10-K405

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
(MARK ONE)
 
     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
       FOR THE TRANSITION PERIOD FROM                TO                .
 
                        COMMISSION FILE NUMBER: 0-20963
 
                          UROQUEST MEDICAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                            
                   DELAWARE                                      59-3176454
         (STATE OR OTHER JURISDICTION                          (IRS EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NUMBER)


 
                  173 CONSTITUTION DRIVE, MENLO PARK, CA 94025
            (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)      (ZIP CODE)
 
                                 (650) 463-5180
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
                            ------------------------
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
    SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days  [X] Yes     [ ] No
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K  [X]
 
     As of March 19, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant is approximately $8,016,000 on the closing
sale price as reported on the Nasdaq National Market on such date. Shares of
Common Stock held by officers, directors and holders of more than 5% of the
outstanding Common Stock have been excluded from this calculation because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
 
     The number of shares of Common Stock outstanding on March 19, 1999 was
12,452,522.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Certain information is incorporated into Part III of this Report on Form
10-K by reference to the Registrant's Proxy Statement for its 1999 Annual
Meeting of Stockholders.
 
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                          UROQUEST MEDICAL CORPORATION
 
                                     PART 1
 
ITEM 1. BUSINESS
 
     The statements contained in this Report that are not purely historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All forward-looking statements involve various
risks and uncertainties and include statements that indicate what the Company
anticipates regarding the Company's product developments, commercial
opportunities, regulatory approval, expectations, strategies, plans and
intentions for the future. All forward-looking statements are made as of this
date based on information available to the Company as of such date, and the
Company assumes no obligation to update any forward-looking statement. It is
important to note that such statements may not prove to be accurate and that the
Company's actual results and future events could differ materially from those
anticipated in such statements. Among the factors that could cause actual
results to differ materially from the results discussed in the forward-looking
statements are described below and elsewhere in this Report. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by this
Section and other factors included elsewhere in this Report. See other portions
of this Item 1. "Business" and see Item 7. "Management's Discussion and Analysis
of Financial Condition" and "Results of Operations."
 
     UroQuest Medical Corporation ("the Company") designs and develops products
for the management and diagnosis of both male and female urological disorders.
The Company's principal product, the On-Command Continence System
("On-Command"), is an intraurethral (inside the urethra) catheter incorporating
a proprietary anchoring system and a proprietary patient controlled,
magnetically activated valve used to regulate urine flow. The On-Command product
is designed to enable persons with either urinary incontinence or urinary
retention to manage their condition without the restricted mobility, medical
complications, discomfort and embarrassment generally associated with many of
the existing management alternatives, including intermittent, Foley, external
and suprapubic catheters, diapers and absorbents, and penile clamps.
 
     During 1998, a clinical trial of the Male On-Command for acute indications
was completed in the United States under an Investigational Device Exemption
("IDE") application approved by the United States Food and Drug Administration
(the "FDA"). The trial was a randomized controlled clinical study comparing the
Male On-Command to a Foley catheter for the treatment of acute urinary retention
and incontinence for a single period of up to 30 days. A 510(k) premarket
notification was submitted to the FDA in September 1998. In January 1999, the
Company responded to a request for additional information from the FDA regarding
this 510(k). There can be no assurance that the FDA will determine that the data
derived from the clinical trial will support the safety and efficacy of the
device or that such application will be approved by the FDA.
 
     The Company has initiated a clinical trial of the Male On-Command to
evaluate its use in multiple, sequential 30-day insertions and exchanges for
chronic indications. The Company began enrolling patients at U.S. sites in a
single arm trial in September 1998. The FDA has indicated to the Company during
informal discussions that chronic indications for its Male On-Command would
require a PMA approval. Furthermore, the agency indicated during IDE approval
discussions that it would expect data from an unspecified number of patients for
twelve consecutive months of sequential On-Command insertions. Based on these
regulatory requirements and the enrollment rate expected, it is not likely that
the Company will complete the chronic clinical trial before late 2000. The
Company expects the chronic patient market to be substantially larger than the
acute patient market because the Company believes more men suffer from chronic
rather than acute symptoms of urinary incontinence or retention. There can be no
assurance that the FDA will determine that the data derived from the chronic
clinical trial will support the safety and efficacy of the device nor that the
data will be sufficient to file a PMA application or that such application will
be approved by the FDA.
 
