<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
SEPTEMBER 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 October 30, 1998
- ----------------------------- -------------------------------
Common Stock, $.001 par value 12,118,322
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for the Three
Months and the Nine Months Ended September 30, 1998 and 1997
(unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
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 September 30, Nine months ended September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................... $ 4,426,670 $ 4,287,298 $ 12,947,140 $ 11,947,676
Cost of sales ........................... 2,210,863 2,515,033 6,520,856 6,577,120
------------ ------------ ------------ ------------
Gross profit .......................... 2,215,807 1,772,265 6,426,284 5,370,556
------------ ------------ ------------ ------------
Operating expenses:
Research and development .............. 986,520 680,025 2,991,036 1,975,321
General and administrative ............ 1,263,593 1,147,471 3,612,856 2,864,533
Sales and marketing ................... 638,387 613,495 2,010,375 1,413,297
Severance costs ....................... -- -- -- 1,600,000
Amortization of goodwill .............. 158,046 157,359 474,138 485,996
------------ ------------ ------------ ------------
Total operating expenses ............ 3,046,546 2,598,350 9,088,405 8,339,147
------------ ------------ ------------ ------------
Operating loss .......................... (830,739) (826,085) (2,662,121) (2,968,591)
Other income (expense):
Interest expense ...................... (39,156) (43,816) (106,871) (142,224)
Interest income ....................... 107,932 157,763 356,129 451,976
------------ ------------ ------------ ------------
Other income (expenses), net ........ 68,776 113,947 249,258 309,752
Loss before provision for income taxes .. (761,963) (712,138) (2,412,863) (2,658,839)
Provision for income taxes .............. 35,000 40,000 76,000 122,000
------------ ------------ ------------ ------------
Net loss ................................ $ (796,963) $ (752,138) $ (2,488,863) $ (2,780,839)
============ ============ ============ ============
Basic and diluted net loss per share .... $ (0.07) $ (0.06) $ (0.21) $ (0.23)
============ ============ ============ ============
Weighted average shares used in computing
basic and diluted net loss per share .. 12,087,222 11,879,566 12,026,752 11,856,385
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 7,757,864 $ 11,054,088
Accounts receivable, net of allowance for
doubtful accounts ..................................... 2,792,342 2,610,764
Inventories ............................................. 2,797,611 2,449,072
Prepaid expenses and other current assets ............... 258,264 317,319
------------ ------------
Total current assets ................................. 13,606,081 16,431,243
------------ ------------
Property, plant and equipment, net .......................... 4,826,816 4,413,131
Goodwill and intangible assets, at cost, less
accumulated amortization ................................ 10,506,455 11,079,377
Other noncurrent asset ...................................... 200,000 --
------------ ------------
Total assets ......................................... $ 29,139,352 $ 31,923,751 .
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 488,043 $ 659,769
Accrued compensation .................................... 853,403 599,306
Accrued severance costs ................................. 123,199 666,376
Other accrued expenses .................................. 1,163,085 810,790
Current portion of long-term debt ....................... 490,360 490,360
------------ ------------
Total current liabilities ............................ 3,118,090 3,226,601
------------ ------------
Long-term debt, net of current portion ...................... 929,619 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; 12,118,322 and 11,954,010
shares issued and outstanding as of September
30, 1998 and December 31, 1997,
respectively ........................................ 12,118 11,954
Additional paid-in capital .............................. 37,146,806 36,979,740
Deferred compensation ................................... (36,166) (45,467)
Accumulated deficit ..................................... (12,031,115) (9,542,252)
------------ ------------
Total stockholders' equity ........................... 25,091,643 27,403,975
------------ ------------
Total liabilities and stockholders' equity ........... $ 29,139,352 $ 31,923,751
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
UROQUEST MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (2,488,863) $ (2,780,839)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................................... 1,239,640 1,114,603
Severance expense related to accelerated vesting of stock options -- 712,983
Changes in operating assets and liabilities:
Accounts receivable ......................................... (181,578) (926,876)
Inventories ................................................. (348,539) (283,445)
Prepaid expenses and other assets ........................... 59,055 99,812
Accounts payable and accrued expenses ....................... 434,666 796,144
Accrued severance costs ..................................... (543,177) 762,601
------------ ------------
Net cash used in operating activities ................ (1,828,796) (505,017)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .................. (1,071,102) (510,931)
Other asset ................................................. (200,000) --
------------ ------------
Net cash used in investing activities ................ (1,271,102) (510,931)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 167,230 43,333
Repayment of notes payable and long-term debt ............... (363,556) (480,275)
------------ ------------
Net cash used in financing activities ................... (196,326) (436,942)
------------ ------------
Net decrease in cash and cash equivalents .............................. (3,296,224) (1,452,890)
Cash and cash equivalents at beginning of period ....................... 11,054,088 12,694,047
------------ ------------
Cash and cash equivalents at end of period ............................. $ 7,757,864 $ 11,241,157
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ........................................... $ 86,426 $ 142,224
Cash paid for income taxes ....................................... 15,000 80,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
UROQUEST MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1998, the results of its
operations for the three months and the nine months ended September 30, 1998 and
1997, and its cash flows for the nine months ended September 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
<PAGE> 7
UROQUEST MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Finished goods ........................ $ 853,443 $ 589,169
Work-in-process ....................... 1,249,490 1,046,127
Raw materials and supplies ............ 694,678 813,776
---------- -----------
$2,797,611 $ 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 including those 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 September 30, 1998, had an accumulated deficit of $12 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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 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 3% to $4,427,000 for the three
months ended September 30, 1998 from $4,287,000 for the three months ended
September 30, 1997. The increase is attributable primarily to increased
quantities of proprietary products sold. Cost of sales of $2,211,000 for the
quarter ended September 30, 1998 decreased 12% from $2,515,000 for the same
quarter in 1997, due partly to a greater percentage of higher margin proprietary
product sales in the third quarter of 1998. In addition, during the three months
ended September 30, 1997, scale-up costs and validation costs related to certain
OEM product lines were incurred. Gross margin for the third quarter of 1998
increased to 50% from 41% for the same period in the prior year. The improvement
in gross margin is due primarily to favorable growth in sales of higher margin
proprietary products, price increases in certain OEM products and other
manufacturing efficiency improvements.
8
<PAGE> 9
Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the three
months ended September 30, 1998, research and development expenses increased to
$987,000 from $680,000 for the three months ended September 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
studies necessary to support regulatory submissions. Research and development
expenses are expected to continue to increase in the foreseeable future as the
result of additional product development, clinical testing and regulatory
efforts.
General and administrative. General and administrative expenses
increased to $1,264,000 for the quarter ended September 30, 1998 from $1,147,000
for the quarter ended September 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 the anticipated
expansion of the Company's business.
Sales and marketing. Sales and marketing expenses increased to $638,000
for the three months ended September 30, 1998 from $613,000 for the three months
ended September 30, 1997. This increase was due primarily to increased personnel
costs, travel, marketing materials and other expenses. Sales and marketing
expenses are expected to increase in the foreseeable future, due in part to the
Company's European marketing evaluation studies of its Male and Female
On-Command product that have been initiated in the fourth quarter of 1998.
Amortization of goodwill. Amortization of goodwill of $158,000 for the
quarter ended September 30, 1998 and $157,000 for the quarter ended September
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 $69,000 for the three months ended September 30, 1998 from a net
interest income of $114,000 for the same period in 1997. Interest income
decreased to $108,000 for the third quarter of 1998 from $158,000 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 and purchases of property and equipment. Interest expense decreased
to $39,000 for the third quarter of 1998 from $44,000 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 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 8% to $12,947,000 for the nine
months ended September 30, 1998 from $11,948,000 for the nine months ended
September 30, 1997. The increase is attributable primarily to the increase in
sales of proprietary products. Cost of sales of $6,521,000 for the nine months
ended September 30, 1998 decreased 1% from $6,577,000 for the same period in
1997, due partly to a greater percentage of higher margin proprietary product
sales in the nine-month period ended September 30, 1998. In addition, during the
three months ended September 30, 1997, scale-up costs and validation costs
related to certain OEM product lines were incurred. Gross margin for the nine
months ended September 30, 1998 increased to 50% from 45% for the same period in
the prior year. The improvement in gross margin is due primarily to favorable
growth in sales of higher margin proprietary products, price increases in
certain OEM products and other manufacturing efficiency improvements.
Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the nine
months ended September 30, 1998, research and
9
<PAGE> 10
development expenses increased to $2,991,000 from $1,975,000 for the nine months
ended September 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 studies necessary to support
regulatory submissions. Research and development expenses are expected to
continue to increase in the foreseeable future as the result of additional
product development, clinical testing and regulatory efforts.
General and administrative. General and administrative expenses
increased to $3,613,000 for the nine months ended September 30, 1998 from
$2,865,000 for the nine months ended September 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 the anticipated expansion of the Company's business.
Sales and marketing. Sales and marketing expenses increased to
$2,010,000 for the nine months ended September 30, 1998 from $1,413,000 for the
nine months ended September 30, 1997. This increase was due primarily to
increased personnel costs, travel, marketing materials and other expenses. Sales
and marketing expenses are expected to increase in the foreseeable future, due
in part to the Company's European marketing evaluation studies of its Male and
Female On-Command product that have been initiated in the fourth quarter of
1998.
Severance costs. The Company did not recognize any severance costs in
the nine months ended September 30, 1998. Severance costs of $1,600,000 incurred
in the nine months ended September 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 $474,000 for the
nine months ended September 30, 1998 and $486,000 for the nine months ended
September 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 $249,000 for the nine months ended September 30, 1998 from a net
interest income of $310,000 for the same period in 1997. Interest income
decreased to $356,000 for the nine months ended September 30, 1998 from $452,000
for the nine months ended September 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 and purchases of property and equipment.
Interest expense decreased to $107,000 for the nine months ended September 30,
1998 from $142,000 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 $35,000 and $40,000 provision for state income
taxes for the three months ended September 30, 1998 and 1997, respectively. For
the nine months ended September 30, 1998 and 1997, the provision for state
income taxes recorded is $76,000 and $122,000, 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 September 30, 1998 and December 31, 1997 to reflect these
uncertainties.
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $5,400,000. The net operating loss carryforwards
will expire beginning in 2007, if not
10
<PAGE> 11
utilized. Utilization of the net operating loss carryforwards may be subject to
a substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986, as amended. This 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 (hardware and software) and/or devices with
embedded date-sensitive chips used by many companies may need to be upgraded or
replaced to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance.
Based on recent assessment that has been completed, the Company believes
that all its computer programs and hardware that have date-sensitive software or
embedded chips will properly utilize dates beyond December 31, 1999, primarily
as a result of system upgrades which were originally planned to enhance business
operations.
The completed assessment indicated that most of the Company's
significant information technology systems, if not upgraded or modified, could
be affected. These systems include accounting programs, internally developed
software and other PC-based applications. The Company is currently completing an
upgrade to its accounting system; such upgrade was originally intended to
facilitate business operations. The upgraded accounting system is certified by
the vendor that it is Year 2000 compliant. Regarding its internally developed
software, the Company determined that approximately 5% of the lines of codes in
the software had to be changed to resolve the Year 2000 Issue. The Company
believes such changes have been fully completed. PC-based applications that are
currently used by the Company are certified by the vendors at time of purchase
that they are Year 2000 compliant; therefore, no replacements or upgrades are
considered necessary. The assessment also indicated that the embedded chips used
in production and manufacturing equipment are not date-sensitive and thus will
not be affected by the Year 2000 Issue. The cost directly related to addressing
Year 2000 issues has been determined to be immaterial.
The Company is planning to purchase software to test all its information
technology systems regarding Year 2000 compliance. The Company is now
identifying and evaluating certain testing programs and anticipates completing
the testing process by the first half of calendar year 1999.
The Company has also begun making queries to its significant suppliers
of their Year 2000 readiness. To date, the Company is not aware of any suppliers
with a Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that its suppliers will be Year 2000 ready. The inability of
suppliers to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of noncompliance by suppliers is
not determinable.
