-----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, AnJJ+b2jb0yqsCIeDuLdFGNFf9oJcika6xS7lIDgAKqPqAWidloeFJCM21eTE1BW mS6Mlqz4VbD+KXp79RfFhw== 0000897101-98-000778.txt : 19980807 0000897101-98-000778.hdr.sgml : 19980807 ACCESSION NUMBER: 0000897101-98-000778 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980806 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCHESTER MEDICAL CORPORATION CENTRAL INDEX KEY: 0000868368 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411613227 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18933 FILM NUMBER: 98678247 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-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------------- FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 Commission file number: 0-18933 ROCHESTER MEDICAL CORPORATION (Exact name of issuer as specified in its charter) MINNESOTA 41-1613227 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE ROCHESTER MEDICAL DRIVE, STEWARTVILLE, MN 55976 (Address of principal executive offices) (507) 533-9600 (Issuer's Telephone Number) 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 (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 5,269,500 Common Shares as of August 5, 1998. Total Number of Pages: 20 Index to Exhibits on Page: 10 ================================================================================ TABLE OF CONTENTS ROCHESTER MEDICAL CORPORATION REPORT ON FORM 10-Q FOR QUARTER ENDED JUNE 30, 1998 PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets -- June 30, 1998 and September 30, 1997 ................. 3 Statements of Operations -- Three months ended June 30, 1998 and 1997; Nine months ended June 30, 1998 and 1997 .............................. 4 Statements of Cash Flows -- Nine months ended June 30, 1998 and 1997 ... 5 Notes to the Financial Statements ...................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 7 PART II. OTHER INFORMATION ................................................ 10 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ROCHESTER MEDICAL CORPORATION BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and Cash Equivalents ................................ $ 3,814,591 $ 1,191,428 Marketable Securities .................................... 13,837,486 3,447,461 Accounts Receivable ...................................... 1,754,548 1,967,194 Inventories .............................................. 2,022,349 1,653,733 Prepaid Expenses And Other Assets ........................ 290,329 253,785 ------------ ------------ TOTAL CURRENT ASSETS .................................... 21,719,303 8,513,601 PROPERTY AND EQUIPMENT Land and Buildings ....................................... 5,361,926 2,438,826 Equipment and Fixtures ................................... 8,035,558 9,186,588 ------------ ------------ 13,397,483 11,625,414 Less: Accumulated Depreciation ........................... (2,347,159) (1,855,980) ------------ ------------ TOTAL PROPERTY AND EQUIPMENT ............................ 11,050,324 9,769,434 INTANGIBLE ASSETS Patents, Less Accumulated Amortization ................... 268,213 330,338 ------------ ------------ TOTAL ASSETS .............................................. $ 33,037,840 $ 18,613,373 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable ......................................... $ 577,568 $ 457,565 Accrued Expenses ......................................... 979,632 974,835 ------------ ------------ TOTAL CURRENT LIABILITIES ............................... 1,557,200 1,432,400 SHAREHOLDERS' EQUITY Common Stock, no par value: Authorized -- 20,000,000 Issued and Outstanding Shares -- 5,269,500 -- June, 1998 and 4,133,500 -- Sept. 1997 .... 40,692,202 24,697,199 Accumulated Deficit ...................................... (9,211,562) (7,516,226) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY .............................. 31,480,640 17,180,973 ------------ ------------ TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ................. $ 33,037,840 $ 18,613,373 ============ ============
Note -- The Balance Sheet at September 30, 1997 was derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Financial Statements 3 ROCHESTER MEDICAL CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ---------------------------- 1998 1997 1998 1997 ---------- ---------- ----------- ----------- NET SALES ........................... $2,488,842 $2,019,752 $ 6,766,812 $ 5,491,128 COST OF SALES ....................... 1,744,229 1,287,362 4,668,609 3,469,325 ---------- ---------- ----------- ----------- GROSS PROFIT ........................ 744,613 732,390 2,098,203 2,021,803 COSTS AND EXPENSES: Marketing and Selling .............. 951,475 589,654 2,239,826 1,562,267 Research and Development ........... 339,370 344,594 1,061,840 1,144,230 General and Administrative ......... 407,613 411,820 1,122,658 1,099,312 ---------- ---------- ----------- ----------- TOTAL OPERATING EXPENSES ......... 