<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED Commission File Number
MARCH 31, 1998 0-20963
UROQUEST MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 59-3176454
(state or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
173 CONSTITUTION DRIVE, MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
(650) 463-5180
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 1998
- ----------------------------- -----------------------------
<S> <C>
Common Stock, $.001 par value 12,033,939
</TABLE>
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INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signatures
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales ...................................... $ 4,022,987 $ 3,674,598
Cost of sales .................................. 2,066,515 1,866,563
------------ ------------
Gross profit ................................. 1,956,472 1,808,035
------------ ------------
Operating expenses:
Research and development ..................... 915,423 583,319
General and administrative ................... 1,234,984 780,130
Sales and marketing .......................... 642,276 379,514
Amortization of goodwill ..................... 158,046 171,281
------------ ------------
Total operating expenses ................... 2,950,729 1,914,244
------------ ------------
Operating loss ................................. (994,257) (106,209)
Other income (expense):
Interest expense ............................. (34,827) (51,017)
Interest income .............................. 132,360 141,406
------------ ------------
97,533 90,389
Loss before provision for income taxes ......... (896,724) (15,820)
Provision for income taxes ..................... 11,000 47,000
------------ ------------
Net loss ....................................... $ (907,724) $ (62,820)
============ ============
Basic and diluted net loss per share ........... $ (0.08) $ (0.01)
============ ============
Weighted average shares used in computing
basic and diluted net loss per share ......... 11,957,193 11,844,602
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 10,448,703 $ 11,054,088
Accounts receivable, net of allowance for doubtful accounts ............. 2,804,347 2,610,764
Inventories ............................................................. 2,436,811 2,449,072
Prepaid expenses and other current assets................................ 264,374 317,319
------------ ------------
Total current assets ................................................. 15,954,235 16,431,243
------------ ------------
Property, plant and equipment, net ........................................... 4,418,993 4,413,131
Intangibles, at cost, less accumulated amortization .......................... 10,888,403 11,079,377
------------ ------------
Total assets ......................................................... $ 31,261,631 $ 31,923,751
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 682,396 $ 659,769
Accrued compensation .................................................... 798,302 599,306
Accrued selling and distribution expenses ............................... 90,895 73,124
Accrued severance costs ................................................. 559,174 666,376
Other accrued expenses .................................................. 911,013 737,666
Current portion of long-term debt ....................................... 490,360 490,360
------------ ------------
Total current liabilities ............................................ 3,532,140 3,226,601
------------ ------------
Long-term debt, net of current portion ....................................... 1,174,189 1,293,175
Stockholders' equity:
Preferred stock, $.001 par value; 16,000,000 shares authorized;
none issued and outstanding .......................................... -- --
Common stock, $.001 par value; 31,000,000 shares authorized;
12,033,939 and 11,954,010 shares issued and outstanding
as of March 31, 1998 and December 31, 1997, respectively ............ 12,034 11,954
Additional paid-in capital .............................................. 37,035,611 36,979,740
Deferred compensation ................................................... (42,367) (45,467)
Accumulated deficit ..................................................... (10,449,976) (9,542,252)
------------ ------------
Total stockholders' equity ........................................... 26,555,302 27,403,975
------------ ------------
Total liabilities and stockholders' equity ........................... $ 31,261,631 $ 31,923,751
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (907,724) $ (62,820)
Adjustments to reconcile net loss to net
cash (used in) provided from operating activities:
Depreciation and amortization ................................................ 400,085 361,565
Provisions for inventory reserves ............................................ (169,777) --
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (193,583) (11,269)
Inventories .............................................................. 182,038 (131,885)
Prepaid expenses and other current assets ................................ 52,945 120,722
Accounts payable and accrued expenses .................................... 412,742 159,353
Accrued severance costs .................................................. (107,202) --
------------ ------------
Net cash (used in) provided from operating activities ............. (330,476) 435,666
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net .......................... (211,874) (160,581)
------------ ------------
Net cash used in investing activities ............................. (211,874) (160,581)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................... 55,951 --
Repayment of notes payable and long-term debt ............................ (118,986) (257,536)
------------ ------------
Net cash used in financing activities .............................. (63,035) (257,536)
------------ ------------
Net (decrease) increase in cash and cash equivalents .............................. (605,385) 17,549
Cash and cash equivalents at beginning of period .................................. 11,054,088 12,694,047
------------ ------------
Cash and cash equivalents at end of period ........................................ $ 10,448,703 $ 12,711,596
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ...................................................... $ 34,827 $ 51,017
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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UROQUEST MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the assets and
liabilities of UroQuest Medical Corporation (the "Company") and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of March 31, 1998, and the results of
operations and cash flows for the three months ended March 31, 1998 and 1997.
The results of operations for any interim period are not necessarily indicative
of results to be expected for the full fiscal year. The balance sheet at
December 31, 1997 has been derived from audited financial statements at such
date, but does not include all of the information and footnotes required by
generally accepted accounting principles.
The accompanying condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's Form 10-K (File No. 0-20963) for the
year ended December 31, 1997 filed with the Securities and Exchange Commission.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of SFAS 131, but does not anticipate that the adoption
of this statement will have a significant effect on the Company's reported
segments.
Certain reclassifications were made to the 1997 condensed consolidated
financial statements to conform with the 1998 presentation.
NOTE 2 - NET LOSS PER SHARE
Basic net loss per share has been calculated based on the weighted
average number of shares of common stock outstanding. If the Company had been in
a net income position in the periods presented, diluted earnings per share would
have been presented separately and would have included the effect of outstanding
stock options and warrants, calculated using the treasury stock method.
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UROQUEST MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Finished goods ............................. $ 510,459 $ 589,169
Work-in-process ............................ 1,246,765 1,046,127
Raw materials and supplies ................. 679,587 813,776
---------- ----------
$2,436,811 $2,449,072
========== ==========
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related 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, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, that involve risks and
uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors discussed under "Factors Affecting Operating Results" and
elsewhere in this Report.
OVERVIEW
Since its inception in April 1992, the Company has devoted its efforts
to the design and development of advanced products for the management and
diagnosis of both male and female urological disorders. The Company's principal
product, the On-Command(R) product, 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 product 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.
Since 1996, Bivona Medical Technologies ("BMT") has been a wholly owned
subsidiary of the Company. BMT develops, manufactures and markets a line of
proprietary silicone medical device products and 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 Company has experienced substantial losses since inception and, as
of March 31, 1998, had an accumulated deficit of $10.4 million. In October 1996,
the Company raised approximately $17.8 million through the initial public
offering of its Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997:
Net sales and cost of sales. Net sales, which were generated from sales
by BMT of primarily proprietary airway management products and other medical
device products to OEM customers, increased 9% to $4,023,000 for the three
months ended March 31, 1998 from $3,675,000 for the three months ended March 31,
1997. The increase is attributable primarily to the increase in sales of
proprietary airway management and other proprietary products. Cost of sales of
$2,067,000 for the first quarter ended March 31, 1998 increased 11% from
$1,867,000 for the same quarter of 1997, due primarily to the increase in sales.
The gross margin for the first quarter of 1998 compared to the same period for
the prior year remained at 49%.
Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the three
months ended March 31, 1998 research and development expenses increased to
$915,000 from $583,000 for the three months ended March 31, 1997. The increase
was attributable primarily to expanded number of sites participating in the
clinical study, additional clinical and site-monitoring personnel hired,
increased training and clinical product availability
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at the clinical sites in order to obtain product performance feedback necessary
to direct current and future product designs and to assist in the completion of
the clinical study necessary to support a regulatory submission, and increase in
other research and development expenditures primarily related to the On-Command
product. Research and development expenses are expected to continue to increase
in the foreseeable future.
General and administrative. General and administrative expenses
increased to $1,235,000 for the quarter ended March 31, 1998 from $780,000 for
the quarter ended March 31, 1997. The increase was attributable primarily to
additional personnel costs, professional service costs, facilities expenses and
other expenses that support the expansion of the Company's business. General and
administrative expenses are expected to increase to support anticipated
expansion of the Company's business.
Sales and marketing. Sales and marketing expenses increased to $642,000
for the three months ended March 31, 1998 from $380,000 for the three months
ended March 31, 1997. This increase was due primarily to the commencement of
marketing and international selling efforts. Sales and marketing expenses are
expected to increase in 1998 partially related to the Company's anticipated
limited product launch of the On-Command product in Europe in the second half of
1998.
Amortization of goodwill. Amortization of goodwill of $158,000 for the
quarter ended March 31, 1998 and $171,000 for the quarter ended March 31, 1997
related to the goodwill recognized as a result of the acquisition of BMT in
October 1996. The goodwill is being amortized over an estimated life of 20
years.
