<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
UROQUEST MEDICAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
UroQuest Medical Corporation Common Stock, par value $0.001 per share
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
shares of UroQuest Medical Corporation Common Stock, par value
$0.001 per share
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
UroQuest Medical Corporation, Chemfab Corporation, and UROK
Acquisition Corp. have entered into an Agreement and Plan of Merger,
dated as of June 3, 1999. The filing fee has been calculated in
accordance with Rule 0-11 under the Exchange Act and is equal to 1/50
of 1% of the product of the following (1) the aggregate number of
shares to which the transaction applies, multiplied by (2) $2.25, the
amount that each stockholder will receive per share.
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$29,000,000
------------------------------------------------------------------------
(5) Total fee paid:
$5,800.00
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
UROQUEST MEDICAL CORPORATION
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
To the Stockholders of UroQuest Medical Corporation:
You are cordially invited to attend a special meeting of the stockholders
of UroQuest Medical Corporation, to be held on December 23, 1999 at 10:00 a.m.,
local time, at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, located at 650 Page Mill Road, Palo Alto, California 94304.
At the special meeting, you will be asked to consider a proposal to approve
and adopt the Agreement and Plan of Merger, dated as of June 3, 1999, relating
to the merger of a wholly-owned subsidiary of Chemfab Corporation with and into
UroQuest, and to approve the merger and the other transactions described in the
merger agreement. If the merger is consummated, UroQuest will become a
wholly-owned subsidiary of Chemfab and each share of UroQuest common stock will
be converted into the right to receive $2.23 in cash, resulting in a total
aggregate consideration of $29,000,000, subject to adjustment based on a number
of factors, including the amount of UroQuest's net operating losses and net
current assets, to be determined prior to closing of the merger, without
interest which represents a forty-three percent (43%) premium over the market
price of $1.5625 as of June 3, 1999. In the event that we waive a material
condition to the closing of the merger, or in the event that the negative
adjustment of the per share purchase price is material, UroQuest will resolicit
your approval and adoption of the Agreement and Plan of Merger and your approval
of the merger and the other transactions described in the merger agreement.
Treasury shares which UroQuest owns, shares which Chemfab and its subsidiaries
own, if any, and shares owned by stockholders who perfect appraisal rights under
Delaware law, however, will not be converted as described above.
UROQUEST'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE
MERGER AGREEMENT WITH CHEMFAB AND THE RELATED TRANSACTIONS AND HAS CONCLUDED
THAT THE PROPOSED MERGER AND RELATED TRANSACTIONS ARE ADVISABLE AND IN THE BEST
INTERESTS OF UROQUEST'S STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
THE MERGER, AS WELL AS FOR THE OTHER MATTERS TO BE VOTED UPON AT THE SPECIAL
MEETING.
UroQuest stockholders who beneficially own approximately 48% of the
outstanding shares of UroQuest common stock have entered into a Stockholder
Voting Agreement with Chemfab, under which they have agreed to vote all of their
shares of UroQuest stock in favor of the approval and adoption of the merger
agreement and the merger, and have granted to Chemfab an option to acquire their
shares under certain circumstances. As a result of the Stockholder Voting
Agreement, UroQuest expects that its stockholders will approve and adopt the
merger agreement and the merger. Nevertheless, I urge you to complete, sign and
promptly return the enclosed proxy card to assure that your shares will be voted
at the special meeting.
In the materials accompanying this letter, you will find a Notice of
Special Meeting, a Proxy Statement relating to the actions to be taken by
UroQuest's stockholders at the special meeting and a proxy card. The proxy
statement provides you with detailed information about the proposed merger. I
encourage you to read the proxy statement and notice carefully. If you have any
questions about the merger, please contact Jeffrey Kaiser, UroQuest's Chief
Financial Officer, at 650-463-5180.
On behalf of your Board of Directors, I thank you for your support and urge
you to vote for approval and adoption of the merger agreement and the merger,
and for the other matters to be voted upon at the special meeting.
Sincerely,
/s/ Terry E. Spraker
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
<PAGE> 3
UROQUEST MEDICAL CORPORATION
1907 CARMELITA DRIVE
SAN CARLOS, CALIFORNIA 94070
------------------------
NOTICE OF SPECIAL MEETING OF UROQUEST MEDICAL CORPORATION STOCKHOLDERS
TO BE HELD ON DECEMBER 23, 1999
------------------------
To UroQuest Stockholders:
Notice is hereby given that a special meeting of the stockholders of
UroQuest Medical Corporation will be held on December 23, 1999 at 10:00 a.m.,
local time, at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, located at 650 Page Mill Road, Palo Alto, California 94304, for the
following purposes:
1. to consider a proposal to approve and adopt the Agreement and Plan of
Merger, dated as of June 3, 1999, among UroQuest, Chemfab Corporation, and UROK
Acquisition Corp., a wholly-owned subsidiary of Chemfab that was created to
complete the merger, and to approve and adopt the merger and the other
transactions described in the merger agreement; and
2. to transact any other business that may properly come before the special
meeting and any adjournments thereof, including adjournments or postponements of
the special meeting for the purpose of soliciting additional proxies to approve
and adopt the merger agreement and the merger.
The close of business on November 29, 1999 has been fixed as the record
date for determining which stockholders are entitled to notice of and to vote at
the special meeting and at any postponement or adjournment of the special
meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE RETURN POSTAGE-PAID
ENVELOPE. PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
If you attend the special meeting, you may vote your shares in person,
which will revoke any previously executed proxy. If your shares are held of
record by a broker, bank or other nominee and you wish to vote your shares at
the special meeting, you must obtain from the record holder a proxy issued in
your name.
Regardless of how many shares you own, your vote is very important. PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY.
By Order of the Board of Directors
of UroQuest Medical Corporation,
/s/ Jeffrey L. Kaiser
Jeffrey L. Kaiser
Secretary
Menlo Park, California
December 3, 1999
<PAGE> 4
PROXY STATEMENT
OF
UROQUEST MEDICAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY OF THE PROXY STATEMENT.............................. 3
FORWARD-LOOKING STATEMENTS.................................. 10
THE SPECIAL MEETING......................................... 11
When And Where The Special Meeting Will Be Held........... 11
What Will Be Voted Upon................................... 11
Only Stockholders of Record as of November 29, 1999 Are
Entitled to Vote at the Special Meeting................ 11
Number Of Shares That Must Be Present For A Vote To Be
Taken.................................................. 11
Votes Required For Approval............................... 11
Voting Your Shares And How Proxies Are Counted............ 12
Revocability Of Proxy..................................... 12
Solicitation Of Proxies................................... 13
Independent Public Accountants............................ 13
INFORMATION ABOUT THE MERGER................................ 13
Background Of The Merger.................................. 13
Recommendation Of The Board Of Directors And Reasons For
The Merger............................................. 16
Vector Fairness Opinion................................... 18
SUMMARY OF THE MERGER AGREEMENT............................. 21
Structure And Effective Time.............................. 21
Merger Consideration...................................... 21
Payment Procedures........................................ 22
Stock Options............................................. 22
Appraisal Rights.......................................... 23
Amendment of Merger Agreement............................. 23
Representations And Warranties............................ 24
Conduct Prior To The Effective Time....................... 24
Additional Agreements..................................... 25
Conditions To The Merger.................................. 27
Termination Of The Merger Agreement....................... 28
Break-Up Fee.............................................. 28
Payment Of Fees And Expenses.............................. 29
Amendments And Waivers.................................... 29
Consequences Of The Merger................................ 29
Voting Agreement.......................................... 29
Chemfab's Source Of Funds................................. 30
Interest Of UroQuest's Directors And Executive Officers In
The Merger............................................. 30
Accounting Treatment...................................... 31
Federal Income Tax Consequences Of The Merger To
Stockholders And Option Holders........................ 31
UROQUEST STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE MERGER TO THEM........................ 32
Regulatory Approvals...................................... 32
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INFORMATION CONCERNING UROQUEST............................. 33
Business.................................................. 33
Properties................................................ 41
Legal Proceedings......................................... 42
Market Price Of UroQuest's Common Equity And Related
Stockholder Matters.................................... 42
Security Ownership of Certain Beneficial Owners and
Management............................................. 42
Selected Financial Data................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 46
Overview.................................................. 46
Results Of Operations..................................... 46
Liquidity And Capital Resources........................... 51
Year 2000 Compliance...................................... 53
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 54
OTHER MATTERS............................................... 54
WHERE YOU CAN FIND MORE INFORMATION......................... 54
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
ANNEXED DOCUMENTS
<TABLE>
<S> <C> <C>
ANNEX A Agreement And Plan Of Merger................................ A-1
ANNEX B Stockholder Voting Agreement................................ B-1
ANNEX C Opinion Of Vector Securities International, Inc............. C-1
ANNEX D Section 262 Of The Delaware General Corporation Law......... D-1
ANNEX E Agreement Concerning Agreement and Plan of Merger........... E-1
</TABLE>
ii
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE FOR MY SHARES IN THE MERGER?
A: At the special meeting, holders of UroQuest Medical Corporation common stock
will consider a proposal to approve and adopt a merger agreement relating to
the merger of UROK Acquisition Corp. ("Merger Sub"), a wholly-owned,
indirect subsidiary of Chemfab Corporation, with and into UroQuest, with
UroQuest surviving as a subsidiary of Chemfab. If the merger is consummated,
holders of UroQuest common stock will be entitled to receive the merger
consideration of $2.23 per share in cash, subject to adjustment based on a
number of factors, including the amount of UroQuest's net operating losses
and net current assets, to be determined prior to the closing of the merger,
without interest, in exchange for each share of UroQuest common stock that
they own.
Q: WHY IS THE UROQUEST BOARD OF DIRECTORS RECOMMENDING THE MERGER AGREEMENT?
A: In the opinion of UroQuest's Board of Directors, the merger offers you the
best opportunity to realize value from your investment in UroQuest. The
merger offers you an opportunity to realize value from your investment in
UroQuest in an amount greater than the value reflected by the recent market
prices of UroQuest's common stock. The Board received a fairness opinion
from Vector Securities International, Inc., UroQuest's financial advisor,
that the merger consideration is fair to holders of UroQuest common stock
from a financial point of view. The merger consideration of $2.23 per share,
which is subject to adjustment as described above, represents a 43% premium
over the closing price of UroQuest common stock on the Nasdaq National
Market ("Nasdaq") on June 3, 1999 the last trading day prior to the
announcement of the merger.
Q: WHEN DO YOU EXPECT THE MERGER WILL BE COMPLETED?
A: We hope to complete the merger promptly after the UroQuest stockholders
approve and adopt the merger agreement and the merger at the special
meeting. The special meeting is scheduled for December 23, 1999. However,
the merger may be delayed if other closing conditions have not been
satisfied by that time.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE MERGER?
A: If you are subject to federal income tax, you may be taxed on your receipt
of the merger consideration to the extent that the amount you receive
exceeds your tax basis in your UroQuest common stock. Additionally, in the
event that your tax basis in your UroQuest common stock exceeds the merger
consideration, the resulting loss may have an effect on your federal income
tax liability. However, tax matters are complicated, and tax results may
vary among stockholders. We urge you to contact your own tax advisor to
fully understand how the merger will affect you.
Q: WHAT IS THE REQUIRED VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE
MERGER?
A: The affirmative vote of a majority of the outstanding shares of UroQuest
common stock entitled to vote is required to approve and adopt the merger
agreement and the merger.
UroQuest stockholders who beneficially own approximately 48% of the
outstanding shares of UroQuest common stock have entered into a Stockholder
Voting Agreement with Chemfab under which they have agreed to vote all of
their shares of UroQuest stock in favor of approval and adoption of the
merger agreement and the merger, and have granted to Chemfab an option to
acquire their shares under certain circumstances. Consequently, holders of
only approximately 2% of UroQuest common stock who are not parties to the
Stockholder Voting Agreement need to vote in favor of the merger agreement
for stockholder approval of the merger agreement and the merger to be
obtained. As a result of the Stockholder Voting Agreement, UroQuest expects
that its stockholders will adopt and approve the merger agreement and the
merger.
THE UROQUEST BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
1
<PAGE> 7
Q: WILL I HAVE APPRAISAL RIGHTS?
A: Any stockholder who does not wish to accept the merger consideration has the
right under Delaware law to have the "fair value" of his or her shares
determined by the Delaware Chancery Court. This "appraisal right" is subject
to a number of restrictions and technical requirements. You may withdraw
your request for appraisal any time within 60 days of the effective date of
the merger. In addition, you can find more information regarding the
restrictions and technical requirements related to your appraisal rights in
Delaware Code, Title 8, Section 262, Appraisal Rights. The text of this
section is reproduced for your convenience as Annex D to these materials.
Q: WHAT DO I NEED TO DO NOW?
A: PLEASE VOTE. You should mail your completed, signed and dated proxy card in
the enclosed envelope as soon as possible, so that your shares will be
represented at the special meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will send you written instructions that
will tell you how to exchange your stock certificates for the merger
consideration. Please hold your certificates until you receive our
instructions.
Q: HOW DO I VOTE SHARES HELD IN MY BROKER'S NAME?
A: If your broker holds your shares of UroQuest common stock in his or her name
(or in what is commonly called "street name"), then you should give your
broker written instructions on how to vote. Your broker will not vote your
shares if you do not give these instructions.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time (before your proxy is voted) in
any one of the following three ways:
- by filing a written notice of revocation;
- by completing and submitting a new, later-dated proxy card; or
- by attending the special meeting and voting in person.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have questions about the proposed merger, please call Jeffrey Kaiser,
Vice President and Chief Financial Officer of UroQuest, at (650) 463-5180.
2
<PAGE> 8
SUMMARY OF THE PROXY STATEMENT
This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. To understand
fully the proposed merger to be voted upon at the special meeting, and for a
more complete description of the terms of the merger, you should read carefully
the entire proxy statement, the annexed documents and the other available
information referred to in "Where You Can Find More Information" (page 54). The
merger agreement is attached as Annex A to this proxy statement. We encourage
you to read the merger agreement, which is the legal document that governs the
merger. We have included page references parenthetically to direct you to a more
complete description of the topics presented in this summary.
PARTIES TO THE MERGER
UROQUEST MEDICAL CORPORATION
Through its Bivona subsidiary, based in Gary, Indiana, UroQuest designs,
develops, manufactures and markets a line of proprietary silicone medical device
products used to manage airway problems, as well as provides engineering design,
development and manufacturing services for silicone products on an OEM basis for
other medical device companies. In July 1999, pursuant to the merger agreement,
UroQuest terminated the operations of its urology division. As of October 15,
1999, UroQuest completed the closure of its corporate headquarters in Menlo
Park. UroQuest's mailing address is 1907 Carmelita Drive, San Carlos,
California, 94070, and its telephone number is (650) 463-5180.
CHEMFAB CORPORATION
Chemfab is a leader in the design, manufacture, fabrication and marketing
of value added polymer-based products which deliver outstanding performance in
severe service and highly specialized operating environments. Chemfab
manufactures a broad range of reinforced and unreinforced products based on high
performance polymer materials including fluoroplastics, fluoroelastomers,
silicone elastomers and adhesives. Chemfab's products include laminates, films,
coated fabrics and tapes. Chemfab also produces molded polymer products and
fabricated finished articles from roll goods. Worldwide end use applications for
Chemfab's products are in the food processing, biomedical, protective clothing,
electronics, communications, aerospace, architectural and other industrial
markets and applications. The headquarters and principal executive offices of
Chemfab are located at 701 Daniel Webster Highway, Merrimack, New Hampshire
03054, and its telephone number is (603) 424-9000.
UROK ACQUISITION CORP.
Merger Sub is a wholly-owned subsidiary of Chemfab incorporated solely to
effect the merger with UroQuest. Merger Sub has had no prior business and, upon
consummation of the merger, its separate corporate existence will cease. The
headquarters and principal executive offices of Merger Sub are located at 701
Daniel Webster, Highway, Merrimack, New Hampshire 03054, and its telephone
number is (603) 424-9000.
THE SPECIAL MEETING
DATE, TIME AND PLACE (PAGE 11)
The special meeting will be held on December 23, 1999 at 10:00 a.m., local
time at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, located at 650 Page Mill Road, Palo Alto, California 94304.
PURPOSE (PAGE 11)
Holders of UroQuest common stock will be asked to consider and vote upon a
proposal to approve and adopt the merger agreement and the merger. Upon the
terms and subject to the conditions of the merger agreement, UROK Acquisition
Corp. ("Merger Sub"), a wholly-owned, indirect subsidiary of Chemfab
3
<PAGE> 9
Corporation, will be merged with and into UroQuest, with UroQuest surviving as a
wholly-owned, indirect subsidiary of Chemfab.
In July 1999, pursuant to the merger agreement, UroQuest completed the
termination of the operations of its urology division. As of October 15, 1999,
UroQuest completed the closure of its corporate headquarters in Menlo Park,
California.
The attorneys-in-fact named in the accompanying proxy also will have
discretionary authority to vote upon other business, if any, that properly comes
before the special meeting and any adjournments of the special meeting,
including any adjournments or postponements for the purpose of soliciting
additional proxies to approve and adopt the merger agreement and the merger.
RECORD DATE AND VOTING POWER (PAGE 11)
You are entitled to vote at the special meeting if you owned shares of
UroQuest common stock at the close of business on November 29, 1999, the record
date for the special meeting. You will have one vote at the special meeting for
each share of UroQuest common stock you owned on the record date. As of the
record date, there were 12,538,997 shares of UroQuest common stock entitled to
be voted at the special meeting.
VOTES REQUIRED (PAGE 11)
The transaction of business at the special meeting requires a quorum, which
means the presence in person or by proxy of the holders of a majority of the
outstanding shares of UroQuest common stock entitled to vote at the special
meeting.
If a quorum is present, approval and adoption of the merger agreement and
the merger requires the affirmative vote of a majority of the outstanding shares
of UroQuest common stock.
As a result of a Stockholder Voting Agreement between Chemfab, UroQuest and
UroQuest stockholders who are the beneficial owners of approximately 48% of the
shares of UroQuest common stock, UroQuest expects that its stockholders will
approve and adopt the merger agreement and the merger. Nevertheless, the
UroQuest Board of Directors urges all UroQuest stockholders to vote "FOR"
approval and adoption of the merger agreement and the merger.
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS (PAGE 42)
As of the record date, the current directors and executive officers of
UroQuest beneficially owned approximately 48% of the shares of UroQuest common
stock entitled to vote at the special meeting. Each of them has advised UroQuest
that he or she plans to vote all his or her shares in favor of approval and
adoption of the merger agreement and the merger.
REVOCABILITY OF PROXY (PAGE 12)
Any stockholder who executes and returns a proxy may revoke that proxy at
any time before it is voted in any one of the following three ways:
- filing a written notice of revocation, bearing a later date than the
proxy, with the corporate secretary of UroQuest at or before the special
meeting;
- duly executing a proxy relating to the same shares of UroQuest common
stock, bearing a later date than the proxy you wish to revoke, and
delivering it to the corporate secretary of UroQuest at or before the
special meeting; or
- attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, constitute
revocation of a proxy.
MARKET PRICE OF UROQUEST COMMON STOCK PRIOR TO ANNOUNCEMENT OF MERGER (PAGE 42)
On June 3, 1999, the last full trading day prior to the public announcement
of the merger, the highest reported sales price for shares of UroQuest common
stock was $1.6250 per share, the lowest reported sales price for shares of
UroQuest common stock was $1.5000 per share, and the last reported sales price
for shares of UroQuest common stock was $1.5625 per share.
4
<PAGE> 10
THE MERGER
STRUCTURE (PAGE 21)
Upon the terms and subject to the conditions of the merger agreement,
Merger Sub will be merged with and into UroQuest, with UroQuest surviving as a
wholly-owned, indirect subsidiary of Chemfab.
EFFECTIVE TIME (PAGE 21)
We currently expect that the merger will become effective promptly after
approval and adoption of the merger agreement and the merger at the special
meeting, which is scheduled to take place on December 23, 1999. A number of
conditions must be satisfied prior to the completion of the merger. If these
conditions are not satisfied in a timely manner, the closing may be delayed or
the merger agreement may be terminated.
MERGER CONSIDERATION (PAGE 21)
At the effective time of the merger, each outstanding share of UroQuest
common stock will be converted into the right to receive the merger
consideration equal to $2.23 in cash, subject to adjustment based on a number of
factors, including the amount of UroQuest's net operating losses and net current
assets, with any adjustment to be determined prior to the closing of the merger,
without interest. Shares which UroQuest owns, shares which Chemfab and its
subsidiaries own and shares owned by stockholders who perfect appraisal rights
under Delaware corporate law, however, will not be converted into the right to
receive the merger consideration.
PAYMENT PROCEDURES (PAGE 22)
Prior to the effective time, Chemfab will select a bank or trust company to
serve as the exchange agent. Upon completion of the merger, each holder of
certificates representing shares of UroQuest common stock outstanding
immediately prior to the effective time of the merger will, by surrendering
those certificates to the exchange agent, be entitled to receive the appropriate
merger consideration. The exchange agent will mail a letter of transmittal with
instructions to all record holders of UroQuest common stock as of the effective
time for use in surrendering their certificates in exchange for the merger
consideration. You should not surrender your certificates until you have
received the letter of transmittal and instructions.
STOCK OPTIONS (PAGE 22)
The merger agreement provides that each outstanding option to purchase
UroQuest common stock granted under the UroQuest stock option plan, whether or
not the option is then exercisable, will be cancelled by UroQuest and each
holder of a cancelled option will receive, promptly after the merger becomes
effective, a cash amount equal to the excess (if any) of the per share merger
consideration over the option's exercise price multiplied by the number of
shares covered by the option.
APPRAISAL RIGHTS (PAGE 22 AND ANNEX D)
Under Delaware law, UroQuest stockholders who do not vote for approval and
adoption of the merger agreement and the merger and who comply with the other
statutory requirements may elect to receive, in cash, the judicially determined
appraised value of their shares of UroQuest common stock.
BOARD RECOMMENDATIONS TO STOCKHOLDERS AND REASONS FOR THE MERGER (PAGE 16)
The Board believes that the merger is advisable and in your best interests
and unanimously recommends that you vote "FOR" approval and adoption of the
merger agreement and the merger. The Board based its determination to approve
and adopt the merger agreement and the merger on a number of considerations,
including the following:
- the history of UroQuest's discussions with other parties, including,
without limitation, (1) the extensive efforts of Vector to assist
UroQuest in exploring strategic initiatives to enhance stockholder value,
(2) the fair and ample opportunity provided to other parties to submit
proposals to UroQuest, (3) the fact that, despite these efforts, UroQuest
had received only one alternative proposal for the acquisition of the
company, (4) the superiority of Chemfab's proposal over the proposal made
by
5
<PAGE> 11
another potential buyer, (5) the absence of any proposal to acquire
UroQuest's urology business, and (6) the extensive arms-length
negotiations between UroQuest and Chemfab that resulted in the $2.23 per
share price which is subject to adjustment as previously described;
- the favorable terms and conditions of the merger agreement, including the
parties' representations, warranties and covenants, the conditions to
their respective obligations, the limited ability of Chemfab and Merger
Sub to terminate the merger or the merger agreement and the provision
requiring payment of the merger consideration in cash;
- the significant risks inherent in UroQuest's remaining independent,
including, without limitation, (1) uncertainties relating to the
regulatory clearance of UroQuest's urology products for sale in the
United States, particularly in light of the U.S. Food and Drug
Administration's denial of 510(k) premarket clearance for the Male
On-Command Continence System for acute applications, (2) uncertainties
relating to the availability of reimbursement for UroQuest's urology
products, (3) the need for significant additional financing to support
several more years of development and clinical trials of UroQuest's
urology products, and to develop a sales and marketing organization for
those products, and (4) the impairment of Bivona's business due to
UroQuest's need to raise additional financing to support its urology
operations;
- the value of the merger consideration compared with the recent trading
price of UroQuest common stock on Nasdaq, including the fact that the
merger consideration to be paid represents a premium of approximately 43%
over the $1.5625 closing sale price for the shares on June 3, 1999, the
last trading day prior to the public announcement of the execution of the
merger agreement;
- the oral presentation that Vector Securities International, Inc.
delivered to the Board on June 2, 1999 and Vector's June 2, 1999 written
fairness opinion, which concluded that, as of the date of the opinion,
the $29 million cash consideration (subject to adjustments as previously
described) that UroQuest stockholders would receive in the merger was
fair to UroQuest stockholders from a financial point of view;
- that the merger agreement permits the Board, in the exercise of its
fiduciary duties and subject to certain conditions, to furnish
information, and to participate in discussions and negotiations, in
connection with an unsolicited acquisition proposal that is superior to
the merger agreement and to recommend an unsolicited, superior
acquisition proposal to UroQuest's stockholders;
- that the merger agreement permits the Board, in the exercise of its
fiduciary duties and subject to certain conditions, to terminate the
merger agreement in favor of an alternative, superior acquisition
proposal, subject to the obligation to pay Chemfab a termination fee of
$500,000; and
- the assessment that Chemfab has the financial commitments necessary for
it to consummate the merger.
VECTOR FAIRNESS OPINION (PAGE 18 AND ANNEX B)
On June 2, 1999, Vector delivered its opinion to the Board to the effect
that, as of that date, the cash consideration of $29 million, subject to certain
adjustments, that UroQuest stockholders would receive in the merger was fair to
UroQuest stockholders from a financial point of view. The opinion does not
constitute a recommendation as to how any UroQuest stockholder should vote with
respect to the adoption of the merger agreement. You are urged to read the
Vector fairness opinion, which is attached to this proxy statement as Annex C,
in its entirety.
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INTERESTS OF UROQUEST'S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER AND
POSSIBLE CONFLICTS OF INTEREST (PAGE 30)
In considering the recommendation of the Board that you vote "FOR" the
adoption and approval of the merger agreement and the merger, you should be
aware that a number of UroQuest's directors and executive officers have
interests in the merger that are or may be different from other UroQuest
stockholders.
At or prior to the effective time, certain of UroQuest's current executive
officers will be terminated. This termination will trigger rights that some
executive officers hold pursuant to their respective employment contracts and
arrangements. These rights include the right to receive severance payments.
The merger agreement provides that Chemfab will negotiate with Thomas E.
Brandt, UroQuest's current Chief Operating Officer and a director of UroQuest,
regarding the terms of a new employment agreement, but that unless and until a
new employment agreement is reached, Chemfab will honor the terms of Mr.
Brandt's existing employment agreement. In addition, the merger agreement
provides that UroQuest (as the surviving corporation) will make accrued bonus
payments to Mr. Brandt that were earned prior to the effective time.
Chemfab also has agreed to cause UroQuest to indemnify each UroQuest
officer and director against losses arising from his or her service as a
director or officer of UroQuest and to continue to maintain directors' and
officers' liability insurance for each UroQuest officer and director. See
"Summary of the Merger Agreement -- Additional Agreements -- Indemnification and
Insurance."
Four UroQuest stockholders, who beneficially own, in the aggregate,
approximately 48% of the outstanding UroQuest Common Stock, have executed the
Stockholder Voting Agreement. Thomas E. Brandt, a member of UroQuest's Board of
Directors, executed the Stockholder Voting Agreement on behalf of himself,
Richard C. Davis, MD, a member of UroQuest's Board of Directors, executed the
Stockholder Voting Agreement on behalf of his trust, Jack W. Lasersohn, a member
of UroQuest's Board of Directors, executed the Stockholder Voting Agreement on
behalf of Vertical Fund Associates, L.P., and Elizabeth H. Weatherman, a member
of UroQuest's Board of Directors, executed the Stockholder Voting Agreement on
behalf of Warburg, Pincus Investors, L.P. The Stockholder Voting Agreement,
among other things, (1) requires such stockholders to vote the shares of
UroQuest common stock beneficially owned by them in favor of approving and
adopting the merger agreement and the merger, unless certain exceptions become
applicable, and (2) grants to Chemfab an option to acquire such stockholders'
UroQuest shares under certain circumstances. The Stockholder Voting Agreement
provides that, subject to certain exceptions, Chemfab will indemnify these four
stockholders and their affiliates, agents, advisers and representatives against
losses arising from the Stockholder Voting Agreement or any of the transactions
contemplated by the Stockholder Voting Agreement.
CONDITIONS TO THE MERGER (PAGE 26)
UroQuest and Chemfab will not complete the merger unless a number of
conditions are satisfied or waived. The conditions to both parties' obligations
include:
- the approval and adoption of the merger agreement and the merger by
UroQuest's stockholders;
- the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act",
which waiting period was terminated effective June 30, 1999);
- the absence of any temporary restraining order, injunction, judgment, or
other order, decree, or ruling, or statute, rule or regulation in effect
which prevents the consummation of the merger;
- the representations and warranties of each party must be true and correct
in all material respects on and as of the closing date (except for
representations or warranties which address matters only as of a
particular date, which must be true and correct as of the particular
date, and except for changes required by the merger agreement); and
- each party must have performed and complied with in all respects the
covenants and agreements under the merger agreement required to be
performed or complied with by it on or before the closing date.
In addition, Chemfab's obligation to effect the merger is dependent upon
the absence of any event or condition which could reasonably be expected to have
a material adverse effect on UroQuest or any of its
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subsidiaries, with certain exceptions, and upon UroQuest's net operating losses
being no less than $7,500,000 at the effective time. UroQuest's obligation to
effect the merger is dependent upon Chemfab having received the financing to
allow it to pay the merger consideration.
REGULATORY APPROVALS (PAGE 31)
The completion of the merger is conditioned upon the expiration or
termination of waiting period under the HSR Act. The waiting period specified
under the HSR Act was terminated effective June 30, 1999. However, the U.S.
Department of Justice and the U.S. Federal Trade Commission continue to have the
authority to challenge the merger on antitrust grounds before or after the
merger is completed.
NO SOLICITATION (PAGE 25)
UroQuest has agreed not to initiate or participate in any discussions or
negotiations with another party regarding an acquisition of UroQuest by another
party while the merger is pending. However, UroQuest may engage in discussions
or negotiations regarding an alternative proposal if the UroQuest Board
determines in good faith that the alternative proposal is reasonably likely to
lead to a proposal that is superior to the merger agreement. The Board also may
withdraw or modify its recommendation in favor of the merger and may recommend
or enter into an agreement with respect to a proposal that is superior to the
merger agreement.
TERMINATION OF THE MERGER AGREEMENT (PAGE 27)
UroQuest and Chemfab may mutually agree to terminate the merger agreement
at any time, whether before or after the receipt of stockholder approval,
without completing the merger. In addition, either party can terminate the
merger agreement if:
- a governmental authority prohibits the merger; or
- the other party has breached any representation, warranty, covenant or
agreement in the merger agreement and the breach is capable of being
cured, but is not cured, before the closing date or other specified time;
or
- the effective time has not occurred by the later of (1) July 31, 1999 and
(2) 60 days after the later of (a) clearance of this proxy statement by
the Securities and Exchange Commission ("SEC") or (b) termination or
expiration of all waiting periods under the HSR Act.
In addition, Chemfab may terminate the merger agreement if:
- the UroQuest Board approves or recommends an acquisition proposal by a
third party, or withdraws or modifies, in a manner adverse to Chemfab or
Merger Sub, its approval or recommendation of the transactions
contemplated by the merger agreement, or if the Board publicly resolves
to do any of the above.
In addition, UroQuest may also terminate the merger agreement if:
- prior to the effective time, UroQuest determines to accept a superior
proposal and has complied with certain provisions of the merger agreement
related to such acceptance; provided that (1) UroQuest has provided
Chemfab with 48 hours notice of its intent to terminate the agreement,
(2) at the time UroQuest terminates the merger agreement, it pays to
Chemfab the break-up fee described below and (3) the stockholders who are
parties to the Stockholder Voting Agreement continue to be bound by the
Stockholder Voting Agreement. The termination notice must contain, in
reasonable detail, the terms and conditions of the superior proposal,
including the amount and form of the proposed consideration and whether
it is subject to any material conditions.
BREAK-UP FEE (PAGE 28)
The merger agreement requires that, under certain circumstances, UroQuest
pay to Chemfab a break-up fee of $500,000 as reimbursement for Chemfab's
expenses and as liquidated damages. The payment of the break-up fee must be made
upon termination of the merger agreement if UroQuest terminates the merger
agreement because of its acceptance of a superior proposal or three business
days after termination of the merger agreement by Chemfab because of the
UroQuest Board's approval or recommendation of a superior
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proposal or its withdrawal or modification of its recommendation of the merger
agreement to its stockholders, in a manner adverse to Chemfab.
VOTING AGREEMENT (PAGE 29 AND ANNEX C)
As a condition to executing the merger agreement, Chemfab required that the
beneficial owners of an aggregate of 6,021,203 shares of UroQuest common stock,
representing approximately 48% of the outstanding UroQuest common stock as of
the date of this proxy statement, execute the Stockholder Voting Agreement.
Pursuant to the Stockholder Voting Agreement, such stockholders have agreed with
Chemfab to vote all of their shares of UroQuest common stock in favor of
approval and adoption of the merger agreement and the merger and against any
transaction or proposal that would prevent the merger, unless, prior to the
special meeting, the merger agreement is terminated by Chemfab as a result of
the UroQuest Board (1) approving or recommending a third party acquisition
proposal that is superior to the merger agreement; or (2) withdrawing or
modifying its favorable recommendation of the merger agreement and the merger in
a manner which is adverse to Chemfab, or by UroQuest in connection with
UroQuest's acceptance of a superior proposal. However, if the merger agreement
is so terminated, Chemfab has the option to purchase from the stockholders who
are parties to the Stockholder Voting Agreement all of such holders' shares of
UroQuest common stock at a purchase price per share equal to the per share
merger consideration provided in the merger agreement. The Stockholder Voting
Agreement terminates upon the later of (1) the termination of the merger
agreement by mutual agreement or as a result of a breach of the merger agreement
that has not been cured prior to the closing date or other specified time, and
(2) the later of July 31, 1999 and 60 days after the later of clearance of this
proxy statement by the SEC or termination or expiration of all waiting periods
under the HSR Act. The Stockholder Voting Agreement is expected to result in
approximately 48% of the outstanding shares of UroQuest common stock being voted
in favor of approval and adoption of the merger agreement and the merger. Thus,
UroQuest expects that the merger agreement and the merger will be adopted and
approved at the special meeting, even if holders of only approximately 2% of
UroQuest common stock who are not parties to the Stockholder Voting Agreement
vote in favor of the proposal.
ACCOUNTING TREATMENT (PAGE 31)
The merger will be accounted for as a "purchase" for financial accounting
purposes in accordance with generally accepted accounting principles.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 31)
If you are subject to federal income tax, you may be taxed on your receipt
of the merger consideration to the extent that the amount you receive exceeds
your tax basis in your UroQuest common stock. Additionally, in the event that
your tax basis in your UroQuest common stock exceeds the merger consideration,
the resulting loss may have an effect on your federal income tax liability.
However, tax matters are complicated, and tax results may vary among
stockholders. We urge you to contact your own tax advisor to fully understand
how the merger will affect you.
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FORWARD-LOOKING STATEMENTS
Statements in this proxy statement that are not historical in nature,
including references to beliefs, anticipations or expectations, are
forward-looking (as that term is defined in Section 27A of the Securities Act of
1933 and in Section 21E of the Securities Exchange Act of 1934). Forward-looking
statements are subject to a wide variety of risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include, without limitation risks and uncertainties relating to:
- the actions contemplated by the merger agreement;
- UroQuest's product developments and commercial opportunities;
- Regulatory approvals of UroQuest's products;
- the availability of capital to fund operations;
- the effect of national and regional economic conditions;
- changes in laws and regulations to which UroQuest is subject; and
- other risks and uncertainties contained in or incorporated by reference
in this proxy statement.
For these and other forward-looking statements, UroQuest claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. UroQuest does not intend to
update, revise or otherwise publicly release any revisions to these
forward-looking statements, which revisions may be made to reflect any future
events or circumstances, other than through its regular quarterly and annual
financial statements, and through the accompanying discussion and analysis
contained in UroQuest's Quarterly Reports on Form 10-Q and Annual Report on Form
10-K.
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THE SPECIAL MEETING
This proxy statement is being furnished to the stockholders of UroQuest
Medical Corporation, a Delaware corporation ("UroQuest"), in connection with the
solicitation of proxies by UroQuest for use at the special meeting of
stockholders and at any adjournment or postponement of that meeting.
WHEN AND WHERE THE SPECIAL MEETING WILL BE HELD
The special meeting will be held at 10:00 a.m., local time, on December 23,
1999, at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, located at 650 Page Mill Road, Palo Alto, California 94304.
WHAT WILL BE VOTED UPON
At the special meeting, UroQuest stockholders will be asked to:
1. consider a proposal to approve and adopt the Agreement and Plan of
Merger, dated as of June 3, 1999, among UroQuest, Chemfab Corporation
("Chemfab") and UROK Acquisition Corp. ("Merger Sub"), relating to the
merger of Merger Sub with and into UroQuest, the merger and other
transactions described in the merger agreement; and
2. transact any other business that may properly come before the special
meeting and any adjournments thereof, including adjournments or
postponements of the special meeting for the purpose of soliciting
additional proxies to approve and adopt the merger agreement and the
merger.
ONLY STOCKHOLDERS OF RECORD AS OF NOVEMBER 29, 1999 ARE ENTITLED TO VOTE AT THE
SPECIAL MEETING
The UroQuest Board of Directors (the "Board") has fixed the close of
business on November 29, 1999 as the record date. Only UroQuest stockholders of
record on the record date are entitled to notice of and to vote at the special
meeting. As of the record date, UroQuest had 12,538,997 shares of common stock
outstanding and entitled to vote at the special meeting.
This proxy statement and the accompanying form of proxy were first mailed
to stockholders on December 3, 1999.
NUMBER OF SHARES THAT MUST BE PRESENT FOR A VOTE TO BE TAKEN
At the special meeting, the inspector of elections will determine the
presence of a quorum. The presence, in person or by proxy, of the holders of a
majority of the issued and outstanding shares of UroQuest common stock entitled
to vote at the special meeting is necessary to constitute a quorum for all
matters.
VOTES REQUIRED FOR APPROVAL
Under Delaware corporate law, the affirmative vote of the holders of a
majority of the issued and outstanding shares of UroQuest common stock is
required for approval and adoption of the merger agreement and the merger. The
beneficial owners of UroQuest stockholders who beneficially own approximately
48% of the outstanding shares of UroQuest common stock, have entered into a
Stockholder Voting Agreement that requires them to vote their shares in favor of
approval and adoption of the merger agreement and the merger and against any
transaction or proposal that would prevent the merger, unless, prior to the
Special Meeting, the merger agreement is terminated by Chemfab as a result of
the UroQuest Board (1) approving or recommending a third party acquisition
proposal that is superior to the merger agreement; or (2) withdrawing or
modifying its favorable recommendation of the merger agreement and the merger in
a manner which is adverse to Chemfab, or by UroQuest in connection with
UroQuest's acceptance of a superior proposal. However, if the transaction is so
terminated, Chemfab has the option to purchase from the stockholders who are
parties to the Stockholder Voting Agreement all of such stockholders' shares of
UroQuest common stock at a purchase price equal to the per share merger
consideration provided in the merger agreement. THUS, WHILE UROQUEST EXPECTS
THAT THE MERGER AGREEMENT AND THE MERGER WILL
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BE APPROVED AND ADOPTED AT THE SPECIAL MEETING, ALL UROQUEST STOCKHOLDERS ARE
URGED TO VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
The affirmative vote of the holders of a majority of the shares of UroQuest
common stock present, either in person or by proxy, at the special meeting is
necessary for the approval of other matters that may properly come before the
special meeting.
VOTING YOUR SHARES AND HOW PROXIES ARE COUNTED
All shares of UroQuest common stock represented by properly executed
proxies received before or at the special meeting and not revoked will be voted
as instructed on such proxies. If no instructions are indicated on a properly
executed and returned proxy, such proxy will be voted in favor of the approval
and adoption of the merger agreement and the merger and related transactions.
The proxy also confers discretionary authority on the attorneys-in-fact named in
the proxy to vote the shares of stock represented by the proxy on any other
matter that may properly come before the special meeting. Other matters may
include consideration of a motion to adjourn or postpone the special meeting to
another time and/or place for the purpose of soliciting additional proxies to
approve and adopt the merger agreement and the merger.
Abstentions and broker non-votes will be counted for purposes of
determining the presence or absence of a quorum at the special meeting. Broker
non-votes occur when a broker holding shares of UroQuest common stock in "street
name" (i.e., as nominee for the beneficial owner) returns an executed proxy (or
voting directions) that indicates that the broker does not have discretionary
authority to vote on a proposal. Under Delaware law, broker non-votes and
abstentions are counted as present for quorum purposes. Therefore, because the
approval and adoption of the merger agreement and the merger require the
affirmative vote of a majority of the issued and outstanding shares of UroQuest
common stock, broker non-votes and abstentions will have the effect of votes
against the proposal to approve and adopt the merger agreement and the merger.
UroQuest stockholders who vote for approval and adoption of the merger agreement
and the merger are not eligible to exercise appraisal rights under Delaware law.
See "Appraisal Rights."
If a UroQuest stockholder does not return a signed proxy, the stockholder's
shares will not be voted, unless the stockholder attends the special meeting and
votes in person. Returning a signed proxy will not affect a stockholder's right
to attend the special meeting and vote in person. UroQuest stockholders are
urged to mark the appropriate box on the form of proxy enclosed with this proxy
statement to indicate how their shares are to be voted.
As of the date of this proxy statement, UroQuest does not know of any other
matters to be presented for action by UroQuest stockholders at the special
meeting. If, however, other matters not now known are properly brought before
the special meeting, the attorneys-in-fact named in the accompanying proxy will
vote the proxies upon the other matters according to their discretion and best
judgment.
REVOCABILITY OF PROXY
Any UroQuest stockholder who executes and returns a proxy may revoke the
proxy at any time before it is voted in any one of the following three ways:
- filing a written notice of revocation, bearing a later date than the
proxy, with the corporate secretary of UroQuest at or before the special
meeting;
- duly executing a proxy relating to the same shares of UroQuest common
stock, bearing a later date than the proxy you wish to revoke, and
delivering it to the corporate secretary of UroQuest at or before the
special meeting; or
- attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, constitute
revocation of a proxy.
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SOLICITATION OF PROXIES
Pursuant to the merger agreement, the entire cost of UroQuest's
solicitation of proxies will be borne by UroQuest. In addition to solicitations
by mail, solicitations may also be made by personal interview, facsimile
transmission, telegram and telephone. UroQuest may retain a proxy solicitor to
aid in the solicitation of proxies and to verify certain records related to the
solicitation. If UroQuest hires a proxy solicitor, UroQuest will bear all costs
of such proxy solicitor, which UroQuest believes would not exceed $10,000.00
plus expenses.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Ernst and Young LLP, UroQuest's independent public
accountants, are expected to be present at the special meeting and will have the
opportunity to make a statement and respond to appropriate questions.
INFORMATION ABOUT THE MERGER
The discussion in this proxy statement of the merger and the description of
the principal terms of the merger agreement are qualified by reference to the
merger agreement and to the other annexes to this proxy statement, including the
Stockholder voting agreement, the opinion of Vector, Section 262 of the Delaware
General Corporation Law and the Agreement Concerning Agreement and Plan of
Merger attached as Annexes B, C, D and E, respectively.