The Company presently believes that with upgrades or modifications of
existing computer systems, the Year 2000 Issue can be mitigated. However, if
such upgrades or modifications fail to address the Year 2000 issues, the
Company's business, financial condition and result of operations could be
materially adversely affected. The extent of the financial impact due to a Year
2000 noncompliance cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event
that its computer systems are not Year 2000 compliant. The Company plans to
evaluate and determine whether such a plan is necessary after the internal
testing process is completed in the first half of calendar year 1999. The
Company is considering developing certain strategies in the case that its key
suppliers do not resolve their Year 2000 issues in a timely manner.
11
<PAGE> 12
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 $28 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 nine months ended September 30, 1998, net cash used in
operating activities amounted to $1,829,000. During the nine months ended
September 30, 1997, net cash used in operating activities amounted to $505,000.
The increase in net cash flows used in operating activities in the first nine
months in 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 nine months ended September
30, 1998 and 1997 were $1,071,000 and $511,000, respectively. The Company
expects the increase in additions of property and equipment to continue through
the end of 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.
As of September 30, 1998 and December 31, 1997, the Company had cash of
$7,758,000 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 September 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 BMT's 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
12
<PAGE> 13
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 Company has recently completed a controlled,
randomized clinical study in the United States on its Male On-Command product
with respect to single-use insertions up to 30 days for an acute indication. The
Company submitted a 510(k) premarket notification to the FDA for the acute
indication for its Male On-Command product 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 510(k) application will be cleared by the FDA. In addition
to the acute study, the FDA granted the Company conditional approval to begin a
Male On-Command chronic single arm trial involving multiple sequential monthly
insertions. The Company began enrolling patients in September 1998 in this
clinical trial. Upon completion of the chronic study, the Company expects to
apply for marketing approval of the On-Command for chronic indications under PMA
regulations. 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 was completed and a report on the feasibility study was
submitted to the FDA in the second quarter of 1998. The results of this study
were used to prepare an IDE submission for a controlled, randomized clinical
study of this device, which the Company submitted in August 1998, and which
received conditional FDA approval in September 1998. 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 next 90 days. 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 clearance or 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.
13
<PAGE> 14
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 of the Company's 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. 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 costs 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 the 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 September 30, 1998, had
an accumulated deficit of approximately $12 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 or 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.
14
<PAGE> 15
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.
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 Union. 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 affect 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
15
<PAGE> 16
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 began marketing evaluation studies of the On-Command product in Europe
in the fourth quarter of 1998, and intends to market the On-Command product
internationally through independent foreign distribution arrangements, none of
which is 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.
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
16
<PAGE> 17
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 it will
face considerable competition from existing incontinence management modalities,
such as intermittent, Foley, external and suprapubic catheters, adult diapers
and absorbents, and penile clamps. 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
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
17
<PAGE> 18
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 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
18
<PAGE> 19
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 39% of BMT's net
sales during 1997 and the nine months ended September 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 nine months ended
September 30, 1998, BMT derived approximately 24% and 17%, 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. Although
there has not been any problem complying with the environmental laws and
regulations, 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
19
<PAGE> 20
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.
20
<PAGE> 21
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 September
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 .. -- 201,504 201,504
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........... 898,520 2,570,135 3,468,655
Other purposes:
- Clinical trials and
research and development.. 179,168 1,547,898 1,727,066
- Sales and marketing
activities ............... 191,150 738,819 929,969
- Severance payments ....... 477,515(2) 96,091 573,606
----------- ---------- -----------
10,374,902 7,428,448 17,803,350
Temporary investment:
- Cash and cash equivalents. -- -- --
----------- ---------- -----------
$10,374,902 $7,428,448 $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.
21
<PAGE> 22
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
10.17 Indemnification Agreement between the Company and Terry E.
Spraker dated October 12, 1998
10.18 Indemnification Agreement between the Company and Jeffrey L.
Kaiser dated October 12, 1998
10.19 Indemnification Agreement between the Company and Alan Marquardt
dated October 12, 1998
10.20 Indemnification Agreement between the Company and Keith Ward
dated October 12, 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 September 30, 1998.
22
<PAGE> 23
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: November 13, 1998 /s/ Terry E. Spraker, Ph.D.
-----------------------------------------
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
Date: November 13, 1998 /s/ Jeffrey L. Kaiser
-----------------------------------------
Jeffrey L. Kaiser
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.17 Indemnification Agreement between the Company and Terry E.
Spraker dated October 12, 1998
10.18 Indemnification Agreement between the Company and Jeffrey L.
Kaiser dated October 12, 1998
10.19 Indemnification Agreement between the Company and Alan Marquardt
dated October 12, 1998
10.20 Indemnification Agreement between the Company and Keith Ward
dated October 12, 1998
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.17
INDEMNIFICATION AGREEMENT
UROQUEST MEDICAL CORPORATION
<TABLE>
<S> <C> <C> <C>
1. EFFECTIVE DATE: October 12, 1998
2. PARTIES: UroQuest Medical Corporation Terry E. Spraker
173 Constitution Drive c/o 173 Constitution Drive
Menlo Park, CA 94025 Menlo Park, CA 94025
(the "Company") (the "Indemnified Party")
</TABLE>
3. RECITALS/AGREEMENT:
(a) At the request of the "Company", the Indemnified Party currently
serves as a director, officer or manager of the Company (as defined
below), or in a combination of these positions. As such, Indemnified Party
may be subjected to claims, suits or proceedings.
(b) The Company's By-laws and Section 145 of the Delaware General
Corporation Law contemplate that contracts may be made between the Company
and members of its Board of Directors, officers and employees with respect
to indemnification.
(c) In consideration of Indemnified Party's acceptance and continuation of
service as a director, officer or manager, or in a combination of these
positions, after the date of this Agreement, and in consideration of the
mutual covenants stated herein, the parties agree as follows.
4. DEFINITIONS: As used in this Agreement, the following terms have the
following meanings:
(a) Change in Control. A "Change in Control" shall be deemed to have
occurred if any of the following events occurs: (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended) becomes after the date hereof the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 30% or more of the total number of
votes that may be cast for the election of directors of the Company
(called in this definition "voting securities"); (ii) at least 40% of the
directors of the Company constitute persons who were not, at the time of
their first election to the Board of Directors of the Company, candidates
proposed by a majority of the Company's Board of Directors in office prior
to the time of such first election; (iii) either stockholder approval of
the dissolution of the Company or the actual dissolution of the Company;
(iv) a sale or other disposition,
<PAGE> 2
or the last sale or other disposition to occur in a series of sales and/or
other dispositions within any 12-month period ("Serial Sales"), by the
Company of assets which (at the time of the sale or disposition or, in the
case of Serial Sales, as of the beginning of such 12-month period) account
for more than 75% of the total assets or 40% of the revenues of the
Company, as determined in accordance with generally accepted accounting
principles; provided, however, that no sale or disposition of assets or
stock shall be taken into account to the extent that the proceeds of such
sale or disposition (whether in cash or in-kind) are reinvested in the
Company or are, in the case of proceeds received in-kind, used in the
ongoing conduct of the Company, provided further that such a reinvestment
shall not be deemed to have occurred unless made within 12 months of such
sale or disposition and provided further that, the term reinvestment shall
include, among other things, the use of proceeds to repay debt incurred in
connection with the operation of the business in which the assets sold or
disposed of were used; (v) the stockholders shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the voting securities
of the Company outstanding immediately prior thereto representing (by
remaining outstanding or being converted into securities of the surviving
entity or otherwise) less than 70% of the voting securities of the Company
or such surviving entity outstanding immediately after such merger,
consolidation, business combination or reorganization; or (vi) any other
event which the Company's Board of Directors determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
(b) Corporation Law. The term "Corporation Law" means the Delaware General
Corporation Law as it exists on the date of this Agreement and as it may
be hereafter amended from time to time. In the case of any amendment of
the Delaware General Corporation Law after the date of this Agreement,
when used in reference to an act or omission occurring prior to
effectiveness of such amendment (unless prohibited by law), the term
"Corporation Law" shall include such amendment only to the extent that the
amendment permits the Company to provide broader indemnification rights
than the Delaware General Corporation Law permitted the Company to provide
prior to the amendment.
(c) Director, Officer or Manager. As used in reference to a position held
by Indemnified Party, the term "director," "officer" or "manager" means a
director officer or manager (as designated by the person's title in the
case of a manager) of the Company and, while a director, officer or
manager of the Company, Indemnified Party's serving at the Company's
request as a director, officer, manager, partner, trustee, employee, agent
or fiduciary of any corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan (including without limitation any
service as a director, officer, manager, employee, agent or fiduciary
which imposes duties on, or involves services by, such director, officer,
manager, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries). The terms "director," "officer" and
"manager" also include, unless the context otherwise requires, the estate
or personal representative of a director, officer or manager. The terms
"director" and "officer" shall also include any such broader definition as
may be provided in the Corporation Law with amendments after the date of
this Agreement.
<PAGE> 3
(d) Potential Change in Control. A "Potential Change in Control" shall be
deemed to have occurred if (i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control (ii) any person or entity (including the Company) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control or (iii) the Board of
Directors adopts a resolution to the effect that, for purposes of this
Agreement, a potential Change in Control has occurred.
(e) Proceeding. The term "proceeding" means any threatened, pending or
completed action, suit or proceeding, or any inquiry or investigation,
whether civil criminal, administrative or investigative, and whether
formal or informal.
(f) Reviewing Party. "Reviewing Party" means the person or body determined
in accordance with Section 9.
5. AGREEMENT TO INDEMNIFY: The Company shall indemnify, and keep indemnified,
Indemnified Party in accordance with, and to the full extent permitted and/or
required by, the Corporation Law and any other applicable law from and against
any expenses (including but not limited to attorneys' fees, expenses of
investigation and preparation, and fees and disbursements of Indemnified Party's
accountants or other experts), judgments, fines (including but not limited to
excise taxes assessed on a person with respect to an employee benefit plan),
penalties and amounts paid in settlement (including without limitation all
interest, assessments and other charges paid or payable in connection with any
of the foregoing) actually and reasonably incurred by Indemnified Party in
connection with any proceeding in which Indemnified Party was or is made a party
or was or is involved (for example, as a witness) by reason of the fact that
Indemnified Party is or was a director, officer or manager of the Company.
6. D&O INSURANCE: So long as Indemnified Party may be subject to any possible
proceeding by reason of the fact that Indemnified Party is or was a director or
officer of the Company, to the extent the Company maintains an insurance policy
or policies providing directors' and officers' liability insurance, Indemnified
Party shall be covered by such policy or policies, in accordance with its or
their terms, to the maximum extent of the coverage applicable to any then
current director or officer of the Company.
7. ADVANCES: In the event of any proceeding in which Indemnified Party is a
party or is involved and which may give rise to a right of indemnification from
the Company pursuant to this Agreement, following written request to the Company
by Indemnified Party, the Company shall pay to Indemnified Party, in accordance
with and to the full extent permitted and/or required by the Corporation Law,
amounts to cover reasonable expenses incurred by Indemnified Party in such
proceeding in advance of its final disposition upon receipt of (a) a written
undertaking executed by or on behalf of Indemnified Party to repay the advance
if it shall ultimately be determined that Indemnified Party is not entitled to
be indemnified by the Company and (b) satisfactory evidence as to the amount of
such expenses.
