<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
JUNE 30, 1998 0-20963
UROQUEST MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 59-3176454
(state or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
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.
Class Outstanding at July 31, 1998
- ----------------------------- ----------------------------
Common Stock, $.001 par value 12,090,322
<PAGE> 2
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for the Three
Months and the Six Months Ended June 30, 1998 and 1997
(unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 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
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ................................... $ 4,497,483 $ 3,985,780 $ 8,520,470 $ 7,660,378
Cost of sales ............................... 2,243,478 2,195,524 4,309,993 4,062,087
------------ ------------ ------------ ------------
Gross profit .............................. 2,254,005 1,790,256 4,210,477 3,598,291
------------ ------------ ------------ ------------
Operating expenses:
Research and development .................. 1,089,092 711,977 2,004,515 1,295,296
General and administrative ................ 1,114,279 936,932 2,349,263 1,717,062
Sales and marketing ....................... 729,712 420,288 1,371,988 799,802
Severance costs ........................... -- 1,600,000 -- 1,600,000
Amortization of goodwill .................. 158,046 157,356 316,092 328,637
------------ ------------ ------------ ------------
Total operating expenses ................ 3,091,129 3,826,553 6,041,858 5,740,797
------------ ------------ ------------ ------------
Operating loss .............................. (837,124) (2,036,297) (1,831,381) (2,142,506)
Other income (expense):
Interest expense .......................... (32,888) (47,391) (67,715) (98,408)
Interest income ........................... 115,836 152,807 248,196 294,213
------------ ------------ ------------ ------------
Other income (expenses), net ............ 82,948 105,416 180,481 195,805
Loss before provision for income taxes ...... (754,176) (1,930,881) (1,650,900) (1,946,701)
Provision for income taxes .................. 30,000 35,000 41,000 82,000
------------ ------------ ------------ ------------
Net loss .................................... $ (784,176) $ (1,965,881) $ (1,691,900) $ (2,028,701)
============ ============ ============ ============
Basic and diluted net loss per share ........ $ (0.07) $ (0.17) $ (0.14) $ (0.17)
============ ============ ============ ============
Weighted average shares used in computing
basic and diluted net loss per share ...... 12,034,412 11,844,602 11,996,015 11,844,602
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 8,443,450 $ 11,054,088
Accounts receivable, net of allowance for doubtful accounts ..... 3,109,541 2,610,764
Inventories ..................................................... 2,671,691 2,449,072
Prepaid expenses and other current assets ....................... 281,523 317,319
------------ ------------
Total current assets ....................................... 14,506,205 16,431,243
------------ ------------
Property, plant and equipment, net .................................... 4,720,320 4,413,131
Goodwill and intangible assets, at cost, less
accumulated amortization ........................................ 10,697,429 11,079,377
Other noncurrent asset ................................................ 200,000 --
------------ ------------
Total assets ............................................... $ 30,123,954 $ 31,923,751
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 620,992 $ 659,769
Accrued compensation ............................................ 567,504 599,306
Accrued severance costs ......................................... 268,113 666,376
Other accrued expenses .......................................... 1,348,793 810,790
Current portion of long-term debt ............................... 490,360 490,360
------------ ------------
Total current liabilities .................................. 3,295,762 3,226,601
------------ ------------
Long-term debt, net of current portion ................................ 1,053,264 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;
12,034,939 and 11,954,010 shares issued and outstanding
as of June 30, 1998 and December 31, 1997, respectively ... 12,035 11,954
Additional paid-in capital ...................................... 37,036,310 36,979,740
Deferred compensation ........................................... (39,265) (45,467)
Accumulated deficit ............................................. (11,234,152) (9,542,252)
------------ ------------
Total stockholders' equity ................................. 25,774,928 27,403,975
------------ ------------
Total liabilities and stockholders' equity ................. $ 30,123,954 $ 31,923,751
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (1,691,900) $ (2,028,701)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ....................... 813,890 738,460
Changes in operating assets and liabilities:
Accounts receivable ............................. (498,777) (334,270)
Inventories ..................................... (222,619) (191,611)
Prepaid expenses and other assets ............... 35,796 88,365
Accounts payable and accrued expenses ........... 467,424 100,596
Accrued severance costs ......................... (398,263) 1,572,180
------------ ------------
Net cash used in operating activities .... (1,494,449) (54,981)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ...... (732,929) (230,613)
Other asset ..................................... (200,000) --
------------ ------------
Net cash used in investing activities .... (932,929) (230,613)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .......... 56,651 --
Repayment of notes payable and long-term debt ... (239,911) (367,816)
------------ ------------
Net cash used in financing activities ...... (183,260) (367,816)
------------ ------------
Net decrease in cash and cash equivalents ................. (2,610,638) (653,410)
Cash and cash equivalents at beginning of period .......... 11,054,088 12,694,047
------------ ------------
Cash and cash equivalents at end of period ................ $ 8,443,450 $ 12,040,637
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest .............................. $ 68,028 $ 98,408
Cash paid for income taxes .......................... -- 80,000
</TABLE>
5
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
UROQUEST MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1998, the results of its
operations for the three months and the six months ended June 30, 1998 and 1997,
and its cash flow for the six months ended June 30, 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 in annual
financial statements 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. 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
financial reporting.