Other income (expense). Other income (expense) increased to net
interest income of $98,000 for the three months ended March 31, 1998 from a net
interest income of $90,000 for the same period in 1997. Interest income
decreased to $132,000 for the first quarter of 1998 from $141,000 for the same
quarter of 1997. The decrease in interest income was attributable to lower net
average cash balances, due primarily to net cash being used in operating
activities. Interest expense decreased to $35,000 for the first quarter of 1998
from $51,000 for the same quarter of 1997. The decrease in interest expense was
attributable primarily to the lower net average debt balances as the Company is
repaying existing loans and has not obtained any new loans.
Provision for income taxes. The Company recorded $11,000 and $47,000 in
provision for state income taxes for the three months ended March 31, 1998 and
1997, respectively, primarily as a result of taxable income earned by its
subsidiary in a state where the Company is required to file tax returns on a
separate company basis. The Company has not paid any federal income taxes since
its inception due to net operating losses. Realization of deferred tax assets is
dependant on future earnings, if any, the timing and amount of which are
uncertain. Accordingly deferred tax asset valuation allowances have been
established as of March 31, 1998 and December 31, 1997 to reflect these
uncertainties.
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $5,900,000. The net operating loss carryforwards
will expire beginning in 2007, if not utilized. Utilization of the net operating
loss carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
loss carryforwards before utilization.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The Company is in the process of
establishing procedures for evaluating and managing the risk and costs
associated with Year 2000 problems. While the Company believes its software will
be Year 2000 compliant by the end of the 1998
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calendar year, there can be no assurances that the Company's software will
contain all necessary date code changes to prevent processing errors potentially
arising from calculation using the Year 2000 date. Any disruptions in the
Company's business as a result of Year 2000 noncompliance could have a material
adverse effect on the Company's business, financial condition and result of
operations.
Additionally, the Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues. Many
companies are expending significant resources to correct or patch their current
software systems of Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products, such as those provided by the
Company.
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 and, beginning in
1997, cash generated from operations at BMT. Since inception, the Company has
raised approximately $27 million in net proceeds of equity financing which
includes the net proceeds of $17,803,000 from the initial public offering of the
Company's Common Stock in October 1996.
During the three months ended March 31, 1998, net cash flows used in
operating activities amounted to $330,000. During the three months ended March
31, 1997, net cash provided from operating activities amounted to $436,000. The
increase in net cash flows used in operating activities in the first quarter of
1998 compared to the same quarter in 1997 was due primarily to increase in
operating expenses.
Net additions of property and equipment for the quarters ended March
31, 1998 and 1997 were $212,000 and $161,000, respectively. The Company expects
the net addition of property and equipment will increase in 1998 due primarily
to additional purchases of property and equipment to support urological
products.
The Company's primary internal source of liquidity presently consists
of existing borrowings, cash balances and cash generated from BMT's operations.
The Company's primary external sources of liquidity are equity financings and
bank-provided debt financing.
As of March 31, 1998 and December 31, 1997, the Company had cash of
$10,449,000 and $11,054,000, respectively. The decrease since December 31, 1997
was due to the net cash used in operations, purchases of fixed assets and
repayment of long-term debt. As of March 31, 1998, 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 product 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 accurately be
predicted. The Company believes that existing cash and cash equivalents and cash
anticipated to be generated from BMT's operations will provide adequate funding
for the Company's currently anticipated capital requirements through the
calendar year 1998. Prior to achieving profitability, the Company may require
additional capital and there can be no assurance that such additional funding
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.
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The Company expects its operating losses to continue until the
On-Command product achieves significant market acceptance. The Company 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. All
management estimates regarding liquidity and capital requirements are subject to
the factors discussed above and in the following section titled "Factors
Affecting Operating Results".
FACTORS AFFECTING OPERATING RESULTS
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. See other portions of this Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Lack of Regulatory Approval and Limited Clinical Data
The Company's principal product, the On-Command product, is an
investigational device that has not been approved by the FDA and will not be
available for commercial distribution in the United States unless and until such
approval is obtained. The Male On-Command product is currently in a controlled,
randomized clinical study in the United States with respect to single use
insertions up to 30 days for an acute indication. During the past twelve months,
the Company has expanded the number of sites participating in the clinical
study, hired additional clinical and site-monitoring personnel and increased the
training and clinical product availability at these clinical sites in order to
obtain product performance feedback necessary to direct current and future
product designs and to assist in the completion of the clinical study necessary
to support a regulatory submission. There can be no assurance that the FDA will
determine that the data derived from the clinical study will support the safety
and efficacy of the device nor that the data will be sufficient to file a
regulatory application or that such application will be approved by the FDA. In
addition to the acute study currently underway, UroQuest is preparing to submit
an IDE to begin a multi-center trial in support of a PMA application for a
chronic indication for the Male On-Command product. The Company intends to
submit the chronic study IDE during the second quarter of 1998 and anticipates
beginning this trial during the third quarter of 1998. There can be no assurance
that the FDA will determine that the data derived from the clinical study will
support the safety and efficacy of the device nor that the data will be
sufficient to file a PMA application or that such application will be approved
by the FDA. A feasibility study of the Female On-Command product is nearing
completion. The results of this study will be used to prepare an IDE submission
for a controlled, randomized clinical study of this device. There can be no
assurance that the FDA will approve such a submission. If either the Male or
Female On-Command product does not prove to be safe and effective in clinical
testing to the satisfaction of the FDA, the Company will not be able to market
or commercialize these On-Command products in the United States. Furthermore,
approval for single use insertions of the On-Command product, if obtained, does
not mean that use of successive device insertions will be approved. There can be
no assurance that either single use or successive insertion use of the
On-Command product will prove to be safe and effective in the United States, or
that FDA approval will be obtained on a timely basis, if at all. In addition,
the clinical studies may identify technical, manufacturing, design or other
factors that could delay completion of such testing. If the On-Command product
does not prove to be safe and effective in clinical
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testing or if the Company is otherwise unable to obtain necessary regulatory
approval, the Company's business, financial condition and results of operations
will be materially adversely affected.
Dependence Upon the On-Command Product
The Company expects to derive a substantial majority of its future
revenues from sales of the On-Command product. 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 product in the United States
and abroad. Although the Company markets a line of proprietary medical device
products through BMT, there can be no assurance that such products will receive
continued market acceptance or generate significant sales. Furthermore, even
though the Company is in the process of developing new products in addition to
the On-Command product, there can be no assurance that such development efforts
will be successful or that any resulting products will achieve market
commercialization. The life cycle of the On-Command product is difficult to
estimate, particularly in light of current and future technological
developments, competition and other factors. The failure of the Company to
successfully commercialize the On-Command product or to realize significant
revenues therefrom would have a material adverse effect on the business,
financial condition and results of operations of the Company.
Uncertainty of Market Acceptance
The On-Command product represents a new management modality for urinary
outflow dysfunction, and there can be no assurance that the On-Command product
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. The Company believes that
recommendations of the On-Command product by physicians will be essential for
market acceptance of the On-Command product, and there can be no assurance that
any such recommendations will be obtained. Broad use of the On-Command product
will require the training of numerous physicians and the time required to
complete such training could result in a delay or dampening of market
acceptance. Moreover, health care payers' approval of reimbursement for the
On-Command product will be an important factor in establishing market
acceptance. 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 product to achieve substantial market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Limited Operating History; History of Losses and Expectation of Future Losses
The Company has a limited history of operations. Since its inception in
April 1992, the urology portion of Company has been primarily engaged in
research and development of the On-Command product. The Company has experienced
substantial operating losses since inception and, as of March 31, 1998, had an
accumulated deficit of approximately $10.4 million. The Company expects its
operating losses to continue until the On-Command product achieves significant
market acceptance. The Company 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.
Government Regulation
The Company's products, including the On-Command product, will continue
to be subject to pervasive and continuing regulation by the FDA. The FDA
regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices in the United States. Prior to
commercialization in the United States, a medical device generally must receive
FDA clearance or
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approval, which can be an expensive, lengthy and uncertain process. Regulatory
agencies in various foreign countries in which the Company's products may be
sold may impose additional or varying regulatory requirements. Noncompliance
with applicable requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
of approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Companies desiring to market a new medical device generally must obtain
either a premarket notification clearance under Section 510(k) of the FDC Act
("510(k)") or premarket approval ("PMA") prior to the introduction of such
medical device into the market. In addition, changes to a medical device that
significantly affect the safety or efficacy of the device are also subject to
FDA review and clearance or approval. Although generally believed to be a
shorter, less costly regulatory path than a PMA, the process of obtaining a
510(k) clearance generally requires the submission of supporting data, which may
include data from clinical trails of the device. The time period required to
assemble and compile this data can be extensive and can extend the regulatory
process for a considerable length of time. The PMA process can take several
years longer than the 510(k) clearance process and requires the submission of
extensive clinical data and supporting information.
Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy strictly prohibits the marketing of medical devices for unapproved uses.