8. BURDEN OF PROOF: If under applicable law, the entitlement of Indemnified
Party to be indemnified or advanced expenses hereunder depends upon whether a
<PAGE> 4
standard of conduct has been met, the burden of proof of establishing that
Indemnified Party did not act in accordance with such standard shall rest with
the Company. Indemnified Party shall be presumed to have acted in accordance
with such standard and to be entitled to indemnification or the advancement of
expenses (as the case may be) unless, based upon a preponderance of the
evidence, it shall be determined that Indemnified Party has not met such
standard. For purposes of this Agreement, unless otherwise expressly stated, the
termination of any proceeding by judgment, order, settlement (whether with or
without court approval), conviction, or upon a plea of nolo contendere or its
equivalent, shall not create a presumption that Indemnified Party did not meet
any particular standard of conduct or have any particular belief
9. DETERMINATION REGARDING STANDARD OF CONDUCT; REVIEWING PARTY: Any
determination as to whether Indemnified Party has met an applicable standard of
conduct for indemnification or advancement of expenses and any evaluation as to
the reasonableness of amounts claimed by Indemnified Party shall be made by the
Reviewing Party. If there has not been a Change of Control after the date of
this Agreement, the Reviewing Party shall be the Board of Directors of the
Company or such other body or persons appointed by the Board of Directors of the
Company as permitted by the Corporation Law. If there has been a Change of
Control after the date of this Agreement and if so requested by the Indemnified
Party, the Reviewing Party shall be an independent counsel who is selected by
the Indemnified Party and approved by the Company (which approval shall not be
unreasonably withheld). For this purpose, "independent counsel" means a law firm
or a member of a law firm that neither is at the time, nor in the past five
years has been, retained to represent (i) the Company or the Indemnified Party
in any matter material to either such party or (ii) any other party to the
Proceeding giving rise to a claim for indemnification under this Agreement.
Notwithstanding the foregoing, the term "independent counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing under the law of the State of Delaware, would have a conflict of
interest in representing either the Company or the Indemnified Party in an
action to determine the Indemnified Party's rights under this Agreement. The
Company agrees to pay the reasonable fees of the independent counsel referenced
above and to indemnify fully such independent counsel against any and all
expenses (including without limitation attorneys' fees), liabilities, losses and
damages arising out of or relating to this Agreement or its engagement pursuant
to this Agreement.
10. NOTICE TO THE COMPANY: Indemnified Party shall notify the Secretary of the
Company in writing of any matter for which Indemnified Party intends to seek
indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnified Party of written notice thereof; provided, however, that
delay in so notifying the Company shall not constitute a waiver or release by
Indemnified Party of rights hereunder.
11. COUNSEL FOR PROCEEDING; SETTLEMENTS: In the event of any proceeding in which
Indemnified Party is a party or is involved and which may give rise to a right
of indemnification hereunder, the Company shall have the right to retain counsel
satisfactory to Indemnified Party in his or her discretion, to represent
Indemnified Party and any others the Company may designate in such proceeding.
In any such proceeding, Indemnified Party shall have the right to retain
Indemnified Party's own
<PAGE> 5
counsel but the fees and expenses of such counsel shall be at the expense of
Indemnified Party unless (a) the retention of such counsel has been specifically
authorized by the Company; (b) representation of Indemnified Party and another
party by the same counsel would be inappropriate, in the reasonable judgment of
Indemnified Party, due to actual or potential differing interests between them;
(c) the counsel retained by the Company and satisfactory to Indemnified Party
has advised Indemnified Party, in writing, that such counsel's representation of
Indemnified Party would be likely to involve such counsel in representing
differing interests which could adversely affect either the judgment or loyalty
of such counsel to Indemnified Party, whether it be a conflicting, inconsistent,
diverse or other interest; or (d) the Company shall fail to retain counsel for
Indemnified Party in such proceeding. Notwithstanding the foregoing, if an
insurance carrier has supplied directors' and officers' liability insurance
covering a proceeding and is entitled to retain counsel for the defense of such
proceeding, then the insurance carrier shall retain counsel to conduct the
defense of such proceeding unless Indemnified Party and the Company concur in
writing that the insurance carrier's doing so is undesirable. The Company shall
not be liable under this Agreement for any settlement of any proceeding effected
without its written consent. The Company shall not settle any proceeding in any
manner which would impose any penalty or limitation on Indemnified Party without
Indemnified Party's written consent. Consent to a proposed settlement of any
proceeding shall not be unreasonably withheld by either the Company or
Indemnified Party.
12. ENFORCEMENT; ACTION TO DETERMINE COMPLIANCE WITH STANDARD OF CONDUCT: The
Company acknowledges that Indemnified Party is relying upon this agreement in
serving as a director, officer or manager of the Company. If a claim for
indemnification or advancement of expenses is not paid in full by the Company
within sixty days, or within twenty days in the case of a claim for advancement
of expenses, after a written claim has been received from Indemnified Party by
the Company, Indemnified Party may at any time bring a legal action against the
Company to recover the unpaid amount of the claim. Indemnified Party shall also
be entitled to be paid by the Company all reasonable fees and expenses
(including without limitation fees of counsel) in bringing and prosecuting such
claim, unless as a part of the legal action concerning such claim the court
having jurisdiction over the action determines that each of the material
assertions made by Indemnified Party as a basis for the action was not made in
good filth or was frivolous. Neither the failure of the Reviewing Party or the
Company (including its Board of Directors, independent counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the Indemnified Party is proper in the
circumstances nor an actual determination by the Reviewing Party or the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the Indemnified Party is not entitled to indemnification
shall be a defense to the action, be admissible as evidence, or create a
presumption that the Indemnified Party is not so entitled. Any such action shall
be de novo, and the Indemnified Party shall not be prejudiced by reason of any
such adverse determination. If an action is brought pursuant to this Section, a
final nonappealable order in such action shall constitute the ultimate
determination of the Indemnified Party's right to indemnification. Whether or
not Indemnified Party has met any applicable standard of conduct, the Court in
such suit may order indemnification or the advancement of expenses as the Court
deems proper (subject to any express limitation of the Corporation Law).
Further, the Company shall indemnify Indemnified Party from
<PAGE> 6
and against any and all expenses (including without limitation attorneys' fees)
and, if requested by Indemnified Party, shall (within twenty days of such
request) advance such expenses to Indemnified Party, which are incurred by
Indemnified Party in connection with any claim asserted against or legal action
brought by Indemnified Party for recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
Indemnified Party is unsuccessful in whole or in part in such claim or suit.
13. PROCEEDINGS BY INDEMNIFIED PARTY: Notwithstanding other provisions of this
Agreement to the contrary, prior to a Change in Control the Company shall not
indemnify Indemnified Party and advance expenses to Indemnified Party in
connection with any proceeding (or part thereof) initiated by Indemnified Party
against the Company or any director, officer or manager of the Company unless
such proceeding (or part thereof) was authorized by the Board of Directors of
the Company.
14. ESTABLISHMENT OF TRUST: In the event of a Potential Change in Control the
Company shall, upon written request by Indemnified Party, create a trust for the
benefit of Indemnified Party (and possibly others as described below) and from
time to time upon written request of Indemnified Party shall fund such trust in
an amount sufficient to satisfy any and all expenses and other amounts for which
indemnification may be sought under this Agreement and which at the time of each
such request are reasonably anticipated to be incurred, are proposed to be paid
by Indemnified Party, have actually been paid by Indemnified Party or have
actually been claimed in a proceeding. The amount or amounts to be deposited in
the trust pursuant to the foregoing funding obligation shall be determined by
mutual agreement of the Company and Indemnified Party or, if they are unable to
reach such mutual agreement within ten days after any such request by
Indemnified Party for funding, by a Reviewing Party who is selected in
accordance with Section 9 of this Agreement as if a Change of Control had
occurred. In determining any such amounts, the parties or the Reviewing Party
(as the case may be) shall take into account the availability of any amounts
under any directors' and officers' liability insurance. At the Company's
discretion, the trust created by the Company at the request of the Indemnified
Party pursuant to the foregoing obligation may also be for the benefit of other
existing or former officers, directors or employees of the Company with respect
to indemnification and advancement of expenses, and may be a trust previously
created and existing at the time for the benefit of any such persons. If and to
the extent authorized by the parties or Reviewing Party, as the case may be,
when determining the amounts to be deposited in the trust; the trust may
commingle and combine into one or more funds amounts held for Indemnified Person
and such other persons. The terms of the trust shall provide that upon a Change
in Control (i) the trust shall not be revoked or the principal thereof invaded,
without the written consent of Indemnified Party, (ii) the trustee shall advance
within twenty days of a request by Indemnified Party, any and all expenses to
Indemnified Party (and Indemnified Party hereby agrees to reimburse the trust
under the circumstances under which Indemnified Party would be required to
reimburse the Company under Section 7 of this Agreement), (iii) the trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the trustee shall pay promptly (but in any event within
sixty days after a written claim for indemnification) to Indemnified Party all
amounts for which the Indemnified Party is entitled to indemnification pursuant
to this Agreement; and (v) all unexpended funds in such trust
<PAGE> 7
shall revert to the Company upon a final determination by the Reviewing Party or
a court of competent jurisdiction, as the case may be, that Indemnified Party
has been fully indemnified under the terms of this Agreement. The trustee shall
be an individual or entity chosen by Indemnified Party and approved by the
Company (whose approval shall not be unreasonably withheld). All income earned
on the assets held in the trust shall be reported as income by the Company for
federal, state, local and foreign tax purposes. The Company shall pay all costs
of establishing and maintaining the trust and shall indemnify the trustee
against any and all expenses (including without limitation attorneys' fees),
liabilities, losses and damages arising out of or relating to this Agreement or
the establishment and maintenance of the trust. Nothing in this Section 14 shall
relieve the Company of any of its obligations under this Agreement.
15. NONEXCLUSIVITY: The rights of Indemnified Party for indemnification and
advancement of expenses under this Agreement shall not be deemed exclusive of or
in limitation of any rights to which Indemnified Party may be entitled under
Delaware law, the Company's Certificate of Incorporation or By-laws, vote of
shareholders or otherwise.
16. MISCELLANEOUS:
(a) Effectiveness. This Agreement is effective for, and shall apply to, (i)
any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no action, suit or proceeding has actually been
brought prior to the date of this Agreement and (ii) any action, suit or
proceeding which is threatened before, on or after the date of this
Agreement but which is not pending prior to the date of this Agreement.
Thus, this Agreement shall not apply to any action, suit or proceeding which
has actually been brought before the date of this Agreement. So long as the
foregoing standard of effectiveness has been satisfied, this Agreement shall
be effective for and shall be applied to acts or omissions prior to, on or
after the date of this Agreement.
(b) Survival; Continuation. The rights of Indemnified Party hereunder shall
inure to the benefit of the Indemnified Party (even after Indemnified Party
ceases to be a director, officer or manager), Indemnified Party's personal
representative, heirs, executors, administrators and beneficiaries; and this
Agreement shall be binding upon the Company, its successors and assigns. The
rights of Indemnified Party under this Agreement shall continue so long as
Indemnified Party may be subject to any possible proceeding because of the
fact that Indemnified Party was a director, officer or manager of the
Company. If the Company sells, leases, exchanges or otherwise disposes of in
a single transaction or series of related transactions, all or substantially
all of its property and assets, the Company shall, as a condition precedent
to such transaction, cause effective provision to be made so that the person
or entity acquiring such property and assets shall become bound by and
replace the Company under this Agreement.
(c) Partial Indemnification. If the Indemnified Party is entitled to
indemnification by the Company for some or a portion of expenses, judgments,
fines or settlement amounts actually incurred by the Indemnified Party in a
proceeding but not, however, for the total amount thereof the Company shall
nevertheless indemnify
<PAGE> 8
the Indemnified Party for the portion of such expenses, judgments, fines
or settlement amounts to which the Indemnified Party is entitled.
(d) No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any proceeding against
the Indemnified Party to the extent the Indemnified Party has otherwise
actually received payment (under any insurance policy, bylaw or otherwise)
of the amounts otherwise subject to indemnification under this Agreement.
Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without regard to the conflict of laws principles thereof.
(e) Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without regard to the conflict of the laws principles
thereof.
(f) Severability. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the full extent permitted by law and all other provisions shall
remain in full force and effect.
(g) Amendment. No amendment, termination or cancellation of this Agreement
shall be effective unless in writing signed by the Company and Indemnified
Party.
(h) Subrogation. In the event of payment under this Agreement the Company
shall be subrogated shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
(i) Headings. The headings in this Agreement are for convenience only and
are not to be considered in construing this Agreement.
(j) Counterparts. This Agreement may be executed in counterparts, both of
which shall be deemed an original, and together shall constitute one
document.
The parties have executed this Agreement as of the Effective Date first
above stated.
