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Dear Shareholders:
This past year has been one of transition and growth for UroQuest Corporation.
UroQuest successfully completed an initial public offering in October 1996 which
included a merger with Bivona Medical Technologies to form UroQuest Medical
Corporation. The combination of these two companies brought UroQuest's
innovative urological technologies together with Bivona's 25 years of healthcare
products manufacturing experience to create a medical device company capable of
meeting the rigorous requirements of patients and healthcare providers now and
in the years ahead.
Today, UroQuest is engaged in the development of innovative products for the
management and diagnosis of both male and female urological disorders. The
On-Command Catheter is designed to enable persons with either urinary
incontinence or urinary retention to manage their condition without the
restricted mobility, medical complications, discomfort and embarrassment
generally associated with many of the existing alternatives.
At Bivona Medical Technologies, we have 270 dedicated employees who produce over
500 different airway management products which are marketed in over 40 countries
worldwide. We also provide contract manufacturing services and expertise for
some of the world's largest medical products companies.
Everyone at UroQuest is dedicated to the task of developing innovative medical
devices that can benefit patients throughout the world. Seeking to preserve and
improve the quality of life for patients with challenging medical problems is
the principle that guides our work. 1997 will be a busy year as we continue to
press forward with this objective in mind.
We appreciate the efforts of all our employees and look forward to continuing to
earn your support as a valued UroQuest shareholder.
Sincerely,
/s/ Terry E. Spraker, Ph.D.
President and Chief Executive Officer
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UroQuest Medical Corporation
1996 Annual Report
Table of Contents
<TABLE>
<S> <C>
Business............................................................................ 3
Financial Section:
Consolidated Balance Sheets..................................................... 13
Consolidated Statements of Operations........................................... 14
Consolidated Statements of Cash Flows........................................... 15
Notes to Consolidated Financial Statements...................................... 16
Independent Auditors' Report.................................................... 25
Management's Discussion and Analysis............................................ 26
Selected Financial Data......................................................... 31
Selected Quarterly Results of Operations (Unaudited)............................ 32
Market price for Common Stock (Unaudited)....................................... 32
Officers and Directors.............................................................. 33
Shareholder Information............................................................. 33
</TABLE>
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BUSINESS
UroQuest Medical Corporation ("the Company") completed an initial public
offering of its Common Stock on October 30, 1996 (the "IPO"). Prior to the IPO,
the Company changed its name from "UroQuest Corporation" to "UroQuest Medical
Corporation" and reincorporated from the State of Florida to the State of
Delaware. In connection with the IPO, the Company completed the acquisition of
BMT, Inc., an Indiana corporation, and its wholly owned subsidiary, Bivona,
Inc., an Indiana corporation (collectively, "BMT"), pursuant to which BMT became
a wholly owned subsidiary of the Company as described below.
The Company's other wholly owned subsidiary is UroCath Corporation, a Florida
corporation ("UroCath"). Unless the context of this Report requires otherwise,
(i) references to the "Company" refer to UroQuest Medical Corporation and each
of its wholly owned subsidiaries, including the business and operations of BMT
from October 30, 1996 (the date of the BMT acquisition), and (ii) references to
"UroQuest" refer to UroQuest Medical Corporation and UroCath, excluding the
business and operations of BMT.
UroQuest was formed to design, develop and market advanced products for the
management and diagnosis of both male and female urological disorders.
UroQuest's principal product, the On-Command Catheter, is an intraurethral
(inside the urethra) catheter incorporating a proprietary anchoring system and a
proprietary patient controlled, magnetically activated valve used to regulate
urine flow. The On-Command Catheter is designed to enable persons with either
urinary incontinence or urinary retention to manage their condition without the
restricted mobility, medical complications, discomfort and embarrassment
generally associated with many of the existing management alternatives,
including intermittent, Foley, external and suprapubic catheters, diapers and
absorbents, and penile clamps. Clinical trials of the On-Command Catheter have
demonstrated the utility of the device in managing male urinary outflow
disorders. The results of the clinical trials have shown an overall symptomatic
urinary tract infection ("UTI") rate of less than 3% for all device insertions
during the trials. This rate is significantly lower than the rate of infection
generally associated with the use of Foley catheters. Of the patients included
in the trials, approximately 90% found the Male On-Command Catheter maintained
continence, was comfortable to wear and easy to use.
Clinical trials of the Male On-Command Catheter have been conducted at eight
sites in the United States under an Investigational Device Exemption ("IDE")
application approved by the United States Food and Drug Administration (the
"FDA"). The results to date, while promising, are preliminary and additional
clinical testing is required before any definitive conclusions can be reached
concerning the general use of the On-Command Catheter. Consequently, UroQuest is
conducting a controlled, randomized clinical study under an approved IDE
application at several investigational sites in the United States. An IDE
application for the Female On-Command Catheter was approved in March 1996 and
UroQuest has obtained Institutional Review Board ("IRB") approval at two
investigational sites and is conducting a non-randomized pilot evaluation prior
to initiating a controlled, randomized study.
In October 1996, UroQuest acquired BMT. BMT designs, develops, manufactures
and markets a line of proprietary silicone medical device products used to
manage airway problems, as well as provides engineering design, development and
manufacturing services for silicone products on an OEM basis for other medical
device companies. BMT is one of a limited number of specialty manufacturers of
silicone catheters in the United States. The acquisition was effected through a
merger of BMT with and into an acquisition subsidiary of the Company pursuant to
which shareholders of BMT received, in the aggregate, a combination of $10
million cash and 2,500,000 newly issued shares of the Company's Common Stock.
The acquisition has enabled the Company to control its own production source
while providing necessary capacity and flexibility in the manufacturing process.
The acquisition has also expanded the Company's limited product line and
experience which previously focused primarily on the On-Command Catheter. The
product development and production expertise of BMT is also being utilized by
the Company to develop additional On-Command Catheter products and other new
devices related to the management and diagnosis of urological disorders.
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UROLOGY PRODUCTS
The On-Command Catheter is an intraurethral catheter incorporating a
proprietary anchoring system and a proprietary patient controlled, magnetically
activated valve used to regulate urine flow. The On-Command Catheter is designed
to enable persons with either incontinence (the inability to control one's
urinary function, leading to frequent involuntary urine leakage from the
bladder) or retention (the inability to voluntarily and spontaneously empty
one's bladder) to manage their condition without the restricted mobility,
medical complications, discomfort and embarrassment generally associated with
many of the existing management alternatives including intermittent, Foley,
external and suprapubic catheters, diapers and absorbents, and penile clamps.
Unlike most of the widely used incontinence management products, which are
designed to capture urine flow in an external container or absorbent medium, the
On-Command Catheter enables the incontinent person to remain dry without
interfering with normal lifestyle activities and without the associated medical
and psychological problems. Furthermore, unlike most of the widely used products
for the management of retention, which result in severe lifestyle restrictions,
the On-Command Catheter allows the patient with retention to empty the bladder
conveniently and without the potential complications associated with the use of
an external collection bag or the need for intermittent catheterization ("IC").
The principal features of the On-Command Catheter include:
- Patient Control. The On-Command Catheter enables persons with either
incontinence or retention to maintain control of their urinary outflow.
The On-Command Catheter prevents urine from leaving the urinary tract
until the incontinent person chooses to void, enabling such a person to
remain dry. The On-Command Catheter allows the patient with retention to
void when desired and without the need for IC.
- Non-Surgical Application. The On-Command Catheter is designed to be a
relatively low-risk, non-surgical management application for urinary
outflow problems when compared to surgery or permanently implanted
devices. This is particularly important due to the uncertainty and
complications of invasive treatments, or when the longevity of the
patient is in question.
- Ease of Use. The operation of the On-Command Catheter is simple and
efficient for the patient. The device is also easy for the physician to
understand, size and insert because it shares several common design
features with other commonly used indwelling catheters, such as the
Foley catheter. There is no initial capital or inventory investment
required and only minimal training is necessary for a physician to
become proficient in the use of the device.
- Convenience and Enhanced Lifestyle. The proprietary intraurethral design
of the On-Command Catheter eliminates the need for external collection
bags and absorbents that can restrict mobility and compromise lifestyle.
Periodic replacement is also convenient when compared to products like
diapers, intermittent catheters and urethral plugs which must be changed
or replaced multiple times per day.
- Lower Incidence of Complications. The On-Command Catheter, because of
its intraurethral design, is believed to result in fewer complications
than other products designed for the treatment or management of urinary
outflow problems. Incontinent persons are likely to stay dry, reducing
the risks of rashes, skin irritations, urethral strictures and other
complications.
- Reduced Infection Rate. Male patients with either incontinence or
retention have been shown in the Company's clinical trials to have lower
symptomatic UTI rates while using the Male On-Command Catheter, when
compared with infection rates generally associated with the use of Foley
catheters.
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- Cost Effectiveness. The Company believes that less frequent replacement
of the On-Command Catheter should provide a competitive cost advantage
over products that are changed daily or multiple times per day. In
addition, the Company anticipates that the overall treatment cost using
the On-Command Catheter will be lower due to a reduced incidence of
complications and side effects, as well as patient transfers into
institutionalized settings.