BACKGROUND OF THE MERGER
In November 1998, as part of UroQuest's long-term planning process,
UroQuest's Board of Directors and senior management undertook an evaluation of
the strategies underlying UroQuest's business plan and the challenges facing
UroQuest, with an emphasis on the need for additional financing in order to
support UroQuest's urology division. UroQuest's forecasts projected increased
expenditures for urology operations to support ongoing clinical trials and
studies and increased need for manufacturing capacity, assuming UroQuest would
receive regulatory approvals relating to urology products. The Board and senior
management evaluated various strategic alternatives for financing UroQuest's
urology operations and for maximizing stockholder value. The strategic
alternatives considered by the Board included raising equity financing, selling
UroQuest's Bivona subsidiary to fund the urology operations, expanding Bivona's
operations to provide additional cash flow from Bivona operations as well as
ensure adequate manufacturing capacity for the urology operations, and
dismantling Bivona's OEM and airway management businesses to provide
manufacturing capacity for the projected growth in the urology business.
In considering the strategic alternatives available to UroQuest, the Board
concluded that each of the alternatives involved significant risks and
detrimental effects on UroQuest. The Board believed that, in view of low market
valuations of small capitalization medical device companies in general, and of
urology companies like UroQuest in particular, obtaining additional equity
financing to support the urology operations would cause excessive dilution to
UroQuest's stockholders. In addition, although the Bivona subsidiary's
profitability would likely make it attractive to a potential buyer, a sale of
Bivona would end the positive cash flow from Bivona that was contributing to
finance UroQuest's urology operations, and would eliminate the sole
manufacturing source for the products the urology division was developing.
Similarly, although the expansion of Bivona's operations could provide
additional positive cash flow to finance the urology operations and could
enhance the value of Bivona for an eventual sale, the expansion of Bivona would
itself require UroQuest to obtain significant additional funding that would not
be related to UroQuest's core urology focus. Dismantling Bivona was the most
cost-effective means of providing additional manufacturing capacity for
UroQuest's urology operations, but that course of action would remove the
positive cash flow of Bivona that was helping to support the urology operations.
On December 17, 1998, the Board resolved to retain an investment banker to
assist UroQuest in the evaluation of financing and strategic alternatives for
maximizing stockholder value. Due to the need for additional financing to
support the urology operations and the lack of attractive alternatives to secure
this
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financing, the Board concluded that the best way to maximize stockholder value
would be to sell all or part of the company. At a telephonic meeting on February
4, 1999, at which the Board approved the retention of Vector, the Board
determined that Vector's efforts should encompass the evaluation of
opportunities to sell the Bivona subsidiary or the urology operations, as well
as opportunities to sell the entire company, which would include the urology
operations as well as Bivona. On February 19, 1999, UroQuest signed an
engagement letter with Vector. On February 22, 1999, UroQuest issued a press
release to announce, along with its 1998 results, the status of its clinical
trials and studies and its retention of an investment banker to help it explore
strategic alternatives.
During February and March 1999, Vector initiated contacts with over 20
parties that it and UroQuest believed might have a potential interest in
acquiring UroQuest's urology operations, its Bivona subsidiary, or the entire
company. These parties included many of the major providers of urological
devices, as well as large, diversified medical device manufacturers. Vector also
initiated contact with several companies that had previously expressed to
UroQuest an interest in acquiring either UroQuest or its Bivona subsidiary. Over
20 potential buyers received summary information describing UroQuest and 3
potential buyers signed confidentiality agreements. Upon signing a
confidentiality agreement, each of these parties received non-public evaluation
materials regarding UroQuest's operations and performance and copies of a
confidential memorandum describing UroQuest that had been prepared by Vector and
UroQuest management. During this period, UroQuest management met with three
potential buyers. Because the potential buyers were interested primarily in
obtaining ownership of Bivona, and because they were not interested in acquiring
UroQuest's urology operations, Vector continued to initiate contacts with
parties that it and UroQuest believed might have an interest in the urology
operations. However, none of the parties Vector contacted elected to pursue an
acquisition of UroQuest's urology operations.
On February 3, 1999, in response to Chemfab's preliminary contact and
discussions with the president of UroQuest on December 21, 1998, Vector
reinitiated contact with Chemfab regarding Chemfab's interest in acquiring
UroQuest. On February 25, 1999, Chemfab executed a confidentiality agreement
with UroQuest. On March 5, 1999, Chemfab submitted to UroQuest a preliminary,
non-binding indication of interest and, on March 18, 1999, a term sheet for the
acquisition of all of the outstanding stock of UroQuest. On March 11, 1999
Vector contacted another party regarding its interest in acquiring UroQuest. On
March 15, 1999, the other party executed a confidentiality agreement with
UroQuest, and on March 19, 1999, submitted a preliminary, non-binding indication
of interest to acquire all of the outstanding stock of UroQuest. At a telephonic
meeting on March 19, 1999, the UroQuest Board evaluated both indications of
interest and concluded that, although both indications of interest contained
aspects that raised questions as to valuation and transaction structure, Vector
and UroQuest should continue negotiations with both interested parties and
should release additional information regarding UroQuest to these parties.
Accordingly, Vector responded to the indications of interest by submitting a
non-binding term sheet to each party, and UroQuest provided the two potential
buyers with access to a management presentation containing additional
information regarding UroQuest and access to a data room containing, among other
items, materials pertaining to UroQuest's corporate governance, employees and
material contracts, copies of management reports and financial and operating
data. UroQuest's management also made itself available for question and answer
sessions with the two potential buyers. On March 26, 1999, the Board met by
telephone to discuss the two proposals and the status of negotiations between
Vector and the two potential buyers. At the Board's direction, Vector continued
to negotiate transaction terms with both parties during March and April 1999, as
both potential buyers continued their due diligence review of UroQuest. In April
1999, UroQuest received notification that the U.S. Food and Drug Administration
had denied 510(k) premarket clearance of one of the company's urology
products -- the Male On-Command Continence System -- for acute indications. This
denial was further clarified and confirmed in a meeting in June 1999 between the
company and the FDA.
On May 11 and May 12, 1999, respectively, Chemfab and the other potential
buyer submitted revised proposals for the acquisition of UroQuest. Chemfab's
proposal reflected a valuation of $28.225 million, subject to certain
adjustments, including adjustments relating to transaction costs and certain
UroQuest asset levels. At a telephonic meeting on May 12, 1999, Vector reviewed
both proposals with the Board. Although the Board believed the revised proposals
were more advantageous to the UroQuest stockholders than the March
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proposals, the Board believed that certain aspects of the proposals were still
disadvantageous to UroQuest's stockholders, due to low valuation and/or
problematic transaction structure and timing. Accordingly, the Board determined
that Vector should continue negotiating the terms of the proposals with each of
the two potential buyers. On May 19, 1999, the other potential buyer submitted
to UroQuest a further revised non-binding proposal. Although the May 12 and May
19 proposals of the other party reflected a valuation of approximately $33.5
million, that price was subject to adjustment, and in addition, the Board felt
that despite this higher valuation, the overall proposal was inferior to the
Chemfab proposal. Specifically, the other parties proposal required UroQuest: to
terminate negotiations with Chemfab, prior to executing a definitive merger
agreement with the other party; to negotiate exclusively with the other
potential buyer; to place $1.5 million of the merger consideration in escrow for
a period of two years and to agree to a $3.0 million break-up fee. In addition,
the other parties proposal represented a transaction with less certainty of
closing than Chemfab's proposal, due to the other potential buyer's requirement
of an additional two to three months to complete its due diligence review of
UroQuest.
On May 20, 1999, Wilson Sonsini Goodrich & Rosati, Professional Corporation
("Wilson Sonsini"), UroQuest's counsel, delivered a draft merger agreement to
Chemfab and its counsel, Bingham Dana LLP, that reflected the terms the UroQuest
Board sought for its stockholders.
At a special telephonic meeting on May 25, the Board convened again with
representatives of Vector and Wilson Sonsini to discuss the status of
discussions with the two potential buyers, to review in detail the terms of the
Chemfab proposal and the other potential buyer's proposal, and to receive the
advice of its advisors. At the meeting, the Board also discussed the potential
effect of the contingent environmental liabilities on the terms of the
proposals. The Board reached a consensus that Vector and Wilson Sonsini should
proceed with negotiating a definitive merger agreement with Chemfab.
On May 26, 1999, Chemfab submitted a revised proposal, in the form of a
revised merger agreement and Stockholder Voting Agreement, for the acquisition
of UroQuest. Chemfab's proposal reflected a valuation of $28.225 million,
subject to certain adjustments, including the adjustments relating to
transaction costs and certain UroQuest asset levels and the contingent
environmental liabilities. Chemfab's proposal also required that UroQuest either
sell, dispose of or transfer control of the assets of the urology division
before the closing of the merger. The cost of this disposal to UroQuest is
approximately $500,000 in severance costs, however, in the event UroQuest sells
the assets, the net proceeds of the transaction will be included in the final
net asset adjustment calculation for the merger consideration.
On May 28, 1999, the Board met via telephone to discuss Chemfab's revised
proposal with representatives of Vector and legal counsel. The Board discussed
the revised proposal and certain provisions in the merger agreement and the
Stockholder Voting Agreement. Vector, on behalf of UroQuest, conducted
subsequent negotiations with Chemfab, which resulted in Chemfab increasing its
offer to $29 million, subject to the same adjustments and making certain other
changes in the terms of its proposal. On May 28, 1999, Chemfab submitted this
increased offer to UroQuest, in the form of a further revised merger agreement
and Stockholder Voting Agreement.
Through May 19, 1999, neither of the potential buyers nor UroQuest knew of
the possible environmental liability; consequently, neither bid, up until that
date, accounted for this liability. Chemfab's May 26th bid included an
adjustment to the purchase price based upon the possible environmental
liability. Additionally, each bid treated all option and stockholders in a
similar manner, and neither bid contained provisions that specifically benefited
the interests of UroQuest's officers and directors.
As negotiations with Chemfab progressed, Vector contacted the other
potential buyer. Vector informed the potential buyer that UroQuest was
proceeding with an offer, and that the other potential buyer would need to
improve the terms of its offer. The other potential buyer declined to improve
its bid.
From May 26 to June 2, 1999, UroQuest and Chemfab, along with their
respective legal and financial advisors, engaged in numerous conference calls to
resolve the remaining open issues with respect to the proposed transaction,
including provisions for the contingent environmental liabilities, and by the
morning of June 2, 1999, the terms of the proposed transaction were
substantially finalized.
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On June 2, 1999, the Board held a special telephonic meeting to review
Chemfab's May 28 proposal and the status of the merger agreement.
Representatives of Vector made a presentation to the Board regarding the
fairness of the proposed merger consideration to the stockholders from a
financial point of view. The Board discussed the advantages and disadvantages of
the proposed transaction and posed various questions to management and
UroQuest's legal and financial advisors. The Board then unanimously resolved:
- that the merger agreement and the merger are advisable and in the best
interests of UroQuest and its stockholders;
- that the Stockholder Voting Agreement is advisable and in the best
interests of UroQuest and its stockholders;
- to approve and adopt the merger agreement and the merger and the
Stockholder Voting Agreement;
- to recommend that the merger agreement and the merger be adopted by
UroQuest's stockholders; and
- to authorize other actions that would further the process of completing
the merger.
UroQuest and Chemfab finalized and executed the merger agreement and issued
press releases announcing the transaction after the close of business on June 3,
1999.
Accordingly, the Board unanimously recommends that you vote "FOR" the
approval and adoption of the merger agreement, the merger and the transactions
related thereto. Some members of the Board and of the management of UroQuest
have interests that may present conflicts of interest in connection with the
merger. See "Interests of UroQuest's Directors and Executive Officers in the
Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS AND REASONS FOR THE MERGER
The Board believes that the merger is advisable and in your best interests
and unanimously recommends that you vote "FOR" approval and adoption of the
merger agreement and the merger. The Board based its determination to approve
and adopt the merger agreement and the merger on a number of considerations,
including the following:
- the history of UroQuest's discussions with other parties, including,
without limitation, (1) the extensive efforts of Vector to assist
UroQuest in exploring strategic initiatives to enhance stockholder value,
(2) the fair and ample opportunity provided to other parties to submit
proposals to UroQuest, (3) the fact that, despite these efforts, UroQuest
had received only one alternative proposal for the acquisition of the
company, (4) the superiority of Chemfab's proposal over the proposal made
by the other potential buyer, (5) the absence of any proposal to acquire
UroQuest's urology business, and (6) the extensive arms-length
negotiations between UroQuest and Chemfab that resulted in the $2.23 per
share price;
- the favorable terms and conditions of the merger agreement, including the
parties' representations, warranties and covenants, the conditions to
their respective obligations, the limited ability of Chemfab and Merger
Sub to terminate the merger or the merger agreement and the provision
requiring payment of the merger consideration in cash;
- the significant risks inherent in UroQuest's remaining independent,
including, without limitation, (1) uncertainties relating to the
regulatory clearance of UroQuest's urology products for sale in the
United States, particularly in light of the U.S. Food and Drug
Administration's denial of 510(k) premarket clearance for the Male
On-Command Continence System for acute indications, (2) uncertainties
relating to the availability of reimbursement for UroQuest's urology
products, (3) the need for significant additional financing to support
several more years of development and clinical trials of UroQuest's
urology products, and to develop a sales and marketing organization for
those products, and (4) the compromise of Bivona's business due to
UroQuest's continued use of resources to support its urology operations;
- the value of the merger consideration compared with the recent trading
price of UroQuest common stock on Nasdaq, including the fact that the
merger consideration to be paid represents a premium of
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<PAGE> 22
approximately 43%, subject to adjustment in the event of adjustments to
the purchase price, over the $1.5625 closing sale price for the shares on
June 3, 1999, the last trading day prior to the public announcement of
the execution of the merger agreement;
- the oral presentation that Vector delivered to the Board on June 2, 1999
and Vector's June 2, 1999 written fairness opinion, which concluded that,
as of the date of the opinion, the $29 million cash consideration
(subject to certain adjustments) that UroQuest stockholders would receive
in the merger was fair to UroQuest stockholders from a financial point of
view;
- that the merger agreement permits the Board, in the exercise of its
fiduciary duties and subject to certain conditions, to furnish
information, and to participate in discussions and negotiations, in
connection with an unsolicited acquisition proposal that is superior to
the merger agreement and to recommend an unsolicited, superior
acquisition proposal to UroQuest's stockholders;
- that the merger agreement permits the Board, in the exercise of its
fiduciary duties and subject to certain conditions, to terminate the
merger agreement in favor of an alternative, superior acquisition
proposal, subject to the obligation to pay Chemfab a termination fee of
$500,000; and
- the assessment that Chemfab has the financial commitments necessary for
it to consummate the merger.
In reaching its conclusion, the Board considered the proposal it had
received from the other potential acquiror. Although this proposal reflected a
higher valuation than the Chemfab proposal, the Board felt that it was less
advantageous to UroQuest's stockholders in other ways, including requirements
that UroQuest terminate negotiations with Chemfab and negotiate exclusively with
such other potential buyer, and that a significant portion of the merger
consideration be placed in escrow, as well as a reduced level of certainty of
closing than Chemfab's proposal, due to the other potential buyer's requirement
of additional time to complete its due diligence review of UroQuest.
Accordingly, the Board determined that the merger was in the best interests of
UroQuest's stockholders.
In addition, the Board considered the fact that unless the UroQuest
management were able to sell the assets of the company's urology operations,
UroQuest's stockholders would not receive value for those assets. However, based
on the risks inherent in the urology operations, including the difficulty of
financing their continuation, the fact that UroQuest had received no indications
of interest from any party in acquiring the urology assets, and the fact that
Chemfab's proposal, as well as the proposal received from the other potential
acquiror, included the requirement that UroQuest dispose of or terminate its
urology operations prior to the closing of the merger, the Board determined the
way to maximize stockholder value was to terminate the urology division and
pursue the merger.
The UroQuest Board of Directors also considered the interests of UroQuest's
management in the transaction, including the severance and other provisions
contained in the employment agreements with two members of the Board of
Directors, Terry E. Spraker, Ph.D., UroQuest's President and Chief Executive
Officer and Thomas E. Brandt, UroQuest's Chief Operating Officer, the severance
arrangements with other members of UroQuest's management as well as the
acceleration of all outstanding options held by UroQuest's employees, some of
which are held by UroQuest's Executive Officers. Despite the potential for
conflicting interests raised by the existence of these severance provisions and
other benefits, the Board of Directors unanimously concluded that the merger was
fair and in the best interests of UroQuest's stockholders.
The UroQuest Board of Directors also considered the risks relating to the
merger, including:
- the risk that the merger would not be completed and the effect of the
public announcement of the merger on UroQuest's sales and operating
results, particularly the effect of the announcement on key customer and
supplier relationships; and
- the risk that UroQuest would suffer employee attrition or would be unable
to attract key personnel due to uncertainties associated with the pending
merger.
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<PAGE> 23
The UroQuest Board of Directors concluded that the potential benefits of
the merger outweighed these risks.
The foregoing discussion of the information and factors considered by the
UroQuest Board of Directors is not intended to be exhaustive but is believed to
include all material factors considered by the UroQuest Board of Directors. In
view of the wide variety of information and factors, both positive and negative,
considered by the UroQuest Board of Directors, the UroQuest Board did not find
it practical to, and did not, quantify or otherwise assign relative or specific
weights to the factors considered. After taking into consideration all of the
factors set forth above, the UroQuest Board of Directors unanimously determined
that the merger agreement and the merger were in the best interests of UroQuest
and its stockholders and that UroQuest should enter into the merger agreement
and complete the merger.
VECTOR FAIRNESS OPINION
THE FULL TEXT OF THE OPINION OF VECTOR SECURITIES INTERNATIONAL, INC.
("VECTOR"), DATED JUNE 2, 1999 (THE "VECTOR OPINION"), WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY VECTOR, IS ATTACHED AS AN ANNEX TO THIS PROXY STATEMENT AND
IS INCORPORATED HEREIN BY REFERENCE. UROQUEST STOCKHOLDERS ARE URGED TO READ
SUCH OPINION CAREFULLY IN ITS ENTIRETY. THE SUMMARY OF THE VECTOR OPINION SET
FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
UroQuest retained Vector as its financial advisor in connection with the
merger. In connection with such engagement, UroQuest requested Vector to render
an opinion as to whether or not the consideration offered to the UroQuest
stockholders by Chemfab in the merger is fair, from a financial point of view,
to the UroQuest stockholders.
In connection with the UroQuest Board of Directors' consideration of the
merger, Vector delivered its oral opinion, which was confirmed in writing, to
the effect that, as of June 2, 1999, and based on its review and assumptions and
subject to the limitations on the review undertaken as set forth in such
opinion, the cash consideration to be received by the UroQuest stockholders is
fair to such stockholders from a financial point of view. The Vector Opinion was
prepared at the request of and for the use of the UroQuest Board of Directors in
connection with and for the purposes of its evaluation of the proposed merger
and did not constitute a recommendation to the Board of Directors with respect
to the approval of the proposed merger nor does it constitute a recommendation
to any UroQuest stockholders as to how any such stockholder should vote with
respect to the merger.
In arriving at the opinion set forth herein, Vector, among other things:
(1) reviewed UroQuest's Annual Reports to Stockholders, Annual Reports on Form
10-K and/or related financial information for the four fiscal years ended
December 31, 1998, and its Quarterly Reports on Form 10-Q and related unaudited
financial information for the three months ended March 31, 1999; (2) reviewed
certain information, including financial forecasts, relating to the business,
earnings, cash flows, assets and prospects of UroQuest, furnished to Vector by
UroQuest; (3) conducted discussions with members of senior management of
UroQuest concerning its business and prospects; (4) reviewed the historical
market prices and trading activity for Uroquest's common stock and compared such
prices and trading histories with those of certain publicly traded companies
which Vector deemed to be relevant; (5) compared the financial position and
operating results of UroQuest with those of certain other publicly traded
companies which Vector deemed relevant; (6) compared the proposed financial
terms of the proposed transaction with the financial terms of certain other
transactions which Vector deemed relevant; (7) reviewed the financial terms of
the proposed transaction as set forth in the merger agreement; and (8) reviewed
such other financial studies and analyses and performed such other
investigations and took into account such other matters as Vector deemed
appropriate.
The amount of consideration to be paid to UroQuest stockholders pursuant to
the merger agreement was determined through negotiations between UroQuest and
Chemfab and was approved by the UroQuest Board of Directors. Vector provided
advice to UroQuest; however, Vector did not recommend any specific
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<PAGE> 24
consideration to UroQuest or that any specific consideration constituted the
only appropriate consideration for the merger. In preparing the Vector Opinion,
Vector relied on the accuracy and completeness of all information that was
publicly available, supplied or otherwise communicated to Vector by or on behalf
of UroQuest, and Vector neither attempted independently to verify nor assumed
any responsibility for independent verification of any such information. Vector
assumed that the financial forecasts examined by it were reasonably prepared on
bases reflecting the best available estimates and judgements of the management
of UroQuest as to the future financial performance of UroQuest and that UroQuest
will perform in accordance with such forecasts. Vector did not make or obtain
any independent evaluation or appraisal of the assets of UroQuest. The Vector
Opinion is based upon economic, market and other conditions existing on the date
thereof. Vector assumed that the transactions contemplated by the proposed
merger will be consummated on the terms described in the merger agreement,
without any material waiver or modification by UroQuest. Based on information
provided by management regarding the likelihood of a purchase price adjustment,
Vector assumed that no adjustments to the purchase price will be made. Whether
or not a purchase price adjustment will be required is based upon a number of
contingencies and the Vector Opinion does not address the fairness of the merger
consideration in the event that any significant changes to the consideration
occur. The Vector Opinion does not address the relative merits of the merger and
any other transactions or business strategies discussed by the UroQuest Board of
Directors as alternatives to the merger, or the decision of the UroQuest Board
of Directors to proceed with the merger. UroQuest did not place any limitations
upon Vector with respect to the procedures followed or factors considered in
rendering the Vector Opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to partial analysis or
summary description. Vector did not attribute any particular weight to analyses
or factors considered by it, but rather made qualitative judgements as to the
significance and relevance of each analysis or factor. Accordingly, Vector
believes that its analyses must be considered as a whole and that considering
any portion of such analyses or the factors considered, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying the Vector Opinion. For purposes of its opinion, Vector
relied upon and assumed the accuracy, completeness and fairness of the financial
statements and other information, including information regarding the shutdown
of UroQuests's urology business, provided to it by UroQuest and did not assume
responsibility for the independent verification of that information. Vector
assumed that any estimates for forecasts used in its analysis had been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of UroQuest's management as to the future financial performance of
UroQuest. In its analyses, Vector also made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of UroQuest and involved the
application of complex methodologies and educated judgement. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In preparing its analysis, Vector excluded
from the financial results all information with respect to the urology assets,
which Vector has been advised by UroQuest will be shut down or divested. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold.
Because such analyses are inherently subject to uncertainty, neither Vector nor
any other person assumes responsibility for their accuracy.
The following paragraphs summarize the significant analyses performed by
Vector in arriving at the Vector Opinion.
Stock Trading History. Vector reviewed and analyzed the trading prices and
volume for the UroQuest common stock, as compared to the Russell 2000 Index and
the Standard & Poor's MidCap 400 Index and noted that in the aggregate UroQuest
had underperformed both the Russell 2000 Index and the Standard & Poor's Midcap
400 Index.
Selected Comparable Public Company Analysis. Using publicly available
information, Vector compared selected historical and projected financial,
operating and stock market performance data of UroQuest to the corresponding
data of the comparable companies including: Chemfab Corporation, Furon Company,
ResMed
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Inc., Respironics, Inc., Rochester Medical Corporation, Somnus Medical
Technologies, Inc., Surmodics, Inc., and Vital Signs, Inc. (the "Comparable
Companies"). Vector compared multiples of total enterprise value (market value
plus debt minus cash and cash equivalents) to latest twelve month ("LTM")
revenue, earnings before interest, taxes, depreciation and amortization
("EBITDA") and earnings before interest and taxes ("EBIT"). Vector also compared
the multiple of stock price to LTM earnings per share ("EPS") and the multiple
of market capitalization to tangible book value. These multiples are standard
methods of valuation. The Comparable Companies' multiples were as follows: (1)
LTM revenue multiples ranged from 0.5x to 1.8x (median of 1.4x); (2) LTM EBITDA
multiples ranged from 7.4x to 14.8x (median of 7.8x); (3) LTM EBIT multiples
ranged from 10.0x to 17.4x (median of 10.4x); (4) LTM EPS multiples ranged from
13.4x to 17.7x (median of 15.1x); and (5) tangible book value multiples ranged
from 1.3x to 7.4x (median of 2.8x). The multiples derived from this analysis
were applied to UroQuest's financial results to determine a range of implied
values for UroQuest. Based on this analysis, Vector derived an equity value
range for UroQuest of $19.8 million to $30.2 million (median of $23.5 million).
Because the consideration to be received by the UroQuest stockholders was within
the valuation range, Vector determined that this analysis supported an opinion
that the consideration offered to UroQuest stockholders in the merger is fair to
the UroQuest stockholders from a financial point of view.
Selected Comparable Mergers and Acquisitions Analysis. Vector reviewed
publicly available financial information for mergers and acquisitions involving
medical technology/device companies from January 1, 1995 through the present
having an aggregate value between $5 million and $500 million. Vector analyzed
the following completed transactions (target/acquiror): American Medical Systems
Inc./E.M. Warburg, Pincus & Co.; Navius Corp./EndoSonics Corp.; Cardiometrics
Inc./EndoSonics Corp.; Marquest Medical Products Inc./Vital Signs Inc.; Ideas
for Medicine Inc./Cryolife Inc.; Medex Inc./FCY Inc.; Advanced Orthopedic
Technologies/NovaCare Inc.; Impra Inc./C.R. Bard, Inc.; Sterile Concepts
Inc./Maxxim Medical Inc.; MDT Corp./Getinge Industrier AB; Leisegang Medical
Inc./Galileo Electro-Optics Corp.; SensorMedics Corp./Thermo Electron Corp.;
Pryon Corp./Protocol Systems Inc.; Corvita Corp./Pfizer Inc.; Healthdyne
Inc./Tokos Medical Corp.; Life Support Products Inc./American Home Patient Inc.;
BioSafety Systems Inc./HVB Ltd.; Medrad Inc./Schering Berlin Inc.; Arbor
Technologies Inc./Whatman plc; Level 1 Technologies Inc./Smiths Industries plc;
Bird Medical Technologies/Thermo Electron Corp.; Cabot Medical Corp./ Circon
Corp.; Mitek Surgical Products/Johnson & Johnson; Sterile Products
Corp./American Safety Razor Co.; and Bear Medical Systems Inc./Allied Healthcare
Products Inc. Vector calculated, among other things, total imputed transaction
value plus debt minus cash and cash equivalents as a multiple of LTM revenue,
EBITDA and EBIT and total imputed transaction value as a multiple of LTM net
income and tangible book value for the Comparable Transactions. These multiples
are standard measures of valuation. The multiples for the Comparable
Transactions were as follows: (1) LTM revenue multiples ranged from 0.5x to 2.9x
(median of 1.4x); (2) LTM EBITDA multiples ranged from 6.9x to 15.9x (median of
11.1x); (3) LTM EBIT multiples ranged from 7.8x to 20.6x (median of 11.7x); (4)
LTM net income multiples ranged from 6.5x to 41.3x (median of 25.8x); and (5)
tangible book value multiples ranged from 0.6x to 4.7x (median of 2.7x). The
multiples derived from this analysis were applied to UroQuest's financial
results to determine a range of implied values for UroQuest. Based on this
analysis, Vector derived an equity value range for UroQuest of $11.8 million to
$34.8 million (median of $21.4 million). Because the consideration to be
received by the UroQuest stockholders was within the valuation range, Vector
determined that this analysis supported an opinion that the consideration
offered to UroQuest stockholders in the merger is fair to the UroQuest
stockholders from a financial point of view.
No Comparable Transaction used in the comparable mergers and acquisitions
analysis is identical to the UroQuest/Chemfab merger, and no Comparable Company
used in the comparable public company analysis is identical to UroQuest.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgements
concerning differences in financial and operating characteristics and other
factors that could affect the public trading or acquisition value of the
companies to which they are being compared. Consequently, in evaluating the
available data, Vector made qualitative judgements concerning the differences
between those Comparable Transactions and Comparable Companies and UroQuest and
disregarded data that it did not believe were representative of the
UroQuest/Chemlab merger.
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Discounted Cash Flow Analysis. Vector analyzed the value of UroQuest based
on a discounted cash flow analysis of the projected financial performance of
UroQuest. This discounted cash flow analysis was based upon forecasts for
UroQuest provided by UroQuest. The discounted cash flow analysis determined the
present value of the cash flows generated over the projection period and a
terminal value based upon a range of EBIT multiples from 9.0x to 13.0x. The cash
flows and terminal value were discounted using a range of discount rates from
17.5% to 22.5%. Based on this analysis, Vector derived an equity value range for
UroQuest of $27.4 million to $39.4 million (median of $33.1 million).
UroQuest selected Vector to be its financial advisor in connection with the
merger because Vector is a prominent investment banking and financial advisory
firm with experience in the valuation of health care and life sciences companies
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes. Vector was acquired in July 1999 by an
affiliate of Prudential Securities Incorporated.
Pursuant to an engagement letter between UroQuest and Vector dated February
19, 1999 (the "Engagement Letter"), Vector will receive a success fee payable
upon completion of the Merger equal to approximately $570,000. In connection
with the engagement, UroQuest paid Vector a non-creditable retainer fee of
$50,000. UroQuest has agreed to reimburse all of Vector's reasonable
out-of-pocket expenses, including fees and disbursements of counsel. UroQuest
has also agreed, under separate agreement, to indemnify Vector, its affiliates
and its employees against certain liabilities, including liabilities under
federal securities laws.
In the past, Vector has performed investment banking services for UroQuest
and has received fees for the rendering of these services. Vector may provide
financial advisory services to, and may act as underwriter or placement agent
for, the combined company in the future. Vector may actively trade the
securities of Chemfab for its own account and for the accounts of its customers
and, accordingly, may at any time hold long or short positions in such
securities.
SUMMARY OF THE MERGER AGREEMENT
The description of the merger agreement contained in this proxy statement
is not complete and is qualified in its entirety by reference to the merger
agreement itself, the full text of which is attached to this proxy statement as
Annex A, and which is incorporated herein by reference. Stockholders are urged
to read the full text of the merger agreement carefully.
STRUCTURE AND EFFECTIVE TIME
The merger agreement provides for the merger of Merger Sub with and into
UroQuest. UroQuest will survive the merger and continue to exist after the
merger as a wholly-owned subsidiary of Chemfab. The merger will become effective
at the time a certificate of merger is filed with the Delaware Secretary of
State, which will occur as soon as practicable following satisfaction or waiver
of the conditions to the merger set forth in the merger agreement. The time that
the merger becomes effective is referred to in this proxy statement as the
"effective time." The effective time is expected to occur promptly after the
UroQuest stockholders approve and adopt the merger agreement and the merger at
the special meeting. The special meeting is scheduled for December 23, 1999.
However, the effective time of the merger may be delayed if other closing
conditions have not been satisfied by that time.
The officers and directors of Merger Sub immediately before the effective
time will be the initial officers and directors of UroQuest following the
merger.
MERGER CONSIDERATION
Each share of UroQuest common stock outstanding immediately prior to the
effective time will, at the effective time, be converted into the right to
receive $2.23 in cash per share, subject to certain adjustments, without
interest, from Chemfab. The aggregate adjustment as of the effective time may
cause the per share merger consideration to increase, decrease or remain the
same. The adjustments will be based on (1) a portion of the amount by which
UroQuest's net operating losses immediately before the effective time are less
than
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$8,500,000 and (2) the amount by which UroQuest's net current assets (as defined
in the merger agreement) as of the effective time are less than $5,603,000 or
greater than $6,403,000. UroQuest believes that in the probable worst case
scenario the per share merger consideration could be reduced by $.07 per share,
while in the probable best case scenario the per share merger consideration
could be increased by $.07. However, all shares owned by UroQuest, Chemfab or
any of their direct or indirect wholly-owned subsidiaries will, at the effective
time, be cancelled and retired and no payment will be made for such shares.
Additionally, if appraisal rights for any shares are perfected, those shares
will be treated as described under "Appraisal Rights."
Examples:
These examples are for demonstration purposes only:
All examples assume no net operating loss deficiency adjustment.
<TABLE>
<CAPTION>
<S> <C>
Example No. 1
Merger Consideration........................................ $29,000,000.00
plus: Net Current Asset Adjustment..................... $ 1,000,000.00
less: Total Option Consideration....................... $(1,065,459.17)
Net Merger Consideration.................................. $28,934,540.83
Total Shares Outstanding.................................. 12,540,000
Merger Consideration Per Share............................ $ 2.3074
Example No. 2
Merger Consideration...................................... $29,000,000.00
plus: Net Current Asset Adjustment..................... $(1,000,000.00)
less: Total Option Consideration....................... $ (873,530.76)
Net Merger Consideration.................................. $27,126,469.74
Total Shares Outstanding.................................. 12,540,000
Merger Consideration Per Share............................ $ 2.1632
</TABLE>
PAYMENT PROCEDURES
Chemfab will appoint an exchange agent who will make payment of the merger
consideration in exchange for certificates representing shares of UroQuest
common stock. Chemfab will make cash available to the exchange agent in order to
permit the payment of the merger consideration. Promptly after the effective
time, the exchange agent will send UroQuest stockholders a letter of transmittal
and instructions explaining how to send their stock certificates to the exchange
agent. Checks for the appropriate merger consideration (minus any withholding
taxes required by law) will be mailed to stockholders promptly following the
exchange agent's receipt and processing of stock certificates and properly
completed transmittal documents.
STOCK OPTIONS
Notice will be given to holders of outstanding UroQuest stock options
issued pursuant to the UroQuest stock option plan that all options will be
cancelled at the effective time. Promptly after the effective time, each holder
of cancelled options will receive from UroQuest a cash payment equal to the
excess (if any) of the per merger consideration over the option's exercise
price, multiplied by the number of shares covered by the option. The exercise
price of some outstanding UroQuest stock options is greater than the merger
consideration; holders of those options will not receive any consideration in
the merger unless they exercise their options and purchase shares of UroQuest
common stock before the effective time. Any holder of options who does not agree
to the cash on payment for his or her options described above will be given the
opportunity to exercise all of his or her options during the 15-day period prior
to the effective time. UroQuest estimates that the aggregate merger
consideration attributable to the holders of outstanding stock options would be
between approximately $800,000 -- $1 million, assuming the per share merger
consideration is less than $2.375 and more than $2.00, of which approximately
47% would be payable to directors and executive officers of UroQuest.
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APPRAISAL RIGHTS
Section 262 of the Delaware General Corporation Law provides that UroQuest
stockholders who do not wish to accept the merger consideration may elect to
have the fair value of their shares, exclusive of any element of value arising
from the accomplishment or expectation of the merger, determined by the Delaware
Chancery Court. This amount would then be paid to the stockholder in cash,
together with interest. The following summary of Section 262 is qualified in its
entirety by reference to the full text of Section 262, which is attached to this
proxy statement as Annex D.
STOCKHOLDERS WHO WISH TO EXERCISE THEIR APPRAISAL RIGHTS OR TO PRESERVE
THEIR APPRAISAL RIGHTS SHOULD CAREFULLY REVIEW ANNEX D. FAILURE TO COMPLY WITH
THE PROCEDURES SPECIFIED IN SECTION 262 IN A TIMELY MANNER MAY RESULT IN THE
LOSS OF THE APPRAISAL RIGHT. BECAUSE OF THE COMPLEXITY OF THESE PROCEDURES,
STOCKHOLDERS ARE URGED TO SEEK THE ADVICE OF LEGAL COUNSEL IF THEY ARE
CONSIDERING EXERCISING THEIR APPRAISAL RIGHTS.
Stockholders who wish to exercise their appraisal rights under Section 262
must satisfy each of the following conditions:
- The stockholder must not vote in favor of the merger.
- The stockholder must deliver to UroQuest a written demand for appraisal
before the vote on the merger agreement at the special meeting. This
written demand for appraisal must be in addition to and separate from any
proxy or vote against the merger agreement. Merely voting against,
abstaining from voting, or failing to vote in favor of adoption of the
merger agreement will not constitute a demand for appraisal within the
meaning of Section 262.
- The stockholder must continuously hold the shares for which appraisal is
sought from the date of the demand through the effective time. Appraisal
rights will be lost if the shares are transferred before the effective
time.
- The stockholder must file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of the shares within 120 days
after the effective time.
Demands for appraisal must be made in writing and must be mailed or
delivered to: Jeffrey Kaiser, Secretary, in care of Jason Altieri, Wilson
Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, California 94304.
STOCKHOLDERS SHOULD BE AWARE THAT THE FAIR VALUE OF THEIR SHARES AS
DETERMINED UNDER SECTION 262 COULD BE GREATER THAN, THE SAME AS, OR LESS THAN
THE MERGER CONSIDERATION. THE VECTOR FAIRNESS OPINION IS NOT AN OPINION AS TO
FAIR VALUE UNDER SECTION 262.
If a stockholder demands appraisal of shares under Section 262 and fails to
perfect, withdraws or loses the appraisal right, the stockholder's shares will
be converted into the right to receive the merger consideration of $2.23 per
share in cash, subject to adjustment as described above, without interest.
Stockholders may withdraw a demand for appraisal by delivering to UroQuest a
written withdrawal of the demand and acceptance of the merger consideration.
However, UroQuest must consent to any withdrawal request made more than 60 days
after the effective time.
AMENDMENT OF MERGER AGREEMENT
On October 8, 1999, UroQuest and Chemfab entered into an Agreement
Concerning Agreement and Plan of Merger. This agreement amended the merger
agreement in the following ways:
- the environmental accrual was set at $2,000,000;
- the closing condition set forth in Section 5.1(d) was waived. This
section would have allowed either party to not finalize the merger if the
environmental accrual was greater than $1.0 million; provided
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that if Chemfab agreed to fix and limit the accrual to $1.0 million this
section could not prevent UroQuest from finalizing the merger; and
- the parties agreed that the current and future discoveries, if any, of
environmental problems and any associated remediation costs will not be
deemed to be a material adverse affect on UroQuest or its Bivona
subsidiary.
The summary of the agreement is qualified in its entirety by the full text
of the agreement attached to the proxy statement as Annex E.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains a number of representations and warranties by
UroQuest, Chemfab and Merger Sub. These representations and warranties were made
as of the date of the merger agreement, and it is a condition to the closing of
the merger that they be true and correct in all material respects as of the date
of the merger agreement and as of the closing date (except representations and
warranties which speak as of a specific date, which must be true and correct as
of the specific date). The representations and warranties will not survive the
effective time. UroQuest, Chemfab and Merger Sub each made representations and
warranties regarding, among other things, the respective party's corporate
organization, authorization of the merger agreement and the merger, absence of
conflicts, required consents and approvals, information supplied for inclusion
in this proxy statement and fees and expenses of brokers and others. Chemfab and
Merger Sub also made representations and warranties relating to, among other
things, Chemfab's receipt of a commitment letter from a lender to provide the
funds to pay the merger consideration and related fees and expenses. UroQuest
also made representations and warranties relating to, among other things,
UroQuest's capitalization, SEC filings, financial statements, absence of
defaults, compliance with law, absence of certain changes, absence of
undisclosed liabilities, litigation, ERISA and employee benefits, tax matters,
intellectual property, federal regulation of its products, material agreements,
year 2000 compliance, environmental matters, UroQuest's minute books, compliance
with state takeover laws, the Stockholder Voting Agreement, and the receipt by
the Board of a fairness opinion regarding the merger from Vector.
With respect to the merger, UroQuest made representations and warranties
that UroQuest's Board of Directors: (1) approved the merger and declared it
advisable; (2) determined that the merger agreement and the merger were in the
best interests of UroQuest's stockholders; and (3) subject to the fiduciary
duties of the Board of Directors applicable from time to time, resolved to
recommend that the UroQuest stockholders adopt the merger agreement.
CONDUCT PRIOR TO THE EFFECTIVE TIME
Until the effective time, the terms of the merger agreement require
UroQuest and its wholly-owned subsidiaries to comply with a number of interim
operating covenants. In general, UroQuest, on behalf of itself and its
wholly-owned subsidiaries, agreed to operate during the period in the ordinary
and usual course in all material respects in the same manner as previously
operated and to use their respective reasonable efforts to preserve intact their
respective business organizations, keep available their respective present
officers and employees and maintain relationships with their respective
suppliers and customers and others having business relationships with them.
UroQuest also agreed to refrain from taking a number of actions, such as
significant acquisitions or incurring indebtedness other than in the ordinary
course of business, without Chemfab's prior consent. UroQuest's covenants to
operate its businesses in the ordinary course relate primarily to the following:
- amending its Certificate of Incorporation or other document or Bylaws;
- issuing securities and dividends;
- adopting or changing employee compensation and benefit plans;
- selling assets;
- changing accounting methods;
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- paying off claims;
- entering into or changing material agreements;
- entering into agreements with respect to the acquisition of UroQuest by a
third party;
- commencing or settling litigation;
- maintaining intellectual property;
- electing or appointing new directors or officers
- waiving or amending its rights under any confidentiality or "standstill"
agreement entered into in connection with a strategic transaction;
- reducing net operating losses; and
- taking, or agreeing in writing to take, any actions described above or
any actions that would make any of its representations and warranties
untrue or incorrect in any material respect as of the date when it was
made.
Notwithstanding the covenants above regarding UroQuest's operations, prior
to the closing of the merger UroQuest was permitted under the merger agreement
to, and has, completed the termination of the operations of its urology
division. In addition, UroQuest has completed the closure of its corporate
headquarters in Menlo Park, California. As required by the merger agreement,
Chemfab approved the design, terms and implementation of the termination of the
urology division.
ADDITIONAL AGREEMENTS
The merger agreement contains a number of additional agreements of Chemfab,
Merger Sub and UroQuest regarding the completion of the merger and related
transactions, including:
Proxy Materials and Special Meeting of Stockholders. UroQuest agreed to
prepare this proxy statement, mail it to UroQuest stockholders and call and hold
a special meeting of its stockholders to vote on the merger agreement and the
merger. UroQuest also agreed that this proxy statement shall contain the Board's
recommendation that the UroQuest stockholders vote in favor of approving and
adopting the merger agreement and the merger.
No Solicitation. Except as to a sale of the urology division assets,
UroQuest agreed that it will not, directly or indirectly, through any officer,
director, employee, agent, subsidiary or otherwise, solicit, initiate, entertain
or encourage (including by way of providing non-public information) any inquires
or the making of any proposal or offer from any third party relating to any
merger, sale of substantial assets, sale or purchase of shares of capital stock
of UroQuest or any subsidiary of UroQuest or similar transactions. UroQuest also
agreed not to participate in any discussions or negotiations with respect to
such a proposal or offer. UroQuest also agreed to terminate any existing
discussions or negotiations with any person other than Chemfab or Merger Sub and
to request that any such person to return or destroy all confidential
information that was previously provided to such person by UroQuest or any
subsidiary of UroQuest. In addition, UroQuest agreed that its Board would not,
and would not, (1) withdraw or modify or propose publicly to withdraw or modify
its approval or recommendation of the merger or the merger agreement in a manner
adverse to Chemfab or (2) approve or recommend or propose publicly to approve or
recommend an acquisition proposal by a third party or (3) cause UroQuest to
enter into any agreement with any third party related to any such acquisition
proposal.