1,698,458 1,346,068 4,424,324 3,805,809 ---------- ---------- ----------- ----------- LOSS FROM OPERATIONS ................ (953,845) (613,678) (2,326,121) (1,784,006) OTHER INCOME (EXPENSE): Interest Income .................... 226,344 150,022 630,786 530,935 Interest Expense ................... (71,338) (213,750) ---------- ---------- ----------- ----------- TOTAL OTHER INCOME (EXP) ......... 226,344 78,684 630,786 317,185 ---------- ---------- ----------- ----------- NET LOSS ............................ $ (727,501) $ (534,994) $(1,695,335) $(1,466,821) ========== ========== =========== =========== NET LOSS PER COMMON SHARE (Basic and Diluted) ................ $ (0.14) $ (0.13) $ (0.33) $ (0.36) ========== ========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING .......... 5,264,489 4,133,500 5,097,255 4,130,900 ========== ========== =========== ===========
See Notes to Financial Statements 4 ROCHESTER MEDICAL CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, ------------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net Loss ............................................... $ (1,695,335) $ (1,466,821) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................ 587,293 405,069 Changes in assets and liabilities: Accounts Receivable ................................ 212,646 233,993 Inventories ........................................ (368,616) (334,764) Other Current Assets ............................... (36,543) (136,510) Accounts Payable ................................... 120,003 (233,786) Other Current Liabilities .......................... 4,797 455,371 ------------ ------------ NET CASH (USED IN) OPERATING ACTIVITIES .......... (1,175,755) (1,077,448) INVESTING ACTIVITY Capital expenditures ................................. (1,772,069) (5,478,992) Patents .............................................. (33,991) (57,972) Sale (Purchase) of Marketable Securities ............. (10,390,025) 1,672,049 ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES .......... (12,196,085) (3,864,915) FINANCING ACTIVITIES Interest Expense Added To Note Payable ............... -- 213,750 Proceeds from Sale of Common Stock ................... 15,995,003 48,287 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 15,995,003 262,037 ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 2,623,163 (4,680,326) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................... 1,191,428 8,394,607 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 3,814,591 $ 3,714,281 ============ ============
See Notes to Financial Statements 5 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1998 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the financial statements and related notes included in the Company's 1997 Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. NOTE B -- EARNINGS (LOSS) PER SHARE The company has adopted Financial Accounting Standards Board Statement No. 128, Earnings Per Share. This Statement replaces previously reported primary and fully diluted earnings per share (EPS) with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effects of options, warrants and convertible debt. Diluted EPS is very similar to the previously reported fully diluted EPS. For the nine-month periods ended June 30, 1998 and 1997, there is no difference between basic and diluted net loss per share or between basic and net loss per share as previously reported. Common equivalent shares from stock options and convertible debt are excluded as their effects are antidilutive. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company develops, manufactures and markets innovative urinary continence care products for urinary dysfunction management and urine drainage management. The Company currently manufactures and markets a broad line of functionally and technologically enhanced latex-free versions of standard continence care products, including male external catheters, Foley catheters and intermittent catheters. The Company markets its products under its own ROCHESTER MEDICAL(R) brand and through private label arrangements. Since receiving FDA marketing approval for the Release NF(TM) catheter in January 1998, the Company has been engaged in market introduction activities domestically and in pursuing regulatory approvals, including CE mark, for introduction into overseas markets. Following initial presentation of the Release NF catheter at a series of medical trade shows and conventions in May and June of this year, the Company has focused its selling efforts on negotiating contracts with group purchasing organizations (GPOs) and on securing product evaluations in medical institutions. These activities are generally considered prerequisites to a broad introduction of a new medical product into the acute care market. Typically, the selling process includes (i) making the