Urinary outflow dysfunction can result from a wide range of diseases,
surgical complications or other factors affecting anatomic structures, autonomic
reflexes or neurologic function. As a result, it is difficult for a single
treatment or management alternative to effectively address every specific
condition. There are certain specific patients who would not be able to benefit
from the clinical and lifestyle advantages of the On-Command Catheter. First,
patients who have limited motor function or dementia may not be able to
effectively activate the magnetic valve. Second, the anatomy of patients who
have low bladder capacity or bladder instability may not be able to accommodate
an intraurethral device such as the On-Command Catheter. Finally, patients with
other physical limitations such as excessive obesity or retracted penis may not
be able to use the On-Command Catheter.
Male On-Command Catheter
The Male On-Command Catheter consists of two separable units, the
intraurethral catheter portion and the detachable inflator section. When the two
units are connected, prior to use, the device closely resembles a Foley
catheter. The device is inserted non-surgically through the urethra in a simple
five-minute procedure. Two balloons are inflated, one in the bladder to seal the
bladder neck and one in the urethra on the downstream side of the prostate gland
to anchor the device. The inflator portion is then detached and discarded,
allowing the device to reside completely inside the urethra with no exposed
components, thereby reducing the risk of infection. The device is designed to
remain in place for up to 30 days.
The proprietary magnetic control valve is located at the outlet end of the
catheter section. This valve can be opened by simply placing a matchbook sized
magnet externally along the underside of the penis, allowing the urine to flow.
Removing the magnet closes the valve, shutting off the flow of urine and keeping
the patient dry. Both insertion and removal procedures are non-surgical, take
only a few minutes and are easily accomplished by medical staff or other
caregivers. The Company offers a range of sizes, and uses a proprietary sizing
catheter to ensure appropriate fit. The sizing catheter is easy for physicians
to use and ensures a comfortable and customized fit in a variety of anatomies.
Female On-Command Catheter
The Female On-Command Catheter also employs a catheter with a detachable
inflator section and a magnetically activated valve. The device is shorter than
the Male On-Command Catheter and substitutes the urethral anchoring balloon with
a small rounded external cap which anchors the device in place beneath the
labial folds of the vagina. The device is designed to remain in place for up to
30 days making it more convenient than many other products requiring multiple
changes per day. Because the external anchoring cap extends past the urethral
opening, symptomatic UTI rates in the Female On-Command Catheter are expected to
be higher than the Male On-Command Catheter which resides entirely inside the
urethra. The procedures for insertion, voiding and removal are similar to those
for the male device.
CLINICAL TRIALS
Initial clinical trials of the Male On-Command Catheter were conducted by
Surgitek, Inc. ("Surgitek"), a prior licensee of the Company's technology, from
1989 to 1992. The trials evaluated a minimum of three successive device
insertions for a period of 30 to 37 days each in male patients with either
incontinence or retention. A total of 49 patients were enrolled receiving an
aggregate of 201 Male On-Command Catheter insertions. The longest trial period
on any patient was 32 months, with the patient receiving a total of 30 device
insertions.
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The clinical trials demonstrated the utility of the Male On-Command Catheter in
managing urinary outflow problems. The results of the clinical trials showed an
overall symptomatic UTI rate of less than 3% for all device insertions during
the trials. This rate is significantly lower than the rate of infection
generally associated with the use of Foley catheters. The Company believes that
the results are due, in part, to the entirely indwelling design of the Male
On-Command Catheter which is not subject to bacterial influx from external
tubing and collection systems typically associated with a Foley catheter. In
addition, the proprietary anchoring system caused no adverse effects to the
urethra or bladder.
In the Surgitek trials, the Male On-Command Catheter initially experienced a
high degree of mechanical failure; however, the device's performance improved
substantially as the design, manufacturing procedures, testing protocols and
insertion techniques were modified and enhanced. Complications other than
symptomatic UTI primarily included migration, mis-sizing and bladder spasms.
Notwithstanding the foregoing, approximately 90% of the patients included in the
trials found the Male On-Command Catheter maintained continence and was
comfortable to wear and easy to use.
UroQuest submitted a 510(k) application to the FDA in July 1994 based on the
clinical data collected by Surgitek. UroQuest was notified by the FDA that the
clinical trials were deficient in certain respects, particularly with respect to
the design of the trials, which had an insufficient number of patients and was
not structured as a controlled, randomized study. In response to the FDA, the
Company designed a controlled, randomized study of the Male On-Command Catheter
and filed an IDE application that was approved in July 1995.
The controlled, randomized study was initially started in September 1995 and
then stopped in order to diagnose and correct a component assembly problem
causing migration of the device away from the bladder. UroQuest initiated two
non-randomized pilot studies to evaluate several assembly and manufacturing
procedures designed to correct the problem and incorporate other improvements,
including a modified magnetic valve and a new sizing catheter and procedure to
enhance the patient fit of the device. UroQuest completed the pilot studies
prior to recommencing the controlled, randomized study in December 1996.
The purpose of the randomized study is to confirm prior clinical results and
demonstrate the safety and efficacy of the Male On-Command Catheter when
compared to a Foley catheter in managing urinary outflow dysfunction. The study
protocol includes the evaluation of a single device insertion for a period of up
to 30 days. The duration of the study is seven weeks per patient, including
enrollment and both pre-insertion and post-insertion examinations. Study
endpoints include comparison of symptomatic UTI rates, physical changes to the
bladder and urethra and patient assessment of quality of life between study
groups.
In January 1997, UroQuest obtained clarification from the FDA that the Male
and Female On-Command Catheters would be regulated through a PMA process. The
FDA also re-examined the IDE protocol being used in the Company's ongoing
controlled, randomized study and indicated that the study design should be
sufficient to support a PMA filing.
The IDE for the Female On-Command Catheter was approved in March 1996 by the
FDA and UroQuest has obtained IRB approval at two investigational sites. As part
of the approved IDE, the Company is conducting a non-randomized pilot evaluation
to test protocols and procedures prior to initiating the controlled, randomized
study. Once the pilot study is completed and the data analyzed, UroQuest will
design the necessary studies to support the clinical indications and claims
sought.
MARKETING AND SALES OF THE ON-COMMAND CATHETER
At this time, UroQuest's marketing strategy is to market the On-Command
Catheter directly in the United States to physicians and their patients while
using marketing collaborations for institutions (nursing home and hospital care)
and international markets. The Company's marketing strategy is designed to
create awareness and promote the On-Command Catheter as the preferred
alternative for the management of lower
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urinary tract problems in men and women. The Company's initial marketing efforts
will be directed toward urologists, uro-gynecologists and primary care
physicians whose patients are seeking relief from urinary outflow problems.
The On-Command Catheter represents a new management modality for urinary
outflow dysfunction, and there can be no assurance that the On-Command Catheter
will gain any significant degree of market acceptance among physicians, health
care payers or patients, even if necessary domestic or international regulatory
and reimbursement approvals are obtained. Patient acceptance of the device will
depend on many factors, including physician recommendations, the degree, rate
and severity of potential complications, the cost and benefits compared to
competing products, lifestyle implications, available reimbursement and other
considerations. Failure of the On-Command Catheter to achieve substantial market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
Domestic Sales
The Company intends to implement its marketing strategy through clinical
sales specialists who will educate and train physicians and patients. These
specialists will include field-based paraprofessionals, nurse practitioners and
professional sales representatives with experience demonstrating medical
products and procedures. Initially, the Company will target the sunbelt region
of the United States where there is a greater percentage of older persons in
whom the incidence of urinary dysfunction is higher. The Company then intends to
expand its sales efforts into other areas of the country.
The Company believes that many patients using currently available products to
manage incontinence and retention are dissatisfied with such products. Patient
awareness of the benefits of the On-Command Catheter will be created through the
use of selected print advertising, incontinence advocacy group sponsorship,
prostate cancer newsletters and other targeted promotions. The objective will be
to inform patients that a new management option is available and provide them
with a toll free phone number to call for more information. Callers will be
provided with the names of physicians in the patient's area who have been
trained by the clinical sales specialist, have adopted the On-Command Catheter
for their patients and are prepared to evaluate the clinical suitability of the
patient. The Company's strategy is to identify reference physicians in selected
geographic areas to provide a referral network for patients seeking management
alternatives. Timing of the media awareness campaign will be carefully
orchestrated to coincide with the physician training. The Company's direct sales
activities will also be augmented through attendance and participation in trade
shows and organizational meetings specifically related to urology and urinary
dysfunction and through the publication of scientific papers discussing the
results of expanded clinical development work.
Based on market research commissioned by the Company, the Company believes
its initial target market includes men who have incontinence or retention whose
condition does not preclude them from using a medical device and who meet
certain additional criteria including age, manual dexterity and dissatisfaction
with their current management modality. This research also indicates that over
one million men are currently using a catheter-type device to manage urinary
outflow problems. The Company believes that patients currently using these
devices will be the first to recognize the benefits of the On-Command Catheter.
These male patients are accustomed to catheters, see their physician on a
regular basis, and are believed to be the most receptive to alternative
management methods. Patients using absorbents who are dissatisfied with the
wetness, odor, discomfort and embarrassment associated with diapers are also
primary targets.
The Company is targeting women with moderate to severe stress incontinence
who require some form of continuous management and are dissatisfied with wearing
diapers and pads. The Company estimates that this represents a target market of
one and one-half million women in the United States. The Company intends to
introduce the Female On-Command Catheter initially through the physicians who
have had prior experience with the Male On-Command Catheter and are treating
female patients with similar profiles.
