-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wix5/mdsdYismTXOMcxPu/V0qFPbwm2TcqH4vmTw0GZuiDxSb8ddoKonZ0SyCNsm kDgqOKSo4o1P99dovwGgWQ== 0000897101-00-001205.txt : 20001221 0000897101-00-001205.hdr.sgml : 20001221 ACCESSION NUMBER: 0000897101-00-001205 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCHESTER MEDICAL CORPORATION CENTRAL INDEX KEY: 0000868368 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411613227 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18933 FILM NUMBER: 792624 BUSINESS ADDRESS: STREET 1: ONE ROCHESTER MEDICAL DR CITY: STEWARTVILLE STATE: MN ZIP: 55976 BUSINESS PHONE: 5075339600 MAIL ADDRESS: STREET 1: ONE ROCHESTER MEDICAL DR CITY: STEWARTVILLE STATE: MN ZIP: 55976 10-K 1 0001.txt - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2000 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 $7,860,132. The aggregate market value of voting stock held by non-affiliates based upon the closing Nasdaq sale price on December 1, 2000 was $23,907,725. Number of shares outstanding on December 15, 2000 was 5,338,900 Common Shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for its February 8, 2001 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 home care and acute/extended care markets. The Company's home care products include its FEMSOFT(R) INSERT, a soft, liquid-filled, conformable urethral insert for managing female stress urinary incontinence in adult females, a line of male external catheters for managing male urinary incontinence and a line of intermittent catheters for managing both male and female urinary retention. The Company's acute/extended care products include a line of standard Foley catheters and its RELEASE-NF (TM) 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. HOME CARE PRODUCTS MALE EXTERNAL CATHETERS. The Company's male external catheters are self-care, disposable devices for managing male urinary incontinence. The Company manufactures and markets three models of silicone male external catheters: the ULTRAFLEX(R), "POP-ON"(R) and WIDE BAND(R) catheters. The UltraFlex catheter has adhesive positioned midway down the catheter sheath. The "POP-ON" catheter has a sheath that is shorter than that of a standard male external catheter and has adhesive applied to the full length of the sheath. It is designed to accommodate patients who require shorter-length external catheters. The Company's WIDE BAND self-adhering male external catheter has an adhesive band which extends over the full length of the sheath, providing approximately 70% more adhesive coverage than other male external catheters currently marketed. The WIDE BAND catheter is designed to reduce adhesive failure and the resulting leakage, which is a common complaint among users of male external catheters. All models of the Company's male external catheters are produced in five sizes for better patient fit. The Company's male external catheters are made from silicone, a non-toxic and biocompatible material that eliminates the risks of latex-related skin irritation. Silicone catheters are also odor free and have greater air permeability than catheters made from other materials, including latex. Air permeability reduces skin irritation and damage from catheter use and thereby increases patient comfort. The Company's silicone catheters are transparent, permitting visual skin inspection without removal of the catheters and aiding proper placement of the catheters. The Company's catheters also have a kink-proof funnel design to ensure uninterrupted urine flow. The self-adhering technology of the Company's catheters simplifies application of the catheters and provides a strong bond to the skin for greater patient confidence and improved wear. The Company also manufactures and sells male external catheters made from a proprietary non-latex, non-silicone material to certain private label customers. Certain of these catheters use the same self-adhesive technology as the Company's silicone male external catheters. Like the silicone male external catheters, these non-silicone catheters eliminate the risk of latex reactions and latex-related skin irritations. The non-silicone catheters also are odor free. PERSONAL CATHETER(TM). The Company's PERSONAL CATHETER is a disposable intermittent catheter manufactured from two different silicones, with a stiff core catheter tube and a softer outer cover. This construction provides sufficient stiffness for ease of insertion, while the softer cover is designed to reduce tissue irritation during insertion. The Company produces the PERSONAL CATHETER in three lengths for male, female and pediatric use and multiple diameters. 2 In June 2000, the Company received authorization from the FDA to market its hydrophilic intermittent catheter. When moistened, the hydrophilic surface of the catheter becomes slippery to provide a low friction surface. The Company intends to formally introduce the hydrophilic intermittent catheter in January 2001 under the ROCHESTER MEDICAL brand in the United States. FEMSOFT INSERT. The FEMSOFT INSERT is a disposable device for the management of stress urinary incontinence in active women. It is a soft, conformable urethral insert that assists the female urethra and bladder neck to control the involuntary loss of urine. The device can be simply inserted, worn and removed for voiding by most women. It requires no inflation, deflation, syringes or valving mechanisms. The Company believes the FEMSOFT INSERT will provide significant advantages in the management of female stress incontinence. The FEMSOFT INSERT is a minimally invasive device that provides a patient with effective control of her urinary function and eliminates the need for collection bags and pads or liners that can cause embarrassment, restrict mobility and compromise lifestyle. In addition, the soft, liquid-filled silicone membrane of the FEMSOFT INSERT has been designed to conform to the irregular shape of the urethra and follow the movements of the urethra during normal activities, thereby reducing leakage without chafing or abrasion of the delicate tissues of the urethra. The FEMSOFT INSERT is a prescription device that requires a woman to visit her physician. The physician will fit the patient with the proper size and instruct the patient on proper application of the FEMSOFT INSERT. ACUTE/EXTENDED CARE PRODUCTS RELEASE-NF CATHETER. The Company's RELEASE-NF CATHETER is a silicone Foley catheter that has been designed to reduce the incidence of hospital acquired UTI. Using patented technology, the RELEASE-NF CATHETER incorporates nitrofurazone, an effective broad-spectrum antibacterial agent, into the structure of the catheter, permitting sustained release of a controlled dosage directly into the urinary tract to prevent the onset of infection. FOLEY CATHETERS. The Company offers Foley catheters in a standard two lumen version for urinary drainage management and in a three lumen version for irrigation of the urinary tract. These Foley catheters are available in all standard adult and pediatric sizes. All of the Company's silicone Foley catheters eliminate the risk of the allergic reactions and tissue irritation and damage associated with latex Foley catheters. The Company's Foley catheters are transparent which enables healthcare professionals to observe urine flow. Unlike the manufacturing processes used by producers of competing silicone Foley catheters, in which the balloon is made separately and attached by hand in a separate process involving gluing, the Company's automated manufacturing processes allow the Company to integrate the balloon into the structure of the Foley catheter, resulting in a smoother, more uniform exterior that may help reduce irritation to urinary tissue. The Company's standard Foley catheters are packaged sterile in single catheter strips and sold under the ROCHESTER MEDICAL brand and under private label arrangements. In addition, the Company sells its standard Foley catheters in bulk under private label arrangements for packaging in kits with tubing, collection bags and other associated materials. TECHNOLOGY The Company uses proprietary, automated manufacturing technologies and processes to manufacture continence care devices cost effectively. The production of the Company's products also depends on its materials expertise and know-how in the formulation of silicone and advanced polymer products. The Company's proprietary liquid encapsulation technology enables it to manufacture innovative products, such as its FEMSOFT INSERT, that have soft, conformable, liquid-filled reservoirs, which cannot be manufactured using conventional technologies. Using this liquid encapsulation technology, the Company can mold and form liquid encapsulated devices in a variety of shapes and sizes in an automated process. The Company's manufacturing technologies and 3 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. In fiscal 1999, the Company experienced a significant reduction in sales under these arrangements due to one customer that switched to its own production of silicone male external catheters and another customer that significantly reduced its order volume. Private label arrangements are likely to continue to account for a significant portion of the Company's revenues in the foreseeable future, particularly in international markets where the Company does not maintain a direct sales presence. The Company sells its products in the United States under the ROCHESTER MEDICAL brand name through a five-person direct sales force. The primary markets for the Company's products are individual hospitals and healthcare institutions, distributors and extended care facilities. In fiscal 2000, the Company began a phased introduction of FEMSOFT INSERT in three metropolitan areas, Denver, Detroit and Iowa City, including the Quad-Cities of Iowa and Illinois, which were among the primary clinical study locations for the insert. The Company also has begun to introduce the FEMSOFT INSERT to a select group of clinicians in the United States. The marketing of the FEMSOFT INSERT requires significant physician and clinician education efforts. The Company's focus is on enrolling clinicians in its FEMSOFT program which trains the clinicians in the use of the FEMSOFT INSERT and enters the clinicians in the Company's distribution and customer service program for the insert. The Company has formed a distribution and customer service program for the FEMSOFT INSERT with Healthcare Delivery Systems ("HDS"), a business unit of McKesson Corporation. Under this program, HDS will administer a centralized resource center for customer service, product information and nationwide distribution of the FEMSOFT INSERT. In addition, the Company is testing methods of consumer advertising of the FEMSOFT INSERT in its initial markets. The Company is actively exploring alternative approaches to the sales and marketing of the RELEASE-NF catheter in the United States. The Company relies on arrangements with medical product companies and independent distributors to sell the Company's products in Europe and other international markets. These arrangements are conducted under the ROCHESTER MEDICAL brand name and under brands controlled by the medical product companies. MANUFACTURING The Company designs and builds custom equipment to implement its manufacturing technologies and processes. The Company's manufacturing facilities are located in Stewartville, Minnesota. The Company produces its Foley catheters on one production line and its male external catheters on other lines. The Company has constructed a separate manufacturing facility to house its liquid encapsulation manufacturing operations, and has installed the FEMSOFT INSERT manufacturing line in this facility. 4 The Company maintains a comprehensive quality assurance and quality control program, which includes documentation of all material specifications, operating procedures, equipment maintenance and quality control test methods. The Company has obtained ISO 9001 certification and CE mark quality system certification for its Foley catheter, male external catheter, and FEMSOFT INSERT production lines. The Company's manufacturing facility has been designed to accommodate the specialized requirements for the manufacture of medical devices, including the FDA's requirements for Quality System Regulation ("QSR"). SOURCES OF SUPPLY The Company obtains certain raw materials and components for a number of its products from a sole supplier or limited number of suppliers. The loss of such a supplier or suppliers, or a material interruption of deliveries from such a supplier or suppliers, could have a material adverse effect on the Company. The Company believes that in most, if not all, cases the Company has identified other potential suppliers. In the event that the Company had to replace a supplier, however, the Company may be required to repeat biocompatibility and other testing of its products using the material from the new supplier and may be required to obtain additional regulatory clearances. RESEARCH AND DEVELOPMENT The Company believes that its ability to add new products to its existing continence care product lines is important to the Company's future success. Accordingly, the Company is engaged in ongoing research and development to develop and introduce new products which provide additional features and functionality. In the future, consistent with market opportunities and the Company's financial and personnel resources, the Company intends to perform clinical studies for other of its products in development. Research and development expense for fiscal years 2000, 1999 and 1998, was $1,008,000, $1,052,000 and $1,384,000, respectively. COMPETITION The continence care market is highly competitive. The Company believes that the primary competitive factors include price, product quality, technical capability, breadth of product line and distribution capabilities. The Company's ability to compete is affected by its product development and innovation capabilities, its ability to obtain regulatory clearances, its ability to protect the proprietary technology of its products and manufacturing processes, its marketing capabilities, its ability to attract and retain skilled employees, and, for products sold in managed care environments, its ability to maintain current distribution relationships, to establish new distribution relationships and to secure participation in purchase contracts with group purchasing organizations. The Company believes that it will be important for the Company to differentiate its products in order to attract large customers, such as distributors, dealers, institutions and home care organizations. The Company's products compete with a number of alternative products and treatments for continence care. The Company's ability to compete with these alternative methods for urinary continence care depends on the relative market acceptance of alternative products and therapies and the technological advances in these alternative products and therapies. Any development of a broad-based and effective cure for a significant form of incontinence could have a material adverse effect on sales of continence care devices such as the Company's products. The Company competes directly for sales of continence care devices under the Company's own brand with larger, multi-product medical device manufacturers and distributors such as ConvaTec, C.R. Bard, Inc., Maersk Medical, Kendall Healthcare Products Company, Hollister and Mentor. Many of the competitive alternative products or therapies to the Company's products are distributed by larger competitors including Johnson & Johnson Personal Products Company, Kimberly-Clark Corporation and Proctor & Gamble Company (for adult diapers and absorbent 5 pads), and C.R. Bard, Inc. (for injectable materials). Many of the Company's competitors, potential competitors and providers of alternative products or therapies have significantly greater financial, manufacturing, marketing, distribution and technical resources and experience than the Company. It is possible that other large healthcare and consumer products companies may enter this market in the future. Furthermore, academic institutions, governmental agencies and other public and private research organizations will continue to conduct research, seek patent protection and establish arrangements for commercializing products in this market. Such products may compete directly with products which may be offered by the Company. PATENTS AND PROPRIETARY RIGHTS The Company's success may depend in part on its ability to obtain patent protection for its products and manufacturing processes, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. The Company may seek patents on certain features of its products and technology based on the Company's analysis of various business considerations, such as the cost of obtaining a patent, the likely scope of patent protection and the benefits of patent protection relative to relying on trade secret protection. The Company also relies upon trade secrets, know-how and continuing technological innovations to develop and maintain its competitive position. The Company owns 17 United States patents and a number of corresponding foreign patents that generally relate to certain of the Company's catheters and devices and certain of the 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 6 claims affecting the Company's technology are issued and such claims are determined to be valid, there can be no assurance that the Company would be able to obtain licenses to such patents at costs reasonable to the Company, if at all, or be able to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing, using or selling certain of its products, which could have a material adverse effect on the Company's business, financial condition and results of operations. There also can be no assurance that any third party does not currently have, has not applied for, or might not in the future apply for, additional patents in the United States or abroad which, if ultimately granted, might be infringed in such country by any of the Company's products as currently configured or any other product of the Company and provide the basis for an infringement action in such country against the Company. The Company also relies on proprietary manufacturing processes and techniques, materials expertise and trade secrets applicable to the manufacture of its products. The Company seeks to maintain the confidentiality of this proprietary information. There can be no assurance, however, that the measures taken by the Company will provide the Company with adequate protection of its proprietary information or with adequate remedies in the event of unauthorized use or disclosure. In addition, there can be no assurance that the Company's competitors will not independently develop or otherwise gain access to processes, techniques or trade secrets that are similar or superior to the Company's. Finally, as with patent rights, legal action to enforce trade secret rights can be lengthy and costly, with no guarantee of success. GOVERNMENT REGULATION The manufacture and sale of the Company's products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding foreign agencies. In the United States, the medical devices manufactured and sold by the Company are subject to laws and regulations administered by the FDA, including regulations concerning the prerequisites to commercial marketing, the conduct of clinical investigations, compliance with QSR and labeling. A manufacturer may seek from the FDA market authorization to distribute a new medical device by filing a 510(k) Premarket Notification ("510(k)") to establish that the device is "substantially equivalent" to medical devices legally marketed in the United States prior to the Medical Device Amendments of 1976. A manufacturer may also seek market authorization for a new medical device through the more rigorous Premarket Approval ("PMA") application process, which requires the FDA to determine that the device is safe and effective for the purposes intended. The Company received FDA marketing authorization for its FEMSOFT INSERT on September 30, 1999 pursuant to a PMA. As a condition of FDA approval of the Company's PMA filing based on interim clinical study results, the Company will be required to complete the current clinical study of the FEMSOFT INSERT and submit the additional data to the FDA for its further consideration to determine whether such approval should be continued. There can be no assurance that these additional data will be sufficient in the FDA's opinion to permit continued marketing of the device even though the PMA filing for the FEMSOFT INSERT was initially approved by the FDA. All of the Company's other marketed products have received FDA marketing authorization pursuant to 510(k) notifications. The Company is also required to register with the FDA as a medical device manufacturer. As such, the Company's manufacturing facilities are inspected on a routine basis for compliance with QSR. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner with respect to design, manufacturing, testing and quality control activities. As a medical device manufacturer, the Company is further required to comply with FDA requirements regarding the reporting of adverse events associated with the use of its medical devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. FDA regulations also govern product labeling and can prohibit a manufacturer from marketing an approved device for unapproved applications. If the FDA believes that a manufacturer is not in compliance with the law, it can institute 7 enforcement proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the manufacturer, its officers and employees. The Company may become subject to future legislation and regulations concerning the manufacture and marketing of medical devices. Such future legislation and regulations could increase the cost and time necessary to begin marketing new products and could affect the Company in other respects not currently foreseeable. The Company cannot predict the effect of possible future legislation and regulations. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. These laws and regulations range from simple product registration requirements in some countries to complex clearance and production controls in others. As a result, the processes and time periods required to obtain foreign marketing approval may be longer or shorter than those necessary to obtain FDA approval. These differences may affect the efficiency and timeliness of international market introduction of the Company's products. For countries in the European Union ("EU"), medical devices must display a CE mark before they may be imported or sold. In order to obtain and maintain the CE mark, the Company must comply with the Medical Device Directive and pass an initial and annual facilities audit inspections to ISO 9001 by an EU inspection agency. The Company has obtained ISO 9001 quality system certification for the CE mark for its currently marketed standard products and the FEMSOFT INSERT. The Company is pursuing CE mark certification for the RELEASE-NF CATHETER. In order to maintain certification, if granted, the Company will be required to pass annual facilities audit inspections conducted by EU inspectors. There can be no assurance, however, that the Company will be able to obtain or maintain all necessary regulatory approvals or clearances, including CE mark certification, for its products in foreign countries. In addition, international sales of medical devices manufactured in the United States that have not been approved by the FDA for marketing in the United States are subject to FDA export requirements. These require that the Company obtain documentation from the medical device regulatory authority of the destination country stating that sale of the medical device is not in violation of that country's medical device laws, and, under some circumstances, may require the Company to apply to the FDA for permission to export a device to that country. THIRD PARTY REIMBURSEMENT In the United States, healthcare providers that purchase medical devices generally rely on third party payors, such as Medicare, Medicaid, private health insurance plans and managed care organizations, to reimburse all or a portion of the cost of the devices. The Medicare program is funded and administered by the federal government, while the Medicaid program is jointly funded by the federal government and the states, which administer the program under general federal oversight. The Company believes its currently marketed products, including the RELEASE-NF CATHETER, are generally eligible for coverage under these third party reimbursement programs. The Company is currently seeking to establish the eligibility of the FEMSOFT INSERT for reimbursement. Several private health insurance plans have begun to offer this reimbursement. The competitive position of certain of the Company's products may be partially dependent upon the extent of reimbursement for its products. The federal government and certain state governments are currently considering a number of proposals to reform the Medicare and Medicaid health care reimbursement system. The Company is unable to evaluate what legislation may be drafted and whether or when any such legislation will be enacted and implemented. Certain of the proposals, if adopted, could have an adverse effect on the Company's business, financial condition and results of operations. In foreign countries, the policies and procedures for obtaining third party payment of reimbursement for medical devices vary widely. Compliance with such procedures may delay or prevent the eligibility of the Company's branded and/or private label products for reimbursement, and have an adverse effect on the Company's ability to sell its branded or private label products in a particular foreign country. 8 PRIVATE LABEL DISTRIBUTION AGREEMENTS CONVATEC. In April 1998, the Company and ConvaTec entered into a Revised and Restated Distribution Agreement (the "Revised ConvaTec Agreement"), which grants ConvaTec certain rights to market the Company's Foley catheters and male external catheters under the ConvaTec brand. The Revised ConvaTec Agreement provides, subject to certain existing obligations and limitations, that the Company will not appoint any other private label distributor for silicone male external catheters in Central America, South America, Australia, Japan, New Zealand, South Africa, Israel, Iran, Iraq, Lebanon, Oman, Saudi Arabia, Syria, United Arab Emirates and Yemen. ConvaTec has non-exclusive rights to distribute the Company's products in other markets. The Revised ConvaTec Agreement does not include any minimum purchase requirements or require that ConvaTec market any or all of the Company's products. The ConvaTec Agreement also provides in the event that the Company is unable to supply ConvaTec's requirements for products under certain circumstances, ConvaTec will have a license to the Company's technologies for purposes of manufacturing such products for ConvaTec. The Revised ConvaTec Agreement has an initial term expiring April 30, 2006, and may be renewed for successive annual extensions thereafter. Either party may terminate the Revised ConvaTec Agreement upon the other party's material breach of the Revised ConvaTec Agreement, bankruptcy or insolvency, or inability to perform under the Revised ConvaTec Agreement for a period of more than six months. Sales of products to ConvaTec represented 16% of the Company's revenues in fiscal 2000 and 16% of revenues in fiscal 1999. ConvaTec has consulted with us regarding its intention going forward in the continence care market and these consultations may result in modifications to the Company's agreement with ConvaTec. The Company supplies a number of medical product companies with products on a private label basis. EMPLOYEES As of September 30, 2000, the Company employed 118 full-time employees, of whom 80 were in manufacturing, and the remainder in marketing and sales, research and development and administration. The labor market for medical device manufacturing personnel has tightened in Minnesota, and particularly in the Rochester area where the Company's manufacturing facilities are located. This has resulted in upward pressure on wages for production workers but has not, to date, adversely affected the Company's ability to hire and retain capable manufacturing personnel. The Company is not a party to any collective bargaining agreement and believes its employee relations are good. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of December 19, 2000 are as follows: NAME AGE POSITION - ------------------- ----- ------------------------------------------------- Anthony J. Conway 56 Chairman of the Board, Chief Executive Officer, President and Secretary David A. Jonas 36 Controller, Treasurer and Director of Operations Philip J. Conway 44 Vice President, Production Technologies Richard D. Fryar 53 Vice President, Research and Development Dara Lynn Horner 42 Vice President, FEMSOFT Marketing Martyn R. Sholtis 41 Vice President, Marketing and Sales ANTHONY J. CONWAY, a founder of the Company, has served as Chairman of the Board, Chief Executive Officer, President and Secretary of the Company since May 1988. In addition to his duties as Chief Executive Officer, Mr. Anthony Conway actively contributes to the Company's research and development and design activities. From 1979 to March 1988, he was President, 9 Secretary and Treasurer of Arcon Corporation ("Arcon"), a company that he co-founded in 1979 to develop, manufacture and sell latex-based male external catheters and related medical devices. Prior to founding Arcon, Mr. Anthony Conway worked for twelve years for International Business Machines Corporation ("IBM") in various research and development capacities. Mr. Anthony Conway is one of the named inventors on numerous patent applications that have been assigned to the Company, of which to date 17 have resulted in issued United States patents. DAVID A. JONAS has served as the Company's Controller since June 1998, as its Director of Operations since August 1999, and as its Treasurer since November 2000. Mr. Jonas has had principal responsibility for the Company's operational activities since August 1999, and since November 2000 has also had principal responsibility for the Company's financial activities. Prior to joining the Company, Mr. Jonas was employed in various financial, financial management and operational management positions with Polaris Industries, Inc. from January 1989 to June 1998. Mr. Jonas holds a BS degree in Accounting from the University of Minnesota and is a certified public accountant. PHILIP J. CONWAY, a founder of the Company, has served as Vice President of Production Technologies of the Company since August 1999 and as a Director of the Company since May 1988. From 1988 to July 1999, Mr. Philip Conway served as Vice President of Operations of the Company. Mr. Philip Conway is responsible for plant design as well as new product and production processes, research, design and development activities. From 1979 to March 1988, Mr. Philip Conway served as Plant and Production Manager of Arcon, a company that he co-founded. Prior to joining Arcon, Mr. Philip Conway was employed in a production supervisory capacity by AFC Corp., a manufacturer and fabricator of fiberglass, plastics and other composite materials. He is one of the named inventors on numerous patent applications that have been assigned to the Company, of which to date 17 have resulted in issued United States patents. RICHARD D. FRYAR, a founder of the Company, has served as Vice President, Research and Development and as a director of the Company since May 1988. Mr. Fryar is responsible for overseeing the Company's research and development and regulatory affairs activities. From 1984 to March 1988, Mr. Fryar was employed by Arcon, a company that he co-founded, in research and development capacities. From 1969 to 1984, he was employed by IBM in various research and development capacities. He is one of the named inventors on numerous patent applications that have been assigned to the Company, of which to date 17 have resulted in issued United States patents. DARA LYNN HORNER has served as Marketing Director for the Company's FEMSOFT INSERT product line since November 1998. Ms. Horner has principal responsibility for management of the Company's FEMSOFT marketing activities. From 1990 until joining the Company in 1998, Ms. Horner was employed by Lake Region Manufacturing, Inc., a medical device manufacturer, most recently as Marketing Director. From 1980 to 1998, she was employed in various marketing and sales capacities with, respectively, Medtronic, Inc., West Central Tribune, and Blue Cross-Blue Shield of Minnesota. MARTYN R. SHOLTIS joined the Company in April 1992 and serves as Vice President of Marketing & Sales. Mr. Sholtis' responsibilities include implementation of the Company's marketing & sales strategy as well as the development of the Company's relationships with the Company's private label and international customers. From 1985 to 1992 Mr. Sholtis was employed by Sherwood Medical, a company that manufactured and sold a variety of disposable medical products including urological catheters, most recently as Regional Sales Manager for the Nursing Care Division. Messrs. Anthony J. Conway, Philip J. Conway and Peter R. Conway, a director of the Company, are brothers. 10 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, 2000. 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 1999 First Quarter .......... $ 15.250 $ 9.625 Second Quarter ......... 15.500 9.250 Third Quarter .......... 12.250 9.500 Fourth Quarter ......... 12.313 8.375 FISCAL 2000 First Quarter .......... $ 10.156 $ 6.25 Second Quarter ......... 12.375 7.00 Third Quarter .......... 12.25 7.625 Fourth Quarter ......... 9.375 5.875 HOLDERS As of December 15, 2000, the Company had 132 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. 11 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company as of September 30, 2000 and 1999 and for the three fiscal years ended September 30, 2000, 1999 and 1998 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, 1998, 1997 and 1996 and for the fiscal years ended September 30, 1997 and 1996 are derived from audited financial statements not included herein. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10-K.
FISCAL YEARS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ------------- ------------- ------------- ------------- Statements of Operations Data: Net sales .......................... $ 7,860 $ 7,341 $ 9,518 $ 7,615 $ 5,540 Cost of sales ...................... 6,151 5,602 6,604 4,869 3,788 -------- --------- --------- --------- --------- Gross profit ...................... 1,709 1,739 2,914 2,746 1,752 Operating expenses: Marketing and selling .............. 4,589 3,944 3,191 2,210 1,351 Research and development ........... 1,008 1,052 1,384 1,451 1,182 General and administrative ......... 2,238 1,863 1,445 1,499 1,112 -------- --------- --------- --------- --------- Total operating expenses .......... 7,835 6,859 6,020 5,160 3,645 -------- --------- --------- --------- --------- Loss from operations ................ (6,126) (5,120) (3,106) (2,414) (1,893) Interest income ..................... 595 719 848 657 818 Interest expense .................... -- -- -- (342) (285) -------- --------- --------- --------- --------- Net loss ............................ $ (5,531) $ (4,401) $ (2,258) $ (2,099) $ (1,360) ======== ========= ========= ========= ========= Net loss per common share -- basic and diluted .................. $ (1.04) $ (.83) $ (.44) $ (.51) $ (.35) Weighted average number of common shares outstanding .......... 5,341 5,333 5,141 4,132 3,867
AS OF SEPTEMBER 30, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------ ------------ ----------- ------------ ----------- Balance Sheet Data: Cash, cash equivalents and Marketable securities ............. $ 8,859 $ 13,246 $ 16,410 $ 4,639 $ 17,408 Working capital .................... 10,329 15,486 19,245 7,081 18,861 Total assets ....................... 23,254 28,702 32,736 18,613 23,888 Long-term debt ..................... -- -- -- -- 3,321 Accumulated deficit ................ (19,706) (14,175) (9,774) (7,516) (5,418) Total shareholders' equity ......... $ 21,573 $ 27,177 $ 30,918 $ 17,181 $ 19,231
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements other than historical information contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "may," "will," "expect," "anticipate," "predict," "intend," "designed," "estimate," "should" or "continue" or the negatives thereof or other variations thereon or comparable terminology. The forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" below. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the statements of operations of the Company expressed as a percentage of net sales:
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Total net sales ..................... 100% 100% 100% Cost of sales ....................... 78 76 69 --- --- --- Gross margin ........................ 22 24 31 Operating expenses: Marketing and selling .............. 58 54 34 Research and development ........... 13 14 15 General and administrative ......... 29 26 15 --- --- --- Total operating expenses ............ 100 94 64 Loss from operations ................ (78) (70) (33) Interest income, net ................ 8 10 9 --- --- --- Net loss ............................ (70)% (60)% (24)% === === ===
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 NET SALES. Net sales increased 7% to $7.9 million in fiscal 2000 from $7.3 million in the prior fiscal year. Domestic sales were flat compared to the prior fiscal year, with growth of 17% in ROCHESTER MEDICAL brand product sales offset by a 13% decline in sales to domestic private label customers, primarily Mentor and ConvaTec. International sales increased 18% in fiscal 2000 compared to the prior fiscal year, primarily due to growth in European markets. GROSS MARGIN. The Company's gross margin was 22% in fiscal 2000 compared to 24% in fiscal 1999. The fiscal 2000 margin primarily reflects costs associated with continuing underutilized production capacity. Costs associated with increased capacity are anticipated to continue until such time as, if ever, the Company achieves sufficient sales to absorb the additional capacity. MARKETING AND SELLING. Marketing and selling expense increased 16% to $4.6 million in fiscal 2000 from $3.9 million in fiscal 1999. The increase in expense is due to promotional activities for the FEMSOFT INSERT. The Company anticipates that marketing and selling expenses will decrease in fiscal 2001 because fiscal 2000 included nonrecurring expenses for the development of marketing materials related to the FEMSOFT INSERT and due to a reduction in the size of the Company's sales force. RESEARCH AND DEVELOPMENT. Research and development expense decreased 4% to $1.0 million in fiscal 2000 from $1.1 million in fiscal 1999. The decrease in research and development expense primarily reflects a reduction in accruals for costs of the FEMSOFT INSERT clinical trials related to stage of completion. 13 GENERAL AND ADMINISTRATIVE. General and administrative expense increased 20% to $2.2 million in fiscal 2000 from $1.9 million in fiscal 1999. The increase in general and administrative expense is related to one-time costs associated with the terminated transaction with Maersk Medical, as well as one-time costs related to severance expenses associated with a reduction in personnel. INTEREST INCOME. Interest income decreased 17% to $595,000 in fiscal 2000 from $719,000 in fiscal 1999. The decrease in interest income reflects the comparatively lower average level of invested cash balances in the current quarter due to the utilization of cash for operations and capital expenditures. FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1998 NET SALES. Net sales decreased 23% to $7.3 million in fiscal 1999 from $9.5 million in the prior fiscal year. Domestic sales decreased 31% in fiscal 1999 from the prior fiscal year, with growth of 41% in ROCHESTER MEDICAL brand product sales offset by a 50% decline in sales to domestic private label customers, primarily Mentor and ConvaTec. International sales decreased 6% in fiscal 1999 from the prior fiscal year compared with the prior year, with 45% growth in European markets offset by a 25% decline in all other international markets. GROSS MARGIN. The Company's gross margin was 24% in fiscal 1999 compared to 31% in fiscal 1998. The fiscal 1999 margin primarily reflects costs associated with continuing underutilized production capacity due to lower sales. Costs associated with increased capacity are anticipated to continue until such time as, if ever, the Company achieves sufficient sales to absorb the additional capacity. MARKETING AND SELLING. Marketing and selling expense increased 24% to $3.9 million in fiscal 1999 from $3.2 million in fiscal 1998. The increase in expense is due to promotional activities for the RELEASE-NF CATHETER and market introduction preparation for the FEMSOFT INSERT. The Company anticipates that marketing and selling expenses will increase in future periods as the Company expands its promotional and market development activities related to Rochester Medical brand products, particularly the Company's FEMSOFT INSERT. RESEARCH AND DEVELOPMENT. Research and development expense decreased 24% to $1.1 million in fiscal 1999 from $1.4 million in fiscal 1998. The decrease in research and development expense primarily reflects a reduction in accruals for costs of the FEMSOFT INSERT clinical trials related to stage of completion. GENERAL AND ADMINISTRATIVE. General and administrative expense increased 29% to $1.9 million in fiscal 1999 from $1.4 million in fiscal 1998. The increase in general and administrative expense is related to upgrading of business systems, including the Year 2000 compliance program, and general increases in administrative support costs. INTEREST INCOME. Interest income decreased 15% to $719,000 in fiscal 1999 from $848,000 in fiscal 1998. The decrease in interest income reflects the comparatively lower average level of invested cash balances in the current quarter due to the utilization of cash for operations and capital expenditures. 