However, if the Board determines in good faith that an acquisition proposal
is reasonably likely to lead to a superior proposal, and, after consultation
with and receipt of advice from outside counsel, that it is necessary to do so
in order to act in a manner consistent with its fiduciary duties to UroQuest's
stockholders, then UroQuest may, subject to certain conditions, furnish
information and participate in discussions or in negotiations concerning an
acquisition proposal received from a third party. A "superior proposal" means a
bona fide acquisition proposal that the Board concludes in good faith, after
consultation with its financial advisors,
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- is reasonably likely to be consummated, taking into account all factors;
and
- if consummated, will result in a more favorable, transaction to
UroQuest's stockholders than the proposal in the merger agreement.
UroQuest has agreed not to engage in negotiations with, or disclose any
non-public information to, any person making an acquisition proposal, unless it
receives a confidentiality agreement executed by the person making the
acquisition proposal that contains terms no less favorable to UroQuest than the
confidentiality agreement between UroQuest and Chemfab. UroQuest must notify
Chemfab orally or in writing of any request for non-public information. This
notification is to be delivered to Chemfab within 48 hours of the receipt of any
request for non-public information or acquisition proposal and prior to UroQuest
taking any other actions with respect to such request. If the request or
proposal comes from a party on a list of competitors previously provided to
UroQuest by Chemfab, UroQuest shall also identify the third-party making the
request. If UroQuest intends to enter into an acquisition agreement with a third
party relating to a superior proposal, then UroQuest shall deliver to Chemfab at
least 48 hours prior to entering into the acquisition agreement a notice
identifying the third party and all material proposed terms of the agreement.
Indemnification and Insurance. For three years after the effective time,
Chemfab has agreed to cause UroQuest (as the surviving corporation in the
merger) to maintain all rights of indemnification (including rights to
advancement of expenses and exculpation from liability) existing in favor of
UroQuest's present and former directors, officers, employees and agents on terms
no less favorable than those provided in the Certificate of Incorporation and
Bylaws of UroQuest on the date of the merger agreement, with respect to matters
occurring prior to the effective time. In addition, Chemfab has agreed to cause
UroQuest (or any of its successors) to perform all of their respective
obligations under indemnification agreements between UroQuest and its present
and former directors and officers listed as exhibits to UroQuest's Annual Report
on Form 10-K.
Chemfab has agreed to maintain in effect for three years after the
effective time, UroQuest's current directors' and officers' liability insurance
policies with respect to matters occurring prior to the effective time. UroQuest
has prepaid the premium for such insurance coverage. If such insurance expires,
is terminated or cancelled, Chemfab will use all reasonable efforts to obtain as
much insurance as can be obtained for any remaining period for the premium
prepaid by UroQuest. Chemfab has also agreed to guarantee the indemnification of
UroQuest's directors and officers to the extent of the difference between
UroQuest's consolidated net tangible worth (as defined in the merger agreement)
immediately prior to the effective time and, if less, during the three years
after the effective time. Chemfab also has agreed that, in the event that it
causes UroQuest to consolidate or merge into any other person, such that
UroQuest is not the surviving corporation the successors and assigns of UroQuest
will assume these indemnification obligations, subject to the same limitations.
Benefit Plans. The merger agreement provides that UroQuest (as the
surviving corporation) will honor the employment agreements of specified
UroQuest employees and maintain benefits and not reduce base compensation of
certain other employees who are retained after the effective time, and make
accrued bonus payments to certain of those employees. The merger agreement
further provides that UroQuest will make certain payments to employees who are
to be terminated before the effective time, and that certain benefits will be
continued for such employees.
Stock Options. The merger agreement provides that UroQuest will cancel all
outstanding stock options granted under its stock option plan and outstanding
immediately before the effective time, and that UroQuest will cancel its stock
option plan and employee stock purchase plan before the effective time.
In addition to the agreements referred to above, the merger agreement
provides that UroQuest and Chemfab will take certain actions with respect to
access to information and maintenance of confidentiality, public announcements,
notification of certain matters, HSR, SEC and other filings and consents,
indebtedness, litigation and tax matters, and the determination of certain
contingent environmental liabilities.
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CONDITIONS TO THE MERGER
Conditions to Each Party's Obligations to Effect the Merger. The
obligations of UroQuest, Chemfab and Merger Sub to effect the merger are subject
to the satisfaction or waiver of the following conditions:
- UroQuest stockholders must have approved and adopted the merger agreement
and the merger by a vote of the majority of outstanding shares entitled
to vote at the special meeting;
- any waiting periods under the HSR Act for the transactions contemplated
by the merger agreement must have expired or been terminated; and
- the consummation of the merger must not be prevented by any temporary
restraining order, injunction, judgment or other order, decree or ruling,
or statue, rule or regulation.
Conditions to the Obligations of Chemfab and Merger Sub to Effect the
Merger. The obligations of Chemfab and Merger Sub to effect the merger are
subject to the satisfaction or waiver of the following additional conditions:
- the representations and warranties of UroQuest, individually and in the
aggregate, must be true and correct in all material respects as of the
closing date (except for representations and warranties which address
matters only as of a particular date, which must be true and correct as
of the particular date, and except for changes required by the merger
agreement);
- UroQuest must have performed and complied with in all respects the
covenants and agreements under the merger agreement required to be
performed or complied with by it on or before the closing date;
- since the date of the merger agreement, no event or condition will have
occurred that has had or could reasonably be expected to have a material
adverse effect on UroQuest or any of its subsidiaries, other than (1)
changes related to the economy in general and not specifically to the
business of UroQuest or its subsidiaries, (2) changes due to disruption
of UroQuest's business as a result of any rumors, speculation or
announcement of the merger or (3) changes related to certain contingent
environmental liabilities;
- UroQuest will have executed and delivered to Chemfab at and as of the
closing date a certificate executed by UroQuest's President and Chief
Financial Officer certifying that, to the officers' knowledge, the above
conditions have been satisfied; and
- Immediately before to the effective time, UroQuest shall have cumulative
federal income tax net operating losses of at least $7,500,000.00.
Conditions to the Obligations of UroQuest to Effect the Merger. The
obligation of UroQuest to effect the merger is subject to the satisfaction or
waiver of the following additional conditions:
- the representations and warranties of Chemfab and Merger Sub,
individually and in the aggregate, must be true and correct in all
material respects as of the closing date (except for representations and
warranties which address matters only as of a particular date, which must
be true and correct as of the particular date, and except for changes
required by the merger agreement);
- Chemfab and Merger Sub must have performed and complied with in all
respects the covenants and agreements under the merger agreement required
to be performed or complied with by them on or before the closing date;
- Chemfab and Merger Sub will have executed and delivered to UroQuest at
and as of the closing date a certificate executed by Chemfab's and Merger
Sub's Presidents and Chief Financial Officers certifying that, to the
officers' knowledge, the above conditions have been satisfied; and
- Chemfab shall have received the financing sufficient for it to perform
its obligations under the merger agreement.
For purposes of the merger agreement, a "material adverse effect" means,
with respect to UroQuest and its subsidiaries, any change in or effect on the
business, properties or assets of UroQuest and its subsidiaries
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that is materially adverse to the business, properties, assets, results of
operations or condition (business, financial or otherwise) of UroQuest and its
subsidiaries, taken as a whole. If UroQuest waives a material condition to the
closing of the merger, or in the event of a material negative adjustment of the
per share merger consideration, UroQuest would resolicit the UroQuest
stockholders' consent to the merger.
TERMINATION OF THE MERGER AGREEMENT
UroQuest and Chemfab may mutually agree to terminate the merger agreement
at any time, whether before or after the receipt of stockholder approval,
without completing the merger. In addition, either party can terminate the
merger agreement if:
- any court of competent jurisdiction in the United States or other United
States governmental authority shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting the merger and the order, decree, ruling or other action that
restrains, enjoins or otherwise prohibits the merger shall have become
final and nonappealable;
- there has been a material breach by the other party of any
representation, warranty, covenant or agreement in the merger agreement
and the breach is capable of being cured, but is not cured, with certain
exceptions, before the closing date; or
- the effective time shall not have occurred by the later of (1) July 31,
1999 and (2) 60 days after the later of (a) clearance by the SEC or (b)
the expiration or termination of all waiting periods under the HSR Act.
In addition, Chemfab may terminate the merger agreement if:
- the UroQuest Board approves or recommends an acquisition proposal by a
third party, or withdraws or modifies, in a manner adverse to Chemfab or
Merger Sub, its approval or recommendation of the transactions
contemplated by the merger agreement, or if the Board publicly resolves
to do any of the above.
In addition, UroQuest may also terminate the merger agreement if:
- prior to the effective time, UroQuest determines to accept a superior
proposal and complies with the requirements under the merger agreement
related to its acceptance of the superior proposal; provided that (1)
UroQuest has provided Chemfab with 48 hours notice of its intent to
terminate the agreement, (2) at the time UroQuest terminates the merger
agreement, it pays to Chemfab the break-up fee described below and (3)
the stockholders who are parties to the Stockholder Voting Agreement
continue to be bound by the Stockholder Voting Agreement. The termination
notice must contain, in reasonable detail, the terms and conditions of
the superior proposal, including the amount and form of the proposed
consideration and whether it is subject to any material conditions.
In the event the merger agreement were terminated due to UroQuest's
acceptance of a superior proposal, UroQuest would be required to pay to Chemfab
a break-up fee in the amount of $500,000. In the event the merger agreement were
terminated for a reason other than UroQuest's acceptance of a superior proposal,
UroQuest would consist solely of the operations of Bivona, due to the
termination of the company's urology operations in July 1999. In the event a
decision were made to restart those terminated operations, the process of doing
so would be difficult and expensive, and UroQuest would face the same risks
related to such operations that led to the decision of UroQuest's Board of
Directors to accept Chemfab's proposal to acquire UroQuest.
BREAK-UP FEE
The merger agreement requires that, under certain circumstances, UroQuest
pay to Chemfab a break-up fee of $500,000 as reimbursement for Chemfab's
expenses and as liquidated damages. The payment of the break-up fee must be made
upon termination of the merger agreement if UroQuest terminates the merger
agreement because of its acceptance of a superior proposal or three business
days after termination of the merger agreement by Chemfab because of the
UroQuest Board's approval or recommendation of a superior
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proposal or its withdrawal or modification of its recommendation of the merger
agreement to its stockholders, in a manner adverse to Chemfab.
PAYMENT OF FEES AND EXPENSES
Except as otherwise provided in the merger agreement, all costs and
expenses incurred in connection with the merger agreement and the transactions
contemplated thereby shall be paid by the party incurring the expenses, whether
or not the merger is consummated.
AMENDMENTS AND WAIVERS
The merger agreement may be amended by written action taken by the parties
thereto at any time before the effective time. However, after any approval by
UroQuest's stockholders, the parties may not amend the merger agreement without
the approval of UroQuest's stockholders if the amendment (1) reduces or changes
the form of the merger consideration or (2) changes any other terms and
conditions of the merger agreement, if the changes, alone or in the aggregate,
would materially adversely affect UroQuest's stockholders. At any time prior to
the effective time, whether before or after the special meeting, Chemfab and
Merger Sub on the one hand, and UroQuest on the other hand, may:
- extend the time for the performance of any of the obligations or other
acts of the other party; or
- waive compliance with any of the agreements or conditions contained in
the merger agreement by the other party.
Any agreement on the part of any party to any extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of the party.
CONSEQUENCES OF THE MERGER
After the merger, UroQuest stockholders will no longer have any interest in
UroQuest or its future earnings or growth. UroQuest will no longer be registered
as a reporting company under the federal securities laws, and shares of UroQuest
common stock will no longer be quoted on Nasdaq or listed on any other exchange.
VOTING AGREEMENT
The description of the Stockholder Voting Agreement between Chemfab,
UroQuest and certain UroQuest stockholders set forth below is only a summary and
is qualified in its entirety by reference to the agreement itself. The full text
of the voting agreement is attached to this proxy statement as Annex C, and is
incorporated herein by reference.
As a condition to executing the merger agreement, Chemfab required that the
beneficial owners of an aggregate of 6,021,203 shares of UroQuest common stock,
representing approximately 48% of the outstanding UroQuest common stock as of
the date of this proxy statement, execute the Stockholder Voting Agreement.
Pursuant to the Stockholder Voting Agreement, such stockholders have agreed with
Chemfab to vote all of their shares of UroQuest common stock in favor of
approval and adoption of the merger agreement and the merger and against any
transaction or proposal that would prevent the merger, unless, prior to the
special meeting, the merger agreement is terminated by Chemfab as a result of
the UroQuest Board (1) approving or recommending a third party acquisition
proposal that is superior to the merger agreement; or (2) withdrawing or
modifying its favorable recommendation of the merger agreement and the merger in
a manner which is adverse to Chemfab, or by UroQuest in connection with
UroQuest's acceptance of a superior proposal. However, if the merger agreement
is so terminated, Chemfab has the option to purchase from the stockholders who
are parties to the Stockholder Voting Agreement all of such holders' shares of
UroQuest common stock at a purchase price per share equal to the per share
merger consideration provided in the merger agreement. The Stockholder Voting
Agreement terminates upon the later of (1) the termination of the merger
agreement by mutual agreement or as a result of a breach of the merger agreement
that has not been cured prior to the closing date or other specified time, and
(2) the later of July 31, 1999 and 60 days after the
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later of clearance of this proxy statement by the SEC or termination or
expiration of all waiting periods under the HSR Act. The Stockholder Voting
Agreement is expected to result in approximately 48% of the outstanding shares
of UroQuest common stock being voted in favor of approval and adoption of the
merger agreement and the merger. Thus, UroQuest expects that the merger
agreement and the merger will be adopted and approved at the special meeting,
even if holders of only approximately 2% of UroQuest common stock who are not
parties to the Stockholder Voting Agreement vote in favor of the proposal.
Each of the stockholders who is party to the Stockholder Voting Agreement
has also agreed, with certain limitations, that such stockholder will not: (1)
transfer or agree to transfer such stockholder's UroQuest shares; (2) grant any
proxy, authorization or voting power or enter into any voting agreement with
respect to such shares (except as contained in the Stockholder Voting Agreement)
or deposit such shares in a voting trust; (3) solicit any acquisition proposal
for UroQuest; or (4) engage in negotiations or discussions with, or provide
information to, the maker of an unsolicitated acquisition proposal. The
existence of the Stockholder Voting Agreement is likely to discourage other
parties from attempting to acquire UroQuest.
CHEMFAB'S SOURCE OF FUNDS
Chemfab intends to consummate the transactions contemplated by the merger
agreement using funds expected to be available under an unsecured credit
facility. Chemfab has obtained a commitment letter from Brown Brothers Harriman
& Co. to provide an acquisition term loan facility of up to $30 million for the
purpose of funding the payments to UroQuest stockholders.
INTEREST OF UROQUEST'S DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
Some UroQuest officers and directors own UroQuest common stock. To that
extent, their interest in the merger may be considered to be the same as other
UroQuest stockholders. Some of UroQuest's officers and directors hold options to
purchase UroQuest common stock. UroQuest estimates that, assuming the per share
merger consideration is less than $2.3750, approximately 47% of the estimated
$1,000,000 of the aggregate merger consideration attributable to holders of
outstanding stock options would be payable to the directors and executive
officers of UroQuest with respect to their stock options. For information
concerning ownership by UroQuest's officers and directors, see "Security
Ownership of Certain Beneficial Owners and Management." However, in considering
the recommendation of the Board that the merger agreement and merger be approved
and adopted, UroQuest stockholders should be aware that a number of UroQuest
officers and directors have interests in the merger that are, or may be,
different from other UroQuest stockholders.
The merger agreement contemplates that the directors and officers of Merger
Sub prior to the merger will be the directors and officers of UroQuest following
the merger. None of the directors or officers of Merger Sub prior to the merger
will include any of the directors or officers of UroQuest. At or prior to the
effective time, certain of UroQuest's current executive officers will be
terminated. This termination will trigger rights that some executive officers
hold pursuant to their respective employment contracts and arrangements. These
rights include the right to receive severance payments.
Pursuant to the terms of his employment agreement with UroQuest, Terry E.
Spraker, Ph.D., UroQuest's President and Chief Executive Officer, will receive
severance payments equal to approximately $370,000, representing payments in the
amount of twelve months' salary and bonus, and continuation of benefits
estimated to total $10,000,
Pursuant to a severance plan adopted by the UroQuest Board of Directors in
March 1999, Jeffrey L. Kaiser, UroQuest's Vice President, Chief Financial
Officer, Treasurer and Secretary, will receive severance payments equal to
approximately $85,000, representing payments in the amount of six months' salary
and continuation of benefits estimated to total $8,000.
Pursuant to a severance plan adopted by the UroQuest Board of Directors in
March 1999, Alan L. Marquardt, UroQuest's Vice President, Regulatory, Clinical,
and Quality Affairs, will receive severance payments equal to approximately
$85,000, representing payments in the amount of six months' salary and
continuation of benefits estimated to total $8,000.
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Pursuant to the terms of his employment agreement with UroQuest, Keith W.
L. Ward, UroQuest's Vice President, International, will receive severance
payments equal to approximately $85,000, representing payments in the amount of
six months' salary and continuation of benefits estimated to total $24,000.
The merger agreement provides that Chemfab will negotiate with Thomas E.
Brandt, UroQuest's current Chief Operating Officer and a director of UroQuest,
regarding the terms of a new employment agreement, but that unless and until a
new employment agreement is reached, Chemfab will honor the terms of Mr.
Brandt's existing employment agreement. Pursuant to the terms of his employment,
Mr. Brandt is entitled, in the event he is terminated without cause, to
severance payments equal to the greater of (1) twelve months' regular
compensation and (2) the aggregate amount of regular compensation he would have
received through the remaining term of his employment agreement, which expires
in September 2001. In addition, the merger agreement provides that UroQuest (as
the surviving corporation) will make accrued bonus payments to Mr. Brandt that
were earned prior to the effective time.
Chemfab also has agreed to maintain all rights of indemnification that each
UroQuest officer and director currently has under UroQuest's certificate of
incorporation, bylaws and any agreements listed as exhibits to UroQuest's 1998
Annual Report on Form 10-K, against losses arising from his or her service as a
director or officer of UroQuest and, subject to certain thresholds, to continue
to maintain directors' and officers' liability insurance for each UroQuest
officer and director until the third anniversary of the effective time. See
"Summary of the Merger Agreement -- Additional Agreements -- Indemnification and
Insurance."
Four UroQuest stockholders, who beneficially own, in the aggregate,
approximately 48% of the outstanding UroQuest Common Stock, have executed the
Stockholder Voting Agreement. Thomas E. Brandt, a member of UroQuest's Board of
Directors, executed the Stockholder Voting Agreement on behalf of himself,
Richard C. Davis, M.D. member of UroQuest's Board of Directors, executing the
Stockholder Voting Agreement on behalf of his trust, Jack W. Lasersohn, a member
of UroQuest's Board of Directors, executed the Stockholder Voting Agreement on
behalf of Vertical Fund Associates, L.P., Elizabeth H. Weatherman, a member of
UroQuest Board of Directors, executed the Stockholder Voting Agreement on behalf
of Warburg, Pincus Investors, L.P. The Stockholder Voting Agreement provides
that, subject to certain exceptions, Chemfab will indemnify, these four
stockholders and their affiliates, agents, advisers and representatives against
losses arising from the Stockholder Voting Agreement or any of the transactions
contemplated by the Stockholder Voting Agreement. Accordingly, the interests of
those stockholders who are party to the Stockholder Voting Agreement may not
necessarily coincide with those of other UroQuest stockholders.
ACCOUNTING TREATMENT
The merger will be accounted for using the purchase method of accounting.
Under this method of accounting, the purchase price will be allocated to the
fair value of the net assets acquired, and UroQuest's results will be included
in Chemfab's consolidated financial statements from and after the effective
time.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS AND OPTION HOLDERS
The receipt of cash by a UroQuest stockholder in the merger or as a result
of the exercise of appraisal rights may be a taxable transaction for federal
income tax purposes and may also be a taxable transaction under applicable
state, local or foreign income or other tax laws. Generally, a stockholder will
recognize gain or loss in an amount equal to the difference between the cash
received by the stockholder pursuant to the merger and the stockholder's
adjusted basis in the shares. If the UroQuest shares constitute a capital asset
in the stockholder's hands, the rate at which any gain is taxed for federal
income tax purposes will depend on how long the stockholder has held the shares
on the date of the merger.
A stockholder who is a nonresident alien individual, a foreign corporation,
a nonresident alien fiduciary of a foreign estate or trust, or a foreign
partnership with certain types of partners may not be subject to federal income
tax with respect to any gain or loss on the sale of UroQuest common stock.
However, this exemption is subject to a number of complex limitations that
depend on a stockholder's particular circumstances.
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In general, holders of options to purchase UroQuest common stock will be
required to report as ordinary taxable income any cash they receive in exchange
for cancellation of the options. In addition, any cash payable to an option
holder will be reduced by the amount of any taxes required to be withheld on
ordinary income.
This summary describes some of the federal income tax consequences of the
merger for UroQuest stockholders. It does not discuss all potentially relevant
federal income tax matters or the consequences to any stockholders or option
holders subject to special tax treatment, or any state or local tax consequences
of the merger. The tax consequences to particular UroQuest stockholders will
depend on their specific circumstances.
UROQUEST STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS CONCERNING THE FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE MERGER TO THEM.
REGULATORY APPROVALS
Under the HSR Act and the rules of the Federal Trade Commission (the "FTC")
relating to the HSR Act, the merger cannot be completed until pre-merger
notification and request forms have been filed and required information has been
furnished to the Antitrust Division of the United States Department of Justice
(the "Antitrust Division") and the FTC, and a specified waiting period has
expired or been earlier terminated. UroQuest and Chemfab each filed their
respective pre-merger notification and report forms under the HSR Act on June
18, 1999. The waiting period specified under the HSR Act was terminated
effective June 30, 1999.
The merger agreement provides that all waiting periods under the HSR Act
must have expired or been earlier terminated in order to complete the merger.
The merger agreement also conditions the merger on the absence of any action by
a government entity to make the merger illegal or otherwise prohibit its
completion.
At any time before or after the effective time, the Antitrust Division or
the FTC could, if deemed necessary or desirable to do so, act under the federal
antitrust laws and seek to enjoin completion of the merger or seek the
divestiture of substantial assets of Chemfab or UroQuest. At any time before or
after the effective time, and notwithstanding that the HSR Act waiting period
has expired, any state attorney general of a state where UroQuest or Chemfab has
operations also could take action under its state antitrust laws to enjoin
completion of the merger or seek the divestiture of substantial assets. Private
parties also may take legal action under federal and/or state antitrust laws
under certain circumstances.
UroQuest and Chemfab believe that the merger will comply with federal and
state antitrust laws. However, there can be no assurance that a challenge to the
merger will not be made or that, if made, UroQuest and Chemfab would prevail or
would not be required to accept conditions, including divestitures, in order to
complete the merger.
Other than the expiration or earlier termination of the relevant waiting
period under the HSR Act (and the acceptance of the certificate of merger by the
Delaware Secretary of State), there are no regulatory approvals from any
governmental entities required to complete the merger.
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INFORMATION CONCERNING UROQUEST
BUSINESS
Through its Bivona subsidiary, based in Gary, Indiana, UroQuest designs,
develops, manufactures and markets a line of proprietary silicone medical device
products used to manage airway problems, as well as provides engineering design,
development and manufacturing services for silicone products on an OEM basis for
other medical device companies. Bivona is one of a limited number of specialty
manufacturers of silicone catheters in the United States.
From its inception in April 1992 until June 1999, UroQuest, through its
urology division, devoted its efforts to the design and development of advanced
products for the management and diagnosis of both male and female urological
disorders. UroQuest's principal urology product focus was the On-Command, an
intraurethral (inside the urethra) catheter incorporating a proprietary
anchoring system and a proprietary patient controlled, magnetically activated
valve used to regulate urine flow. As part of the design and development of the
On-Command product, UroQuest conducted various clinical trials for the acute and
chronic indications of the Male On-Command and the acute indication of the
Female On-Command. In April 1999, UroQuest received notification that the FDA
had denied 510(k) premarket clearance of the Male On-Command for acute
indications. The denial was further clarified and confirmed in a meeting in June
1999 between UroQuest and the FDA.
In July 1999, pursuant to the merger agreement, UroQuest completed the
termination of the operations of its urology division, which included the
termination of all research and development activities relating to urology
products, the termination of all clinical trials and studies and the termination
of all urology division personnel. The Company is seeking to sell the urology
related technology, however, no sale is currently pending. Any proceeds realized
from a sale of the technology will be included in the final net asset adjustment
calculation in the merger. Accordingly, the discussion in Information Concerning
UroQuest refers to UroQuest's business as conducted by its Bivona subsidiary. As
of October 15, 1999, UroQuest completed the closure of its corporate
headquarters in Menlo Park, California, and terminated its administrative
personnel working in Menlo Park.
Prior to the termination of UroQuest's urology operations, management of
UroQuest has historically identified two business segments for purposes of
assessing performance and making operating decisions. The business segments
identified are the two business units that offered different products: Urology
Products and Airway Management/OEM Products. See UroQuest's consolidated
financial statements and the notes thereto, included elsewhere in this proxy,
for additional segment information.
UroQuest was founded as a Florida corporation in 1992 and reincorporated in
Delaware in October of 1996. UroQuest's address is 1907 Carmelita Drive, San
Carlos, California 94070, and its telephone number is (650) 463-5180. In October
1996, UroQuest acquired BMT, Inc., an Indiana corporation, and its wholly owned
subsidiary, Bivona, Inc., an Indiana corporation.
Airway Management Products and OEM Sales
UroQuest manufactures and markets a series of proprietary airway management
products under the Bivona label. These products consist primarily of silicone
based medical devices used in a wide variety of clinical applications, including
tracheostomy and endotracheal tubes for airway management and voice prostheses
for voice restoration. Bivona also produces a range of catheter-type products on
an OEM and private label basis for other medical device companies in areas that
include gastrointestinal feeding, esophageal management, cardiac perfusion,
hyperalimentation and dialysis.
Bivona uses a direct sales force to market its proprietary airway
management products to medical specialists including ear, nose and throat
("ENT") surgeons, respiratory therapists, speech pathologists and
anesthesiologists. A group of specialty medical dealers is used in international
markets. Approximately 13% of UroQuest's net sales are currently derived from
sales in international markets.
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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.
The current proprietary airway management product line includes over 400
different products sold to approximately 9,000 customers in 40 different
countries. The OEM product line includes approximately 500 additional products
sold to approximately 20 different companies, some of which are Fortune 500
medical device companies. For the year ended December 31, 1998, OEM sales
accounted for approximately 41% of UroQuest's net sales. Sales to one customer,
Abbott Laboratories, accounted for approximately 19% of total net sales.
Although Bivona continues to develop its OEM business, there can be no assurance
that its OEM customers will continue to use Bivona as a manufacturing resource.
The loss of OEM customers could have a material adverse effect on UroQuest's
business, financial conditions and results of operations.
The OEM business is serviced by a team of contract sales agents with
support from Bivona's engineering staff. Bivona is positioned as a value added
manufacturer providing complete product development, regulatory affairs,
manufacturing and packaging service. Bivona emphasizes its broad expertise in
complex catheter manufacturing, silicone fabrication techniques and surface
enhancement technologies.
Government Regulation
UroQuest's products are subject to pervasive and continuing regulation by
the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDC Act") and
regulations promulgated thereunder, 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 the various
foreign countries in which UroQuest'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
authority to request recall, repair, replacement or refund of the cost of any
device manufactured or distributed by UroQuest.
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 approved medical devices for unapproved
uses. UroQuest will be required to adhere to applicable FDA regulations
regarding Good Manufacturing Practices ("GMP") and similar regulations in other
countries, which include testing, control, and documentation requirements, and
with Medical Device Reporting ("MDR") requirements. Ongoing compliance with GMP
and other applicable regulatory requirements will be monitored through periodic
inspections by state and federal agencies, including the FDA, and by comparable
agencies in other countries. In addition, changes in existing regulations or
adoption of new governmental regulations or policies could prevent or delay
regulatory approval of UroQuest's products.
UroQuest is also subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that UroQuest will
not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon UroQuest's ability to do business.
Following the enactment of the Medical Device Amendments to the FDC Act in
May 1976, the FDA has classified medical devices in commercial distribution into
one of three classes, Class I, II or III. This classification is based on the
controls deemed necessary to reasonably ensure the safety and efficacy of
medical devices. Class I devices are those whose safety and efficacy can
reasonably be ensured through general controls, such as adequate labeling,
premarket notification and adherence to GMPs. Class II devices are generally
those whose safety and efficacy can reasonably be ensured through the use of
general and special
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controls, such as performance standards, post-market surveillance, patient
registries and FDA guidelines. Class III devices are devices which must receive
premarket approval by the FDA to ensure their safety and efficacy, generally
life-sustaining, life-supporting or implantable devices, and also include all
new devices introduced after May 28, 1976 that are not "substantially
equivalent" to legally marketed products. Manufacturers must also report to the
FDA any incident in which its product may have caused or contributed to a death
or serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, it would be likely to cause or contribute to a death or serious
injury. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses.
Before a new device can be introduced into the market in the United States,
the manufacturer or distributor generally must obtain FDA marketing clearance or
approval through either a 5l0(k) premarket notification or a PMA application. If
a manufacturer or distributor of medical products can establish that a new
device is "substantially equivalent" to a legally marketed Class I or Class II
medical device or to a pre-amendment Class III medical device for which the FDA
has not required a PMA, the manufacturer or distributor may seek FDA marketing
clearance for the device by submitting a 510(k) notification. The FDA recently
has been requiring more vigorous demonstration of substantial equivalence than
in the past, including in some cases requiring submission of clinical data. The
510(k) notification and the claim of substantial equivalence may have to be
supported by various types of information indicating that the device is as safe
and effective for its intended use as a legally marketed predicate device.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. It generally takes four to 12 months from the date of
submission to obtain 5l0(k) premarket clearance, but it may take longer. The FDA
may agree with the manufacturer or distributor that the proposed device is
"substantially equivalent" to another legally marketed device, and allow the
proposed device to be marketed in the United States. The FDA may, however,
determine that the proposed device is not substantially equivalent, or may
require further information, such as additional clinical data, before a
substantial equivalence determination can be made. Such a determination or
request for additional information could prevent or delay the market
introduction of a new product. For any devices that are cleared through the
510(k) process, modifications or enhancements that could significantly affect
safety or effectiveness, or constitute a major change in the intended use of the
device, will require new 5l0(k) submissions.
If a manufacturer or distributor cannot establish to the FDA's satisfaction
that a new device is substantially equivalent to a legally marketed medical
device, the manufacturer or distributor will have to seek a PMA for the device.
A PMA must be supported by valid scientific evidence to demonstrate the safety
and effectiveness of the device, typically including the results of preclinical
testing, clinical trials and extensive manufacturing information. The PMA
process can be expensive, uncertain and lengthy. Upon receipt of a PMA
application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If
sufficiently complete, the application is declared fileable by the FDA and the
FDA will begin an in-depth review of the PMA. The FDA review of a PMA
application generally takes one to three years from the date the PMA is accepted
for filing, but may take significantly longer. A number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, whether for a 510(k) or
a PMA, and the device presents a "significant risk," the sponsor of the trial
(usually the manufacturer or the distributor of the device) will have to file an
investigational device exemption ("IDE") application prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and one or more appropriate Institutional Review Boards
("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific
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number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate IRBs without
the need for FDA approval. Submission of an IDE does not give assurances that
FDA will approve the IDE and, if it is approved, there can be no assurance that
FDA will determine that the data derived from these studies will support the
safety and efficacy of the device or warrant the continuation of clinical
studies. An IDE supplement must be submitted to and approved by the FDA before a
sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from 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. UroQuest has 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 its products. Some countries
in which UroQuest is selling devices through distributors either do not
currently regulate medical devices or have minimal registration requirements.
However, these countries may develop more extensive regulations in the future
that could impact UroQuest's ability to market its products.
There can be no assurance that UroQuest will be able to obtain or maintain
the required clearances or approvals, both domestically and internationally,
which would allow UroQuest to market its 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 UroQuest's business,
financial condition and results of operations.
Bivona, 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. Bivona is also registered with the FDA as a distributor, initial importer,
repackager and relabeler of medical devices. Among its activities, Bivona
markets a range of proprietary and OEM products, most of which require and have
received 510(k) clearance. Bivona has made modifications to one or more of its
cleared proprietary devices that Bivona 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 Bivona's determinations not to submit a new 510(k) notice for
any of these changes or would not require Bivona to submit a new 510(k) notice
for any of the changes made to Bivona's devices. If the FDA requires Bivona to
submit a new 510(k) notice for any device modification, Bivona may be prohibited
from marketing the modified device until the 510(k) notice is cleared by the
FDA.
In January 1998, Bivona received a Warning Letter from the FDA following
Bivona's response to the FDA regarding certain deficiencies noted during an
on-site FDA inspection in December 1997. Bivona 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, Bivona received a letter in which the
FDA acknowledged Bivona's responses and planned actions to address the FDA's
concerns and informed Bivona that the FDA was planning a follow-up inspection in
1998. The FDA has subsequently extended the time for the follow-up inspection
into 1999. While UroQuest believes it has fully addressed the FDA's concerns,
there can be no assurance that the FDA will concur. Nor can there be any
assurance that the FDA will not issue additional Warning Letters in the future.
Failure by Bivona to adequately address the FDA's concerns could cause the FDA
to take additional actions that might cause disruptions in Bivona's operations.
These disruptions could have a material, adverse effect on UroQuest's business,
financial condition and results of operations.
Bivona has received certification of its conformance to ISO-9001 Standards.
Bivona has contracted with a foreign certification services company to act on
its behalf for assessment of compliance with the provisions of the Medical
Device Directive ("MDD") of the European Union. Bivona's products are classified
as Class IIA, and self certification and authorization for application of the CE
mark under Annex II of the MDD (full quality system in conformance to EN29001
and EN46001) is conducted to assure compliance with applicable requirements.
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Manufacturing
Bivona has specialized in the manufacture of medical devices using
predominantly silicone technology for over 25 years. Bivona manufactures a broad
range of silicone-based catheter-type products used in various segments of the
health care industry. Bivona has obtained ISO-9001 certification from BSI
Product Certification of the United Kingdom, which is based on adherence to
established standards in the area of quality assurance and manufacturing process
control, and CE mark status. There can be no assurance that Bivona will be able
to maintain such standards and certifications.
Bivona purchases certain of the components used in manufacturing from
several single source suppliers, with whom Bivona has no long-term agreements.
Any interruptions or delays associated with any component shortages could have a
material adverse effect on UroQuest's business, financial condition and results
of operations.
Bivona's manufacturing capabilities include custom compounding, where
special pigmentation, radiopacity agent, or unique ratio blending are necessary
to customize end product performance specifications. Liquid silicones and high
consistency silicones are utilized in injection, transfer, compression, insert
or blow molding processes to manufacture components in a variety of custom
configurations. Bivona also has the capability to extrude single or multi-lumen
tubing, special round or compound profiles or even coextrusion with other
silicone or non-silicone substrates in a range of sizes from as small as 0.002"
inside diameter tubing to as large as 1.6" outside diameter. In some cases,
these basic processes yield a finished device. In most cases these molded or
extruded products become the components and/or subassemblies from which a broad
range of catheter-type devices are manufactured, including the On-Command.
Bivona has extensive assembly and fabrication capabilities. The molded or
extruded silicone components are combined together with any number of
non-silicone components to produce a variety of products. In addition to both
Class 100,000 and Class 10,000 certified cleanroom assembly and packaging
capability, Bivona's other custom assembly processes include adhesiving,
bonding, potting, forming, porting, drilling, notching, cutting, printing,
coating, dispensing and reinforcing with wires or other non-silicone substrates.
In addition, Bivona has developed proprietary surface enhancement technologies
and processes which provide a wide range of alternative product characteristics.
Over 800,000 silicone catheter-type devices are currently manufactured annually
and Bivona currently has excess manufacturing capacity.
Environmental Compliance
UroQuest uses 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, UroQuest could be held liable for damages, the costs of
remedial actions and could also be subject to revocation of permits necessary to
conduct its business. Any such revocations could require UroQuest to cease or
limit production at its facilities, which could have a material adverse effect
on UroQuest's business, financial condition and results of operations. UroQuest
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. Although UroQuest believes it has
complied with all environmental laws and has received no notification of any
investigation concerning any violation of any such laws, there can be no
assurance that UroQuest 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
UroQuest's business, financial condition and results of operations. The results
of an environmental study of Bivona's real property indicate that elevated
readings of certain chlorinated volatile organic compounds were found in a
portion of the real property. Such levels exceed the federal minimum tolerated
levels under certain regulatory acts. Pursuant to the amendment to the merger
agreement, UroQuest has agreed to set the environmental accrual for remediation
of this contamination at $2,000,000.
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Research And Development
UroQuest's current research and development efforts are focused primarily
on Bivona proprietary and OEM products, although such efforts have historically
focused on UroQuest's urology products as well. UroQuest also has built upon its
clinical knowledge and relationships to develop additional advanced and
innovative products. Accordingly, UroQuest has devoted significant funds to its
research and development activities. The research and development expenses for
the years ended December 31, 1998, 1997 and 1996 were $4,298,000, $2,901,000 and
$2,173,000 respectively.
UroQuest has a fully-staffed pilot production laboratory with a range of
capabilities including product molding, extrusion, testing and assembly as well
as extensive experience in silicone manufacturing and in materials selection for
specific applications. As of June 30, 1999, the research and development staff
consisted of 14 engineers and 9 skilled technicians. In July 1999, in connection
with the termination of UroQuest's urology operations, two of the 14 engineers,
who were related to UroQuest's urology operations, were terminated.
Competition
Bivona competes with a number of other silicone fabricators for OEM and
private label business. The OEM business is highly competitive and the timing
and volume of orders can fluctuate significantly. Bivona specializes in complete
device assemblies of complex products. Because virtually all of Bivona'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.
Bivona's proprietary silicone products compete primarily against
non-silicone counterparts produced by a number of large multinational companies,
including Mallinkrodt Group Inc., Smith Industries Medical Systems and Rusch
Inc. In addition, there are a number of smaller companies that compete in other
Bivona market areas, including InHealth in voice restoration and Xomed Surgical
Products, Inc. in ENT. Competition in the markets for Bivona's proprietary
products is also intense.
Most of UroQuest's competitors and potential competitors have significantly
greater financial, technical, research, manufacturing, marketing, sales,
distribution and other resources than UroQuest. It is possible that other large
health care and consumer product companies may also enter UroQuest's markets in
the future. Furthermore, academic institutions, governmental agencies and other
public and private research organizations will continue to conduct research,
seek patent protection and establish arrangements for commercializing products
that may compete with products offered by UroQuest.
There can be no assurance that UroQuest'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 UroQuest, or that such
competitors will not succeed in obtaining regulatory approval, introducing or
commercializing any such products prior to UroQuest. Such developments could
have a material adverse effect on UroQuest's business, financial condition and
results of operations.
Patents And Proprietary Rights
UroQuest's ability to compete effectively will depend, in part, on its
ability to develop and maintain proprietary aspects of its technology to
preserve its trade secrets and to operate without infringing the proprietary
rights of the third parties. UroQuest's strategy regarding the protection of its
proprietary rights and innovations is to seek patents on those portions of its
technology that it believes are patentable and to protect as trade secrets other
confidential information and proprietary know-how. There can be no assurance
that UroQuest's issued patents, or any patents which may be issued as a result
of UroQuest'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 UroQuest'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
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seek to apply for and obtain patents that may prevent, limit or interfere with
UroQuest's ability to make, use or sell its products either in the United States
or internationally.
Bivona holds fifteen United States patents and nine foreign patents
relating to proprietary airway management products. UroQuest also holds sixteen
United States patents, eleven of which relate to the On-Command and numerous
foreign patents and has two United States patents applications and various
foreign patent applications pending, relating to urology products and methods.
Except for two patents that expire in 1999 and 2000, these patents have
expiration dates ranging from 2002 to 2016. There can be no assurance that
UroQuest's issued patents, or any patents which may be issued as a result of
UroQuest's applications, will offer any degree of protection. Moreover, there
can be no assurance that any of UroQuest's patents or patent applications will
not be challenged, invalidated or circumvented in the future. In addition, there
can be no assurance that competitors, many of whom have substantial resources
and have made significant investments in competing technologies, will not apply
for and obtain patents that will prevent, limit or interfere with UroQuest's
ability to make, use or sell its products either in the United States or
internationally.
Some of the technology used in, and that may be important to, UroQuest's
products is not covered by any patent or patent application of UroQuest.
Therefore, UroQuest also relies on trade secrets and proprietary know-how, which
it seeks to protect, in part, through proprietary information agreements with
certain employees, consultants and other parties. UroQuest's proprietary
information agreements with employees and consultants contain standard
confidentiality provisions and, in certain instances, require such individuals
to assign to UroQuest, without additional consideration, any inventions
conceived or reduced to practice by them while employed or retained by UroQuest,
subject to customary exceptions. There can be no assurance that proprietary
information agreements with employees, consultants and others will not be
breached, that UroQuest would have adequate remedies for any breach, or that
UroQuest's trade secrets will not otherwise become known to or independently
developed by competitors. Moreover, litigation associated with the enforcement
by UroQuest of its trade secrets and proprietary know-how can be lengthy and
costly, with no guarantee of success.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that UroQuest will not in the
future become subject to patent infringement claims and litigation or
interference proceedings before the United States Patent and Trademark Office.
The 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
UroQuest, to protect trade secrets or know how owned by UroQuest 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 UroQuest and significant diversion of attention by UroQuest's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which UroQuest may become a party could subject
UroQuest to significant liabilities to third parties or require UroQuest to seek
licenses from third parties. Although patent and intellectual property disputes
in the medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to UroQuest on satisfactory terms or at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent UroQuest from
manufacturing and selling its products, which would have a material adverse
effect on UroQuest's business, financial condition and results of operations.
To date, no claims have been brought against UroQuest alleging that its
technology or products infringe intellectual property rights of others. However,
there can be no assurance that such claims will not be brought against UroQuest
in the future or that any such claims will not be successful.
UroQuest seeks to protect its trademarks through registration. Bivona holds
five registered trademarks, including Bivona(R), Fome-Cuf(R), Aire-Cuf(R),
Saf T Flo(R) and Nu-Trake(R) and 16 trademarks for which United States and
foreign registrations are pending. UroQuest(R) and On-Command(R) are registered
trademarks of
39
<PAGE> 45
UroQuest. In addition, UroQuest has filed intent to use applications for other
marks which have been approved by the PTO and for which notices of use have been
filed. There can be no assurance, however, that registration of UroQuest's
trademarks will provide any significant protection.