The Company expects eventually to add managed care specialists to address the
unique requirements of capitated health care systems including hospitals, HMOs
and nursing homes. The products will be sold on the
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basis of pharmacoeconomic results and the overall cost effectiveness versus
other management and treatment modalities. The Company plans to analyze and use
the most appropriate distribution method to reach these institutional markets.
To date, the Company has not sold any On-Command Catheter products and does
not currently employ any marketing or sales employees for such device. There can
be no assurance that the Company can attract and retain its own qualified
marketing and sales personnel or otherwise design and implement an effective
marketing and sales strategy for the On-Command Catheter. The failure to
establish and maintain effective marketing, sales and distribution channels for
the Company's products, or to attract and retain qualified sales personnel to
support commercial sales of the Company's products, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
International
International marketing efforts are initially being directed at Europe and
Japan. International sales are expected to be made through independent foreign
distribution arrangements. UroQuest signed a letter of intent with B. Braun
Biotrol ("Braun"), a European-based multinational medical device company , in
February 1996. As part of the agreement, Braun is required to initiate clinical
trials prior to the negotiation of a definitive distribution agreement. It is
anticipated that Braun will commence a clinical trial in France during 1997.
There can be no assurance that the study will be initiated during that time
frame. Preliminary discussions are currently underway with other potential
distributors in Japan and other Pacific Rim countries. There can be no assurance
that the Company will be successful in establishing or maintaining effective
marketing, sales and distribution channels internationally.
International sales may be adversely affected by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, distributor difficulties, communications
problems, fluctuations in foreign currency rates, foreign competition and other
factors. Any one or more of these factors could limit the Company's
international sales and have a material adverse effect on the Company's
business, financial condition and results of operations.
AIRWAY MANAGEMENT PRODUCTS AND OEM SALES
The Company manufactures and markets a series of proprietary airway
management products under the BMT label. These products consist primarily of
silicone based medical devices used in a wide variety of clinical applications,
including tracheostomy and endotracheal tubes for airway management and voice
prostheses for voice restoration. The Company also produces a range of complex
catheter type products on an OEM and private label basis for other medical
device companies in areas that include gastrointestinal feeding, esophageal
management, cardiac perfusion, hyperalimentation and dialysis.
The Company uses a small direct sales force to market its proprietary airway
management products to medical specialists including ear, nose and throat
("ENT") surgeons, respiratory therapists, speech pathologists and
anesthesiologists. A group of specialty medical dealers is used in international
markets. Approximately 20% of the Company's net sales are currently derived from
sales in international markets.
The current proprietary airway management product line includes over 400
different products sold to approximately 9,000 customers in 40 different
countries. The OEM product line includes approximately 500 additional products
sold to about 20 different companies, most of which are Fortune 500 medical
device companies. For the year ended December 31, 1996, OEM sales accounted for
approximately 40% of the Company's net sales. Sales to Abbott Laboratories
accounted for approximately 20% of total net sales. Although the Company intends
to continue developing its OEM business, there can be no assurance that it will
be successful in its efforts or that its OEM customers will react favorably to
the acquisition of BMT by the Company. The loss of Abbott Laboratories or other
OEM customers could have a material adverse effect on the Company's business,
financial conditions and results of operations.
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The OEM business is serviced by a team of contract sales agents with support
from the Company's engineering staff. The Company is positioned as a value added
manufacturer providing complete product development, regulatory affairs,
manufacturing and packaging service. The Company emphasizes its broad expertise
in complex catheter manufacturing, silicone fabrication techniques and surface
enhancement technologies.
MANUFACTURING
Through BMT, the Company currently produces limited quantities of the
On-Command Catheter for use in its clinical trials. The manufacturing facilities
are currently operated in compliance with existing FDA-mandated Good
Manufacturing Practices ("GMPs") and have passed inspection repeatedly by the
FDA, as well as the United Kingdom's Department of Health.
The business of BMT has been specialized in the manufacture of medical
devices using predominantly silicone technology for 25 years. BMT manufactures a
broad range of silicone-based catheter-type products used in various segments of
the health care industry. BMT has obtained ISO-9001 certification from BSI
Product Certification of the United Kingdom, which is based on adherence to
established standards in the area of quality assurance and manufacturing process
control, and CE mark status.
The Company purchases certain of the components used to manufacture the
On-Command Catheter from several single source suppliers, with whom the Company
has no long-term agreements. Any interruptions or delays associated with any
component shortages, particularly as the Company scales up its manufacturing
activities in support of commercial sales of the On-Command Catheter, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company's manufacturing capabilities include custom compounding, where
special pigmentation, radiopacity agent, or unique ratio blending are necessary
to customize end product performance specifications. Liquid silicones and high
consistency silicones are utilized in injection, transfer, compression, insert
or blow molding processes to manufacture components in a variety of custom
configurations. The Company also has the capability to extrude single or
multi-lumen tubing, special round or compound profiles or even coextrusion with
other silicone or non-silicone substrates in a range of sizes from as small as
0.002" inside diameter tubing to as large as 1.6" outside diameter. In some
cases, these basic processes yield a finished device. In most cases these molded
or extruded products become the components and/or subassemblies from which a
broad range of catheter-type devices are manufactured, including the On-Command
Catheter.
The Company has extensive assembly and fabrication capabilities. The molded
or extruded silicone components are combined together with any number of
non-silicone components to produce a variety of products. In addition to both
Class 100,000 and Class 10,000 certified cleanroom assembly and packaging
capability, the Company's other custom assembly processes include adhesiving,
bonding, potting, forming, porting, drilling, notching, cutting, printing,
coating, dispensing and reinforcing with wires or other non-silicone substrates.
In addition, the Company has developed proprietary surface enhancement
technologies and processes which provide a wide range of alternative product
characteristics. Over 800,000 silicone catheter-type devices are currently
manufactured annually and the Company currently has excess manufacturing
capacity.
The manufacture of the On-Command Catheter over the past two years has
included design and process steps which have evolved over this period to its
current design. The processes and techniques required to manufacture and
assemble the On-Command Catheter are similar to those currently used by the
Company to manufacture other silicone catheter-type devices. The On-Command
Catheter also requires the procurement of several non-silicone components. The
sources for each component have been identified and a limited inventory of
certain components is currently available. In addition, the Company is seeking
to develop alternative sources for such components.
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The Company may encounter difficulties, delays and significant expenses in
scaling up production of the On-Command Catheter, including potential problems
involving production yields, quality control, component supply and shortage of
qualified personnel. The Company may also experience higher than expected
manufacturing costs that could prevent the Company from selling the On-Command
Catheter at a commercially reasonable price. Notwithstanding BMT's manufacturing
expertise, there can be no assurance that difficulties or unfavorable costs will
not be encountered in mass-production of the On-Command Catheter and, in such
event, these difficulties or costs could result in a material adverse effect on
the Company's business, financial condition and results of operations.
Many raw materials used in the manufacturing process are subject to various
environmental laws and regulations. Proper disposal of waste including metals
and chemicals used in the manufacturing process is a major consideration for
medical device manufacturers. In the event of a violation of environmental laws,
the Company could be held liable for damages, the costs of remedial actions and
could also be subject to revocation of permits necessary to conduct its
business. Any such revocations could require the Company to cease or limit
production at its facilities, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is also subject to environmental laws relating to the storage, use and disposal
of chemicals, solid waste and other hazardous materials, as well as air quality
regulations. Changes or restrictions on discharge limits, emissions levels, or
material storage or handling might require a high level of unplanned capital
investment and/or subsequent relocation. There can be no assurance that the
Company will be able to comply with the discharge levels mandated or that the
costs of complying with such regulations will not require additional capital
expenses. Furthermore, there can be no assurance that compliance with such
regulations will not have a material adverse effect on the Company's business,
financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company's current research and development efforts are focused primarily
on broadening the number of On-Command configurations to address additional
clinical indications, as well as developing the Snap-Shot Urine Chemistry Test
System. The Company also intends to continue to build upon its clinical
knowledge and relationships to develop additional advanced, innovative products
for the management, treatment and diagnosis of other urological problems.
Accordingly, the Company intends to continue to devote significant funds to its
research and development activities.
The Company has a fully-staffed pilot production laboratory with a range of
capabilities including product molding, extrusion, testing and assembly as well
as extensive experience in silicone manufacturing and in materials selection for
specific applications. The research and development staff consists of 8
engineers and 14 skilled technicians.
On-Command Convertible Catheter
The On-Command Convertible Catheter is being developed for use in patients
requiring temporary bladder management in a clinical setting where a Foley or
intermittent type catheter would normally be used to monitor urine output and
chemistry and evaluate kidney function. With the inflator portion attached, the
On-Command Convertible Catheter would function like a Foley catheter allowing
for continuous bladder drainage. When continuous monitoring is no longer
necessary and continence has not yet returned, the inflator portion of the
On-Command Convertible Catheter can be disconnected and the device then
functions in the controlled flow mode. The patient can then move about without
restriction or without the attendant problems associated with an indwelling
Foley catheter, external tubing and collection bag.
On-Command Control Catheter
The On-Command Control Catheter is being developed for use with
semi-ambulatory or bed-ridden patients in long-term or home care environments.