The Company will be required to adhere to applicable FDA regulations regarding
Good Manufacturing Practices ("GMP") and similar regulations in other countries,
which include testing, control, and documentation requirements, and with Medical
Device Reporting ("MDR") requirements. Ongoing compliance with GMP and other
applicable regulatory requirements will be monitored through periodic
inspections by state and federal agencies, including the FDA, and by comparable
agencies in other countries. In addition, changes in existing regulations or
adoption of new governmental regulations or policies could prevent or delay
regulatory approval of the Company's products.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely for country to country. The
time necessary to obtain approval for sales in foreign countries may be longer
or shorter than that required for FDA approval, and requirements may differ from
FDA requirements. The Company has received the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives, to the On-Command product.
Some countries in which the Company intends to sell devices through distributors
(for example, France, Germany and Spain) either do not currently regulate
medical devices such as the On-Command product or have minimal registration
requirements. However, these countries may develop more extensive regulations in
the future that could impact the Company's ability to market On-Command product.
There can be no assurance that the Company will be able to obtain FDA
clearance or approval to market the On-Command product or other products in the
United States for their intended uses on a timely basis or at all, and delays in
receipt of or failure to receive such clearances or approvals, or failure to
comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
BMT, as a developer and manufacturer of Class I and Class II medical
devices, is also subject to all of the foregoing regulatory requirements of the
FDA. Among its activities, BMT markets a range of proprietary and OEM products,
most of which have received 510(k) clearance. BMT has made modifications to one
or more of its cleared proprietary devices that BMT believes do not require the
submission of new 510(k) notices. There can be no assurance, however, that the
FDA would agree with any of BMT's determinations not to submit a new 510(k)
notice for any of the changes made to BMT's
13
<PAGE> 14
devices. If the FDA requires BMT to submit a new 510(k) notice for any device
modification, BMT may be prohibited from marketing the modified device until the
510(k) notice is cleared by the FDA.
In January 1998, BMT received a Warning Letter from the FDA following
BMT's response to the FDA regarding certain deficiencies noted during an on-site
FDA inspection in December 1997. BMT management addressed the FDA's concerns
noted in the Warning Letter in both written and verbal communication in January
and February 1998. In March 1998, BMT received a letter in which the FDA
indicated that BMT's responses and planned actions to address the FDA's concerns
were acceptable and that the FDA was planning a follow-up inspection in 1998.
There can be no assurance that the FDA will determine that BMT has fully
addressed the FDA's concerns. Nor can there be any assurance that the FDA will
not issue additional Warning Letters in the future. Failure by BMT to adequately
address the FDA's concerns could cause the FDA to take additional actions that
might cause disruptions in BMT's operations. These disruptions could have a
material, adverse effect on the Company's business, financial condition and
results of operations.
Lack of Marketing and Sales Experience
To date, the Company has not sold any On-Command product. The Company
is currently analyzing various sales and marketing methods it intends to use to
market the On-Command product in the United States if and when necessary
regulatory approvals are obtained. The Company currently employs a small number
of marketing and no sales employees for the On-Command product. In addition, the
Company intends to market the On-Command product internationally through
independent foreign distribution arrangements, none of which are currently in
place. There can be no assurance that the Company can attract and retain its own
qualified marketing and sales personnel, establish acceptable international
arrangements or otherwise design and implement an effective marketing and sales
strategy for the On-Command product.
Manufacturing Risks
Through BMT, the Company has only manufactured the On-Command product
in limited quantities for clinical testing purposes to date. Although BMT has
extensive experience in manufacturing custom silicone products, including
urological products, the Company does not have experience in manufacturing the
On-Command product in commercial quantities. As the Company begins to launch its
On-Command product into various markets, the Company may encounter difficulties,
delays and significant expenses in scaling up production of the On-Command
product, including potential problems involving production yields, quality
control, component supply and shortages of qualified personnel. The Company may
also experience higher than expected manufacturing costs that could prevent the
Company from selling the On-Command product at a commercially reasonable price.
There can be no assurance that difficulties or unfavorable costs will not be
encountered in mass-production of the On-Command product and, in such an event,
these difficulties or costs could result in a material adverse effect on the
Company's business, financial condition and results of operations.
Reliance On Patents and Protection of Proprietary Technology
The Company's ability to compete effectively will depend, in part, on
its ability to develop and maintain proprietary aspects of its technology. 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. Legal standards related to the enforceability, scope and validity of
patents are in transition and are subject to uncertainty due to broad judicial
discretion and evolving case law. 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 which have substantial resources and have
made significant investments in competing technologies, will not seek to apply
for and obtain patents that may prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or
internationally.
14
<PAGE> 15
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through proprietary
information agreements with certain of its 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 secrets will not
otherwise become known to or independently developed by competitors. The Company
also seeks to protect its trademarks through registration. There can be no
assurance, however, that registration of such marks will provide any significant
protection.
Intense Competition and Technological Advances
Competition in the market for treatment and management of urological
disorders is intense and is expected to increase. The Company believes its
principal competition will come from existing incontinence management
modalities, such as adult diapers and absorbents. The Company also expects to
face significant competition from other domestic and international companies
that are developing similar and other products and technologies for the
management of incontinence. Most of the Company's competitors and potential
competitors have significantly greater financial, technical, research,
manufacturing, marketing, sales, distribution and other resources than the
Company. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies and products that are more
effective or commercially attractive than any which may be offered by the
Company, or that such competitors will not succeed in obtaining regulatory
approval, introducing or commercializing any such products prior to the Company.
Such developments could have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainty Relating to Third-Party Reimbursement
In the United States and in foreign countries, third-party
reimbursement is generally available for medical devices such as intermittent,
Foley, external and suprapubic catheters for the management of urinary outflow
dysfunction, including incontinence and retention. Diapers and absorbents
generally do not receive third-party reimbursement and are paid for by the
patient. The Company believes, based on the availability of third-party
reimbursement for certain other medical devices, that the On-Command product
will likely be eligible for coverage by third-party reimbursement programs.
There can be no assurance, however, that such reimbursement will be available
for the On-Command product or, if available, that it will be sufficient to cover
the cost of the product. If third-party reimbursement is unavailable, consumers
will have to pay for the On-Command product themselves, resulting in greater
relative out-of-pocket costs for the device as compared to surgical procedures
and other management options for which third-party reimbursement is available.
The Company does not expect that third-party reimbursement will be available, if
at all, unless and until FDA and foreign regulatory approval is received. After
such time, if ever, as applicable regulatory approval is received, third-party
reimbursement for the On-Command product will be dependent upon decisions by the
Health Care Financing Administration (and its associates) for Medicare in the
United States and similar authorities abroad, as well as by private insurers and
other payers.
Changes in the availability of third-party reimbursement for the
On-Command product, for products of the Company's competitors or for surgical
procedures may affect the pricing of the On-Command product or the relative cost
to the patient. Regardless of the type of reimbursement system, the Company
believes that physician advocacy of the On-Command product will be required to
obtain reimbursement. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either governmental or private reimbursement systems, or that
physicians will support the On-Command product. Failure to obtain such
15
<PAGE> 16
reimbursement may have a material adverse effect on the Company's business,
financial condition and results of operations.
Future Capital Needs; Uncertainty of Additional Funding
The Company's capital requirements depend on numerous factors,
including the extent to which the On-Command product 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 non-urological
operations, general economic conditions and various other factors. The timing
and amount of such capital requirements cannot adequately be predicted.
Consequently, although the Company believes existing cash balances and cash
anticipated to be generated from BMT operations will provide adequate funding
for its capital requirements through calendar year 1998, 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. See "Liquidity and Capital Resources".
Intellectual Property Litigation Risks
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 ("PTO"). The defense and prosecution
of intellectual property suits, PTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company. to protect trade
secrets or knowhow owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others.
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.
International Sales Risks
The Company plans to sell the On-Command product and other products
both in the United States and in foreign markets. Any international sales are
expected to be made through independent foreign distributors and involve a
number of inherent risks. Consequently, there can be no assurance that the
Company will be able to achieve significant sales of the On-Command product or
other products in any foreign market. 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
16
<PAGE> 17
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.
Product Liability Risk; Product Recall Risk
The manufacture and sale of medical devices entails significant product
liability and recall risks. Product liability may exist despite FDA approval and
future court decisions may also affect the Company's risk of product liability.
Although the Company maintains product liability insurance with respect to its
products, a successful product liability claim or series of claims brought
against the Company which are in excess of the Company's insurance coverage
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
product recalls, which could have a material adverse effect on the Company's
business, financial condition and results of operations, will not occur.
Dependence Upon Key Suppliers
Through BMT, the Company purchases certain of the components used to
manufacture the On-Command product 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
product, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty of BMT Operations
Although the business operations of BMT have continued since 1971,
there can be no assurance that BMT's revenues, cash flow or current
profitability and growth rate will continue in the future. Approximately 45% and
37% of BMT's net sales during 1997 and the three months ended March 31, 1998,
respectively, were derived from its manufacture of OEM medical device products.