product available under group contract, (ii) introducing the product directly at medical institutions to secure an evaluation, (iii) gaining acceptance of the product by an institution's product review committee based on successful trial and evaluation, and (iv) securing product orders. The Company believes the Release NF catheter will be undergoing product evaluations at a number of medical institutions in the coming months. The Company believes the interest expressed by GPOs and hospitals results from the long-standing professional acceptance of nitrofurazone as a medically effective anti-bacterial agent, from the FDA-required clinical study which showed that the nitrofurazone impregnated Release NF catheter significantly reduced the number of hospital acquired bacterial urinary infections, and from a number of recent medical publications which quantify the substantial infection related costs of catheterization. The Company's clinical study of its FEMSOFT(TM) female continence insert continued during the quarter at eight clinical sites throughout the US. The Company is encouraged by results of the study to date, and expects to file a Premarket Approval application ("PMA") with the FDA later this year. Interim study results are scheduled for presentation at the 1998 American Urogynecologic Society Annual Meeting to be held in Washington D.C. later this year. As previously announced, the Company filled a key management position with employment of a new Vice President of Marketing and Sales who will oversee the Company's marketing and sales activities. 7 RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, certain items from the statements of operations of the Company expressed as a percentage of net sales.
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30 JUNE 30 ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net Sales: Private Label ........................ 80% 75% 76% 78% Rochester Medical Brand .............. 20% 25% 24% 22% -- -- -- -- Total Net Sales ..................... 100% 100% 100% 100% Cost of Sales ......................... 70% 64% 69% 63% --- --- --- --- Gross Margin .......................... 30% 36% 31% 37% Operating Expenses: Marketing and Selling ................ 38% 29% 33% 28% Research and Development ............. 14% 17% 16% 21% General and Administrative ........... 16% 20% 17% 20% --- --- --- --- Total Operating Expenses ............ 68% 67% 65% 69% Loss From Operations .................. (38%) (30%) (34%) (32%) Interest Income (Expense) Net ......... 9% 4% 9% 6% --- --- --- --- Net Loss ............................ (29%) (26%) (25%) (27%) === === === ===
THREE MONTH AND NINE MONTH PERIODS ENDED JUNE 30, 1998 AND JUNE 30, 1997 NET SALES. Net sales increased 23% to $2,489,000 for the third quarter of fiscal 1998 from $2,020,000 for the comparable quarter last year. Sales to private label customers increased 32% over last year, primarily reflecting stronger order volumes for Foley catheters due to increasing market demand for non-latex catheters. Sales of Rochester Medical brand products were at comparable levels with last year. Branded product sales growth of 33% in the domestic market was offset by a decrease in international sales for the quarter. The domestic growth rate in branded product sales was slowed somewhat by the concentration of sales resources and efforts on the introduction of Release NF anti-infection catheter. The decrease in international branded product sales reflects typical fluctuations in international customer order patterns, which ordinarily entail larger orders placed less frequently, and a temporary decrease in selling activities due to a sales position vacancy. Net sales increased 23% to $6,767,000 for the nine months ended June 30, 1998, from $5,491,000 for the comparable period last year. Sales growth rates for branded products and private label products during the nine-month period were 33% and 20%, respectively. GROSS MARGIN. The Company's gross margin was 30% for the third quarter of fiscal 1998 compared with 36% for the same quarter last year. The gross margin rate has been impacted by expansion of production facilities including capacity charges associated with the new liquid encapsulation production line and new male external catheter production line, by increased support operations, by a shift in product mix, and by production wage rates. The Company's gross margin was 31% for the nine months ended June 30, 1998 compared with 37% for the same period last year. Factors affecting margins during the current nine-month period are consistent with those described above for the current quarter. MARKETING AND SELLING. Marketing and selling expense increased 61% to $951,000 for the third quarter of fiscal 1998 from $590,000 for the comparable quarter last year. The increase is due primarily to market introduction costs for the Release NF catheter, expansion of the domestic field sales force and hiring costs associated with the new Vice President of Marketing and Sales. Marketing and selling expense increased 43% to $2,240,000 for the nine months ended June 30, 1998 from $1,562,000 for the comparable period last year. The primary factors affecting the expense increase for the nine-month period are consistent with those described above for the current quarter. RESEARCH AND DEVELOPMENT. Research and development expense remained relatively constant for the third quarter of fiscal 1998 compared to the same quarter last year. The primary activity affecting research and development expense levels is the ongoing clinical testing for the FEMSOFT insert. 