The On-Command Control Catheter incorporates a mechanical valve mechanism that
can be easily opened or closed by a caregiver to facilitate patient voiding. The
Company believes the device will be useful in the management of incontinence in
nursing homes and
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<PAGE> 11
extended care settings, replacing adult diapers, Foley catheters, male external
catheters and suprapubic catheters.
Snap-Shot Urine Chemistry Test System
The urine chemistry test system, to be identified under the trademark
"Snap-Shot," is a simple disposable device used for the chemical analysis of
urine samples. The product is a completely closed system in which urine can be
easily collected and tested for various chemical components. Because urine is a
body fluid that can potentially transmit dangerous diseases, OSHA has mandated
the use of precautionary measures when handling such fluids. The use of gloves,
gowns, face protection and special ventilation and disposal for these supplies,
as well as the specimen, raises the cost of urinalysis performed in a
physician's office.
The Snap-Shot is designed to ensure compliance with OSHA safety regulations
for the safe handling of body fluids during testing procedures. The Company is
not aware of any other manual urinalysis device which is either currently on the
market or under development which complies with these regulations. The Company
believes that the Snap-Shot will be classified as a Class I device, and
therefore the Company will seek FDA marketing clearance or approval through a
510(k) premarket notification. The Snap-Shot is in the prototype stage of
development and there can be no assurance that the Company will be able to
develop it as a product that will be accepted by the market or generate
significant sales. The Company has not sold any Snap-Shot products to date.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in part, on its ability to obtain and
maintain patent protection for its products, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. The
Company's strategy regarding the protection of its proprietary rights and
innovations is to seek patents on those portions of its technology that it
believes are patentable and to protect as trade secrets other confidential
information and proprietary know-how.
UroQuest holds ten United States patents, eight of which relate to the
On-Command Catheter, numerous foreign patents, five United States patent
applications and various foreign patent applications pending. One United States
patent and two patent applications relate to the Snap Shot chemistry test
system. The issued United States patents include both method and device claims.
UroQuest's first two patents, which relate to the On-Command Catheter, expire in
2000 and 2001 and the remainder of all other patents, including six related to
the On-Command Catheter, expire in the years from 2007 through 2014. In
addition, BMT holds fifteen Unites States patents and nine foreign patents
relating to proprietary airway management products. Except for two patents that
expire in 1999 and 2000, theses patents have expiration dates ranging from 2002
to 2014. The Company believes that its patents contain claims which may provide
a substantial competitive advantage to the Company. However, there can be no
assurance that the Company's issued patents, or any patents which may be issued
as a result of the Company's applications, will offer any degree of protection.
Moreover, there can be no assurance that any of the Company's patents or patent
applications will not be challenged, invalidated or circumvented in the future.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made significant investments in competing
technologies, will not apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use or sell its products either in
the United States or internationally.
Some of the technology used in, and that may be important to, the Company's
products is not covered by any patent or patent application of the Company.
Therefore, the Company also relies on trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with certain employees, consultants and other parties. The Company's proprietary
information agreements with employees and consultants contain standard
confidentiality provisions and, in certain instances, require such individuals
to assign to the Company, without additional consideration, any inventions
conceived or reduced to practice by them while employed or retained by the
Company, subject to customary exceptions. There can be no assurance that
proprietary information agreements with employees, consultants and others will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade
11
<PAGE> 12
secrets will not otherwise become known to or independently developed by
competitors. Moreover, litigation associated with the enforcement by the Company
of its trade secrets and proprietary know-how can be lengthy and costly, with no
guarantee of success.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. The Company is aware of patents held by other
participants in the urological disorder management market, and there can be no
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings before the United
States Patent and Trademark Office (the "PTO").
Any litigation or interference proceedings would result in substantial
expense to the Company and significant diversion of attention by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms or at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
To date, no claims have been brought against the Company alleging that its
technology or products infringe intellectual property rights of others. However,
there can be no assurance that such claims will not be brought against the
Company in the future or that any such claims will not be successful.
The Company seeks to protect its trademarks through registration.
On-Command(R) is a registered trademark of UroQuest. In addition, UroQuest has
filed intent to use applications for other marks which have been approved by the
PTO. BMT also holds four registered trademarks, including Bivona(R),
Fome-Cuf(R), Aire-Cuf(R) and Saf T Flo(R) and 16 trademarks for which United
States and foreign registrations are pending. There can be no assurance,
however, that registration of the Company's trademarks will provide any
significant protection.
12
<PAGE> 13
UROQUEST MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash .................................................................. $ 12,694,047 $ 1,113,594
Accounts receivable, net of allowance for doubtful accounts
of $60,000 (note 4) ................................................. 2,161,849 --
Inventories (notes 2 and 4) ........................................... 2,622,812 9,590
Prepaid expenses and other current assets ............................. 226,040 14,311
Income tax receivable ................................................. 145,808 --
Deferred income taxes (note 6) ........................................ 124,000 --
------------ ------------
Total current assets ............................................... 17,974,556 1,137,495
------------ ------------
Property, plant and equipment, net (notes 3 and 4) ....................... 4,542,950 142,321
Intangibles, at cost, less accumulated amortization of $476,883 in 1996
and $181,949 in 1995 .................................................. 12,522,011 441,211
------------ ------------
Total assets ....................................................... $ 35,039,517 $ 1,721,027
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable under line of credit (note 4) ........................... $ 150,000 $ --
Current portion of long-term debt (note 4) ............................ 442,364 --
Accounts payable ...................................................... 721,984 200,416
Accrued compensation .................................................. 146,460 76,983
Accrued selling and distribution expenses ............................. 137,500 --
Other accrued expenses ................................................ 384,958 6,502
Secured promissory notes (note 4) ..................................... 390,000
------------ ------------
Total current liabilities .......................................... 1,983,266 673,901
------------ ------------
Long-term liabilities:
Deferred income taxes (note 6) ........................................ 782,500 --
Long-term debt (note 4) ............................................... 1,787,437 --
------------ ------------
Total long-term liabilities ........................................ 2,569,937 --
------------ ------------
Commitments (note 9)
Stockholders' equity (note 5): Convertible preferred stock, $.001 par value:
Series D: Converted to 628,573 shares of common stock upon
close of initial public offering ................................... -- 629
Series A: Converted to 90,486 shares of common stock upon
close of initial public offering ................................... -- 90
Series B: Converted to 273,020 shares of common stock upon
close of initial public offering ................................... -- 273
Series C: Converted to 260,593 shares of common stock upon
close of initial public offering ................................... -- 261
Voting common stock, $.001 par value; 31,000,000
shares authorized; 11,844,602 and 2,947,516 shares issued and
outstanding as of December 31, 1996 and 1995, respectively ......... 11,845 2,948
Non-voting common stock, $.001 par value; Converted to 285,715
shares of common stock upon close of initial public offering ....... -- 286
Additional paid-in capital ............................................ 36,203,483 4,088,237
Deferred compensation ................................................. (62,706) --
Accumulated deficit ................................................... (5,666,308) (3,045,598)
------------ ------------
Total stockholders' equity ......................................... 30,486,314 1,047,126
------------ ------------
Total liabilities and stockholders' equity ................................ $ 35,039,517 $ 1,721,027
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ......................... $ 2,299,895 $ -- $ 2,801
Cost of sales ..................... 1,308,730 -- 2,381
----------- ----------- -----------
Gross profit .................... 991,165 -- 420
----------- ----------- -----------
Operating expenses:
Research and development ........ 2,173,312 1,106,631 431,295
General and administrative ...... 1,091,857 397,523 483,399
Sales and marketing ............. 297,587 46,262 30,257
Amortization of goodwill ........ 90,982 -- --
----------- ----------- -----------
Total operating expenses ...... 3,653,738 1,550,416 944,951
----------- ----------- -----------
Operating loss .................... (2,662,573) (1,550,416) (944,531)
Other income (expense):
Interest expense ................ (82,364) (54,809) (29,939)
Interest income ................. 124,227 60,688 4,284
Other, net (note 8) ............. -- 30,790 (235,008)
----------- ----------- -----------
41,863 36,669 (260,663)
Provision for income taxes (note 6) -- -- --
----------- ----------- -----------
Net loss ..................... $(2,620,710) $(1,513,747) $(1,205,194)
=========== =========== ===========
Net loss per common share ......... $ (0.45) $ (0.36) $ (0.36)
=========== =========== ===========
Weighted average number of common
shares outstanding ............... 5,768,198 4,156,968 3,382,974
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (2,620,710) $ (1,513,747) $ (1,205,194)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................................... 430,689 139,022 58,244
Write-off of in-process research and development costs .......... 783,000 -- --
Issuance of Common Stock in
exchange for consulting services .............................. -- -- 11,367
Provisions for loss on receivables .............................. 38,541 614 235,008
Provisions for inventory reserve ................................ 45,000 -- --
Changes in operating assets and liabilities:
Accounts Receivable ......................................... 155,432 -- --
Inventories ................................................. 98,597 (9,590) --
Prepaid expenses and other current assets ................... (4,604) (12,221) --
Accounts payable ............................................ 57,240 116,291 26,008
Amounts payable to related parties .......................... -- (31,404) (66,500)
Accrued expenses ............................................ 250,283 28,550 54,935
Deferred income taxes ....................................... (14,000) -- --
Income taxes ................................................ (254,541) -- --
------------ ------------ ------------
Net cash used in operating activities ................. (1,035,073) (1,282,485) (886,132)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (132,143) (83,468) (159,819)
Purchases of patents and trademarks ............................. -- -- (400,000)
Business acquisition, net of cash acquired (note 7) ............. (9,900,262) -- --
Deposits and other .............................................. 25,756 -- --
Cash advances - affiliates ...................................... -- (614) (92,290)
------------ ------------ ------------
Net cash used in investing activities ................. (10,006,649) (84,082) (652,109)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Stock ................................. 22,932,036 2,113,252 1,321,888
Proceeds from issuance of Notes ................................. 650,000 -- 674,000
Repayment of Notes .............................................. (959,861) (197,188) (80,972)
------------ ------------ ------------
Net cash provided by financing activities ............. 22,622,175 1,916,064 1,914,916
------------ ------------ ------------
Net increase in cash ................................................. 11,580,453 549,497 376,675
Cash at beginning of period .......................................... 1,113,594 564,097 187,422
------------ ------------ ------------
Cash at end of period ................................................ $ 12,694,047 $ 1,113,594 $ 564,097
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ......................................... $ 80,851 $ 63,849 $ 20,899
Cash paid for income taxes ..................................... 254,541 -- --
Supplemental disclosure of noncash investing and financing activities:
Common stock issued for common stock of subsidiary ................. 9,107,940 -- 5,000
Conversion of notes payable to preferred stock ..................... -- 35,000 214,000
Issuance of note payable, net of discount,
for patents and trademarks ....................................... -- -- 243,160
Notes received in exchange for patents and trademarks .............. -- -- 30,000
Note received in exchange for fixed assets ......................... -- -- 112,718
Increase in additional paid-in capital as a result of
recording deferred compensation ............................... 81,360 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company was incorporated in the state of Florida on April 8, 1992,
and commenced operations for the purpose of designing, developing, and marketing
disposable urological catheters and other medical devices. Prior to October 30,
1996 the Company was considered a development stage company under the guidelines
of Statement of Financial Accounting Standards No. 7. On October 30, 1996 the
Company closed on its initial public offering ("IPO") of common stock which
generated net proceeds of approximately $17.8 million and acquired all of the
common stock of BMT, Inc. ("BMT"). BMT designs, develops manufactures and
markets a line of proprietary silicone medical device products as well as
provides engineering design, development and manufacturing services for silicone
products on an OEM basis for other medical device companies. The Company's
principal markets are in the United States, Western Europe and Japan.