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 Uroquest's risk of product liability. On
October 7, 1999, Uroquest's Bivona subsidiary was served with notice that is was
being sued in the 92nd District Court of Texas for wrongful death, along with
other parties, for product failure relating to the death of a five-year old girl
in September 1997. Although Uroquest maintains product liability insurance with
respect to its products, a successful product liability claim, such as the one
described above, or series of claims brought against Uroquest which are in
excess of Uroquest's insurance coverage could have a material adverse effect on
Uroquest's business, financial condition and results of operations. In addition,
there can be no assurance that product recalls, which could have a material
adverse effect on Uroquest's business, financial condition and results of
operations, will not occur.
Employees
As of September 30, 1999 UroQuest employed a total of 273 full-time
employees. Of these full-time employees, 263 were related to Bivona, 10 were
related to urology operations and four were administrative personnel. UroQuest
believes that it has been successful in attracting experienced and capable
personnel. However, there can be no assurance that UroQuest will continue to do
so. In July 1999, in connection with the termination of UroQuest's urology
operations, the 10 employees related to urology operations were terminated. As
of October 15, 1999, UroQuest completed the closure of its corporate
headquarters in Menlo Park, California, and terminated the four administrative
personnel working in Menlo Park.
None of UroQuest's employees is covered by collective bargaining
agreements. UroQuest considers relations with its employees to be good. In the
past eight years, Bivona has faced two union election contests at its
manufacturing facility, each of which failed. There can be no assurances that
UroQuest will not face additional attempts to unionize its employees. In the
event UroQuest becomes subject to a collective bargaining agreement, it may
experience increased labor and related costs that could have a material adverse
effect on UroQuest's business, financial condition and results of operations.
Additional Risk Factors
History of Losses. UroQuest has experienced substantial losses since
inception and, as of September 30, 1999, had an accumulated deficit of $16.1
million. UroQuest expects its operating losses to end due to the termination of
its urology division and closure of its corporate headquarters. UroQuest
continues to expend substantial resources in marketing and sales activities, and
research and development in the Airway Management/OEM division. In addition,
UroQuest's results of operation may fluctuate significantly during future
quarterly periods.
Uncertainty of Bivona's Operations. Although the business operations of
Bivona have continued since 1971, there can be no assurance that Bivona's
revenues, cash flow or current profitability and growth rate will continue in
the future. Approximately 41% and 39% of Bivona's net sales during 1998 and the
six months ended June 30, 1999, respectively, were derived from its manufacture
of OEM medical device products. Bivona maintains no long-term OEM customer
contracts and, during 1998 and the six months ended June 30, 1999, Bivona
derived approximately 19% and 18%, respectively, of its net sales from its major
customer, Abbott Laboratories. There can be no assurance that Bivona's OEM
customers will continue to use Bivona as a manufacturing resource. Furthermore,
Bivona 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
Bivona'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.
Bivona has faced two labor union election contests in the past eight years and
may face additional elections in the future. In the event Bivona becomes
40
<PAGE> 46
subject to a collective bargaining agreement, it may experience increased labor
and related costs that could have a material adverse effect on UroQuest's
business, financial condition and results of operations.
Uroquest's 1996 acquisition of Bivona has resulted in approximately $12.3
million of goodwill being recognized upon consolidation. This goodwill will be
amortized over 20 years resulting in an amortization charge of approximately
$629,000 annually. This amortization and other depreciation charges related to
the acquisition, totaling approximately $823,000 annually, will reduce
UroQuest's earnings. There can be no assurance that the anticipated benefits of
the acquisition will be realized.
Future Capital Needs; Uncertainty of Additional Funding. UroQuest's
capital requirements depend on numerous factors, including the effect of
competitive products, the cost and effect of future marketing programs, the
resources UroQuest devotes to manufacturing and developing its products, the
success of proprietary airway management products and OEM sales, general
economic conditions and various other factors. The timing and amount of such
capital requirements cannot adequately be predicted. Consequently, although
UroQuest believes existing cash balances and cash anticipated to be generated
from Bivona operations will provide adequate funding for its capital
requirements through 1999, there can be no assurance that UroQuest will not
require additional funding or that such additional funding, if needed, will be
available on terms satisfactory to UroQuest, 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 UroQuest's business, financial condition
and results of operations.
Dependence Upon Key Employees. UroQuest is dependent upon a number of key
management and technical personnel. The loss of the services of one or more key
employees would have a material adverse effect on UroQuest. UroQuest's ability
to manage its transition to commercial-scale operations, and hence its success,
will depend in large part on the efforts of these individuals. UroQuest's
success will also depend on its ability to attract and retain additional highly
qualified management and technical personnel. UroQuest faces intense competition
for qualified personnel, and there can be no assurance that UroQuest will be
able to attract and retain such personnel.
Uncertainty Related to Health Care Reform. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. Although Congress has failed to pass comprehensive
health care reform legislation to date, UroQuest anticipates that Congress,
state legislatures and the private sector will continue to review and assess
alternative health care delivery and payment systems. Potential approaches that
have been considered include mandated basic health care benefits, controls on
health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls and other fundamental changes to the
health care delivery system. Legislative debate is expected to continue in the
future, and market forces are expected to demand reduced costs. UroQuest cannot
predict what impact the adoption of any federal or state health care reform
measures, future private sector reform or market forces may have on its
business.
PROPERTIES
UroQuest's principal administrative offices are located in Menlo Park,
California and its manufacturing and distribution facility is located in Gary,
Indiana. UroQuest believes that its facilities are adequate for its current
operations.
Since August 1997, UroQuest had leased approximately 5,000 square feet in
Menlo Park, California. This lease expired in October 1999. The annual rate on
the lease was $123,700. As of October 15, 1999, UroQuest completed the closure
of its corporate headquarters in Menlo Park, California.
UroQuest owns its manufacturing plant which is a 45,000 square foot
facility located on a 10 acre parcel of land in Gary, Indiana. The plant's space
is allocated as follows: approximately 12,000 square feet dedicated to
equipment-intensive production, approximately 10,000 square feet dedicated to
office and support activity, and approximately 23,000 square feet dedicated to
cleanroom production and packaging. Additionally,
41
<PAGE> 47
UroQuest leases an 18,600 square foot warehouse and shipping facility located
approximately five miles from the manufacturing plant. The lease expired in
December 1998 and a new lease was executed in February 1999. The initial rent
under the new lease is approximately $64,000 per year.
LEGAL PROCEEDINGS
On October 7, 1999, UroQuest's Bivona subsidiary received notice that it
was being sued in the District Court of Hidalgo County, Texas, 92nd District by,
among others, the parents of Jasmine Marie Casas (deceased) individually and on
behalf of Ms. Casas' estate. The case is encaptioned Victoriano Casas IV, et.
al. v. Smiths Industries PLC, et. al., C-4754-99-A. Ms. Casas died following a
tracheostomy performed in connection with treatment for leukemia. According to
plaintiffs, a pediatric tracheostomy tube was inserted into Ms. Casas' trachea
during the operation, which tube was held in place with a strap around her neck.
A heat and moisture exchanger was attached to the external end of the tube. Ms.
Casas allegedly died when the registered nurse (and family members) attending to
her care could not remove the heat and moisture exchanger attached to the
tracheostomy tube to remove a mucus plug blocking Ms. Casas' airway. The
plaintiffs have sued for an unspecified amount of damages. UroQuest is currently
investigating the factor underlying the complaint and intends to defend itself
vigorously. There can be no assurance that UroQuest will not experience other
material litigation with respect to the operation of its business.
MARKET PRICE OF UROQUEST'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UroQuest's stock is traded on the Nasdaq National Market under the symbol:
UROQ. UroQuest's stock commenced trading on October 24, 1996 following
UroQuest's IPO.
The following table shows the market range for UroQuest's Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
June 3, 1999(1)............................................ 1.625 1.500
1999
Fourth Quarter (through December 1, 1999).................. 1.813 1.250
Third Quarter.............................................. 1.900 1.875
Second Quarter............................................. 2.000 1.375
First Quarter.............................................. 2.438 0.625
1998
Fourth Quarter............................................. 1.750 1.000
Third Quarter.............................................. 2.813 1.625
Second Quarter............................................. 3.875 2.500
First Quarter.............................................. 5.500 2.125
1997
Fourth Quarter............................................. 6.500 2.375
Third Quarter.............................................. 6.500 3.313
Second Quarter............................................. 7.000 5.000
First Quarter.............................................. 7.125 5.375
</TABLE>
- ---------------
(1) June 3, 1999 was the last trading day prior to the public announcement of
the execution of the merger agreement.
UroQuest has never declared or paid dividends on its stock and does not
anticipate paying dividends in the foreseeable future.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to UroQuest with respect
to the beneficial ownership of its Common Stock as of June 30, 1999, by (1) each
person who is known by UroQuest to own beneficially
42
<PAGE> 48
more than 5% of the outstanding UroQuest common stock, (2) each of UroQuest's
directors, (3) the Chief Executive Officer and each of the four other most
highly compensated executive officers of UroQuest, and (4) all directors and
executive officers as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) TOTAL(2)
- ------------------------ ------------------- ----------
<S> <C> <C>
Warburg, Pincus Investors, L.P.(3).......................... 3,188,571 25.6%
466 Lexington Ave., 10th Floor
New York, NY 10017
Elizabeth H. Weatherman(4).................................. 3,188,571 25.6%
Warburg, Pincus Investors, L.P.
466 Lexington Ave., 10th Floor
New York, NY 10017
Thomas E. Brandt(5)......................................... 1,649,655 13.2%
Richard C. Davis, M.D.(6)................................... 980,461 7.8%
Jack W. Lasersohn(7)........................................ 354,285 2.8%
Terry E. Spraker, Ph.D.(8).................................. 331,500 2.6%
Gary E. Nei(9).............................................. 107,143 *
Jeffrey L. Kaiser(10)....................................... 72,777 *
Keith W. L. Ward(11)........................................ 74,522 *
Alan Marquardt(12).......................................... 31,876 *
All directors and executive officers as a group (9 6,790,790 51.5%
persons)(13)..............................................
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated in these footnotes, or pursuant to applicable
state community property laws, each stockholder has sole voting and
investment power with respect to the shares beneficially owned.
(2) Percentages are determined based upon 12,452,522 shares of Common Stock
outstanding on June 30, 1999 together with the applicable options
exercisable within 60 days after June 30, 1999 for such stockholder.
(3) Represents 3,188,571 shares of Common Stock held by Warburg, Pincus
Investors, L.P. ("Warburg"). The sole general partner of Warburg is
Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg,
Pincus & Co., LLC, a New York limited liability company ("EM Warburg"),
manages Warburg. The members of EM Warburg are substantially the same as
the partners of WP. Lionel I. Pincus is the managing partner of WP and the
managing member of EM Warburg and may be deemed to control both WP and EM
Warburg. WP has a 20% interest in the profits of Warburg as the general
partner. Elizabeth H. Weatherman, a director of UroQuest, is a Managing
Director and member of EM Warburg, and a general partner of WP. As such,
Ms. Weatherman may be deemed to have an indirect pecuniary interest (within
the meaning of Rule 16a-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) in an indeterminate portion of the shares
beneficially owned by Warburg and WP.
(4) All of the shares indicated as owned by Ms. Weatherman are owned directly
by Warburg and are included because of Ms. Weatherman's affiliation with
Warburg. As such, Ms. Weatherman may be deemed to have an indirect
pecuniary interest in an indeterminate portion of the shares beneficially
owned by Warburg. Ms. Weatherman disclaims beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Exchange Act.
(5) Includes 44,626 shares of Common Stock issuable upon exercise of stock
options within 60 days of June 30, 1999.
(6) Represents 873,318 shares of Common Stock, 871,318 shares of which are held
by The Richard C. Davis, Jr. 1993 Revocable Trust, of which Dr. Davis is a
trustee and over which Dr. Davis has investment and voting control. The
remaining 2,000 shares are owned by Mrs. Elizabeth K. Davis, wife of Dr.
Davis. Dr. Davis disclaims beneficial ownership of these shares. Also
includes 107,143 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of June 30, 1999.
43
<PAGE> 49
(7) Represents 354,285 shares of Common Stock held by Vertical Fund Associates,
L.P. ("Vertical"). The sole general partner of Vertical is The Vertical
Group, L.P. ("Vertical Group"). Jack W. Lasersohn, a director of UroQuest,
is a General Partner of the Vertical Group. As such, Mr. Lasersohn may be
deemed to have an indirect pecuniary interest in an indeterminate portion
of the shares beneficially owned by Vertical Group. Mr. Lasersohn disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Exchange Act.
(8) Represents 331,500 shares of Common Stock issuable upon exercise of stock
options within 60 days of June 30, 1999.
(9) Represents 107,143 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of June 30, 1999.
(10) Includes 57,376 shares of Common Stock issuable upon exercise of stock
options within 60 days of June 30, 1999.
(11) Includes 51,000 shares of Common Stock issuable upon exercise of stock
options within 60 days of June 30, 1999.
(12) Represents 31,876 shares of Common Stock issuable upon exercise of stock
options within 60 days of June 30, 1999.
(13) Includes 730,664 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of June 30, 1999.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Net sales.................... $14,196,587 $12,947,140 $17,603,575 $16,541,161 $ 2,299,895 $ -- $ 2,801
Cost of sales................ 6,998,906 6,520,856 8,931,951 9,307,272 1,308,730 -- 2,381
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit................. 7,197,681 6,426,284 8,671,624 7,233,889 991,165 -- 420
Research and development
expenses................... 2,459,981 2,991,036 4,297,713 2,901,050 2,173,312 1,106,631 431,295
General and administrative
expenses................... 3,453,093 3,612,856 4,695,635 3,997,210 1,091,857 397,523 483,399
Sales and marketing
expenses................... 1,630,816 2,010,375 2,579,834 2,258,963 297,587 46,262 30,257
Severance costs.............. 503,108 -- -- 1,600,000 -- -- --
Environmental remediation
costs...................... 2,000,000 -- -- -- -- -- --
Amortization of goodwill..... 474,138 474,138 632,184 643,355 90,982 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss............... (3,323,365) (2,662,121) (3,533,742) (4,166,689) (2,662,573) (1,550,416) (944,531)
Other income (expense),
net........................ 153,425 249,258 311,955 420,745 41,863 36,669 (260,663)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before taxes............ (3,169,940) (2,412,863) (3,221,787) (3,745,944) (2,620,710) (1,513,747) (1,205,194)
Provision for income taxes... 115,000 76,000 100,000 130,000 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss..................... $(3,284,940) $(2,488,863) $(3,321,787) $(3,875,944) $(2,620,710) $(1,513,747) $(1,205,194)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted net loss
per share.................. $ (0.26) (0.21) $ (0.28) $ (0.33) $ (0.55) $ (0.47) $ (0.39)
=========== =========== =========== =========== =========== =========== ===========
Shares used in computing
basic and diluted net loss
per share.................. 12,468,999 12,026,752 12,058,861 11,872,647 4,726,807 3,194,243 3,098,033
</TABLE>
44
<PAGE> 50
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------- -------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- ------------ ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents... $ 5,995,445 $ 6,980,128 $11,054,088 $12,694,047 $1,113,594 $ 564,097
Working capital............. 8,505,938 10,145,602 13,204,642 15,991,290 463,594 325,723
Total assets................ 25,490,264 28,159,047 31,923,751 35,039,517 1,721,027 1,205,273
Long-term debt, excluding
current portion........... 857,279 921,654 1,293,175 1,787,437 -- 552,188
Accumulated deficit......... (16,148,979) (12,864,039) (9,542,252) (5,666,308) (3,045,598) (1,531,851)
Stockholders' equity(2)..... 21,296,678 24,438,920 27,403,975 30,486,314 1,047,126 412,621
</TABLE>
- ---------------
(1) On October 30, 1996, concurrent with the closing of UroQuest's initial
public offering, UroQuest completed its acquisition of Bivona, Inc. The
transaction, which was accounted for as a purchase, was effected through the
payment of $10 million cash, and the issuance of 2.5 million newly issued
shares of UroQuest Common Stock.
(2) On October 24, 1996, UroQuest sold 3,350,000 shares of Common Stock in its
initial public offering at $6.00 per share. Concurrent with and subsequent
to the offering, warrants totaling 1,454,494 shares were exercised at $3.50
per share. Combined, UroQuest realized net proceeds of $22,894,082.
45
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of UroQuest should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
proxy statement.
OVERVIEW
From its inception in April 1992 until June 1999, UroQuest devoted its
efforts to the design and development of advanced products for the management
and diagnosis of both male and female urological disorders. The Company's
principal urology product, the On-Command(R) Continence System, 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. As part of the design and development of the
On-Command product, UroQuest conducted various clinical trials for the acute and
chronic indications of the Male On-Command and the acute indication of the
Female On-Command. In April 1999, UroQuest received notification that the FDA
had denied 510(k) premarket clearance of the Male On-Command for acute
indications. The denial was further clarified and confirmed in a meeting in June
1999 between UroQuest and the FDA.
Since 1996, Bivona has been a wholly owned subsidiary of UroQuest. Bivona
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
UroQuest's current revenues relate to sales of Bivona products. Bivona is one of
a limited number of specialty manufacturers of silicone catheters in the United
States. Bivona manufactured UroQuest's On-Command used in clinical trials and
market evaluation studies.
On June 3, 1999, UroQuest and Chemfab entered into an Agreement and Plan of
Merger whereby UroQuest would be merged with and into an indirect subsidiary of
Chemfab in exchange for $29,000,000, subject to certain adjustments. The boards
of directors of both companies have unanimously approved the merger, and subject
to the approval of the stockholders of UroQuest and certain other closing
conditions, the transaction is expected to close in third or fourth quarter of
1999.
In July 1999, pursuant to the merger agreement, UroQuest completed the
termination of the operations of its urology division, which included the
termination of all research and development activities relating to urology
products, the termination of all clinical trials and studies and the termination
of all urology division personnel. The Company is seeking to sell the urology
related technology, however no sale is currently pending. Any proceeds realized
from a sale of the technology will be included in the final net asset adjustment
calculation in the merger. As of October 15, 1999, UroQuest completed the
closure of its corporate headquarters in Menlo Park, California, and terminated
its administrative personnel working in Menlo Park. UroQuest has accounted for
the related shutdown costs in the quarter ended September 30, 1999. The
termination of the urology division's operations, the closure of the corporate
headquarters and the termination of certain administrative personnel will not be
affected by the outcome of the merger.
Uroquest has experienced substantial losses since inception and, as of
September 30, 1999, had an accumulated deficit of $16.1 million. Uroquest
expects its operating losses to end due to the termination of its urology
division and closure of its corporate headquarters. Uroquest continues to expend
substantial resources in marketing and sales activities, and research and
development in the Airway Management/OEM division. In addition, Uroquest's
results of operations may fluctuate significantly during future quarterly
periods.
RESULTS OF OPERATIONS
UroQuest has historically evaluated performance based on profit or loss
from operations before allocation of intangible asset amortization expense and
before income taxes of the two business segments: Urology Products and Airway
Management/OEM Products. The results of operations of the two segments for the
46
<PAGE> 52
three months and the nine months ended September 30, 1999 and 1998, and for the
years ended December 31, 1998, 1997 and 1996 are highlighted as follows:
<TABLE>
<CAPTION>
AIRWAY
CORPORATE/ MANAGEMENT/OEM
UROLOGY PRODUCTS PRODUCTS TOTAL
---------------- -------------- -----------
<S> <C> <C> <C>
Three Months ended September 30, 1999
Revenues from external customers.............. $ -- $ 5,013,000 $ 5,013,000
Segment profit (loss)....................... (2,842,000) 1,035,000 1,807,000
Three Months ended September 30, 1998
Revenues from external customers............ $ -- $ 4,427,000 $ 4,427,000
Segment profit (loss)....................... (1,176,000) 620,000 (556,000)
Nine Months ended September 30, 1999
Revenues from external customers............ $ -- $14,197,000 14,197,000
Segment profit (loss)....................... (5,254,000) 2,704,000 (2,550,000)
Nine Months ended September 30, 1998
Revenues from external customers............ $ -- $12,947,000 $12,947,000
Segment profit (loss)....................... (3,737,000) 1,945,000 (1,792,000)
Year ended December 31, 1998
Revenues from external customers............ $ -- $17,604,000 $17,604,000
Segment profit (loss)....................... (5,033,000) 2,636,000 (2,397,000)
Year ended December 31, 1997
Revenues from external customers............ $ -- $16,541,000 $16,541,000
Segment profit (loss)....................... (3,409,000) 2,094,000 (1,315,000)
Year ended December 31, 1996
Revenues from external customers............ $ -- $ 2,300,000 $ 2,300,000
Segment profit (loss)....................... (1,912,000) 233,000 (1,679,000)
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998:
Net sales and cost of sales. Net sales, which were generated from sales by
BMT, increased 13% to $5,013,000 for the three months ended September 30, 1999
from $4,427,000 for the three months ended September 30, 1998. The increase in
net sales was attributable to increased product shipments to proprietary product
and OEM customers. Cost of sales of $2,444,000 for the three months ended
September 30, 1999 increased 11% from $2,211,000 for the three months ended
September 30, 1998, due primarily to the increase in sales. Gross profit
percentage for the three months ended September 30, 1999 increased to 51% from
50% for the same period in 1998. The improvement in gross profit percentage was
due primarily to volume growth in sales of proprietary and OEM products.
Research and development. Research and development expenses include product
development, clinical testing and regulatory expenses. For the three months
ended September 30, 1999 research and development expenses decreased to $559,000
from $987,000 for the three months ended September 30, 1998. The decrease was
attributable primarily to the termination of clinical trials and studies and
research and development of the urology products in June 1999 as part of the
closure of Uroquest's urology division. Research and development expenses are
expected to continue to decrease in the foreseeable future as the result of this
closure.
General and administrative. General and administrative expenses decreased
to $1,010,000 for the three months ended September 30, 1999 from $1,264,000 for
the three months ended September 30, 1998. The decrease was attributable
primarily to the closure of Uroquest's urology division and corporate
headquarters. General and administrative expenses are expected to continue to
decrease in the foreseeable future as the result of these closures.
Sales and marketing. Sales and marketing expenses decreased to $406,000 for
the three months ended September 30, 1999 from $638,000 for the three months
ended September 30, 1998. This decrease was
47
<PAGE> 53
attributable primarily to the closure of Uroquest's urology division, decreased
promotion and translation costs in the Airway Management marketing organization
as well as temporarily decreased personnel costs in the Airway Management direct
selling organization. Sales and marketing expenses are expected to decrease in
the foreseeable future due to the closure of Uroquest's urology division.
Severance costs. Severance costs of $503,000 incurred in the three months
ended September 30, 1999 were related to the employment termination of certain
personnel in the urology division and corporate headquarters. Substantially all
severance amounts had been paid by September 30, 1999. Uroquest did not
recognize any severance costs in the three months ended September 30, 1998.
Environmental Remediation Costs. During the third quarter of 1999, Uroquest
became aware that it is potentially liable for the cost of environmental
remediation at its Bivona facility. Pursuant to the terms of the Merger
Agreement, the parties each engaged environmental consultants to assess the
situation and estimate remediation costs. Following this assessment, Chemfab
entered into a fixed price remediation contract with an environmental firm,
contingent upon the closing of the merger transaction. The remediation costs,
including certain insurance related costs totaled $2 million. On October 8,
1999, the parties entered into an amendment to the Agreement which established
an environmental accrual of $2 million. As a result, Uroquest provided an
accrual for this amount in its financial statements for the three months ended
September 30, 1999.
Amortization of goodwill. Amortization of goodwill remained at $158,000 for
the three months ended September 30, 1999 compared to the same period in 1998.
The goodwill was recognized as a result of the acquisition of BMT in October
1996, and is being amortized over an estimated life of 20 years.
Other income (expense). Other income (expense) decreased to net interest
income of $53,000 for the three months ended September 30, 1999 from a net
interest income of $69,000 for the three months ended September 30, 1998.
Interest income decreased to $71,000 for the three months ended September 30,
1999 from $108,000 for the three months ended September 30, 1998. The decrease
in interest income was attributable to lower average cash balances, due
primarily to net cash being used in operating activities. Interest expense
decreased to $18,000 for the three months ended September 30, 1999 from $39,000
for the three months ended September 30, 1998. The decrease in interest expense
was attributable primarily to the lower average debt balances as Uroquest is
repaying existing loans and has not incurred any new loans.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998:
Net sales and cost of sales. Net sales, which were generated from sales by
BMT, increased 10% to $14,197,000 for the nine months ended September 30, 1999
from $12,947,000 for the nine months ended September 30, 1998. The increase in
net sales was attributable to the increased product shipments to proprietary
product and OEM customers. Cost of sales of $6,999,000 for the nine months ended
September 30, 1999 increased 7% from $6,521,000 for the nine months ended
September 30, 1998, due primarily to the increase in sales. Gross profit
percentage for the nine months ended September 30, 1999 increased to 51% from
50% for the same period in 1998. The improvement in gross profit percentage was
due to favorable growth in sales of higher margin proprietary products and
overall sales volume growth.
Research and development. Research and development expenses include product
development, clinical testing and regulatory expenses. For the nine months ended
September 30, 1999 research and development expenses decreased to $2,460,000
from $2,991,000 for the nine months ended September 30, 1998. The decrease was
attributable primarily to the termination of clinical trials and studies and
research and development of the urology products in June 1999 as part of the
closure of Uroquest's urology division. Research and development expenses are
expected to continue to decrease in the foreseeable future as the result of this
closure.
General and administrative. General and administrative expenses decreased
to $3,453,000 for the nine months ended September 30, 1999 from $3,613,000 for
the nine months ended September 30, 1998. The decrease was attributable
primarily to the closure of Uroquest's urology division and corporate
headquarters. General and administrative expenses are expected to continue to
decrease in the foreseeable future as the result of this closure.
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Sales and marketing. Sales and marketing expenses decreased to $1,631,000
for the nine months ended September 30, 1999 from $2,010,000 for the nine months
ended September 30, 1998. This decrease was attributable primarily to decreased
promotion and translation costs in the Airway Management marketing organization
as well as temporarily decreased personnel costs in the Airway Management direct
selling organization. Sales and marketing expenses are expected to decrease in
the foreseeable future due to the closure of Uroquest's urology division.
Severance costs. Severance costs of $503,000 incurred in the nine months
ended September 30, 1999 were related to the employment termination of certain
personnel in the urology division and corporate headquarters. Substantially all
severance amounts had been paid by September 30, 1999. Uroquest did not
recognize any severance costs in the nine months ended September 30, 1998.
Environmental Remediation Costs. During the third quarter of 1999, Uroquest
became aware that it is potentially liable for the cost of environmental
remediation at its Bivona facility. Pursuant to the terms of the Merger
Agreement, the parties each engaged environmental consultants to assess the
situation and estimate remediation costs. Following this assessment, Chemfab
entered into a fixed price remediation contract with an environmental firm,
contingent upon the closing of the merger transaction. The remediation costs,
including certain insurance related costs totaled $2 million. On October 8,
1999, the parties entered into an amendment to the Agreement which established
an environmental accrual of $2 million. As a result, Uroquest provided an
accrual for this amount in its financial statements for the nine months ended
September 30, 1999.
Amortization of goodwill. Amortization of goodwill remained at $474,000 for
the nine months ended September 30, 1999 compared to the same period in 1998.
The goodwill was recognized as a result of the acquisition of BMT in October
1996, and is being amortized over an estimated life of 20 years.
Other income (expense). Other income (expense) decreased to net interest
income of $153,000 for the nine months ended September 30, 1999 from a net
interest income of $249,000 for the nine months ended September 30, 1998.
Interest income decreased to $213,000 for the nine months ended September 30,
1999 from $356,000 for the nine months ended September 30, 1998. The decrease in
interest income was attributable to lower average cash balances, due primarily
to net cash being used in operating activities. Interest expense decreased to
$60,000 for the nine months ended September 30, 1999 from $107,000 for the nine
months ended September 30, 1998. The decrease in interest expense was
attributable primarily to the lower average debt balances as Uroquest is
repaying existing loans and has not incurred any new loans.
Provision for income taxes:
Uroquest recorded a $55,000 and $35,000 provision for state income taxes
for the three months ended September 30, 1999 and 1998, respectively. For the
nine months ended September 30, 1999 and 1998, the provision for state income
taxes recorded was $115,000 and $76,000, respectively. The provision for state
income taxes is recorded primarily as a result of taxable income earned by BMT
in Indiana where Uroquest is required to file tax returns on a separate company
basis. Uroquest has not paid any federal income taxes since its inception due to
net operating losses. Realization of deferred tax assets is dependent 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, 1999 and December 31, 1998 to reflect these uncertainties.
As of December 31, 1998, Uroquest had federal net operating loss
carryforwards of approximately $8,300,000. Uroquest also had federal research
and development tax credit carryforwards of approximately $200,000. The net
operating loss and tax credit carryforwards will expire at various dates
beginning 2002 through 2018, if not utilized. Utilization of the net operating
loss and tax credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended. This annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
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Years Ended December 31, 1998, 1997 and 1996
Net sales and cost of sales. Net sales, which were generated from sales by
Bivona of primarily proprietary airway management products and other medical
device products to OEM customers, increased 6% to $17,604,000 for the year ended
December 31, 1998 from $16,541,000 for the year ended December 31, 1997. The
increase was attributable primarily to the increase in unit sales of proprietary
products. Cost of sales of $8,932,000 in 1998 decreased 4% from $9,307,000 in
1997, due partly to a greater percentage of lower cost proprietary product being
sold in 1998, and partly to the scale-up costs and validation costs related to
certain OEM product lines being incurred in 1997. Gross profit percentage for
1998 increased to 49% from 44% for 1997. The improvement in gross profit
percentage was due primarily to favorable growth in sales of higher margin
proprietary products, price increases in certain OEM products and other
manufacturing efficiency improvements.
Net sales increased to $16,541,000 in 1997 from $2,300,000 in 1996.
Included in 1997 net sales were twelve months' Bivona sales of proprietary
airway management products and other medical device products to OEM customers;
included in 1996 net sales were only two months' Bivona sales following the
acquisition. On a pro forma twelve month basis, Bivona sales for 1996 were
$14,635,000. Cost of sales of $9,307,000 and $1,309,000 related to the Bivona
sales in 1997 and two months in 1996 following the acquisition, respectively. On
a pro forma twelve month basis, Bivona cost of sales for 1996 was $8,232,000.
Gross profit of $7,234,000 and $991,000 related to Bivona sales in 1997 and two
months in 1996, respectively. On a pro forma twelve month basis, Bivona gross
profit for 1996 was $6,403,000. The gross profit percentage for 1997 and 1996
(for twelve months on a pro forma basis) was 44% and 44%, respectively.
Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. In 1998, research
and development expenses increased to $4,298,000 from $2,901,000 in 1997. The
increase was attributable primarily to the increase in personnel costs,
consulting and prototype materials expenditures in support of the increased
activities in product research and development, as well as additional clinical
and site-monitoring personnel and other clinical study expenditures required to
support on-going clinical studies of the On-Command product.
In 1997, research and development expenses increased to $2,901,000 from
$2,173,000 in 1996. Included in 1997 expenses were twelve months' research and
development expenses related to Bivona totaling $1,636,000; included in 1996
expenses were only two months' research and development expenses related to
Bivona totaling $213,000 and a $783,000 write-off of in-process research and
development costs when UroQuest acquired Bivona. The remaining increase was
attributable primarily to increased personnel costs, clinical study costs and
other research and development expenditures primarily related to the On-Command
product.
Research and development expenses are expected to continue to increase in
the foreseeable future as the result of additional product development, clinical
testing and regulatory efforts.
General and administrative. General and administrative expenses increased
to $4,696,000 in 1998 from $3,997,000 in 1997. The increase was attributable
primarily to increased personnel costs and urology facilities expenses.
General and administrative expenses increased to $3,997,000 in 1997 from
$1,092,000 in 1996. Included in 1997 expenses were twelve months' general and
administrative expenses related to Bivona totaling $3,035,000; included in 1996
expenses were only two months' general and administrative expenses related to
Bivona totaling $322,000. The remaining increase was attributable primarily to
additional personnel costs, public company expenses and office relocation
expenses.
General and administrative expenses are expected to increase due to
anticipated additional activities related to UroQuest's airway management/OEM
business and urology operations.
Sales and marketing. Sales and marketing expenses increased to $2,580,000
in 1998 from $2,259,000 in 1997. This increase was due primarily to increased
personnel costs, travel expenses and marketing materials.
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Sales and marketing expenses increased to $2,259,000 in 1997 from $298,000
in 1996. Included in 1997 expenses were twelve months' sales and marketing
expenses related to Bivona totaling $1,841,000; included in 1996 expenses were
only two month's sales and marketing expenses related to Bivona totaling
$257,000. The remainder of the increase was attributable primarily to the
commencement of marketing and international selling efforts.
Sales and marketing expenses are expected to increase in the foreseeable
future, due in part to UroQuest'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. UroQuest did not recognize any severance costs in 1998.
Severance costs of $1,600,000 incurred in 1997 were related to the employment
termination of certain members of senior management in May 1997. Of this amount,
approximately $713,000 was non-cash compensation expense resulting from the
acceleration of vesting periods for stock options. No severance costs were
incurred in 1996.
Amortization of goodwill. Amortization of goodwill of $632,000, $643,000
and $91,000 in 1998, 1997 and 1996, respectively, was related to the goodwill
recognized as a result of the acquisition of Bivona 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 $312,000 in 1998 from a net interest income of $421,000 in 1997.
Interest income decreased to $444,000 in 1998 from $601,000 in 1997. The
decrease in interest income was attributable to lower average cash balances, due
primarily to net cash being used in operating activities and purchases of
property and equipment. Interest expense decreased to $132,000 in 1998 from
$181,000 in 1997. The decrease in interest expense was attributable primarily to
the lower average debt balances as UroQuest is repaying existing loans and has
not incurred any new loans.
Other income (expense) increased to net interest income of $421,000 in 1997
from a net interest income of $42,000 in 1996. Interest income increased to
$601,000 in 1997 from $124,000 in 1996. The increase in 1997 in comparison to
1996 was attributable to higher average cash balances, due primarily to the
receipt and holding of proceeds from UroQuest's IPO in October 1996. Interest
expense increased to $181,000 in 1997 from $82,000 in 1996. Included in 1997
expense were twelve months' interest expense related to Bivona totaling
$176,000; included in 1996 expense were only two months' interest expense
related to Bivona totaling $33,000.
Provision for income taxes. UroQuest recorded a $100,000 and $130,000
provision for state income taxes in 1998 and 1997, respectively. The provision
for state income taxes was recorded primarily as a result of taxable income
earned by Bivona in Indiana where UroQuest is required to file tax returns on a
separate company basis. There was no federal income tax expense in 1998, 1997
and 1996 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 December 31, 1998, 1997 and 1996 to reflect these
uncertainties. In 1997, UroQuest reduced the valuation allowance to the extent
of the deferred tax liabilities generated primarily through the acquisition of
Bivona and recorded a corresponding reduction in goodwill.
As of December 31, 1998, UroQuest had federal net operating loss
carryforwards of approximately $8,300,000. UroQuest also had federal research
and development tax credit carryforwards of approximately $200,000. The net
operating loss and tax credit carryforwards will expire at various dates
beginning 2002 through 2018, if not utilized. Utilization of the net operating
loss and tax credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended. This annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
LIQUIDITY AND CAPITAL RESOURCES
Uroquest 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, Uroquest has
raised approxi-
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mately $28 million in net proceeds from equity financing which includes the net
proceeds of $17.8 million from the initial public offering of Uroquest's Common
Stock in October 1996.
During the nine months ended September 30, 1999, net cash used in operating
activities amounted to $603,000 including severance payments made related to the
termination of the urology division. During the nine months ended September 30,
1998, net cash used in operating activities amounted to $1,829,000. The decrease
in net cash used in operating activities in the nine-month period ended
September 30, 1999 compared to the same period in 1998 was due primarily to
increased sales and margins and lower operating expenses following closure of
the urology division in 1999. In addition, the 1998 period included payments of
severance costs in the fourth quarter of 1998 related to the employment
termination of certain members of senior management in May 1997.
During the year ended December 31, 1998, net cash used in operating
activities amounted to $2,741,000. During the year ended December 31, 1997, net
cash used in operating activities amounted to $497,000. The increase in net cash
used in operating activities in 1998 compared to 1997 was due primarily to
increased activities in research and development, general and administrative,
and sales and marketing operations, and cash severance payments. During the year
ended December 31, 1997 and the year ended December 31, 1996, UroQuest used cash
in operations of $497,000 and $1,035,000, respectively. The decrease in net cash
used in operating activities in 1997 from 1996 was due primarily to cash
provided by Bivona's operations and cash provided from investment income.
Additions of property and equipment for the nine months ended September 30,
1999 and 1998 were $156,000 and $1,071,000, respectively. The decrease in
additions of property and equipment in the nine-month period ended September 30,
1999 compared to the same period in 1998 was due primarily to the extraordinary
purchases of property and equipment in support of the infrastructure development
at BMT, the urological product development and the expansion of OEM production
capacity in 1998. Uroquest expects additional purchases of property and
equipment to continue to support the BMT operations.
Net additions of property and equipment for the years ended December 31,
1998, 1997 and 1996 were $1,187,000, $700,000 and $132,000, respectively. The
increase in additions of property and equipment in 1998 from 1997 was due
primarily to additional purchases of property and equipment to support the
urological product development and infrastructure development at Bivona.
Included in the additions of $132,000 in 1996 were two months of Bivona
additions following the acquisition. On a pro forma basis as if the Bivona
acquisition had occurred at the beginning of the year, additions for the year
ended December 31, 1996 were $682,000.
During 1996, UroQuest issued 10% demand promissory notes totaling $500,000
which were repaid by year end. The 12% secured promissory notes totaling
$390,000 issued by UroQuest in December 1994 were also repaid in 1996. In
connection with the placement of the 12% secured promissory notes, UroQuest
issued and the holders of such notes exercised approximately 26,000 warrants for
common stock at an exercise price of $3.50 per share in 1996.
Uroquest is contingently obligated to pay severance in the amount of
$450,000 to two remaining corporate officers in the event that the merger with
Chemfab is completed.
Uroquest's primary internal sources of liquidity presently consists of
existing borrowings, cash balances and cash generated from BMT's operations.
Uroquest's primary external sources of liquidity are equity financing and
bank-provided debt financing.
As of September 30, 1999 and December 31, 1998, Uroquest had cash and cash
equivalents of $5,995,000 and $6,980,000, respectively. The decrease since
December 31, 1998 was due primarily to the net cash used in operations,
purchases of fixed assets and repayment of long-term debt. As of September 30,
1999, Uroquest had no significant noncancelable commitments for capital
expenditures or raw material purchases, although Uroquest may enter into such
commitments in the future.
As of December 31, 1998 and December 31, 1997, the Company had cash and
cash equivalents of $6,980,000 and $11,054,000, respectively. The decrease since
December 31, 1997 was due primarily to the net
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cash used in operations, purchases of fixed assets and repayment of long-term
debt. As of December 31, 1998, the Company had no significant noncancelable
commitments for capital expenditures or raw material purchases, although the
Company may enter into such commitments in the future.
If the merger with Chemfab is not consummated, Uroquest believes that
existing capital resources will be sufficient to fund its operations through
1999, including the costs of any environmental remediation necessary at the
Bivona facility. Uroquest's capital requirements depend on numerous factors,
including the effect of competitive products, the cost and effect of future
marketing programs, the resources Uroquest devotes to manufacturing and
developing its products, the success of proprietary airway management products
and OEM sales, general economic conditions and various other factors. The timing
and amount of such capital requirements cannot accurately be predicted. Prior to
achieving profitability, Uroquest may require additional capital and there can
be no assurance that such additional funding will be available on terms
satisfactory to Uroquest, 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 Uroquest's business, financial condition and
results of operations.
Uroquest has experienced substantial losses since inception and, as of
September 30, 1999, had an accumulated deficit of $16.1 million. Uroquest
expects its operating losses to end due to the termination of its urology
division and closure of its corporate headquarters. Uroquest continues to expend
substantial resources in marketing and sales activities, and research and
development in the Airway Management/OEM division. In addition, Uroquest's
results of operations may fluctuate significantly during future quarterly
periods.
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 one year, 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 an assessment completed in 1998, UroQuest 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, currently in process, which were originally planned
to enhance business operations.
The completed assessment indicated that most of UroQuest'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. UroQuest has completed an upgrade to its accounting
system; such upgrade was originally intended to facilitate increased business
operations. The upgraded accounting system is certified by the vendor that it is
Year 2000 compliant. Regarding its internally developed software, UroQuest
determined that approximately 5% of the lines of codes in the software had to be
changed to resolve the Year 2000 Issue. UroQuest believes such changes have been
fully completed. PC-based applications that are currently used by UroQuest 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.
UroQuest has purchased software to test all its personal computers
regarding Year 2000 compliance. UroQuest is now identifying and evaluating
certain testing programs to be used to assure that its main information
technology operating system is Year 2000 compliant. UroQuest has completed all
internal testing considered appropriate as of September 30, 1999. UroQuest will
perform additional testing through December 31, 1999, if deemed appropriate.
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UroQuest has also made queries to its significant suppliers of their Year
2000 readiness. To date, UroQuest is not aware of any suppliers with a Year 2000
issue that would materially impact UroQuest's results of operations, liquidity,
or capital resources. However, UroQuest 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
UroQuest. The effect of noncompliance by suppliers is not determinable.
UroQuest 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, UroQuest's
business, financial condition and result of operations could be materially
adversely affected. The extent of the financial impact due to Year 2000
noncompliance cannot be reasonably estimated at this time.
UroQuest is studying the need for a contingency plan in the event that its
computer systems are not Year 2000 compliant. UroQuest has determined that no
contingency plan is required as a result of its internal testing process that
was completed in September 1999. UroQuest is developing certain strategies in
the case that its key suppliers do not resolve their Year 2000 issues in a
timely manner.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of UroQuest is
routinely subjected to a variety of risks, including market risk associated with
interest rate movements. UroQuest regularly assesses these risks and has
established policies and business practices to protect against the adverse
effects of these and other potential exposures. As a result, UroQuest does not
anticipate material losses in these areas.
At September 30, 1999, UroQuest had total cash and cash equivalents of
approximately $5,955,445 consisting primarily of money market funds which have
variable interest rates and hence do not expose UroQuest to additional market
risk. The average interest rate on the money market funds account in 1998 was
4.95%.
UroQuest also has long term debts in the form of a bank term note and a
mortgage note. These both have variable interest rates and hence do not expose
UroQuest to additional market risk.
OTHER MATTERS
As of the date of this proxy statement the Board does not intend to
present, and has not been informed that any other person intends to present, any
matters for action at the special meeting other than as discussed herein.
UroQuest will hold an annual meeting of stockholders as soon as practicable
after any termination of the merger agreement (except any termination in
connection with a superior proposal). UroQuest will announce the date of any
annual meeting promptly in the event it is scheduled. Any stockholder who wishes
to submit a proposal for consideration at any annual meeting should submit the
proposal in writing to Jeffrey Kaiser, Secretary, UroQuest Medical Corporation,
173 Constitution Drive, Menlo Park, California 94025. All proposals must be
received a reasonable time before UroQuest begins to print and mail its proxy
materials.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, UroQuest files reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
contain additional information about UroQuest. You can inspect and copy these
materials at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following SEC Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048.