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. In August 1995, the Company received proceeds of $3.0 million from issuance of a convertible note to ConvaTec. The Company repaid the ConvaTec note on September 30, 1997, with accrued interest, for a total amount of $3.7 million. The Company's cash, cash equivalents and marketable securities were $8.9 million at September 30, 2000 compared with $13.2 million at September 30, 1999. The Company used a net $3.6 million of cash in operating activities during the year. Investing activities, primarily sales of 14 marketable securities, provided net cash of $2,658,000 in fiscal 2000, offset in part by capital expenditures of $676,000. The Company anticipates lower capital expenditures in fiscal 2001. During fiscal 2000, the Company's working capital position, excluding cash and marketable securities, decreased by a net $770,000. Accounts receivable balances decreased 26% or $362,000 during the fiscal year as a result of receivable collections. Inventories decreased by 8% or $155,000 during the year. Other current assets decreased 28% or $97,000 as a result of the collection of miscellaneous receivables. Current liabilities increased 10% or $156,000 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 the first quarter of fiscal 2000, the Company repurchased 10,600 shares of common stock for $73,000. Although the Company believes that its existing resources and anticipated cash flows from operations will be sufficient to satisfy its capital needs for approximately the next two years, there can be no assurance that the Company will not require additional financing before that time. The Company's actual liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of sales and marketing activities; the amount of revenues from sales of the Company's existing and new products; changes in, termination of, and the success of, existing and new distribution arrangements; the cost of maintaining, enforcing and defending patents and other intellectual property rights; competing technological and market developments; developments related to regulatory and third party reimbursement matters; the cost and progress of the Company's research and development efforts; and other factors. In the event that additional financing is needed, the Company may seek to raise additional funds through public or private financing, collaborative relationships or other arrangements. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies, products or marketing territories. Failure to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that such financing, if required, will be available on terms satisfactory to the Company, if at all. 15 RISK FACTORS UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS Much of the Company's ability to increase revenues and to achieve profitability and positive cash flow will depend on the successful introduction of new products, primarily the RELEASE-NF CATHETER, the FEMSOFT INSERT and the new hydrophilic personal catheter. These products 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. LIMITED REVENUES; HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES The Company has generated only limited revenues to date and has experienced net losses since its inception. Net losses for the fiscal years ended September 30, 2000, 1999 and 1998 were $5.5 million, $4.4 million and $2.3 million, respectively. The Company had an accumulated deficit of approximately $19.7 million at September 30, 2000. The Company's ability to increase revenues and achieve profitability and positive cash flow will depend primarily upon market acceptance of, and achievement of material sales from, the Company's new products, particularly the RELEASE-NF CATHETER, FEMSOFT INSERT and hydrophilic personal catheter, of which there can be no assurance. A substantial portion of the expenses associated with the Company's manufacturing facilities are fixed in nature (i.e. depreciation) and will reduce the Company's operating margin until such time, if ever, as the Company is able to increase utilization of its capacity through increased sales of its new products. As a result, the Company expects to incur substantial operating losses for the foreseeable future and there can be no assurance that the Company will ever generate substantial revenues or achieve or sustain profitability. 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. 16 Urinary continence care can be managed with a variety of alternative medical treatments and management products or techniques, including adult diapers and absorbent pads, surgery, behavior therapy, pelvic muscle exercise, implantable devices, injectable materials and other medical devices. Manufacturers of these products or techniques are engaged in research to develop more advanced versions of current products and techniques. Many of the companies that are engaged in such development work have substantially greater capital resources than the Company and greater expertise than the Company in research, development and regulatory matters. There can be no assurance that the Company's products will be able to compete with existing or future alternative products, techniques or therapies, or that advancements in existing products, techniques or therapies will not render the Company's products obsolete. DEPENDENCE ON DISTRIBUTION ARRANGEMENTS A significant portion of the Company's net sales to date have depended on the Company's ability to provide products that meet the requirements of medical product companies that resell or distribute the Company's products, and on the sales and marketing efforts of such entities. Arrangements with these entities are likely to continue to be a significant portion of the Company's revenues in the future. There can be no assurance that the Company's purchasers and distributors will be able to successfully market and sell the Company's products, that they will devote sufficient resources to support the marketing of any of the Company's products, that they will market any of the Company's products at prices which will permit such products to develop, achieve, or sustain market acceptance, or that they will not develop alternative sources of supply. The failure of the Company's purchasers and distributors to continue to purchase products from the Company at levels reasonably consistent with their prior purchases or to effectively market the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. POSSIBLE NEED FOR ADDITIONAL CAPITAL The Company intends to expend substantial funds for expansion of sales and marketing activities, product education efforts, advertising and other working capital and general corporate purposes. Although the Company believes its existing resources and anticipated cash flows from operations will be sufficient to satisfy its capital needs for approximately the next two years, there can be no assurance that the Company will not require additional financing before that time. The Company's actual liquidity and capital requirements will depend on numerous factors, including the costs and timing of expansion of sales and marketing activities; the amount of revenues from sales of the Company's existing and new products, including the RELEASE-NF CATHETER and FEMSOFT INSERT; changes in, termination of, and the success of, existing and new distribution arrangements; the cost of maintaining, enforcing and defending patents and other intellectual property rights; competing technological and market developments; developments relating to regulatory and third party reimbursement matters; the cost and progress of the Company's research and development efforts; and other factors. In the event that additional financing is needed, the Company may seek to raise additional funds through public or private financing, collaborate relationships or other arrangements. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. Failure to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that such financing, if required, will be available on terms satisfactory to the Company, if at all. EFFECTS OF GOVERNMENT REGULATION The Company's products, product development activities and manufacturing processes are subject to extensive regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the introduction of medical devices as well as manufacturing, labeling and record keeping procedures for such products. The process of obtaining marketing clearance for new medical products from the FDA can be costly and time consuming, and there can be no assurance that such clearance will be granted timely, if at all, for the Company's products in 17 development, or that FDA review will not involve delays that would adversely affect the Company's ability to commercialize additional products or to expand permitted uses of existing products. Even if regulatory clearance to market a product is obtained from the FDA, this clearance may entail limitations on the indicated uses of the product. Marketing clearance can also be withdrawn by the FDA due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance. The Company may be required to make further filings with the FDA under certain circumstances, such as the addition of product claims or product reformulation. The FDA could also limit or prevent the manufacture or distribution of the Company's products and has the power to require the recall of such products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretation made by the FDA or other regulatory bodies, which may have retroactive effect, will not adversely affect the Company. The FDA and various state agencies inspect the Company and its facilities from time to time to determine whether the Company is in compliance with regulations relating to medical device manufacturing companies, including regulations concerning design, manufacturing, testing, quality control and product labeling practices. A determination that the Company is in material violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls, product seizures, or, in extreme cases, criminal sanctions. A portion of the Company's revenues are dependent upon sales of its products outside the United States. Foreign regulatory bodies have established varying regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. The Company relies on its third-party foreign distributors to comply with certain foreign regulatory requirements. The inability or failure of the Company or such foreign distributors to comply with varying foreign regulations or the imposition of new regulations could restrict the sale of the Company's products internationally and thereby adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON THIRD PARTY REIMBURSEMENT The Company's products are purchased by medical care institutions and other users, which bill various third party payors, such as government health programs, private health insurance plans, managed care organizations and other similar programs, for the health care products and services provided to their patients. Payors may deny reimbursement if they determine that a product used in a procedure was not used in accordance with established payor protocols regarding cost-efficient treatment methods, was used for an unapproved indication or was not otherwise covered. Third party payors are increasingly challenging the prices charged for medical products and services and, in some instances, have pressured medical suppliers to lower their prices. The Company is unable to predict what changes will be made in the reimbursement methods used by third party health care payors. There can be no assurance that treatments utilizing the Company's products will be considered cost effective by third party payors, that reimbursement for such treatments will be available or, if available, that payor reimbursement levels will not adversely affect the Company's ability to sell its products on a profitable basis. Moreover, Medicare, Medicaid and private third party payors may limit reimbursement for disposable devices such as those manufactured by the Company by implementing fee schedules or by allowing reimbursement for only a fixed number of devices per month. In addition, healthcare costs have risen significantly over the past decade, and there have been and may continue to be proposals by legislators, regulators and third party payors to curb these costs. The Company is currently in the process of assessing the eligibility of the FEMSOFT INSERT for reimbursement. Failure by users of the Company's products to obtain reimbursement from third party payors, changes in third party payors' policies towards reimbursement for the Company's products or legislative action limiting reimbursement for certain procedures or products could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS The Company's success may depend in part on its ability to obtain patent protection for its products and manufacturing processes, to preserve its trade secrets, and to operate without 18 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. 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. 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's operations are not currently subject to market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature. ITEM 8. FINANCIAL STATEMENTS ROCHESTER MEDICAL CORPORATION FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 PAGE ---- Report of Independent Auditors ............. 20 Audited Financial Statements ............... 21-31 Balance Sheets ............................ 21 Statements of Operations .................. 22 Statement of Shareholders' Equity ......... 23 Statements of Cash Flows .................. 24 Notes to Financial Statements ............. 25 20 REPORT OF INDEPENDENT AUDITORS Shareholders Rochester Medical Corporation We have audited the accompanying balance sheets of Rochester Medical Corporation as of September 30, 2000 and 1999, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2000. Our audits also included the financial statement schedule listed in Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2000, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota October 20, 2000 21 ROCHESTER MEDICAL CORPORATION BALANCE SHEETS
SEPTEMBER 30, --------------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,204,161 $ 4,216,814 Marketable securities 5,654,442 9,029,296 Accounts receivable, less allowance for doubtful accounts ($62,567 - 2000; $59,466 - 1999) 1,007,432 1,369,662 Inventories, net 1,892,455 2,047,820 Prepaid expenses and other current assets 251,328 347,860 ------------ ------------ Total current assets 12,009,818 17,011,452 Property, plant and equipment: Land 169,707 169,707 Buildings 5,250,720 5,221,078 Construction in progress -- 1,699,440 Equipment and fixtures 9,984,496 7,638,733 ------------ ------------ 15,404,923 14,728,958 Less accumulated depreciation (4,351,235) (3,257,233) ------------ ------------ Total property, plant and equipment 11,053,688 11,471,725 Patents, less accumulated amortization ($710,492 - 2000 $641,516 - 1999) 190,717 219,218 ------------ ------------ Total assets $ 23,254,223 $ 28,702,395 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 799,737 $ 689,475 Accrued compensation 530,276 556,329 Accrued clinical costs -- 45,214 Accrued expenses 351,192 234,371 ------------ ------------ Total current liabilities 1,681,205 1,525,389 Shareholders' equity: Common Stock, no par value: Authorized shares - 20,000,000 Issued and outstanding shares; (5,338,900 - 2000; 5,349,500 - 1999) $ 41,279,359 $ 41,352,202 Accumulated deficit (19,706,341) (14,175,196) ------------ ------------ Total shareholders' equity 21,573,018 27,177,006 ------------ ------------ Total liabilities and shareholders' equity $ 23,254,223 $ 28,702,395 ============ ============
SEE ACCOMPANYING NOTES. 22 ROCHESTER MEDICAL CORPORATION STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, ----------------------------------------------------- 2000 1999 1998 --------------- --------------- ----------------- Net sales .............................................. $ 7,860,132 $ 7,340,870 $ 9,518,311 Cost of sales .......................................... 6,151,195 5,602,042 6,604,201 ------------ ------------ ------------- Gross profit ........................................... 1,708,937 1,738,828 2,914,110 Operating expenses: Marketing and selling ................................. 4,588,874 3,943,589 3,190,642 Research and development .............................. 1,008,431 1,052,090 1,384,210 General and administrative ............................ 2,237,985 1,863,194 1,445,167 ------------ ------------ ------------- Total operating expenses ............................... 7,835,290 6,858,873 6,020,019 Loss from operations ................................... (6,126,353) (5,120,045) (3,105,909) Other income (expense): Interest income ....................................... 595,208 719,322 847,662 Interest expense ...................................... -- -- -- ------------ ------------ ------------- Net loss ............................................... $ (5,531,145) $ (4,400,723) $ (2,258,247) ============ ============ ============= Net loss per common share -- basic and diluted ......... $ (1.04) $ (.83) $ (.44) ============ ============ ============= Weighted average number of common shares outstanding ........................................... 5,341,243 5,332,868 5,140,670 ============ ============ =============
SEE ACCOMPANYING NOTES. 23 ROCHESTER MEDICAL CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------------------ ACCUMULATED SHARES AMOUNT DEFICIT TOTAL ------------- -------------- ---------------- -------------- Balance at September 30, 1997 ............. 4,133,500 $24,697,199 $ (7,516,226) $17,180,973 Common Stock issued in public offering ................................ 1,125,000 15,862,253 -- 15,862,253 Exercise of common stock options ......... 11,000 132,750 -- 132,750 Net loss for the year .................... -- -- (2,258,247) (2,258,247) --------- ----------- ------------ ------------ Balance at September 30, 1998 ............. 5,269,500 40,692,202 (9,774,473) 30,917,729 Exercise of common stock options ......... 80,000 660,000 -- 660,000 Net loss for the year .................... -- -- (4,400,723) (4,400,723) --------- ----------- ------------ ------------ Balance at September 30, 1999 ............. 5,349,500 $41,352,202 $(14,175,196) $27,177,006 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 ========= =========== ============ ============
SEE ACCOMPANYING NOTES. 24 ROCHESTER MEDICAL CORPORATION STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------------------------ 2000 1999 1998 ---------------- ---------------- ---------------- OPERATING ACTIVITIES Net loss ............................................... $(5,531,145) $(4,400,723) $(2,258,247) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................... 1,162,978 837,331 776,699 Changes in operating assets and liabilities: Accounts receivable .................................. 362,230 585,386 12,146 Inventories .......................................... 155,365 161,779 (555,866) Other current assets ................................. 96,532 141,141 (235,216) Accounts payable ..................................... 110,262 (76,829) 308,740 Other current liabilities ............................ 45,554 (215,803) 76,882 ----------- ----------- ----------- Net cash used in operating activities .................. (3,598,224) (2,967,718) (1,874,862) INVESTING ACTIVITIES Capital expenditures ................................... (675,965) (798,285) (2,305,258) Patents ................................................ (40,475) (58,081) (43,579) Purchase of marketable securities ...................... (23,570,342) (54,892,037) (50,871,767) Sales and maturities of marketable securities .......... 26,945,196 59,408,013 40,773,957 ----------- ----------- ----------- Net cash provided by (used in) investing activities 2,658,414 3,659,610 (12,446,647) FINANCING ACTIVITIES Sale (purchase) of Common Stock ........................ (72,843) 660,000 15,995,003 ----------- ----------- ----------- Net cash provided by (used in) financing activities ............................................ (72,843) 660,000 15,995,003 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ........................................... (1,012,653) 1,351,892 1,673,494 Cash and cash equivalents at beginning of year ......... 4,216,814 2,864,922 1,191,428 ----------- ----------- ----------- Cash and cash equivalents at end of year ............... $ 3,204,161 $ 4,216,814 $ 2,864,922 =========== =========== ===========