Principles of Consolidation
The consolidated financial statements include the assets and liabilities
of the Company and its subsidiaries, all of which are wholly owned. The results
of operations of entities purchased during the year are included in the
accompanying consolidated statements of operations since acquisition. All
significant intercompany transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
calculated using straight-line and accelerated methods over the estimated useful
lives of the assets, which range from 3 to 15 years.
Intangible Assets
Intangible assets consist primarily of values assigned to the excess of
cost over the assigned value of the net assets acquired ($12,280,869), patents
and trademarks ($650,160) and other intangibles ($67,865). Intangible assets are
amortized using the straight-line method over periods of five to twenty years.
The increase in intangible assets during 1996 is attributable to the acquisition
of BMT. Management evaluates the recoverability of these net assets on a
periodic basis based on the projected cash flows from estimated future sales.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating loss, and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Revenue Recognition - Revenue is recognized by the Company upon the actual
shipment of goods.
Research and Development Cost - Research and development costs are expensed as
incurred.
16
<PAGE> 17
Net Loss Per Share
Net loss per share amounts are based on the weighted average number of
common shares and common share equivalents (if dilutive) resulting from options
and warrants outstanding during the periods, after giving retroactive effect to
the common stock reverse stock split and the conversion of preferred shares into
common shares at their respective issuance dates as discussed in note 5.
Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 encourages entities to
adopt a fair-value based method of accounting for stock options of similar
equity instruments. However, it also allows an entity to continue measuring
compensation cost for stock-based compensation using the intrinsic-value method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (ABP 25). The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma footnote
disclosures required by SFAS No. 123.
2. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Finished goods ......................... $ 748,268 $ --
Work-in-process ........................ 1,100,104 --
Raw materials and supplies ............. 774,440 9,590
---------- ----------
$2,622,812 $ 9,590
========== ==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land and building ...................... $ 2,414,914 $ --
Machinery and equipment ................ 2,955,253 109,370
Office furniture and equipment ......... 649,301 57,374
----------- -----------
Total ................................ 6,019,468 166,744
Less accumulated depreciation .......... (1,476,518) (24,423)
----------- -----------
Property, plant and equipment, net ..... $ 4,542,950 $ 142,321
=========== ===========
</TABLE>
17
<PAGE> 18
4. NOTES PAYABLE, SECURED PROMISSORY NOTES AND LONG-TERM DEBT
Notes payable, secured promissory notes, and long-term debt at December 31
consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Notes payable under bank line of credit agreement:
Maximum borrowings are the lesser of $1,200,000 or 75% of eligible accounts
receivable, plus 50% of eligible inventory as defined. Interest at the
bank's prime rate is payable monthly. The prime rate was 8.25% at December
31, 1996. The line of credit agreement is payable on demand and is
collateralized by certain trade receivables, inventory and
equipment, in aggregate totaling approximately $9.7 million ...................... $ 150,000 $ --
=========== ===========
Secured promissory notes:
12% secured promissory notes due December 31, 1996 with interest payable
quarterly, secured by an interest in certain patents. The notes were fully
repaid in November 1996 .......................................................... -- 390,000
=========== ===========
Long-term debt:
Bank term note payable to bank monthly, with interest at the bank's prime rate
(8.25% at December 31, 1996) plus .5% based upon a seven year amortization.
The note matures in October of 1999 and is collateralized by certain trade
receivables, inventory and equipment, in aggregate totaling approximately
$9.7 million ..................................................................... 1,073,664 --
Mortgage note payable with monthly principal and interest payable at the
bank's prime rate (8.25% at December 31, 1996) plus .5%. The note matures in
October of 2007 and is collateralized by the plant land and building ............. 1,156,137 --
----------- -----------
2,229,801 --
Less current maturities ...................................................... 442,364 --
----------- -----------
$ 1,787,437 $ --
=========== ===========
</TABLE>
The loan agreements contain certain restrictive covenants and provide
for the maintenance of certain financial requirements. The Company has satisfied
all covenants and requirements at December 31, 1996.
Long-term debt matures as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997 ........................................................... $ 442,364
1998 ........................................................... 483,677
1999 ........................................................... 370,190
2000 ........................................................... 88,098
2001 ........................................................... 96,123
2002 and thereafter ............................................ 749,349
----------
$2,229,801
==========
</TABLE>
18
<PAGE> 19
5. STOCKHOLDERS' EQUITY
Initial Public Offering
In October 1996, the Company closed an IPO of 3,350,000 shares of common
stock which generated net proceeds of $17,803,352, a portion of which was used
to fund the acquisition of BMT. Management intends to use the remainder for
clinical trials, marketing and sales, research and development, and working
capital requirements. In conjunction with the Company's IPO, all outstanding
shares of convertible preferred stock were converted to 1,252,672 shares of
common stock and all outstanding shares of non-voting common stock were
converted to 285,715 shares of common stock. Prior to the closing of the IPO,
the Company had 10,281,268 authorized shares, and 1,252,672 issued and
outstanding shares of convertible preferred stock.
Reverse Stock Split
The Company effected a 1 for 3.5 reverse stock split of all stock
effective October 18, 1996. The effect of the reverse stock split has been
reflected for all periods presented in the accompanying financial statements.
Stock Warrants
Concurrent with the Company's IPO, warrants to purchase 1,428,571 shares
of common stock were exercised for $5 million. Subsequent to the IPO, warrants
to purchase 25,923 shares of common stock for $90,730 were exercised.
Fixed Stock Option Plan
Under the Company's 1994 Stock Option Plan ("Plan"), the Company may
grant options to its employees, directors and consultants for up to
approximately 1.4 million shares of common stock. Options granted may be either
incentive stock options or non-qualified stock options. The exercise price of
each option is at least equal to the market price of the Company's stock on the
date of grant and an option's maximum term is ten years. Options must be granted
by March 31, 2004. Options are generally granted at the inception of employment
or engagement and generally vest over a five year period.
A summary of the activity of the Plan follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
--------- ----------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,116 $ 0.67 1,233 $ 0.630 -- $ --
Granted ...................... 77 4.67 47 0.700 1,233 0.63
Exercised .................... (54) 0.70 (86) 0.004 -- --
Canceled ..................... (11) 0.70 (78) 0.700 -- --
-------- -------- --------
Outstanding at end of year ..... 1,128 0.95 1,116 0.670 1,233 0.63
======== ======== ========
Options exercisable
at year-end ................. 572 450 324
Weighted-average fair
value of options granted
during the year ............. $ 3.38 $ 0.48
</TABLE>
19
<PAGE> 20
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------
Number Options
Outstanding Weighted-Avg. Exercisable
at 12/31/96 Remaining at 12/31/96
Exercise Price (000) Contractual Life (000)
-------------- ----------- ---------------- ------------
<S> <C> <C> <C>
$ .004 43 7.8 years 18
.700 1,007 7.6 46
1.750 6 9.3 4
4.900 72 9.7 4
------- ------
1,128 7.7 572
======= ======
</TABLE>
The weighted-average exercise price of options outstanding and options
exercisable at December 31, 1996 and 1995 was $0.95 and $0.71, respectively.