For further information concerning the SEC's public reference rooms, you may
call the SEC at 1-800-SEC-0330. Some of this information may also be accessed on
the World Wide Web through the SEC's Internet address at "http://www.sec.gov."
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UROQUEST FILED ITS ANNUAL REPORT ON FORM 10-K FOR FISCAL 1998 ON MARCH 31,
1999 AND AN AMENDMENT TO ITS ANNUAL REPORT ON FORM 10K-A ON APRIL 30, 1999. IF
YOU ARE A STOCKHOLDER OF UROQUEST AND WOULD LIKE TO RECEIVE A COPY OF UROQUEST'S
ANNUAL REPORT ON FORM 10-K (WHICH WILL NOT INCLUDE ANY OF THE EXHIBITS TO THE
ANNUAL REPORT), YOU SHOULD WRITE TO UROQUEST MEDICAL CORPORATION, 173
CONSTITUTION DRIVE, MENLO PARK, CALIFORNIA 94025, ATTENTION: JEFFREY KAISER,
SECRETARY.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN (OR INCORPORATED BY
REFERENCE INTO) THIS PROXY STATEMENT. UROQUEST HAS NOT AUTHORIZED ANYONE TO GIVE
ANY INFORMATION THAT IS DIFFERENT FROM THE INFORMATION CONTAINED IN (OR
INCORPORATED BY REFERENCE INTO) THIS PROXY STATEMENT. THIS PROXY STATEMENT IS
DATED DECEMBER 2, 1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS
PROXY STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE
CONTRARY.
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UROQUEST MEDICAL CORPORATION
CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... F-2
Consolidated Statements of Operations....................... F-4
Consolidated Balance Sheets................................. F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 62
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
UroQuest Medical Corporation
We have audited the accompanying consolidated balance sheets of UroQuest
Medical Corporation (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UroQuest Medical Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 12, 1999
F-2
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
UroQuest Medical Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of UroQuest Medical Corporation and
subsidiaries for the year ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of UroQuest Medical Corporation and subsidiaries for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Salt Lake City, Utah
February 10, 1997
F-3
<PAGE> 64
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................... $14,196,587 $12,947,140 $17,603,575 $16,541,161 $ 2,299,895
Cost of sales.................. 6,998,906 6,520,856 8,931,951 9,307,272 1,308,730
----------- ----------- ----------- ----------- -----------
Gross profit................. 7,197,681 6,426,284 8,671,624 7,233,889 991,165
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development..... 2,459,981 2,991,036 4,297,713 2,901,050 2,173,312
General and administrative... 3,453,093 3,612,856 4,695,635 3,997,210 1,091,857
Sales and marketing.......... 1,630,816 2,010,375 2,579,834 2,258,963 297,587
Severance costs.............. 503,018 -- -- 1,600,000 --
Environmental remediation
costs..................... 2,000,000 -- -- -- --
Amortization of goodwill..... 474,138 474,138 632,184 643,355 90,982
----------- ----------- ----------- ----------- -----------
Total operating
expenses................ 10,521,046 9,088,405 12,205,366 11,400,578 3,653,738
----------- ----------- ----------- ----------- -----------
Operating loss................. (3,323,365) (2,662,121) (3,533,742) (4,166,689) (2,662,573)
Other income (expense):
Interest expense............. (59,708) (106,871) (131,593) (180,634) (82,364)
Interest income.............. 213,133 356,129 443,548 601,379 124,227
----------- ----------- ----------- ----------- -----------
Other income (expense),
net..................... 153,425 249,258 311,955 420,745 41,863
Loss before provision for
income taxes................. (3,169,940) (2,412,863) (3,221,787) (3,745,944) (2,620,710)
Provision for income taxes..... 115,000 76,000 100,000 130,000 --
----------- ----------- ----------- ----------- -----------
Net loss....................... $(3,284,940) (2,488,863) $(3,321,787) $(3,875,944) $(2,620,710)
=========== =========== =========== =========== ===========
Basic and diluted net loss per
share........................ $ (0.26) $ (0.21) $ (0.28) $ (0.33) $ (0.55)
=========== =========== =========== =========== ===========
Weighted average shares used in
computing basic and diluted
net loss per share........... 12,468,999 12,026,752 12,058,861 11,872,647 4,726,807
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 65
UROQUEST MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1999 1998 1997
------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 5,995,445 $ 6,980,128 $11,054,088
Accounts receivable, net of allowance for
doubtful accounts of $60,000 at December 31,
1998 and 1997................................ 2,950,867 3,145,490 2,610,764
Inventories..................................... 2,737,162 2,557,618 2,449,072
Prepaid expenses and other current assets....... 158,771 260,839 317,319
------------ ------------ -----------
Total current assets......................... 11,842,245 12,944,075 16,431,243
------------ ------------ -----------
Property, plant and equipment, net................ 3,858,151 4,699,491 4,413,131
Intangible assets, at cost, less accumulated
amortization of $2,024,913 and $1,261,017 at
December 31, 1998 and 1997, respectively........ 9,789,868 10,315,481 11,079,377
Other noncurrent asset............................ -- 200,000 --
------------ ------------ -----------
Total assets................................. $ 25,490,264 $ 28,159,047 $31,923,751
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 368,042 $ 462,715 $ 659,769
Accrued compensation............................ 496,671 839,663 599,306
Accrued selling and distribution expenses....... 32,039 154,610 73,124
Accrued severance costs......................... -- -- 666,376
Other accrued expenses.......................... 352,459 970,870 737,666
Accrued environmental remediation costs......... 2,000,000 -- --
Current portion of long-term debt............... 87,096 370,615 490,360
------------ ------------ -----------
Total current liabilities.................... 3,336,307 2,798,473 3,226,601
------------ ------------ -----------
Long-term debt, net of current portion............ 857,279 921,654 1,293,175
Commitments
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; 12,356,210 and 11,954,010 shares
issued and outstanding as of December 31,
1998 and 1997, respectively.................. 12,539 12,356 11,954
Additional paid-in capital...................... 37,433,118 37,323,670 36,979,740
Deferred compensation........................... -- (33,067) (45,467)
Accumulated deficit............................. (16,148,979) (12,864,039) (9,542,252)
------------ ------------ -----------
Total stockholders' equity................... 21,296,678 24,438,920 27,403,975
------------ ------------ -----------
Total liabilities and stockholders' equity... $ 25,490,264 $ 28,159,047 $31,923,751
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 66
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK VOTING NON-VOTING
ISSUED IN SERIES COMMON STOCK COMMON STOCK ADDITIONAL DEFERRED
------------------- -------------------- ---------------- PAID-IN COMPEN-
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL SATION
---------- ------ ---------- ------- -------- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.... 1,252,672 $1,253 2,947,511 $ 2,948 285,715 $ 286 $ 4,088,237 $ --
Issuance of 54,220 shares of
Common Stock for cash, upon
exercise of stock options..... -- -- 54,220 54 -- -- 37,900 --
Compensation related to grant
of stock options............ -- -- -- -- -- -- 1,268 --
Deferred compensation related
to grant of stock options... -- -- -- -- -- -- 81,360 (81,360)
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 18,654
Issuance of 3,350,000 shares
of Common Stock in Initial
Public Offering, net of
issuance costs of
$2,296,648.................. -- -- 3,350,000 3,350 -- -- 17,800,002 --
Issuance of 2,499,990 shares
of Common Stock for
acquisition of Subsidiary... -- -- 2,499,990 2,500 -- -- 9,105,440 --
Issuance of 1,454,494 shares
of Common Stock for cash,
upon exercise of stock
warrants.................... -- -- 1,454,494 1,454 -- -- 5,089,276 --
Conversion of Non-Voting
Common Stock to Common
Stock....................... -- -- 285,715 286 (285,715) (286) -- --
Conversion of Preferred Stock
to Common Stock............. (1,252,672) (1,253) 1,252,672 1,253 -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
---------- ------ ---------- ------- -------- ----- ----------- --------
BALANCE, DECEMBER 31, 1996.... -- -- 11,844,602 11,845 -- -- 36,203,483 (62,706)
---------- ------ ---------- ------- -------- ----- ----------- --------
Issuance of 106,551 shares of
Common Stock for cash, upon
exercise of stock options... -- -- 106,551 106 -- -- 44,629 --
Issuance of 2,857 shares of
Common Stock for consulting
services.................... -- -- 2,857 3 -- -- 18,645 --
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 17,239
Severance expense related to
accelerated vesting of stock
options..................... -- -- -- -- -- -- 712,983 --
Net loss...................... -- -- -- -- -- -- -- --
---------- ------ ---------- ------- -------- ----- ----------- --------
BALANCE, DECEMBER 31, 1997.... -- -- 11,954,010 11,954 -- -- 36,979,740 (45,467)
---------- ------ ---------- ------- -------- ----- ----------- --------
Issuance of 296,348 shares of
Common Stock for cash, upon
exercise of stock options... -- -- 296,348 296 -- -- 207,147 --
Issuance of 105,852 shares of
Common Stock for cash under
the Employee Stock Purchase
Plan........................ -- -- 105,852 106 -- -- 136,783 --
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 12,400
Net loss...................... -- -- -- -- -- -- -- --
---------- ------ ---------- ------- -------- ----- ----------- --------
BALANCE, DECEMBER 31, 1998.... -- $ -- 12,356,210 $12,356 -- $ -- $37,323,670 $(33,067)
========== ====== ========== ======= ======== ===== =========== ========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1995.... $ (3,045,598) $ 1,047,126
Issuance of 54,220 shares of
Common Stock for cash, upon
exercise of stock options..... -- 37,954
Compensation related to grant
of stock options............ -- 1,268
Deferred compensation related
to grant of stock options... -- --
Amortization of deferred
compensation................ -- 18,654
Issuance of 3,350,000 shares
of Common Stock in Initial
Public Offering, net of
issuance costs of
$2,296,648.................. -- 17,803,352
Issuance of 2,499,990 shares
of Common Stock for
acquisition of Subsidiary... -- 9,107,940
Issuance of 1,454,494 shares
of Common Stock for cash,
upon exercise of stock
warrants.................... -- 5,090,730
Conversion of Non-Voting
Common Stock to Common
Stock....................... -- --
Conversion of Preferred Stock
to Common Stock............. -- --
Net loss...................... (2,620,710) (2,620,710)
------------ -----------
BALANCE, DECEMBER 31, 1996.... (5,666,308) 30,486,314
------------ -----------
Issuance of 106,551 shares of
Common Stock for cash, upon
exercise of stock options... -- 44,735
Issuance of 2,857 shares of
Common Stock for consulting
services.................... -- 18,648
Amortization of deferred
compensation................ -- 17,239
Severance expense related to
accelerated vesting of stock
options..................... -- 712,983
Net loss...................... (3,875,944) (3,875,944)
------------ -----------
BALANCE, DECEMBER 31, 1997.... (9,542,252) 27,403,975
------------ -----------
Issuance of 296,348 shares of
Common Stock for cash, upon
exercise of stock options... -- 207,443
Issuance of 105,852 shares of
Common Stock for cash under
the Employee Stock Purchase
Plan........................ -- 136,889
Amortization of deferred
compensation................ -- 12,400
Net loss...................... (3,321,787) (3,321,787)
------------ -----------
BALANCE, DECEMBER 31, 1998.... $(12,864,039) $24,438,920
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 67
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss..................................... $(3,284,940) $(2,488,863) $(3,321,787) $(3,875,944) $ (2,620,710)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 1,227,667 1,239,640 1,666,921 1,512,056 430,689
Issuance of stock for services............. -- -- -- 18,648 --
Severance expense related to accelerated
vesting of stock options................. -- -- -- 712,983 --
Loss on sale of property, plant and
equipment................................ -- -- 8,961 10,556 --
Write-off of in-process research and
development costs........................ -- -- -- -- 783,000
Provisions for reserve and allowance....... (132,868) (27,777) 245,755 195,635 83,541
Changes in operating assets and
liabilities:
Accounts receivable...................... 194,623 (181,578) (534,726) (448,915) 155,432
Inventories.............................. (300,676) (320,762) (354,301) (21,895) 98,597
Prepaid expenses and other assets........ 302,068 59,055 (143,520) 54,529 (259,145)
Accounts payable and accrued expenses.... (608,788) 434,666 357,993 678,963 293,523
Accrued environmental remediation
costs.................................. 2,000,000 -- -- -- --
Accrued severance costs.................. -- (543,177) (666,376) 666,376 --
----------- ----------- ----------- ----------- ------------
Net cash used in operating
activities........................... (602,914) (1,828,796) (2,741,080) (497,008) (1,035,073)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant
and equipment, net....................... (156,421) (1,071,102) (1,186,946) (700,068) (132,143)
Proceeds from sale of property, plant and
equipment................................ -- -- 1,000 108,648 --
Business acquisition, net of cash
acquired................................. -- -- -- -- (9,900,262)
Other...................................... -- (200,000) -- -- 25,756
----------- ----------- ----------- ----------- ------------
Net cash used in investing
activities........................... (156,421) (1,271,102) (1,185,946) (591,420) (10,006,649)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock..... 122,546 167,230 344,332 44,735 22,932,036
Proceeds from issuance of notes payable and
long-term debt........................... -- -- -- -- 650,000
Repayment of notes payable
and long-term debt....................... (347,894) (363,556) (491,266) (596,266) (959,861)
----------- ----------- ----------- ----------- ------------
Net cash (used in) provided by financing
activities............................. (225,348) (196,326) (146,934) (551,531) 22,622,175
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................ (984,683) (3,296,224) (4,073,960) (1,639,959) 11,580,453
Cash and cash equivalents at beginning of
year....................................... 6,980,128 11,054,088 11,054,088 12,694,047 1,113,594
----------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of period... $ 5,995,445 $ 7,757,864 $ 6,980,128 $11,054,088 $ 12,694,047
=========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest..................... $ 59,708 $ 86,426 $ 131,907 $ 180,634 $ 80,851
Cash paid for income taxes................. 145,000 15,000 35,000 118,000 254,541
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 68
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company commenced its operations in April 1992 for the purpose of
designing, developing, and marketing advanced products for the management and
diagnosis of both male and female urological disorders. On October 30, 1996, the
Company completed an initial public offering ("IPO") of its Common Stock which
generated net proceeds of approximately $17.8 million and acquired all of the
Common Stock of BMT, Inc. and its wholly-owned subsidiary, Bivona, Inc.
(collectively "BMT"). BMT designs, develops, manufactures and markets a line of
proprietary silicone medical device products as well as provides engineering
design, development and manufacturing services for silicone products on an OEM
basis for other medical device companies. The Company's principal markets are in
the United States, Western Europe and Japan.
Basis of Presentation
The consolidated financial statements include the assets and liabilities of
the Company and its subsidiaries, all of which are wholly-owned. The results of
operations of entities purchased are included in the accompanying consolidated
statements of operations since acquisition. 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, 1999, the results of its
operations for the nine months ended September 30, 1999 and 1998, and its cash
flow for the nine months ended September 30, 1999 and 1998. The results of
operations for any interim period are not necessarily indicative of results to
be expected for the full fiscal year.
Certain reclassifications were made to the 1997 and 1996 consolidated
financial statements to conform with the 1998 presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows presentation.
Cash and cash equivalents consist primarily of money market funds which are
carried at cost which approximates market value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
The Company's sales are generated primarily in the United States, Western
Europe and Japan. The Company generally does not require collateral or other
security in extending credit to customers. Management believes concentration of
credit risk with respect to accounts receivable is substantially mitigated by
the Company's credit evaluation process, relatively short collection terms, and
the geographical dispersion of sales. The Company did not incur any material bad
debt write-offs in 1998, 1997 or 1996.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-8
<PAGE> 69
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from three to fifteen years.
Intangible Assets
Intangible assets consist of the excess of cost over the fair value of net
assets acquired, patents and trademarks and other intangibles. Intangible assets
are amortized using the straight-line method over periods of five to twenty
years. Management evaluates the recoverability of these net assets on a periodic
basis based on the projected cash flows from estimated future operations.
Intangible assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Excess of cost over the fair value of net assets
acquired................................................ $11,622,369 $11,622,369
Patents and trademarks.................................... 650,160 650,160
Other intangibles......................................... 67,865 67,865
----------- -----------
Less accumulated amortization............................. (2,024,913) (1,261,017)
----------- -----------
$10,315,481 $11,079,377
=========== ===========
</TABLE>
Income Taxes
The Company accounts for income taxes using the asset and liability method
under Statement of Financial Accounting Standards No. 109. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, operating loss, and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Revenue Recognition
Revenue is earned and recognized by the Company upon shipment. The Company
provides for estimated product returns, which have been insignificant in all
periods presented.
Net Loss Per Share
At December 31, 1997, the Company adopted the provisions of Financial
Accounting Standard No. 128 Earnings per Share ("SFAS 128") and the requirements
of the Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB
98"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings (loss) per share excludes any dilutive effects of options,
warrants and convertible securities. Earnings (loss) per share amounts for all
periods have been presented in accordance with SFAS 128 and SAB 98 requirements.
Basic net loss per share has been calculated based on the weighted average
number of shares of common stock outstanding. On a pro forma basis, assuming
conversion of the preferred stock upon the completion of
F-9
<PAGE> 70
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
the Company's initial public offering (using the as-if converted method) from
original date of issuance, basic and diluted net loss per share in 1996 is
$0.45.
If the Company had been in a net income position in the years 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, and the conversion of outstanding preferred stock,
using the as-if converted method.
Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires use of option
valuation models that were not developed for use in valuing employee stock
options. The Company generally grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the shares at the
date of grant. Under APB 25, for employee stock options with an exercise price
equal to the market price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company recognizes compensation expense
for those stock options granted to employees with an exercise price less than
fair value.
Other Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". Total comprehensive income of the
Company includes only the net loss. The Company had no items of other
comprehensive income in any period presented.
Operating Segments
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". 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. SFAS 131 also establishes standards for related
disclosures about product and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See note 11.
Effect of New Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company expects to adopt the new
Statement effective January 1, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Management
believes that the Company's use of derivatives will be minimal, if any.
Management therefore
F-10
<PAGE> 71
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
does not anticipate that the adoption of the new Statement will have a material
impact on the Company's financial position, results of operations or cash flows.
2. INVENTORIES
Inventories at September 30, 1999 and at December 31 consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 1998 1997
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods................................ $ 484,672 $ 581,383 $ 589,169
Work-in-progress.............................. 1,489,990 1,211,519 1,046,127
Raw materials and supplies.................... 762,500 764,716 813,776
---------- ---------- ----------
$2,737,162 $2,557,618 $2,449,072
========== ========== ==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land, building and improvements........................... $ 2,625,068 $ 2,385,282
Machinery and equipment................................... 3,673,903 3,232,846
Office furniture and equipment............................ 1,382,601 942,911
----------- -----------
Total................................................ 7,681,572 6,561,039
Less accumulated depreciation............................. (2,982,081) (2,147,908)
----------- -----------
Property, plant and equipment, net........................ $ 4,699,491 $ 4,413,131
=========== ===========
</TABLE>
Depreciation expense in 1998, 1997, and 1996 was $890,625, $710,682 and
$186,473, respectively.
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Long-term debt:
Bank term note payable monthly, with interest at the bank's
prime rate (7.75% at December 31, 1998) based upon a seven
year amortization. The note matures in October 1999 and is
collateralized by certain trade receivables, inventory, and
property, plant and equipment............................... $ 283,520 $ 696,214
Mortgage note payable with monthly principal and interest
payable at the average weekly yield on United States
Treasury Securities (4.625% at December 31, 1998) plus
2.25%. The note matures in October 2007 and is
collateralized by certain trade receivables, inventory,
and property, plant and equipment......................... 1,008,749 1,087,321
---------- ----------
1,292,269 1,783,535
Less current maturities..................................... 370,615 490,360
---------- ----------
$ 921,654 $1,293,175
========== ==========
</TABLE>
F-11
<PAGE> 72
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
The Company has also entered into a line of credit agreement with a bank.
The loan under the line of credit is payable on demand and collateralized by
certain trade receivables, inventory, and property, plant and equipment.
Interest on the line of credit loan is payable monthly at the bank's prime rate.
As of December 31, 1998 and 1997, the Company had no outstanding balance under
the line of credit.
The loan agreements contain certain restrictive covenants and provide for
the maintenance of certain financial requirements.
Long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999............................................. $ 370,615
2000............................................. 93,277
2001............................................. 99,895
2002............................................. 106,983
2003............................................. 114,575
2004 and thereafter.............................. 506,924
----------
$1,292,269
==========
</TABLE>
5. STOCKHOLDERS' EQUITY
Initial Public Offering
In October 1996, the Company closed an initial public offering of 3,350,000
shares of common stock which generated net proceeds of $17,803,352, a portion of
which was used to fund the acquisition of BMT. In conjunction with the Company's
IPO, all outstanding shares of convertible preferred stock were converted to
1,252,672 shares of common stock and all outstanding shares of non-voting common
stock were converted to 285,715 shares of common stock.
Stock Warrants
Concurrent with the Company's IPO, warrants to purchase 1,428,571 shares of
common stock were exercised for $5 million. Subsequent to the IPO in 1996,
warrants to purchase 25,923 shares of common stock for $90,730 were exercised.
There were no warrants outstanding at December 31, 1998 and 1997.
Preferred Stock
The Company has 16,000,000 undesignated preferred shares authorized, but
none outstanding. Terms of the preferred stock will be established by the Board
of Directors at the time of issuance.
Stock Plan
Under the Company's 1994 Stock Plan (the "Plan"), which was adopted by the
Board of Directors (the "Board") in March 1994 and was amended, restated and
approved by shareholders in September 1997, the Company may grant options and
rights to its employees, directors and consultants for up to approximately
3,400,000 shares of common stock.
Options granted may be either incentive stock options or non-qualified
stock options. The exercise price of each option is generally at least equal to
the market price of the Company's common stock on the date of grant and an
option's maximum term is ten years. Options under the Plan must be granted by
March 31, 2004.
F-12
<PAGE> 73
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
Options are generally granted at the inception of employment or engagement and
generally vest over a four year period.
In December 1998, the Board of Directors approved a plan to cancel and
regrant certain options held by primarily employees pursuant to the Plan.
Options originally priced at above $2.50 per share were repriced; half of such
options were repriced at $2 per share, and the other half were repriced at $3
per share. Each of the repriced options, whether vested or not vested, cannot be
exercised for a period of six months ending June 13, 1999, unless certain events
defined under the Plan occur.
At December 10, 1998, options to purchase a total of 1,616,929 shares of
common stock were repriced, of which approximately 526,000 shares were fully
vested prior to repricing.
A summary of the activity of the Plan follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 2,638 $2.910 1,128 $0.950 1,116 $0.670
Granted.................................. 1,816 2.530 1,649 4.120 77 4.670
Exercised.............................. (296) 0.700 (107) 0.420 (54) 0.700
Canceled............................... (1,881) 3.950 (32) 4.510 (11) 0.700
------- ------ ------
Outstanding at end of year............... 2,277 2.030 2,638 2.910 1,128 0.950
======= ====== ======
Options exercisable at year end.......... 582 813 572
Weighted-average fair value of options
granted during the year................ $ 0.93 $ 2.83 $ 3.38
</TABLE>
The number of shares of options granted and canceled in 1998 includes the
exchanged options.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE (000) LIFE PRICE (000) PRICE
- -------------- ------ ----------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.700 - $1.750 618 5.6 years $0.752 569 $0.711
$2.000 - $2.000 809 8.3 2.000 -- 0.000
$2.375 - $5.500 850 8.3 2.992 13 3.580
----- ---
2,277 7.6 2.032 582 0.777
===== ===
</TABLE>
Options available for grant as of December 31, 1998 was 609,034 shares.
F-13
<PAGE> 74
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
Had compensation cost for the Company's stock option plan and employee
stock purchase plan been determined on a fair value basis consistent with SFAS
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As Reported................................. $(3,321,787) $(3,875,944) $(2,620,710)
Pro forma................................. $(4,648,106) $(4,197,795) $(2,664,111)
Basic and diluted net loss per share:
As Reported............................... $ (0.28) $ (0.33) $ (0.55)
Pro forma................................. $ (0.39) $ (0.35) $ (0.56)
</TABLE>
The effects of calculating compensation cost under SFAS 123 for the years
ending December 31, 1998, 1997 and 1996, may not be representative of the
effects that this calculation may have on reported net losses or income for
future years.
The fair value of each option grant and common share sold under the
Employee Stock Purchase Plan is estimated on the date of grant or issue using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
STOCK OPTION PLAN PURCHASE PLAN
------------------------------- --------------
1998 1997 1996 1998
------- ------- --------- --------------
<S> <C> <C> <C> <C>
Expected stock price volatility........ 77% 82% 113% 77%
Risk-free interest rate................ 4.85% 5.50% 6.60% 4.85%
Expected life.......................... 5 years 5 years 3.9 years 0.5 year
Expected dividend yield................ None None None None
</TABLE>
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and stock purchase shares have
characteristics significantly different than those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and stock purchase shares.
Employee Stock Purchase Plan
In October 1996, the Company adopted the 1996 Employee Stock Purchase Plan
("Purchase Plan"), and reserved 250,000 common shares for issuance under the
Purchase Plan. Under the terms of the Purchase Plan, employees may purchase
common shares at 85% of the lower of market value on the first business day or
on the last business day of the offering period. Eligible employees may elect to
participate through payroll deductions at the maximum level established by the
Board of Directors, but not to exceed 15% of the participants' base pay, as
defined. For the year ended December 31, 1998, 105,852 shares were issued under
the Purchase Plan. No shares were issued from the Purchase Plan prior to 1998.
6. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee benefit plan
(the "Benefit Plan") pursuant to Section 401(k) of the Internal Revenue Code.
Employees who have completed one year of
F-14
<PAGE> 75
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
service, and have attained the age of twenty-one, are eligible to participate in
the Benefit Plan. Participants may elect to make salary deferral contributions
of up to 15% of their compensation. The Company makes matching contributions of
up to 4% of each participant's compensation. The Company made matching
contributions of approximately $177,000, $157,000 and $16,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
7. INCOME TAXES
The Company recorded a $100,000 and $130,000 provision for state income
taxes in 1998 and 1997, respectively, as a result of taxable income earned by
its subsidiary in a state where the Company is required to file tax returns on a
separate company basis. There was no federal income tax expense in 1998, 1997,
and 1996 due to net operating losses.
The reconciliation of the provision (benefit) for income taxes computed at
the U.S. federal statutory tax rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. Statutory
rate....................................... $(1,095,407) $(1,273,621) $(891,041)
Valuation allowance for deferred tax
assets....................................... 1,095,407 1,273,621 891,041
State income tax............................. 100,000 130,000 --
----------- ----------- ---------
$ 100,000 $ 130,000 $ --
=========== =========== =========
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities at December 31
are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $2,487,448 $1,901,284
Acquired net operating loss carryforwards................. 394,262 454,677
Research and development credits.......................... 80,000 80,000
Inventory capitalization and allowances................... 15,022 23,372
Start up and organization costs........................... 224,402 332,252
Allowance for doubtful accounts........................... 116,396 132,320
Other..................................................... 378,856 551,343
---------- ----------
Total.................................................. 3,696,386 3,475,248
Less valuation allowance.................................. (2,984,618) (2,611,268)
---------- ----------
Net deferred tax assets................................ 711,768 863,980
Deferred tax liabilities:
Depreciation.............................................. (711,768) (863,980)
---------- ----------
Net deferred tax liabilities.............................. $ -- $ --
========== ==========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, a valuation
allowance in an amount equal to the difference between the net deferred tax
assets and the deferred tax liability has been established to reflect these
uncertainties. In 1997, the Company reduced the valuation allowance to the
extent of the deferred tax liabilities generated primarily
F-15
<PAGE> 76
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
through the acquisition of BMT with a corresponding reduction in goodwill. The
valuation allowance for deferred tax assets increased by $373,350, $710,830 and
$764,431 during 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $8,300,000. The Company also had federal research
and development tax credit carryforwards of approximately $200,000. The net
operating loss and tax credit carryforwards will expire at various dates
beginning 2002 through 2018, if not utilized. Utilization of the net operating
loss and tax credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended. The annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
8. BUSINESS ACQUISITION
On October 30, 1996, simultaneous with the closing of the Company's IPO,
the Company acquired all of the issued and outstanding common stock of BMT. The
shareholders of BMT received, in the aggregate, a combination of $10,000,060
cash and 2,499,990 newly issued shares of common stock valued at $9,107,940.
The acquisition was accounted for as a purchase. Accordingly, the purchase
price was allocated, based on an estimated fair value, to the net tangible
assets and identifiable in-process research and development projects that had
not reached technological feasibility. The excess of the purchase price over the
fair value of the acquired net tangible and identifiable assets was recorded as
goodwill and is being amortized over 20 years on a straight line basis. The
amount allocated to in-process research and development projects was written-off
to expense in November 1996. The allocation of the purchase price is summarized
as follows:
<TABLE>
<S> <C>
Assets acquired............................................. $ 7,912,219
Liabilities assumed......................................... (3,979,331)
Expensed in-process research and development................ 783,000
Net fair market value of property, plant and equipment
acquired in excess of book value.......................... 2,111,243
Goodwill.................................................... 12,280,869
-----------
Total....................................................... $19,108,000
===========
</TABLE>
BMT's results of operations are included in the accompanying consolidated
statements of operations since November 1, 1996.
The unaudited pro forma supplemental information on the results of
operations, exclusive of the non-recurring charge (the charge associated with
in-process research and development projects has not been reflected in the
following pro forma summary as it is non-recurring), for the year ended December
31, 1996 includes the acquisition as if it had occurred at January 1, 1996.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Revenues.................................................... $14,634,838
Net loss.................................................... (483,601)
Basic and diluted net loss per share........................ (0.04)
</TABLE>
The unaudited pro forma financial information is not necessarily indicative
of either the results of operations that would have occurred had the acquisition
been effected at January 1, 1996 or of future results of operations of the
combined companies.
F-16
<PAGE> 77
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
9. SEVERANCE COSTS
The Company included in 1997 operating expenses a non-recurring severance
charge of $1,600,000 related to accrued severance payments, stock option
compensation expenses and expenses incurred primarily due to certain changes in
management personnel in May 1997. Approximately $713,000 of the severance costs
were non-cash charges related to stock option compensation.
10. LEASE OBLIGATIONS AND COMMITMENTS
The Company leases office and warehouse space and certain equipment under
operating leases that expire through 2000. Minimum future obligations under
noncancelable operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
1999.............................................. $104,000
2000.............................................. 3,000
--------
Total............................................. $107,000
========
</TABLE>
Total rent expense for operating leases in 1998, 1997 and 1996 was
approximately $237,000, $148,000 and $55,000, respectively.
11. OPERATING SEGMENTS, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMER
Operating Segments
The Company has two reportable segments: Urology Products and Airway
Management/OEM Products. The On-Command, the urology division's principal
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. BMT, the Company's wholly-owned subsidiary,
manufactures and markets a series of proprietary airway management products.
These products consist primarily of silicone based medical devices used in a
wide variety of clinical applications, including tracheostomy and endotracheal
tubes for airway management and voice prostheses for voice restoration. BMT also
produces a range of complex catheter type products on an OEM and private label
basis for other medical device companies in areas that include gastrointestinal
feeding, esophageal management, cardiac perfusion, hyperalimentation and
dialysis.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before allocation of
intangible asset amortization expense and before income taxes. No intersegment
sales are recorded and intersegment transfers are recorded at cost beginning in
fiscal year 1997; there is no intercompany profit or loss on intersegment sales
or transfers. In the two-month period following the acquisition of BMT in
October 1996, intersegment sales were recorded as if the sales were made to
third parties.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
distribute distinct products to different user groups.
F-17
<PAGE> 78
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
The Company utilizes the following information for purposes of assessing a
segment's performance and making operating decisions:
<TABLE>
<CAPTION>
AIRWAY
UROLOGY MANAGEMENT/
PRODUCTS OEM PRODUCTS TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenues from external customers............... $ -- $17,604,000 $17,604,000
Interest expense............................... -- 132,000 132,000
Interest income................................ 400,000 44,000 444,000
Depreciation and amortization expense.......... 281,000 561,000 842,000
Segment profit (loss).......................... (5,033,000) 2,636,000 (2,397,000)
Segment assets................................. 26,673,000 21,054,000 47,727,000
Expenditures for long-lived assets............. 369,000 818,000 1,187,000
YEAR ENDED DECEMBER 31, 1997
Revenues from external customers............... $ -- $16,541,000 $16,541,000
Interest expense............................... 5,000 176,000 181,000
Interest income................................ 577,000 25,000 602,000
Depreciation and amortization expense.......... 210,000 471,000 681,000
Segment profit (loss).......................... (3,409,000) 2,094,000 (1,315,000)
Segment assets................................. 29,794,000 21,498,000 51,292,000
Expenditures for long-lived assets............. 296,000 404,000 700,000
YEAR ENDED DECEMBER 31, 1996
Revenues from external customers............... $ -- $ 2,300,000 $ 2,300,000
Intersegment revenues.......................... -- 48,000 48,000
Interest expense............................... 49,000 33,000 82,000
Interest income................................ 124,000 -- 124,000
Depreciation and amortization expense.......... 194,000 78,000 272,000
Segment profit (loss).......................... (1,912,000) 233,000 (1,679,000)
Segment assets................................. 32,019,000 22,227,000 54,246,000
Expenditures for long-lived assets*............ 73,000 59,000 132,000
</TABLE>
- ---------------
* Goodwill of $12,281,000 and net fair market value of property, plant &
equipment in excess of book value of $2,111,000 resulting from the BMT
acquisition are excluded.
A reconciliation of reportable segment amounts to the Company's
consolidated balances is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Total external revenues for reportable
segments......................................... $ 17,604,000 $ 16,541,000 $ 2,300,000
Intersegment revenues for reportable segments.... -- -- 48,000
Elimination of intersegment revenues............. -- -- (48,000)
------------ ------------ ------------
Total consolidated revenues................. $ 17,604,000 $ 16,541,000 $ 2,300,000
============ ============ ============
</TABLE>
F-18
<PAGE> 79
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION EXPENSE
Total depreciation and amortization for
reportable segments............................ $ 842,000 681,000 $ 272,000
Unallocated amounts:
Amortization of goodwill....................... 632,000 644,000 91,000
Depreciation of acquired fixed asset fair value
adjustment.................................. 193,000 187,000 68,000
------------ ------------ ------------
Total consolidated depreciation and
amortization expense...................... $ 1,667,000 $ 1,512,000 $ 431,000
============ ============ ============
LOSS BEFORE INCOME TAXES
Total loss for reportable segments............... $ (2,397,000) $ (1,315,000) $ (1,679,000)
Unallocated amounts:
Amortization of goodwill....................... (632,000) (644,000) (91,000)
Depreciation of acquired fixed asset fair value
adjustment.................................. (193,000) (187,000) (68,000)
Severance costs................................ -- (1,600,000) --
Acquired in-process research and development... -- -- (783,000)
------------ ------------ ------------
Total consolidated loss before income
taxes..................................... $ (3,222,000) $ (3,746,000) $ (2,621,000)
============ ============ ============
ASSETS
Total assets for reportable segments............. $ 47,727,000 $ 51,292,000 $ 54,246,000
Elimination of intercompany receivables.......... (460,000) (260,000) (98,000)
Elimination of investment in subsidiaries........ (19,108,000) (19,108,000) (19,108,000)
------------ ------------ ------------
Total consolidated assets................... $ 28,159,000 $ 31,924,000 $ 35,040,000
============ ============ ============
</TABLE>
Geographic Area Data
Sales by major geographic area are as follows (sales are attributed to
countries based on the location of customers):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
United States................................ $15,205,000 $14,391,000 $1,948,000
Western Europe............................... 1,623,000 1,358,000 286,000
Japan........................................ 153,000 163,000 54,000
Other........................................ 623,000 629,000 12,000
----------- ----------- ----------
$17,604,000 $16,541,000 $2,300,000
=========== =========== ==========
</TABLE>
All assets are primarily located in the United States. Amount of inventory
and office equipment located outside the United States (in Europe) is
insignificant.
MAJOR CUSTOMER
Net sales to one customer of the Airway Management/OEM Products business
segment (Abbott Laboratories) amounted to 19%, 24% and 21% of total net sales
for the years ended December 31, 1998, 1997
F-19
<PAGE> 80
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
IS UNAUDITED)
and 1996, respectively. Outstanding receivables from this customer at December
31, 1998, 1997 and 1996 approximated 32%, 22% and 21% of total gross accounts
receivable, respectively.
12. PENDING MERGER
On June 3, 1999, Uroquest entered into an Agreement and Plan of Merger (the
"Agreement") with Chemfab Corporation ("Chemfab"), a publicly-held company that
designs, manufactures, fabricates and markets value added polymer-based
products. Under the terms of the Agreement, Chemfab will acquire all outstanding
shares of Uroquest's common stock for an aggregate consideration of $29 million,
subject to adjustment based on a number of factors including net operating
losses and net current assets, to be determined prior to the close of the
merger. During the third quarter of 1999, Uroquest became aware that it is
potentially liable for the cost of environmental remediation at its Bivona
facility. Pursuant to the terms of the Merger Agreement, the parties each
engaged environmental consultants to assess the situation and estimate
remediation costs. Following this assessment, Chemfab entered into a fixed price
remediation contract with an environmental firm, contingent upon the closing of
the merger transaction. The remediation costs, including certain insurance
related costs totaled $2 million. On October 8, 1999, the parties entered into
an amendment to the Agreement which established an environmental accrual of $2
million. As a result, Uroquest provided an accrual for this amount in its
financial statements for the nine months ended September 30, 1999.
Completion of the merger is subject to customary conditions to closing,
including approval by Uroquest's stockholders. Stockholders holding
approximately 48% of Uroquest's common stock have agreed to vote their shares in
favor of the proposed merger and have granted to Chemfab an option to acquire
their shares of common stock under certain circumstances. The merger is expected
to be completed during the fourth quarter of 1999.
In connection with the merger, in July 1999 Uroquest has shut down the
operations of its urology division and as of October 15, 1999, Uroquest has shut
down its Menlo Park corporate headquarters. In connection with the termination
of the urology operations and the termination of certain corporate personnel,
Uroquest accrued $503,000 of severance costs during the quarter ended September
30, 1999, substantially all of which had been paid by September 30, 1999. In
addition, Uroquest is contingently obligated to pay severance to two remaining
corporate officers in the event that the merger is completed. Such severance
payments will total approximately $450,000 and will be accrued when the
contingency is removed.
F-20
<PAGE> 81
ANNEXED DOCUMENTS
Important information related to UroQuest, Chemfab, their respective
subsidiaries and the merger agreement is included in the materials attached to
this proxy statement. These materials are specifically incorporated herein and
made a part hereof. You should read these materials carefully. These materials
are:
Annex A Agreement and Plan of Merger
Annex B Opinion of Vector Securities International, Inc.
Annex C Voting Agreement
Annex D Section 262 of the Delaware General Corporation Law
Annex E Agreement Concerning Agreement and Plan of Merger
<PAGE> 82
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of this 3rd day of June, 1999, by and among CHEMFAB CORPORATION, a
Delaware corporation ("Parent"), UROK ACQUISITION CORP., a Delaware corporation
and a direct or indirect wholly-owned subsidiary of Parent ("Purchaser"), and
UROQUEST MEDICAL CORPORATION, a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Boards of Directors of Parent, Purchaser and the Company each
deem it advisable and in the best interests of Parent, Purchaser and the Company
and their respective stockholders, that Purchaser be merged with and into
Company (the "Merger") upon the terms and subject to the conditions set forth
herein and in accordance with the Delaware General Corporation Law (the "DGCL").
The Board of Directors of Parent and Purchaser and the stockholder of Purchaser
have adopted this Agreement. The Board of Directors of Company has approved this
Agreement and has resolved to recommend to the stockholders of the Company to
vote in favor of this Agreement; and
WHEREAS, substantially concurrently herewith and as a condition and
inducement to Parent's willingness to enter into this Agreement, Parent and
certain stockholders of the Company, who include certain of the directors and
officers of the Company and its Subsidiaries (as defined below) and certain
entities related to such directors and officers and who hold, in the aggregate,
more than 48% of the outstanding shares of Common Stock, par value $.001, of the
Company, are entering into Stockholder Agreements in the form of Exhibit A
hereto (the "Stockholder Agreements").
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, Parent, Purchaser and Company
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.3 hereof),
in accordance with this Agreement and the DGCL, Purchaser shall be merged with
and into Company, the separate existence of Purchaser (except as may be
continued by operation of law) shall cease, and Company shall continue as the
surviving corporation under the corporate name it possesses immediately prior to
the Effective Time. Company after the Merger hereinafter sometimes is referred
to as the "Surviving Corporation."
1.2 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of this Agreement and the
DGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the rights and property of Company and Purchaser (the
"Constituent Corporations") shall vest in the Surviving Corporation, and all
debts and liabilities of Company and Purchaser shall become the debts and
liabilities of the Surviving Corporation.
1.3 Consummation of the Merger. In the event of, and as soon as is
practicable after, the satisfaction or waiver of the conditions set forth in
Article V hereof, the parties hereto will cause the Merger to be consummated by
filing with the Secretary of State of Delaware a Certificate of Merger in the
form of Exhibit B (the time of confirmation of such filing or such later time as
is specified in such Certificate of Merger being the "Effective Time").
Contemporaneous with the filing referred to in this Section 1.3, a closing (the
"Closing") will be held at the offices of Bingham Dana LLP, 150 Federal Street,
Boston, Massachusetts 02110 or at such other location as the parties may
establish for the purpose of confirming all the foregoing. The date and the time
of such Closing are referred to as the "Closing Date."
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1.4 Charter; Bylaws; Directors and Officers. Unless otherwise determined
by Parent prior to the Effective Time, the Certificate of Incorporation and
Bylaws of the Surviving Corporation shall be the Certificate of Incorporation
and Bylaws of Company, as in effect immediately prior to the Effective Time,
until thereafter amended as provided therein and under the DGCL. The directors
of Purchaser immediately prior to the Effective Time will be the initial
directors of the Surviving Corporation, and the officers of Purchaser
immediately prior to the Effective Time will be the initial officers of the
Surviving Corporation, in each case until their successors are elected and
qualified.
1.5 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Purchaser, Company, the Surviving
Corporation or the holder of any of the following securities:
(a) Each share of Common Stock, $.001 par value per share, of Company
(the "Shares"), issued and outstanding immediately prior to the Effective
Time (other than Shares to be cancelled pursuant to Section 1.5(b) hereof
and any Dissenting Shares (as hereinafter defined)), shall be cancelled and
extinguished and be automatically converted into and become a right to
receive the Per Share Merger Consideration (as defined in Section 1.6) upon
surrender in the manner provided in Section 1.9, of the certificate that
evidenced the Shares (the "Certificate").
(b) Each Share which is issued and held in the treasury of Company
immediately prior to the Effective Time or issued and outstanding and owned
by Parent or any direct or indirect Subsidiary (as defined in Section 2.1)
of Parent or Company, shall be cancelled and retired, and no payment shall
be made with respect thereto.
