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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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
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<PAGE>
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
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
========== ========== =========== ===========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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%)
=== === === ===
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBITS
PAGE
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10.18 Employment Agreement dated July 6, 1998, between the Company and 12
Randy C. Dennis.
27 Financial Data Schedule 21
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
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