BMT maintains no long-term OEM customer contracts and, during 1997 and the three
months ended March 31, 1998, BMT derived approximately 24% and 15%,
respectively, of its net sales from one such customer. Although BMT continues to
develop its OEM business, there can be no assurance that BMT will be successful
in its efforts or that its OEM customers will continue to use BMT as a
manufacturing resource. Furthermore, BMT is subject to general business risks
associated with operations of its size and, in particular, to the same risks
faced by other companies that manufacture and market medical device products.
Because virtually all of BMT's proprietary and OEM products incorporate silicone
components, any cost increase or other negative development associated with this
material could adversely affect its business, financial condition and results of
operations. BMT has faced two labor union election contests in the past seven
years and may face additional elections in the future. In the event BMT becomes
subject to a collective bargaining agreement, it may experience increased labor
and related costs that could have a material adverse effect on the Company's
business, financial condition and results of operations.
Environmental Risks
BMT utilizes many raw materials in the manufacturing process that 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 and for the
costs of remedial actions and could also be subject to revocation of permits
necessary to conduct its business. Any such revocations could require BMT 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.
BMT 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
17
<PAGE> 18
and/or subsequent relocation to another location. There can be no assurance that
BMT 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.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock has been volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products by
the Company or its competitors, FDA and international regulatory actions,
actions with respect to reimbursement matters, developments with respect to
patents or proprietary rights, public concern as to the safety of products
developed by the Company or others, changes in health care policy in the United
States and internationally, changes in stock market analyst recommendations
regarding the Company, other medical device companies or the medical device
industry generally and general market conditions may have a significant effect
on the market price of the Common Stock. In addition, it is likely that during
future quarterly periods, the Company's results of operations may fluctuate
significantly or may fail to meet the expectations of stock market analysts and
investors and, in such event, the Company's stock price could be materially
adversely affected. In the past, securities class action litigation has been
initiated following periods of volatility in the market price of a company's
securities. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities and Use of Proceeds
The following information is provided as an amendment to the initial
report on Form SR, "Report of Sales of Securities and Use of Proceeds
Therefrom", regarding the use of proceeds from the sale of common stock under
the Company's Registration Statement on Form S-1 (SEC file number 333-07277),
which was declared effective on October 24, 1996 (CUSIP number 917285). The
information provided is for the period from October 24, 1996 through March 31,
1998. All amounts in the table below represent actual payments, unless otherwise
stated.
<TABLE>
<CAPTION>
Use of Net Proceeds Directors/Officers(1) Others(3) Total
- ---------------------------------- --------------------- ---------- ----------
<S> <C> <C> <C>
Construction of plant, building,
and facilities -- -- --
Purchases and installation of
machinery and equipment -- 193,842 193,842
Purchases of real estate -- -- --
Acquisition of other business 8,476,330 1,523,670 10,000,000
Repayment of indebtedness 152,219 750,331 902,550
Working capital/general corporate
purposes 683,001 2,180,013 2,863,014
Other purposes:
- Clinical trials and
research and development 101,121 1,102,023 1,203,144
- Sales and marketing activities 98,476 429,473 527,949
- Severance payments 277,802(2) 39,829 317,631
---------- ---------- ----------
9,788,949 6,219,181 16,008,130
Temporary investment:
- Cash and cash equivalents -- 1,795,220 1,795,220
---------- ---------- ----------
9,788,949 8,014,401 17,803,350
========== ========== ==========
</TABLE>
(1) Direct or indirect payments to directors, officers, general partners of
the Company or their associates; to persons owning ten percent or more of
any class of equity securities of the Company; and to affiliates of the
Company.
(2) Direct or indirect payments to former officers of the Company who resigned
in 1997.
(3) Direct or indirect payments to others.
There is no material change in the use of net proceeds as described in
the prospectus, except that the Company has used approximately $2.9 million for
working capital and general corporate purposes.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
19
<PAGE> 20
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
10.4* Employment Agreement dated January 2, 1998 between the Company
and Terry E. Spraker, Ph.D.
10.5* Employment Agreement dated January 2, 1998 between the Company
and Jeffrey L. Kaiser
10.8* Employment Agreement dated January 2, 1998 between the Company
and Keith W.L. Ward
10.10* Employment Agreement dated February 18, 1998 between the Company
and Alan L. Marquardt
10.15 Note and Security Agreement between the Company and Richard C.
Davis, Jr., M.D. dated January 9, 1998 (the note was repaid on
March 30, 1998.)
27.1 Financial Data Schedule
</TABLE>
- ----------
* Management contract or compensatory plan arrangement
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
three months ended March 31, 1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UROQUEST MEDICAL CORPORATION
Date: May 14, 1998 /s/ Terry E. Spraker, Ph.D.
-----------------------------------------
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
Date: May 14, 1998 /s/ Jeffrey L. Kaiser
-----------------------------------------
Jeffrey L. Kaiser
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
Description
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
10.4* Employment Agreement dated January 2, 1998 between the Company
and Terry E. Spraker, Ph.D.
10.5* Employment Agreement dated January 2, 1998 between the Company
and Jeffrey L. Kaiser
10.8* Employment Agreement dated January 2, 1998 between the Company
and Keith W.L. Ward
10.10* Employment Agreement dated February 18, 1998 between the Company
and Alan L. Marquardt
10.15 Note and Security Agreement between the Company and Richard C.
Davis, Jr., M.D. dated January 9, 1998 (the note was repaid on
March 30, 1998.)
27.1 Financial Data Schedule
</TABLE>
- ----------
* Management contract or compensatory plan arrangement
22
<PAGE> 1
EXHIBIT 10.4
UROQUEST MEDICAL CORPORATION
EMPLOYMENT AGREEMENT
This Agreement is entered into as of January 2, 1998, by and between
UroQuest Medical Corporation, a Delaware corporation (the "Company") and Terry
Spraker (the "Employee").
WHEREAS, the Company desires to retain the Employee on a full-time basis
in the capacity of President and Chief Executive Officer of the Company and the
Employee desires to accept such employment; and
WHEREAS the parties desire and agree to enter into an employment
relationship by means of this Agreement;
NOW THEREFORE in consideration of the promises and mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is mutually covenanted and
agreed by and among the parties as follows:
1. POSITION AND DUTIES. The Employee shall be employed as President and
Chief Executive Officer of the Company, reporting to the Company's Board of
Directors (the "Board") and assuming and discharging such responsibilities as
are commensurate with the Employee's position. In performing his basic duties,
the Employee shall work at his current location, although the Employee
acknowledges that frequent travel may be necessary in carrying out his duties
hereunder.
2. EMPLOYMENT RELATIONSHIP. The Company and the Employee acknowledge that
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
3. COMPENSATION.
(a) BASE SALARY. For all services to be rendered by the Employee
pursuant to this Agreement, the Employee shall receive a minimum annual base
salary of $240,000,
1
<PAGE> 2
payable in accordance with the Company's normal payroll
practices (the "Base Salary"). The Base Salary may be increased from time to
time by the Board in its absolute discretion.
(b) BONUS. For the Company's 1997 fiscal year, the Employee shall
receive a fixed bonus equal to 50% of the Base Salary pro-rated for the portion
of the year spent as CEO, subject to further review by the Compensation
Committee. For each fiscal year of the Company after the 1997 fiscal year during
the term of this Agreement, the Employee shall be eligible to receive a bonus,
based on the achievement of certain performance criteria (which shall be
determined by the Board for each fiscal year prior to the beginning of each such
fiscal year) of up to a maximum of 50% of the Base Salary.
4. STOCK OPTIONS.
(a) INITIAL OPTION. The Company has granted the Employee an option
(the "First Option") to purchase 120,000 shares of Common Stock of the Company.
Except as otherwise provided herein, the First Option was granted pursuant to,
and shall be governed by, the Company's 1994 Stock Plan. The First Option was
vested and exercisable as to 100% of the shares subject thereto upon Dr.
Spraker's employment commencement.
(b) SECOND OPTION. The Company has granted the Employee a second
option (the "Second Option") to purchase 100,000 shares of Common Stock of the
Company. Except as otherwise provided herein, the Second Option was granted
pursuant to, and shall be governed by, the Company's 1994 Stock Plan. The Second
Option shall vest and become exercisable as to 100% of the shares subject
thereto on the date ten (10) years from Dr. Spraker's employment commencement;
provided, however, that on such date Employee remains employed by the Company.
Notwithstanding the foregoing, the Second Option shall vest and become
exercisable in full upon the Company obtaining U.S. regulatory approval to begin
marketing its Male On-Command Catheter product.
