities ................. 87,334 (60,501) 45,554
------------ ------------ ------------
Net cash used in operating activities ............. (741,340) (2,668,214) (3,598,224)
INVESTING ACTIVITIES:
Capital expenditures .............................. (559,840) (224,814) (675,965)
Patents ........................................... (66,000) (38,133) (40,475)
Purchase of marketable securities ................. (1,121,195) (7,285,274) (23,570,342)
Sales and maturities of marketable securities ..... 1,053,072 8,902,046 26,945,196
------------ ------------ ------------
Net cash provided by (used in) investing
activities ...................................... (693,963) 1,353,825 2,658,414
FINANCING ACTIVITIES:
Sale (purchase) of Common Stock ................... 4,125 (46,976) (72,843)
------------ ------------ ------------
Net cash provided by (used in) financing
activities ...................................... 4,125 (46,976) (72,843)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents... (1,431,178) (1,361,365) (1,012,653)
Cash and cash equivalents at beginning of year .... 1,842,796 3,204,161 4,216,814
------------ ------------ ------------
Cash and cash equivalents at end of year .......... $ 411,618 $ 1,842,796 $ 3,204,161
============ ============ ============
See accompanying notes.
-27-
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
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, 2002 and 2001, the balance consists of corporate bonds with
remaining contractual maturities of one month to twelve months. The amortized
cost and estimated market value of available-for-sale securities are as follows:
AMORTIZED UNREALIZED ESTIMATED
COST LOSS MARKET VALUE
---- ---- ------------
September 30, 2002 ............. 4,105,793 53,404 4,052,389
September 30, 2001 ............. 4,037,670 132,830 3,904,840
The total includes a corporate bond from Pacific Gas & Electric ("PG&E") with a
carrying value of $920,000 on September 30, 2002. This bond matured December 24,
2001 and, although PG&E remains current on its interest payment obligations, the
principal amount of this bond has not yet been paid. On April 6, 2001, PG&E
filed for Chapter 11 bankruptcy protection. Recently, PG&E and the State of
California asked PG&E's creditors to vote on two separate reorganization
proposals. A certification of the results of voting was filed with the U.S.
Bankruptcy Court for the Northern District of California on September 9, 2002.
However, as of September 30, 2002, the bankruptcy court had not confirmed either
plan of reorganization. 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 actuality of payments. However, the Company
currently believes that it will realize the full value of this investment.
-28-
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 to 60 days. Credit losses relating to customers consistently have been
within management expectations.
INVENTORIES
Inventories, consisting of material, labor and manufacturing overhead, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is based on estimated useful lives of 4 - 35 years computed using
the straight-line method.
PATENTS
Capitalized costs include costs incurred in connection with making patent
applications for the Company's products and are amortized on a straight-line
basis over eight years. The Company periodically reviews its patents for
impairment of value. Any adjustment from the analysis is charged to operations.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Research and development costs include clinical testing costs, certain salary
and related expenses, other labor costs, materials and an allocation of certain
overhead expenses.
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.
-29-
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.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued Statement 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement 144, which replaces
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," requires long-lived assets to be measured
at the lower of carrying amount or fair value less the cost to sell. Statement
144 also broadens disposal transactions reporting related to discontinued
operations. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company will adopt Statement
144 in fiscal 2003 and does not expect the adoption to have a material impact on
the Company's financial statements.
3. ADVERTISING COSTS
The Company incurred advertising expenses of $334,000, $359,000 and
$1,347,000 for the years ended September 30, 2002, 2001 and 2000, respectively.
All advertising costs are charged to operations as incurred.
-30-
4. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30,
-------------
2002 2001
---- ----
Raw materials .............................. $ 595,971 $ 675,234
Work-in-process ............................ 1,881,150 892,736
Finished goods ............................. 1,200,810 631,256
Reserve for inventory obsolescence ......... (100,000) (100,000)
----------- -----------
$ 3,577,931 $ 2,099,226
=========== ===========
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.