8 Research and development expense decreased 7% to $1,062,000 for the nine months ended June 30, 1998 from $1,144,000 for the comparable period last year. The decrease in expense relates to the completion of clinical tests for the Release NF catheter in early 1997. GENERAL AND ADMINISTRATIVE. General and administrative expense decreased 1% to $408,000 in the third quarter of fiscal 1998 from $412,000 for the comparable quarter last year. The expense level for the quarter reflects administrative infrastructure and support requirements commensurate with the current business operations. General and administrative expense increased 2% to $1,123,000 for the nine months ended June 30, 1998 from $1,099,000 for the comparable period last year. The stable trend in administrative expense levels reflects the Company's efforts to contain administrative costs in the current year. INTEREST INCOME AND (EXPENSE). Interest income increased to $226,000 for the third quarter of fiscal 1998 from $150,000 for the comparable quarter last year. For the nine months ended June 30, 1998, interest income increased to $631,000 from $531,000 for the comparable period last year. The increase in interest income in the current fiscal year is a result of investment of net proceeds from the Company's public stock offering, completed in November, 1997. Interest expense has been eliminated for the three and nine-month periods ended June 30, 1998 due to repayment of the $3 million convertible loan from ConvaTec, with accrued interest, on September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities were $17,652,000 at June 30, 1998 compared with $4,639,000 at September 30, 1997. The increase of $13,013,000 primarily reflects the receipt of $15,887,000 in net proceeds from the public offering completed in November 1997. The Company used a net $1,175,000 of cash from operating activities during the nine months ended June 30, 1998, primarily reflecting the net loss before non-cash depreciation charges. Capital expenditures of $1,772,000 were made during the nine month period, substantially all of which relate to completion of the Company's production facilities expansion. Accounts receivable at June 30, 1998 decreased 11% to $1,755,000 during the current nine-month period as a result of increased emphasis on credit and collections. Inventories increased 22% to $2,022,000 as compared with September 30, 1997 reflecting inventory purchases commensurate with increasing sales volumes. Changes in other asset and liability balances relate to timing of expense recognition and reflect normal operating activities. The Company believes that its capital resources on hand at June 30, 1998, together with cash flows from future sales, will be sufficient to satisfy its working capital requirements for the foreseeable future as described in the Liquidity and Capital Resources portion of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K (Part II, Item 6) for the fiscal year ended September 30, 1997. BUSINESS OUTLOOK The following discussion, as well as the discussion elsewhere in this document, including the "Introduction," contains forward looking statements that involve risks and uncertainties, including the results of product evaluations, the securing of GPO contract participation, the timing of purchases by customers, manufacturing capacities for both current products and new products, the timing of clinical preference testing and product introductions, FDA review and response times, the timing and ultimate outcome of clinical tests, the scope and effect of patent opinions, as well as other risk factors listed from time to time in the Company's SEC reports and filings, including, without limitation, the sections entitled "Business Outlook" and "Risk Factors" in the Company's Annual Report on Form 10-K (Part II, Item 6) for the year ended September 30, 1997. The Company has begun to benefit from the recent and growing market preference for non-latex products. New FDA labeling regulations that become mandatory in September 1998 require that latex products contain a warning label as to the inherent risks associated with latex product use. In light of 9 these inherent risks, many customers and medical