     Additionally, the Company is preparing a clinical trial of its Female
On-Command Continence System for acute indications in a randomized controlled
clinical study comparing the Female On-Command to a Foley catheter in patients
requiring post-surgical management of their urinary outflow. Based on informal
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communications with the FDA, the Company believes an acute indication would be
covered under 510(k) regulations. The Company anticipates completing this
clinical study by the end of 1999. There can be no assurance that the FDA will
determine that the data derived from the clinical trial will support the safety
and efficacy of the device nor that the data will be sufficient to file a 510(k)
notification or that such notification will be approved by the FDA.
 
     If either the Male or Female On-Command does not receive FDA approval, the
Company will not be able to market or commercialize these On-Command products in
the United States. Furthermore, approval for single use insertions of the
On-Command, if obtained, does not mean that use of successive device insertions
will be approved. There can be no assurance that either single use or successive
insertion use of the On-Command will prove to be safe and effective in the
United States, or that FDA approval will be obtained on a timely basis, if at
all. In addition, the clinical studies may identify technical, manufacturing,
design or other factors that could delay completion of such testing, as has been
experienced in early clinical trials of the Male On-Command. If the Company is
unable to obtain necessary regulatory approval, or if the Company decides that
the size of the markets for the On-Command do not justify a product launch, the
Company's business, financial condition and results of operations will be
materially adversely affected.
 
     The Company has initiated marketing evaluation studies of its Male and
Female On-Command products in three countries in Europe for chronic use. The
Company intends to continue these marketing evaluation studies during 1999. The
Company is considering various strategies for the distribution of its products
in Europe.
 
     The Company realizes that significant resources will be required to
complete the programs outlined above. In particular, regarding the pending
510(k) for its Male On-Command for acute indications, the Company is studying
whether to launch if and when FDA clearance for acute indications is received
and, if so, how, given the expenditures required and the limited acute market
size. Given this program's challenges and others, the Company is considering its
strategic alternatives. To explore these alternatives, the Company has engaged
an investment banker.
 
     UroQuest was founded as a Florida corporation in 1992 and reincorporated in
Delaware in October of 1996. UroQuest's principal offices are located at 173
Constitution Drive, Menlo Park, CA. The Company's telephone number is (650)
463-5180.
 
     In October 1996, the Company acquired BMT, Inc., an Indiana corporation,
and its wholly owned subsidiary, Bivona, Inc., an Indiana corporation
(collectively, "BMT"). BMT designs, develops, manufactures and markets a line of
proprietary silicone medical device products used to manage airway problems, as
well as provides engineering design, development and manufacturing services for
silicone products on an OEM basis for other medical device companies. BMT is one
of a limited number of specialty manufacturers of silicone catheters in the
United States. The acquisition has enabled the Company to control its own
production source while providing necessary capacity and flexibility in the
manufacturing process. The acquisition has also expanded the Company's limited
product line which previously focused primarily on the On-Command. The product
development and production expertise of BMT is also being utilized by the
Company to develop additional On-Command and other new devices related to the
management and diagnosis of urological disorders.
 
     Management of the Company has identified two business segments for purposes
of assessing performance and making operating decisions. The business segments
identified are the two business units that offer different products: Urology
Products and Airway Management/OEM Products. See Item 8. "Financial Statements
and Supplementary Data" for additional segment information.
 
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UROLOGY PRODUCTS
 
     The On-Command is an intraurethral catheter incorporating a proprietary
anchoring system and a proprietary patient controlled, magnetically activated
valve used to regulate urine flow. The On-Command is designed to enable persons
with either incontinence (the inability to control one's urinary function,
leading to frequent involuntary urine leakage from the bladder) or retention
(the inability to voluntarily and spontaneously empty one's bladder) to manage
their condition without the restricted mobility, medical complications,
discomfort and embarrassment generally associated with many of the existing
management alternatives including intermittent, Foley, external and suprapubic
catheters, diapers and absorbents, and penile clamps.
 