SEE ACCOMPANYING NOTES. 25 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000 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 cost which approximates fair value as determined by published market data. The balance at September 30, 2000 consists of $3,000,000 of bonds maturing in 2001 and $2,650,000 of commercial paper. At September 30, 1999, the balance consisted entirely of bonds and commercial paper. MANUFACTURING AND SALES The Company manufactures and sells its products to a full range of companies in the medical industry on a worldwide basis. There is a concentration of sales to larger medical wholesalers and distributors. Sales of products are recorded upon shipment. The Company performs periodic credit evaluations of its customers' financial condition. The Company requires irrevocable letters of credit on sales to certain foreign customers. Receivables generally are due within 30 days. Credit losses relating to customers consistently have been within management expectations. INVENTORIES Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is based on estimated useful lives of 4 -- 35 years computed using the straight-line method. PATENTS Capitalized costs include costs incurred in connection with making patent applications for the Company's products and are amortized on a straight-line basis over eight years. The Company periodically reviews its patents for impairment of value. Any adjustment from the analysis is charged to operations. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to operations as incurred. Research and development costs include clinical testing costs, certain salary and related expenses, other labor costs, materials and an allocation of certain overhead expenses. INCOME TAXES Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. 26 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No 123, "Accounting for Stock-Based Compensation." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPAIRMENT OF LONG-LIVED ASSETS The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. NET LOSS PER SHARE Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Fully diluted and basic net loss per share are the same because the effect of common equivalent shares from stock options and convertible debt are excluded from the computation as their effect is antidilutive. 3. ADVERTISING COSTS The Company incurred advertising expenses of $1,347,000, $779,000 and $414,000 for the years ended September 30, 2000, 1999 and 1998, respectively. All advertising costs are charged to operations as incurred. 4. INVENTORIES Inventories are summarized as follows: SEPTEMBER 30, ------------------------------ 2000 1999 -------------- ------------- Raw materials .............................. $ 771,468 $ 652,229 Work-in-process ............................ 766,466 1,058,716 Finished goods ............................. 452,640 445,605 Reserve for inventory obsolescence ......... (98,119) (108,730) ---------- ---------- $1,892,455 $2,047,820 ========== ========== 5. SHAREHOLDERS' EQUITY STOCK OPTIONS In August 1998, the 1991 Stock Option Plan (the Plan) was amended to increase by 300,000 shares the number of shares authorized for issuance to 1,000,000 shares. Under terms of the Plan, the Board of Directors may grant employee incentive stock options equal to fair market value of the Company's Common Stock or employee non-qualified options at a price which cannot be less than 85% of the fair market value. Automatic non-employee director options are also covered 27 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY (CONTINUED) under the Plan, under which 1,000 shares are granted at fair market value to non-employee directors on the date of each of the Company's Annual Meetings. The 1995 Non-Statutory Stock Option Plan authorizes the issuance of up to 50,000 shares of Common Stock. In September 1995, Medical Advisory Board members were granted options to purchase 12,000 shares of the Company's Common Stock at an exercise price of $15.75 per share. In April 1999, one member of the Medical Advisory Board was granted options to purchase 6,000 shares of the Company's Common Stock at an exercise price of $10.125 per share. Option activity is summarized as follows:
AVERAGE SHARES WEIGHTED EXERCISE RESERVED OPTIONS PRICE PER FOR GRANT OUTSTANDING SHARE ------------- ------------- ---------- Balance as of September 30, 1997 ......... 209,000 535,000 $ 12.35 Options granted .......................... (226,000) 226,000 14.90 Options exercised ........................ -- (11,000) 12.07 Options canceled ......................... 27,000 (27,000) 14.13 Increase in authorized shares ............ 300,000 -- -- -------- ------- -------- Balance as of September 30, 1998 ......... 310,000 723,000 13.09 Options granted .......................... (173,500) 173,500 11.40 Options exercised ........................ -- (80,000) 8.25 Options canceled ......................... 70,000 (70,000) 13.80 -------- ------- -------- Balance as of September 30, 1999 ......... 206,500 746,500 13.15 Options granted .......................... (153,000) 153,000 7.85 Options exercised ........................ -- -- -- Options canceled ......................... 124,375 (124,375) 13.34 -------- -------- -------- Balance as of September 30, 2000 ......... 177,875 775,125 $ 12.07 ======== ======== ========
The weighted average fair value of options granted in 2000, 1999 and 1998 was $4.90, $7.48 and $9.67 per share, respectively. The exercise price of options outstanding at September 30, 2000 ranged from $6.00 to $20.00 per share as summarized in the following table:
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OUTSTANDING REMAINING EXERCISABLE EXERCISE PRICE RANGE OF EXERCISE PRICES AT 9/30/00 CONTRACTUAL LIFE AT 9/30/00 PER SHARE - -------------------------- ------------- ------------------ ------------- ----------------- $6.00 -- $10.75 .......... 325,375 6.8 years 135,125 $ 8.25 10.76 -- 14.75 ........... 301,250 6.0 years 229,750 13.95 14.76 -- 20.00 ........... 148,500 6.2 years 103,750 16.54 ------- ------- 775,125 6.4 years 468,625 $ 12.88 ======= =======
The number of stock options exercisable at September 30, 2000, 1999 and 1998 was 468,625, 367,000 and 307,500 at a weighted average exercise price of $12.88, $12.80 and $9.68 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 28 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY (CONTINUED) options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.08%; volatility factor of the expected market price of the Company's common stock of .528 and a weighted average expected life of the option of seven years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information is as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------ 2000 1999 1998 ---------------- ---------------- ---------------- Pro forma net loss .......................... $ (6,803,649) $ (5,934,181) $ (3,796,025) Pro forma net loss per common share ......... $ (1.27) $ (1.11) $ (.74)
These pro forma amounts may not be indicative of future years' amounts since the statement provides for a phase in of option values beginning with those granted in fiscal 1997. WARRANTS In connection with the November 1995 public offering, the Company sold to the underwriters for a nominal purchase price five-year warrants to purchase 75,000 shares of Common Stock at $14.85 per share. The warrants can be exercised any time through November 2000. 29 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES Deferred income taxes are due to temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred income taxes are as follows:
SEPTEMBER 30, --------------------------- 2000 1999 ------------ ---------- Deferred assets: Net operating loss ........................... $ 7,484,000 $5,466,000 Research and development credits ............. 164,000 143,000 Allowance for uncollectible accounts ......... 23,000 22,000 Inventory reserves ........................... 36,000 40,000 Inventory capitalization ..................... 68,000 37,000 Accrued expenses ............................. 116,000 61,000 ------------ ---------- Subtotal ..................................... 7,891,000 5,769,000 Deferred liability: Depreciation and amortization ................ 346,000 386,000 ------------ ---------- Net deferred income tax assets ............... 7,545,000 5,383,000 Valuation allowance .......................... (7,545,000) (5,383,000) ------------ ---------- 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 $20,436,000 can be carried forward to offset future taxable income, subject to the limitation of Internal Revenue Code Section 382. The net operating loss carryforward will expire at different times beginning in 2005. 7. LEASES Rent expense from operating leases for the years ended September 30, 2000, 1999 and 1998 was $1,000, $5,000 and $7,000, respectively. 8. RELATED PARTY TRANSACTIONS The brother-in-law of the CEO and President, the Vice President of Production Technologies and a member of the board of directors of the Company has performed legal services for the Company. During the years ended September 30, 2000, 1999 and 1998, the Company incurred legal fees and expenses of approximately $16,000, $46,000 and $71,000, 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 2000, 1999 and 1998, the Company paid Petersen Blacksmith Company the sum of $56,000, $46,000 and $231,000, 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. 30 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. CONVATEC AGREEMENT On August 11, 1995, the Company entered into a Distribution and Co-Development Agreement (the "Distribution Agreement") with ConvaTec, a division of E.R. Squibb & Sons, Inc., a wholly-owned subsidiary of Bristol-Myers Squibb Company ("ConvaTec"), for the purpose of marketing and distributing the Company's incontinence and urological devices. Under the Distribution Agreement, the Company has granted ConvaTec, subject to obligations and limitations imposed by the Company's other distribution agreements, worldwide rights to market the Company's current products and products in development. The Company is obligated to offer ConvaTec rights of first and last refusal to market all products developed after the date of the Distribution Agreement. Under the Distribution Agreement, the Company retains worldwide marketing rights to its products under the Rochester Medical brand. In April 1998, the Company and ConvaTec entered into a Revised and Restated Distribution Agreement (the "Revised Agreement") which grants ConvaTec limited territorial rights to market certain of the Company's standard male external catheter and Foley catheter products under the ConvaTec name. In addition to retaining worldwide marketing rights for Rochester Medical brand products, the Revised Agreement provides the Company exclusive marketing rights for its advanced products and products in development. 10. SIGNIFICANT CUSTOMERS Significant customers, measured as a percentage of sales, are summarized as follows: SEPTEMBER 30, ------------------ 2000 1999 1998 ---- ---- ---- Significant customers: ConvaTec ........... 16% 16% 25% Hollister .......... 9 7 7 Maersk ............. 15 18 15* Mentor ............. 1 10 21 -- -- -- Total ................ 41% 51% 68% == == == - ------------------ * 1998 includes sales to Euromedical Industries SdN., which was acquired by Maersk in July of 1998. In May 1998, Mentor advised the Company of its intention to manufacture its own silicone male external catheters under the royalty-free license it holds from the Company. There have been no sales of male external catheters to Mentor since the first quarter of fiscal 1999. 31 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, 2000, 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, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to portions of the Proxy Statement for Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended September 30, 2000. 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, 2000. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements are filed herewith in Item 8. (i) Balance Sheets as of September 30, 2000 and 1999. (ii) Statements of Operations for the years ended September 30, 2000, 1999 and 1998. (iii) Statement of Shareholders' Equity for the years ended September 30, 2000 and 1999. (iv) Statements of Cash Flows for the years ended September 30, 2000, 1999 and 1998. (v) Notes to financial statements at September 30, 2000. (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). 32 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.* 10.7 Change of Control Agreement dated November 21, 2000, between the Company and Dara Lynn Horner.* 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.* 10.10 Change of Control Agreement dated November 21, 2000, between the Company and David A. Jonas.* 10.11 Revised and Restated Distribution Agreement, dated as of May 6, 1998, between the Company and E. R. Squibb & Sons, Inc. (through its ConvaTec division). (Incorporated by reference to Exhibit 10.17 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 23 Consent of Ernst & Young LLP.* 24 Power of Attorney* 27 Financial Data Schedule.* - ------------------ * Filed herewith. (c) Registrant filed no Report on Form 8-K during its fourth fiscal quarter. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCHESTER MEDICAL CORPORATION Dated: December 19, 2000 By: /s/ ANTHONY J. CONWAY ------------------------------------ Anthony J. Conway CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF EXECUTIVE OFFICER AND SECRETARY Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE - ----------------------------- ------------------------------------------------ /s/ ANTHONY J. CONWAY Chairman of the Board, President, -------------------------- Chief Executive Officer, and Secretary Anthony J. Conway (PRINCIPAL EXECUTIVE OFFICER) /s/ DAVID A. JONAS Controller, Treasurer and Director of Operations -------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) David A. Jonas * Vice President, Production Technologies -------------------------- and Director Philip J. Conway * Vice President, Research and Development -------------------------- and Director Richard D. Fryar * Director -------------------------- Darnell L. Boehm * Director -------------------------- Peter R. Conway * Director -------------------------- Roger W. Schnobrich *By /s/ DAVID A. JONAS Dated: December 19, 2000 ---------------------- David A. Jonas ATTORNEY-IN-FACT 34 ROCHESTER MEDICAL CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR CONTINUING OPERATIONS
- ---------------------------------------------------------------------------------------------------------- COL. A. COL. B COL. C COL. D COL. E - ---------------------------------------------------------------------------------------------------------- ADDITIONS ---------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES -- DESCRIBE -- DESCRIBE PERIOD - ------------------------------ ------------ ----------------- ---------------- --------------- ----------- Year ended September 30, 2000: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ................... $ 59,466 $ 12,000 -- $ 8,899(1) $ 62,567 Allowance for inventory obsolescence ............... 108,729 14,000 -- 24,611(2) 98,118 Allowance for inventory valuation .................. -- 200,849(3) -- -- 200,849 Year ended September 30, 1999: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ................... $ 50,000 $ 10,000 -- $ 534(1) $ 59,466 Allowance for inventory obsolescence ............... 50,034 60,000 -- 1,305(2) 108,729 Allowance for inventory valuation .................. -- -- -- -- -- Year ended September 30, 1998: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ................... $ 52,099 $ 9,000 -- $11,099(1) $ 50,000 Allowance for inventory obsolescence ............... 91,910 12,300 -- 54,106(2) 50,034 Allowance for inventory valuation .................. -- -- -- -- --
- ------------------ (1) Uncollectable accounts written off net of recoveries (2) Obsolete disposed of net of recoveries (3) Valuation of inventory at lower of cost or market INDEX TO EXHIBITS
EXHIBIT PAGE - --------- ----- 3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-2, Registration Number 33-97788) .................................................................... 3.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 of Registrant's Registration Statement on Form S-18, Registration Number 33-36362-C) ......................................................................... 3.3 Amendment to Restated Bylaws of the Company. (Incorporated by reference to Exhibit 4.3 of Registrant's Registration Statement on Form S-2, Registration Number 33-97788) .................................................................... 4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.4 of Registrant's Annual Report on Form 10-KSB for fiscal year ended September 30, 1995) ................................................................. 4.2 The Company's 1991 Stock Option Plan as amended (Incorporated by reference to Exhibit 4.5 of Registrant's Registration Statement on Form S-8, Registration Number 333-10261) ................................................................... 4.3 Amendment to the Company's 1991 Stock Option Plan as amended (Incorporated by reference to Exhibit 4.3 of Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1998) ............................................... 10.1 Employment Agreement, dated August 31, 1990 between the Company and Anthony J. Conway. (Incorporated by reference to Exhibit 10.13 of Registrant's Registration Statement on Form S-18, Registration Number 33-36362-C) ................ 10.2 Employment Agreement, dated August 31, 1990 between the Company and Philip J. Conway. (Incorporated by reference to Exhibit 10.14 of Registrant's Registration Statement on Form S-18, Registration Number 33-36362-C) ................ 10.3 Change of Control Agreement dated December 4, 1998, between the Company and Philip J. Conway (Incorporated by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1998) ................ 10.4 Employment Agreement, dated August 31, 1990 between the Company and Richard D. Fryar. (Incorporated by reference to Exhibit 10.15 of Registrant's Registration Statement on Form S-18, Registration Number 33-36362-C) ................ 10.5 Change of Control Agreement dated December 4, 1998, between the Company and Richard D. Fryar (Incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1998) ................ 10.6 Change of Control Agreement dated November 21, 2000, between the Company and Anthony J. Conway ............................................................... 10.7 Change of Control Agreement dated November 21, 2000, between the Company and Dara Lynn Horner ................................................................ 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 ............................................................... 10.10 Change of Control Agreement dated November 21, 2000, between the Company and David A. Jonas* ................................................................. 10.11 Revised and Restated Distribution Agreement, dated as of May 6, 1998, between the Company and E. R. Squibb & Sons, Inc. (through its ConvaTec division) (Incorporated by reference to Exhibit 10.17 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) ..................................... 23 Consent of Ernst & Young LLP ........................................................ 24 Power of Attorney ................................................................... 27 Financial Data Schedule .............................................................