institutions are now seeking non-latex alternatives such as those the Company offers. The Company intends to continue expanding its domestic field force for branded products and to further develop its international branded product sales activities. Since revising its agreement with ConvaTec in May of this year, the Company has begun marketing efforts to expand its base of customers in major international markets now accessible to the Company for new private label customers. Mentor Corporation, one of the Company's largest private label customers, has recently advised the Company of its intention to manufacture its own silicone male external catheters under a royalty-free license it holds from the Company. The Company is unable to predict when Mentor might begin such manufacturing operations, or the effect, if any on future sales to Mentor. There can be no assurances that the Company will be able to expand its base of private label customers or will continue selling catheters to Mentor. The Company has increased its Foley catheter production rate during the current quarter with the addition of peripheral manufacturing equipment and the expansion of its production work force. This capacity increase was undertaken in response to an increase in order volumes for the Company's silicone Foley catheters, as well as in anticipation of manufacturing capacity requirements for the Release NF catheter. Aside from the Foley catheter production facility, the Company expects to experience excess capacity costs, including depreciation charges, associated with its other new manufacturing facilities, which will affect margins until such time as sales volumes provide a level of utilization to absorb these costs. The Company is aware of the possibility that some computer programs may fail or cause erroneous results due to their inability to accommodate year 2000 processing requirements. The Company's operations are supported exclusively by purchased software. The Company has been advised by its software vendors that such software is fully compliant with year 2000 requirements. The Company plans to make additional inquiries to certain of its key vendors, and does not now know what the results of such inquiries will be. The Company intends to continue to monitor year 2000 compliance matters. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.18 Employment Agreement dated July 6, 1998 between the Company and Randy C. Dennis. 27 Financial Data Schedule (b) Reports on Form 8-K: None 10 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rochester Medical Corporation Date: August 6, 1998 By: /s/ ANTHONY J. CONWAY ------------------------------------ Anthony J. Conway CHIEF EXECUTIVE OFFICER Date: August 6, 1998 By: /s/ BRIAN J. WIERZBINSKI ------------------------------------ Brian J. Wierzbinski CHIEF FINANCIAL OFFICER 11 EXHIBITS PAGE ---- 10.18 Employment Agreement dated July 6, 1998, between the Company and 12 Randy C. Dennis. 27 Financial Data Schedule 21 EX-10.18 2 EMPLOYMENT AGREEMENT EXHIBIT 10.18 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of this 6th day of July 1998, by and between Rochester Medical Corporation, a Minnesota corporation (the "Corporation"), and Randy C. Dennis ("Employee"). WHEREAS, the Corporation and the Employee desire to record the terms of Employee's employment by the Corporation; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Subject to the terms and conditions of this Agreement, the Corporation hereby employs Employee and Employee hereby accepts employment for the period commencing July 6, 1998, and continuing thereafter until the employment is terminated according to the provisions of this Agreement. 2. DUTIES. During the term of this Agreement, Employee shall perform the duties of Vice President Sales and Marketing and such additional duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer of the Corporation. 3. BASE SALARY; OTHER COMPENSATION. 3.1 Base Salary. The Corporation shall pay Employee a initial Base Salary ("Base Salary") of One Hundred Twenty Five Thousand Dollars ($125,000) per annum commencing July 6, 1998. The Base Salary shall be paid according to the Corporation's regular payroll procedure, in equal increments not less frequently than monthly. The Base Salary shall be subject to annual review and merit increase adjustment in accordance with the Corporation's customary practices, as may be then in effect, for salary planning and administration. 3.2 Incentive Bonuses. Employee shall be entitled to receive an initial bonus payment in the amount of Fifteen Thousand Dollars ($15,000) payable with his first regular payroll. Employee shall also be eligible to participate in the Corporation's bonus incentive plan with a targeted bonus ("Bonus") determined in accordance with the Corporation's Executive Bonus Program. The targets and performance necessary to earn the Bonus or any portion thereof shall be set annually by the Corporation; provided, that the Bonus payable to Employee for the Corporation's fiscal year ending September 30, 1998, shall be in the amount of Twenty Eight Thousand One Hundred Twenty Five Dollars ($28,125). 