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.
6
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UROQUEST MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Finished goods........................... $ 633,858 $ 589,169
Work-in-process.......................... 1,344,184 1,046,127
Raw materials and supplies............... 693,649 813,776
----------- -----------
$ 2,671,691 $ 2,449,072
=========== ===========
</TABLE>
7
<PAGE> 8
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 and the Company's annual report on Form 10-K for the
year ended December 31, 1997. 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, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended 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
primarily 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. 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.
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. All of the Company's current revenues relate to
sales of BMT products. BMT is one of a limited number of specialty manufacturers
of silicone catheters in the United States. BMT manufactures the Company's
On-Command product currently being used in clinical trials.
The Company has experienced substantial losses since inception and, as of
June 30, 1998, had an accumulated deficit of $11.2 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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 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 13% to $4,497,000 for the three months
ended June 30, 1998 from $3,986,000 for the three months ended June 30, 1997.
The increase is attributable primarily to the increased quantities of
proprietary products sold and products sold on an OEM basis. Cost of sales of
$2,243,000 for the second quarter ended June 30, 1998 increased 2% from
$2,196,000 for the same quarter of 1997, due primarily to the increase in sales.
Gross margin for the second quarter of 1998 increased to 50% from 45% for the
same period in prior year. The improvement in gross margin is due primarily to
favorable sales mix of higher margin proprietary products and certain
manufacturing efficiencies.
8
<PAGE> 9
Research and development. Research and development expenses include product
development, clinical testing and regulatory expenses. For the three months
ended June 30, 1998 research and development expenses increased to $1,089,000
from $712,000 for the three months ended June 30, 1997. The increase was
attributable primarily to the increase in research and development expenditures
primarily related to the On-Command product and additional clinical and
site-monitoring personnel hired to assist in the completion of the clinical
study necessary to support regulatory submissions. Research and development
expenses are expected to continue to increase in the foreseeable future.
General and administrative. General and administrative expenses increased
to $1,114,000 for the quarter ended June 30, 1998 from $937,000 for the quarter
ended June 30, 1997. The increase was attributable primarily to increased
personnel costs, facilities and other expenses. 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 $730,000 for
the three months ended June 30, 1998 from $420,000 for the three months ended
June 30, 1997. This increase was due primarily to the commencement of marketing
and international distribution efforts related to the On-Command product. Sales
and marketing expenses are expected to increase in the foreseeable future, due
in part to the Company's limited marketing studies of the On-Command product
anticipated to begin in Europe in the second half of 1998.
Severance costs. The Company did not recognize any severance costs in the
three months ended June 30, 1998. Severance costs of $1,600,000 incurred in the
three months ended June 30, 1997 were related to the employment termination of
certain members of senior management in May 1997. Of this amount, approximately
$713,000 was related to non-cash compensation expense due to the acceleration of
vesting periods for stock options.
Amortization of goodwill. Amortization of goodwill of $158,000 for the
quarter ended June 30, 1998 and $157,000 for the quarter ended June 30, 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) decreased to net interest
income of $83,000 for the three months ended June 30, 1998 from a net interest
income of $105,000 for the same period in 1997. Interest income decreased to
$116,000 for the second quarter of 1998 from $153,000 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 $33,000 for the second quarter of 1998 from $47,000 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 incurred any new loans.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 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 11% to $8,520,000 for the six months ended
June 30, 1998 from $7,660,000 for the six months ended June 30, 1997. The
increase is attributable primarily to the increase in sales of proprietary
products. Cost of sales of $4,310,000 for the six months ended June 30, 1998
increased 6% from $4,062,000 for the same period in 1997, due primarily to the
increase in sales. Gross margin for the six months ended June 30, 1998 increased
to 49% from 47% for the same period in prior year. The improvement in gross
margin is due primarily to favorable sales mix of higher margin proprietary
products and certain manufacturing efficiencies.