EX-10.6 2 0002.txt CHANGE OF CONTROL AGREEMENT EXHIBIT 10.6 Anthony J. Conway Rochester Medical Corporation One Rochester Medical Drive Stewartville, Minnesota 55976 Dear Anthony: You are presently the President, Chief Executive Officer and Secretary of Rochester Medical Corporation, a Minnesota corporation (the "Company"). The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 1 below) of the Company may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Accordingly, the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its stockholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its stockholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own personal situation. In order to induce you to remain in the employ of the Company, this letter agreement (this "Agreement"), which has been approved by the Committee, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. This Agreement also provides you with certain benefits following a Change in Control of the Company regardless of whether your employment by the Company is terminated. In consideration of these benefits, the Agreement contains a covenant not to compete (Section 7, below). 1. Definitions. The following terms shall have the meaning set forth below unless the context clearly requires otherwise. Terms defined elsewhere in this Agreement shall have the same meaning throughout this Agreement. (a) "Cause" shall mean: (i) continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your Disability or from termination by you for Good Reason) which failure, in the reasonable judgment of the Company, is willful; (ii) any act or acts of personal dishonesty by you intended to result in your personal enrichment at the expense of the Company (including but not limited to wrongful appropriation of funds of the Company or its affiliates); (iii) willful and deliberate misconduct during the course of employment; or (iv) the commission of a gross misdemeanor or felony (whether or not the Company is the victim of such offense). (b) "Change in Control" shall be deemed to have occurred if: (i) a tender offer shall be made and consummated for the ownership of fifty percent (50%) or more of the outstanding Voting Securities of the Company; (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than fifty percent (50%) of the outstanding Voting Securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Exchange Act) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company; (iv) a Person shall acquire fifty percent (50%) or more of the outstanding Voting Securities of the Company (whether directly, indirectly, beneficially or of record) (for purposes hereof, ownership of Voting Securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act); or (v) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (v), considered as though such person were a member of the Incumbent Board. Notwithstanding anything in the foregoing to the contrary, no Change in Control of the Company shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in: (A) you, or a group of Persons which includes you, acquiring, directly or indirectly more than fifty percent (50%) of the combined voting power of the Company's Voting Securities; or (B) you becoming immediately employed by a Person which leases and/or manages substantially all of the assets of the Company, providing that the terms of such employment do not constitute a "Good Reason" termination as defined in Subsection 1(f) hereof either when such employment commences or at any time during the then remaining term of this Agreement. (c) "Date of Termination" shall mean the date specified in the Notice of Termination (except in the case of your death, in which case Date of Termination shall be the date of death). (d) "Disability" shall have the same meaning as defined in the Company's long-term disability plan as in effect immediately prior to the Change in Control of the Company. (e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (f) "Good Reason" shall mean termination based on: (i) the assignment to you of employment responsibilities which are not of materially comparable responsibility and status as the employment responsibilities held by you immediately prior to the Change in Control of the Company; (i) a reduction by the Company in your rate of compensation (or an adverse change in the form or timing of the payment thereof) as in effect immediately prior to the Change in Control of the Company; (ii) the failure by the Company to continue in effect any Plan in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control of the Company, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control of the Company or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control in the Company; (iii) the Company's requiring you to be based anywhere other than the environs of the municipality where your office is located immediately prior to the Change in Control of the Company and more than thirty-five (35) miles from such office location, except for required travel on the Company's business, and then only to the extent substantially consistent with the business travel obligations which your undertook on behalf of the Company prior to the Change in Control of the Company; or (iv) the failure by the Company to obtain from any Successor the assent to this Agreement contemplated by Subsection 8(a) hereof. (g) "Notice of Termination" shall mean a written notice which shall state the specific termination provision in this Agreement relied upon. Any purported termination by the Company or by you following a Change in Control of the Company shall be communicated by written Notice of Termination to the other party hereto. (h) "Person" shall mean and include any individual, corporation, partnership, group, association or other "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Exchange Act, and used in Section 14(d) thereof, other than the Company, a wholly-owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company or a wholly-owned subsidiary of the Company. (i) "Plan" shall mean any compensation plan (such as an incentive stock option or restricted stock plan) or any employee benefit plan (such as a thrift, pension, profit sharing, medical, disability, accident, life insurance or relocation plan or policy) or any other plan, program, policy or agreement of the Company intended to benefit employees generally, management employees as a group or you in particular, now in existence or becoming effective hereafter during the term of this Agreement. (j) "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Company's Voting Securities, all or substantially all of its assets or otherwise. (k) "Voting Securities" shall mean securities of a corporation ordinarily having the right to vote at elections of directors. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 2001; provided, however, that commencing on January 1, 2002 and each January 1st thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that this Agreement shall continue in effect for a period of twelve (12) months beyond the date of a Change in Control of the Company if such Change in Control of the Company shall have occurred prior to the end of the then current term. 3. Agreement to Provide Services; Right to Terminate. (a) Agreement to Provide Services. You agree to remain in the employ of the Company during the term of this Agreement unless you terminate your employment because of death or Disability or your termination is for Good Reason following a Change in Control of the Company. (b) Right to Terminate Prior to Change in Control. This Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee, to continue your current employment status or to change any employment policies of the Company. Prior to any Change in Control of the Company, the Company may terminate your employment at-will with or without Cause at any time. If a Change in Control of the Company has occurred, the Company may thereafter terminate your employment as herein provided, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. 4. Benefit Payment Upon Fulfillment of Required Service Following Change in Control. If a Change in Control of the Company has occurred then, so long as you have remained in the employ of the Company during the term of this Agreement (including the twelve (12) month period following such Change in Control (as described in Section 2 hereof)), subject to the limitations set forth in Section 10 hereof, within five (5) business days following the end of such twelve (12) month period the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the twelve month (12) period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. No payment shall be paid under this Section 4 if you have not remained in the employ of the Company during the term of this Agreement, regardless of the reason your employment was earlier terminated. 5. Welfare Benefit Plans upon a Change in Control. Following a Change in Control of the Company, unless and until your employment by the Company is terminated for Cause or Disability or you terminate your employment by the Company other than for Good Reason, the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (i) twelve (12) months after the Date of Termination or (ii) the commencement date of equivalent benefits from a new employer, each insured and self-insured employee welfare benefit Plan (including, without limitation, group health, death, dental and disability plans) in which you were entitled to participate immediately prior to the Change in Control of the Company, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and provided that you continue to pay an amount equal to your regular contribution under such Plans for such participation. If, at the end of twelve (12) months after the date of the Date of Termination, you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall arrange, at your sole cost and expense, to enable you to convert your and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at your sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on a federal, state and local income and employment after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this Section 5 or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents equivalent benefits (on a federal, state and local income and employment after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. Any welfare benefits which are subject to continuation rights under state or federal law, and which are provided by the Company pursuant to this Section 5, will be deemed to be provided by the Company in satisfaction of such continuation requirements to the extent permitted under such laws. 6. Benefits Upon Termination of Employment Following Change in Control. (a) Disability or Death. During the term of this Agreement, for any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your compensation at the times, in the form and at the rate then in effect, and any benefits or awards under any and all Plans shall continue to accrue during such period to the extent not inconsistent with such Plans, until your employment is terminated on account of Disability pursuant to and in accordance with the terms hereof. Thereafter, your benefits shall be determined in accordance with the Plans (as in effect immediately prior to a Change in Control of the Company) and as provided in accordance with this Agreement. If your Death occurs during the term of this Agreement, and after a Change in Control of the Company but prior to a termination of your employment, you or your beneficiary (as provided under the applicable Plans) shall receive all benefits or awards (including, without limitation, both the cash and stock components) under any and all Plans as in effect immediately prior to the Change in Control of the Company, and all benefits to which you or your beneficiary may be entitled under the terms of this Agreement. (b) Cause. If, during the term of this Agreement, your employment by the Company shall be terminated for Cause following a Change in Control of the Company, the Company shall pay you your compensation through the Date of Termination at the times, in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. Thereupon, except as otherwise provided in this Agreement, the Company shall have no further obligations to you under this Agreement. (c) Change in Control Termination. If, during the term of this Agreement, after a Change in Control of the Company shall have occurred your employment by the Company shall be terminated by the Company other than for Cause or shall be terminated by you for Good Reason, then you shall be entitled, without regard to any contrary provisions of any Plan, to the benefits as provided below: (i) Compensation. Subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, the Company shall pay your compensation through such Date of Termination in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. (ii) Outplacement Service. The Company shall pay or reimburse you for the costs, fees and expenses of reasonable outplacement assistance services. (iii) Severance. If your termination occurs under this Subsection 6(c) within twelve (12) months following a Change in Control of the Company, then, subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the one (1) year period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. (d) No Setoff. The amount of any payment provided for in this Section 6 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 7. Non-Competition; Non-Solicitation. You and the Company recognize that your services to the Company are special and unique and that your compensation and other benefits are partly in consideration of and conditioned upon your not competing with the Company or its subsidiaries, and that a covenant on your part not to compete during the term of your employment and during a period of twelve (12) full calendar months thereafter is essential to protect the business and goodwill of the Company. Accordingly, you agree that during the term of your employment with the Company or any of its affiliates and for a period of twelve (12) full calendar months following your termination of employment for any reason, you shall not, directly or indirectly, alone or as a partner, officer, director, shareholder or employee of any other firm or entity: (a) engage in any commercial activity in competition with any substantial part of the Company's business as conducted during the term of the Agreement or as of the Date of Termination of your employment or with any substantial part of the Company's contemplated business; (b) assist, solicit, entice, or induce (or assist any other person or entity in soliciting, enticing or inducing) any customer or potential customer (or agent, employee or consultant of any customer or potential customer) with whom you had contact in the course of your employment with the Company to deal with a competitor of the Company; and/or (c) in any manner solicit, assist or encourage (or assist any other person or entity in soliciting or encouraging) any other officer or employee of the Company to work or otherwise provide services for you or for any entity in which you participate in the ownership, management, operation or control of, or is connected with in any manner as an independent contractor, consultant or otherwise.. For purposes of this Section 7, "shareholder" shall not include beneficial ownership of less than five percent (5%) of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange or quoted on NASDAQ. You agree that the services you render to the Company are unique and of extraordinary character; that the Company has agreed to enter into this Agreement and to compensate you in the manner provided for herein relying on that fact; that this covenant not to compete is of the essence of this Agreement and that in the event of a breach or threatened breach of the provisions of the covenant not to compete the Company would suffer irreparable damage for which there is no adequate remedy at law since damages would not be readily determinable. Accordingly, in the event of a breach or a threatened breach by you of this covenant, the Company shall be entitled to a temporary restraining order and an injunction restraining you from any such breach issued by a court of competent jurisdiction notwithstanding the provisions of Section 14 hereof. Should any court of competent jurisdiction determine that any of the covenants set forth in this Section 7 are invalid in any respect, the parties agree that the court so holding may restrict such covenant in time or in area, or in both, or in any other manner which the court determines sufficient to render the covenant enforceable against you. 8. Successors; Binding Agreements. (a) Upon your written request, the Company will seek to have any Successor by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of the Company's obligations under this Agreement. Failure of the Company to obtain such assent at least three (3) business days prior to the time a Person becomes a Successor (or where the Company does not have at least three (3) business days advance notice that a Person may become a successor, within one (1) business day after having notice that such Person may become or has become a Successor) shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company has occurred, shall entitle you immediately to the benefits provided hereunder upon delivery by you of a Notice of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by you, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. (c) For purposes of this Agreement, the "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or other form of business combination in which the Company ceases to exist. 9. Withholding. All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 10. Excess Payment Limitation. Notwithstanding anything in this Agreement to the contrary, in the event that any payment or benefit received or to be received by you in connection with a change in control of the Company or termination of your employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Company, with any person whose actions result in a change in control of the Company or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Company or with any person whose actions result in a change in control of the Company) (collectively, the "Total Payments") would not be deductible (in whole or in part) by the Company or such other person making such payment or providing such benefit solely as a result of Section 280G of the Code, the amounts payable to you under this Agreement shall be reduced until no portion of the Total Payments is not deductible solely as a result of Section 280G of the Code or such amounts payable to you under this Agreement are reduced to zero. For purposes of this limitation: (a) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code (such as payments payable pursuant to the Company's standard or general severance policies); (b) payments pursuant to this Agreement shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in the immediately preceding clause (a)) in their entirety constitute reasonable compensation within the meaning of Section 280G(b)(4)(B) of the Code, in the opinion of the tax counsel referred to in the immediately preceding clause (a); and (c) the value of any other non-cash benefit or of any deferred cash payment included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. In case of uncertainty as to whether all or some portion of a payment is or is not payable to you under this Agreement, the Company shall initially make the payment to you, and you agree to refund to the Company any amounts ultimately determined not to have been payable under the terms hereof. 11. Notice. For the purposes of this Agreement, notices and all other communications provided for in or required under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States certified or registered mail, return receipt requested, postage prepaid and addressed to each party's respective address set forth on the first page of this Agreement (provided that all notices to the Company shall be directed to the attention of the chairman of the board or president of the Company, with a copy to the secretary of the Company), or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Limitation of Damages. If for any reason you believe the benefits provisions of this Agreement have not been properly adhered to by the Company, and if, pursuant to Section 14 hereof, it is determined that the Company has not, in fact, properly adhered to the benefits provisions of this Agreement, the sole and exclusive remedy to which you are entitled are the benefits payment to which you are entitled under the provisions of this Agreement. 14. Dispute Resolution. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Minneapolis, Minnesota by three (3) arbitrators in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators shall be final and binding on both parties. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The arbitrators shall strictly adhere to the sole and exclusive remedy set forth in Section 13 hereof and may not award or assess punitive damages against either party. Each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs of the arbitrators. 15. Related Agreements. To the extent that any provision of any other Plan or agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other Plan agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 16. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 4, 5, 6, 7, 8(b), 14 and 15 of this Agreement shall survive termination of this Agreement and shall remain in full force and effect according to their terms. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the chairman of the board or president of the Company, provided, however, if you occupy those positions at the time, such writings shall be signed by another officer of the Company at the direction of the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Any and all previous written or oral agreements with respect to compensation and/or benefits triggered by a Change in Control of the Company or a similar event are hereby superseded and canceled, and no other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. This Agreement and the legal relations among the parties as to all matters, including, without limitation, matters of validity, interpretation, construction, performance and remedies, shall be governed by and construed in accordance with the internal laws of the State of Minnesota. Headings are for purpose of convenience only and do not constitute a part of this Agreement. The parties hereto agree to perform, or cause to be performed, such further acts and deeds and shall execute and deliver, or cause to be executed and delivered, such additional or supplemental documents or instruments as may be reasonably required by the other party to carry into effect the intent and purpose of this Agreement. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ROCHESTER MEDICAL CORPORATION By: /s/ Anthony J. Conway -------------------------- Name: Anthony J. Conway Title: President and Chief Executive Officer Agreed to this 21st day of November, 2000. /s/ Anthony J. Conway - --------------------- Anthony J. Conway EX-10.7 3 0003.txt CHANGE OF CONTROL AGREEMENT EXHIBIT 10.7 Dara Lynn Horner Rochester Medical Corporation One Rochester Medical Drive Stewartville, Minnesota 55976 Dear Dara Lynn: You are presently the Vice President, FEMSOFT Marketing of Rochester Medical Corporation, a Minnesota corporation (the "Company"). The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 1 below) of the Company may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Accordingly, the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its stockholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its stockholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own personal situation. In order to induce you to remain in the employ of the Company, this letter agreement (this "Agreement"), which has been approved by the Committee, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. This Agreement also provides you with certain benefits following a Change in Control of the Company regardless of whether your employment by the Company is terminated. In consideration of these benefits, the Agreement contains a covenant not to compete (Section 7, below). 