3.3 Relocation Allowance. In addition to any other compensation to which Employee may be entitled by this agreement, The Corporation shall pay Employee a Relocation Allowance (the "Relocation Allowance") consisting of (i) all direct moving costs and expenses incurred by Employee in connection with Employee's associated relocation to the Rochester, Minnesota, area, (ii) reimbursement of all realtor's commissions and closing costs paid by Employee in connection with the sale of his present home, (iii) reimbursement of closing costs paid by Employee in connection with the purchase of his new home, (iv) reimbursement of all expenses for meals and lodging, not to exceed eight days, in connection with Employee's travel to the Rochester, Minnesota, area for purposes of finding a new home, and (v) income tax gross-up to the extent any payments to or on behalf of employee hereunder are taxable as income to Employee. 3.3 Incentive Stock Option. In addition to any other compensation to which Employee may be entitled by this agreement, Employee shall be entitled to receive an Incentive Stock Option for Eighty Thousand (80,000) shares of the Corporation under the Corporation's 1991 Stock Option Plan according to the Incentive Stock Option Agreement appended hereto as Exhibit 1. The exercise price of the Incentive Stock Option shall be fair market value, as determined according to the 1991 Stock Option Plan, as of the close of business on the date of grant by the Corporation.s Board of Directors. Employee acknowledges receiving a copy of the 1991 Stock Option Plan. 4. BENEFITS. 4.1 Vacation. During each year of his employment, Employee shall be entitled to four (4) weeks annual vacation and to reasonable holidays and sick leave. Vacations shall be taken by Employee during the year earned at such time or times and for such periods as Corporation and Employee shall agree. 4.2 Benefit Programs, Insurance. Employee shall be entitled to participate in customary employee benefit programs as may be from time to time determined by the Board of Directors including, but not limited to, life insurance, hospitalization, surgical and major medical coverage, and long-term disability as are or may be made available from time to time to other salaried employees of the Corporation. 2 5. TERMINATION. 5.1 Events of Termination. This Agreement may be terminated upon the occurrence of any one of the following events: (a) Voluntary. Employee may terminate this Agreement at any time during the term of this Agreement by giving 30 days prior written notice of termination to the Board. (b) Involuntary Without Cause. The Corporation may terminate this Agreement without cause by 30 days written notice to Employee. (c) Involuntary With Cause. The Corporation may terminate this Agreement immediately for cause for (i) Employee's material breach of any agreement with the Corporation, (ii) Employee's deliberate, willful or gross misconduct in the performance or Employee's duties on behalf of the Corporation, or (iii) Employee's being charged with a crime punishable by imprisonment. (d) Death. This Agreement shall automatically terminate upon the death of the Employee. (e) Disability. This Agreement shall automatically terminate upon the permanent disability of Employee. For the purposes of this Agreement, Employee shall be deemed permanently disabled if any ailment, illness or other incapacity prevents his from performing his duties as specified in this Agreement for a period of three consecutive months or for an aggregate of three months in any twelve month period from the date of this Agreement. 5.2 Consequences of Termination. In the event of the termination of this Agreement in accordance with Subparagraph 5.1 above, Employee (or his estate) shall be entitled to Base Salary earned by his prior to the date of termination as provided herein computed on a pro rata basis to and including such date of termination. In addition, Employee shall also be reimbursed for his reasonable business expenses incurred prior to the date of termination. 6. INVENTIONS; CONFIDENTIALITY. 