-31-
Option activity is summarized as follows:
AVERAGE
SHARES WEIGHTED EXERCISE
RESERVED OPTIONS PRICE PER
FOR GRANT OUTSTANDING SHARE
--------- ----------- -----
Balance as of September 30, 1999.......................... 206,500 746,500 $13.15
Options granted........................................... (155,000) 155,000 7.84
Options exercised......................................... -- -- --
Options canceled.......................................... 125,375 (125,375) 13.32
--------- --------- ------
Balance as of September 30, 2000.......................... 176,875 776,125 12.06
Options granted........................................... (404,000) 404,000 5.02
Options exercised......................................... -- -- --
Options canceled ......................................... 220,125 (220,125) 11.78
1991 Plan -- options canceled and not reissuable.......... (11,250) -- --
1991 Plan -- options unissued at plan expiration.......... (4,750) -- --
Increase in authorized shares............................. 500,000 -- --
--------- --------- ------
Balance as of September 30, 2001.......................... 477,000 960,000 9.16
Options granted........................................... (203,000) 203,000 4.44
Options exercised......................................... -- (750) 5.50
Options canceled.......................................... 127,250 (127,250) 8.49
1991 Plan -- options canceled and not reissuable.......... (111,000) -- --
--------- --------- ------
Balance as of September 30, 2002.......................... 290,250 1,035,000 $ 8.32
========= ========= ======
The number of stock options exercisable at September 30, 2002, 2001 and
2000 was 586,750, 468,500 and 467,625 at a weighted average exercise price of
$10.59, $11.67 and $12.88 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 3.50%, 3.53% and 6.08% for fiscal 2002,
2001 and 2000, respectively; volatility factor of the expected market price of
the Company's common stock of .569, .559 and .528 for fiscal 2002, 2001 and
2000, respectively; and a weighted average expected life of the option of 6.4
years, 6.6 years and 7 years for fiscal 2002, 2001 and 2000, respectively.
-32-
The weighted average fair value of options granted in 2002, 2001 and 2000
was $2.58, $2.91 and $4.61 per share, respectively. The exercise price of
options outstanding at September 30, 2002 ranged from $4.33 to $20.00 per share
as summarized in the following table:
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER WEIGHTED AVERAGE EXERCISE PRICE PER NUMBER EXERCISE PRICE PER
OUTSTANDING REMAINING SHARE - TOTAL EXERCISABLE AT SHARE - OPTIONS
RANGE OF EXERCISE PRICES AT 9/30/02 CONTRACTUAL LIFE OPTIONS OUTSTANDING 9/30/02 EXERCISABLE
- ------------------------ ---------- ---------------- ------------------- ------- -----------
$4.33 - $5.00.................. 381,000 8.3 years $ 4.54 91,000 $ 4.70
5.01 - 10.00................... 351,000 5.9 years 6.96 205,750 7.41
10.01 - 15.00.................. 187,000 4.6 years 13.51 174,000 13.51
15.01 - 20.00.................. 116,000 4.3 years 16.45 116,000 16.45
--------- --------- ------ ------- ------
1,035,000 6.4 years $ 8.32 586,750 $10.59
========= ========= ====== ======= ======
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,
------------------------
2002 2001 2000
---- ---- ----
Pro forma net loss.............................. $(2,157,420) $(4,308,736) $(6,803,649)
Pro forma net loss per common share............. $ (.40) $ (.81) $ (1.27)
-33-
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,
-------------
2002 2001
---- ----
Deferred assets:
Net operating loss carryforward......................... $ 9,377,000 $ 8,864,000
Research and development credit carryforward............ 241,000 202,000
Allowance for uncollectible accounts.................... 24,000 22,000
Inventory reserves...................................... 37,000 37,000
Inventory capitalization................................ 141,000 108,000
Accrued expenses........................................ 53,000 42,000
------------- ------------
Subtotal................................................ 9,873,000 9,275,000
Deferred liability:
Depreciation and amortization........................... 655,000 543,000
------------- ------------
Net deferred income tax assets.......................... 9,218,000 8,732,000
Valuation allowance..................................... (9,218,000) (8,732,000)
------------- ------------
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
$25.3 million 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 Chief Executive Officer of one of the Company's significant customers,
Mentor Corporation, is the brother of the Company's Chief Executive Officer and
two other directors of the Company.
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, 2002, 2001 and 2000, the Company incurred legal fees and expenses of
approximately $39,000, $24,000 and $16,000, 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 2002, 2001 and 2000, the Company paid
Petersen Blacksmith Company the sum of $14,000, $20,000 and $56,000,
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.