(c) THIRD OPTION. The Company has granted the Employee a third
option (the "Third Option") to purchase 480,000 shares of Common Stock of the
Company. Except as otherwise provided herein, the Third Option was granted
pursuant to, and shall be governed by, the Company's 1994 Stock Plan. The Third
Option shall vest and become exercisable as to 1/4 of the shares subject thereto
on the date one year after the date hereof, and as to 1/16 of the shares subject
thereto at the end of each three (3) month period following the date hereof, so
that the Third Option shall be fully vested and exercisable on the fourth
anniversary of Dr. Spraker's employment commencement; provided, however, that on
such dates the Employee remains employed by the Company.
(d) EXERCISE WITH PROMISSORY NOTE. The First, Second and Third
Options shall allow for payment by the Employee upon exercise to be by
full-recourse promissory note.
2
<PAGE> 3
5. OTHER BENEFITS. The Employee shall be entitled to participate in the
employee benefit plans and programs of the Company, if any, to the extent that
his position, tenure, salary, age, health and other qualifications make him
eligible to participate in such plans or programs, subject to the rules and
regulations applicable thereto. The Company reserves the right to cancel or
change its benefit plans and programs at any time.
6. EXPENSES. The Company shall reimburse the Employee for reasonable
travel, entertainment or other expenses incurred by the Employee in the
furtherance of or in connection with the performance of the Employee's duties
hereunder, in accordance with the Company's expense reimbursement policy as in
effect from time to time.
7. CHANGE OF CONTROL.
(a) OPTION ACCELERATION UPON A CHANGE OF CONTROL. Upon a Change of
Control, the vesting and exercisability of each option granted to the Employee
by the Company (collectively, the "Options") shall be automatically accelerated
in full.
(b) INVOLUNTARY TERMINATION IN CONNECTION WITH A CHANGE OF Control.
If the Employee's employment with the Company terminates in an Involuntary
Termination within [TWELVE (12) MONTHS] of a Change of Control, then, subject to
Section 9, the Employee shall be entitled to receive a lump-sum cash severance
payment equal to the Employee's Current Compensation.
(c) OTHER TERMINATION. If the Employee's employment terminates other
than in an Involuntary Termination within twelve (12) months of a Change of
Control, then the Employee shall not be entitled to receive severance benefits
pursuant to Section 7(b) of this Agreement, but may be eligible for those
benefits (if any) as may then be established under the Company's severance and
benefits plans and policies existing at the time of such termination.
8. DEFINITIONS.
(a) CAUSE. "Cause" shall mean the occurrence of any one or more of
the following: (i) the Employee's conviction by, or entry of a plea of guilty or
nolo contendere in, a court of final jurisdiction for any crime which
constitutes a felony in the jurisdiction involved (other than a felony traffic
offense); (ii) the Employee's misappropriation of funds or commission of a
material act of fraud, whether prior or subsequent to the date hereof, upon the
Company; (iii) gross negligence by the Employee in the scope of the Employee's
services to the Company; (iv) a willful breach by the Employee of a material
provision of this Agreement; or (v) a willful failure of the Employee to
substantially perform his duties
3
<PAGE> 4
hereunder. Notwithstanding the foregoing, the Employee shall not be deemed to
have been terminated for Cause under clause (iii), (iv) or (v) of this Section
8(a) unless the Board delivers a written notice to the Employee setting forth
the reasons for the Company's intention to terminate for Cause and specifically
identifying the manner in which the Board believes that the Employee has engaged
in such conduct, which conduct is not substantially corrected by the Employee
within 10 days following his receipt of such notice, and provides the Employee
with an opportunity, together with his counsel, if any, to be heard before the
Board.
(b) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence
of any of the following events:
(i) the approval by shareholders of the Company of a merger or
consolidation of the Company with any other entity, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(ii) any approval by the shareholders of the Company of a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets;
(iii) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities; or
(iv) a change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of those directors whose election or nomination was not in connection
with any transaction described in subsections (i), (ii) or (iii) or in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company.
(c) CURRENT COMPENSATION. "Current Compensation" shall mean an
amount equal to the Employee's annual base salary and annual bonus for the
fiscal year preceding the fiscal year in which severance benefits become payable
to the Employee pursuant to Section 7(b).
4
<PAGE> 5
(d) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean
(i) without the Employee's express written consent, a reduction by the Board of
the Employee's duties, position or responsibilities relative to the Employee's
duties, position or responsibilities in effect immediately prior to such
reduction, or the removal of the Employee from such position, duties and
responsibilities, unless the Employee is provided with comparable duties,
position and responsibilities; (ii) without the Employee's express written
consent, a reduction by the Board of the Base Salary or the Employee's bonus
opportunity (as set forth in Section 3(b)) in effect immediately prior to such
reduction; (iii) a reduction by the Board in the kind or level of employee
benefits to which the Employee is entitled immediately prior to such reduction,
with the result that the Employee's overall benefits package is significantly
reduced; (iv) without the Employee's express written consent, the relocation of
the Employee by the Board to a facility or a location more than thirty-five (35)
miles from his current location; (v) any purported termination of the Employee
by the Board which is not effected for Cause or for which the grounds relied
upon are not valid; or (vi) the failure of the Company to obtain the assumption
of this Agreement by any successors contemplated in Section 11 below; provided,
however, that an event described above shall not constitute Involuntary
Termination unless it is communicated by the Employee to the Company in writing
and is not corrected by the Company in a manner that is reasonably satisfactory
to the Employee (including full retroactive correction with respect to any
monetary matter) within ten (10) days of the Company's receipt of such written
notice from the Employee.
9. GOLDEN PARACHUTE EXCISE TAX.
(a) BENEFITS CAP. In the event that the benefits under this
Agreement, when aggregated with any other payments or benefits received by the
Employee, or to be received by the Employee, would (i) constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and (ii) but for this provision, would be subject
to the excise tax imposed by Section 4999 of the Code or any similar or
successor provision (the "Excise Tax"), then the Employee's benefits shall be
either delivered in full or delivered to such lesser amount or degree as would
result in no portion of such benefits being subject to the Excise Tax, whichever
of the foregoing amounts, taking into account the applicable federal, state and
local income taxes and the Excise Tax, results in the receipt by the Employee on
an after-tax basis, of the greatest amount of benefits, notwithstanding that all
or some portion of such benefits may be subject to the Excise Tax.
(b) DETERMINATION. Unless the Company and the Employee otherwise
agree in writing, any determination required under this Section shall be made in
writing by the Company's primary independent public accounting firm (the
"Accountants"), whose determination shall be conclusive and binding upon the
Employee and the Company for all purposes. For purposes of making the
calculations required by this Section, the Accountants
5
<PAGE> 6
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. The Company and the Employee
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make any determination under this
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section.
10. RIGHT TO ADVICE OF COUNSEL. The Employee acknowledges that he has had
the right to consult with counsel and is fully aware of his rights and
obligations under this Agreement.
11. LEGAL FEES AND EXPENSES. The Company shall pay, or reimburse the
Employee for, all reasonable legal fees and expenses incurred by the Employee in
connection with negotiating, drafting and executing this Agreement and an
associated Estate Plan; provided, however, that the Company shall not be
obligated to reimburse such legal fees and expenses in excess of $5,000.
12. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company," shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) EMPLOYEE'S SUCCESSORS. Without the written consent of the
Company, the Employee shall not assign or transfer this Agreement or any right
or obligation under this Agreement to any other person or entity.
Notwithstanding the foregoing, the terms of this Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
13. ARBITRATION.
(a) Employee agrees that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, or the interpretation,
validity, construction, performance, breach, or termination thereof, shall be
settled by binding arbitration to be held
6
<PAGE> 7
in San Francisco, California in accordance with the National Rules for the
Resolution of Employment Disputes then in effect of the American Arbitration
Association (the "Rules"). The arbitrator may grant injunctions or other relief
in such dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of
any dispute or claim, without reference to rules of conflicts of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. The Employee hereby consents
to the personal jurisdiction of the state and federal courts located in
California for any action or proceeding arising from or relating to this
Agreement or relating to any arbitration in which the parties are participants.
(c) COSTS AND FEES OF ARBITRATION. Employee shall pay the initial
arbitration filing fee (not to exceed $200.00), and the Company shall pay the
remaining costs and expenses of such arbitration (unless Employee requests that
each party pay one-half of the costs and expenses of such arbitration). The
Company and Employee shall each pay separately its counsel fees and expenses
unless otherwise required by law. The Company will reimburse the Employee for
reasonable counsel fees and expenses actually incurred in connection with any
arbitration pursuant to this section, provided however, such reimbursement will
not exceed $5,000.
(c) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE
RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, DISCRIMINATION CLAIMS.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal substantive laws, but not the choice of law rules,
of the state of California.
15. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement, or any terms hereof, shall not affect the validity or
enforceability of any other provision or term of this Agreement.