UROQUEST MEDICAL CORPORATION Indemnified Party
By: /s/ Jeffrey L. Kaiser /s/ Terry E. Spraker
-------------------------------- ---------------------------------------
Terry E. Spraker
Title: Vice President, Chief
Financial Officer,
Secretary and Treasurer
<PAGE> 1
EXHIBIT 10.18
INDEMNIFICATION AGREEMENT
UROQUEST MEDICAL CORPORATION
<TABLE>
<S> <C> <C> <C>
1. EFFECTIVE DATE: October 12, 1998
2. PARTIES: UroQuest Medical Corporation Jeffrey L. Kaiser
173 Constitution Drive c/o 173 Constitution Drive
Menlo Park, CA 94025 Menlo Park, CA 94025
(the "Company") (the "Indemnified Party")
</TABLE>
3. RECITALS/AGREEMENT:
(a) At the request of the "Company", the Indemnified Party currently
serves as a director, officer or manager of the Company (as defined
below), or in a combination of these positions. As such, Indemnified Party
may be subjected to claims, suits or proceedings.
(b) The Company's By-laws and Section 145 of the Delaware General
Corporation Law contemplate that contracts may be made between the Company
and members of its Board of Directors, officers and employees with respect
to indemnification.
(c) In consideration of Indemnified Party's acceptance and continuation of
service as a director, officer or manager, or in a combination of these
positions, after the date of this Agreement, and in consideration of the
mutual covenants stated herein, the parties agree as follows.
4. DEFINITIONS: As used in this Agreement, the following terms have the
following meanings:
(a) Change in Control. A "Change in Control" shall be deemed to have
occurred if any of the following events occurs: (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended) becomes after the date hereof the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 30% or more of the total number of
votes that may be cast for the election of directors of the Company
(called in this definition "voting securities"); (ii) at least 40% of the
directors of the Company constitute persons who were not, at the time of
their first election to the Board of Directors of the Company, candidates
proposed by a majority of the Company's Board of Directors in office prior
to the time of such first election; (iii) either stockholder approval of
the dissolution of the Company or the actual dissolution of the Company;
(iv) a sale or other disposition,
<PAGE> 2
or the last sale or other disposition to occur in a series of sales and/or
other dispositions within any 12-month period ("Serial Sales"), by the
Company of assets which (at the time of the sale or disposition or, in the
case of Serial Sales, as of the beginning of such 12-month period) account
for more than 75% of the total assets or 40% of the revenues of the
Company, as determined in accordance with generally accepted accounting
principles; provided, however, that no sale or disposition of assets or
stock shall be taken into account to the extent that the proceeds of such
sale or disposition (whether in cash or in-kind) are reinvested in the
Company or are, in the case of proceeds received in-kind, used in the
ongoing conduct of the Company, provided further that such a reinvestment
shall not be deemed to have occurred unless made within 12 months of such
sale or disposition and provided further that, the term reinvestment shall
include, among other things, the use of proceeds to repay debt incurred in
connection with the operation of the business in which the assets sold or
disposed of were used; (v) the stockholders shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the voting securities
of the Company outstanding immediately prior thereto representing (by
remaining outstanding or being converted into securities of the surviving
entity or otherwise) less than 70% of the voting securities of the Company
or such surviving entity outstanding immediately after such merger,
consolidation, business combination or reorganization; or (vi) any other
event which the Company's Board of Directors determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
(b) Corporation Law. The term "Corporation Law" means the Delaware General
Corporation Law as it exists on the date of this Agreement and as it may
be hereafter amended from time to time. In the case of any amendment of
the Delaware General Corporation Law after the date of this Agreement,
when used in reference to an act or omission occurring prior to
effectiveness of such amendment (unless prohibited by law), the term
"Corporation Law" shall include such amendment only to the extent that the
amendment permits the Company to provide broader indemnification rights
than the Delaware General Corporation Law permitted the Company to provide
prior to the amendment.
(c) Director, Officer or Manager. As used in reference to a position held
by Indemnified Party, the term "director," "officer" or "manager" means a
director officer or manager (as designated by the person's title in the
case of a manager) of the Company and, while a director, officer or
manager of the Company, Indemnified Party's serving at the Company's
request as a director, officer, manager, partner, trustee, employee, agent
or fiduciary of any corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan (including without limitation any
service as a director, officer, manager, employee, agent or fiduciary
which imposes duties on, or involves services by, such director, officer,
manager, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries). The terms "director," "officer" and
"manager" also include, unless the context otherwise requires, the estate
or personal representative of a director, officer or manager. The terms
"director" and "officer" shall also include any such broader definition as
may be provided in the Corporation Law with amendments after the date of
this Agreement.
<PAGE> 3
(d) Potential Change in Control. A "Potential Change in Control" shall be
deemed to have occurred if (i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control (ii) any person or entity (including the Company) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control or (iii) the Board of
Directors adopts a resolution to the effect that, for purposes of this
Agreement, a potential Change in Control has occurred.
(e) Proceeding. The term "proceeding" means any threatened, pending or
completed action, suit or proceeding, or any inquiry or investigation,
whether civil criminal, administrative or investigative, and whether
formal or informal.
(f) Reviewing Party. "Reviewing Party" means the person or body determined
in accordance with Section 9.
5. AGREEMENT TO INDEMNIFY: The Company shall indemnify, and keep indemnified,
Indemnified Party in accordance with, and to the full extent permitted and/or
required by, the Corporation Law and any other applicable law from and against
any expenses (including but not limited to attorneys' fees, expenses of
investigation and preparation, and fees and disbursements of Indemnified Party's
accountants or other experts), judgments, fines (including but not limited to
excise taxes assessed on a person with respect to an employee benefit plan),
penalties and amounts paid in settlement (including without limitation all
interest, assessments and other charges paid or payable in connection with any
of the foregoing) actually and reasonably incurred by Indemnified Party in
connection with any proceeding in which Indemnified Party was or is made a party
or was or is involved (for example, as a witness) by reason of the fact that
Indemnified Party is or was a director, officer or manager of the Company.
6. D&O INSURANCE: So long as Indemnified Party may be subject to any possible
proceeding by reason of the fact that Indemnified Party is or was a director or
officer of the Company, to the extent the Company maintains an insurance policy
or policies providing directors' and officers' liability insurance, Indemnified
Party shall be covered by such policy or policies, in accordance with its or
their terms, to the maximum extent of the coverage applicable to any then
current director or officer of the Company.
7. ADVANCES: In the event of any proceeding in which Indemnified Party is a
party or is involved and which may give rise to a right of indemnification from
the Company pursuant to this Agreement, following written request to the Company
by Indemnified Party, the Company shall pay to Indemnified Party, in accordance
with and to the full extent permitted and/or required by the Corporation Law,
amounts to cover reasonable expenses incurred by Indemnified Party in such
proceeding in advance of its final disposition upon receipt of (a) a written
undertaking executed by or on behalf of Indemnified Party to repay the advance
if it shall ultimately be determined that Indemnified Party is not entitled to
be indemnified by the Company and (b) satisfactory evidence as to the amount of
such expenses.
8. BURDEN OF PROOF: If under applicable law, the entitlement of Indemnified
Party to be indemnified or advanced expenses hereunder depends upon whether a
<PAGE> 4
standard of conduct has been met, the burden of proof of establishing that
Indemnified Party did not act in accordance with such standard shall rest with
the Company. Indemnified Party shall be presumed to have acted in accordance
with such standard and to be entitled to indemnification or the advancement of
expenses (as the case may be) unless, based upon a preponderance of the
evidence, it shall be determined that Indemnified Party has not met such
standard. For purposes of this Agreement, unless otherwise expressly stated, the
termination of any proceeding by judgment, order, settlement (whether with or
without court approval), conviction, or upon a plea of nolo contendere or its
equivalent, shall not create a presumption that Indemnified Party did not meet
any particular standard of conduct or have any particular belief.
9. DETERMINATION REGARDING STANDARD OF CONDUCT; REVIEWING PARTY: Any
determination as to whether Indemnified Party has met an applicable standard of
conduct for indemnification or advancement of expenses and any evaluation as to
the reasonableness of amounts claimed by Indemnified Party shall be made by the
Reviewing Party. If there has not been a Change of Control after the date of
this Agreement, the Reviewing Party shall be the Board of Directors of the
Company or such other body or persons appointed by the Board of Directors of the
Company as permitted by the Corporation Law. If there has been a Change of
Control after the date of this Agreement and if so requested by the Indemnified
Party, the Reviewing Party shall be an independent counsel who is selected by
the Indemnified Party and approved by the Company (which approval shall not be
unreasonably withheld). For this purpose, "independent counsel" means a law firm
or a member of a law firm that neither is at the time, nor in the past five
years has been, retained to represent (i) the Company or the Indemnified Party
in any matter material to either such party or (ii) any other party to the
Proceeding giving rise to a claim for indemnification under this Agreement.
Notwithstanding the foregoing, the term "independent counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing under the law of the State of Delaware, would have a conflict of
interest in representing either the Company or the Indemnified Party in an
action to determine the Indemnified Party's rights under this Agreement. The
Company agrees to pay the reasonable fees of the independent counsel referenced
above and to indemnify fully such independent counsel against any and all
expenses (including without limitation attorneys' fees), liabilities, losses and
damages arising out of or relating to this Agreement or its engagement pursuant
to this Agreement.
10. NOTICE TO THE COMPANY: Indemnified Party shall notify the Secretary of the
Company in writing of any matter for which Indemnified Party intends to seek
indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnified Party of written notice thereof; provided, however, that
delay in so notifying the Company shall not constitute a waiver or release by
Indemnified Party of rights hereunder.
11. COUNSEL FOR PROCEEDING; SETTLEMENTS: In the event of any proceeding in which
Indemnified Party is a party or is involved and which may give rise to a right
of indemnification hereunder, the Company shall have the right to retain counsel
satisfactory to Indemnified Party in his or her discretion, to represent
Indemnified Party and any others the Company may designate in such proceeding.
In any such proceeding, Indemnified Party shall have the right to retain
Indemnified Party's own
<PAGE> 5
counsel but the fees and expenses of such counsel shall be at the expense of
Indemnified Party unless (a) the retention of such counsel has been specifically
authorized by the Company; (b) representation of Indemnified Party and another
party by the same counsel would be inappropriate, in the reasonable judgment of
Indemnified Party, due to actual or potential differing interests between them;
(c) the counsel retained by the Company and satisfactory to Indemnified Party
has advised Indemnified Party, in writing, that such counsel's representation of
Indemnified Party would be likely to involve such counsel in representing
differing interests which could adversely affect either the judgment or loyalty
of such counsel to Indemnified Party, whether it be a conflicting, inconsistent,
diverse or other interest; or (d) the Company shall fail to retain counsel for
Indemnified Party in such proceeding. Notwithstanding the foregoing, if an
insurance carrier has supplied directors' and officers' liability insurance
covering a proceeding and is entitled to retain counsel for the defense of such
proceeding, then the insurance carrier shall retain counsel to conduct the
defense of such proceeding unless Indemnified Party and the Company concur in
writing that the insurance carrier's doing so is undesirable. The Company shall
not be liable under this Agreement for any settlement of any proceeding effected
without its written consent. The Company shall not settle any proceeding in any
manner which would impose any penalty or limitation on Indemnified Party without
Indemnified Party's written consent. Consent to a proposed settlement of any
proceeding shall not be unreasonably withheld by either the Company or
Indemnified Party.