9
<PAGE> 10
Research and development. Research and development expenses include product
development, clinical testing and regulatory expenses. For the six months ended
June 30, 1998 research and development expenses increased to $2,005,000 from
$1,295,000 for the six months ended June 30, 1997. The increase was attributable
primarily to the increase in research and development expenditures primarily
related to the On-Command product and additional clinical and site-monitoring
personnel hired to assist in the completion of the clinical study necessary to
support regulatory submissions. Research and development expenses are expected
to continue to increase in the foreseeable future.
General and administrative. General and administrative expenses increased
to $2,349,000 for the six months ended June 30, 1998 from $1,717,000 for the six
months ended June 30, 1997. The increase was attributable primarily to increased
personnel costs, facilities and other expenses. 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 $1,372,000
for the six months ended June 30, 1998 from $800,000 for the six months ended
June 30, 1997. This increase was due primarily to the commencement of marketing
and international distribution efforts related to the On-Command product. Sales
and marketing expenses are expected to increase in the foreseeable future, due
in part to the Company's limited marketing studies of the On-Command product
anticipated to begin in Europe in the second half of 1998.
Severance costs. The Company did not recognize any severance costs in the
six months ended June 30, 1998. Severance costs of $1,600,000 incurred in the
six months ended June 30, 1997 were related to the employment termination of
certain members of senior management in May 1997. Of this amount, approximately
$713,000 was related to non-cash compensation expense due to the acceleration of
vesting periods for stock options.
Amortization of goodwill. Amortization of goodwill of $316,000 for the six
months ended June 30, 1998 and $329,000 for the six months ended June 30, 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) decreased to net interest
income of $180,000 for the six months ended June 30, 1998 from a net interest
income of $196,000 for the same period in 1997. Interest income decreased to
$248,000 for the six months ended June 30, 1998 from $294,000 for the six months
ended June 30, 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 $68,000 for the six months ended June
30, 1998 from $98,000 for the same period in 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 incurred any new loans.
PROVISION FOR INCOME TAXES:
The Company recorded a $30,000 and $35,000 provision for state income taxes
for the three months ended June 30, 1998 and 1997, respectively. For the six
months ended June 30, 1998 and 1997, the provision for state income taxes
recorded is $41,000 and $82,000, respectively. The provision for state income
taxes is recorded primarily as a result of taxable income earned by the
Company's 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 June 30, 1998 and December 31, 1997 to reflect these
uncertainties.
10
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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.
Based on modifications planned or already made, the Company believes its
internal software will be Year 2000 compliant by the end of the 1998 calendar
year. Thus far, management has determined the financial impact of such
modifications to be immaterial. 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 as well as deliveries of goods and services
from vendors 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. In addition, the
timing of the delivery of goods and services by vendors may be altered due to
Year 2000 vendor software issues. The Company plans to make inquiries to certain
of its key customers and vendors and does not know what the results of such
inquiries will be.
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 from equity financings which
include the net proceeds of $17.8 million from the initial public offering of
the Company's Common Stock in October 1996.
During the six months ended June 30, 1998, net cash used in operating
activities amounted to $1,494,000. During the six months ended June 30, 1997,
net cash used in operating activities amounted to $55,000. The increase in net
cash flows used in operating activities in the first half of 1998 compared to
the same period in 1997 was due primarily to increased activities in research
and development, general and administrative, and sales and marketing operations,
and cash severance payments.
Additions of property and equipment for the six months ended June 30, 1998
and 1997 were $733,000 and $231,000, respectively. The Company expects the
increase in additions of property and equipment to continue during 1998 due
primarily to additional purchases of property and equipment to support the
urological product development and infrastructure development at BMT.
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.
11
<PAGE> 12
As of June 30, 1998 and December 31, 1997, the Company had cash of
$8,443,000 and $11,054,000, respectively. The decrease since December 31, 1997
was due primarily to the net cash used in operations, purchases of fixed assets
and repayment of long-term debt. As of June 30, 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 June 30,
1999. 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.
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
development, 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 fifteen
months, the Company has expanded the number of sites participating in the
clinical study, hired additional clinical and site-monitoring personnel and
increased the
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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. The Company anticipates completing the
clinical study during the third quarter of this year. 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
submitted an IDE in the second quarter of 1998 to begin a multi-center trial in
support of a PMA application for a chronic indication for the Male On-Command
product. The FDA has given the Company approval to begin the chronic study,
conditional to addressing several questions raised by the agency. The Company is
in the process of discussing and clarifying these issues with the agency and
anticipates beginning the study 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 has
been completed and a report on the feasibility study has been submitted to FDA
in the second quarter of 1998. The results of this study have been 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 approved, the Company anticipates beginning the clinical trial in support of
a regulatory application for an acute indication for the Female On-Command
product during the fourth 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 regulatory application or that such application will be approved by the
FDA. 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, 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 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 source of most 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. The life cycle of the On-Command product is difficult to estimate,
particularly in light of continued technological advances, 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 health care professionals and the time
required to complete such training could result in a delay or dampening of
market acceptance.