(c) Each share of Common Stock, par value $.001 per share, of
Purchaser issued and outstanding immediately prior to the Effective Time
shall be converted into and become one validly issued, fully paid and
nonassessable share of Common Stock, par value of $.001 per share, of the
Surviving Corporation.
(d) The holders of Dissenting Shares, if any, shall be entitled to
payment for such Shares only to the extent permitted by and in accordance
with the provisions of Section 262 of the DGCL; provided, however, that if,
in accordance with such Section of the DGCL, any holder of Dissenting
Shares shall forfeit such right to payment of the fair cash value of such
Shares, such Shares shall thereupon be deemed to have been converted into
and to have become exchangeable for, as of the Effective Time, the right to
receive the Per Share Merger Consideration provided in Section 1.5(a).
1.6 Calculation of Merger Consideration.
For the purposes of this Agreement:
(a) The term "Per Share Merger Consideration" means an amount equal to
the quotient obtained by dividing (i) $29,000,000 less the sum of (x) the
Total Option Consideration, (y) the NOL Adjustment, if any, and (z) the
Downward Net Current Asset Adjustment, if any, and plus the Upward Net
Current Asset Adjustment, if any, by (ii) the total number of Shares
outstanding at the Effective Time, including Shares issued immediately
prior to the Effective Time pursuant to Section 1.7(a) or 1.7(c) but
excluding Shares held in the treasury of the Company or held by any
Subsidiary of the Company to be cancelled pursuant to Section 1.5(b)
hereof, rounded upward to the nearest one one-hundredth of a cent.
(b) The term "Total Option Consideration" means the total amount to be
paid by the Company in cancellation and settlement of outstanding options,
pursuant to Section 1.7.
(c) The term "NOL Adjustment" means, in the event that the Company's
cumulative net operating losses for federal income tax purposes ("NOLs")
immediately prior to the Effective Time are less than $8,500,000, an amount
equal to (x) $8,500,000 less the total amount of NOLs immediately prior to
the Effective Time (with the difference referred to as the "Specified
NOLs") times (y) .34, and then discounted to the net present value as of
the Effective Time, based on the Parent's reasonable estimate of when the
Parent would have been able to use the Specified NOLs (after taking into
account the limitations of Section 382 of the Internal Revenue Code of
1986, as amended, and any other applicable limitation and assuming the NOLs
actually existing at the Effective Time are used first) and discounted
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from such time to the Effective Time at an annual rate of 5%. Any dispute
regarding the amount of the NOLs existing immediately prior to the
Effective Time or the calculation of the NOL Adjustment shall be resolved
by a mutually acceptable independent accounting firm, which shall be
instructed to complete its determination within ten (10) days and to make
its determination consistent with the definition of NOL Adjustment set
forth in this paragraph (c).
(d) The term "Downward Net Current Asset Adjustment" means the amount,
if any, by which the Net Current Assets (as defined below) as of the
Effective Time are less than $5,603,000, determined as provided in (f)
below.
(e) The term "Upward Net Current Asset Adjustment" means the amount,
if any, by which the Net Current Assets as of the Effective Time are
greater than $6,403,000, determined as provided in (f) below.
(f) The term "Net Current Assets" means (i) the Company's total
current assets on a consolidated basis, determined in accordance with GAAP
(as defined in Section 2.6), but excluding both any cash amounts held
pursuant to the 1996 Employee Stock Purchase Plan (the "ESPP") and any cash
to be provided by the Parent on or after the Closing Date to fund the
termination of Options provided for in Sections 1.7 and 4.15, less (ii) the
sum of, without duplication, (v) the Company's total current liabilities on
a consolidated basis, determined in accordance with GAAP, (w) accruals
through the Closing Date for all vacation and bonus liabilities (including
the bonus liability referred to in Section 4.10(d)) of the Company and its
Subsidiaries and the total short and long-term portions of the total amount
of all Indebtedness (including the Indebtedness secured by mortgages on the
Bivona real property in Gary, Indiana) of the Company and its Subsidiaries,
in each case whether or not in accordance with GAAP, (x) the amount of the
Environmental Accrual (as defined in Section 4.19), to the extent such
Environmental Accrual exceeds $50,000, (y) the current unbilled but accrued
expenses of the Company and its Subsidiaries, on a consolidated basis, and
(z) the total out-of-pocket costs incurred and to be incurred by the
Company and its Subsidiaries in connection with the negotiation and
preparation of this Agreement and the transactions contemplated hereby
including (i) investment banking fees and expenses, (ii) legal and
accounting fees and expenses, (iii) financial printer expenses, (iv) SEC
filing fees, (v) the cost of the insurance referred to in Section 4.9, (vi)
the severance and other costs to be paid by the Company pursuant to Section
4.10(c) and any "gross up" or other amounts to be paid by the Company or
any of its Subsidiaries in connection with any "excess parachute payments"
referred to in Section 2.12(g), and (vii) any costs and expenses (including
any legal fees and expenses and payments to be made pursuant to Section
1.8) to be paid or incurred by the Company or the Parent in connection with
Dissenting Shares. If any such transaction costs are to be incurred after
the Effective Time, then for purposes of this adjustment these costs will
be based on an estimate to be prepared in a reasonable manner by the
Company and agreed to by the Parent, with Parent's agreement to such
estimate not to be unreasonably withheld. The Environmental Accrual will be
determined as provided in Section 4.19 and Section 5.1(d). The other
amounts referred to in the definition of "Net Current Assets" will be based
on a schedule prepared by the Company in a reasonable manner at least ten
(10) days prior to the Effective Time. Thereafter the Parent and the
Company and their representatives will meet to discuss, verify and agree on
this estimate and update it to the Effective Time on a mutually agreeable
basis. In verifying and agreeing on these estimates, both Parent and the
Company will act in a reasonable manner.
1.7 Company Stock Options and Related Matters.
(a) Immediately prior to the Effective Time, each outstanding option (an
"Option") to purchase Shares heretofore granted under the 1994 Stock Plan or any
other employee or director stock option or compensation plan or arrangement of
the Company, excluding the ESPP (collectively, the "Plans"), whether or not
exercisable, shall be cancelled by the Company and each holder of a cancelled
Option shall receive from the Surviving Corporation promptly after the Effective
Time, in cancellation and settlement of such Option, a cash payment in an amount
equal to the excess of the Per Share Merger Consideration over the per Share
exercise price of such Option, if any, multiplied by the number of Shares
covered by such Option (the "Option Settlement Amount"), subject to income tax
withholding as required by applicable law. Prior to the Closing, Company will
provide Parent with a listing of Options held by each optionee (including the
date of grant, the
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number of shares issuable upon exercise of the Option, and the Option Settlement
Amount to which the Optionee is entitled) certified by an executive officer of
Company. In the event that any holder of an Option does not agree to a cash
settlement of such holder's Options as provided above, the Company will permit
such holder to exercise all of such Options during a 15-day period ending
immediately prior to the Effective Time. Company shall not grant or amend any
Option after the date hereof or commence any new offering periods under the ESPP
after the date hereof.
(b) Notwithstanding the foregoing, in the event that due to Section 16(b)
of the Securities and Exchange Act of 1934, as amended, it is inadvisable to
cancel any Option held by an officer or director of the Company, any such Option
shall not be cancelled as described above; provided, however, that the Company
or any such committee shall adopt such resolutions or take such other actions as
are required to adjust the terms of each Option not adjusted and cancelled as
contemplated by the immediately preceding section in order to provide that each
such Option shall be cancelled, and the holder thereof shall be entitled to
receive the Option Settlement Amount, not later than the Effective Time or, in
the case of options designated by the Company in writing within one week after
the date of this Agreement, six months and one day following the grant date of
such Options.
(c) The Board of Directors of Company (the "Board") shall take all actions
necessary pursuant to the terms of the ESPP in order to shorten the Offering
Periods (as defined in the ESPP) then in progress such that the Purchase Date
(as defined in the ESPP) shall occur immediately prior to the Effective Time.
1.8 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
holders of Shares which are entitled to dissenter's rights in connection with
the Merger under the DGCL (collectively, the "Dissenting Shares") shall not be
converted into or represent the right to receive the Per Share Merger
Consideration. Such stockholders shall be entitled to receive payment of the
fair market value of such Shares held by them in accordance with the provisions
of the DGCL, except that all Dissenting Shares held by stockholders who shall
have failed to perfect or who effectively shall have withdrawn or lost their
rights to the payment of fair market value for such shares under the DGCL shall
thereupon be deemed to have been converted into and to have become exchangeable
for, as of the Effective Time, the right to receive the Per Share Merger
Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 1.9, of the certificate or certificates that formerly
evidenced such Shares.
(b) Company shall give Parent (i) prompt notice of any demand for payment
of fair market value received by Company, the withdrawals of any such demand,
and any other instrument served pursuant to the DGCL and received by Company and
(ii) the opportunity to direct all negotiations and proceedings with respect to
demands for payment of fair market value under the DGCL. Company shall not,
except with the prior written consent of Parent, make any payment with respect
to any demands for payment of fair market value or offer to settle or settle any
such demands.
1.9 Exchange of Certificates.
(a) From and after the Effective Time, a bank or trust company to be
designated by Parent (the "Exchange Agent") shall act as exchange agent in
effecting the exchange of the Per Share Merger Consideration for Certificates
which, prior to the Effective Time, represented Shares entitled to payment
pursuant to Section 1.5 hereof. On or before the Effective Time, Parent or
Purchaser shall deposit with the Exchange Agent the aggregate Per Share Merger
Consideration (the "Deposit Amount") in trust for the benefit of the holders of
Certificates. Pending distribution pursuant to this Section 1.9(a) of the
Deposit Amount deposited with the Exchange Agent, Parent may direct the Exchange
Agent to invest such Deposit Amount, provided that such investments (i) shall be
obligations of or guaranteed by the United States of America, in commercial
paper obligations receiving the highest rating from either Moody's Investors
Services, Inc. or Standard & Poor's Corporation, or in certificates of deposit,
bank repurchase agreements or bankers acceptances of commercial banks with
capital exceeding $500,000,000 (collectively "Permitted Investments") or in
money market funds which are invested solely in Permitted Investments and (ii)
shall have maturities that will not prevent or delay payments to be made
pursuant to this Section 1.9(a). Upon the surrender of
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each such Certificate and the issuance and delivery by the Exchange Agent of the
Per Share Merger Consideration in exchange therefor, such Certificate shall
forthwith be cancelled. Until so surrendered and exchanged, each such
Certificate (other than Certificates representing Shares held by Parent or
Company or any direct or indirect Subsidiary of Parent or Company and Dissenting
Shares) shall represent solely the right to receive the Per Share Merger
Consideration, without interest, multiplied by the number of Shares represented
by such Certificate. Promptly after the Effective Time, the Exchange Agent shall
mail to each record holder of Certificates which immediately prior to the
Effective Time represented Shares a form of letter of transmittal and
instructions for use in surrendering such Certificates and receiving the Per
Share Merger Consideration therefor. Upon the surrender to the Exchange Agent of
such an outstanding Certificate together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, and
such other documents as may be required pursuant to such instructions, the
holder shall receive the Per Share Merger Consideration, without any interest
thereon and such Certificate shall be cancelled. If any Per Share Merger
Consideration is to be paid to a name other than the name in which the
Certificate representing Shares surrendered in exchange therefor is registered,
it shall be a condition to such payment or exchange that the natural person,
partnership, corporation, limited liability company, joint venture, business
association or other entity (a "Person") requesting such payment or exchange
shall pay to the Exchange Agent any transfer or other taxes required by reason
of the payment of such Per Share Merger Consideration to a name other than that
of the registered holder of the Certificate surrendered, or such Person shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to a holder of Shares for any Per Share
Merger Consideration delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(b) The Surviving Corporation shall not be entitled to the return of any of
the Deposit Amount in the possession of the Exchange Agent relating to the
transactions described in this Agreement until the date which is 180 days after
the Effective Time. Thereafter, each holder of a Certificate representing a
Share may surrender such Certificate to the Surviving Corporation and (subject
to applicable abandoned property, escheat and similar laws) receive in exchange
therefor the Per Share Merger Consideration, without any interest thereon, but
shall have no greater rights against the Surviving Corporation than may be
accorded to general creditors of the Surviving Corporation.
(c) At and after the Effective Time, the holders of Certificates to be
exchanged for the Per Share Merger Consideration pursuant to this Agreement
shall cease to have any rights as to stockholders of the Company except for the
right to surrender such holder's Certificates in exchange for payment of the Per
Share Merger Consideration, and after the Effective Time there shall be no
transfers on the stock transfer books of the Surviving Corporation of the Shares
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent, they shall be cancelled and exchanged for the Per Share Merger
Consideration, as provided in this Article I, subject to applicable law in the
case of Dissenting Shares.
(d) The provisions of this Section 1.9 shall also apply to Dissenting
Shares that lose their status as such, except that the obligations of Exchange
Agent under this Section 1.9 shall commence on the date of loss of such status.
1.10 Supplementary Action. If at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of either the Company or
Purchaser, or otherwise to carry out the provisions of this Agreement, the
officers and directors of the Surviving Corporation are hereby authorized and
empowered, in the name of and on behalf of the Company and Purchaser, to execute
and deliver any and all things necessary or proper to vest or to perfect or
confirm title to such property or rights in the Surviving Corporation, and
otherwise to carry out the purposes and provisions of this Agreement.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Purchaser that, except as
described in the Company Disclosure Letter furnished by the Company to the
Parent prior to the execution of this Agreement (the "Company Disclosure
Letter") or in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (as amended on April 30, 1999, the "1998 10-K"), the
Quarterly Report on Form 10-Q for the three months ended March 31, 1999 (the
"March 1999 10-Q") or the Company's Proxy Statement for its 1998 Annual Meeting
(the "1998 Proxy" and collectively the "Specified SEC Reports"):
2.1 Organization and Qualification. Each of the Company and its
Subsidiaries (as defined below) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as it is now being
conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign corporation, and is in good standing, in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, other than in jurisdictions where
the failure to be so qualified, individually or in the aggregate, would not have
a Material Adverse Effect (as defined below). Other than the Company's ownership
interest in its Subsidiaries, the Company has no direct or indirect equity or
related interest in any partnership, corporation, limited liability company,
joint venture, business association or other entity.
In this Agreement, (i) a "Subsidiary" means, with respect to any Person,
any corporation more than fifty percent (50%) of whose outstanding voting
securities are, or any partnership, limited liability company, joint venture or
other entity more than fifty percent (50%) of whose total equity interest, is
directly or indirectly owned by such Person, and specifically includes, in the
case of the Company, Bivona, Inc. and BMT Acquisition Co., (ii) any reference to
any event, change or effect being "material" with respect to any entity or group
of entities means any event, change or effect which is material to the business,
properties, assets, results of operations or condition (business, financial or
otherwise) of such entity or group of entities, (iii) "Material Adverse Effect"
means, with respect to the Company and its Subsidiaries, any change in or effect
on the business, properties or assets of the Company and its Subsidiaries that
is materially adverse to the business, properties, assets, results of operations
or condition (business, financial or otherwise) of the Company and its
Subsidiaries, taken as a whole, and (iv) "Affiliate" means, with respect to any
Person, any other Person controlling, controlled by or under common control with
such Person.
2.2 Certificate of Incorporation; Bylaws; and Stock Transfer Records. The
Company has made available to Parent prior to the date of this Agreement or will
furnish prior to the Closing complete and correct copies of (i) the Certificate
of Incorporation (or other charter document) and By-laws of the Company and each
of its Subsidiaries, (ii) shareholder list of each of the Company's Subsidiaries
and (iii) all stock certificates representing any of the issued and outstanding
capital stock of each of the Company's Subsidiaries, including without
limitation, Bivona, Inc., and in each case such copies are or will be accurate
and complete as of the date of this Agreement or when furnished.
2.3 Capitalization of the Company.
(a) The authorized capital stock of the Company consists of (i) 16,000,000
shares of Preferred Stock, par value $.001 per share, of which none are issued
and outstanding, and (ii) 31,000,000 shares of Common Stock, par value $.001 per
share, of which 12,452,522 Shares are issued and outstanding as of March 31,
1999. Except for (i) rights created pursuant to the 1994 Stock Plan and the ESPP
(the "Identified Equity Plans"), (ii) the rights created pursuant to this
Agreement, (iii) the Company's right to repurchase any unvested shares under the
Identified Equity Plans, and (iv) as set forth in the SEC Reports (as defined in
Section 2.6) there are no other options, warrants, calls, rights, commitments or
agreements of any character to which the Company is a party or by which it is
bound obligating the Company to issue, sell, deliver, repurchase or redeem or
cause to be issued, sold, delivered, repurchased or redeemed any shares of
capital stock of, or equity interests in, the Company. All outstanding Shares
are, and all Shares subject to issuance as aforesaid, upon issuance on the terms
and conditions specified in the instruments pursuant to which they are issuable,
will be,
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duly authorized, validly issued, fully paid and nonassessable and free of
preemptive rights or rights of first refusal. None of the Company or any of its
Subsidiaries is required to redeem, repurchase or otherwise acquire shares of
capital stock of the Company or any of its Subsidiaries, respectively, as a
result of the transactions contemplated by this Agreement. The Company has no
stockholder rights plan or agreement in force providing for the issuance to
holders of Shares of rights to purchase or receive stock, cash or other assets
upon the acquisition or proposed acquisition of Shares by a Person (a "Rights
Plan"), nor has the Company's Board of Directors or stockholders ever adopted a
Rights Plan.
(b) All of the Company's Subsidiaries are listed in Exhibit 21.1 to the
1998 10-K. Except as set forth in the 1998 10-K, the Company owns all of the
outstanding capital stock of its Subsidiaries free and clear of any liens,
security interests, pledges, agreements, claims, charges or encumbrances of any
nature whatsoever. Except as set forth in the SEC Reports, there are no voting
trusts or other agreements or understandings to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries may
be bound with respect to the voting of the capital stock of the Company or any
of the Company's Subsidiaries. Except as set forth in the SEC Reports, there are
no options, warrants, calls, rights, commitments, or agreements of any character
to which any of the Company's Subsidiaries is a party or by which any of the
Company's Subsidiaries is bound obligating such Subsidiary to issue, sell,
deliver, repurchase or redeem, or caused to be issued, sold, delivered,
repurchased or redeemed, any shares of capital stock of, or equity interests in,
such Subsidiary. All of the outstanding capital stock of each of the Company's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and issued free of preemptive rights or rights of first refusal.
2.4 Corporate Power, Authorization and Enforceability. The Company has
full corporate power and authority to enter into this Agreement and to perform
its obligations hereunder and to consummate all the transactions contemplated
hereby. The execution and delivery of this Agreement by the Company, the
performance by the Company of its obligations hereunder and the consummation by
the Company of the transactions contemplated hereby have been duly and validly
authorized by the Company's Board of Directors and no other corporate action on
the part of the Company is necessary to authorize this Agreement or to
consummate the transactions contemplated hereby (other than, with respect to the
Merger, the approval and adoption of this Agreement by stockholders holding a
majority of the outstanding Shares entitled to vote thereon). This Agreement has
been duly executed and delivered by the Company and is a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
2.5 No Conflict; Required Filings and Consents.
(a) Assuming satisfaction of any applicable requirements referred to in
Section 2.5(b) below, the execution and delivery by the Company of this
Agreement, the compliance by the Company with the provisions hereof and the
consummation by the Company of the transactions contemplated hereby:
(A) will not conflict with or violate any statute, law, ordinance,
rule, regulation, order, writ, judgment, award, injunction, decree or
ruling applicable to the Company or any of its Subsidiaries or any of their
properties, or conflict with, violate or result in any breach of or
constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of
termination, amendment, cancellation or acceleration of, or the loss of a
benefit under, or result in the creation of a lien, security interest,
charge or encumbrance on any of the properties or assets of the Company or
any of its Subsidiaries pursuant to (i) the Certificate of Incorporation
(or other charter document) or Bylaws of the Company or any of its
Subsidiaries or (ii) any contract, lease, agreement, note, bond, mortgage,
indenture, deed of trust, or other instrument or obligation, or any
license, authorization, permit, certificate or other franchise, other than
such conflicts, violations, breaches, defaults, losses, rights of
termination, amendment, cancellation or acceleration, liens, security
interests, charges or encumbrances as to which requisite waivers have been
obtained or which individually or in the aggregate would not have a
Material Adverse Effect; and
(B) do not and will not result in any grant of rights to any other
party under the Certificate of Incorporation (or other charter document) or
Bylaws of the Company or any of its Subsidiaries or restrict or impair the
ability of the Parent or any of its Subsidiaries to vote, or otherwise
exercise the rights of a
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stockholder with respect to shares of the Company or any of its
Subsidiaries that may be directly or indirectly acquired or controlled by
them.
(b) Other than in connection with or in compliance with the provisions of
the DGCL, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the "blue sky" laws of various states, and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (i) the Company is not
required to submit any notice, report, registration, declaration or other filing
with any federal, state or local government, court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign (collectively, "Governmental Entities"), in connection with the
execution or delivery of this Agreement by the Company or the performance by the
Company of its obligations hereunder or the consummation by the Company of the
transactions contemplated by this Agreement and (ii) no waiver, consent,
approval, order or authorization of any Governmental Entity is required to be
obtained in connection with the execution or delivery of this Agreement by the
Company or the performance by the Company of its obligations hereunder or the
consummation by the Company of the transactions contemplated by this Agreement,
other than such notices, reports, registrations, declarations, filings, waivers,
consents, approvals, orders, or authorizations, the absence of which would not,
individually or in the aggregate, subject the Company or its Subsidiaries to any
criminal penalties or otherwise have a Material Adverse Effect.
2.6 SEC Reports; Financial Statements. The Company has filed all required
reports, schedules, forms, statements and other documents with the Securities
and Exchange Commission (the "SEC") from June 28, 1996 through the date hereof
(collectively, the "SEC Reports"). The financial statements and schedules
contained in the SEC Reports (or incorporated therein by reference) and the
consolidated financial statements of the Company and its Subsidiaries for the
fiscal year ended December 31, 1998 and the quarter ended March 31, 1999
included in the 1998 10-K and March 1999 10-Q (collectively, the "Financial
Statements"), complied as to form in all material respects with the then
applicable accounting requirements and published rules and regulations of the
SEC with respect thereto, were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved ("GAAP") (except as may be indicated in the notes or schedules thereto
and except, in the case of the unaudited interim statements, as may be permitted
under Form 10-Q of the Exchange Act) and present fairly the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows as
of the dates and for the fiscal periods indicated therein (subject, in the case
of unaudited interim financial statements, to normal year-end adjustments). Each
SEC Report was filed with the SEC on a timely basis and, on the date of filing
thereof, complied in all material respects with the then applicable requirements
of the Exchange Act and the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations of the SEC promulgated thereunder and did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
Company has filed all documents and agreements which were required to be filed
as exhibits to the SEC Reports. None of the Company's Subsidiaries is required
to file any statements or reports with the SEC.
2.7 No Default. Neither the Company nor any of its Subsidiaries is in
default or violation (and no event has occurred which with or without notice,
the lapse of time or the happening or occurrence of any other event would
constitute a default or violation) of any term, condition or provision of (i)
its Certificate of Incorporation or Bylaws, or (ii) any contract, lease,
agreement, license, note, bond, mortgage, indenture, deed of trust or other
instrument or obligation to which the Company or any of its Subsidiaries is a
party or by which the Company or its Subsidiaries or any of their properties or
assets may be bound (nor to the knowledge of the Company is any other party
thereto in breach thereof or default thereunder), except in the case of this
clause (ii) for any defaults or violations that individually or in the aggregate
would not have a Material Adverse Effect.
2.8 Compliance with Law. Except as disclosed in the SEC Reports, each of
the Company and its Subsidiaries is in compliance, and has conducted its
respective businesses so as to comply with, all statutes, laws, ordinances,
rules, regulations, permits and approvals applicable to its operations, except
for violations which, individually or in the aggregate do not and insofar as
reasonably can be foreseen in the future would not
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have a Material Adverse Effect. Except as disclosed in the SEC Reports, no
investigation or review by any Governmental Entity with respect to the Company,
any of its Subsidiaries or any property owned or leased by the Company or any of
its Subsidiaries is pending or, to the knowledge of the Company, threatened,
except for any investigation or review that would not individually or in the
aggregate have a Material Adverse Effect. The Company and its Subsidiaries have
all permits, authorizations, licenses and franchises from Governmental Entities
required to conduct their business as now being conducted, except for such
permits, authorizations, licenses and franchises the absence of which would not,
individually or in the aggregate, have a Material Adverse Effect. Since January
1, 1997 the Company and its Subsidiaries have not received notice of any OSHA
violation, other than any violations that individually or in the aggregate would
not have a Material Adverse Effect.
2.9 Absence of Certain Changes. As of the date of this Agreement, except
as contemplated by this Agreement or as disclosed in the SEC Reports or the
Company's financial statements for the fiscal year ended December 31, 1998 or
the three months ended March 31, 1999, since December 31, 1998 (the "Balance
Sheet Date"), since the Balance Sheet Date, the Company and its Subsidiaries
have conducted their business in the ordinary course consistent with past
practice and have not taken any of the actions set forth in paragraphs (a)
through (r) of Section 4.1, and there has not been any occurrence that has had
or may reasonably be expected to have a Material Adverse Effect, other than (i)
changes relating to the economy in general or the industries of the Company and
its Subsidiaries in general and not specifically relating to the Company or any
of its Subsidiaries or (ii) changes due to the disruption of the Company's or
its Subsidiary's businesses as a result of any rumors, speculation, or
announcement of a potential merger involving the Company or the execution of
this Agreement or the Merger.
2.10 No Undisclosed Liabilities. Except for liabilities and obligations
incurred since the Balance Sheet Date in the ordinary course of business,
neither the Company nor any of its Subsidiaries has any liabilities or
obligations of any nature whatsoever (whether absolute, accrued, fixed,
contingent, liquidated, unliquidated or otherwise), required by generally
accepted accounting principles to be recognized or disclosed on a consolidated
balance sheet of the Company and its Subsidiaries or in the notes thereto, other
than (i) recognized or disclosed in the Financial Statements or disclosed in the
SEC Reports, or (ii) liabilities which would not individually or in the
aggregate have a Material Adverse Effect.
2.11 Litigation. Except as set forth in the SEC Reports, there is no
action, suit, investigation or proceeding pending against, or to the knowledge
of the Company, threatened against or affecting, the Company or any of its
Subsidiaries or any of their respective properties as to which there is a
reasonable possibility of an adverse determination and which if determined
adversely to the Company could reasonably be expected to have a Material Adverse
Effect and there is no judgment, decree, writ, injunction, award, ruling or
order of any Governmental Entity or arbitrator outstanding against the Company
or any of its Subsidiaries having, or which, insofar as can reasonably be
foreseen, in the future would have, a Material Adverse Effect. The Company has
made available to Parent correct and complete copies of all correspondence
prepared by its counsel for the Company's auditors in connection with the last
completed audit of the Company's financial statements and any such
correspondence since the date of the last such audit. As of the date of this
Agreement, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against the Company arising out of or in
any way related to this Agreement, the Merger or any of the transactions
contemplated hereby or thereby.
2.12. ERISA.
(a) Each "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all
other written or oral plans or agreements involving direct or indirect
compensation (including any employment agreements entered into between the
Company or any of its Subsidiaries and any employee or former employee of the
Company or any of its Subsidiaries, but excluding worker's compensation,
unemployment compensation and other government-mandated programs) currently or
previously maintained, contributed to or entered into by the Company or any of
its Subsidiaries or any ERISA Affiliate thereof for the benefit of any employee
or former employee of or current or former service provider to the Company or
any of its Subsidiaries under which the Company or any of its Subsidiaries
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or any ERISA Affiliate thereof has or may have any present or future obligation
or liability (collectively, the "Company Employee Plans") is either (i) included
as an exhibit to one or more of the SEC Reports or (ii) is not required to be
filed as an exhibit to the SEC Reports pursuant to Regulation SK Item
601(b)(10)(iii)(B)(4). For purposes of this Section 2.12, "ERISA Affiliate"
shall mean any entity which is a member of (i) a "controlled group of
corporations," as defined in Section 414(b) of the Internal Revenue Code of
1986, as amended (the "Code"), (ii) a group of entities under "common control,"
as defined in Section 414(c) of the Code or (iii) an "affiliated service group,"
as defined in Section 414(m) of the Code or treasury regulations promulgated
under Section 414(o) of the Code, any of which includes the Company or any of
its Subsidiaries. The only Company Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as defined in
Section 3(2) of ERISA (collectively, the "Company Pension Plans"), is the
Bivona, Inc. 401(k) Profit Sharing Plan.
(b) No Company Pension Plan is subject to Title IV of ERISA, Part 3 of
Title I of ERISA or Section 412 of the Code. No Company Pension Plan constitutes
or has since the enactment of ERISA constituted a "multiemployer plan," as
defined in Section 3(37) of ERISA. No "prohibited transaction," as defined in
Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to
any Company Employee Plan which is covered by Title I of ERISA, excluding
transactions effected pursuant to a statutory or administrative exemption.
Nothing done or omitted to be done and no transaction or holding of any asset
under or in connection with any Company Employee Plan has or is likely to make
the Company or any of its Subsidiaries or any officer or director thereof
subject to any material liability under Title I of ERISA or liable for any
material tax pursuant to Section 4975 of the Code.
(c) Each Company Pension Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, except to the extent that the requirements for
qualification may be satisfied by adopting retroactive amendments under Section
401(b) of the Code and the regulations thereunder or under Section 1140 of the
Tax Reform Act of 1986. Each trust forming a part of a Company Pension Plan is
exempt from tax pursuant to Section 501(a) of the Code. Each Company Employee
Plan has been maintained substantially in compliance with its terms and with the
applicable requirements of ERISA and the Code.
(d) Each employment, severance or other similar contract, arrangement or
policy and each plan or arrangement (written or oral) providing for insurance
coverage (including any self-insured arrangements), vacation benefits, severance
or severance-type benefits, disability benefits, death benefits, hospitalization
benefits, retirement benefits, deferred compensation, profit-sharing, bonuses,
stock options, stock purchase, phantom stock, stock appreciation or other forms
of incentive compensation or post-retirement insurance, compensation or benefits
which (i) is not a Company Employee Plan, (ii) is entered into, maintained or
contributed to, as the case may be, by the Company or any of its Subsidiaries,
and (iii) covers any employee or former employee of or other current or former
service provider to the Company or any of its Subsidiaries, is herein referred
to as a "Company Benefit Arrangement" and collectively as the "Company Benefit
Arrangements." All material Company Benefit Arrangements that are required to be
so listed are listed as exhibits to or described in the SEC Reports. Each
Company Benefit Arrangement has been maintained in substantial compliance with
its terms and with the requirements prescribed by any and all statutes
(including but not limited to the Code), orders, rules and regulations which are
applicable to such Company Benefit Arrangements.
(e) Except as set forth in the SEC Reports, there has been no amendment to,
written interpretation or announcement (whether or not written) by the Company
or any of its Subsidiaries relating to, or change in employee participation or
coverage under, any Company Employee Plan or Company Benefit Arrangement which
would increase materially the expense of maintaining such Company Employee Plan
or Company Benefit Arrangement above the level of the expense incurred in
respect thereof for the fiscal year ended December 31, 1998.
(f) The Company has materially complied with the requirements of Section
4980B of the Code with respect to any "qualifying event" (as defined in Section
4980B(f)(3) of the Code) occurring prior to and including the Closing Date, and,
to the best of the Company's knowledge, no tax payable on account of
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Section 4980B of the Code has been incurred with respect to any current or
former employees of the Company or any of its Subsidiaries.
(g) Except as may be contained in any of the agreements listed as exhibits
to the 1998 10-K, there is no term of any Company Employee Plan or Company
Benefit Arrangement covering a "disqualified individual" (as defined in Section
280G(c) of the Code), or of any contract, instrument, agreement or arrangement
with any such disqualified individual, that individually or collectively could
result in a disallowance of the deduction for any "excess parachute payment" (as
defined in Section 280G(b)(i) of the Code) or the imposition of the excise tax
provided in Section 4999 of the Code. The consummation of the transactions
contemplated by this Agreement will not result in any "excess parachute payment"
or the imposition of any such excise tax in an amount greater than $50,000 in
the aggregate for all "disqualified individuals".
(h) The Company has heretofore made available to Parent certain Bivona
handbooks, a Corporate/ Urology Benefits Summary, a Corporate/Urology Medical
Plan Book, a Corporate/Urology Dental Plan Book, a 401(k) Plan Booklet, an
Employee Stock Purchase Plan Document and a summary of the Company's incentive
compensation plan.
(i) There is no pending or threatened legal action, proceeding or
investigation, other than routine claims for benefits, concerning any Company
Employee Plan or Company Benefit Arrangement or, to the best knowledge of the
Company any fiduciary or service provider thereof and, to the best knowledge of
the Company, there is no basis for any such legal action or proceeding.
(j) No Company Employee Plan or Company Benefit Arrangement provides
health, life or other similar welfare coverages after termination of employment
except to the extent required by applicable state insurance laws and Title I,
Part 6 of ERISA.
(k) With respect to each Company Employee Plan or Company Benefit
Arrangement for which a separate fund of assets is or is required to be
maintained, full payment has been made of all amounts required of the Company
and its Subsidiaries and ERISA Affiliates under the terms of each such Plan or
Arrangement or applicable law, through the Closing Date.
(l) Except for the agreements listed in Section 4.10 of the Company
Disclosure Letter (including Schedule 4.1 thereto), neither the Company nor any
of its Subsidiaries has any plan or policy obligating the Company or any
Subsidiary to pay severance to any employee.
2.13 Tax Returns and Reports.
(a) The Company and its Subsidiaries have timely filed with the appropriate
taxing authorities all federal, state, county, local and foreign returns,
estimates, information statements, reports and other documents in respect of
Taxes (as defined below) required to be filed by the Company and its
Subsidiaries, except where the failure to file such Tax return would not
individually or in the aggregate have a Material Adverse Effect. All amounts
shown due on such returns have been timely paid as required by law. For purposes
of this Agreement, "Taxes" and "Tax" shall mean any and all federal, state,
local or foreign taxes and other governmental liabilities or assessments,
including, without limitation, all income, franchise, property, excise,
withholding, sales and use, payroll, profit, trade, capital, occupation,
value-added, unitary, stamp, transfer, registration, license, net worth and
other similar taxes, levies, imposts, duties, deficiencies and assessments,
together with all interest, penalties and additions imposed with respect
thereto.
(b) The audited consolidated financial statements of the Company for the
year ended December 31, 1998 included in the SEC Reports reflect an adequate
reserve for all material Taxes payable by the Company and its Subsidiaries for
all taxable periods and portions thereof through December 31, 1998.
(c) None of the federal, state, local or foreign Tax returns of the Company
or its Subsidiaries is presently being examined, audited or contested by the
relevant taxing authorities, except for any of the foregoing that would not
individually or in the aggregate have a Material Adverse Effect. Neither the
Company nor any of its Subsidiaries has executed, or been asked in writing to
execute, an agreement or waiver extending the statutory period of limitation
applicable to any Tax return for any period with respect to which the applicable
statute of
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limitations has not expired, except for any of the foregoing that would not
individually or in the aggregate have a Material Adverse Effect.
(d) The Company has no ruling requests currently pending with the Internal
Revenue Service, except for any of the foregoing that would not individually or
in the aggregate have a Material Adverse Effect.
(e) Except as set forth in the SEC Reports, neither the Company nor any of
its Subsidiaries is a party to (or obligated under) any Tax allocation, tax
sharing or tax indemnity agreement which has as a party any Person other than
the Company or its Subsidiaries.
(f) The Company and its Subsidiaries have withheld and paid all material
Taxes required to have been withheld and paid in connection with amounts paid or
owing to any employee, consultant, independent contractor, creditor, stockholder
or other party.
2.14 Trademarks, Patents and Copyrights. To the knowledge of the Company,
the Company or its Subsidiaries own or possess adequate licenses or other valid
rights to use all patents, patent rights, trademarks, trademark rights, trade
names, trade name rights, copyrights, know-how and other proprietary information
used or held for use in connection with the business of the Company or any of
its Subsidiaries as currently being, or proposed to be, conducted (except where
the failure to own or possess such licenses or rights would not individually or
in the aggregate have a Material Adverse Effect) and is unaware of any
assertions or claims challenging the validity of any of the foregoing; and to
the knowledge of the Company, the conduct of the business of the Company and its
Subsidiaries as now conducted or proposed to be conducted does not and will not
conflict with any patents, patent rights, licenses, trademarks, trademark
rights, trade names, trade name rights or copyrights of others in any material
way. No material infringement of any proprietary right owned by or licensed by
or to the Company or any of its Subsidiaries is known to the Company.
2.15 Proxy Statement. The proxy statement to be sent to the stockholders
of the Company in connection with the Stockholders' Meeting (as hereinafter
defined) (such proxy statement, as amended or supplemented, being referred to
herein as the "Proxy Statement"), shall not, at the date the Proxy Statement (or
any amendment or supplement thereto) is first mailed to stockholders of the
Company, at the time of the Stockholders' Meeting or at the Effective Time, be
false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they are
made, not misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Stockholders'
Meeting which shall have become false or misleading. The Proxy Statement shall
comply in all material respects as to form with the requirements of the Exchange
Act and the rules and regulations thereunder.
2.16 Company Products; Regulations.
(a) Except as disclosed in the SEC Reports and except as would not
individually or in the aggregate have a Material Adverse Effect, since December
31, 1996 there have been no written notices or citations received by the Company
or any of its Subsidiaries or, to the knowledge of the Company or any of its
Subsidiaries, decisions by any governmental or regulatory body that any product
produced, manufactured, marketed or distributed at any time by the Company or
its Subsidiaries (the "Products") is defective or fails to meet any applicable
standards promulgated by any such governmental or regulatory body. To the
Company's knowledge, the Company and its Subsidiaries have complied in all
material respects with the laws and regulations with respect to design,
manufacture, labeling, testing and inspection of Products promulgated by the
Food and Drug Administration (the "FDA"). Except as disclosed in the SEC
Reports, since December 31, 1996, there have been no recalls, field
notifications or seizures ordered or, to the Company's knowledge, threatened by
any such governmental or regulatory body with respect to any of the Products,
except for any of the foregoing that would not individually or in the aggregate
have a Material Adverse Effect. Except as disclosed in the SEC Reports, neither
the Company nor any of its Subsidiaries has received, and has no knowledge of
any facts that furnish any reasonable basis for, any Notice of Adverse Findings,
Regulatory Warning Letters, Section 305 notices, or other similar communications
or seizures requested or threatened relating to the Company's or any of its
Subsidiaries' Products.
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(b) Except as set forth in the SEC Reports, the Company has obtained, in
all countries where the Company or the Subsidiaries are marketing or have
marketed the Products, all applicable licenses, registrations, approvals,
clearances and authorizations required by local, state or federal agencies
(including the FDA) in such countries regulating the safety, effectiveness and
market clearance of the Products which are currently marketed by the Company or
its Subsidiaries, except where the failure to obtain any of the foregoing would
not individually or in the aggregate have a Material Adverse Effect. The Company
has produced for examination by Parent and Purchaser all material information
relating to regulation of its Products in the United States, including licenses,
registrations, approvals, permits, device listings, inspections, Company recalls
and product actions, audits and the Company's ongoing clinical studies. The
Company has identified in writing to Parent and Purchaser, to Company's
knowledge, all international locations where regulatory information and
documents regarding the Company's or any of its Subsidiary's products are kept.
2.17 Brokers and Finders. The Company has furnished or will furnish prior
to the Effective Time to Parent or its counsel a true and complete copy of that
certain letter agreement between the Company and Vector Securities (the
"Company's Financial Advisor"), such letter agreement being the only agreement
pursuant to which such firm would be entitled to any payment relating to the
transactions contemplated hereunder. No broker, finder or investment banker
other than the Company's Financial Advisor is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company or any of its Subsidiaries.
2.18 Material Agreements. Except as set forth in the SEC Reports and
except for this Agreement and the agreements specifically referred to herein,
neither the Company nor any of its Subsidiaries is a party to or bound by any of
the following agreements (with the following agreements, and the agreements
included as exhibits to the SEC Reports, collectively referred to as the
"Material Agreements"):
(a) any contract or agreement or amendment thereto that would be required
to be filed as an exhibit to a registration statement on Form S-1 filed by the
Company as of the date hereof;
(b) any confidentiality agreement, non-competition agreement or other
contract or agreement that contains covenants limiting the Company's or any of
its Subsidiaries' freedom to compete in any line of business or in any location
or with any Person; and
(c) any loan agreement, indenture, note, bond, debenture or any other
document or agreement evidencing a capitalized lease obligation or other
Indebtedness (as hereinafter defined) to any Person, other than any Indebtedness
in a principal amount less than $25,000 individually or $100,000 in the
aggregate.
The Company has made available to the Parent true, correct and complete
copies of all Material Agreements together with all modifications and
supplements thereto. For purposes of this Agreement "Indebtedness" means (i) all
indebtedness of the Company or any of its Subsidiaries for borrowed money,
whether current or funded, or secured or unsecured, (ii) all indebtedness of the
Company or any of its Subsidiaries for the deferred purchase price of property
or services represented by a note or other security, (iii) all indebtedness of
the Company created or arising under any conditional sale or other title
retention agreement with respect to property acquired by the Company or any of
its Subsidiaries (even though the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), (iv) all indebtedness of the Company or any of its
Subsidiaries secured by a purchase money mortgage or other lien to secure all or
part of the purchase price of property subject to such mortgage or lien, (v) all
obligations under leases which shall have been or must be, in accordance with
generally accepted accounting principles, recorded as capital leases in respect
of which the Company or any of its Subsidiaries is liable as lessee, (vi) any
liability of the Company or any of its Subsidiaries in respect of banker's
acceptances or letters of credit, and (vii) all indebtedness referred to in
clause (i), (ii), (iii), (iv), (v) or (vi) above which is directly or indirectly
guaranteed by the Company or any of its Subsidiaries or which the Company or any
of its Subsidiaries has agreed (contingently or otherwise) to purchase or
otherwise acquire or in respect of which it has otherwise assured a creditor
against loss.
2.19 Year 2000 Compliance. The Company's statements in its 1998 10-K
under the heading "Year 2000 Compliance" are an accurate summary, in all
material respects, of the "Year 2000" issues facing the
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Company and its Subsidiaries and their ability and the total costs required to
become Year 2000 compliant on a timely basis.
2.20 Minute Books. The minute books of the Company and each of its
Subsidiaries made available or to be made available to Parent at or prior to the
Closing for inspection accurately record therein, in all material respects, all
actions taken by Company's and each of its Subsidiaries' Board of Directors and
stockholders.
2.21 Environmental Matters.
Except as set forth in the 1998 10-K and as described in Section 2.21 of
the Company Disclosure Letter.