12. ENFORCEMENT; ACTION TO DETERMINE COMPLIANCE WITH STANDARD OF CONDUCT: The
Company acknowledges that Indemnified Party is relying upon this agreement in
serving as a director, officer or manager of the Company. If a claim for
indemnification or advancement of expenses is not paid in full by the Company
within sixty days, or within twenty days in the case of a claim for advancement
of expenses, after a written claim has been received from Indemnified Party by
the Company, Indemnified Party may at any time bring a legal action against the
Company to recover the unpaid amount of the claim. Indemnified Party shall also
be entitled to be paid by the Company all reasonable fees and expenses
(including without limitation fees of counsel) in bringing and prosecuting such
claim, unless as a part of the legal action concerning such claim the court
having jurisdiction over the action determines that each of the material
assertions made by Indemnified Party as a basis for the action was not made in
good filth or was frivolous. Neither the failure of the Reviewing Party or the
Company (including its Board of Directors, independent counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the Indemnified Party is proper in the
circumstances nor an actual determination by the Reviewing Party or the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the Indemnified Party is not entitled to indemnification
shall be a defense to the action, be admissible as evidence, or create a
presumption that the Indemnified Party is not so entitled. Any such action shall
be de novo, and the Indemnified Party shall not be prejudiced by reason of any
such adverse determination. If an action is brought pursuant to this Section, a
final nonappealable order in such action shall constitute the ultimate
determination of the Indemnified Party's right to indemnification. Whether or
not Indemnified Party has met any applicable standard of conduct, the Court in
such suit may order indemnification or the advancement of expenses as the Court
deems proper (subject to any express limitation of the Corporation Law).
Further, the Company shall indemnify Indemnified Party from
<PAGE> 6
and against any and all expenses (including without limitation attorneys' fees)
and, if requested by Indemnified Party, shall (within twenty days of such
request) advance such expenses to Indemnified Party, which are incurred by
Indemnified Party in connection with any claim asserted against or legal action
brought by Indemnified Party for recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
Indemnified Party is unsuccessful in whole or in part in such claim or suit.
13. PROCEEDINGS BY INDEMNIFIED PARTY: Notwithstanding other provisions of this
Agreement to the contrary, prior to a Change in Control the Company shall not
indemnify Indemnified Party and advance expenses to Indemnified Party in
connection with any proceeding (or part thereof) initiated by Indemnified Party
against the Company or any director, officer or manager of the Company unless
such proceeding (or part thereof) was authorized by the Board of Directors of
the Company.
14. ESTABLISHMENT OF TRUST: In the event of a Potential Change in Control the
Company shall, upon written request by Indemnified Party, create a trust for the
benefit of Indemnified Party (and possibly others as described below) and from
time to time upon written request of Indemnified Party shall fund such trust in
an amount sufficient to satisfy any and all expenses and other amounts for which
indemnification may be sought under this Agreement and which at the time of each
such request are reasonably anticipated to be incurred, are proposed to be paid
by Indemnified Party, have actually been paid by Indemnified Party or have
actually been claimed in a proceeding. The amount or amounts to be deposited in
the trust pursuant to the foregoing funding obligation shall be determined by
mutual agreement of the Company and Indemnified Party or, if they are unable to
reach such mutual agreement within ten days after any such request by
Indemnified Party for funding, by a Reviewing Party who is selected in
accordance with Section 9 of this Agreement as if a Change of Control had
occurred. In determining any such amounts, the parties or the Reviewing Party
(as the case may be) shall take into account the availability of any amounts
under any directors' and officers' liability insurance. At the Company's
discretion, the trust created by the Company at the request of the Indemnified
Party pursuant to the foregoing obligation may also be for the benefit of other
existing or former officers, directors or employees of the Company with respect
to indemnification and advancement of expenses, and may be a trust previously
created and existing at the time for the benefit of any such persons. If and to
the extent authorized by the parties or Reviewing Party, as the case may be,
when determining the amounts to be deposited in the trust; the trust may
commingle and combine into one or more funds amounts held for Indemnified Person
and such other persons. The terms of the trust shall provide that upon a Change
in Control (i) the trust shall not be revoked or the principal thereof invaded,
without the written consent of Indemnified Party, (ii) the trustee shall advance
within twenty days of a request by Indemnified Party, any and all expenses to
Indemnified Party (and Indemnified Party hereby agrees to reimburse the trust
under the circumstances under which Indemnified Party would be required to
reimburse the Company under Section 7 of this Agreement), (iii) the trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the trustee shall pay promptly (but in any event within
sixty days after a written claim for indemnification) to Indemnified Party all
amounts for which the Indemnified Party is entitled to indemnification pursuant
to this Agreement; and (v) all unexpended funds in such trust
<PAGE> 7
shall revert to the Company upon a final determination by the Reviewing Party or
a court of competent jurisdiction, as the case may be, that Indemnified Party
has been fully indemnified under the terms of this Agreement. The trustee shall
be an individual or entity chosen by Indemnified Party and approved by the
Company (whose approval shall not be unreasonably withheld). All income earned
on the assets held in the trust shall be reported as income by the Company for
federal, state, local and foreign tax purposes. The Company shall pay all costs
of establishing and maintaining the trust and shall indemnify the trustee
against any and all expenses (including without limitation attorneys' fees),
liabilities, losses and damages arising out of or relating to this Agreement or
the establishment and maintenance of the trust. Nothing in this Section 14 shall
relieve the Company of any of its obligations under this Agreement.
15. NONEXCLUSIVITY: The rights of Indemnified Party for indemnification and
advancement of expenses under this Agreement shall not be deemed exclusive of or
in limitation of any rights to which Indemnified Party may be entitled under
Delaware law, the Company's Certificate of Incorporation or By-laws, vote of
shareholders or otherwise.
16. MISCELLANEOUS:
(a) Effectiveness. This Agreement is effective for, and shall apply to, (i)
any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no action, suit or proceeding has actually been
brought prior to the date of this Agreement and (ii) any action, suit or
proceeding which is threatened before, on or after the date of this
Agreement but which is not pending prior to the date of this Agreement.
Thus, this Agreement shall not apply to any action, suit or proceeding which
has actually been brought before the date of this Agreement. So long as the
foregoing standard of effectiveness has been satisfied, this Agreement shall
be effective for and shall be applied to acts or omissions prior to, on or
after the date of this Agreement.
(b) Survival; Continuation. The rights of Indemnified Party hereunder shall
inure to the benefit of the Indemnified Party (even after Indemnified Party
ceases to be a director, officer or manager), Indemnified Party's personal
representative, heirs, executors, administrators and beneficiaries; and this
Agreement shall be binding upon the Company, its successors and assigns. The
rights of Indemnified Party under this Agreement shall continue so long as
Indemnified Party may be subject to any possible proceeding because of the
fact that Indemnified Party was a director, officer or manager of the
Company. If the Company sells, leases, exchanges or otherwise disposes of in
a single transaction or series of related transactions, all or substantially
all of its property and assets, the Company shall, as a condition precedent
to such transaction, cause effective provision to be made so that the person
or entity acquiring such property and assets shall become bound by and
replace the Company under this Agreement.
(c) Partial Indemnification. If the Indemnified Party is entitled to
indemnification by the Company for some or a portion of expenses, judgments,
fines or settlement amounts actually incurred by the Indemnified Party in a
proceeding but not, however, for the total amount thereof the Company shall
nevertheless indemnify
<PAGE> 8
the Indemnified Party for the portion of such expenses, judgments, fines
or settlement amounts to which the Indemnified Party is entitled.
(d) No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any proceeding against
the Indemnified Party to the extent the Indemnified Party has otherwise
actually received payment (under any insurance policy, bylaw or otherwise)
of the amounts otherwise subject to indemnification under this Agreement.
Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without regard to the conflict of laws principles thereof.
(e) Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without regard to the conflict of the laws principles
thereof.
(f) Severability. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the full extent permitted by law and all other provisions shall
remain in full force and effect.
(g) Amendment. No amendment, termination or cancellation of this Agreement
shall be effective unless in writing signed by the Company and Indemnified
Party.
(h) Subrogation. In the event of payment under this Agreement the Company
shall be subrogated shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
(i) Headings. The headings in this Agreement are for convenience only and
are not to be considered in construing this Agreement.
(j) Counterparts. This Agreement may be executed in counterparts, both of
which shall be deemed an original, and together shall constitute one
document.
The parties have executed this Agreement as of the Effective Date first
above stated.
UROQUEST MEDICAL CORPORATION Indemnified Party
By: /s/ Terry E. Spraker /s/ Jeffrey L. Kaiser
------------------------------- -----------------------------------------
Jeffrey L. Kaiser
Title: President and CEO
-----------------------------
<PAGE> 1
EXHIBIT 10.19
INDEMNIFICATION AGREEMENT
UROQUEST MEDICAL CORPORATION
1. EFFECTIVE DATE: October 12, 1998
2. PARTIES: UroQuest Medical Corporation Alan Marquardt
173 Constitution Drive c/o 173 Constitution Drive
Menlo Park, CA 94025 Menlo Park, CA 94025
(the "Company") (the "Indemnified Party")
3. RECITALS/AGREEMENT:
(a) At the request of the "Company", the Indemnified Party currently
serves as a director, officer or manager of the Company (as defined
below), or in a combination of these positions. As such, Indemnified Party
may be subjected to claims, suits or proceedings.
(b) The Company's By-laws and Section 145 of the Delaware General
Corporation Law contemplate that contracts may be made between the Company
and members of its Board of Directors, officers and employees with respect
to indemnification.
(c) In consideration of Indemnified Party's acceptance and continuation of
service as a director, officer or manager, or in a combination of these
positions, after the date of this Agreement, and in consideration of the
mutual covenants stated herein, the parties agree as follows.
4. DEFINITIONS: As used in this Agreement, the following terms have the
following meanings:
(a) Change in Control. A "Change in Control" shall be deemed to have
occurred if any of the following events occurs: (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended) becomes after the date hereof the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 30% or more of the total number of
votes that may be cast for the election of directors of the Company
(called in this definition "voting securities"); (ii) at least 40% of the
directors of the Company constitute persons who were not, at the time of
their first election to the Board of Directors of the Company, candidates
proposed by a majority of the Company's Board of Directors in office prior
to the time of such first election; (iii) either stockholder approval of
the dissolution of the Company or the actual dissolution of the Company;
(iv) a sale or other disposition,
<PAGE> 2
or the last sale or other disposition to occur in a series of sales and/or
other dispositions within any 12-month period ("Serial Sales"), by the
Company of assets which (at the time of the sale or disposition or, in the
case of Serial Sales, as of the beginning of such 12-month period) account
for more than 75% of the total assets or 40% of the revenues of the
Company, as determined in accordance with generally accepted accounting
principles; provided, however, that no sale or disposition of assets or
stock shall be taken into account to the extent that the proceeds of such
sale or disposition (whether in cash or in-kind) are reinvested in the
Company or are, in the case of proceeds received in-kind, used in the
ongoing conduct of the Company, provided further that such a reinvestment
shall not be deemed to have occurred unless made within 12 months of such
sale or disposition and provided further that, the term reinvestment shall
include, among other things, the use of proceeds to repay debt incurred in
connection with the operation of the business in which the assets sold or
disposed of were used; (v) the stockholders shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the voting securities
of the Company outstanding immediately prior thereto representing (by
remaining outstanding or being converted into securities of the surviving
entity or otherwise) less than 70% of the voting securities of the Company
or such surviving entity outstanding immediately after such merger,
consolidation, business combination or reorganization; or (vi) any other
event which the Company's Board of Directors determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
(b) Corporation Law. The term "Corporation Law" means the Delaware General
Corporation Law as it exists on the date of this Agreement and as it may
be hereafter amended from time to time. In the case of any amendment of
the Delaware General Corporation Law after the date of this Agreement,
when used in reference to an act or omission occurring prior to
effectiveness of such amendment (unless prohibited by law), the term
"Corporation Law" shall include such amendment only to the extent that the
amendment permits the Company to provide broader indemnification rights
than the Delaware General Corporation Law permitted the Company to provide
prior to the amendment.
(c) Director, Officer or Manager. As used in reference to a position held
by Indemnified Party, the term "director," "officer" or "manager" means a
director officer or manager (as designated by the person's title in the
case of a manager) of the Company and, while a director, officer or
manager of the Company, Indemnified Party's serving at the Company's
request as a director, officer, manager, partner, trustee, employee, agent
or fiduciary of any corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan (including without limitation any
service as a director, officer, manager, employee, agent or fiduciary
which imposes duties on, or involves services by, such director, officer,
manager, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries). The terms "director," "officer" and
"manager" also include, unless the context otherwise requires, the estate
or personal representative of a director, officer or manager. The terms
"director" and "officer" shall also include any such broader definition as
may be provided in the Corporation Law with amendments after the date of
this Agreement.