Had compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss: As Reported.......... $ (2,620,710) $ (1,513,747)
Pro forma............ $ (2,664,111) $ (1,515,661)
Primary loss As Reported.......... $ (0.45) $ (0.36)
per share: Pro forma............ $ (0.46) $ (0.36)
</TABLE>
The effects of calculating compensation cost under SFAS No. 123 for the
years ending December 31, 1996 and 1995, may not be representative of the
effects that this calculation may have on reported net losses or income for
future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0%
for both years; expected volatility of 113% and 107%; risk-free interest rates
of 6.6% and 6.1%, and expected lives of 3.9 and 3.8 years.
The Company has recorded as deferred compensation expense the excess of
the fair value of the common stock at the date of grant over the exercise price.
The compensation expense will be amortized ratably over the vesting period of
the options and will aggregate a maximum of $81,360. Amortization expense for
the year ended December 31, 1996 was $18,654.
1996 Employee Stock Purchase Plan
In October 1996, the Company adopted the 1996 Employee Stock Purchase
Plan (the "Purchase Plan"), and reserved 250,000 common shares for issuance
under the Purchase Plan. Under the terms of the Purchase Plan, employees may
purchase common shares at 85% of the shares' fair market value. Eligible
employees elect to participate through payroll deductions at the maximum level
established by the board of directors, but not to exceed 15% of the participants
base pay, as defined. No shares have been issued from the Purchase Plan as of
December 31, 1996.
20
<PAGE> 21
Employee Benefit Plan
The Company has established a defined contribution employee benefit plan
("Benefit Plan") pursuant to Section 401(k) of the Internal Revenue Code.
Employees who have completed one year of service, and have attained the age of
twenty-one, are eligible to participate in the Benefit Plan. Participants may
elect to make salary deferral contributions of up to 15% of their compensation.
The Company makes matching contributions of up to 4% of each participant's
compensation. The Company made matching contributions of approximately $16,000
for the year ended December 31, 1996.
Increase in Authorized Shares
In October 1996, the shareholders approved an amendment to the Articles
of Incorporation to provide authorized capital stock of 31,000,000 common shares
and 16,000,000 undesignated preferred shares effective upon the closing of the
IPO.
6. INCOME TAXES
There was no Federal income tax expense in 1996, 1995, and 1994 due to
net operating losses. The difference between the expected tax benefit and actual
tax benefit is primarily attributable to the effect of these net operating
losses being offset by an increase in the Company's valuation allowance.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Acquired net operating
loss carryforwards ..................... $ 372,000 $ --
Research and development credits .......... 80,000 --
Inventory capitalization and allowances ... 27,000 --
Start up and organization costs ........... 570,703 434,065
Net operating loss carryforwards .......... 1,024,578 614,285
Allowance for doubtful accounts ........... 112,657 87,657
Other ..................................... 72,000 --
----------- -----------
Total ................................ 2,258,938 1,136,007
Less valuation allowance .................. (1,900,438) (1,136,007)
----------- -----------
Total gross deferred tax assets ........... 358,500 --
Deferred tax liability:
Depreciation .............................. (1,017,000) --
----------- -----------
Net deferred tax liability ................ $ (658,500) $ --
=========== ===========
</TABLE>
The net current and long-term deferred tax asset and liability are
reflected in the financial statements as:
<TABLE>
<S> <C>
Current deferred tax asset ....................................... $ 124,000
Long-term deferred tax liability ................................. (782,500)
---------
$(658,500)
=========
</TABLE>
21
<PAGE> 22
The valuation allowance for deferred tax assets as of January 1, 1996 and 1995
was $1,136,007 and $571,380, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996 and 1995 was an increase of
$764,431 and $564,627, respectively. In assessing the recoverability of deferred
tax assets, management considers whether it is more likely than not that all or
a portion of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of
valuation allowances at December 31, 1996. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets will be recognized
as an income tax benefit to be reported in the statement of operations.
At December 31, 1996 the Company had total tax net operating losses of
approximately $4,400,000 that can be carried forward to reduce federal income
taxes. If not utilized, the tax loss carryforwards expire beginning in 2007.
Under the rules of the Tax Reform Act of 1986, the Company has undergone
a greater than 50% change of ownership. Consequently, a certain amount of the
Company's net operating loss carryforwards available to offset future taxable
income in any one year may be limited. The maximum amount of carryforwards
available in a given year is limited to the product of the Company's value on
the date of ownership change and the federal long-term tax-exempt rate, plus any
limited carryforwards not utilized in prior years.
7. BUSINESS ACQUISITION
On October 30, 1996, simultaneous with the Company's closing of its IPO,
all of the issued and outstanding common stock of BMT was acquired. The
shareholders of BMT received, in the aggregate, a combination of $10,000,060
cash and 2,499,990 newly issued shares of common stock valued at $9,107,940. The
acquisition was accounted for as a purchase. Accordingly, the purchase price was
allocated, based on estimated fair value, to the net tangible assets and
identifiable in-process research and development projects that had not reached
technological feasibility. The excess of the purchase price over the fair value
of the acquired net tangible and identifiable assets was recorded as goodwill
and is being amortized over 20 years on a straight line basis. The amount
allocated to in-process research and development projects was written-off to
expense in November, 1996. The allocation of the purchase price is summarized as
follows:
<TABLE>
<S> <C>
Assets acquired $ 7,912,219
Liabilities assumed (3,979,331)
Expensed in-process research and development 783,000
Net fair market value of property, plant
and equipment acquired in excess of book value 2,111,243
Goodwill 12,280,869
------------
Total $ 19,108,000
============
</TABLE>
BMT's results of operations are included in the accompanying consolidated
statements of operations since November 1, 1996.
22
<PAGE> 23
The unaudited pro forma supplemental information on the results of
operations, exclusive of a non-recurring charge (the charge associated with
in-process research and development projects has not been reflected in the
following pro forma summary as it is non-recurring) for the years ended December
31, 1996 and 1995 include the acquisition as if they had occurred at the
beginning of the respective years.
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 14,634,838 $ 14,257,413
Net loss (483,601) (84,428)
Loss per share (0.04) (0.01)
</TABLE>
The unaudited pro forma financial information is not necessarily
indicative of either the results of operations that would have occurred had the
acquisition been effected at the beginning of the respective preceding years or
of future results of operations of the combined companies.
8. RELATED PARTY TRANSACTIONS
In 1994, non-affiliated corporations were formed by certain stockholders
of the Company. Cash and other non-core business assets totaling $235,008 were
transferred to those corporations in exchange for 8% promissory notes. The notes
are payable on demand and a valuation allowance for the full amount has been
established to account for possible non-collection of the notes. In June 1996,
approximately $200,000 principal amount of the notes was converted into common
stock of a corporation owned by certain stockholders of the Company. After this
conversion, the Company held less than 10% of the outstanding stock of the
corporation. The balance of $35,008 remains outstanding as a promissory note
from SilvaFoam Corporation and U.S. Infusion Care, Inc.
9. LEASE OBLIGATIONS AND COMMITMENTS
The Company leases office and warehouse space and certain equipment
under operating leases that expire over a period of two to four years. Minimum
future obligations under noncancelable operating leases as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1997............................... $ 103,402
1998............................... 101,273
1999............................... 37,017
2000............................... 24,678
---------
Total.............................. $ 266,370
=========
</TABLE>
Total rent expense for operating leases in 1996, 1995, and 1994 was
approximately $54,500, $36,200, and $23,300, respectively.
23
<PAGE> 24
10. MAJOR CUSTOMERS AND EXPORT SALES
Net sales to one customer amounted to 21% of total net sales for the
year ended December 31, 1996. Outstanding receivables from this customer at
December 31, 1996 approximated 21% of total gross accounts receivable.
Export sales by major geographic area are as follows:
<TABLE>
<S> <C>
Western Europe .................................................. $ 286,470
Japan ........................................................... 54,264
Other ........................................................... 11,458
----------
$ 352,192
==========
</TABLE>
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
UroQuest Medical Corporation:
We have audited the accompanying consolidated balance sheets of UroQuest
Medical Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, and cash flows for each of the
years in the three year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UroQuest
Medical Corporation and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
February 10, 1997
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Financial Statements and
notes thereto included elsewhere in this Report. The following Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors discussed under
"Business" and elsewhere in this Report.
UroQuest Background
The Male On-Command Catheter was originally designed and developed by Richard
C. Davis, M.D., the principal founder and Chief Science Officer of the Company.
In December 1986, the technology underlying the Male On-Command Catheter was
licensed to Surgitek, a urological and plastic surgery products subsidiary of
Bristol-Myers Squibb Company. Surgitek spent approximately five years and
substantial sums advancing the technology, engineering prototype catheters,
conducting clinical trials and preparing regulatory filings for the Male
On-Command Catheter. In 1992, Surgitek was acquired by Cabot Medical
Corporation, and as a result of nonperformance under the license agreement, the
technology relating to the Male On-Command Catheter reverted back to Dr. Davis
and was transferred to UroCath, a wholly owned subsidiary of UroQuest, in
February 1993.