6.1 Definitions. For purposes of this Section 6, the following words and phrases have the meanings ascribed to them, respectively: 3 (a) "Confidential Information" means all formulas, processes, customer lists, computer user identifiers and passwords, and all purchasing, engineering, accounting, marketing and other information that is proprietary to the Corporation and not generally known or readily ascertainable by proper means, relating to research, development, manufacture or sale of the Corporation's products, as well as formulas, processes and other information received by the Corporation from third parties under an obligation of secrecy. All information disclosed to Employee or to which Employee has access during the period of his employment, which he has reasonable basis to believe to be Confidential Information, or which is treated by the Corporation as being Confidential Information, shall be presumed to be Confidential Information. (b) "Inventions" means all formulas, processes, discoveries, improvements, ideas and works of authorship, whether patentable or copyrightable or not, which Employee learns, has access to, has a part in developing, first conceives or first reduces to practice, alone or with others (1) that are developed on the Corporation's time, or (2) that relate directly to the Corporation's business or actual or anticipated research, or (3) for which any of the Corporation's property, including Confidential Information, is used, or (4) that result from any of Employee's work for the Corporation. 6.2. Disclosure and Assignment. Except as provided elsewhere in this Agreement, Employee shall treat as for the Corporation's sole benefit and fully and promptly disclose to the Corporation, without additional compensation, all ideas, discoveries, inventions and improvements, whether patentable or not, which, while the Employee is employed by the Corporation, are made conceived or reduced to practice by Employee, alone or with others, during or after usual working hours, either on or off the job, and Employee hereby assigns to the Corporation all such ideas, discoveries, inventions and improvements to be the Corporation's exclusive property. 6.3 Further Documents. Employee will acknowledge and deliver promptly without charge all documents to the Corporation, and will do such other acts as may be necessary in the Corporation's opinion to obtain and maintain patents (including divisional, reissued or extended Letters Patent) or copyrights and to vest the entire right and title in the Corporation to such patents, copyrights and Inventions in all countries. 6.4 Confidentiality. Employee will not use or disclose any Confidential Information, either during or after employment by the Corporation, except as required 4 by his duties to the Corporation, and Employee acknowledges and understands that the obligation to maintain the confidentiality of the Corporation's Confidential Information is unconditional and shall not be excused by any conduct on the part of the Corporation except its prior voluntary disclosure of the information. Upon termination of employment, Employee agrees that (a) all Confidential Information, including all copies, excerpts and summaries in his possession or control (whether prepared by the Corporation, the Employee or others), and also all other the Corporation property, including keys, credit cards, software, reports and the like, shall be left with the Corporation and (b) Employee will stop use of all Confidential Information. Employee shall not at any time during the term of this Agreement or thereafter, or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation in any manner whatsoever any information concerning any matters affecting or relating to the business of the Corporation, including without limiting the generality of the foregoing, any of its customers, the prices it obtains or has obtained from the sale of, or at which it sells or has sold, its products, or any other information concerning the business of the Corporation, its manner of operation, its plans, processes, or other data without regard to whether all of the foregoing matters will be deemed confidential, material, or important, the parties hereto stipulating that as between them, the same are important, material, and confidential and gravely affect the effective and successful conduct of the business of the Corporation, and the Corporation's good will, and that any breach of the terms of this Section 6 shall be a material breach of this Agreement. 6.5 Limitation; First Refusal. The obligations of Section 6.2 and 6.3 shall not apply to any ideas, discoveries, inventions and improvements for which no equipment, supplies, facility or trade secret information of the Corporation was used, and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of the Corporation or (b) to the Corporation's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for the Corporation. Employee will, nonetheless, promptly disclose all such ideas, discoveries, inventions and improvements to the Corporation and offer to the Corporation the right of first refusal to enter into a license or purchase agreement covering the subject idea, discovery, invention or improvement on terms mutually agreed to by Employee and the Corporation. In the event the Corporation and Employee cannot agree on terms and Employee receives an offer to enter into a license or purchase agreement with some other party on terms more favorable to that other party than the terms offered to the Corporation, then the Corporation shall have the right and Employee shall have the obligation to offer to the Corporation the idea, discovery, invention or improvement on such favorable terms. When such an offer is made to the Corporation pursuant to the preceding sentence, it must be accepted by the Corporation within thirty (30) days; or if not accepted, the right of first refusal hereunder as to that offer shall terminate. 