<PAGE> 3
(d) Potential Change in Control. A "Potential Change in Control" shall be
deemed to have occurred if (i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control (ii) any person or entity (including the Company) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control or (iii) the Board of
Directors adopts a resolution to the effect that, for purposes of this
Agreement, a potential Change in Control has occurred.
(e) Proceeding. The term "proceeding" means any threatened, pending or
completed action, suit or proceeding, or any inquiry or investigation,
whether civil criminal, administrative or investigative, and whether
formal or informal.
(f) Reviewing Party. "Reviewing Party" means the person or body determined
in accordance with Section 9.
5. AGREEMENT TO INDEMNIFY: The Company shall indemnify, and keep indemnified,
Indemnified Party in accordance with, and to the full extent permitted and/or
required by, the Corporation Law and any other applicable law from and against
any expenses (including but not limited to attorneys' fees, expenses of
investigation and preparation, and fees and disbursements of Indemnified Party's
accountants or other experts), judgments, fines (including but not limited to
excise taxes assessed on a person with respect to an employee benefit plan),
penalties and amounts paid in settlement (including without limitation all
interest, assessments and other charges paid or payable in connection with any
of the foregoing) actually and reasonably incurred by Indemnified Party in
connection with any proceeding in which Indemnified Party was or is made a party
or was or is involved (for example, as a witness) by reason of the fact that
Indemnified Party is or was a director, officer or manager of the Company.
6. D&O INSURANCE: So long as Indemnified Party may be subject to any possible
proceeding by reason of the fact that Indemnified Party is or was a director or
officer of the Company, to the extent the Company maintains an insurance policy
or policies providing directors' and officers' liability insurance, Indemnified
Party shall be covered by such policy or policies, in accordance with its or
their terms, to the maximum extent of the coverage applicable to any then
current director or officer of the Company.
7. ADVANCES: In the event of any proceeding in which Indemnified Party is a
party or is involved and which may give rise to a right of indemnification from
the Company pursuant to this Agreement, following written request to the Company
by Indemnified Party, the Company shall pay to Indemnified Party, in accordance
with and to the full extent permitted and/or required by the Corporation Law,
amounts to cover reasonable expenses incurred by Indemnified Party in such
proceeding in advance of its final disposition upon receipt of (a) a written
undertaking executed by or on behalf of Indemnified Party to repay the advance
if it shall ultimately be determined that Indemnified Party is not entitled to
be indemnified by the Company and (b) satisfactory evidence as to the amount of
such expenses.
8. BURDEN OF PROOF: If under applicable law, the entitlement of Indemnified
Party to be indemnified or advanced expenses hereunder depends upon whether a
<PAGE> 4
standard of conduct has been met, the burden of proof of establishing that
Indemnified Party did not act in accordance with such standard shall rest with
the Company. Indemnified Party shall be presumed to have acted in accordance
with such standard and to be entitled to indemnification or the advancement of
expenses (as the case may be) unless, based upon a preponderance of the
evidence, it shall be determined that Indemnified Party has not met such
standard. For purposes of this Agreement, unless otherwise expressly stated, the
termination of any proceeding by judgment, order, settlement (whether with or
without court approval), conviction, or upon a plea of nolo contendere or its
equivalent, shall not create a presumption that Indemnified Party did not meet
any particular standard of conduct or have any particular belief.
9. DETERMINATION REGARDING STANDARD OF CONDUCT; REVIEWING PARTY: Any
determination as to whether Indemnified Party has met an applicable standard of
conduct for indemnification or advancement of expenses and any evaluation as to
the reasonableness of amounts claimed by Indemnified Party shall be made by the
Reviewing Party. If there has not been a Change of Control after the date of
this Agreement, the Reviewing Party shall be the Board of Directors of the
Company or such other body or persons appointed by the Board of Directors of the
Company as permitted by the Corporation Law. If there has been a Change of
Control after the date of this Agreement and if so requested by the Indemnified
Party, the Reviewing Party shall be an independent counsel who is selected by
the Indemnified Party and approved by the Company (which approval shall not be
unreasonably withheld). For this purpose, "independent counsel" means a law firm
or a member of a law firm that neither is at the time, nor in the past five
years has been, retained to represent (i) the Company or the Indemnified Party
in any matter material to either such party or (ii) any other party to the
Proceeding giving rise to a claim for indemnification under this Agreement.
Notwithstanding the foregoing, the term "independent counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing under the law of the State of Delaware, would have a conflict of
interest in representing either the Company or the Indemnified Party in an
action to determine the Indemnified Party's rights under this Agreement. The
Company agrees to pay the reasonable fees of the independent counsel referenced
above and to indemnify fully such independent counsel against any and all
expenses (including without limitation attorneys' fees), liabilities, losses and
damages arising out of or relating to this Agreement or its engagement pursuant
to this Agreement.
10. NOTICE TO THE COMPANY: Indemnified Party shall notify the Secretary of the
Company in writing of any matter for which Indemnified Party intends to seek
indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnified Party of written notice thereof; provided, however, that
delay in so notifying the Company shall not constitute a waiver or release by
Indemnified Party of rights hereunder.
11. COUNSEL FOR PROCEEDING; SETTLEMENTS: In the event of any proceeding in which
Indemnified Party is a party or is involved and which may give rise to a right
of indemnification hereunder, the Company shall have the right to retain counsel
satisfactory to Indemnified Party in his or her discretion, to represent
Indemnified Party and any others the Company may designate in such proceeding.
In any such proceeding, Indemnified Party shall have the right to retain
Indemnified Party's own
<PAGE> 5
counsel but the fees and expenses of such counsel shall be at the expense of
Indemnified Party unless (a) the retention of such counsel has been specifically
authorized by the Company; (b) representation of Indemnified Party and another
party by the same counsel would be inappropriate, in the reasonable judgment of
Indemnified Party, due to actual or potential differing interests between them;
(c) the counsel retained by the Company and satisfactory to Indemnified Party
has advised Indemnified Party, in writing, that such counsel's representation of
Indemnified Party would be likely to involve such counsel in representing
differing interests which could adversely affect either the judgment or loyalty
of such counsel to Indemnified Party, whether it be a conflicting, inconsistent,
diverse or other interest; or (d) the Company shall fail to retain counsel for
Indemnified Party in such proceeding. Notwithstanding the foregoing, if an
insurance carrier has supplied directors' and officers' liability insurance
covering a proceeding and is entitled to retain counsel for the defense of such
proceeding, then the insurance carrier shall retain counsel to conduct the
defense of such proceeding unless Indemnified Party and the Company concur in
writing that the insurance carrier's doing so is undesirable. The Company shall
not be liable under this Agreement for any settlement of any proceeding effected
without its written consent. The Company shall not settle any proceeding in any
manner which would impose any penalty or limitation on Indemnified Party without
Indemnified Party's written consent. Consent to a proposed settlement of any
proceeding shall not be unreasonably withheld by either the Company or
Indemnified Party.
12. ENFORCEMENT; ACTION TO DETERMINE COMPLIANCE WITH STANDARD OF CONDUCT: The
Company acknowledges that Indemnified Party is relying upon this agreement in
serving as a director, officer or manager of the Company. If a claim for
indemnification or advancement of expenses is not paid in full by the Company
within sixty days, or within twenty days in the case of a claim for advancement
of expenses, after a written claim has been received from Indemnified Party by
the Company, Indemnified Party may at any time bring a legal action against the
Company to recover the unpaid amount of the claim. Indemnified Party shall also
be entitled to be paid by the Company all reasonable fees and expenses
(including without limitation fees of counsel) in bringing and prosecuting such
claim, unless as a part of the legal action concerning such claim the court
having jurisdiction over the action determines that each of the material
assertions made by Indemnified Party as a basis for the action was not made in
good filth or was frivolous. Neither the failure of the Reviewing Party or the
Company (including its Board of Directors, independent counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the Indemnified Party is proper in the
circumstances nor an actual determination by the Reviewing Party or the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the Indemnified Party is not entitled to indemnification
shall be a defense to the action, be admissible as evidence, or create a
presumption that the Indemnified Party is not so entitled. Any such action shall
be de novo, and the Indemnified Party shall not be prejudiced by reason of any
such adverse determination. If an action is brought pursuant to this Section, a
final nonappealable order in such action shall constitute the ultimate
determination of the Indemnified Party's right to indemnification. Whether or
not Indemnified Party has met any applicable standard of conduct, the Court in
such suit may order indemnification or the advancement of expenses as the Court
deems proper (subject to any express limitation of the Corporation Law).
Further, the Company shall indemnify Indemnified Party from
<PAGE> 6
and against any and all expenses (including without limitation attorneys' fees)
and, if requested by Indemnified Party, shall (within twenty days of such
request) advance such expenses to Indemnified Party, which are incurred by
Indemnified Party in connection with any claim asserted against or legal action
brought by Indemnified Party for recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
Indemnified Party is unsuccessful in whole or in part in such claim or suit.
13. PROCEEDINGS BY INDEMNIFIED PARTY: Notwithstanding other provisions of this
Agreement to the contrary, prior to a Change in Control the Company shall not
indemnify Indemnified Party and advance expenses to Indemnified Party in
connection with any proceeding (or part thereof) initiated by Indemnified Party
against the Company or any director, officer or manager of the Company unless
such proceeding (or part thereof) was authorized by the Board of Directors of
the Company.
14. ESTABLISHMENT OF TRUST: In the event of a Potential Change in Control the
Company shall, upon written request by Indemnified Party, create a trust for the
benefit of Indemnified Party (and possibly others as described below) and from
time to time upon written request of Indemnified Party shall fund such trust in
an amount sufficient to satisfy any and all expenses and other amounts for which
indemnification may be sought under this Agreement and which at the time of each
such request are reasonably anticipated to be incurred, are proposed to be paid
by Indemnified Party, have actually been paid by Indemnified Party or have
actually been claimed in a proceeding. The amount or amounts to be deposited in
the trust pursuant to the foregoing funding obligation shall be determined by
mutual agreement of the Company and Indemnified Party or, if they are unable to
reach such mutual agreement within ten days after any such request by
Indemnified Party for funding, by a Reviewing Party who is selected in
accordance with Section 9 of this Agreement as if a Change of Control had
occurred. In determining any such amounts, the parties or the Reviewing Party
(as the case may be) shall take into account the availability of any amounts
under any directors' and officers' liability insurance. At the Company's
discretion, the trust created by the Company at the request of the Indemnified
Party pursuant to the foregoing obligation may also be for the benefit of other
existing or former officers, directors or employees of the Company with respect
to indemnification and advancement of expenses, and may be a trust previously
created and existing at the time for the benefit of any such persons. If and to
the extent authorized by the parties or Reviewing Party, as the case may be,
when determining the amounts to be deposited in the trust; the trust may
commingle and combine into one or more funds amounts held for Indemnified Person
and such other persons. The terms of the trust shall provide that upon a Change
in Control (i) the trust shall not be revoked or the principal thereof invaded,
without the written consent of Indemnified Party, (ii) the trustee shall advance
within twenty days of a request by Indemnified Party, any and all expenses to
Indemnified Party (and Indemnified Party hereby agrees to reimburse the trust
under the circumstances under which Indemnified Party would be required to
reimburse the Company under Section 7 of this Agreement), (iii) the trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the trustee shall pay promptly (but in any event within
sixty days after a written claim for indemnification) to Indemnified Party all
amounts for which the Indemnified Party is entitled to indemnification pursuant
to this Agreement; and (v) all unexpended funds in such trust
<PAGE> 7
shall revert to the Company upon a final determination by the Reviewing Party or
a court of competent jurisdiction, as the case may be, that Indemnified Party
has been fully indemnified under the terms of this Agreement. The trustee shall
be an individual or entity chosen by Indemnified Party and approved by the
Company (whose approval shall not be unreasonably withheld). All income earned
on the assets held in the trust shall be reported as income by the Company for
federal, state, local and foreign tax purposes. The Company shall pay all costs
of establishing and maintaining the trust and shall indemnify the trustee
against any and all expenses (including without limitation attorneys' fees),
liabilities, losses and damages arising out of or relating to this Agreement or
the establishment and maintenance of the trust. Nothing in this Section 14 shall
relieve the Company of any of its obligations under this Agreement.