(a) neither the Company nor any of its Subsidiaries nor any operator of
their respective past or present properties is in violation, or alleged
violation, of any judgment, decree, order, law, license, rule or regulation
pertaining to environmental matters, including without limitation, those arising
under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"),
the Federal Water Pollution Control Act, the Solid Waste Disposal Act, as
amended, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic
Substances Control Act, the Occupational Safety and Health Act of 1970, as
amended, or any state or local statute, regulation, ordinance, order or decree
relating to health, safety or the environment (hereinafter "Environmental
Laws"), which violation would have, either individually or in the aggregate, a
Material Adverse Effect; and
(b) to the knowledge of the Company or any of its Subsidiaries there have
been no releases (i.e., any past or present releasing, spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
disposing or dumping) or threatened releases of any hazardous waste as defined
by 42 U.S.C. sec.6903(5), any hazardous substances as defined by 42 U.S.C.
sec.9601(33) or any toxic substance, oil or hazardous materials or other
chemicals or substances regulated by any Environmental Laws ("Hazardous
Substances") on, upon, into or from any properties of the Company or its
Subsidiaries, which releases would individually or in the aggregate have a
Material Adverse Effect; and there have been no releases on, upon, from or into
any real property in the vicinity of the real properties of the Company or any
of its Subsidiaries which, through soil or groundwater contamination, may have
come to be located on the properties of the Company or any of its subsidiaries,
and which would have, either in any case or in the aggregate, a Material Adverse
Effect.
2.22 Insurance. Since the incorporation of the Company in 1996, the
Company and its Subsidiaries have been covered by insurance in scope and amount
customary and reasonable for the businesses in which they have engaged and are
engaged. This insurance coverage includes CGL coverage that covers product
liability claims for both products sold and products sampled or tested in trials
in both the Binova and Urology businesses of the Company and its Subsidiaries.
2.23 State Takeover Laws. The Company has taken all necessary action to
exempt the transactions contemplated by this Agreement from, or if necessary to
challenge the validity or applicability of, any applicable "moratorium," "fair
price," "business combination," "control share," or other anti-takeover laws,
including the provisions of Section 203 of the DGCL.
2.24 Stockholders' Voting Agreements. Holders of at least forty-eight
percent (48%) of the outstanding shares of the Company's Common Stock have
executed and delivered to the Parent a Stockholder Agreement.
2.25 Opinion of Financial Advisor. The Company has received the oral
opinion of the Company's Financial Advisor, as of the date of this Agreement, to
the effect that the Per Share Merger Consideration is fair, from a financial
point of view, to the Company's stockholders.
2.26 Board Recommendation. The Board of Directors of the Company, at a
meeting duly called and held, has by at least a majority vote of those directors
present (i) approved the Merger and declared it advisable, (ii) determined that
this Agreement and the transactions contemplated hereby, including the Merger,
are in the best interests of the stockholders of the Company, and (iii) resolved
to recommend that the stockholders of the Company adopt this Agreement.
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2.27 Disclosure. No representation or warranty by the Company in this
Agreement or in any certificate delivered or to be delivered to Parent pursuant
hereto contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact required to be stated therein or necessary
to make the statements contained therein, in light of the circumstances under
which they were made, not false or misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent and Purchaser, jointly and severally, represent and warrant to the
Company that:
3.1 Organization and Qualification. Each of Parent and Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, and has all requisite corporate power
and authority to own, operate and lease its properties and to carry on its
business as it is now being conducted. Purchaser is a new corporation that was
formed for the purpose of consummating the transactions contemplated by this
Agreement. It has conducted no business unrelated hereto.
3.2 Corporate Power, Authorization and Enforceability. Each of Parent and
Purchaser has full corporate power and authority to enter into this Agreement
and to perform its obligations hereunder and to consummate all the transactions
contemplated hereby. The execution and delivery of this Agreement by Parent and
Purchaser, the performance by each of Parent and Purchaser of their respective
obligations hereunder and the consummation by Parent and Purchaser of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of each of Parent and Purchaser and no other corporate action
on the part of Parent or Purchaser is necessary to authorize this Agreement or
to consummate the transactions contemplated hereby (other than the filing and
recordation of appropriate merger documents as required by the DGCL). This
Agreement has been duly executed and delivered by each of Parent and Purchaser
and is a legal, valid and binding obligation of each of Parent and Purchaser,
enforceable against Parent and Purchaser in accordance with its terms.
3.3 No Conflict; Required Filings and Consents.
(a) Assuming satisfaction of all applicable requirements referred to in
Section 3.3(b) below, the execution and delivery of this Agreement by Parent and
Purchaser, the compliance by Parent and Purchaser with the provisions hereof and
the consummation by Parent and Purchaser of the transactions contemplated hereby
will not conflict with or violate any statute, law, ordinance, rule, regulation,
order, writ, judgment, award, injunction, decree or ruling applicable to the
Parent or any of its Subsidiaries or any of their properties, or conflict with,
violate or result in any breach of or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, cancellation or acceleration of, or
the loss of a benefit under, or result in the creation of a lien, security
interest, charge or encumbrance on any of the properties or assets of the Parent
or any of its Subsidiaries pursuant to (i) the Certificate of Incorporation (or
other charter document) or bylaws of the Parent or any of its Subsidiaries or
(ii) any contract, lease, agreement, note, bond, mortgage, indenture, deed of
trust, or other instrument or obligation, or any license, authorization, permit,
certificate or other franchise, other than such conflicts, violations, breaches,
defaults, losses, rights of termination, amendment, cancellation or
acceleration, liens, security interests, charges or encumbrances as to which
requisite waivers have been obtained or which individually or in the aggregate
would not have a material adverse effect on the ability of the Parent to perform
its obligations under this Agreement.
(b) Other than in connection with or in compliance with the provisions of
the DGCL, the Exchange Act, the "blue sky" laws of various states and the HSR
Act, (i) neither Parent nor Purchaser is required to submit any notice, report,
registration, declaration or other filing with any Governmental Entity in
connection with the execution or delivery of this Agreement by Parent and
Purchaser or the performance by Parent and Purchaser of their obligations
hereunder or the consummation by Parent and Purchaser of the transactions
contemplated by this Agreement and (ii) no waiver, consent, approval, order or
authorization of any Governmental Entity is required to be obtained by Parent or
Purchaser in connection with the execution or delivery of this Agreement
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by Parent and Purchaser or the performance by Parent and Purchaser of their
obligations hereunder or the consummation by Parent and Purchaser of the
transactions contemplated by this Agreement. None of the information supplied by
Parent or Purchaser for inclusion in the Proxy Statement shall, at the date the
Proxy Statement (or any amendment thereof or supplement thereto) is first mailed
to stockholders, at the time of the Company Stockholders' Meeting or at the
Effective Time, contain any untrue statement of a material fact required to be
stated therein or necessary in order to make the statements made therein in
light of the circumstances under which they were made, not misleading.
3.4 Available Funds. Parent has previously delivered to the Company a
true and correct copy of a commitment letter from Brown Brothers Harriman & Co.
to provide up to $30 million in acquisition debt financing (the "Commitment
Letter"). Assuming that the Commitment Letter is funded in accordance with its
terms, Parent has or has available to it, and will make available to Purchaser,
all funds necessary to satisfy all of Parent's and Purchaser's obligations under
this Agreement and in connection with the transactions contemplated hereby,
including, without limitation, the obligation to purchase all outstanding Shares
pursuant to the Merger and to pay all related fees and expenses in connection
with the Merger.
3.5 Board Approval. The Board of Directors of the Parent, at a meeting
duly called and held, has by at least a majority vote of those directors present
(i) approved the Merger and (ii) authorized the proper officers to execute and
deliver this Agreement.
3.6 Company Stock. As of the date of this Agreement, neither the Parent
nor any of its Subsidiaries beneficially owns any Shares.
3.7 Brokers and Finders. No broker, finder or investment banker other
than Downer & Company, the fees and expenses of which will be paid by Parent, is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Parent or any of its Subsidiaries.
3.8 No Litigation. As of the date of this Agreement, there are no
actions, suits or proceedings pending or, to the knowledge of the Parent,
threatened against the Parent or the Purchaser arising out of or in any way
related to this Agreement, the Merger or any of the transactions contemplated
hereby or thereby.
ARTICLE IV
COVENANTS
4.1 Conduct of Business by the Company. Except as required or permitted
by this Agreement or as disclosed in Section 4.1 of the Company Disclosure
Schedule, during the period from the date of this Agreement until the Effective
Time, the Company agrees as to itself and its Subsidiaries that (except to the
extent that Parent shall otherwise consent in writing) the Company and its
Subsidiaries shall conduct their respective operations according to the ordinary
course of business consistent with past practice, and each of the Company and
its Subsidiaries will use its reasonable efforts to preserve intact its present
business organization, to keep available the services of its present officers
and employees and to maintain satisfactory relationships with licensors,
licensees, suppliers, contractors, distributors, customers and others having
business relationships with it. Without limiting the generality of the
foregoing, during the period from the date of this Agreement to the Effective
Time, neither the Company nor any of its Subsidiaries shall, without the prior
written consent of Parent:
(a) amend its Certificate of Incorporation or other charter document
or Bylaws;
(b) authorize for issuance, issue, sell, deliver, pledge or agree or
commit to issue, sell, deliver or pledge (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise) any capital stock of any class or any debt or other
securities convertible into capital stock or equivalents (including,
without limitation, stock appreciation rights), or amend any of the terms
of any of the foregoing, other than the issuance of shares of capital stock
upon the exercise of outstanding options or rights under the Identified
Equity Plans;
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(c) (i) split, combine or reclassify any shares of its capital stock,
or authorize or propose the issuance or authorization of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock, adopt or approve any Rights Plan,
or repurchase, redeem or otherwise acquire any of its securities or any
securities of its Subsidiaries, or (ii) make any payment of cash or other
property to terminate, cancel or otherwise settle any outstanding Options
or any rights under the ESPP, other than in the case of clauses (i) or (ii)
above for the issuance of Shares in connection with the exercise of options
or rights under the Identified Equity Plans or the repurchase of Shares to
the extent contractually required pursuant to the standard terms of
existing employee stock repurchase agreements;
(d) (i) incur or assume any long-term Indebtedness or increase any
amounts outstanding under long-term credit facilities existing as of the
Balance Sheet Date or grant, extend or increase the amount of a mortgage
lien on any Facility; or, except in the ordinary course of business
consistent with past practice in the case of clauses (ii) through (vi)
below, (ii) incur or assume any short-term debt or increase amounts
outstanding under short-term credit facilities existing as of the Balance
Sheet Date; (iii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other Person; (iv) make any loans, advances or capital
contributions to, or investments in, any other Person; (v) pledge or
otherwise encumber shares of capital stock of the Company or any of its
Subsidiaries; or (vi) mortgage or pledge any of its assets, tangible or
intangible, or create or suffer to exist any lien thereon except as
existing on the date of this Agreement or as may be required under
agreements outstanding on the date of this Agreement to which the Company
or any of its Subsidiaries are parties;
(e) except as expressly provided in this Agreement, enter into, adopt
or amend in any manner or terminate any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation
right, restricted stock, performance unit, stock equivalent, stock purchase
agreement, pension, retirement, deferred compensation, employment,
severance, change-in-control or other employee benefit agreement, trust,
plan, fund or other arrangement for the benefit or welfare of any director,
officer or employee, or increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit not
required by any plan or arrangement as in effect as of the date of this
Agreement or enter into any contract, agreement, commitment or arrangement
to do any of the foregoing;
(f) sell, lease, license, pledge or otherwise dispose of or encumber
any material assets except in the ordinary course of business consistent
with past practice (including without limitation any indebtedness owed to
it or any claims held by it);
(g) except as otherwise permitted pursuant to Section 4.6, acquire or
agree to acquire by merging or consolidating with or by purchasing any
portion of the capital stock or assets of, or by any other manner, any
business or any corporation, partnership, limited liability company,
association or other business organization or division thereof, other than
in the ordinary course of business consistent with past practice;
(h) change any of the accounting principles or practices used by it
affecting its assets, liabilities or business, except for such changes
required by a change in generally accepted accounting principles;
(i) pay, discharge or satisfy any claims, liabilities or obligations
(whether absolute, accrued, fixed, contingent, liquidated, unliquidated or
otherwise), other than the payment, discharge or satisfaction of
liabilities (i) in the ordinary course of business consistent with past
practices or (ii) with notice to Parent, in an amount which does not exceed
$250,000 in the aggregate;
(j) except as required by their terms, enter into, terminate or breach
(or take or fail to take any action, that, with or without notice or lapse
of time or both, would become a breach) or materially amend any contract
which is or would be a Material Agreement;
(k) transfer the stock of any Subsidiary to any other Subsidiary or
any assets or liabilities to any new or, except in the ordinary course of
business consistent with past practice, existing Subsidiary;
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(l) propose or, except pursuant to the terms of Section 4.6(b), enter
into an agreement with any Person other than Parent or its affiliates
providing for the acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of substantially all assets or
otherwise);
(m) without prior consultation with the Parent (in addition to the
consent requirement described above) commence any litigation or arbitration
other than in accordance with past practice or settle any litigation or
arbitration for money damages in excess of $50,000 or if as part of such
settlement the Company or any Subsidiary would agree to any restrictions on
its operations;
(n) grant any license with respect to or otherwise convey any
intellectual property rights;
(o) elect or appoint any new directors or officers of the Company or
any Subsidiary;
(p) waive, release or amend its rights under any confidentiality,
"standstill" or similar agreement that the Company entered into in
connection with its consideration of a potential strategic transaction;
provided, however, that the Company may waive, release or amend its rights
under any such confidentiality, "standstill" or similar agreement if the
Company's Board determines, based on the advice of independent legal
counsel that failure to do so would be reasonably likely to constitute a
breach of its fiduciary duties to the Company's stockholders under
applicable law;
(q) take any action (other than (i) actions taken in the ordinary
course of business and (ii) actions contemplated by this Agreement,
including but not limited to, a Urology Disposition, a Urology Shutdown and
the consummation of the Merger) which would reduce the amount or
availability of the Company's net operating losses for federal income tax
purposes; or
(r) take, or agree in writing or otherwise to take, (i) any of the
actions described in Sections 4.1(a) through 4.1(q) or (ii) any action
which would make any of the representations or warranties of the Company
contained in this Agreement untrue or incorrect in any material respect as
of the date when made.
4.2 Sale or Shutdown of Urology Division.
(a) Notwithstanding the restrictions set forth in Section 4.1, prior to the
Closing the Company shall either (i) sell, dispose of, or transfer control of
the assets of its Urology Division (a "Urology Disposition") or (ii) terminate
the business operations of its Urology Division (a "Urology Shutdown"). Subject
to compliance with paragraphs (b) and (c) below, the Company may take any
action, including any actions referred to in Section 4.1, to the extent
necessary or desirable to effect a Urology Sale or a Urology Shutdown.
(b) The Company will not enter into any agreement for a Urology Disposition
without the prior consent of the Parent, not to be unreasonably withheld so long
as under the terms of such agreement neither the Company, its Subsidiaries nor
Parent will have any obligation or liability to the transferee in such Urology
Disposition after the closing of such Urology Disposition and the costs of
completing such Urology Disposition are reflected in the calculation of Net
Current Assets pursuant to Section 1.6.
(c) If the Company elects to effect a Urology Shutdown in lieu of a Urology
Disposition, the design, terms and implementation of such Urology Shutdown will
be subject to the prior approval of the Parent, not to be unreasonably withheld
so long as (i) the costs of completing such Urology Shutdown are reflected in
the calculation of Net Current Assets pursuant to Section 1.6 and (ii) the
design, terms and implementation of such Urology Shutdown will not otherwise
have an adverse effect on the remaining business operations of the Company and
its Subsidiaries.
4.3 Access to Information; Confidentiality.
(a) Subject to and in accordance with the terms and conditions of that
certain letter dated March 2, 1999, between Parent and the Company (the
"Confidentiality Agreement"), from the date of this Agreement to the Effective
Time, the Company shall, and shall cause its Subsidiaries, officers, directors,
employees and agents to, afford the officers, employees and agents of Parent,
Purchaser and their affiliates and the attorneys, accountants, banks, other
financial institutions and investment banks working with Parent or Purchaser,
and their respective officers, employees and agents, reasonable access, at all
reasonable times upon reasonable
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notice and in such manner as will not unreasonably interfere with the conduct of
the Company's business, to its officers, employees, agents, properties, books,
records and contracts, and shall furnish Parent, Purchaser and their affiliates
and the attorneys, banks, other financial institutions and investment banks
working with Parent or Purchaser, all financial, operating and other data and
information as they reasonably request.
(b) Subject to the requirements of law, Parent and Purchaser shall, and
shall cause their officers, employees, agents and affiliates and the attorneys,
banks, other financial institutions and investment banks who obtain such
information to, hold all information obtained pursuant to this Agreement or the
Confidentiality Agreement in confidence in accordance with the terms and
conditions of the Confidentiality Agreement and in the event of termination of
this Agreement for any reason, Parent shall promptly return all nonpublic
documents obtained from the Company or any of its Subsidiaries and any copies
made of such documents for Parent and all documentation and other material
prepared by Parent, Purchaser or their advisors based on written nonpublic
information furnished by the Company or its advisors shall be destroyed except
for those which Parent or its counsel deems advisable to retain in connection
with pending or future litigation.
(c) No investigation pursuant to this Section 4.3 shall affect any
representations or warranties of the parties herein or the conditions to the
obligations of the parties hereto.
4.4 Proxy Statement. Promptly after execution and delivery of this
Agreement, the Company shall prepare and shall file with the SEC as soon as is
reasonably practicable a preliminary Proxy Statement, together with a form of
proxy, with respect to the meeting of the Company's stockholders at which the
stockholders of the Company will be asked to vote upon and approve this
Agreement and the Merger and shall use all reasonable efforts to have the Proxy
Statement and form of proxy cleared by the SEC as promptly as practicable, and
promptly thereafter shall mail the definitive Proxy Statement and form of proxy
to stockholders of the Company. The term "Proxy Statement" shall mean such proxy
or information statement at the time it initially is mailed to the Company's
stockholders and all amendments or supplements thereto, if any, similarly filed
and mailed. The information provided and to be provided by Parent, Purchaser and
the Company, respectively, for use in the Proxy Statement shall, on the date the
Proxy Statement is first mailed to the Company's stockholders and on the date of
the Special Meeting (as hereinafter defined), not contain an untrue statement of
a material fact or omit to state any material fact necessary in order to make
such information, in light of the circumstances under which it was provided, not
misleading, and the Company, Parent and Purchaser each agree to correct any
information provided by it for use in the Proxy Statement which shall have
become false or misleading in any material respect. The Proxy Statement shall
comply as to form in all material respects with all applicable requirements of
federal securities laws. The Proxy Statement shall contain the recommendation of
the Board of Directors that the stockholders of the Company vote to adopt and
approve the Merger and this Agreement.
4.5 Meeting of Stockholders of the Company. Promptly after execution and
delivery of this Agreement, the Company shall take all action necessary, in
accordance with the DGCL and its Amended and Restated Certificate of
Incorporation and Bylaws, to convene a meeting of its stockholders (the "Special
Meeting") as promptly as practicable to consider and vote upon this Agreement
and the Merger. The Company shall use reasonable efforts to solicit from
stockholders of the Company proxies in favor of such adoption and approval and
to take all other action necessary to secure the vote or consent of stockholders
required by the DGCL to effect the Merger. At the Special Meeting, Parent and
its direct and indirect Subsidiaries shall vote, or cause to be voted, all of
the Shares then owned by Parent and its direct and indirect Subsidiaries in
favor of the Merger.
4.6. No Solicitation by the Company.
(a) Except as provided in Section 4.2(a) or (b) or Section 4.6(b), the
Company agrees that, from the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement pursuant to Section 6.1, the
Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize or permit any of its directors, officers or employees or any
representative retained by it (including the Company's Financial Advisor) or any
of its Subsidiaries to, directly or indirectly through another Person, (i)
solicit, initiate, entertain or encourage (including by way of furnishing
non-public information) any inquiries or the making of any proposal or offer
from any third party other than the Parent or its Affiliates regarding any
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merger, sale of substantial assets, sale or purchase of (or right to sell or
purchase) shares of capital stock (other than pursuant to the exercise of stock
options outstanding on the date of this Agreement) or similar transactions
involving the Company or any of its Subsidiaries (an "Acquisition Proposal") or
(ii) participate in any discussions or negotiations regarding any Acquisition
Proposal; provided, however, that if, at any time, the Board of Directors of the
Company determines in good faith, after consultation with and receipt of advice
from outside counsel, that it is necessary to do so in order to act in a manner
consistent with its fiduciary duties to the Company's stockholders under
applicable law, the Company may, in response to what is reasonably likely to
lead to a Superior Proposal (as defined below) and subject to delivering a
Company Notice (as defined in paragraph (c) below) and compliance with the other
provisions of paragraph (c) below, following delivery of the Company Notice (x)
furnish information with respect to the Company and its Subsidiaries to any
Person making such Acquisition Proposal pursuant to a confidentiality agreement
entered into between such Person and the Company with terms no less favorable to
the Company than those contained in the Confidentiality Agreement and (y)
participate in discussions or negotiations regarding such Acquisition Proposal.
Immediately following the execution and delivery of this Agreement by the
parties hereto, the Company will cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted with respect
to the foregoing. Promptly following the execution of this Agreement by the
parties hereto, the Company will request each Person that has, prior to the date
of this Agreement, executed a confidentiality agreement in connection with its
consideration of an Acquisition Proposal to return or destroy all confidential
information heretofore furnished to such Person by or on behalf of the Company
or any of its Subsidiaries.
(b) Except as expressly permitted by this Section 4.6, neither the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to the Parent,
the approval or recommendation by such Board of Directors or such committee of
the Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any Acquisition Proposal, or (iii) cause the Company to
enter into any letter of intent, agreement in principle, acquisition agreement
or other similar agreement (each, a "Company Acquisition Agreement") related to
any Acquisition Proposal. Notwithstanding the foregoing, if at any time the
Board of Directors of the Company determines in good faith, after consultation
with and receipt of advice from outside counsel, that it is necessary to do so
in order to act in a manner consistent with its fiduciary duties to the
Company's stockholders under applicable law, subject to compliance with
paragraph (c) below, the Board of Directors of the Company (x) may withdraw or
modify, or propose publicly to withdraw or modify, any approval or
recommendation by such Board of Directors or such committee of the Merger or
this Agreement and (y) may approve or recommend, or propose publicly to approve
or recommend, a Superior Proposal and (z) may cause the Company to enter into a
Company Acquisition Agreement related to a Superior Proposal and may terminate
this Agreement pursuant to Section 6.1(d) and accept such Superior Proposal. For
purposes of this Agreement, a "Superior Proposal" means any Acquisition Proposal
providing for the merger of the Company or the acquisition of all or
substantially all of the capital stock or assets of the Company which (i) the
Board of Directors of the Company determines in good faith is reasonably likely
to be consummated, taking into account the Person making the proposal and all
legal, financial and regulatory aspects of the proposal, including any break-up
fees, expense reimbursement provisions and conditions to consummation, and (ii)
the Board of Directors determines in good faith (after consultation with and
based upon the advice of its outside financial advisors) would, if consummated,
result in a more favorable transaction to the Company's stockholders than the
transaction contemplated by this Agreement. Notwithstanding the existence of one
or more Superior Proposals or anything in this Section 4.6 to the contrary, the
stockholders of the Company that are parties to the Stockholder Agreements shall
remain bound thereby, and such Stockholder Agreements shall remain in full force
and effect.
(c) In addition to the obligations of the Company as set forth in
paragraphs (a) and (b) of this Section 4.6, the Company shall advise the Parent
orally and in writing of any request for non-public information, any Acquisition
Proposal, including all of the material proposed terms of such Acquisition
Proposal, or any decision by the Company to take any of the actions permitted in
clauses (x) or (y) of paragraph (a) above (with any such notice referred to as a
"Company Notice"). Any such Company Notice will be delivered promptly after (and
in no event later than 48 hours after) receipt of any request for non-
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public information or of any Acquisition Proposal and prior to the Company
taking any of the actions permitted in clauses (x) or (y) of paragraph (a)
above. In addition, any Company Notice relating to any of those third parties
previously identified by Parent and listed in Section 4.6 of the Company
Disclosure Letter will disclose the identity of such third party. In addition,
in the event the Company intends to enter into a Company Acquisition Agreement
relating to a Superior Proposal, the Company will deliver a Company Notice at
least 48 hours prior to entering into such Company Acquisition Agreement, which
Company Notice will identify the third party (whether or not previously
disclosed) and the material proposed terms of such Superior Proposal. Subject to
confidentiality agreement requirements imposed by any such third party and which
the Board of Directors determines in good faith, after consultation with and
receipt of advice from outside counsel, are necessary to enter into in order to
act in a manner consistent with its fiduciary duties to the Company's
stockholders under applicable law, the Company will keep the Parent reasonably
informed of the status of any such request or Acquisition Proposal and will
update the information required to be provided in the Company Notice upon the
request of the Parent.
4.7 Public Announcements. Parent and Purchaser on the one hand and the
Company on the other hand will consult with each other before, but will not be
required to obtain the other party's consent with respect to, issuing any press
release, any filing with the SEC on Form 8-K or otherwise making any public
statements with respect to this Agreement or the Merger or the other
transactions contemplated hereby, and shall not issue any such press release,
SEC Form 8-K filing or make any such public statement prior to such
consultation, except to the extent that compliance with legal requirements
requires a party to issue a press release or public announcement or make an 8-K
filing prior to such consultation. This Section 4.7 shall supersede any
conflicting provisions in the Confidentiality Agreement.
4.8 Notification of Certain Matters.
(a) The Company shall give prompt notice (which notice shall state that it
is delivered pursuant to Section 4.8 of this Agreement) in writing to Parent,
and Parent and Purchaser shall give prompt notice in writing to the Company, of
(i) the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect at any time
from the date of this Agreement through the Effective Time and (ii) any material
failure of the Company, Parent or Purchaser, as the case may be, or of any
officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, no such notification shall affect the
representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
(b) The Company shall give prompt notice in writing (which notice shall
state that it is delivered pursuant to Section 4.8 of this Agreement) to Parent
of any occurrence that has had or may reasonably be expected to have a Material
Adverse Effect.
4.9 Officers' and Directors' Indemnification; Insurance.
(a) The Surviving Corporation agrees that for a period ending on the third
anniversary of the Effective Time, the Surviving Corporation will maintain all
rights to indemnification (including with respect to the advancement of expenses
incurred in the defense of any action or suit) existing on the date of this
Agreement in favor of the present and former directors, officers, employees and
agents of the Company as provided in the Company's Certificate of Incorporation
and By-laws and any agreements listed as exhibits to the 1998 Form 10-K
("Existing Indemnification Agreements"), in each case as in effect on the date
of this Agreement, and that during such period, neither the Certificate of
Incorporation nor the Bylaws of the Surviving Corporation nor any of such
Existing Indemnification Agreements shall be amended to reduce or limit the
rights of indemnity afforded to the present and former directors, officers,
employees and agents of the Company, or the ability of the Surviving Corporation
to indemnify them, nor to hinder, delay or make more difficult the exercise of
such rights or indemnity or the ability to indemnify.
(b) The Surviving Corporation agrees to indemnify to the fullest extent
permitted under its Certificate of Incorporation, its Bylaws, such Existing
Indemnification Agreements and applicable law the present and former directors,
officers, employees and agents of the Company against all losses, damages,
liabilities or
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claims made against them arising from their service in such capacities prior to
and including the Effective Time, to at least the same extent as such persons
are currently permitted to be indemnified pursuant to the Company's Certificate
of Incorporation and Bylaws and such Existing Indemnification Agreements, for a
period ending on the third anniversary of the Effective Time.
(c) Should any claim or claims be made against any present or former
director, officer, employee or agent of the Company, arising from such person's
service as such, on or prior to the third anniversary of the Effective Time, the
provisions of this Section 4.9 respecting the Certificate of Incorporation and
Bylaws and the obligation of indemnity of the Surviving Corporation shall
continue in effect until the final disposition of all such claims.
(d) In the event that the Surviving Corporation or any of its successors or
assigns consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
then and in each such case, proper provisions shall be made so that the
successors and assigns of the Surviving Corporation shall assume the obligations
of the Surviving Corporation, set forth in this Section 4.9.
(e) The provisions of this Section 4.9 are intended to be for the benefit
of, and shall be enforceable by, each indemnified party and such party's heirs
and representatives.
(f) Parent will cause to be maintained for a period of three years from the
Effective Time the Company's current directors' and officers' insurance and
indemnification policy to the extent that it provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") for all persons who
are directors and officers of the Company on the date of this Agreement, so long
as the annual premium therefor would not be in excess of 200% of the last annual
premium paid prior to the date of this Agreement (the "Maximum Premium"). If the
existing D&O Insurance expires, is terminated or cancelled during such
three-year period, Parent will use all reasonable efforts to cause to be
obtained as much D&O Insurance as can be obtained for the remainder of such
period for an annualized premium not in excess of the Maximum Premium, on terms
and conditions no less advantageous than the existing D&O Insurance.
(g) The Parent agrees that during the period ending on the third
anniversary of the Effective Time it will either:
(i) cause the Surviving Corporation to maintain a Consolidated
Tangible Net Worth (as defined below) not less than the Company's
Consolidated Tangible Net Worth immediately prior to the Effective Time
(the "Closing CTNW"); or
(ii) in the event it fails or elects not to comply with clause (i)
above, guaranty the Surviving Corporation's indemnification obligations set
forth in this Section 4.9, provided that the Parent's obligations under
this clause (ii) shall not exceed, in the aggregate, the Closing CTNW less
the amount of any proceeds funded under the D&O Insurance.
For purposes of this Agreement, "Consolidated Tangible Net Worth" means, at
any time, the (x) sum of the Company's tangible assets at such time less (y) the
Company's total liabilities at such time, determined on a consolidated basis in
accordance with GAAP.
4.10 Benefit Plans.
(a) [Intentionally Omitted.]
(b) Except as provided in paragraph (c) of this Section 4.10, the Surviving
Corporation shall honor, without modification, the employment and consulting
agreements of the Company and its Subsidiaries that are identified in Section
4.10(b) of the Company Disclosure Letter, as such agreements shall be in effect
in accordance with the terms of this Agreement (including the Company
obligations under Section 4.1) at the Effective Time.
(c) With respect to those employees of the Company and its Subsidiaries
listed in Section 4.10(c) of the Company Disclosure Letter (including Schedule
4.1 thereto), the Company will terminate their employment effective at or before
the Effective Time. If such termination is not permitted pursuant to the
applicable
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employment agreement, if any, the Company will have received any required
consents prior to the Effective Time for the early termination thereof in
accordance with the preceding sentence. The Company shall pay, on or before the
Closing Date, to those employees of the Company and its Subsidiaries who are
listed in Section 4.10(c) of the Company Disclosure Letter (including Schedule
4.1 thereto), all severance and other payments required to be paid pursuant to
the terms of the employment agreement between such employee and the Company or
as otherwise set forth in Schedule 4.1 of the Company Disclosure Letter, as such
agreement shall then be in effect in accordance with the terms of this Agreement
(including the Company's obligations under Section 4.1). The Company will also
maintain certain benefits for such employees as set forth in paragraph (e)
below. Notwithstanding the foregoing, the payments to be made pursuant to this
Section 4.10(c) (including the cost of the benefits referred to in paragraph
(e)) to employees of the Company and its Subsidiaries shall not exceed $1.1
million in the aggregate.
(d) Effective as of the Effective Time, the Parent agrees to cause the
Surviving Corporation to abide by the following employment arrangements for the
employees of the Company Bivona's Subsidiary:
(i) The Surviving Corporation will negotiate in good faith with the
President of the Company's Bivona Subsidiary and those senior management
employees reporting directly to him (herein, "Bivona Senior Managers")
regarding the terms of new employment agreements and, if agreement is
reached on such terms, to enter into new employment agreements. With
respect to any existing employment agreements that terminate prior to
December 31, 1999, the Surviving Corporation agrees (i) to honor the
existing employment agreements (including any severance provisions) of the
Bivona Senior Managers until the earlier of the time new employment
agreements are entered into and December 31, 1999 and (ii) if any Bivona
Senior Managers subject to such existing employment agreements are
terminated without cause (as determined in good faith by the Surviving
Corporation's Board of Directors) on or after January 1, 2000 and prior to
June 30, 2000, they will be entitled to six (6) months severance, to be
paid out over six (6) months and reduced dollar for dollar by any
compensation earned by such Binova Senior Manager from a third party during
such period. The provisions of the preceding sentence will be superseded by
the terms of any new employment agreement entered into by the Parent or the
Surviving Corporation and the applicable Bivona Senior Manager. With
respect to any existing employment agreements that terminate after December
31, 1999, the Surviving Corporation will honor such existing employment
agreement (including any severance provisions) until they are either
superseded by any new employment agreement entered into by the Parent or
the Surviving Corporation and the applicable Bivona Senior Manager or the
termination of such existing employment agreement pursuant to its terms,
whichever is earlier.
(ii) The Surviving Corporation will pay the Bivona Senior Managers and
certain other eligible Bivona Employees as described in Section 4.10(d) of
the Company Disclosure Letter the amount of any bonuses earned in
accordance with the current 1999 Bonus Plan on a pro rata basis for the
period of fiscal year 1999 prior to the Effective Time. The Company will
not be obligated to pay any amount in excess of the accrual for such bonus
included in the calculation of Net Current Assets pursuant to Section
1.6(f)(ii)(w). Any such bonuses will be paid within 70 days after the
Effective Time.
(iii) For all other employees of the Company's Bivona Subsidiary who
are retained after the Effective Time as employees-at-will, the Surviving
Corporation agrees not to reduce their base wages or compensation and to
maintain comparable benefits, determined in the aggregate, for at least a
period of one year after the Effective Time, or for such shorter period as
any such employee remains employed by the Company or its Bivona Subsidiary.
(e) Benefit Coverage. Any employee of the Company or its Urology Division
whose employment is terminated after the date of this Agreement and on or before
the Effective Time (with all such employees referred to as "Severed Employees"),
and his or her eligible spouse and dependents, shall be entitled to continued
coverage under the Company's medical and dental plans, life insurance and
accidental death and
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dismemberment insurance (collectively, the "Continuation Benefits"), on and
subject to all of the following terms and conditions:
(i) Those Severed Employees who are listed in Schedule 4.1 to the
Company Disclosure Letter will be offered Continuation Benefits for
themselves and their eligible spouse and dependents pursuant to this
paragraph 4.10(e)(i) for the severance period listed in Schedule 4.1 (the
"Severance Period"). In this case and for this period such Continuation
Benefits will be provided at Company expense, provided that in no event
will the Company be obligated to spend more on such benefits than the
amounts set forth for such Continuation Benefits on Schedule 4.1 to the
Company Disclosure Letter (under the heading "Estimated Benefits").
(ii) All Severed Employees (whether or not listed in Schedule 4.1 to
the Company Disclosure Letter) who elect to continue coverage under the
Company's medical plan pursuant to the federal law known as "COBRA" (or
similar state insurance continuation laws) will be offered Continuation
Benefits for themselves and their eligible spouse and dependents pursuant
to this paragraph 4.10(e)(ii). In the case of Severed Employees not listed
on Schedule 4.1 to the Company Disclosure Letter, Continuation Benefits
will be offered pursuant to this paragraph (e)(ii) for the entire period
during which the Company is required under COBRA (or similar state
insurance continuation laws) to offer medical benefits (with such period
referred to as the "COBRA Coverage Period"). In the case of Severed
Employees listed in Schedule 4.1 to the Company Disclosure Letter,
Continuation Benefits will be offered pursuant to this paragraph
4.10(e)(ii) for the period from the expiration of the Severed Employee's
Severance Period to the end of his or her COBRA Coverage Period. All
Continuation Benefits provided to Severed Employees not listed in Schedule
4.1 to the Company Disclosure Letter and all Continuation Benefits provided
after the end of the applicable Severance Period to Severed Employees
listed in Schedule 4.1 to the Company Disclosure Letter will be provided
solely at the expense of the Severed Employee or eligible spouse or
dependent and otherwise on the same terms and conditions generally
applicable to COBRA recipients prior to the Closing Date.
(iii) All Severed Employees participating in the Company's medical
expense reimbursement plan at termination will also be eligible for
continued participation under that plan at their expense for the COBRA
Coverage Period, but in no event beyond the end of the current fiscal year
of the plan.
(iv) The Company may substitute comparable coverage of another insurer
for any Continuation Benefit provided through an insurance policy in the
event the issuer of such policy shall terminate or decline to renew at
generally applicable rates such policy. Maintenance of any of the
Continuation Benefits during the Severance Period or the COBRA Coverage
Period is also subject to the consent of any insurer providing a policy
with respect to such Continuation Benefit if necessary to enable the
continued coverage of former employees and their eligible spouses and
dependents for the Severance Period or COBRA Coverage Period, as
applicable.
(v) Except as otherwise provided in paragraph (e)(i) above, neither
the Parent nor the Purchaser nor the Company will have any liability under
this paragraph (e) or otherwise if any Severed Employee or qualified
beneficiary fails for any reason to pay any required premiums or other
amounts under the applicable Continuation Benefit plan or medical expense
reimbursement plan.
(vi) No Continuation Benefit shall be required to be offered to any
spouse or dependent of a Severed Employee if such spouse or dependent would
not otherwise be eligible for coverage as a spouse or dependent of an
employee.
4.11 Additional Agreements.
(a) Subject to the terms and conditions hereof, each of the parties to this
Agreement agrees to take, or cause to be taken, all actions, and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement (including consummation of the
Merger) and to cooperate with each other in connection with the foregoing.
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(b) Subject to the terms and conditions hereof, each of the parties to this
Agreement agrees (i) to obtain all necessary waivers, consents and approvals
from other parties to loan agreements, leases, licenses and other contracts, and
(ii) to obtain all necessary consents, approvals and authorizations as required
to be obtained under any federal, state or foreign law or regulations,
including, but not limited to, those required under the HSR Act, to defend all
lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby, to lift or rescind any
injunction or restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated hereby, to effect all
necessary registrations and filings, including, but not limited to, filings
under the HSR Act and submissions of information requested by Governmental
Entities, and to fulfill all conditions to this Agreement.
4.12 Company Indebtedness. Prior to the Effective Time, the Company shall
cooperate with Parent in taking such actions as are reasonably appropriate or
necessary in connection with the redemption, prepayment, modification,
satisfaction or elimination of any outstanding Indebtedness of the Company or
any of its Subsidiaries with respect to which a consent is required to be
obtained to effectuate the Merger and the transactions contemplated by this
Agreement and has not been so obtained.
4.13 Other Actions by the Company. If any "fair price," "moratorium,"
"control share acquisition," "shareholder protection" or other form of
anti-takeover statute, regulation or charter provision or contract is or shall
become applicable to the Merger or the transactions contemplated hereby, the
Company and the Board of Directors of the Company shall grant such approvals and
take such actions as are necessary under such laws and provisions so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate or minimize the
effects of such statute, regulation, provision or contract on the transactions
contemplated hereby.
4.14 Litigation Cooperation. Promptly upon execution of this Agreement
and until the Effective Time, each of the Company, Parent and Purchaser shall
cooperate with each other in connection with any litigation by a third party
arising out of or in connection with this Agreement or any of the transactions
contemplated by this Agreement, and shall take such steps as are necessary to
establish successfully a joint defense privilege, including without limitation
coordinating all depositions in such actions.
4.15 Stock Options.
(a) Immediately prior to the Effective Time, Company and its Subsidiaries
shall cancel all outstanding Options (as described in Section 1.7) and shall
comply with all requirements regarding income tax withholding in connection
therewith. In addition to the foregoing, Company will take all steps necessary
to cause the Plans and the ESPP to be terminated on or prior to the Effective
Time, and to satisfy Purchaser that no holder of Options or participant in any
Plans will have any right to acquire any interest in Company or Purchaser as a
result of the exercise of Options or other rights pursuant to such Plans and the
ESPP on or after the Effective Time.
(b) All amounts payable pursuant to this Section 4.15 shall be subject to
any required withholding of taxes and shall be paid without interest. The
Company shall use its best efforts to obtain all consents of the holders of the
Options as shall be necessary to effectuate the foregoing. Notwithstanding
anything to the contrary contained in this Agreement, payment shall, at Parent's
request, be withheld in respect of any Option until all necessary consents are
obtained.
4.16 Future Filings. The Company will deliver to Parent as soon as they
become available true and complete copies of any report or statement mailed by
it to its stockholders generally or filed by it with the SEC subsequent to the
date of this Agreement and prior to the Effective Time. As of their respective
dates, such reports and statements (excluding any information therein provided
by Parent or Purchaser, as to which the Company makes no representation) will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading and will
comply as to form in all material respects with all applicable requirements of
law. The consolidated financial statements of the Company to be included in such
reports and statements (excluding any information therein provided by Parent or
Purchaser, as to which the Company makes no representation) will be prepared in
accordance with generally accepted
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accounting principles applied on a consistent basis throughout the periods
involved (except (i) as otherwise indicated in such financial statements and the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
permitted under Form 10-Q under the Exchange Act) and will present fairly the
consolidated financial position, results of operations and cash flows of the
Company as of the dates thereof and for the periods indicated therein (subject,
in the case of any unaudited interim financial statements, to normal year-end
audit adjustments). Parent shall deliver to the Company as soon as they become
available, true and complete copies of any report or statement mailed by it to
the Company's stockholders generally or filed by it with the SEC subsequent to
the date of this Agreement and prior to the Effective Time.
4.17 Section 203 of the DGCL. From and after the date of this Agreement,
the Company will not, except as otherwise provided herein, approve any
acquisition of shares of Common Stock by any Person which would result in such
Person becoming an interested stockholder (as such term is defined in Section
203 of the DGCL) or otherwise be subject to Section 203 of the DGCL.
4.18 Company Actions Relating to Tax Matters. Without the prior consent
of Parent (which shall not be unreasonably withheld and which shall be deemed
given if there is no response within twenty business days of a request for
consent), neither the Company nor any Subsidiary shall make or change any
election, request permission of any Tax authority or to change any accounting
method, file any amended Tax return, enter into any closing agreement, settle
any Tax claim or assessment relating to the Company or its Subsidiaries,
surrender any right to claim a refund of Taxes, or consent to any extension or
waiver of the limitation period applicable to any Tax claim or assessment
relating to the Company or its Subsidiaries, if any such election, adoption,
change, amendment, agreement, settlement, surrender or consent would have the
effect of materially increasing the Tax liability of the Company, any
Subsidiary, or the Surviving Corporation (or Parent).