In November 1994, UroQuest hired a new Chief Executive Officer to facilitate
the regulatory approval process, including necessary clinical trials,
commercialize the On-Command Catheter and to seek additional funding to support
UroQuest's operations. In December 1994, UroQuest secured all remaining
intellectual property rights related to the Female On-Command Catheter. UroQuest
also intensified its efforts in design and engineering refinements,
manufacturing tooling, production testing and regulatory filings in connection
with conducting clinical trials in the United States of the Male On-Command
Catheter and initiating clinical trials for the Female On-Command Catheter. In
June 1995, UroQuest raised $2.2 million pursuant to the issuance of Preferred
Stock to Warburg and Vertical, allowing UroQuest to continue its efforts to
develop and commercialize the On-Command Catheter. The Company completed an IPO
in October 1996 with net proceeds to the Company of approximately $17.8 million.
The Company expects to derive a substantial majority of its future revenues
from sales of the On-Command Catheter. Although the operations of BMT are
expected to be the sole source of revenues in the short-term, the Company's
long-term revenues and future success are substantially dependent upon its
ability to market and commercialize the On-Command Catheter in the United States
and abroad. The life cycle of the On-Command Catheter is difficult to estimate,
particularly in light of current and future technological developments,
competition and other factors.
The Company has a limited history of operations and has experienced
substantial operating losses since inception. Notwithstanding the acquisition of
BMT, the Company expects its operating losses to continue until the On-Command
Catheter reaches necessary market acceptance as it continues to expend
substantial resources in funding clinical trials in support of regulatory and
reimbursement approvals, expansion of marketing and sales activities, and
research and development. There can be no assurance that the Company will
achieve or sustain profitability in the future.
26
<PAGE> 27
Acquisition of BMT
On October 30, 1996, concurrent with the closing of the IPO, the Company
acquired BMT, which became a wholly owned subsidiary of the Company. BMT
develops, manufactures and markets a line of proprietary silicone medical device
products as well as provides engineering design, development and manufacturing
services for silicone products on an OEM basis for other medical device
companies. BMT is one of a limited number of specialty manufacturers of silicone
catheters in the United States. Prior to the acquisition, BMT was a contract
manufacturer for the Company.
In the acquisition, shareholders of BMT received, in the aggregate, a
combination of $10 million cash and 2,500,000 newly issued shares of Common
Stock. The acquisition was accounted for under the purchase method of accounting
and resulted in goodwill of approximately $12.3 million. Amortization of such
goodwill and other depreciation charges related to the acquisition, totaling
approximately $823,000 annually, will negatively impact the Company's
consolidated results of operations. The financial statements and operations of
the Company include the operations of BMT from October 30, 1996 (the date of the
BMT acquisition).
The Company believes the acquisition provides a number of significant
benefits. The acquisition enables the Company to control its own manufacturing
source while providing necessary capacity and flexibility in the manufacturing
process, as well as expands the Company's limited product line and experience
which has focused primarily on the On-Command Catheter. The product development
and engineering expertise of BMT is also being utilized by the Company to
develop additional On-Command Catheter products and other new devices related to
the management and diagnosis of urological disorders.
The ongoing operations of BMT are expected to provide a source of revenues
and cash flow while the Company completes its clinical testing and prepares to
market the On-Command Catheter. There can be no assurance, however, that such
revenues and cash flow or BMT's current profitability and growth rate will
continue in the future or that the expected benefits of the acquisition will be
realized. The acquisition of BMT constitutes the Company's first acquisition of
another business. BMT's operations are significantly different in many respects
from the Company's current operations, and the acquisition may result in a
number of unforeseen difficulties and problems that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
BMT Background
The business of BMT was commenced in 1971 to develop tracheal and
endotracheal tubes for airway management and has expanded to include various
other medical device products. BMT has utilized its product development
expertise and production capabilities to manufacture silicone medical device
products on an OEM basis, including components, assemblies and finished devices
for use in gastroenterology, urology, cardiopulmonary, parenteral and diagnostic
applications.
In December 1987, the business of BMT was acquired by Synthelabo, a
pharmaceutical division of L'Oreal S.A. In October 1992, the business was
acquired from Synthelabo by the existing executive officers and certain other
employees of BMT in a management buyout for approximately $7 million. These
officers and employees have continued to operate the business of BMT since the
buyout.
Over the past three years, BMT has implemented various management strategies
to increase sales and profitability. These strategies have included elimination
of low margin products, expansion of BMT's line of proprietary products,
investment in research and development, and improvements in manufacturing
facilities and capabilities. BMT operates under GMPs and has obtained ISO-9001
certification and CE mark status.
27
<PAGE> 28
RESULTS OF OPERATIONS
Net sales and cost of sales. The Company had no material sales in 1994 or
1995. Sales of $2,299,895 in 1996 related to BMT sales in November and December
of proprietary airway management products and other medical devices products to
OEM customers. Cost of sales of $1,308,730 related to the those sales.
Research and development. Research and development expenses include clinical
testing and regulatory expenses. For the year ended December 31, 1996, research
and development expenses increased to $2,173,312 from $1,106,631 for the year
ended December 31, 1995. This increase was due primarily to hiring of clinical
personnel, conducting clinical trials in 1996 and implementing improvements in
product design and the manufacturing process. Included in the 1996 expense was a
$783,000 write-off of in-process research and development costs related to the
acquisition of BMT. Also included in 1996 were two month's research and
development expenses related to BMT totaling $213,122. Research and development
expenses increased to $1,106,631 in 1995 from $431,295 in 1994 resulting
primarily from the transfer of certain personnel to research and development
functions in 1995 from general and administrative functions in 1994 and
manufacturing costs incurred to produce devices used in clinical trials. The
increase in research and development expenses in 1995, as compared to 1994, is
also attributable to costs associated with commencing clinical trials of the
Male On-Command Catheter, including legal and other fees related to regulatory
matters, the increased number of research and development employees and
amortization of approximately $79,000 related to patents purchased by UroQuest
in December 1994. Research and development expenses are expected to continue to
increase for the foreseeable future.
General and administrative. General and administrative expenses increased to
$1,091,857 for the year ended December 31, 1996 from $397,523 for the year ended
December 31, 1995. This increase was attributable primarily to public company
administration expenses. Also included in 1996 were two month's general and
administrative expenses related to BMT totaling $413,319. General and
administrative expenses decreased to $397,523 in 1995 from $483,399 in 1994 due
primarily to the transfer of certain personnel to research and development
functions in 1995 from general and administrative functions in 1994. General and
administrative expenses are expected to continue to increase as the Company
hires additional personnel to support anticipated expansion of the Company's
business.
Sales and marketing. Sales and marketing expenses increased to $297,587 for
the year ended December 31, 1996 from $46,262 for the year ended December 31,
1995. This increase was primarily attributable primarily to the inclusion of two
month's sales and marketing expenses related to BMT totaling $256,991. Sales and
marketing expenses increased to $46,262 in 1995 from $30,257 in 1994 due
principally to costs associated with UroQuest retaining a sales and marketing
consultant.
Other income (expense), net. Other income (expense), net increased to income
of $41,863 in 1996 from $36,669 in 1995. Interest income increased to $124,227
in 1996 from $60,688 in 1995, primarily as a result of interest income earned on
net cash and cash equivalents obtained from the IPO. Interest expense increased
to $82,364 in 1996 from $54,809 in 1995. Included in 1996 were two month's
interest expense related to BMT totaling $33,201. Other income (expense), net
increased to income of $36,669 in 1995 from an expense of $260,663 in 1994. This
change resulted primarily from a bad debt reserve in 1994 which was not incurred
in 1995. In exchange for the sale of assets unrelated to the urology business in
1994 to corporations owned by certain stockholders of the Company, UroQuest
received promissory notes totaling $235,008 from such corporations. The notes
were reserved in full as it was probable that the Company would not collect the
full amount of the notes. In June 1996, approximately $200,000 principal amount
of the notes due from Trek Medical Corporation (a company formed in June 1994 by
certain stockholders of the Company) was converted into common stock of Trek
Medical Corporation. The balance of $35,008 remains outstanding as a promissory
note from SilvaFoam Corporation and U.S. Infusion Care, Inc. The total $35,008
of notes receivable is reserved in full. The net change to 1995 from 1994 also
resulted from an increase of approximately $56,000 in interest income partially
offset by an increase of approximately $25,000 in interest expense.
Provision for income taxes. The Company has not generated any taxable income
to date and, therefore, has not paid any federal income taxes since its
inception. The Company accounts for income taxes under
28
<PAGE> 29
Statement of Financial Accounting Standards No. 109 ("FAS 109"). Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances, in amounts
equal to the net deferred tax assets as of December 31, 1996, 1995 and 1994,
have been established in each period to reflect these uncertainties. At December
31, 1996, UroQuest and BMT had net operating losses, for tax purposes, of
approximately $3,300,000 and $1,093,000, respectively, that can be carried
forward to reduce federal income taxes. However, utilization of net operating
losses and any tax credit carryforwards will be subject to annual limitations
due to the ownership change limitations of the Internal Revenue Code of 1986, as
amended, and similar state provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the public and
private sale of equity securities and through bank-provided working capital
financing, short-term borrowings and equipment lease financing. Since inception,
the Company has raised approximately $26.8 million in net proceeds of equity
financing.
In December 1994, UroQuest issued $390,000 of 12% secured promissory notes
due December 31, 1996. The notes were repaid in November 1996. In connection
with such placement, UroQuest issued and the holders of such notes exercised
approximately 26,000 warrants for Common Stock at an exercise price of $3.50 per
share.