7
<PAGE> 8
16. INTEGRATION. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter herein and supersedes
all prior or contemporaneous agreements whether written or oral. No waiver,
alteration, or modification of any of the provisions of this Agreement shall be
binding unless in writing and signed by duly authorized representatives of the
parties hereto.
17. TAXES. All payments made pursuant to this Agreement shall be subject
to withholding of applicable income and employment taxes.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by a duly authorized officer, as of the day and year
first above written.
UROQUEST MEDICAL CORPORATION
By: /s/ JEFFREY L. KAISER
---------------------------------
Title: Vice President,
Chief Financial Officer,
Secretary and Treasurer
TERRY E. SPRAKER, PH.D.:
/s/ TERRY E. SPRAKER, PH.D.
-----------------------------------------
8
<PAGE> 1
EXHIBIT 10.5
January 2, 1998
Mr. Jeffrey L. Kaiser
1907 Carmelita Drive
San Carlos, CA 94070
Dear Jeffrey:
The following sets forth the terms of your employment with UroQuest:
Position/Title: Vice President, Chief Financial Officer, Secretary and
Treasurer
Salary: Salary of $140,000 per annum to be reviewed by the
President/CEO and the Compensation Committee at our
annual increase time of April 1 each year.
Bonus: 30% (maximum) of salary based on objectives to be
mutually agreed upon with the Compensation Committee.
Such objectives will be a combination of personal as
well as corporate targets.
Stock Options: 120,000 shares whose vesting will occur over a
four (4) year period commencing with your start of
employment. The price of those options was based on the
fair market price at the date of grant.
Vacation: You will be entitled to two weeks paid vacation per
year. This will be increased to three weeks at the
completion of your fifth year of service.
Benefits: UroQuest will provide customary benefits such as
medical, dental and life insurance. Each employee will
be required to make certain contributions toward this
coverage. In addition, UroQuest sponsors a 401(K) plan
that allows each employee to contribute up to 15% of his
or her salary to the plan. The Company will match, at a
100% rate, up to 4% of your salary contribution. You
will become eligible to participate in the 401(K) plan
on your one-year anniversary.
<PAGE> 2
Mr. Jeffrey L. Kaiser
January 2, 1998
Page 2 of 5
Proprietary
Information: You agree to execute the Company's standard form of
employee proprietary information and inventions
agreement.
Resolution of
Disputes;
Arbitration: Any disputes between the parties relating in any way to
this Agreement, including without limitation, the
termination of your employment with UroQuest, shall be
resolved by arbitration.
Successors;
Entire Agreement: This Agreement shall be binding upon any successor to
the Company, whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or
otherwise. The terms of this Agreement and all your
rights hereunder shall inure to the benefit of, and be
enforceable by, your personal or legal representatives,
executors, administrators, successors, heirs,
distributees, devisees and legatees. The terms of this
Agreement, including the terms of the proprietary
information and inventions agreement to be executed, are
intended by the parties to be the final expression of
their agreement with respect to your employment by the
Company and may not be contradicted by evidence of any
prior contemporaneous agreements. If any provision of
this Agreement, or the application thereof, shall be
held to be invalid or unenforceable, or void, the
remainder of this Agreement shall remain in full force
and effect.
Amendment;
Governing Law: This Agreement may not be amended or modified except by
a writing signed by you and the Company. The terms of
this Agreement and the resolution of disputes shall be
governed by California law.
At Will: Employee's employment with the Company may be terminated
at any time, with or without cause, or for any or no
cause, with or without notice.
<PAGE> 3
Mr. Jeffrey L. Kaiser
January 2, 1998
Page 3 of 5
Option Acceleration: If your employment with the Company terminates as a
result of an Involuntary Termination other than for
Cause at anytime within twelve (12) months after a
Change of Control, then the vesting and exercisability
of each unvested option granted to you by the Company
(the "Options") shall be automatically accelerated in
full; provided, however, that if it is determined by the
Company's independent public accountants that such
acceleration would preclude accounting for the Change of
Control as a pooling of interests for financial
accounting purposes, and it is a condition to the
closing of the Change of Control that the transaction be
accounted for as a pooling of interests, then the
vesting and exercisability of the Options shall not
accelerate pursuant to this Section.
Definitions: (a) Cause. "Cause" shall mean the occurrence of any one
or more of the following: (i) the Employee's conviction
by, or entry of a plea of guilty or nolo contender in, a
court of final jurisdiction for any crime which
constitutes a felony in the jurisdiction involved (other
than a felony traffic offense); (ii) the Employee's
misappropriation of funds or commission of a material
act of fraud, whether prior or subsequent to the date
hereof, upon the Company; (iii) gross negligence by the
Employee in the scope of the Employee's services to the
Company; (iv) a willful breach by the Employee of a
material provision of this Agreement; or (v) a willful
failure of the Employee to substantially perform his
duties hereunder. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for
Cause under clause (iii), (iv) or (v) of this Section
8(a) unless the Company delivers a written notice to the
Employee setting forth the reasons for the Company's
intention to terminate for Cause and specifically
identifying the manner in which the Company believes
that the Employee has engaged in such conduct, which
conduct is not substantially corrected by the Employee
within 10 days following his receipt of such notice, and
provides the Employee with an opportunity, together with
his counsel, if any, to be heard by the Company.
(b) Change of Control. "Change of Control" shall
mean the occurrence of any of the following events:
<PAGE> 4
Mr. Jeffrey L. Kaiser
January 2, 1998
Page 4 of 5
(i) The approval by shareholders of the Company of a
merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than fifty percent (50%) of the total
voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately
after such merger or consolidation;
(ii) Any approval by the shareholders of the Company of
a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets; or
(iii) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becoming the "beneficial owner" (as defined
in Rule 13d-3 under said Act), directly or indirectly,
of securities of the Company representing 50% or more of
the total voting power represented by the Company's then
outstanding voting securities.
(c) Involuntary Termination. "Involuntary Termination"
shall mean (i) without the Employee's express written
consent, a significant reduction of the Employee's
duties, position or responsibilities relative to the
Employee's duties, position or responsibilities in
effect immediately prior to such reduction, or the
removal of the Employee from such position, duties and
responsibilities, unless the Employee is provided with
comparable duties, position and responsibilities;
provided, however, that a reduction in duties, position
or responsibilities solely by virtue of the Company
being acquired and made part of a larger entity (as, for
example, when the VP R&D of the Company remains as such
following a Change of Control but is not made the VP R&D
of the acquiring corporation) shall not constitute an
"Involuntary Termination" (ii) a reduction by the
Company of the Employee's base salary as in effect
immediately prior to such reduction; (iii) a
<PAGE> 5
Mr. Jeffrey L. Kaiser
January 2, 1998
Page 5 of 5
material reduction by the Company in the kind or level
of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly
reduced; (iv) without the Employee's express written
consent, the relocation of the Employee to a facility or
a location more than fifty (50) miles from his current
location; (v) any purported termination of the Employee
by the Company which is not effected for Cause or for
which the grounds relied upon are not valid; or (vi) the
failure of the Company to obtain the assumption of this
Agreement by any successors.
Sincerely,
UROQUEST MEDICAL CORPORATION
/s/ TERRY E. SPRAKER
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
ACCEPTED: /s/ JEFFREY L. KAISER
-------------------------
Jeffrey L. Kaiser
<PAGE> 1
EXHIBIT 10.8
January 2, 1998
Mr. Keith Ward
3, Limmard Way
Felpham, Bognor Regis
West Sussex, P022 7NH
Dear Keith:
The following sets forth the terms of your employment with UroQuest:
Position/Title: Vice President International
Salary: Salary of pound sterling 70K per annum to be reviewed at
our annual increase time of April 1 each year.
Bonus: 30% (maximum) of comparable U.S. compensation based on
objectives to be mutually agreed upon. Such objectives
will be a combination of personal as well as corporate
targets.
Stock Options: 120,000 shares whose vesting will occur over a four (4)
year period commencing with your start of employment.
The price of those options will be based on the fair
market price at the date of grant, which will
approximate your start date.
Company Car: The Company will pay for the lease and customary
expenses associated with a car of equivalent
specification to your current company car. The period of
the lease will be at least two (2) years.
Vacation: You will be entitled to twenty (20) formal and eight (8)
statutory days per year. This will be increased to
twenty-five (25) formal days at the completion of your
fifth year of service.
<PAGE> 2
Mr. Keith Ward
January 2, 1998
Page 2 of 5
Benefits: UroQuest will contribute and/or will reimburse coverages
of a similar nature to what is normal and customary at
competing companies in the U.K. This would include:
Pension Scheme - UroQuest will double your
contribution up to a maximum of 12% (UroQuest
contribution) to your salary.
National Health Insurance - UroQuest will make the
customary employer contribution at 10% of your
salary.