5 NOTICE: SECTION 6 HEREOF REQUIRES EMPLOYEE TO ASSIGN RIGHTS TO INVENTIONS TO THE CORPORATION OR ITS SUCCESSORS. MINNESOTA STATUTES SS.181.78 LIMITS THE SCOPE OF AGREEMENTS REQUIRING THE INVENTIONS BE ASSIGNED TO EMPLOYERS. THE STATUTE STATES THAT SUCH ASSIGNMENT AGREEMENTS DO NOT APPLY: "TO AN INVENTION FOR WHICH NO EQUIPMENT, SUPPLIES, FACILITY OR TRADE SECRET INFORMATION OF THE EMPLOYER WAS USED AND WHICH WAS DEVELOPED ENTIRELY ON THE EMPLOYEE'S OWN TIME, AND (1) WHICH DOES NOT RELATE (a) DIRECTLY TO THE BUSINESS OF THE EMPLOYER OR (b) TO THE EMPLOYER'S ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (2) WHICH DOES NOT RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER." PLEASE NOTE THAT SECTION 6 OF THIS AGREEMENT USES THESE STATUTORY TERMS TO DEFINE THE INVENTIONS WHICH ARE NOT AUTOMATICALLY ASSIGNED TO THE CORPORATION BUT INSTEAD ARE SUBJECT TO A RIGHT OF FIRST REFUSAL IN FAVOR OF THE CORPORATION. 6.6. Assistance to the Corporation. Employee shall give the Corporation, at the Corporation's expense, all assistance the Corporation reasonably requires to perfect, protect, and exercise the rights to all ideas, discoveries, inventions or improvements acquired by the Corporation pursuant to the assignment provisions or the right of first refusal provisions of this Section 6. 6.7 Remedies. The Employee's obligations set forth in Section 6 of this Agreement shall continue to be binding upon Employee, notwithstanding the termination of his employment with the Corporation for any reason whatsoever. Such obligations shall be deemed and construed as separate agreements independent of any other provisions of this Agreement. The existence of any claim or cause of action by Employee against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation or any or all of such obligations. It is expressly agreed that the remedy at law for the breach of any such obligation is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages. 7. NOTICES. Any notices to be given hereunder by either party to the other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Personal delivery to the Corporation shall mean personal delivery to the Chief Executive Officer of the Corporation. Mailed notices shall be addressed to the respective addresses shown below. Either party may change its address for notice by giving written notice according to the terms of this Section 7. (a) If to Employee: Randy C. Dennis 12400 53rd Avenue North Plymouth, Minnesota 55442 6 (b) If to the Corporation: Rochester Medical Corporation One Rochester Medical Drive Stewartville, Minnesota 55976 Attention: Chairman of the Board 8. GENERAL PROVISIONS. 8.1 Law Governing. This Agreement shall be governed by and construed according to the laws of the State of Minnesota. 8.2 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforce- able provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. 8.3 Entire Agreement. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof. No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto. 8.4 Binding Effect. This Agreement shall extend to and be binding upon and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by Employee. 8.5 Waiver. The waiver by either party hereto of a breach of any term or provision of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by any party or of the breach of any other term or provision of this Agreement. 8.7 Titles. Titles of the paragraphs herein are used solely for convenience and shall not be used for interpretation or construing any word, clause, paragraph, or provision of this Agreement. 7 8.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.9 Merger. This Agreement merges and supersedes any and all prior negotiations or agreements between the Employee and the Corporation. IN WITNESS WHEREOF, the Corporation and Employee have executed this Agreement as of the date and year first written above. "Employee" Rochester Medical Corporation By: - ----------------------------------- ----------------------------------- Randy C. Dennis Anthony J. Conway, Chief Executive Officer 8 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-1998 APR-01-1998 JUN-30-1998 3,814,591 13,837,486 1,813,777 59,229 2,022,349 21,719,303 13,397,483 2,347,159 33,037,840 1,557,200 0 0 0 40,692,202 0 33,037,840 6,766,812 6,766,812 4,668,609 9,092,933 0 (9,000) 0 (1,695,335) 0 (1,695,335) 0 0 0 (1,695,335) (0.33) (0.33)
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