During the year ended December 31, 1996 and the year ended December 31, 1995,
UroQuest consumed cash in operations of $1,035,073 and $1,282,485, respectively.
The decrease in cash used in operations in 1996 from 1995 was due primarily to
cash provided by BMT's operations. During the 1996 year, the Company issued 10%
demand promissory notes totaling $500,000. The notes were repaid by year end.
The Company's primary internal source of liquidity presently consists of
existing borrowings and cash generated from BMT's operations. The Company's
primary external sources of liquidity are public and private debt and equity
financings and bank-provided debt financing.
As of December 31, 1996 and December 31, 1995, the Company had cash and cash
equivalents of $12,694,047 and $1,113,594, respectively. The increase since
December 31, 1995 was due primarily to the net cash provided by the public sale
of common stock and the exercise of $5 million of stock warrants. As of December
31, 1996, the Company had no significant noncancelable commitments for capital
expenditures or raw material purchases, although the Company may enter into such
commitments in the future.
The Company's capital requirements depend on numerous factors, including the
extent to which the On-Command Catheter and other products gain market
acceptance, actions relating to regulatory and reimbursement matters, progress
of clinical trials, the effect of competitive products, the cost and effect of
future marketing programs, the resources the Company devotes to manufacturing
and developing its products, the success of proprietary airway management
products and OEM sales, general economic conditions and various other factors.
The timing and amount of such capital requirements cannot adequately be
predicted. Consequently, although the Company believes that the net proceeds
from its IPO, together with existing borrowings and cash anticipated to be
generated from BMT's operations, will provide adequate funding for its capital
requirements in the foreseeable future, there can be no assurance that the
Company will not require additional funding or that such additional funding, if
needed, will be available on terms satisfactory to the Company, if at all. Any
additional equity financing may be dilutive to stockholders, 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.
The Company expects its operating losses to continue until the On-Command
Catheter reaches necessary market acceptance as it continues to expend
substantial resources in funding clinical trials in support of regulatory and
reimbursement approvals, expansion of marketing and sales activities, and
research and development. In addition, the Company's results of operations may
fluctuate significantly during future quarterly periods. The Company plans to
implement an aggressive marketing and growth strategy, and all management
estimates regarding liquidity and capital requirements are subject to the
factors discussed above and those set forth under "Risk Factors" in the
Company's Form 10-K.
29
<PAGE> 30
The statements contained in this Report that are not purely historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All forward-looking statements involve various
risks and uncertainties and include statements regarding the Company's product
developments, commercial opportunities, regulatory approval, expectations,
strategies, plans and intentions for the future. All forward-looking statements
are made as of this date, based on information available to the Company as of
such date, and the Company assumes no obligation to update any forward-looking
statement. It is important to note that such statements may not prove to be
accurate, and that the Company's actual results and future events could differ
materially from those anticipated in such statements. Among the factors that
could cause actual results to differ materially from the Company's expectations
are described below and elsewhere in this Report. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by this Section and other
factors included elsewhere in this Report.
30
<PAGE> 31
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Period from
Year Ended Inception
--------------------------------------------------------- (April 8, 1992) to
1996 1995 1994 1993 Dec. 31, 1992
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales ..................................... $ 2,299,895 $ -- $ 2,801 $ 979 $ --
Cost of sales ................................. 1,308,730 -- 2,381 832 --
Gross profit .................................. 991,165 -- 420 147 --
Research and development expenses ............. 2,173,312 1,106,631 431,295 120,531 --
General and administrative expenses ........... 1,091,857 397,523 483,399 156,647 11,234
Sales and marketing expenses .................. 297,587 46,262 30,257 38,392 --
Amortization of goodwill ...................... 90,982 -- -- -- --
Operating loss ............................... (2,662,573) (1,550,416) (944,531) (315,423) (11,234)
Other income (expense), net ................... 41,863 36,669 (260,663) -- --
Net loss ...................................... (2,620,710) (1,513,747) (1,205,194) (315,423) (11,234)
Net loss per common share (2) ................. (0.45) (0.36) (0.36) (0.21) (0.01)
Shares used in computing net loss per share (2) 5,768,198 4,156,968 3,382,974 1,502,596 1,428,571
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash and cash equivalents .............. 12,694,047 1,113,594 564,097 187,422 --
Working capital ......................... 15,991,290 463,594 325,723 33,491 (38,300)
Total assets ............................ 35,039,517 1,721,027 1,205,273 221,581 32,566
Long-term debt, excluding current portion 1,787,437 -- 552,188 -- --
Accumulated deficit ..................... (5,666,308) (3,045,598) (1,531,851) (326,657) (11,234)
Stockholder's equity (3) ................ 30,486,314 1,047,126 412,621 65,560 (6,234)
</TABLE>
(1) On October 30, 1996, concurrent with the closing of Company's initial public
offering, the Company completed its acquisition of BMT, Inc The transaction,
which was accounted for as a purchase, was effected through the payment of
$10 million cash, and the issuance of 25 million newly issued shares of
UroQuest Common Stock.
(2) Restated to reflect the impact of preferred shares' conversion to common
shares in connection with the Company's initial public offering.
(3) On October 24, 1996 the Company sold 3,350,000 shares of Common Stock in its
initial public offering at $600 per share Concurrent with the offering,
warrants totaling 1,428,572 shares were exercised at $350 per share
Combined, the Company realized net proceeds of $22,803,350.
31
<PAGE> 32
SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- ------------ ------------
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Net sales ................... $ -- $ -- $ -- $ 2,299,895
Gross profit ................ -- -- -- 991,165
Operating loss ............. (446,232) (363,754) (352,908) (1,499,679)
Net loss .................... (446,793) (370,041) (364,873) (1,439,003)
Net loss per common share (1) (0.10) (0.08) (0.08) (0.15)
YEAR ENDED DECEMBER 31, 1995
Net sales ................... -- -- -- --
Gross profit ................ -- -- -- --
Operating loss ............. (274,771) (368,532) (371,579) (535,534)
Net loss .................... (282,681) (343,659) (364,531) (522,876)
Net loss per common share (1) (0.08) (0.09) (0.08) (0.12)
</TABLE>
(1) Restated to reflect the impact of preferred shares' conversion to common
shares in connection with the Company's initial public offering.
MARKET PRICE FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS (UNAUDITED)
The Company's stock is traded on the Nasdaq National Market under the Symbol:
UROQ.
The Company's stock commenced trading on October 24, 1996 following the
Company's IPO.
The following table shows the market range for the Company's Common Stock:
<TABLE>
<CAPTION>
High Low
--------- --------
<S> <C> <C>
Fourth Quarter (since October 24, 1996) ........... $ 10.25 $ 5.25
</TABLE>
At December 31, 1996, there were approximately 149 record holders of the
Company's Common Stock.
The closing price of the Registrant's Common Stock as reported by The Wall
Street Journal on March 21, 1997 was $6.875.
The Company has never declared or paid dividends on its stock and does not
anticipate paying paying dividends in the foreseeable future.
32
<PAGE> 33
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS SHAREHOLDER INFORMATION
- ------------------------------------- --------------------------------------
<S> <C>
TERRY E. SPRAKER, PH.D. CORPORATE HEADQUARTERS
President UroQuest Medical Corporation
Chief Executive Officer 173 Constitution Drive
Menlo Park, CA 94025
TOM E. BRANDT Phone: (650) 463-5180
Vice President, Operations Fax: (650) 463-5181
Chief Operating Officer
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JEFFREY L. KAISER Ernst & Young, LLP
Vice President 1451 California Ave.
Chief Financial Officer Palo Alto, CA 94304
Secretary and Treasurer
REGISTRAR AND STOCK TRANSFER AGENT
KEITH W. L. WARD ChaseMellon Shareholder Services
Vice President, International 50 California Street, 10th Floor
San Francisco, CA 94111
BOARD OF DIRECTORS STOCK LISTING
- ------------------------------------- The Company's Common Stocktrades
RICHARD C. DAVIS, JR., M.D. on the NASDAQ Exchange
Chairman of the Board under the symbol UROQ
TERRY E. SPRAKER, PH.D. COUNSEL
President Wilson, Sonsini, Goodrich & Rosati
Chief Executive Officer 650 Page Mill Road
Palo Alto, CA 94304
GARY E. NEI
Chairman of the Board SHAREHOLDER INQUIRIES
B&B Publishing For information about UroQuest Medical
Corporation and its subsidiaries, including
copies of Annual Reports, Form 10-K and
10-Q documents and other available financial
ELIZABETH H. WEATHERMAN information, please contact in writing:
Managing Director
E. M. Warburg, Pincus & Co., Inc.
UroQuest Medical Corporation
TOM E. BRANDT Attn: Investor Relations
Vice President, Operations 173 Constitution Dr.
Chief Operating Officer Menlo Park, CA 94025
ANNUAL MEETING
JACK W. LASERSOHN UroQuest Medical Corporation's annual
Managing Director meeting of shareholders will be held on
The Vertical Group, Inc. September 25, 1997 at 9:00 a.m.
at the Corporate Offices
MAYNARD RAMSEY, III, M.D., PH.D.
Chief Executive Officer and
Chief Science Officer
AARSCO Medical Systems, Inc.
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