Life Insurance - UroQuest will pay for the life
insurance premium for term life insurance equal to
four (4) times your salary as long as you are an
employee of UroQuest.
Office: You will work out of your home and UroQuest will cover
business related expenses and any capital expenditures
necessary to set up a suitable office (fax, computer,
etc).
Proprietary
Information: You agree to execute the Company's standard form of
employee proprietary information and inventions
agreement.
Resolution of
Disputes;
Arbitration: Any disputes between the parties relating in any way to
this Agreement, including without limitation, the
termination of your employment with UroQuest, shall be
resolved by arbitration.
Successors;
Entire Agreement: This Agreement shall be binding upon any successor to
the Company, whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or
otherwise. The terms of this Agreement and all your
rights hereunder shall inure to the benefit of, and be
enforceable by, your personal or legal representatives,
executors, administrators, successors, heirs,
distributees, devisees and legatees. The terms of this
Agreement, including the terms of the proprietary
information and inventions agreement to be executed, are
intended by the parties to be the final expression of
their agreement with respect to your employment by the
Company and may not be contradicted
<PAGE> 3
Mr. Keith Ward
January 2, 1998
Page 3 of 5
by evidence of any prior contemporaneous agreements. If
any provision of this Agreement, or the application
thereof, shall be held to be invalid or unenforceable,
or void, the remainder of this Agreement shall remain in
full force and effect.
Notice Period: Notice period will be six (6) months. Renumeration
during notice period will be reduced by amount related
to any new position, etc.
Amendment;
Governing Law: This Agreement may not be amended or modified except by
a writing signed by you and the Company. The terms of
this Agreement and the resolution of disputes shall be
governed by California Law.
Option Acceleration: If your employment with the Company terminates as a
result of an Involuntary Termination other than for
Cause at anytime within twelve (12) months after a
Change of Control, then the vesting and exercisability
of each unvested option granted to you by the Company
(the "Options") shall be automatically accelerated in
full; provided, however, that if it is determined by the
Company's independent public accountants that such
acceleration would preclude accounting for the Change of
Control as a pooling of interests for financial
accounting purposes, and it is a condition to the
closing of the Change of Control that the transaction be
accounted for as a pooling of interests, then the
vesting and exercisability of the Options shall not
accelerate pursuant to this Section.
Definitions: (a) Cause. "Cause" shall mean the occurrence of any one
or more of the following: (i) the Employee's conviction
by, or entry of a plea of guilty or nolo contender in, a
court of final jurisdiction for any crime which
constitutes a felony in the jurisdiction involved (other
than a felony traffic offense); (ii) the Employee's
misappropriation of funds or commission of a material
act of fraud, whether prior or subsequent to the date
hereof, upon the Company; (iii) gross negligence by the
Employee in the scope of the Employee's services to the
Company; (iv) a willful breach by the Employee of a
material provision of this Agreement; or (v) a willful
failure of the
<PAGE> 4
Mr. Keith Ward
January 2, 1998
Page 4 of 5
Employee to substantially perform his duties hereunder.
Notwithstanding the foregoing, the Employee shall not be
deemed to have been terminated for Cause under clause
(iii), (iv) or (v) of this Section 8(a) unless the
Company delivers a written notice to the Employee
setting forth the reasons for the Company's intention to
terminate for Cause and specifically identifying the
manner in which the Company believes that the Employee
has engaged in such conduct, which conduct is not
substantially corrected by the Employee within 10 days
following his receipt of such notice, and provides the
Employee with an opportunity, together with his counsel,
if any, to be heard by the Company.
(b) Change of Control. "Change of Control" shall mean
the occurrence of any of the following events:
(i) The approval by shareholders of the Company of a
merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than fifty percent (50%) of the total
voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately
after such merger or consolidation;
(ii) Any approval by the shareholders of the Company of
a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets; or
(iii) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becoming the "beneficial owner" (as defined
in Rule 13d-3 under said Act), directly or indirectly,
of securities of the Company representing 50% or more of
the total voting power represented by the Company's then
outstanding voting securities.
<PAGE> 5
Mr. Keith Ward
January 2, 1998
Page 5 of 5
(c) Involuntary Termination. "Involuntary Termination"
shall mean (i) without the Employee's express written
consent, a significant reduction of the Employee's
duties, position or responsibilities relative to the
Employee's duties, position or responsibilities in
effect immediately prior to such reduction, or the
removal of the Employee from such position, duties and
responsibilities, unless the Employee is provided with
comparable duties, position and responsibilities;
provided, however, that a reduction in duties, position
or responsibilities solely by virtue of the Company
being acquired and made part of a larger entity (as, for
example, when the VP R&D of the Company remains as such
following a Change of Control but is not made the VP R&D
of the acquiring corporation) shall not constitute an
"Involuntary Termination" (ii) a reduction by the
Company of the Employee's base salary as in effect
immediately prior to such reduction; (iii) a material
reduction by the Company in the kind or level of
employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly
reduced; (iv) without the Employee's express written
consent, the relocation of the Employee to a facility or
a location more than fifty (50) miles from his current
location; (v) any purported termination of the Employee
by the Company which is not effected for Cause or for
which the grounds relied upon are not valid; or (vi) the
failure of the Company to obtain the assumption of this
Agreement by any successors.
Sincerely,
UROQUEST MEDICAL CORPORATION
/s/ TERRY E. SPRAKER
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
ACCEPTED: /s/ KEITH WARD
-------------------------
Keith Ward
<PAGE> 1
EXHIBIT 10.10
February 18, 1998
Mr. Alan Marquardt
3206 Belvedere Court
Pleasanton, CA 94588
Dear Alan:
The following sets forth the terms of your employment with UroQuest:
Position/Title: VP - Regulatory and Clinical, Quality Affairs
Salary: Salary of $147,000 per annum to be reviewed at our
annual increase time of April 1 each year. This initial
salary will be your salary through April 1, 1999.
Bonus: 30% (maximum) of salary based on objectives to be
mutually agreed upon. Such objectives will be a
combination of personal as well as corporate targets.
Your bonus for 1998 will be prorated based on the time
you spend working at UroQuest during 1998 and will be
guaranteed at 30% of your 1998 salary, subject to
proration.
Stock Options: 120,000 shares whose vesting will occur over a four (4)
year period commencing with your start of employment.
The price of those options will be based on the fair
market price at the date of grant, which date will
approximate your date of hire.
Vacation: You will be entitled to two weeks per year. This will be
increased to three weeks at the completion of your fifth
year of service. You will be granted an additional six
weeks paid time off during 1998.
Benefits: UroQuest will provide customary benefits such as
medical, dental and life insurance. Each employee will
be required to
<PAGE> 2
Mr. Alan Marquardt
February 18, 1998
Page 2 of 5
make certain contributions toward this coverage. In
addition, UroQuest sponsors a 401(K) plan that allows
each employee to contribute up to 15% of his or her
salary to the plan. The Company will match, at a 100%
rate, up to 4% of your salary contribution. You will
become eligible to participate in the 401(K) plan on
your one-year anniversary. You will also be eligible to
participate in the Company's Employee Stock Purchase
Plan.
Loan: You will be granted a $200,000 loan, interest free, at
the time you exercise your BSC options. Such loan will
be repayable at the end of 20 months. The loan will be
secured by sufficient shares of BSC stock at all times
to cover the loan balance (the Company and you will
execute a separate loan and security agreement to
formalize this arrangement). Per IRS guidelines you may
be subject to imputation of interest regarding this
loan.
Start Date: March 2, 1998
Proprietary
Information: You agree to execute the Company's standard form of
employee proprietary information and inventions
agreement.
Resolution of
Disputes;
Arbitration: Any disputes between the parties relating in any way to
this Agreement, including without limitation, the
termination of your employment with UroQuest, shall be
resolved by arbitration.
Successors;
Entire Agreement: This Agreement shall be binding upon any successor to
the Company, whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or
otherwise. The terms of this Agreement and all your
rights hereunder shall inure to the benefit of, and be
enforceable by, your personal or legal representatives,
executors, administrators, successors, heirs,
distributees, devisees and legatees. The terms of this
Agreement, including the terms of the proprietary
information and inventions agreement to be executed, are
intended by the parties to be the final expression of
their agreement with respect to your employment by the
Company and may not be contradicted by evidence of any
prior contemporaneous agreements. If
<PAGE> 3
Mr. Alan Marquardt
February 18, 1998
Page 3 of 5
any provision of this Agreement, or the application
thereof, shall be held to be invalid or unenforceable,
or void, the remainder of this Agreement shall remain in
full force and effect.
Amendment;
Governing Law: This Agreement may not be amended or modified except by
writing signed by you and the Company. The terms of this
Agreement and the resolution of disputes shall be
governed by California Law.
At Will: Employee's employment with the Company may be terminated
at any time, with or without good cause or for any or no
cause with or without notice.