1. Definitions. The following terms shall have the meaning set forth below unless the context clearly requires otherwise. Terms defined elsewhere in this Agreement shall have the same meaning throughout this Agreement. (a) "Cause" shall mean: (i) continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your Disability or from termination by you for Good Reason) which failure, in the reasonable judgment of the Company, is willful; (ii) any act or acts of personal dishonesty by you intended to result in your personal enrichment at the expense of the Company (including but not limited to wrongful appropriation of funds of the Company or its affiliates); (iii) willful and deliberate misconduct during the course of employment; or (iv) the commission of a gross misdemeanor or felony (whether or not the Company is the victim of such offense). (b) "Change in Control" shall be deemed to have occurred if: (i) a tender offer shall be made and consummated for the ownership of fifty percent (50%) or more of the outstanding Voting Securities of the Company; (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than fifty percent (50%) of the outstanding Voting Securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Exchange Act) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company; (iv) a Person shall acquire fifty percent (50%) or more of the outstanding Voting Securities of the Company (whether directly, indirectly, beneficially or of record) (for purposes hereof, ownership of Voting Securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act); or (v) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (v), considered as though such person were a member of the Incumbent Board. Notwithstanding anything in the foregoing to the contrary, no Change in Control of the Company shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in: (A) you, or a group of Persons which includes you, acquiring, directly or indirectly more than fifty percent (50%) of the combined voting power of the Company's Voting Securities; or (B) you becoming immediately employed by a Person which leases and/or manages substantially all of the assets of the Company, providing that the terms of such employment do not constitute a "Good Reason" termination as defined in Subsection 1(f) hereof either when such employment commences or at any time during the then remaining term of this Agreement. (c) "Date of Termination" shall mean the date specified in the Notice of Termination (except in the case of your death, in which case Date of Termination shall be the date of death). (d) "Disability" shall have the same meaning as defined in the Company's long-term disability plan as in effect immediately prior to the Change in Control of the Company. (e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (f) "Good Reason" shall mean termination based on: (i) the assignment to you of employment responsibilities which are not of materially comparable responsibility and status as the employment responsibilities held by you immediately prior to the Change in Control of the Company; (i) a reduction by the Company in your rate of compensation (or an adverse change in the form or timing of the payment thereof) as in effect immediately prior to the Change in Control of the Company; (ii) the failure by the Company to continue in effect any Plan in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control of the Company, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control of the Company or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control in the Company; (iii) the Company's requiring you to be based anywhere other than the environs of the municipality where your office is located immediately prior to the Change in Control of the Company and more than thirty-five (35) miles from such office location, except for required travel on the Company's business, and then only to the extent substantially consistent with the business travel obligations which your undertook on behalf of the Company prior to the Change in Control of the Company; or (iv) the failure by the Company to obtain from any Successor the assent to this Agreement contemplated by Subsection 8(a) hereof. (g) "Notice of Termination" shall mean a written notice which shall state the specific termination provision in this Agreement relied upon. Any purported termination by the Company or by you following a Change in Control of the Company shall be communicated by written Notice of Termination to the other party hereto. (h) "Person" shall mean and include any individual, corporation, partnership, group, association or other "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Exchange Act, and used in Section 14(d) thereof, other than the Company, a wholly-owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company or a wholly-owned subsidiary of the Company. (i) "Plan" shall mean any compensation plan (such as an incentive stock option or restricted stock plan) or any employee benefit plan (such as a thrift, pension, profit sharing, medical, disability, accident, life insurance or relocation plan or policy) or any other plan, program, policy or agreement of the Company intended to benefit employees generally, management employees as a group or you in particular, now in existence or becoming effective hereafter during the term of this Agreement. (j) "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Company's Voting Securities, all or substantially all of its assets or otherwise. (k) "Voting Securities" shall mean securities of a corporation ordinarily having the right to vote at elections of directors. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 2001; provided, however, that commencing on January 1, 2002 and each January 1st thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that this Agreement shall continue in effect for a period of twelve (12) months beyond the date of a Change in Control of the Company if such Change in Control of the Company shall have occurred prior to the end of the then current term. 3. Agreement to Provide Services; Right to Terminate. (a) Agreement to Provide Services. You agree to remain in the employ of the Company during the term of this Agreement unless you terminate your employment because of death or Disability or your termination is for Good Reason following a Change in Control of the Company. (b) Right to Terminate Prior to Change in Control. This Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee, to continue your current employment status or to change any employment policies of the Company. Prior to any Change in Control of the Company, the Company may terminate your employment at-will with or without Cause at any time. If a Change in Control of the Company has occurred, the Company may thereafter terminate your employment as herein provided, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. 4. Benefit Payment Upon Fulfillment of Required Service Following Change in Control. If a Change in Control of the Company has occurred then, so long as you have remained in the employ of the Company during the term of this Agreement (including the twelve (12) month period following such Change in Control (as described in Section 2 hereof)), subject to the limitations set forth in Section 10 hereof, within five (5) business days following the end of such twelve (12) month period the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the twelve month (12) period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. No payment shall be paid under this Section 4 if you have not remained in the employ of the Company during the term of this Agreement, regardless of the reason your employment was earlier terminated. 5. Welfare Benefit Plans upon a Change in Control. Following a Change in Control of the Company, unless and until your employment by the Company is terminated for Cause or Disability or you terminate your employment by the Company other than for Good Reason, the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (i) twelve (12) months after the Date of Termination or (ii) the commencement date of equivalent benefits from a new employer, each insured and self-insured employee welfare benefit Plan (including, without limitation, group health, death, dental and disability plans) in which you were entitled to participate immediately prior to the Change in Control of the Company, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and provided that you continue to pay an amount equal to your regular contribution under such Plans for such participation. If, at the end of twelve (12) months after the date of the Date of Termination, you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall arrange, at your sole cost and expense, to enable you to convert your and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at your sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on a federal, state and local income and employment after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this Section 5 or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents equivalent benefits (on a federal, state and local income and employment after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. Any welfare benefits which are subject to continuation rights under state or federal law, and which are provided by the Company pursuant to this Section 5, will be deemed to be provided by the Company in satisfaction of such continuation requirements to the extent permitted under such laws. 6. Benefits Upon Termination of Employment Following Change in Control. (a) Disability or Death. During the term of this Agreement, for any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your compensation at the times, in the form and at the rate then in effect, and any benefits or awards under any and all Plans shall continue to accrue during such period to the extent not inconsistent with such Plans, until your employment is terminated on account of Disability pursuant to and in accordance with the terms hereof. Thereafter, your benefits shall be determined in accordance with the Plans (as in effect immediately prior to a Change in Control of the Company) and as provided in accordance with this Agreement. If your Death occurs during the term of this Agreement, and after a Change in Control of the Company but prior to a termination of your employment, you or your beneficiary (as provided under the applicable Plans) shall receive all benefits or awards (including, without limitation, both the cash and stock components) under any and all Plans as in effect immediately prior to the Change in Control of the Company, and all benefits to which you or your beneficiary may be entitled under the terms of this Agreement. (b) Cause. If, during the term of this Agreement, your employment by the Company shall be terminated for Cause following a Change in Control of the Company, the Company shall pay you your compensation through the Date of Termination at the times, in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. Thereupon, except as otherwise provided in this Agreement, the Company shall have no further obligations to you under this Agreement. (c) Change in Control Termination. If, during the term of this Agreement, after a Change in Control of the Company shall have occurred your employment by the Company shall be terminated by the Company other than for Cause or shall be terminated by you for Good Reason, then you shall be entitled, without regard to any contrary provisions of any Plan, to the benefits as provided below: (i) Compensation. Subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, the Company shall pay your compensation through such Date of Termination in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. (ii) Outplacement Service. The Company shall pay or reimburse you for the costs, fees and expenses of reasonable outplacement assistance services. (iii) Severance. If your termination occurs under this Subsection 6(c) within twelve (12) months following a Change in Control of the Company, then, subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the one (1) year period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. (d) No Setoff. The amount of any payment provided for in this Section 6 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 7. Non-Competition; Non-Solicitation. You and the Company recognize that your services to the Company are special and unique and that your compensation and other benefits are partly in consideration of and conditioned upon your not competing with the Company or its subsidiaries, and that a covenant on your part not to compete during the term of your employment and during a period of twelve (12) full calendar months thereafter is essential to protect the business and goodwill of the Company. Accordingly, you agree that during the term of your employment with the Company or any of its affiliates and for a period of twelve (12) full calendar months following your termination of employment for any reason, you shall not, directly or indirectly, alone or as a partner, officer, director, shareholder or employee of any other firm or entity: (a) engage in any commercial activity in competition with any substantial part of the Company's business as conducted during the term of the Agreement or as of the Date of Termination of your employment or with any substantial part of the Company's contemplated business; (b) assist, solicit, entice, or induce (or assist any other person or entity in soliciting, enticing or inducing) any customer or potential customer (or agent, employee or consultant of any customer or potential customer) with whom you had contact in the course of your employment with the Company to deal with a competitor of the Company; and/or (c) in any manner solicit, assist or encourage (or assist any other person or entity in soliciting or encouraging) any other officer or employee of the Company to work or otherwise provide services for you or for any entity in which you participate in the ownership, management, operation or control of, or is connected with in any manner as an independent contractor, consultant or otherwise.. For purposes of this Section 7, "shareholder" shall not include beneficial ownership of less than five percent (5%) of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange or quoted on NASDAQ. You agree that the services you render to the Company are unique and of extraordinary character; that the Company has agreed to enter into this Agreement and to compensate you in the manner provided for herein relying on that fact; that this covenant not to compete is of the essence of this Agreement and that in the event of a breach or threatened breach of the provisions of the covenant not to compete the Company would suffer irreparable damage for which there is no adequate remedy at law since damages would not be readily determinable. Accordingly, in the event of a breach or a threatened breach by you of this covenant, the Company shall be entitled to a temporary restraining order and an injunction restraining you from any such breach issued by a court of competent jurisdiction notwithstanding the provisions of Section 14 hereof. Should any court of competent jurisdiction determine that any of the covenants set forth in this Section 7 are invalid in any respect, the parties agree that the court so holding may restrict such covenant in time or in area, or in both, or in any other manner which the court determines sufficient to render the covenant enforceable against you. 8. Successors; Binding Agreements. (a) Upon your written request, the Company will seek to have any Successor by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of the Company's obligations under this Agreement. Failure of the Company to obtain such assent at least three (3) business days prior to the time a Person becomes a Successor (or where the Company does not have at least three (3) business days advance notice that a Person may become a successor, within one (1) business day after having notice that such Person may become or has become a Successor) shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company has occurred, shall entitle you immediately to the benefits provided hereunder upon delivery by you of a Notice of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by you, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. (c) For purposes of this Agreement, the "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or other form of business combination in which the Company ceases to exist. 9. Withholding. All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 10. Excess Payment Limitation. Notwithstanding anything in this Agreement to the contrary, in the event that any payment or benefit received or to be received by you in connection with a change in control of the Company or termination of your employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Company, with any person whose actions result in a change in control of the Company or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Company or with any person whose actions result in a change in control of the Company) (collectively, the "Total Payments") would not be deductible (in whole or in part) by the Company or such other person making such payment or providing such benefit solely as a result of Section 280G of the Code, the amounts payable to you under this Agreement shall be reduced until no portion of the Total Payments is not deductible solely as a result of Section 280G of the Code or such amounts payable to you under this Agreement are reduced to zero. For purposes of this limitation: (a) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code (such as payments payable pursuant to the Company's standard or general severance policies); (b) payments pursuant to this Agreement shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in the immediately preceding clause (a)) in their entirety constitute reasonable compensation within the meaning of Section 280G(b)(4)(B) of the Code, in the opinion of the tax counsel referred to in the immediately preceding clause (a); and (c) the value of any other non-cash benefit or of any deferred cash payment included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. In case of uncertainty as to whether all or some portion of a payment is or is not payable to you under this Agreement, the Company shall initially make the payment to you, and you agree to refund to the Company any amounts ultimately determined not to have been payable under the terms hereof. 11. Notice. For the purposes of this Agreement, notices and all other communications provided for in or required under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States certified or registered mail, return receipt requested, postage prepaid and addressed to each party's respective address set forth on the first page of this Agreement (provided that all notices to the Company shall be directed to the attention of the chairman of the board or president of the Company, with a copy to the secretary of the Company), or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Limitation of Damages. If for any reason you believe the benefits provisions of this Agreement have not been properly adhered to by the Company, and if, pursuant to Section 14 hereof, it is determined that the Company has not, in fact, properly adhered to the benefits provisions of this Agreement, the sole and exclusive remedy to which you are entitled are the benefits payment to which you are entitled under the provisions of this Agreement. 14. Dispute Resolution. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Minneapolis, Minnesota by three (3) arbitrators in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators shall be final and binding on both parties. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The arbitrators shall strictly adhere to the sole and exclusive remedy set forth in Section 13 hereof and may not award or assess punitive damages against either party. Each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs of the arbitrators. 15. Related Agreements. To the extent that any provision of any other Plan or agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other Plan agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 16. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 4, 5, 6, 7, 8(b), 14 and 15 of this Agreement shall survive termination of this Agreement and shall remain in full force and effect according to their terms. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the chairman of the board or president of the Company, provided, however, if you occupy those positions at the time, such writings shall be signed by another officer of the Company at the direction of the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Any and all previous written or oral agreements with respect to compensation and/or benefits triggered by a Change in Control of the Company or a similar event are hereby superseded and canceled, and no other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. This Agreement and the legal relations among the parties as to all matters, including, without limitation, matters of validity, interpretation, construction, performance and remedies, shall be governed by and construed in accordance with the internal laws of the State of Minnesota. Headings are for purpose of convenience only and do not constitute a part of this Agreement. The parties hereto agree to perform, or cause to be performed, such further acts and deeds and shall execute and deliver, or cause to be executed and delivered, such additional or supplemental documents or instruments as may be reasonably required by the other party to carry into effect the intent and purpose of this Agreement. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ROCHESTER MEDICAL CORPORATION By: /s/ Anthony J. Conway -------------------------- Name: Anthony J. Conway Title: President and Chief Executive Officer Agreed to this 21st day of November, 2000. /s/ Dara Lynn Horner - -------------------- Dara Lynn Horner EX-10.9 4 0004.txt CHANGE OF CONTROL AGREEMENT EXHIBIT 10.9 Martyn R. Sholtis Rochester Medical Corporation One Rochester Medical Drive Stewartville, Minnesota 55976 Dear Martyn: You are presently the Vice President, Sales and Marketing of Rochester Medical Corporation, a Minnesota corporation (the "Company"). The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 1 below) of the Company may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Accordingly, the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its stockholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its stockholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own personal situation. In order to induce you to remain in the employ of the Company, this letter agreement (this "Agreement"), which has been approved by the Committee, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. This Agreement also provides you with certain benefits following a Change in Control of the Company regardless of whether your employment by the Company is terminated. In consideration of these benefits, the Agreement contains a covenant not to compete (Section 7, below). 