15. NONEXCLUSIVITY: The rights of Indemnified Party for indemnification and
advancement of expenses under this Agreement shall not be deemed exclusive of or
in limitation of any rights to which Indemnified Party may be entitled under
Delaware law, the Company's Certificate of Incorporation or By-laws, vote of
shareholders or otherwise.
16. MISCELLANEOUS:
(a) Effectiveness. This Agreement is effective for, and shall apply to, (i)
any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no action, suit or proceeding has actually been
brought prior to the date of this Agreement and (ii) any action, suit or
proceeding which is threatened before, on or after the date of this
Agreement but which is not pending prior to the date of this Agreement.
Thus, this Agreement shall not apply to any action, suit or proceeding which
has actually been brought before the date of this Agreement. So long as the
foregoing standard of effectiveness has been satisfied, this Agreement shall
be effective for and shall be applied to acts or omissions prior to, on or
after the date of this Agreement.
(b) Survival; Continuation. The rights of Indemnified Party hereunder shall
inure to the benefit of the Indemnified Party (even after Indemnified Party
ceases to be a director, officer or manager), Indemnified Party's personal
representative, heirs, executors, administrators and beneficiaries; and this
Agreement shall be binding upon the Company, its successors and assigns. The
rights of Indemnified Party under this Agreement shall continue so long as
Indemnified Party may be subject to any possible proceeding because of the
fact that Indemnified Party was a director, officer or manager of the
Company. If the Company sells, leases, exchanges or otherwise disposes of in
a single transaction or series of related transactions, all or substantially
all of its property and assets, the Company shall, as a condition precedent
to such transaction, cause effective provision to be made so that the person
or entity acquiring such property and assets shall become bound by and
replace the Company under this Agreement.
(c) Partial Indemnification. If the Indemnified Party is entitled to
indemnification by the Company for some or a portion of expenses, judgments,
fines or settlement amounts actually incurred by the Indemnified Party in a
proceeding but not, however, for the total amount thereof the Company shall
nevertheless indemnify
<PAGE> 8
the Indemnified Party for the portion of such expenses, judgments, fines
or settlement amounts to which the Indemnified Party is entitled.
(d) No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any proceeding against
the Indemnified Party to the extent the Indemnified Party has otherwise
actually received payment (under any insurance policy, bylaw or otherwise)
of the amounts otherwise subject to indemnification under this Agreement.
Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without regard to the conflict of laws principles thereof.
(e) Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without regard to the conflict of the laws principles
thereof.
(f) Severability. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the full extent permitted by law and all other provisions shall
remain in full force and effect.
(g) Amendment. No amendment, termination or cancellation of this Agreement
shall be effective unless in writing signed by the Company and Indemnified
Party.
(h) Subrogation. In the event of payment under this Agreement the Company
shall be subrogated shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
(i) Headings. The headings in this Agreement are for convenience only and
are not to be considered in construing this Agreement.
(j) Counterparts. This Agreement may be executed in counterparts, both of
which shall be deemed an original, and together shall constitute one
document.
The parties have executed this Agreement as of the Effective Date first
above stated.
UROQUEST MEDICAL CORPORATION Indemnified Party
By: /s/ Terry E. Spraker /s/ Alan Marquardt
------------------------------- -----------------------------------------
Alan Marquardt
Title: President and CEO
----------------------------
<PAGE> 1
EXHIBIT 10.20
INDEMNIFICATION AGREEMENT
UROQUEST MEDICAL CORPORATION
1. EFFECTIVE DATE: October 12, 1998
2. PARTIES: UroQuest Medical Corporation Keith Ward
173 Constitution Drive c/o 173 Constitution Drive
Menlo Park, CA 94025 Menlo Park, CA 94025
(the "Company") (the "Indemnified Party")
3. RECITALS/AGREEMENT:
(a) At the request of the "Company", the Indemnified Party currently
serves as a director, officer or manager of the Company (as defined
below), or in a combination of these positions. As such, Indemnified Party
may be subjected to claims, suits or proceedings.
(b) The Company's By-laws and Section 145 of the Delaware General
Corporation Law contemplate that contracts may be made between the Company
and members of its Board of Directors, officers and employees with respect
to indemnification.
(c) In consideration of Indemnified Party's acceptance and continuation of
service as a director, officer or manager, or in a combination of these
positions, after the date of this Agreement, and in consideration of the
mutual covenants stated herein, the parties agree as follows.
4. DEFINITIONS: As used in this Agreement, the following terms have the
following meanings:
(a) Change in Control. A "Change in Control" shall be deemed to have
occurred if any of the following events occurs: (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended) becomes after the date hereof the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 30% or more of the total number of
votes that may be cast for the election of directors of the Company
(called in this definition "voting securities"); (ii) at least 40% of the
directors of the Company constitute persons who were not, at the time of
their first election to the Board of Directors of the Company, candidates
proposed by a majority of the Company's Board of Directors in office prior
to the time of such first election; (iii) either stockholder approval of
the dissolution of the Company or the actual dissolution of the Company;
(iv) a sale or other disposition,
<PAGE> 2
or the last sale or other disposition to occur in a series of sales and/or
other dispositions within any 12-month period ("Serial Sales"), by the
Company of assets which (at the time of the sale or disposition or, in the
case of Serial Sales, as of the beginning of such 12-month period) account
for more than 75% of the total assets or 40% of the revenues of the
Company, as determined in accordance with generally accepted accounting
principles; provided, however, that no sale or disposition of assets or
stock shall be taken into account to the extent that the proceeds of such
sale or disposition (whether in cash or in-kind) are reinvested in the
Company or are, in the case of proceeds received in-kind, used in the
ongoing conduct of the Company, provided further that such a reinvestment
shall not be deemed to have occurred unless made within 12 months of such
sale or disposition and provided further that, the term reinvestment shall
include, among other things, the use of proceeds to repay debt incurred in
connection with the operation of the business in which the assets sold or
disposed of were used; (v) the stockholders shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the voting securities
of the Company outstanding immediately prior thereto representing (by
remaining outstanding or being converted into securities of the surviving
entity or otherwise) less than 70% of the voting securities of the Company
or such surviving entity outstanding immediately after such merger,
consolidation, business combination or reorganization; or (vi) any other
event which the Company's Board of Directors determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
(b) Corporation Law. The term "Corporation Law" means the Delaware General
Corporation Law as it exists on the date of this Agreement and as it may
be hereafter amended from time to time. In the case of any amendment of
the Delaware General Corporation Law after the date of this Agreement,
when used in reference to an act or omission occurring prior to
effectiveness of such amendment (unless prohibited by law), the term
"Corporation Law" shall include such amendment only to the extent that the
amendment permits the Company to provide broader indemnification rights
than the Delaware General Corporation Law permitted the Company to provide
prior to the amendment.
(c) Director, Officer or Manager. As used in reference to a position held
by Indemnified Party, the term "director," "officer" or "manager" means a
director officer or manager (as designated by the person's title in the
case of a manager) of the Company and, while a director, officer or
manager of the Company, Indemnified Party's serving at the Company's
request as a director, officer, manager, partner, trustee, employee, agent
or fiduciary of any corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan (including without limitation any
service as a director, officer, manager, employee, agent or fiduciary
which imposes duties on, or involves services by, such director, officer,
manager, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries). The terms "director," "officer" and
"manager" also include, unless the context otherwise requires, the estate
or personal representative of a director, officer or manager. The terms
"director" and "officer" shall also include any such broader definition as
may be provided in the Corporation Law with amendments after the date of
this Agreement.
<PAGE> 3
(d) Potential Change in Control. A "Potential Change in Control" shall be
deemed to have occurred if (i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control (ii) any person or entity (including the Company) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control or (iii) the Board of
Directors adopts a resolution to the effect that, for purposes of this
Agreement, a potential Change in Control has occurred.
(e) Proceeding. The term "proceeding" means any threatened, pending or
completed action, suit or proceeding, or any inquiry or investigation,
whether civil criminal, administrative or investigative, and whether
formal or informal.
(f) Reviewing Party. "Reviewing Party" means the person or body determined
in accordance with Section 9.
5. AGREEMENT TO INDEMNIFY: The Company shall indemnify, and keep indemnified,
Indemnified Party in accordance with, and to the full extent permitted and/or
required by, the Corporation Law and any other applicable law from and against
any expenses (including but not limited to attorneys' fees, expenses of
investigation and preparation, and fees and disbursements of Indemnified Party's
accountants or other experts), judgments, fines (including but not limited to
excise taxes assessed on a person with respect to an employee benefit plan),
penalties and amounts paid in settlement (including without limitation all
interest, assessments and other charges paid or payable in connection with any
of the foregoing) actually and reasonably incurred by Indemnified Party in
connection with any proceeding in which Indemnified Party was or is made a party
or was or is involved (for example, as a witness) by reason of the fact that
Indemnified Party is or was a director, officer or manager of the Company.
6. D&O INSURANCE: So long as Indemnified Party may be subject to any possible
proceeding by reason of the fact that Indemnified Party is or was a director or
officer of the Company, to the extent the Company maintains an insurance policy
or policies providing directors' and officers' liability insurance, Indemnified
Party shall be covered by such policy or policies, in accordance with its or
their terms, to the maximum extent of the coverage applicable to any then
current director or officer of the Company.
7. ADVANCES: In the event of any proceeding in which Indemnified Party is a
party or is involved and which may give rise to a right of indemnification from
the Company pursuant to this Agreement, following written request to the Company
by Indemnified Party, the Company shall pay to Indemnified Party, in accordance
with and to the full extent permitted and/or required by the Corporation Law,
amounts to cover reasonable expenses incurred by Indemnified Party in such
proceeding in advance of its final disposition upon receipt of (a) a written
undertaking executed by or on behalf of Indemnified Party to repay the advance
if it shall ultimately be determined that Indemnified Party is not entitled to
be indemnified by the Company and (b) satisfactory evidence as to the amount of
such expenses.
8. BURDEN OF PROOF: If under applicable law, the entitlement of Indemnified
Party to be indemnified or advanced expenses hereunder depends upon whether a
<PAGE> 4
standard of conduct has been met, the burden of proof of establishing that
Indemnified Party did not act in accordance with such standard shall rest with
the Company. Indemnified Party shall be presumed to have acted in accordance
with such standard and to be entitled to indemnification or the advancement of
expenses (as the case may be) unless, based upon a preponderance of the
evidence, it shall be determined that Indemnified Party has not met such
standard. For purposes of this Agreement, unless otherwise expressly stated, the
termination of any proceeding by judgment, order, settlement (whether with or
without court approval), conviction, or upon a plea of nolo contendere or its
equivalent, shall not create a presumption that Indemnified Party did not meet
any particular standard of conduct or have any particular belief.
9. DETERMINATION REGARDING STANDARD OF CONDUCT; REVIEWING PARTY: Any
determination as to whether Indemnified Party has met an applicable standard of
conduct for indemnification or advancement of expenses and any evaluation as to
the reasonableness of amounts claimed by Indemnified Party shall be made by the
Reviewing Party. If there has not been a Change of Control after the date of
this Agreement, the Reviewing Party shall be the Board of Directors of the
Company or such other body or persons appointed by the Board of Directors of the
Company as permitted by the Corporation Law. If there has been a Change of
Control after the date of this Agreement and if so requested by the Indemnified
Party, the Reviewing Party shall be an independent counsel who is selected by
the Indemnified Party and approved by the Company (which approval shall not be
unreasonably withheld). For this purpose, "independent counsel" means a law firm
or a member of a law firm that neither is at the time, nor in the past five
years has been, retained to represent (i) the Company or the Indemnified Party
in any matter material to either such party or (ii) any other party to the
Proceeding giving rise to a claim for indemnification under this Agreement.