Option Acceleration: If your employment with the Company terminates as a
result of an Involuntary Termination other than for
Cause at anytime within twelve (12) months after a
Change of Control, then the vesting and exercisability
of each unvested option granted to you by the Company
(the "Options") shall be automatically accelerated in
full; provided, however, that if it is determined by the
Company's independent public accountants that such
acceleration would preclude accounting for the Change of
Control as a pooling of interests for financial
accounting purposes, and it is a condition to the
closing of the Change of Control that the transaction be
accounted for as a pooling of interests, then the
vesting and exercisability of the Options shall not
accelerate pursuant to this Section.
Definitions: (a) Cause. "Cause" shall mean the occurrence of any one
or more of the following: (i) the Employee's conviction
by, or entry of a plea of guilty or nolo contender in, a
court of final jurisdiction for any crime which
constitutes a felony in the jurisdiction involved (other
than a felony traffic offense); (ii) the Employee's
misappropriation of funds or commission of a material
act of fraud, whether prior or subsequent to the date
hereof, upon the Company; (iii) gross negligence by the
Employee in the scope of the Employee's services to the
Company; (iv) a willful breach by the Employee of a
material provision of this Agreement; or (v) a willful
failure of the Employee to substantially perform his
duties hereunder. Notwithstanding the foregoing, the
Employee shall not be
<PAGE> 4
Mr. Alan Marquardt
February 18, 1998
Page 4 of 5
deemed to have been terminated for Cause under clause
(iii), (iv) or (v) of this Section 8(a) unless the
Company delivers a written notice to the Employee
setting forth the reasons for the Company's intention to
terminate for Cause and specifically identifying the
manner in which the Company believes that the Employee
has engaged in such conduct, which conduct is not
substantially corrected by the Employee within 10 days
following his receipt of such notice, and provides the
Employee with an opportunity, together with his counsel,
if any, to be heard by the Company.
(b) Change of Control. "Change of Control" shall mean
the occurrence of any of the following events:
(i) The approval by shareholders of the Company of a
merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than fifty percent (50%) of the total
voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately
after such merger or consolidation;
(ii) Any approval by the shareholders of the Company of
a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets; or
(iii) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becoming the "beneficial owner" (as defined
in Rule 13d-3 under said Act), directly or indirectly,
of securities of the Company representing 50% or more of
the total voting power represented by the Company's then
outstanding voting securities.
(c) Involuntary Termination. "Involuntary Termination"
shall mean (i) without the Employee's express written
consent, a significant reduction of the Employee's
duties, position or responsibilities relative to the
Employee's duties, position or
<PAGE> 5
Mr. Alan Marquardt
February 18, 1998
Page 5 of 5
responsibilities in effect immediately prior to such
reduction, or the removal of the Employee from such
position, duties and responsibilities, unless the
Employee is provided with comparable duties, position
and responsibilities; provided, however, that a
reduction in duties, position or responsibilities solely
by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the VP R&D of the
Company remains as such following a Change of Control
but is not made the VP R&D of the acquiring corporation)
shall not constitute an "Involuntary Termination" (ii) a
reduction by the Company of the Employee's base salary
as in effect immediately prior to such reduction; (iii)
a material reduction by the Company in the kind or level
of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly
reduced; (iv) without the Employee's express written
consent, the relocation of the Employee to a facility or
a location more than fifty (50) miles from his current
location; (v) any purported termination of the Employee
by the Company which is not effected for Cause or for
which the grounds relied upon are not valid; or (vi) the
failure of the Company to obtain the assumption of this
Agreement by any successors.
Sincerely,
UROQUEST MEDICAL CORPORATION
/s/ TERRY E. SPRAKER
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
ACCEPTED: /s/ ALAN MARQUARDT
-------------------------
Alan Marquardt
<PAGE> 1
EXHIBIT 10.15
NOTE
$350,000.00 Menlo Park, CA
January 9, 1998
Thirty (30) days after demand, Richard C. Davis, M.D. ("Borrower")
promises to pay to the order of UroQuest Medical Corporation, a Delaware
corporation (the "Company"), at 173 Constitution Drive, Menlo Park, California
94025, or at such other place as the holder of this note may designate, the
principal sum of Three Hundred Fifty Thousand Dollars ($350,000), together with
interest on the unpaid principal amount from the date hereof until paid at the
rate of five and six-tenths percent (5.60%) per annum, computed as if each year
consisted of three hundred sixty (360) days and each month consisted of thirty
(30) days, or such portion thereof as may be demanded; successive demands may be
made until the entire amount due hereunder has been paid.
If any part of the principal hereof is not paid when due, such part of
the principal will bear interest from the due date at the maximum rate permitted
by law until the date of payment.
The Borrower may at any time prepay all or any portion of the principal
owing hereunder.
This Note is secured in part by a pledge of the Company's Common Stock
under the terms of a Security Agreement of even date herewith and is subject to
all the provisions thereof.
The holder of this Note shall have full recourse against the Borrower,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
Demands hereunder shall be deemed to have been received by the Borrower
if delivered or telecopied to the address below on the date thereof, or three
(3) days after having been mailed postpaid in the United States mails, so
addressed. The Borrower may change the address for notices by written notice to
the holder of this note.
If any provision of this note is held invalid or unenforceable, it shall
not affect the validity and enforceability of the other provisions of this note.
If actions are taken to enforce this note, the Borrower agrees to pay
all costs of collection, including, but not limited to, reasonable attorney's
fees incurred by the holder hereof on account of such collection, whether or not
suit is filed hereon.
<PAGE> 2
This note is executed and delivered in, and shall in all respects be
governed by and construed in accordance with, the laws of the State of
California, including all matters of construction, validity and performance.
/s/ Richard C. Davis, M.D.
----------------------------------------
Richard C. Davis, M.D.
-2-
<PAGE> 3
SECURITY AGREEMENT
This Security Agreement is made as of January 9, 1998 between UroQuest
Medical Corporation, a Delaware corporation ("Pledgee"), and Richard C. Davis,
M.D. ("Pledgor").
Recitals
Pursuant to Pledgor's Note dated and given to Pledgee on the date hereof
(the "Note"), Pledgor has borrowed $350,000.00 from Pledgee and wishes to secure
repayment of the Note with shares of Pledgee's Common Stock (the "Shares").
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the loan of $350,000.00 to Pledgor under the Note, Pledgor, pursuant to the
California Commercial Code, hereby pledges 350,000 Shares (herein sometimes
referred to as the "Collateral") represented by certificate number ______, duly
endorsed in blank or with executed stock powers, and herewith delivers said
certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said
certificate subject to the terms and conditions of this Security Agreement.
The pledged stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, executed by Pledgor, and the Pledgeholder shall not encumber or dispose
of such Shares except in accordance with the provisions of this Security
Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE> 4
c. Margin Regulations. In the event that Pledgee's Common Stock
is now or later becomes margin-listed by the Federal Reserve Board and Pledgee
is classified as a "lender" within the meaning of the regulations under Part 207
of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees
to cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants contained in
this Security Agreement for a period of 10 days after written notice thereof
from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
-2-
<PAGE> 5
7. Release of Collateral. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal of
the Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
governed under the laws of the State of California.
-3-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" By: /s/ Richard C. Davis, M.D.
----------------------------------
Richard C. Davis, M.D.
Address: 4870 Longwater Way
----------------------------------
Tampa, FL 33615
----------------------------------
"PLEDGEE" UROQUEST MEDICAL CORP.
a Delaware corporation
By: /s/ Jeffrey L. Kaiser
-----------------------------------------
Title: Chief Financial Officer
"PLEDGEHOLDER" /s/ Jeffrey L. Kaiser
-------------------------------------------------
Jeffrey Kaiser
Secretary of
UroQuest Medical Corp.
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT OF UROQUEST MEDICAL
CORPORATION, INCLUDING THE NOTES THERETO, OF MARCH 31, 1998 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,448,703
<SECURITIES> 0
<RECEIVABLES> 2,864,347
<ALLOWANCES> 60,000
<INVENTORY> 2,436,811
<CURRENT-ASSETS> 15,954,235
<PP&E> 6,772,911
<DEPRECIATION> 2,353,918
<TOTAL-ASSETS> 31,261,631
<CURRENT-LIABILITIES> 3,532,140
<BONDS> 0
0
0
<COMMON> 12,034
<OTHER-SE> 26,543,268
<TOTAL-LIABILITY-AND-EQUITY> 31,261,631
<SALES> 4,022,987
<TOTAL-REVENUES> 4,022,987
<CGS> 2,066,515
<TOTAL-COSTS> 2,066,515
<OTHER-EXPENSES> 2,950,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,827
<INCOME-PRETAX> (896,724)
<INCOME-TAX> 11,000
<INCOME-CONTINUING> (907,724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (907,724)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