1. Definitions. The following terms shall have the meaning set forth below unless the context clearly requires otherwise. Terms defined elsewhere in this Agreement shall have the same meaning throughout this Agreement. (a) "Cause" shall mean: (i) continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your Disability or from termination by you for Good Reason) which failure, in the reasonable judgment of the Company, is willful; (ii) any act or acts of personal dishonesty by you intended to result in your personal enrichment at the expense of the Company (including but not limited to wrongful appropriation of funds of the Company or its affiliates); (iii) willful and deliberate misconduct during the course of employment; or (iv) the commission of a gross misdemeanor or felony (whether or not the Company is the victim of such offense). (b) "Change in Control" shall be deemed to have occurred if: (i) a tender offer shall be made and consummated for the ownership of fifty percent (50%) or more of the outstanding Voting Securities of the Company; (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than fifty percent (50%) of the outstanding Voting Securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Exchange Act) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company; (iv) a Person shall acquire fifty percent (50%) or more of the outstanding Voting Securities of the Company (whether directly, indirectly, beneficially or of record) (for purposes hereof, ownership of Voting Securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act); or (v) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (v), considered as though such person were a member of the Incumbent Board. Notwithstanding anything in the foregoing to the contrary, no Change in Control of the Company shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in: (A) you, or a group of Persons which includes you, acquiring, directly or indirectly more than fifty percent (50%) of the combined voting power of the Company's Voting Securities; or (B) you becoming immediately employed by a Person which leases and/or manages substantially all of the assets of the Company, providing that the terms of such employment do not constitute a "Good Reason" termination as defined in Subsection 1(f) hereof either when such employment commences or at any time during the then remaining term of this Agreement. (c) "Date of Termination" shall mean the date specified in the Notice of Termination (except in the case of your death, in which case Date of Termination shall be the date of death). (d) "Disability" shall have the same meaning as defined in the Company's long-term disability plan as in effect immediately prior to the Change in Control of the Company. (e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (f) "Good Reason" shall mean termination based on: (i) the assignment to you of employment responsibilities which are not of materially comparable responsibility and status as the employment responsibilities held by you immediately prior to the Change in Control of the Company; (i) a reduction by the Company in your rate of compensation (or an adverse change in the form or timing of the payment thereof) as in effect immediately prior to the Change in Control of the Company; (ii) the failure by the Company to continue in effect any Plan in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control of the Company, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control of the Company or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control in the Company; (iii) the Company's requiring you to be based anywhere other than the environs of the municipality where your office is located immediately prior to the Change in Control of the Company and more than thirty-five (35) miles from such office location, except for required travel on the Company's business, and then only to the extent substantially consistent with the business travel obligations which your undertook on behalf of the Company prior to the Change in Control of the Company; or (iv) the failure by the Company to obtain from any Successor the assent to this Agreement contemplated by Subsection 8(a) hereof. (g) "Notice of Termination" shall mean a written notice which shall state the specific termination provision in this Agreement relied upon. Any purported termination by the Company or by you following a Change in Control of the Company shall be communicated by written Notice of Termination to the other party hereto. (h) "Person" shall mean and include any individual, corporation, partnership, group, association or other "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Exchange Act, and used in Section 14(d) thereof, other than the Company, a wholly-owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company or a wholly-owned subsidiary of the Company. (i) "Plan" shall mean any compensation plan (such as an incentive stock option or restricted stock plan) or any employee benefit plan (such as a thrift, pension, profit sharing, medical, disability, accident, life insurance or relocation plan or policy) or any other plan, program, policy or agreement of the Company intended to benefit employees generally, management employees as a group or you in particular, now in existence or becoming effective hereafter during the term of this Agreement. (j) "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Company's Voting Securities, all or substantially all of its assets or otherwise. (k) "Voting Securities" shall mean securities of a corporation ordinarily having the right to vote at elections of directors. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 2001; provided, however, that commencing on January 1, 2002 and each January 1st thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that this Agreement shall continue in effect for a period of twelve (12) months beyond the date of a Change in Control of the Company if such Change in Control of the Company shall have occurred prior to the end of the then current term. 3. Agreement to Provide Services; Right to Terminate. (a) Agreement to Provide Services. You agree to remain in the employ of the Company during the term of this Agreement unless you terminate your employment because of death or Disability or your termination is for Good Reason following a Change in Control of the Company. (b) Right to Terminate Prior to Change in Control. This Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee, to continue your current employment status or to change any employment policies of the Company. Prior to any Change in Control of the Company, the Company may terminate your employment at-will with or without Cause at any time. If a Change in Control of the Company has occurred, the Company may thereafter terminate your employment as herein provided, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. 4. Benefit Payment Upon Fulfillment of Required Service Following Change in Control. If a Change in Control of the Company has occurred then, so long as you have remained in the employ of the Company during the term of this Agreement (including the twelve (12) month period following such Change in Control (as described in Section 2 hereof)), subject to the limitations set forth in Section 10 hereof, within five (5) business days following the end of such twelve (12) month period the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the twelve month (12) period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. No payment shall be paid under this Section 4 if you have not remained in the employ of the Company during the term of this Agreement, regardless of the reason your employment was earlier terminated. 5. Welfare Benefit Plans upon a Change in Control. Following a Change in Control of the Company, unless and until your employment by the Company is terminated for Cause or Disability or you terminate your employment by the Company other than for Good Reason, the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (i) twelve (12) months after the Date of Termination or (ii) the commencement date of equivalent benefits from a new employer, each insured and self-insured employee welfare benefit Plan (including, without limitation, group health, death, dental and disability plans) in which you were entitled to participate immediately prior to the Change in Control of the Company, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and provided that you continue to pay an amount equal to your regular contribution under such Plans for such participation. If, at the end of twelve (12) months after the date of the Date of Termination, you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall arrange, at your sole cost and expense, to enable you to convert your and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at your sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on a federal, state and local income and employment after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this Section 5 or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents equivalent benefits (on a federal, state and local income and employment after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. Any welfare benefits which are subject to continuation rights under state or federal law, and which are provided by the Company pursuant to this Section 5, will be deemed to be provided by the Company in satisfaction of such continuation requirements to the extent permitted under such laws. 6. Benefits Upon Termination of Employment Following Change in Control. (a) Disability or Death. During the term of this Agreement, for any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your compensation at the times, in the form and at the rate then in effect, and any benefits or awards under any and all Plans shall continue to accrue during such period to the extent not inconsistent with such Plans, until your employment is terminated on account of Disability pursuant to and in accordance with the terms hereof. Thereafter, your benefits shall be determined in accordance with the Plans (as in effect immediately prior to a Change in Control of the Company) and as provided in accordance with this Agreement. If your Death occurs during the term of this Agreement, and after a Change in Control of the Company but prior to a termination of your employment, you or your beneficiary (as provided under the applicable Plans) shall receive all benefits or awards (including, without limitation, both the cash and stock components) under any and all Plans as in effect immediately prior to the Change in Control of the Company, and all benefits to which you or your beneficiary may be entitled under the terms of this Agreement. (b) Cause. If, during the term of this Agreement, your employment by the Company shall be terminated for Cause following a Change in Control of the Company, the Company shall pay you your compensation through the Date of Termination at the times, in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. Thereupon, except as otherwise provided in this Agreement, the Company shall have no further obligations to you under this Agreement. (c) Change in Control Termination. If, during the term of this Agreement, after a Change in Control of the Company shall have occurred your employment by the Company shall be terminated by the Company other than for Cause or shall be terminated by you for Good Reason, then you shall be entitled, without regard to any contrary provisions of any Plan, to the benefits as provided below: (i) Compensation. Subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, the Company shall pay your compensation through such Date of Termination in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. (ii) Outplacement Service. The Company shall pay or reimburse you for the costs, fees and expenses of reasonable outplacement assistance services. (iii) Severance. If your termination occurs under this Subsection 6(c) within twelve (12) months following a Change in Control of the Company, then, subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the one (1) year period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. (d) No Setoff. The amount of any payment provided for in this Section 6 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 7. Non-Competition; Non-Solicitation. You and the Company recognize that your services to the Company are special and unique and that your compensation and other benefits are partly in consideration of and conditioned upon your not competing with the Company or its subsidiaries, and that a covenant on your part not to compete during the term of your employment and during a period of twelve (12) full calendar months thereafter is essential to protect the business and goodwill of the Company. Accordingly, you agree that during the term of your employment with the Company or any of its affiliates and for a period of twelve (12) full calendar months following your termination of employment for any reason, you shall not, directly or indirectly, alone or as a partner, officer, director, shareholder or employee of any other firm or entity: (a) engage in any commercial activity in competition with any substantial part of the Company's business as conducted during the term of the Agreement or as of the Date of Termination of your employment or with any substantial part of the Company's contemplated business; (b) assist, solicit, entice, or induce (or assist any other person or entity in soliciting, enticing or inducing) any customer or potential customer (or agent, employee or consultant of any customer or potential customer) with whom you had contact in the course of your employment with the Company to deal with a competitor of the Company; and/or (c) in any manner solicit, assist or encourage (or assist any other person or entity in soliciting or encouraging) any other officer or employee of the Company to work or otherwise provide services for you or for any entity in which you participate in the ownership, management, operation or control of, or is connected with in any manner as an independent contractor, consultant or otherwise.. For purposes of this Section 7, "shareholder" shall not include beneficial ownership of less than five percent (5%) of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange or quoted on NASDAQ. You agree that the services you render to the Company are unique and of extraordinary character; that the Company has agreed to enter into this Agreement and to compensate you in the manner provided for herein relying on that fact; that this covenant not to compete is of the essence of this Agreement and that in the event of a breach or threatened breach of the provisions of the covenant not to compete the Company would suffer irreparable damage for which there is no adequate remedy at law since damages would not be readily determinable. Accordingly, in the event of a breach or a threatened breach by you of this covenant, the Company shall be entitled to a temporary restraining order and an injunction restraining you from any such breach issued by a court of competent jurisdiction notwithstanding the provisions of Section 14 hereof. Should any court of competent jurisdiction determine that any of the covenants set forth in this Section 7 are invalid in any respect, the parties agree that the court so holding may restrict such covenant in time or in area, or in both, or in any other manner which the court determines sufficient to render the covenant enforceable against you. 8. Successors; Binding Agreements. (a) Upon your written request, the Company will seek to have any Successor by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of the Company's obligations under this Agreement. Failure of the Company to obtain such assent at least three (3) business days prior to the time a Person becomes a Successor (or where the Company does not have at least three (3) business days advance notice that a Person may become a successor, within one (1) business day after having notice that such Person may become or has become a Successor) shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company has occurred, shall entitle you immediately to the benefits provided hereunder upon delivery by you of a Notice of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by you, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. (c) For purposes of this Agreement, the "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or other form of business combination in which the Company ceases to exist. 9. Withholding. All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 10. Excess Payment Limitation. Notwithstanding anything in this Agreement to the contrary, in the event that any payment or benefit received or to be received by you in connection with a change in control of the Company or termination of your employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Company, with any person whose actions result in a change in control of the Company or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Company or with any person whose actions result in a change in control of the Company) (collectively, the "Total Payments") would not be deductible (in whole or in part) by the Company or such other person making such payment or providing such benefit solely as a result of Section 280G of the Code, the amounts payable to you under this Agreement shall be reduced until no portion of the Total Payments is not deductible solely as a result of Section 280G of the Code or such amounts payable to you under this Agreement are reduced to zero. For purposes of this limitation: (a) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code (such as payments payable pursuant to the Company's standard or general severance policies); (b) payments pursuant to this Agreement shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in the immediately preceding clause (a)) in their entirety constitute reasonable compensation within the meaning of Section 280G(b)(4)(B) of the Code, in the opinion of the tax counsel referred to in the immediately preceding clause (a); and (c) the value of any other non-cash benefit or of any deferred cash payment included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. In case of uncertainty as to whether all or some portion of a payment is or is not payable to you under this Agreement, the Company shall initially make the payment to you, and you agree to refund to the Company any amounts ultimately determined not to have been payable under the terms hereof. 11. Notice. For the purposes of this Agreement, notices and all other communications provided for in or required under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States certified or registered mail, return receipt requested, postage prepaid and addressed to each party's respective address set forth on the first page of this Agreement (provided that all notices to the Company shall be directed to the attention of the chairman of the board or president of the Company, with a copy to the secretary of the Company), or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Limitation of Damages. If for any reason you believe the benefits provisions of this Agreement have not been properly adhered to by the Company, and if, pursuant to Section 14 hereof, it is determined that the Company has not, in fact, properly adhered to the benefits provisions of this Agreement, the sole and exclusive remedy to which you are entitled are the benefits payment to which you are entitled under the provisions of this Agreement. 14. Dispute Resolution. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Minneapolis, Minnesota by three (3) arbitrators in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators shall be final and binding on both parties. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The arbitrators shall strictly adhere to the sole and exclusive remedy set forth in Section 13 hereof and may not award or assess punitive damages against either party. Each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs of the arbitrators. 15. Related Agreements. To the extent that any provision of any other Plan or agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other Plan agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 16. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 4, 5, 6, 7, 8(b), 14 and 15 of this Agreement shall survive termination of this Agreement and shall remain in full force and effect according to their terms. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the chairman of the board or president of the Company, provided, however, if you occupy those positions at the time, such writings shall be signed by another officer of the Company at the direction of the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Any and all previous written or oral agreements with respect to compensation and/or benefits triggered by a Change in Control of the Company or a similar event are hereby superseded and canceled, and no other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. This Agreement and the legal relations among the parties as to all matters, including, without limitation, matters of validity, interpretation, construction, performance and remedies, shall be governed by and construed in accordance with the internal laws of the State of Minnesota. Headings are for purpose of convenience only and do not constitute a part of this Agreement. The parties hereto agree to perform, or cause to be performed, such further acts and deeds and shall execute and deliver, or cause to be executed and delivered, such additional or supplemental documents or instruments as may be reasonably required by the other party to carry into effect the intent and purpose of this Agreement. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ROCHESTER MEDICAL CORPORATION By: /s/ Anthony J. Conway -------------------------- Name: Anthony J. Conway Title: President and Chief Executive Officer Agreed to this 21st day of November, 2000. /s/ Martyn R. Sholtis - --------------------- Martyn R. Sholtis EX-10.10 5 0005.txt CHANGE OF CONTROL AGREEMENT EXHIBIT 10.10 David A. Jonas Rochester Medical Corporation One Rochester Medical Drive Stewartville, Minnesota 55976 Dear David: You are presently the Controller, Director of Operations and Principle Financial Officer of Rochester Medical Corporation, a Minnesota corporation (the "Company"). The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 1 below) of the Company may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Accordingly, the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its stockholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its stockholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own personal situation. In order to induce you to remain in the employ of the Company, this letter agreement (this "Agreement"), which has been approved by the Committee, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. This Agreement also provides you with certain benefits following a Change in Control of the Company regardless of whether your employment by the Company is terminated. In consideration of these benefits, the Agreement contains a covenant not to compete (Section 7, below). 