-34-
8. SIGNIFICANT CUSTOMERS
Significant customers, measured as a percentage of sales, are summarized
as follows:
SEPTEMBER 30,
-------------
2002 2001 2000
---- ---- ----
Significant customers:
ConvaTec..................................... 0% 6% 16%
Hollister.................................... 13 8 9
Maersk....................................... 7 10 15
Mentor....................................... 15 1 1
Porges (a subsidiary of Mentor).............. 6 5 4
--- --- ---
Total........................................... 41% 30% 45%
=== === ===
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, 2002 and 2001 follows (in thousands, except per share
amounts):
THREE MONTHS ENDED
------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
Fiscal year 2002
Net sales ............................. $ 2,326 $ 2,553 $ 3,033 $ 3,163
Gross profit .......................... 575 653 903 1,057
Loss from operations .................. (602) (574) (360) (71)
Net Loss .............................. (544) (523) (310) (18)
Net Loss per common share .......... $ (0.10) $ (0.10) $ (0.06) $ (0.00)
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)
-35-
11. GEOGRAPHIC AREA DATA
Sales related to customers in the United States and other foreign countries are
as follows:
SEPTEMBER 30,
-------------
2002 2001 2000
---- ---- ----
United States .................... $ 6,150,000 $ 4,043,000 $ 4,552,000
Europe ........................... 2,983,000 2,462,000 1,627,000
Rest of world .................... 1,942,000 1,797,000 1,681,000
----------- ----------- -----------
Total ............................... $11,075,000 $ 8,302,000 $ 7,860,000
=========== =========== ===========
Sales are attributed to countries based upon the address to which the Company
ships products, as set forth on the customer's purchase order.
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,
2002, 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,
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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,
2002.
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,
2002.
-36-
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that the Company's disclosure controls and procedures are adequately
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities and Exchange Act of
1934, as amended, is recorded, processed, summarized and reported, within the
time periods specified in applicable rules and forms. There have not been any
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls, subsequent to the date of such
evaluation, including any corrective actions taken with regard to significant
deficiencies and material weaknesses.
ITEM 15. 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, 2002 and 2001.
(ii) Statements of Operations for the years ended September 30,
2002, 2001 and 2000.
(iii) Statement of Shareholders' Equity for the years ended
September 30, 2002 and 2001.
(iv) Statements of Cash Flows for the years ended September 30,
2002, 2001 and 2000.
(v) Notes to financial statements at September 30, 2002.
(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).
-37-
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).
-38-
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).
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.*
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
- -------------------------------
* Filed herewith.
(c) Registrant filed no Report on Form 8-K during its fourth fiscal quarter.
-39-
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 18, 2002 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,
- -----------------------------
Anthony J. Conway Chief Executive Officer, and Secretary
(principal executive officer)
/s/ David A. Jonas Chief Financial Officer and Treasurer
- -----------------------------
David A. Jonas (principal financial and accounting officer)
* Vice President, Production Technologies
- -----------------------------
Philip J. Conway and Director
* Vice President, Research and Development
- -----------------------------
Richard D. Fryar and Director
* Director
- -----------------------------
Darnell L. Boehm
* Director
- -----------------------------
Peter R. Conway
* Director
- -----------------------------
Roger W. Schnobrich
* Director
- -----------------------------
Benson Smith
*By David A. Jonas Dated: December 18, 2002
- -----------------------------
David A. Jonas
Attorney-in-Fact
-40-
CERTIFICATIONS
I, Anthony J. Conway, Chief Executive Officer of Rochester Medical Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Rochester Medical
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
-41-
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 18, 2002 /s/ Anthony J. Conway
-----------------------------
Chief Executive Officer
I, David A. Jonas, Chief Financial Officer of Rochester Medical Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Rochester Medical
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and
-42-
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 18, 2002 /s/ David A. Jonas
----------------------------
Chief Financial Officer
-43-
ROCHESTER MEDICAL CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- --------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS - DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------- ------ -------- -------- -------- ---------
Year ended September 30, 2002:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts ............... $ 60,498 $ 5,004 -- $ 873(1) $ 64,629
Allowance for inventory
obsolescence ........... 100,000 -- -- -- 100,000
Allowance for inventory
valuation .............. 131,490 -- -- 70,051(3) 61,439
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
- ----------------------------
(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)......................................................................................................
45
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)..............................................................................................
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................................................................................................
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002............................................................................
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002............................................................................
46