4.19 Environmental Testing and Accrual.
(a) Parent and/or Purchaser may cause such additional environmental testing
to be conducted at the Bivona Site (as defined in Section 2.21 of the Company
Disclosure Letter) by its environmental consultants/engineers (the
"Environmental Consultants") as the Environmental Consultants, in their
professional judgment, deem necessary or advisable to address the Environmental
Contingency (as defined in Section 2.21 of the Company Disclosure Letter). The
procedure and scope of work to be followed by Parent and Purchaser and their
Environmental Consultants in connection with the additional environmental
testing to be conducted at the Bivona Site will be agreed to by the Parent and
the Company. The procedure shall include, without limitation, the right of the
Company's environmental consultants to be present at any location where the
Environmental Consultants take samples in connection with the Environmental
Contingency, the right of the Company's environmental consultants to take split
samples at any such location, the selection of a testing laboratory satisfactory
to the Company and its environmental consultants and the simultaneous providing
of laboratory test results to Parent and Purchaser and the Company. Based on the
results of such tests and any reporting, remediation or containment recommended
by each party's consultants, the parties shall agree on an accrual for the
estimated costs and expenses to contain and remediate the contamination and/or
pollutants (including any off-site migration) at the Bivona Site to the extent
required such that the Bivona Site complies with Environmental Laws and the plan
of containment and remediation would receive any required approval of the
applicable Indiana regulatory authority (collectively, the "Remediation
Standard")(such estimated costs and expenses shall be referred to herein as the
"Environmental Estimate"). The following is referred to herein as the
"Environmental Accrual": the sum of (i) the Environmental Estimate, as
determined pursuant to this Section 4.19; and (ii) in the event the
Environmental Estimate exceeds $300,000 and Parent and the Company agree that
either (A) or (B) below is appropriate, either (A) the premium required to
obtain "cost-cap" insurance covering any costs required above the Environmental
Estimate to make the Bivona Site meet the Remediation Standard (the
"Environmental Insurance"), the coverage limit of which Environmental Insurance
shall be no less than two (2) times the Environmental Estimate, or (B) the
difference between the Environmental Estimate and the total fixed price (the
"Fixed Price") for which an environmental consultant/engineer satisfactory to
Parent and the Company agrees (1) to execute and complete a plan of containment
and remediation meeting the Remediation Standard in a manner such that the
Bivona Site meets the Remediation Standard and (2) to guarantee any cost over
such Fixed Price. Any election between (A) and (B) above shall be in the
Company's sole discretion.
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(b) If the parties are unable to agree on the Remediation Standard and/or
the Environmental Estimate and/or the Environmental Accrual, the parties will
select a third independent environmental consultant/engineer (the "Third
Consultant") to review the parties' proposed Remediation Standards,
Environmental Estimates and Environmental Accruals. The Third Consultant shall
be instructed (i) to make its own determination of the Remediation Standard and
Environmental Estimate and Environmental Accrual meeting the requirements of
paragraph (a) above (including a determination whether or not (A) or (B) in
paragraph (a) above is appropriate, and the coverage limits of Environmental
Insurance, if any, to be obtained) within fourteen (14) days after selection by
the parties and (ii) that its Environmental Accrual is to be a fixed number (as
compared to a range of numbers) representing the Third Consultant's best
estimate of the costs and expenses referred to in paragraph (a) above, but the
Third Consultant's estimate of the Environmental Accrual is to fall within the
range represented by the parties' respective proposals for the Environmental
Accrual. The Parent and the Company and their environmental consultants shall
meet with the Third Consultant as requested to discuss the bases of their
respective proposals. The Third Consultant's determination of the Remediation
Standard and the Environmental Estimate and the Environmental Accrual will be
final and binding on the parties thereto.
ARTICLE V
CONDITIONS OF MERGER
5.1 Conditions to the Obligations of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of each of the following
conditions:
(a) This Agreement and the Merger shall have been approved and adopted
by the requisite vote of the stockholders of the Company.
(b) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(c) No temporary restraining order, preliminary or permanent
injunction, judgment or other order, decree or ruling nor any statute,
rule, regulation or order shall be in effect which would make the
acquisition or holding by Parent or its affiliates of Shares or shares of
Common Stock of the Surviving Corporation illegal or otherwise prevent the
consummation of the Merger.
(d) The parties shall not have agreed pursuant to Section 4.19(a) that
the Environmental Accrual (as defined in Section 4.19) exceeds $1,000,000
and the Third Consultant shall not have determined pursuant to Section
4.19(b) that the Environmental Accrual exceeds $1,000,000; provided that,
in the event that the parties or the Third Consultant so determine that the
Environmental Accrual exceeds $1,000,000, this paragraph (d) shall not be a
condition to the Company's obligations to consummate the Merger if the
Parent agrees that the Environmental Accrual will be fixed and limited to
$1,000,000 for purposes of the calculation of Net Current Assets pursuant
to Section 1.6(f)(ii)(x) above.
5.2. Conditions Precedent to Parent's and Purchaser's Obligations. Parent
and Purchaser shall be obligated to perform the acts contemplated for
performance by them under Article 1 only if each of the following conditions is
satisfied at or prior to the Closing Date, unless any such condition is waived
in writing by Parent and Purchaser:
(a) The representations and warranties of the Company set forth in
Article 2 shall, individually and in the aggregate, be true and correct in
all material respects (without giving duplicative effect to any materiality
qualification contained in the applicable representation or warranty) as of
the Closing Date with the same force and effect as though made again at and
as of the Closing Date, except for any representations and warranties that
address matters only as of a particular date (which shall remain true and
correct in all material respects (without giving duplicative effect to any
materiality qualification contained in the applicable representation or
warranty) as of such date) and except for changes required by this
Agreement.
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(b) The Company shall have performed and complied (i) in all respects
its covenants under Section 4.1(d)(i), Section 4.1(c), Section 4.2 and
Section 4.15 and (ii) in all material respects (without giving duplicative
effect to any materiality qualification contained in the applicable
obligation) with all other covenants and agreements contained in this
Agreement required to be performed or complied with by it on or before the
Closing Date.
(c) Since the date of this Agreement, there shall not have been the
occurrence of any event or condition that has had or could reasonably be
expected to have a Material Adverse Effect other than (i) changes relating
to the economy in general or the industries of the Company and its
Subsidiaries in general and not specifically relating to the Company or any
of its Subsidiaries or (ii) changes due to the disruption of the Company's
or its Subsidiary's businesses as a result of any rumors, speculation, or
announcement of a potential merger involving the Company or the execution
of this Agreement or the Merger or (iii) changes related to the
Environmental Contingency.
(d) The Company shall have executed and delivered to Purchaser and
Parent at and as of the Closing a certificate, duly executed by the
Company's President and Chief Financial Officer, in form and substance
reasonably satisfactory to Parent and Parent's counsel, certifying that to
such officers' knowledge, the conditions specified in (a), (b) and (c) have
been satisfied.
(e) The aggregate NOLs existing immediately prior to the Effective
Time shall not be less than $7,500,000.
5.3. Conditions to Obligation of the Company. The Company shall be
obligated to perform the acts contemplated for performance by it under Article 1
only if each of the following conditions is satisfied at or prior to the Closing
Date, unless any such condition is waived in writing by the Company:
(a) The representations and warranties of the Parent and Purchaser set
forth in Article 3 shall, individually and in the aggregate, be true and
correct in all material respects (without giving duplicative effect to any
materiality qualification contained in the applicable representation or
warranty) as of the Closing Date with the same force and effect as though
made again at and as of the Closing Date, except for any representations
and warranties that address matters only as of a particular date (which
shall remain true and correct in all material respects (without giving
duplicative effect to any materiality qualification contained in the
applicable representation or warranty) as of such date) and except for
changes required by this Agreement.
(b) The Parent and Purchaser shall have performed and complied in all
material respects (without giving duplicative effect to any materiality
qualification contained in the applicable obligation) with all covenants
and agreements contained in this Agreement required to be performed or
complied with by them on or before the Closing Date.
(c) The Parent and Purchaser shall have executed and delivered to the
Company at and as of the Closing a certificate, duly executed by the
Parent's and Purchaser's Presidents and Chief Financial Officers, in form
and substance reasonably satisfactory to the Company and the Company's
counsel, certifying that to such officers' knowledge, the conditions
specified in (a) and (b) have been satisfied.
(d) The Parent shall have received the financing referred to in
Section 3.4 or other financing sufficient for it to perform its obligations
under this Agreement.
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ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
6.1 Termination. This Agreement may be terminated, at any time prior to
the Effective Time, whether before or after approval by the stockholders of the
Company:
(a) by mutual written agreement of the Boards of Directors of Parent
and the Company; or
(b) by either Parent or Company:
(i) if any court of competent jurisdiction in the United States or
other United States governmental body shall have issued an order, decree
or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable; or
(ii) if there has been a material breach by the other party of any
representation, warranty, covenant or agreement set forth in this
Agreement and such breach is capable of being cured and is cured prior
to the Closing Date, except with respect to any breach of Section 4.6,
which must be cured within five (5) days after written notice from the
Parent specifying such breach;
(c) by Parent, if the Board of Directors of the Company or any
committee thereof shall have approved or recommended an Acquisition
Proposal by a third party, or withdrawn or modified in a manner adverse to
Parent or Purchaser its approval or recommendation of this Agreement or the
transactions contemplated hereby, or failed to mail the Proxy Statement to
its stockholders or failed to include in such Proxy Statement such
recommendation (including the recommendation that the stockholders of the
Company vote in favor of the Merger); or publicly resolved to do any of the
foregoing; or
(d) by the Company, pursuant to Section 4.6, in the event the Company
has complied with all the provisions of Section 4.6 and has determined to
accept a Superior Proposal; provided that (A) at the time of terminating
this Agreement pursuant to this Section 6.1(d), the Company pay the
Break-Up Fee referred to in Section 6.3(b), (B) the Company shall have
provided Parent with forty-eight (48) hours' prior written notice of the
Company's decision to so terminate (the "Company Termination Notice"); and
(C) the stockholders of the Company that are parties to the Stockholder
Agreement shall continue to be bound thereby. The Company Termination
Notice shall indicate in reasonable detail the terms and conditions of such
Superior Proposal, including, without limitation, the amount and form of
the proposed consideration and whether such Superior Proposal is subject to
any material conditions.
(e) by either the Company or the Parent in the event the Effective
Time has not occurred by the later to occur of (i) July 31, 1999, and (ii)
60 days after the later of the clearance by the SEC of the Proxy Statement
or the expiration or termination of the waiting period (including any
extensions) under the HSR Act (with such date referred to as the "Outside
Date").
6.2 Procedure and Effect of Termination. In the event of the termination
of this Agreement by the Company or Parent or both of them pursuant to Section
6.1, the terminating party shall provide written notice of such termination to
the other party and this Agreement shall forthwith become void and there shall
be no liability on the part of Parent, Purchaser or the Company, except as set
forth in this Section 6.2 and in Sections 4.3(b) and 6.3 of this Agreement. The
foregoing shall not relieve any party for liability for damages actually
incurred as a result of any breach of this Agreement. The Confidentiality
Agreement and Sections 4.3(b), 6.2, 6.3, 7.2, 7.3 and 7.5 of this Agreement
shall survive the termination of this Agreement.
6.3 Fees and Expenses. (a) Except as otherwise provided in this Agreement
and whether or not the transactions contemplated by this Agreement are
consummated, all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses. Parent and Purchaser understand and agree that the Company will pay at
the Closing its financial advisory, legal and accounting expenses, including
without limitation all amounts owed to the Company's Financial Advisor.
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(b) In the event that the Parent terminates this Agreement pursuant to
Section 6.1(c) or the Company terminates this Agreement pursuant to Section
6.1(d), then the Company shall pay to the Parent the amount of $500,000 as
reimbursement of the Parent's expenses and as liquidated damages (the
"Break-Up Fee"). Any such payment shall be made within three (3) business
days after a termination pursuant to Section 6.1(c) or at the time of any
termination pursuant to Section 6.1(d).
6.4 Amendment. This Agreement may be amended by each of the parties by
action taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that (i) such amendment shall be
in writing signed by all of the parties, and (ii) after adoption of this
Agreement and the Merger by the stockholders of the Company, no amendment may be
made without the further approval of the stockholders of the Company which
reduces the Per Share Merger Consideration or changes the form thereof or
changes any other terms and conditions of this Agreement if the changes, alone
or in the aggregate, would materially adversely affect the stockholders of the
Company.
6.5 Waiver. At any time prior to the Effective Time, whether before or
after the Special Meeting, any party hereto, by action taken by its Board of
Directors, may (i) extend the time for the performance of any of the obligations
or other acts of any other party hereto or (ii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party by a duly authorized officer of such party. Notwithstanding the above, any
waiver given shall not apply to any subsequent failure of compliance with
agreements of the other party or conditions to its own obligations.
ARTICLE VII
MISCELLANEOUS
7.1 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by rule of law or public policy,
all other conditions and provisions of this Agreement shall nevertheless remain
in full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
7.2 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given, or made
as of the date delivered if sent via telecopier or delivered personally
(including, without limitation, delivery by commercial carrier warranting
next-day delivery) to the parties at the following addresses (or at such other
address for a party as shall be specified by similar notice, except that notices
of changes of address shall be effective upon receipt):
(a) If to Company:
UroQuest Medical Corporation
173 Constitution Drive
Menlo Park, CA 94025
Telecopier No.: (650) 463-5181
With copies to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Christopher J. Ozburn
Telecopier No.: (650) 493-6811
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(b) If to Parent or Purchaser:
Chemfab Corporation
701 Daniel Webster Highway
Merrimack, NH 03054
Telecopier No.: (603) 424-4161
With copies to:
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Attention: John R. Utzschneider
Telecopier No.: (617) 951-8736
7.3 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
7.4 Representations and Warranties, etc. The respective representations
and warranties of the Company, Parent and Purchaser contained herein shall
survive until, and shall expire with, and be terminated and extinguished upon
the earlier to occur of (a) the termination of this Agreement pursuant to
Section 6.1 and (b) the Closing Date. This Section 7.4 shall have no effect upon
any other obligation of the parties hereto, whether to be performed before or
after the consummation of the Merger.
7.5 Miscellaneous. This Agreement, the documents delivered pursuant hereto
or in connection herewith and the Confidentiality Agreement (i) constitute the
entire agreement and supersede all other prior agreements and undertakings, both
written and oral (including, without limitation, any agreement or proposed
agreement relating to the timing of execution of this Agreement and the payment
of any amount in connection therewith), among the parties, or any of them, with
respect to the subject matter hereof, (ii) are not intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder, (iii) may
not be assigned, except that Purchaser may assign its rights hereunder in whole
or in part to one or more direct or indirect Subsidiaries or affiliates of
Parent which, in written instruments reasonably satisfactory to the Company,
shall agree to make all representations and warranties of Purchaser set forth
herein and shall agree to assume all of such party's obligations hereunder and
be bound by all of the terms and conditions of this Agreement and Purchaser and
Parent may assign this Agreement to their lenders as collateral security;
provided, however, that no such assignment shall relieve the assignor of its
obligations hereunder, and (iv) shall be governed by and construed in accordance
with the laws of the State of Delaware (without reference to choice of law
rules). This Agreement may be executed in one or more counterparts which
together shall constitute a single agreement.
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IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CHEMFAB CORPORATION
By: /s/ JOHN W. VERBICKY
------------------------------------
John W. Verbicky, President
UROK ACQUISITION CORP.
By: /s/ JOHN W. VERBICKY
------------------------------------
John W. Verbicky, President
UROQUEST MEDICAL CORPORATION
By: /s/ TERRY SPRAKER
------------------------------------
Terry Spraker, President and Chief
Executive Officer
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<PAGE> 114
ANNEX B
STOCKHOLDER VOTING AGREEMENT
THIS STOCKHOLDER VOTING AGREEMENT (this "Agreement") is made and entered
into as of June 3, 1999, by and among Chemfab Corporation, a Delaware
corporation ("Parent"), UroQuest Medical Corporation, a Delaware corporation
(the "Company"), and the undersigned (the "Stockholders").
WHEREAS, the Stockholders desire that Parent, UROK Acquisition Corp., a
wholly owned subsidiary of Parent ("Sub"), and the Company enter into an
Agreement and Plan of Merger dated the date hereof (as the same may be amended
or supplemented, the "Merger Agreement") with respect to the merger of Sub with
and into the Company (the "Merger"); and
WHEREAS, the Stockholders and the Company are executing this Agreement as
an inducement to Parent to enter into and execute, and to cause Sub to enter
into and execute, the Merger Agreement;
NOW, THEREFORE, in consideration of the execution and delivery by Parent
and Sub of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein and therein, the parties agree as follows:
1. Representations and Warranties.
(a) Each Stockholder represents and warrants to Parent as follows:
(i) The Stockholder is the record and beneficial owner of the
number of shares (the "Stockholder's Shares") of capital stock, $0.001
par value, of the Company ("Company Capital Stock") set forth below such
Stockholder's name on the signature page hereof. This Agreement has been
duly authorized, executed and delivered by, and constitutes a valid and
binding agreement of, the Stockholder, enforceable in accordance with
its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
of general application respecting creditors' rights and by general
equitable principles.
(ii) Neither the execution and delivery of this Agreement nor the
consummation by the Stockholder of the transactions contemplated hereby
will result in a violation of, or a default under, or conflict with, any
contract, trust, commitment, agreement, understanding, arrangement or
restriction of any kind to which the Stockholder is a party or bound or
to which the Stockholder's Shares are subject. If the Stockholder is
married and the Stockholder's Shares constitute community property, this
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Stockholder's spouse,
enforceable against such person in accordance with its terms.
Consummation by the Stockholder of the transactions contemplated hereby
will not violate, or require any consent, approval, or notice under, any
provision of any judgment, order, decree, statute, law, rule or
regulation applicable to the Stockholder or the Stockholder's Shares.
(iii) The Stockholder's Shares and the certificates representing
the Stockholder's Shares are now, and at all times during the term
hereof will be, held by the Stockholder, or by a nominee or custodian
for the benefit of such Stockholder, free and clear of all liens,
security interests, proxies, voting trusts or voting agreements or any
other encumbrances whatsoever, except for any such encumbrances or
proxies arising hereunder.
(iv) No broker, investment banker, financial adviser or other
person is entitled to any broker's, finder's, financial adviser's or
other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of the
Stockholder.
(v) The Stockholder understands and acknowledges that Parent is
entering into, and causing Sub to enter into, the Merger Agreement in
reliance upon the Stockholder's execution and delivery of this
Agreement. The Stockholder acknowledges that the irrevocable proxy set
forth in Section 4
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and the option in Section 5 are granted in consideration for the
execution and delivery of the Merger Agreement by Parent and Sub.
(b) Parent represents and warrants to each of the Stockholders as
follows:
(i) This Agreement has been duly authorized, executed and delivered
by, and constitutes a valid and binding agreement of, Parent,
enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws of general application respecting
creditors' rights and by general equitable principles.
(ii) Neither the execution and delivery of this Agreement nor the
consummation by Parent of the transactions contemplated hereby will
result in a violation of, or a default under, or conflict with, the
Certificate of Incorporation or Bylaws of Parent or any contract, trust,
commitment, agreement, understanding, arrangement to which Parent is a
party or bound or to which Parent is subject.
2. Voting Agreements. Each Stockholder agrees with, and covenants to,
Parent as follows:
(a) At any meeting of stockholders of the Company called to vote upon
the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with
respect to the Merger and the Merger Agreement is sought (the
"Stockholders' Meeting"), the Stockholder shall vote (or cause to be voted)
the Stockholder's Shares in favor of the Merger, the execution and delivery
by the Company of the Merger Agreement, and the approval of the terms
thereof and each of the other transactions contemplated by the Merger
Agreement.
(b) At any meeting of stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which their vote,
consent or other approval is sought, the Stockholder shall vote (or cause
to be voted) the Stockholder's Shares against (i) any merger agreement or
merger (other than the Merger Agreement and the Merger), consolidation,
combination, sale of substantial assets, reorganization, recapitalization,
dissolution, liquidation or winding up of or by the Company or (ii) any
amendment of the Company's Certificate of Incorporation or Bylaws or other
proposal or transaction involving the Company or any of its subsidiaries
which amendment or other proposal or transaction would in any manner
impede, frustrate, prevent or nullify the Merger, the Merger Agreement or
any of the other transactions contemplated by the Merger Agreement (each of
the foregoing in clause (i) or (ii) above, a "Competing Transaction").
3. Covenants. Each Stockholder agrees with, and covenants to, Parent that
such Stockholder shall not (i) transfer (which term shall include, without
limitation, for the purposes of this Agreement, any sale, gift, pledge or other
disposition), or consent to any transfer of, any or all of the Stockholder's
Shares or any interest therein, except pursuant to the Merger; (ii) enter into
any contract, option or other agreement or understanding with respect to any
transfer of any or all of the Stockholder's Shares or any interest therein;
(iii) grant any proxy, power of attorney or other authorization in or with
respect to such shares, except for this Agreement; (iv) deposit such shares into
a voting trust or enter into a voting agreement or arrangement with respect to
such shares; (v) initiate, solicit or encourage, or take any action to
facilitate the making of, any offer or proposal which constitutes or is
reasonably likely to lead to an Acquisition Proposal (as defined in the Merger
Agreement); or (vi) in the event of any unsolicited proposed Acquisition
Proposal, engage in negotiations with or discussions with, or provide any
information or data to, any person or entity (other than Parent, any of its
affiliates or representatives) relating to any Acquisition Proposal, except as
expressly permitted by Section 4.6 of the Merger Agreement; provided, that the
Stockholder may transfer (as defined above) any of the Stockholder's Shares to
any other person or entity who is on the date hereof, or to any family member of
a person or to any charitable institution which prior to the Stockholders
Meeting and prior to such transfer becomes, a party to this Agreement bound by
all the obligations of the "Stockholder" hereunder.
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4. Grant of Irrevocable Proxy; Appointment of Proxy.
(a) Each Stockholder hereby irrevocably grants to, and appoints, Parent and
John W. Verbicky, Chief Executive Officer of Parent, and Moosa E. Moosa, Chief
Financial Officer of Parent, in their respective capacities as officers of
Parent, and any individual who shall hereafter succeed to any such office of
Parent, and each of them individually, the Stockholder's proxy and
attorney-in-fact (with full power of substitution), for and in the name, place
and stead of the Stockholder, to vote the Stockholder's Shares, or grant a
consent or approval in respect of the Stockholder's Shares (i) in favor of the
Merger, the execution and delivery of the Merger Agreement and approval of the
terms thereof and each of the other transactions contemplated by the Merger
Agreement, and (ii) against any Competing Transaction.
(b) Each Stockholder represents that any proxies heretofore given in
respect of the Stockholder's Shares are not irrevocable, and that any such
proxies are hereby revoked.
(c) Each Stockholder hereby affirms that the irrevocable proxy set forth in
this Section 4 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of the Stockholder under this Agreement. Each Stockholder hereby
further affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked. Each Stockholder hereby ratifies and confirms
all that such irrevocable proxy may lawfully do or cause to be done by virtue
hereof. Such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 212 of the Delaware General
Corporation Law.
5. Option to Acquire Shares. In the event that the Merger Agreement is
terminated by Parent in accordance with Section 6.1(c) of the Merger Agreement
or by the Company in accordance with Section 6.1(d) of the Merger Agreement, at
the option of Parent, the Stockholders shall sell to Parent or an affiliate of
Parent all of the Shares, as well as any other shares of Company Capital Stock
of which the Stockholder acquires beneficial ownership and sole voting power, at
a purchase price equal to the Per Share Merger Consideration (as defined in the
Merger Agreement). The Company agrees that it will cooperate with the Parent in
order to prepare a calculation of the Per Share Merger Consideration as of the
Notice Date referred to below. In the event that Parent is entitled to and
wishes to purchase all or some of the Shares, Parent shall give the Stockholders
written notice (the date of which being herein referred to as the "Notice Date")
within ten (10) days of the termination of the Merger Agreement specifying (i)
the total number of Shares it will purchase, and (ii) a place and date not
earlier than three (3) business days nor later than sixty (60) business days
from the Notice Date for the closing of such purchase (the "Closing"); provided
that if prior notification to or approval of any regulatory agency is required
in connection with such purchase, Parent and the Stockholders shall promptly
file the required notice or application for approval and shall expeditiously
process the same and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. The term "business
day" for purposes of this Agreement means any day, excluding Saturdays, Sundays
and any other day that is a legal holiday in the State of New Hampshire or the
State of California or a day on which banking institutions in the State of New
Hampshire or the State of California are authorized by law or executive order to
close. At the Closing, Parent shall pay to each Stockholder the aggregate
purchase price for the Shares purchased from such Stockholder pursuant to this
Section 5 in immediately available funds by a wire transfer to a bank account
designated by such Stockholder. At such Closing, simultaneously with the
delivery of immediately available funds as provided in this Section 5, the
Stockholders shall deliver to Parent the certificate or certificates
representing the number of Shares held by the Stockholders and any other
documents reasonably requested by Parent to effect the transfer of the Shares
from the Stockholders to Parent.
6. Certain Events. Each Stockholder agrees that this Agreement and the
obligations hereunder shall attach to the Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of any
or all of the Stockholder's Shares shall pass, whether by operation of law or
otherwise, including without limitation the Stockholder's successors or assigns.
In the event of any stock split, stock dividend, merger, reorganization,
recapitalization or other change in the capital structure of the Company
affecting the Company Capital Stock, or the acquisition of additional shares of
Company Capital Stock or
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<PAGE> 117
other voting securities of the Company by any Stockholder, the number of the
Stockholder's Shares subject to the terms of this Agreement shall be adjusted
appropriately and this Agreement and the obligations hereunder shall attach to
any additional shares of Company Capital Stock or other voting securities of the
Company issued to or acquired by the Stockholder.
7. Stop Transfer. The Company agrees with, and covenants to, Parent that
the Company shall not register the transfer of any certificate representing any
of the Stockholder's Shares, unless such transfer is made to Parent or Sub or
otherwise in compliance with this Agreement.
8. Further Assurances. Each Stockholder shall, upon request of Parent,
execute and deliver any additional documents and take such further actions as
may reasonably be deemed by Parent to be necessary or desirable to carry out the
provisions hereof and to vest the power to vote the Stockholder's Shares as
contemplated by Section 4 in Parent and the other irrevocable proxies described
therein at the expense of Parent.
9. Termination. This Agreement, and all rights and obligations of the
parties hereunder; shall terminate, and the proxy granted under paragraph 4
shall expire, upon the later of (i) the termination of the Merger Agreement
pursuant to and in accordance with Section 6.1(a) or Section 6.1(b)(i) thereof
or (ii) the Outside Date (as defined in the Merger Agreement); provided,
however, (A) that if the Company terminates the Merger Agreement pursuant to and
in accordance with Section 6.1(b)(ii) thereof, then this Agreement shall
terminate immediately, and/or (B) that if Parent terminates the Merger Agreement
pursuant to and in accordance with Section 6.1(c) of the Merger Agreement, then
this Agreement shall terminate immediately, and/or (C) no termination of the
Merger Agreement pursuant to Section 6.1(c) or Section 6.1(d) will affect
Parent's rights under Section 5 of this Agreement if it exercises its option
within fifteen (15) days after such termination.
10. Indemnification. In the event that the Merger occurs, then commencing
at the Effective Time (as defined in the Merger Agreement), Parent shall
indemnify and hold harmless the Stockholders and the Stockholders' affiliates,
agents, advisers and representatives (the "Indemnified Parties") against and
from any costs, expenses (including reasonable attorneys' fees), settlement
payments, claims, demands, judgments, fines, penalties, losses, damages and
liabilities incurred in connection with any claim, suit, action or proceeding
(whether asserted, commenced or arising before or after the Effective Time) that
arises directly or indirectly from or relates directly or indirectly to (a)
execution, delivery or performance of this Agreement, or (b) any of the
transactions contemplated by this Agreement; provided, that the Parent shall not
be obligated to indemnify the Indemnified Parties with respect to any claim,
suit, action or proceeding to the extent it arises out of or relates to any
breach or alleged breach of any representation or warranty or covenant in this
Agreement by the Company or any Stockholder or any breach or alleged breach by
the Company of any representation or warranty or covenant in the Merger
Agreement. In the event any such claim, suit, action or proceeding is asserted
or commenced against any Indemnified Party, (i) Parent shall advance and pay the
reasonable fees and expenses of any counsel retained by such Indemnified Party
in connection with such claim, suit, action or proceeding promptly after receipt
of a request therefor from such Indemnified Party, and (ii) Parent shall
cooperate with such Indemnified Party and such Indemnified Party's counsel in
the defense of such claim, suit, action or proceeding.
11. Enforcement Costs. If any party institutes an action for the
enforcement of this Agreement, the prevailing party shall be entitled to
reimbursement on demand of all costs and expenses of such action including
reasonable legal fees.
12. Miscellaneous.
(a) Capitalized terms used and not otherwise defined in this Agreement
shall have the respective meanings assigned to them in the Merger Agreement.
(b) All notices, requests, claims, demands and other communications under
this Agreement shall be in writing and shall be deemed given if delivered
personally or sent by overnight courier (providing proof of delivery) to the
parties at the following addresses (or at such other address for a party as
shall be specified by
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like notice): (i) if to Parent, to the address provided in the Merger Agreement;
and (ii) if to a Stockholder, to its address shown below its signature on the
last page hereof.
(c) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
(d) This Agreement may be executed in two or more counterparts, each of
which shall be considered an original hereof and one and the same agreement.
(e) This Agreement (including the documents and instruments referred to
herein) constitutes the entire agreement, and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof.
(f) This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
(g) Neither this Agreement nor any of the rights, interests or obligations
under this Agreement shall be assigned, in whole or in part, by operation of law
or otherwise, by any of the parties without the prior written consent of the
other parties, except as expressly contemplated by the proviso to Section 3. Any
assignment in violation of the foregoing shall be void.
(h) Each Stockholder agrees that irreparable damage would occur and that
Parent would not have any adequate remedy at law in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that Parent
shall be entitled to an injunction or injunctions to prevent breaches by any
Stockholder of this Agreement and to enforce specifically the terms and
provisions of this Agreement in any court, this being in addition to any other
remedy to which they are entitled at law or in equity. In addition, each of the
parties hereto (i) consents to submit such party to the personal jurisdiction of
any Federal court located in the State of Delaware or any State of Delaware
state court in the event any dispute arises out of this Agreement or any of the
transactions contemplated hereby, (ii) agrees that such party will not attempt
to deny or defeat such personal jurisdiction by motion or other request for
leave from any such court and (iii) agrees that such party will not bring any
action relating to this Agreement or any of the transactions contemplated hereby
in any court other than a Federal court sitting in the State of Delaware or a
Delaware state court. The foregoing remedies are in addition to, and not in lieu
of, any payment required to be made by the Company pursuant to the terms of the
Merger Agreement.
(i) If any term, provision, covenant or restriction herein, or the
application thereof to any circumstance, shall, to any extent, be held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions herein and the
application thereof to any other circumstances, shall remain in full force and
effect, shall not in any way be affected, impaired or invalidated, and shall be
enforced to the fullest extent permitted by law.
(j) No amendment, modification or waiver in respect of this Agreement shall
be effective against any party unless it shall be in writing and signed by such
party.
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IN WITNESS WHEREOF, the undersigned parties have executed and delivered
this Agreement as of the day and year first above written.
CHEMFAB CORPORATION
By: /s/ JOHN W. VERBICKY
------------------------------------
Name: John W. Verbicky
Title: President
UROQUEST MEDICAL CORPORATION
By: /s/ TERRY SPRAKER
------------------------------------
Name: Terry Spraker
Title: President and Chief
Executive Officer
STOCKHOLDERS:
WARBURG, PINCUS INVESTORS, L.P.
By: Warburg, Pincus & Co.
General Partner
By: /s/ ELIZABETH H. WEATHERMAN
------------------------------------
Elizabeth H. Weatherman
Partner
Address: 466 Lexington Avenue
New York, NY 10017
Number of Shares
Beneficially Owned: 3,188,571
/s/ THOMAS E. BRANDT
--------------------------------------
Name: Thomas E. Brandt
Address: UroQuest Medical Corporation
173 Constitution Drive
Menlo Park, CA 94025
Number of Shares
Beneficially Owned: 1,605,029
THE RICHARD C. DAVIS, JR. 1993
REVOCABLE TRUST
By: /s/ RICHARD C. DAVIS
------------------------------------
Richard C. Davis
Trustee
Address: UroQuest Medical Corporation
173 Constitution Drive
Menlo Park, CA 94025
Number of Shares
Beneficially Owned: 871,318
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/s/ RICHARD C. DAVIS
--------------------------------------
Name: Richard C. Davis
Address: UroQuest Medical Corporation
173 Constitution Drive
Menlo Park, CA 94025
Number of Shares
Beneficially Owned: 2,000
VERTICAL FUND ASSOCIATES, L.P.,
By: /s/ JACK W. LASERSOHN
------------------------------------
Jack W. Lasersohn
General Partner
Address: 18 Bank Street
Summit, NJ 07901
Number of Shares
Beneficially Owned: 354,285
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<PAGE> 121
OPINION OF VECTOR SECURITIES INTERNATIONAL, INC.
ANNEX C
June 2, 1999
The Board of Directors
UroQuest Medical Corporation
173 Constitution Drive
Menlo Park, CA 94025
Members of the Board:
You have requested our opinion as investment bankers with respect to the
fairness, from a financial point of view as of the date hereof, to the holders
of common stock, par value $0.001 per share ("Common Stock"), of UroQuest
Medical Corporation ("UroQuest"), a Delaware corporation, of the cash
consideration to be offered to such stockholders pursuant to the terms of the
draft of the Agreement and Plan of Merger, dated as of June 2, 1999 (the
"Agreement"), among (i) Chemfab Corporation, a Delaware corporation ("Chemfab"),
(ii) UROK Acquisition Corp., a Delaware corporation and a direct or indirect
wholly-owned subsidiary of Chemfab ("Merger Sub"), and (iii) UroQuest.
The Agreement provides, among other things, that, subject to the terms and
conditions set forth therein, Merger Sub will be merged with and into UroQuest
for an aggregate purchase price of $29,000,000, subject to certain adjustments.
The terms and conditions of the Proposed Transaction are more fully set forth in
the Agreement.
In arriving at the opinion set forth herein, we, among other things: (i)
reviewed UroQuest's Annual Reports to Stockholders, Annual Reports on Form 10-K
and/or related financial information for the four fiscal years ended December
31, 1998, and its Quarterly Reports on Form 10-Q and related unaudited financial
information for the three months ended March 31, 1999; (ii) reviewed certain
information, including financial forecasts, relating to the business, earnings,
cash flows, assets and prospects of UroQuest, furnished to us by UroQuest; (iii)
conducted discussions with members of senior management of UroQuest concerning
its business and prospects; (iv) reviewed the historical market prices and
trading activity for the Common Stock and compared such prices and trading
histories with those of certain publicly traded companies which we deemed to be
relevant; (v) compared the financial position and operating results of UroQuest
with those of certain other publicly traded companies which we deemed relevant;
(vi) compared the proposed financial terms of the Proposed Transaction with the
financial terms of certain other transactions which we deemed relevant; (vii)
reviewed the financial terms of the Proposed Transaction as set forth in the
Agreement; and (viii) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters as
we deemed appropriate.
In connection with our opinion, we have not assumed any responsibility for
independent verification of any information publicly available or supplied or
otherwise made available to us regarding UroQuest and we have assumed and relied
on such information being accurate and complete in all respects. We have not
made or obtained or been provided with any independent evaluation or appraisal
of the assets or liabilities of UroQuest. With respect to the financial
projections of UroQuest referred to above, we have assumed that they have been
reasonably prepared on bases reflecting the best available estimates and
judgements of the management of UroQuest as to the future financial performance
of UroQuest and that UroQuest will perform in accordance with such projections.
We assume no responsibility for and express no view as to such forecasts or the
assumptions under which they are prepared. Our conclusions are based solely on
information available to us on or before the date hereof and reflect economic,
market, and other conditions as of such date. In rendering our opinion, we have
assumed that the Proposed Transaction will be consummated on the terms described
in the Agreement, without any waiver of any material terms or conditions, and
that obtaining any necessary regulatory approvals for the transaction will not
have an adverse effect on UroQuest.
Vector Securities International, Inc. is a full service securities firm,
and in the course of its normal trading activities, may from time to time effect
transactions and hold positions in securities of UroQuest. We have
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UroQuest Medical Corporation
June 2, 1999
Page 2
performed investment banking services for UroQuest in the past and have received
customary compensation for such services. We are currently acting as financial
advisor to UroQuest in connection with the Proposed Transaction and will receive
a fee in connection therewith, with such fee being contingent upon consummation
of the Proposed Transaction.
This opinion has been prepared at the request and for the use and benefit
of the Board of Directors of UroQuest and is rendered to the Board of Directors
of UroQuest in connection with its consideration of the Proposed Transaction.
This opinion does not constitute a recommendation to any stockholder of UroQuest
as to whether to accept the consideration to be offered to the stockholders in
connection with the Proposed Transaction. This opinion does not address the
relative merits of the Proposed Transaction or any other transactions or
business strategies discussed by the Board of Directors of UroQuest as
alternatives to the Proposed Transaction or the decision of the Board of
Directors of UroQuest to proceed with the Proposed Transaction.
This opinion shall not be reproduced, summarized, described or referred to,
or provided to any other person, without our prior written consent, except that
this letter may be reproduced in full in the proxy statement of UroQuest to be
filed with the Securities and Exchange Commission in connection with the Merger.
On the basis of and subject to the foregoing, including the various
assumptions and limitations set forth herein, and based upon such other matters
as we consider relevant, it is our opinion as of the date hereof that the cash
consideration to be offered to the holders of Common Stock of UroQuest pursuant
to the Proposed Transaction is fair to such stockholders from a financial point
of view.
Very truly yours,
VECTOR SECURITIES INTERNATIONAL, INC.
By: /s/ ROBERT F. CAREY
------------------------------------
Robert F. Carey
Managing Director
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ANNEX D
DELAWARE CODE ANNOTATED -- SECTION 262. APPRAISAL RIGHTS
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 DEL. C. SECTION 262
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to section
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depositary receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a and b of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a, b and c of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section
228 or section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this
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subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
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resulting corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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ANNEX E
AGREEMENT CONCERNING
AGREEMENT AND PLAN OF MERGER
This Agreement Concerning Agreement and Plan of Merger (this "Agreement")
is made as of October 8, 1999, by and among Chemfab Corporation, a Delaware
corporation ("Parent"), UROK Acquisition Corp., a Delaware corporation and an
indirect wholly owned subsidiary of Parent ("Purchaser") and UroQuest Medical
Corporation, a Delaware corporation (the "Company").
WHEREAS, the parties have entered into that certain Agreement and Plan of
Merger dated as of June 3, 1999 (the "Merger Agreement"), which provides that
Purchaser be merged with and into the Company on the terms and subject to the
conditions set forth in the Merger Agreement;
WHEREAS, Section 4.19 of the Merger Agreement provides, among other things,
for the calculation of the Environmental Accrual (as defined in the Merger
Agreement);
WHEREAS, for purposes of Section 5.2(c)(iii) of the Merger Agreement,
changes related to the Environmental Contingency (as defined in the Merger
Agreement), shall not be considered in determining whether a Material Adverse
Effect (as defined in the Merger Agreement) has occurred; and
WHEREAS, the parties wish to determine the Environmental Accrual and to
waive a certain condition set forth in the Merger Agreement relating thereto;
NOW, THEREFORE, in consideration of the foregoing, the parties agree as
follows:
1. The Environmental Accrual, for purposes of the Merger Agreement and
all of the transactions contemplated thereby, shall be an amount in U.S.
dollars equal to two million (U.S. $2,000,000) (the "Stipulated Accrual").
2. Each of Parent and Purchaser and the Company hereby waives the
requirement that the conditions set forth in Section 5.1(d) of the Merger
Agreement be fulfilled at or prior to the Effective Time (as defined in the
Merger Agreement).
3. The Parties acknowledge that further investigation of the
Environmental Contingency (as defined in Section 2.21 of the Company
Disclosure Letter (the "Environmental Disclosure")) has resulted in
additional environmental data regarding the Bivona Site and adjacent
properties (the "Environmental Data"). The Parties agree that, after giving
effect to the Stipulated Accrual, the Environmental Data have not caused,
and shall not be deemed to have caused, a Material Adverse Effect (as
defined in the Merger Agreement) for purposes of Section 5.2(c) of the
Merger Agreement. In the event that further investigation or analysis of
the Environmental Contingency or Environmental Data results in additional
or related data (regardless of whether the remediation costs relating to
such additional or related data might have or be deemed to have an adverse
effect (material or otherwise) on the Company or its Bivona Subsidiary),
the Parties further agree that, after giving effect to the Stipulated
Accrual, no Material Adverse Effect shall be deemed to have occurred.
4. Each Party represents and warrants that it has full corporate power
and authority to enter into this Agreement; that its execution and delivery
of this Agreement has been duly authorized by its Board of Directors; and
that no other corporate action on its part is necessary to authorize this
Agreement (other than the approval of the Merger (as defined in the Merger
Agreement), as contemplated by Sections 2.4, 5.1(a) and other provisions of
the Merger Agreement).
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5. Except as expressly modified hereby, the Merger Agreement shall
remain in full force and effect in accordance with its original terms.
6. This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of Delaware, without regard to
principles of conflicts of laws.
CHEMFAB CORPORATION
By: /s/ JOHN W. VERBICKY
------------------------------------
Name: John W. Verbicky
Title: President & CEO
UROK ACQUISITION CORP.
By: /s/ THOMAS C. PLATT
------------------------------------
Name: Thomas C. Platt
Title: Director
UROQUEST MEDICAL CORPORATION
By: /s/ JEFFREY L. KAISER
------------------------------------
Name: Jeffrey L. Kaiser
Title: Vice-President, CFO,
Secretary and Treasurer
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PROXY
UROQUEST MEDICAL CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS, DECEMBER 23, 1999
THIS PROXY IS SOLICITED ON BEHALF OF UROQUEST MEDICAL CORPORATION
The undersigned hereby appoints Terry Spraker, Ph.D. and Jeffrey Kaiser,
and each or any of them (with power of substitution), proxies for the
undersigned to represent and to vote, as designated on the reverse side hereof,
all shares of Common Stock of UroQuest Medical Corporation which the undersigned
would be entitled to vote if personally present at the Special Meeting of its
stockholders to be held on December 23, 1999, and at any adjournment thereof,
subject to any directions indicated on the reverse side of this card. IF NO
DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR THE PROPOSAL TO APPROVE AND
ADOPT THE AGREEMENT AND PLAN OF MERGER, THE MERGER, AND OTHER TRANSACTIONS
CONTEMPLATED IN THE AGREEMENT AND PLAN OF MERGER.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE. PLEASE SIGN AND RETURN PROMPTLY IN
THE ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
IF YOU ATTEND THE MEETING AND VOTE IN PERSON, THIS PROXY WILL NOT BE USED.
Continued and to be signed and UROQUEST MEDICAL CORPORATION
dated on reverse side.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 130
VOTE MUST
BE [ILLEGIBLE] [ X ]
IN BLACK OR
BLUE INK.
UROQUEST'S DIRECTORS RECOMMEND A VOTE FOR APPROVAL AND ADOPTION OF THE AGREEMENT
PLAN OF MERGER, THE MERGER, AND THE OTHER TRANSACTIONS CONTEMPLATED IN THE
AGREEMENT AND PLAN OF MERGER.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
1. Approval and adoption of the Agreement and Plan of Merger, the Merger, and [ ] [ ] [ ]
the other transactions contemplated in the Agreement and Plan of Merger.
In their discretion the proxies are authorized to vote upon such other matters as may properly come before the meeting or any
postponement or adjournment thereof.
Change of Address and [ ] If You Plan to Attend the Special Meeting Mark Here [ ]
or Comments Mark Here
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY
RETURN THE PROXY IN THE ENCLOSED ENVELOPE,
IF MAILED IN THE UNITED STATES.
Signed ______________________________________ Signed (if held jointly) ______________________________________ Dated __________, 1999
Please sign exactly as name or names appear on this proxy. If stock is held jointly, each holder should sign. If signing as
attorney, trustee, executor, administrator, custodian, guardian or corporate officer, please give full title.
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
</TABLE>