     Unlike most of the widely used incontinence management products, which are
designed to capture urine flow in an external container or absorbent medium, the
On-Command enables the incontinent person to remain dry without interfering with
normal lifestyle activities. Furthermore, unlike most of the widely used
products for the management of retention, which result in severe lifestyle
restrictions, the On-Command allows the patient with retention to empty the
bladder conveniently and without the potential complications associated with the
use of an external collection bag or the need for intermittent catheterization
("IC").
 
     The principal features of the On-Command include:
 
     - Patient Control. The On-Command enables persons with either incontinence
       or retention to maintain control of their urinary outflow. The On-Command
       prevents urine from leaving the urinary tract until the incontinent
       person chooses to void, enabling such a person to remain dry. The
       On-Command allows the patient with retention to void when desired and
       without the need for IC.
 
     - Non-Surgical Application. The On-Command is designed to be a relatively
       low-risk, non-surgical management application for urinary outflow
       problems when compared to surgery or permanently implanted devices. This
       is particularly important due to the uncertainty and complications of
       invasive treatments, or when the longevity of the patient is in question.
 
     - Ease of Use. The operation of the On-Command is simple and efficient for
       the patient. The physician is trained to understand how to size and
       insert the catheter which shares several common design features with
       other commonly used indwelling catheters, such as the Foley catheter.
 
     - Convenience and Enhanced Lifestyle. The proprietary intraurethral design
       of the On-Command eliminates the need for external collection bags and
       absorbents that can restrict mobility and compromise lifestyle. Periodic
       replacement is also convenient when compared to products like diapers,
       intermittent catheters and urethral plugs which must be changed or
       replaced multiple times per day.
 
     - Lower Incidence of Complications. The On-Command, because of its
       intraurethral design, is believed to result in fewer complications than
       other products designed for the treatment or management of urinary
       outflow problems. Incontinent persons are more likely to stay dry,
       reducing the risks of rashes, skin irritations, urethral strictures and
       other complications.
 
     - Reduced Infection Rate. Male patients with either incontinence or
       retention have been shown in the Company's clinical trials to have lower
       symptomatic Urinary Tract Infection ("UTI") rates while using the Male
       On-Command, when compared with infection rates generally associated with
       the use of Foley catheters.
 
     - Cost Effectiveness. The Company believes that less frequent replacement
       of the On-Command should provide a competitive cost advantage over
       products that are changed daily or multiple times per day. In addition,
       the Company anticipates that the overall treatment cost using the
       On-Command will be lower due to a reduced incidence of complications and
       side effects.
 
     Urinary outflow dysfunction can result from a wide range of diseases,
surgical complications or other factors affecting anatomic structures, autonomic
reflexes or neurologic function. As a result, it is difficult for a single
treatment or management alternative to effectively address every specific
condition. There are certain specific patients who would not be able to benefit
from the clinical and lifestyle advantages of the On-Command. First, patients
who have limited motor function or dementia may not be able to effectively
activate the magnetic valve. Second, the anatomy of patients who have low
bladder capacity or bladder
 
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instability may not be able to accommodate an intraurethral device such as the
On-Command. Finally, patients with other physical limitations such as excessive
obesity or retracted penis may not be able to use the On-Command.
 
  Male On-Command
 
     The Male On-Command consists of two separable units, the intraurethral
catheter portion and the detachable inflator section. When the two units are
connected, prior to use, the device closely resembles a Foley catheter. The
device is inserted non-surgically through the urethra in a five-minute
procedure. Two balloons are inflated, one in the bladder to seal the bladder
neck and one in the urethra on the downstream side of the prostate gland to
anchor the device. The inflator portion is then detached and discarded.
Following proper sizing, the device should reside completely inside the urethra
with no exposed components, thereby reducing the risk of infection. The device
is designed to remain in place for up to 30 days.
 
     The proprietary magnetic control valve is located at the outlet end of the
catheter section. This valve can be opened by simply placing a matchbook sized
magnet externally along the underside of the penis, allowing the urine to flow.
Removing the magnet closes the valve, shutting off the flow of urine and keeping
the patient dry. Both insertion and removal procedures are non-surgical, take
only a few minutes and can be accomplished by medical staff or other caregivers.
The Company offers a range of sizes, and uses a proprietary sizing catheter
designed to ensure an appropriate fit. The Sizing Catheter is easy for
physicians to use and promotes a comfortable and customized fit in a variety of
anatomies.
 