1. Definitions. The following terms shall have the meaning set forth below unless the context clearly requires otherwise. Terms defined elsewhere in this Agreement shall have the same meaning throughout this Agreement. (a) "Cause" shall mean: (i) continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your Disability or from termination by you for Good Reason) which failure, in the reasonable judgment of the Company, is willful; (ii) any act or acts of personal dishonesty by you intended to result in your personal enrichment at the expense of the Company (including but not limited to wrongful appropriation of funds of the Company or its affiliates); (iii) willful and deliberate misconduct during the course of employment; or (iv) the commission of a gross misdemeanor or felony (whether or not the Company is the victim of such offense). (b) "Change in Control" shall be deemed to have occurred if: (i) a tender offer shall be made and consummated for the ownership of fifty percent (50%) or more of the outstanding Voting Securities of the Company; (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than fifty percent (50%) of the outstanding Voting Securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Exchange Act) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company; (iv) a Person shall acquire fifty percent (50%) or more of the outstanding Voting Securities of the Company (whether directly, indirectly, beneficially or of record) (for purposes hereof, ownership of Voting Securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act); or (v) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (v), considered as though such person were a member of the Incumbent Board. Notwithstanding anything in the foregoing to the contrary, no Change in Control of the Company shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in: (A) you, or a group of Persons which includes you, acquiring, directly or indirectly more than fifty percent (50%) of the combined voting power of the Company's Voting Securities; or (B) you becoming immediately employed by a Person which leases and/or manages substantially all of the assets of the Company, providing that the terms of such employment do not constitute a "Good Reason" termination as defined in Subsection 1(f) hereof either when such employment commences or at any time during the then remaining term of this Agreement. (c) "Date of Termination" shall mean the date specified in the Notice of Termination (except in the case of your death, in which case Date of Termination shall be the date of death). (d) "Disability" shall have the same meaning as defined in the Company's long-term disability plan as in effect immediately prior to the Change in Control of the Company. (e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (f) "Good Reason" shall mean termination based on: (i) the assignment to you of employment responsibilities which are not of materially comparable responsibility and status as the employment responsibilities held by you immediately prior to the Change in Control of the Company; (i) a reduction by the Company in your rate of compensation (or an adverse change in the form or timing of the payment thereof) as in effect immediately prior to the Change in Control of the Company; (ii) the failure by the Company to continue in effect any Plan in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control of the Company, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control of the Company or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control in the Company; (iii) the Company's requiring you to be based anywhere other than the environs of the municipality where your office is located immediately prior to the Change in Control of the Company and more than thirty-five (35) miles from such office location, except for required travel on the Company's business, and then only to the extent substantially consistent with the business travel obligations which your undertook on behalf of the Company prior to the Change in Control of the Company; or (iv) the failure by the Company to obtain from any Successor the assent to this Agreement contemplated by Subsection 8(a) hereof. (g) "Notice of Termination" shall mean a written notice which shall state the specific termination provision in this Agreement relied upon. Any purported termination by the Company or by you following a Change in Control of the Company shall be communicated by written Notice of Termination to the other party hereto. (h) "Person" shall mean and include any individual, corporation, partnership, group, association or other "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Exchange Act, and used in Section 14(d) thereof, other than the Company, a wholly-owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company or a wholly-owned subsidiary of the Company. (i) "Plan" shall mean any compensation plan (such as an incentive stock option or restricted stock plan) or any employee benefit plan (such as a thrift, pension, profit sharing, medical, disability, accident, life insurance or relocation plan or policy) or any other plan, program, policy or agreement of the Company intended to benefit employees generally, management employees as a group or you in particular, now in existence or becoming effective hereafter during the term of this Agreement. (j) "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Company's Voting Securities, all or substantially all of its assets or otherwise. (k) "Voting Securities" shall mean securities of a corporation ordinarily having the right to vote at elections of directors. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 2001; provided, however, that commencing on January 1, 2002 and each January 1st thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that this Agreement shall continue in effect for a period of twelve (12) months beyond the date of a Change in Control of the Company if such Change in Control of the Company shall have occurred prior to the end of the then current term. 3. Agreement to Provide Services; Right to Terminate. (a) Agreement to Provide Services. You agree to remain in the employ of the Company during the term of this Agreement unless you terminate your employment because of death or Disability or your termination is for Good Reason following a Change in Control of the Company. (b) Right to Terminate Prior to Change in Control. This Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee, to continue your current employment status or to change any employment policies of the Company. Prior to any Change in Control of the Company, the Company may terminate your employment at-will with or without Cause at any time. If a Change in Control of the Company has occurred, the Company may thereafter terminate your employment as herein provided, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. 4. Benefit Payment Upon Fulfillment of Required Service Following Change in Control. If a Change in Control of the Company has occurred then, so long as you have remained in the employ of the Company during the term of this Agreement (including the twelve (12) month period following such Change in Control (as described in Section 2 hereof)), subject to the limitations set forth in Section 10 hereof, within five (5) business days following the end of such twelve (12) month period the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the twelve month (12) period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. No payment shall be paid under this Section 4 if you have not remained in the employ of the Company during the term of this Agreement, regardless of the reason your employment was earlier terminated. 5. Welfare Benefit Plans upon a Change in Control. Following a Change in Control of the Company, unless and until your employment by the Company is terminated for Cause or Disability or you terminate your employment by the Company other than for Good Reason, the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (i) twelve (12) months after the Date of Termination or (ii) the commencement date of equivalent benefits from a new employer, each insured and self-insured employee welfare benefit Plan (including, without limitation, group health, death, dental and disability plans) in which you were entitled to participate immediately prior to the Change in Control of the Company, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and provided that you continue to pay an amount equal to your regular contribution under such Plans for such participation. If, at the end of twelve (12) months after the date of the Date of Termination, you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall arrange, at your sole cost and expense, to enable you to convert your and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at your sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on a federal, state and local income and employment after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this Section 5 or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents equivalent benefits (on a federal, state and local income and employment after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. Any welfare benefits which are subject to continuation rights under state or federal law, and which are provided by the Company pursuant to this Section 5, will be deemed to be provided by the Company in satisfaction of such continuation requirements to the extent permitted under such laws. 6. Benefits Upon Termination of Employment Following Change in Control. (a) Disability or Death. During the term of this Agreement, for any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your compensation at the times, in the form and at the rate then in effect, and any benefits or awards under any and all Plans shall continue to accrue during such period to the extent not inconsistent with such Plans, until your employment is terminated on account of Disability pursuant to and in accordance with the terms hereof. Thereafter, your benefits shall be determined in accordance with the Plans (as in effect immediately prior to a Change in Control of the Company) and as provided in accordance with this Agreement. If your Death occurs during the term of this Agreement, and after a Change in Control of the Company but prior to a termination of your employment, you or your beneficiary (as provided under the applicable Plans) shall receive all benefits or awards (including, without limitation, both the cash and stock components) under any and all Plans as in effect immediately prior to the Change in Control of the Company, and all benefits to which you or your beneficiary may be entitled under the terms of this Agreement. (b) Cause. If, during the term of this Agreement, your employment by the Company shall be terminated for Cause following a Change in Control of the Company, the Company shall pay you your compensation through the Date of Termination at the times, in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. Thereupon, except as otherwise provided in this Agreement, the Company shall have no further obligations to you under this Agreement. (c) Change in Control Termination. If, during the term of this Agreement, after a Change in Control of the Company shall have occurred your employment by the Company shall be terminated by the Company other than for Cause or shall be terminated by you for Good Reason, then you shall be entitled, without regard to any contrary provisions of any Plan, to the benefits as provided below: (i) Compensation. Subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, the Company shall pay your compensation through such Date of Termination in the form and at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including, without limitation, both the cash and stock components) which pursuant to the terms of any and all Plans have been earned or become payable, but which have not yet been paid to you. (ii) Outplacement Service. The Company shall pay or reimburse you for the costs, fees and expenses of reasonable outplacement assistance services. (iii) Severance. If your termination occurs under this Subsection 6(c) within twelve (12) months following a Change in Control of the Company, then, subject to the limitations set forth in Section 10 hereof, within five (5) business days following the Date of Termination, as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you a lump sum cash payment equal to two and one-half (2.5) times your compensation earned on account of your employment with the Company during the one (1) year period prior to the date of the Change in Control of the Company. For purposes of this Agreement, compensation shall include your base salary plus any cash amounts received under incentive or other bonus plans. (d) No Setoff. The amount of any payment provided for in this Section 6 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 7. Non-Competition; Non-Solicitation. You and the Company recognize that your services to the Company are special and unique and that your compensation and other benefits are partly in consideration of and conditioned upon your not competing with the Company or its subsidiaries, and that a covenant on your part not to compete during the term of your employment and during a period of twelve (12) full calendar months thereafter is essential to protect the business and goodwill of the Company. Accordingly, you agree that during the term of your employment with the Company or any of its affiliates and for a period of twelve (12) full calendar months following your termination of employment for any reason, you shall not, directly or indirectly, alone or as a partner, officer, director, shareholder or employee of any other firm or entity: (a) engage in any commercial activity in competition with any substantial part of the Company's business as conducted during the term of the Agreement or as of the Date of Termination of your employment or with any substantial part of the Company's contemplated business; (b) assist, solicit, entice, or induce (or assist any other person or entity in soliciting, enticing or inducing) any customer or potential customer (or agent, employee or consultant of any customer or potential customer) with whom you had contact in the course of your employment with the Company to deal with a competitor of the Company; and/or (c) in any manner solicit, assist or encourage (or assist any other person or entity in soliciting or encouraging) any other officer or employee of the Company to work or otherwise provide services for you or for any entity in which you participate in the ownership, management, operation or control of, or is connected with in any manner as an independent contractor, consultant or otherwise.. For purposes of this Section 7, "shareholder" shall not include beneficial ownership of less than five percent (5%) of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange or quoted on NASDAQ. You agree that the services you render to the Company are unique and of extraordinary character; that the Company has agreed to enter into this Agreement and to compensate you in the manner provided for herein relying on that fact; that this covenant not to compete is of the essence of this Agreement and that in the event of a breach or threatened breach of the provisions of the covenant not to compete the Company would suffer irreparable damage for which there is no adequate remedy at law since damages would not be readily determinable. Accordingly, in the event of a breach or a threatened breach by you of this covenant, the Company shall be entitled to a temporary restraining order and an injunction restraining you from any such breach issued by a court of competent jurisdiction notwithstanding the provisions of Section 14 hereof. Should any court of competent jurisdiction determine that any of the covenants set forth in this Section 7 are invalid in any respect, the parties agree that the court so holding may restrict such covenant in time or in area, or in both, or in any other manner which the court determines sufficient to render the covenant enforceable against you. 8. Successors; Binding Agreements. (a) Upon your written request, the Company will seek to have any Successor by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of the Company's obligations under this Agreement. Failure of the Company to obtain such assent at least three (3) business days prior to the time a Person becomes a Successor (or where the Company does not have at least three (3) business days advance notice that a Person may become a successor, within one (1) business day after having notice that such Person may become or has become a Successor) shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company has occurred, shall entitle you immediately to the benefits provided hereunder upon delivery by you of a Notice of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by you, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. (c) For purposes of this Agreement, the "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or other form of business combination in which the Company ceases to exist. 9. Withholding. All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 10. Excess Payment Limitation. Notwithstanding anything in this Agreement to the contrary, in the event that any payment or benefit received or to be received by you in connection with a change in control of the Company or termination of your employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Company, with any person whose actions result in a change in control of the Company or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Company or with any person whose actions result in a change in control of the Company) (collectively, the "Total Payments") would not be deductible (in whole or in part) by the Company or such other person making such payment or providing such benefit solely as a result of Section 280G of the Code, the amounts payable to you under this Agreement shall be reduced until no portion of the Total Payments is not deductible solely as a result of Section 280G of the Code or such amounts payable to you under this Agreement are reduced to zero. For purposes of this limitation: (a) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code (such as payments payable pursuant to the Company's standard or general severance policies); (b) payments pursuant to this Agreement shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in the immediately preceding clause (a)) in their entirety constitute reasonable compensation within the meaning of Section 280G(b)(4)(B) of the Code, in the opinion of the tax counsel referred to in the immediately preceding clause (a); and (c) the value of any other non-cash benefit or of any deferred cash payment included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. In case of uncertainty as to whether all or some portion of a payment is or is not payable to you under this Agreement, the Company shall initially make the payment to you, and you agree to refund to the Company any amounts ultimately determined not to have been payable under the terms hereof. 11. Notice. For the purposes of this Agreement, notices and all other communications provided for in or required under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States certified or registered mail, return receipt requested, postage prepaid and addressed to each party's respective address set forth on the first page of this Agreement (provided that all notices to the Company shall be directed to the attention of the chairman of the board or president of the Company, with a copy to the secretary of the Company), or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Limitation of Damages. If for any reason you believe the benefits provisions of this Agreement have not been properly adhered to by the Company, and if, pursuant to Section 14 hereof, it is determined that the Company has not, in fact, properly adhered to the benefits provisions of this Agreement, the sole and exclusive remedy to which you are entitled are the benefits payment to which you are entitled under the provisions of this Agreement. 14. Dispute Resolution. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Minneapolis, Minnesota by three (3) arbitrators in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators shall be final and binding on both parties. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The arbitrators shall strictly adhere to the sole and exclusive remedy set forth in Section 13 hereof and may not award or assess punitive damages against either party. Each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs of the arbitrators. 15. Related Agreements. To the extent that any provision of any other Plan or agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other Plan agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 16. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 4, 5, 6, 7, 8(b), 14 and 15 of this Agreement shall survive termination of this Agreement and shall remain in full force and effect according to their terms. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the chairman of the board or president of the Company, provided, however, if you occupy those positions at the time, such writings shall be signed by another officer of the Company at the direction of the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Any and all previous written or oral agreements with respect to compensation and/or benefits triggered by a Change in Control of the Company or a similar event are hereby superseded and canceled, and no other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. This Agreement and the legal relations among the parties as to all matters, including, without limitation, matters of validity, interpretation, construction, performance and remedies, shall be governed by and construed in accordance with the internal laws of the State of Minnesota. Headings are for purpose of convenience only and do not constitute a part of this Agreement. The parties hereto agree to perform, or cause to be performed, such further acts and deeds and shall execute and deliver, or cause to be executed and delivered, such additional or supplemental documents or instruments as may be reasonably required by the other party to carry into effect the intent and purpose of this Agreement. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ROCHESTER MEDICAL CORPORATION By: /s/ Anthony J. Conway -------------------------- Name: Anthony J. Conway Title: President and Chief Executive Officer Agreed to this 21st day of November, 2000. /s/ David A. Jonas - ------------------ David A. Jonas EX-23 6 0006.txt CONSENT EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-10261) pertaining to the 1991 Stock Option Plan of Rochester Medical Corporation, of our report dated October 20, 2000, with respect to the financial statements and schedule of Rochester Medical Corporation included in this Annual Report (Form 10-K) for the year ended September 30, 2000. /s/ Ernst & Young LLP Minneapolis, Minnesota December 13, 2000 EX-24 7 0007.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Anthony J. Conway and David A. Jonas, with full power to each to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Rochester Medical Corporation (the "Company") for the Company's fiscal year ended September 30, 2000, and any or all amendments to said Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such other authorities as necessary, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on this 13th day of December, 2000, by the following persons. /s/ ANTHONY J. CONWAY /s/ DARNELL L. BOEHM ------------------------- ------------------------- Anthony J. Conway Darnell L. Boehm /s/ DAVID A. JONAS /s/ PETER CONWAY ------------------------- ------------------------- David A. Jonas Peter Conway /s/ PHILIP CONWAY /s/ ROGER SCHNOBRICH ------------------------- ------------------------- Philip Conway Roger Schnobrich /s/ RICHARD FRYAR ------------------------- Richard Fryar EX-27 8 0008.txt FINANCIAL DATA SCHEDULE
5 12-MOS SEP-30-2000 SEP-30-2000 OCT-01-1999 3,204,161 5,654,442 1,069,999 62,567 1,892,455 12,009,818 15,404,923 4,351,235 23,254,223 1,681,205 0 0 0 41,279,359 0 23,254,223 7,860,132 7,860,132 6,151,195 13,986,485 0 (6,126,353) 0 0 0 0 0 0 0 (5,531,145) (1.04) (1.04)
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