13
<PAGE> 14
Additionally, health care payers' approval of sufficient reimbursement levels
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 June 30, 1998, had an
accumulated deficit of approximately $11.2 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
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
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 trials 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 is required to adhere to applicable FDA regulations regarding Good
Manufacturing Practices ("GMP") and with Medical Device Reporting ("MDR")
requirements and similar regulations in other countries, which include testing,
control, and documentation 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.
14
<PAGE> 15
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.
The CE mark allows the On-Command product to be commercially available in the
European Economic Community. Some countries in which the Company intends to sell
devices through distributors either do not currently regulate medical devices
such as the On-Command product or have minimal registration requirements other
than the CE mark requirement. 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 or
maintain the required clearances or approvals, both domestically and
internationally, which would allow the Company to market the On-Command product
or other products 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 devices. If the FDA requires BMT to
submit a new 510(k) notice for any device modification, BMT may be required to
recall the modified device and/or 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
acknowledged BMT's responses and planned actions to address the FDA's concerns
and informed BMT that the FDA was planning a follow-up inspection in 1998, which
to date has not yet occurred. 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 plans to begin limited marketing studies of the On-Command product in
Europe in the second half of 1998, and intends to market the On-Command product
internationally through independent foreign distribution arrangements, none of
which are formally 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.
16
<PAGE> 16
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.
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 urological disorders. 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
16
<PAGE> 17
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 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 June 30, 1999, 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
17
<PAGE> 18
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 future royalty payments. 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 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.
18
<PAGE> 19
Approximately 45% and 39% of BMT's net sales during 1997 and the six months
ended June 30, 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 six months ended June 30, 1998, BMT derived approximately
24% and 16%, respectively, of its net sales from one such customer. There can be
no assurance that BMT's 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 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.
19
<PAGE> 20
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 June 30, 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 -- 198,441 198,441
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 880,393 2,570,135 3,450,528
Other purposes:
- Clinical trials and research and development 140,682 1,298,309 1,438,991
- Sales and marketing activities 153,278 609,401 762,679
- Severance payments 423,791(2) 64,901 488,692
----------- ----------- ------------
10,226,693 7,015,188 17,241,881
Temporary investment:
- Cash and cash equivalents -- 561,469 561,469
----------- ----------- ------------
$10,226,693 $ 7,576,657 $ 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 $3.5 million for
working capital and general corporate purposes.
Item 3 - Defaults upon Senior Securities
Not applicable.
20
<PAGE> 21
Item 4 - Submission of Matters to a Vote of Security Holders
The Company solicited proxies for an annual meeting of stockholders on June
25, 1998 to all of the Company's stockholders. The election of all directors was
conducted and the following nominees were elected: Richard C. Davis, M.D., Terry
E. Spraker, Ph.D., Tom E. Brandt, Jack W. Lasersohn, Gary Nei, Maynard Ramsey,
III, M.D. Ph.D., Elizabeth H. Weatherman. The vote with respect to each nominee
was as follows:
<TABLE>
<CAPTION>
Votes Votes
Name For Withheld
- ---- ----- --------
<S> <C> <C>
Richard C. Davis, M.D. 10,149,780 38,952
Terry E. Spraker, Ph.D. 8,300,157 1,888,575
Tom E. Brandt 10,149,780 38,952
Jack W. Lasersohn 8,299,257 1,889,475
Gary Nei 10,146,480 42,252
Maynard Ramsey, III, M.D. Ph.D. 10,148,780 39,952
Elizabeth H. Weatherman 10,147,380 41,352
</TABLE>
Ernst & Young LLP was ratified as the independent auditors of the Company
for the fiscal year ending December 31, 1998 with 10,116,982 votes in favor,
6,050 votes against and 65,700 abstentions.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
10.16 Note and Security Agreement between the Company
and Alan Marquardt dated May 7, 1998
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended June 30, 1998.
21
<PAGE> 22
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: August 13, 1998 /s/ Terry E. Spraker, Ph.D.