Notwithstanding the foregoing, the term "independent counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing under the law of the State of Delaware, would have a conflict of
interest in representing either the Company or the Indemnified Party in an
action to determine the Indemnified Party's rights under this Agreement. The
Company agrees to pay the reasonable fees of the independent counsel referenced
above and to indemnify fully such independent counsel against any and all
expenses (including without limitation attorneys' fees), liabilities, losses and
damages arising out of or relating to this Agreement or its engagement pursuant
to this Agreement.
10. NOTICE TO THE COMPANY: Indemnified Party shall notify the Secretary of the
Company in writing of any matter for which Indemnified Party intends to seek
indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnified Party of written notice thereof; provided, however, that
delay in so notifying the Company shall not constitute a waiver or release by
Indemnified Party of rights hereunder.
11. COUNSEL FOR PROCEEDING; SETTLEMENTS: In the event of any proceeding in which
Indemnified Party is a party or is involved and which may give rise to a right
of indemnification hereunder, the Company shall have the right to retain counsel
satisfactory to Indemnified Party in his or her discretion, to represent
Indemnified Party and any others the Company may designate in such proceeding.
In any such proceeding, Indemnified Party shall have the right to retain
Indemnified Party's own
<PAGE> 5
counsel but the fees and expenses of such counsel shall be at the expense of
Indemnified Party unless (a) the retention of such counsel has been specifically
authorized by the Company; (b) representation of Indemnified Party and another
party by the same counsel would be inappropriate, in the reasonable judgment of
Indemnified Party, due to actual or potential differing interests between them;
(c) the counsel retained by the Company and satisfactory to Indemnified Party
has advised Indemnified Party, in writing, that such counsel's representation of
Indemnified Party would be likely to involve such counsel in representing
differing interests which could adversely affect either the judgment or loyalty
of such counsel to Indemnified Party, whether it be a conflicting, inconsistent,
diverse or other interest; or (d) the Company shall fail to retain counsel for
Indemnified Party in such proceeding. Notwithstanding the foregoing, if an
insurance carrier has supplied directors' and officers' liability insurance
covering a proceeding and is entitled to retain counsel for the defense of such
proceeding, then the insurance carrier shall retain counsel to conduct the
defense of such proceeding unless Indemnified Party and the Company concur in
writing that the insurance carrier's doing so is undesirable. The Company shall
not be liable under this Agreement for any settlement of any proceeding effected
without its written consent. The Company shall not settle any proceeding in any
manner which would impose any penalty or limitation on Indemnified Party without
Indemnified Party's written consent. Consent to a proposed settlement of any
proceeding shall not be unreasonably withheld by either the Company or
Indemnified Party.
12. ENFORCEMENT; ACTION TO DETERMINE COMPLIANCE WITH STANDARD OF CONDUCT: The
Company acknowledges that Indemnified Party is relying upon this agreement in
serving as a director, officer or manager of the Company. If a claim for
indemnification or advancement of expenses is not paid in full by the Company
within sixty days, or within twenty days in the case of a claim for advancement
of expenses, after a written claim has been received from Indemnified Party by
the Company, Indemnified Party may at any time bring a legal action against the
Company to recover the unpaid amount of the claim. Indemnified Party shall also
be entitled to be paid by the Company all reasonable fees and expenses
(including without limitation fees of counsel) in bringing and prosecuting such
claim, unless as a part of the legal action concerning such claim the court
having jurisdiction over the action determines that each of the material
assertions made by Indemnified Party as a basis for the action was not made in
good filth or was frivolous. Neither the failure of the Reviewing Party or the
Company (including its Board of Directors, independent counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the Indemnified Party is proper in the
circumstances nor an actual determination by the Reviewing Party or the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the Indemnified Party is not entitled to indemnification
shall be a defense to the action, be admissible as evidence, or create a
presumption that the Indemnified Party is not so entitled. Any such action shall
be de novo, and the Indemnified Party shall not be prejudiced by reason of any
such adverse determination. If an action is brought pursuant to this Section, a
final nonappealable order in such action shall constitute the ultimate
determination of the Indemnified Party's right to indemnification. Whether or
not Indemnified Party has met any applicable standard of conduct, the Court in
such suit may order indemnification or the advancement of expenses as the Court
deems proper (subject to any express limitation of the Corporation Law).
Further, the Company shall indemnify Indemnified Party from
<PAGE> 6
and against any and all expenses (including without limitation attorneys' fees)
and, if requested by Indemnified Party, shall (within twenty days of such
request) advance such expenses to Indemnified Party, which are incurred by
Indemnified Party in connection with any claim asserted against or legal action
brought by Indemnified Party for recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
Indemnified Party is unsuccessful in whole or in part in such claim or suit.
13. PROCEEDINGS BY INDEMNIFIED PARTY: Notwithstanding other provisions of this
Agreement to the contrary, prior to a Change in Control the Company shall not
indemnify Indemnified Party and advance expenses to Indemnified Party in
connection with any proceeding (or part thereof) initiated by Indemnified Party
against the Company or any director, officer or manager of the Company unless
such proceeding (or part thereof) was authorized by the Board of Directors of
the Company.
14. ESTABLISHMENT OF TRUST: In the event of a Potential Change in Control the
Company shall, upon written request by Indemnified Party, create a trust for the
benefit of Indemnified Party (and possibly others as described below) and from
time to time upon written request of Indemnified Party shall fund such trust in
an amount sufficient to satisfy any and all expenses and other amounts for which
indemnification may be sought under this Agreement and which at the time of each
such request are reasonably anticipated to be incurred, are proposed to be paid
by Indemnified Party, have actually been paid by Indemnified Party or have
actually been claimed in a proceeding. The amount or amounts to be deposited in
the trust pursuant to the foregoing funding obligation shall be determined by
mutual agreement of the Company and Indemnified Party or, if they are unable to
reach such mutual agreement within ten days after any such request by
Indemnified Party for funding, by a Reviewing Party who is selected in
accordance with Section 9 of this Agreement as if a Change of Control had
occurred. In determining any such amounts, the parties or the Reviewing Party
(as the case may be) shall take into account the availability of any amounts
under any directors' and officers' liability insurance. At the Company's
discretion, the trust created by the Company at the request of the Indemnified
Party pursuant to the foregoing obligation may also be for the benefit of other
existing or former officers, directors or employees of the Company with respect
to indemnification and advancement of expenses, and may be a trust previously
created and existing at the time for the benefit of any such persons. If and to
the extent authorized by the parties or Reviewing Party, as the case may be,
when determining the amounts to be deposited in the trust; the trust may
commingle and combine into one or more funds amounts held for Indemnified Person
and such other persons. The terms of the trust shall provide that upon a Change
in Control (i) the trust shall not be revoked or the principal thereof invaded,
without the written consent of Indemnified Party, (ii) the trustee shall advance
within twenty days of a request by Indemnified Party, any and all expenses to
Indemnified Party (and Indemnified Party hereby agrees to reimburse the trust
under the circumstances under which Indemnified Party would be required to
reimburse the Company under Section 7 of this Agreement), (iii) the trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the trustee shall pay promptly (but in any event within
sixty days after a written claim for indemnification) to Indemnified Party all
amounts for which the Indemnified Party is entitled to indemnification pursuant
to this Agreement; and (v) all unexpended funds in such trust
<PAGE> 7
shall revert to the Company upon a final determination by the Reviewing Party or
a court of competent jurisdiction, as the case may be, that Indemnified Party
has been fully indemnified under the terms of this Agreement. The trustee shall
be an individual or entity chosen by Indemnified Party and approved by the
Company (whose approval shall not be unreasonably withheld). All income earned
on the assets held in the trust shall be reported as income by the Company for
federal, state, local and foreign tax purposes. The Company shall pay all costs
of establishing and maintaining the trust and shall indemnify the trustee
against any and all expenses (including without limitation attorneys' fees),
liabilities, losses and damages arising out of or relating to this Agreement or
the establishment and maintenance of the trust. Nothing in this Section 14 shall
relieve the Company of any of its obligations under this Agreement.
15. NONEXCLUSIVITY: The rights of Indemnified Party for indemnification and
advancement of expenses under this Agreement shall not be deemed exclusive of or
in limitation of any rights to which Indemnified Party may be entitled under
Delaware law, the Company's Certificate of Incorporation or By-laws, vote of
shareholders or otherwise.
16. MISCELLANEOUS:
(a) Effectiveness. This Agreement is effective for, and shall apply to, (i)
any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no action, suit or proceeding has actually
been brought prior to the date of this Agreement and (ii) any action, suit
or proceeding which is threatened before, on or after the date of this
Agreement but which is not pending prior to the date of this Agreement.
Thus, this Agreement shall not apply to any action, suit or proceeding
which has actually been brought before the date of this Agreement. So long
as the foregoing standard of effectiveness has been satisfied, this
Agreement shall be effective for and shall be applied to acts or omissions
prior to, on or after the date of this Agreement.
(b) Survival; Continuation. The rights of Indemnified Party hereunder shall
inure to the benefit of the Indemnified Party (even after Indemnified Party
ceases to be a director, officer or manager), Indemnified Party's personal
representative, heirs, executors, administrators and beneficiaries; and
this Agreement shall be binding upon the Company, its successors and
assigns. The rights of Indemnified Party under this Agreement shall
continue so long as Indemnified Party may be subject to any possible
proceeding because of the fact that Indemnified Party was a director,
officer or manager of the Company. If the Company sells, leases, exchanges
or otherwise disposes of in a single transaction or series of related
transactions, all or substantially all of its property and assets, the
Company shall, as a condition precedent to such transaction, cause
effective provision to be made so that the person or entity acquiring such
property and assets shall become bound by and replace the Company under
this Agreement.
(c) Partial Indemnification. If the Indemnified Party is entitled to
indemnification by the Company for some or a portion of expenses,
judgments, fines or settlement amounts actually incurred by the Indemnified
Party in a proceeding but not, however, for the total amount thereof the
Company shall nevertheless indemnify
<PAGE> 8
the Indemnified Party for the portion of such expenses, judgments, fines
or settlement amounts to which the Indemnified Party is entitled.
(d) No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any proceeding against
the Indemnified Party to the extent the Indemnified Party has otherwise
actually received payment (under any insurance policy, bylaw or otherwise)
of the amounts otherwise subject to indemnification under this Agreement.
Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without regard to the conflict of laws principles thereof.
(e) Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without regard to the conflict of the laws principles
thereof.
(f) Severability. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the full extent permitted by law and all other provisions shall
remain in full force and effect.
(g) Amendment. No amendment, termination or cancellation of this Agreement
shall be effective unless in writing signed by the Company and Indemnified
Party.
(h) Subrogation. In the event of payment under this Agreement the Company
shall be subrogated shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
(i) Headings. The headings in this Agreement are for convenience only and
are not to be considered in construing this Agreement.
(j) Counterparts. This Agreement may be executed in counterparts, both of
which shall be deemed an original, and together shall constitute one
document.
The parties have executed this Agreement as of the Effective Date first
above stated.
UROQUEST MEDICAL CORPORATION Indemnified Party
By: /s/ Terry E. Spraker /s/ Keith Ward
------------------------------- -----------------------------------------
Keith Ward
Title: President and CEO
----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF UROQUEST MEDICAL
CORPORATION, INCLUDING THE NOTES THERETO, OF SEPTEMBER 30, 1998 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,757,864
<SECURITIES> 0
<RECEIVABLES> 2,852,342
<ALLOWANCES> 60,000
<INVENTORY> 2,797,611
<CURRENT-ASSETS> 13,606,081
<PP&E> 7,632,141
<DEPRECIATION> 2,805,325
<TOTAL-ASSETS> 29,139,352
<CURRENT-LIABILITIES> 3,118,090
<BONDS> 0
0
0
<COMMON> 12,118
<OTHER-SE> 25,079,525
<TOTAL-LIABILITY-AND-EQUITY> 29,139,352
<SALES> 12,947,140
<TOTAL-REVENUES> 12,947,140
<CGS> 6,520,856
<TOTAL-COSTS> 6,520,856
<OTHER-EXPENSES> 9,088,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,871
<INCOME-PRETAX> (2,412,863)
<INCOME-TAX> 76,000
<INCOME-CONTINUING> (2,488,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,488,863)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