-------------------------------------
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
Date: August 13, 1998 /s/ Jeffrey L. Kaiser
-------------------------------------
Jeffrey L. Kaiser
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial Officer)
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.16 Note and Security Agreement between the Company and
Alan Marquardt dated May 7, 1998.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.16
NOTE
200,000.00 Menlo Park, CA
May 7, 1998
Upon the close of business on January 7, 2000, Alan Marquardt ("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 Two Hundred Thousand Dollars ($200,000), which sum shall be
free from interest for the term of this Note.
If 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 without penalty.
This Note is secured in by a pledge of the Borrower's Common Stock of
Boston Scientific Corporation, a Delaware corporation, 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 no recourse against the Borrower, and may
only proceed against the collateral securing this Note in the event of default.
Notices 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/ Alan Marquardt
--------------------------
Alan Marquardt
3206 Belvedere Ct.
--------------------------
Address
Pleasanton, CA 94588
--------------------------
-2-
<PAGE> 3
SECURITY AGREEMENT
This Security Agreement is made as of May 7, 1998 between UroQuest Medical
Corporation, a Delaware corporation ("Pledgee"), and Alan Marquardt ("Pledgor").
Recitals
Pursuant to Pledgor's Note dated and given to Pledgee on the date hereof
(the "Note"), Pledgor has borrowed $200,000.00 from Pledgee and wishes to secure
repayment of the Note with shares of Pledgee's Common Stock (the "Shares") in
Boston Scientific Corporation, a Delaware corporation, ("BSC").
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of the
loan of $200,000.00 to Pledgor under the Note, Pledgor, pursuant to the
California Commercial Code, hereby pledges 4,000 shares (herein sometimes
referred to as the "Shares" or "Collateral") represented by certificate number
FBU 32774, 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 if required, 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 BSC's Common Stock is now
or later becomes margin-listed by the Federal Reserve Board and BSC 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, as the case may be, 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. Collateral Adjustments.
(a) 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 BSC, 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.
(b) In the event that during the term of the pledge the average of the
Share's daily closing prices, as quoted in the Western Edition of the Wall
Street Journal, over a fifteen (15) day period ("Average Period") is less than
or equal to fifty (50) dollars per Share; provided, however, that any Average
Period shall not overlap with any other Average Period, Pledgor shall execute
such documents as are reasonable so as to deliver additional Shares to the
Pledgee The Pledgor shall deliver such number of additional Shares such that
after delivery the quotient obtained by dividing: (i) the product of (a) the
number of pledged Shares and (b) the Shares' closing price on the date of
transfer, by (ii) the outstanding balance of the Note, shall be equal to or
greater than one point two (1.2). The Pledgor's delivery of such additional
Shares shall occur no later than three (3) days following the Pledgor's receipt
of notice of the Pledgee's request for additional Shares ("Request Notice").
Such Request Notice shall contain the fifteen day period used, the Shares' daily
closing price, and the average closing price over such period. Such additional
Shares shall be held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. Upon such
additional delivery, references to "Shares" in this Security Agreement shall
include such additional Shares.
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
-2-
<PAGE> 5
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.
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.
-3-
<PAGE> 6
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.
-4-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" By: /s/ Alan Marquardt
------------------------------
Alan Marquardt
Address: 3206 Belvedere Ct.
------------------------------
Pleasanton, CA 94588
------------------------------
"PLEDGEE" UROQUEST MEDICAL CORP.
a Delaware corporation
By: /s/ Jeffrey L. Kaiser
------------------------------
Title: Chief Financial Officer
---------------------------
"PLEDGEHOLDER" /s/Jeffrey L. Kaiser
---------------------------------
Jeffrey L. Kaiser
Secretary of
UroQuest Medical Corp.
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF UROQUEST MEDICAL
CORPORATION, INCLUDING THE NOTES THERETO, OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,443,450
<SECURITIES> 0
<RECEIVABLES> 3,169,541
<ALLOWANCES> 60,000
<INVENTORY> 2,671,691
<CURRENT-ASSETS> 14,506,205
<PP&E> 7,293,968
<DEPRECIATION> 2,573,648
<TOTAL-ASSETS> 30,123,954
<CURRENT-LIABILITIES> 3,295,762
<BONDS> 0
0
0
<COMMON> 12,035
<OTHER-SE> 25,762,893
<TOTAL-LIABILITY-AND-EQUITY> 30,123,954
<SALES> 8,520,470
<TOTAL-REVENUES> 8,520,470
<CGS> 4,309,993
<TOTAL-COSTS> 4,309,993
<OTHER-EXPENSES> 6,041,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,715
<INCOME-PRETAX> (1,650,900)
<INCOME-TAX> 41,000
<INCOME-CONTINUING> (1,691,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,691,900)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