  Female On-Command
 
     The Female On-Command also employs a catheter with a detachable inflator
section and a magnetically activated valve. The device is shorter than the Male
On-Command and substitutes the urethral anchoring balloon with a small rounded
external cap which anchors the device in place beneath the labial folds of the
vagina. The device is designed to remain in place for up to 30 days making it
more convenient than many other products requiring multiple changes per day.
Because the external anchoring cap extends past the urethral opening,
symptomatic UTI rates in the Female On-Command are expected to be higher than
the Male On-Command which resides entirely inside the urethra. The procedures
for insertion, voiding and removal are similar to those for the male device.
 
MARKETING AND SALES OF THE ON-COMMAND
 
     The Company anticipates designing a marketing strategy to create awareness
and promote the On-Command as the preferred alternative for the management of
lower urinary tract problems in men and women. The Company believes its initial
marketing efforts will likely be directed toward urologists, uro-gynecologists
and other physicians whose patients are seeking relief from urinary outflow
problems.
 
     The Company believes its initial target market includes men who have
incontinence or retention whose condition does not preclude them from using a
medical device and who meet certain additional criteria including age, manual
dexterity, mental capabilities, and dissatisfaction with their current
management modality. It is estimated that 600,000 to 900,000 men are currently
using a catheter-type device to manage urinary outflow problems. The Company
believes that patients currently using these devices will be the first to
recognize the benefits of the On-Command. These male patients are accustomed to
catheters, see their physician on a regular basis, and are believed to be the
most receptive to alternative management methods. Patients using absorbents who
are dissatisfied with the wetness, odor, discomfort and embarrassment associated
with diapers are also primary targets.
 
     Initially, the female population the Company anticipates targeting is
comprised of women who are post-surgical patients with an acute urinary
management need. Subsequently, the Company anticipates targeting women with
moderate to severe stress incontinence who require some form of continuous
management. Based on previously published research, the Company estimates that
between 2.6 million and 3.4 million women in the United States suffer from
moderate and severe incontinence.
 
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     The On-Command represents a new management modality for urinary outflow
dysfunction, and there can be no assurance that the On-Command will gain any
significant degree of market acceptance among physicians, health care payers or
patients, even if necessary domestic or international regulatory and
reimbursement approvals are obtained. Patient acceptance of the device will
depend on many factors, including physician recommendations, the degree, rate
and severity of potential complications, the cost and benefits compared to
competing products, lifestyle implications, available reimbursement and other
considerations. Failure of the On-Command to achieve substantial market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  Domestic Sales
 
     The Company is considering a sales strategy utilizing sales specialists who
will educate and train physicians and patients. These specialists may include
field-based paraprofessionals, nurse practitioners and professional sales
representatives with experience demonstrating medical products and procedures.
 
     The Company believes the market for the Male On-Command for acute
indications may be limited in size. The Company is studying whether to launch
the product if and when FDA clearance for acute indications is received and, if
so, how, given the expenditures required and the limited acute market size.
 
     To date, the Company has not sold any On-Command products and employs only
a small marketing staff. There can be no assurance that the Company can attract
and retain its own qualified marketing and sales personnel or otherwise design
and implement an effective marketing and sales strategy for the Male and Female
On-Command. The failure to establish and maintain effective marketing, sales and
distribution channels for the Company's products, or to attract and retain
qualified sales personnel to support commercial sales of the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  International Sales
 
     In order to test market the product and obtain chronic use data, the
Company is conducting marketing evaluation studies of its Male and Female
On-Command products in three countries in Europe. The Company intends to
continue these marketing evaluation studies during 1999. Furthermore, the
Company is considering various strategies for the distribution of its products
in Europe. In 1997, the Company received the right to affix the CE mark for the
male and female On-Command. There can be no assurance that the Company will be
successful in continuing these marketing evaluation studies of its products
during this period or be able to establish effective marketing, sales and
distribution channels internationally at a later date.
 
     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.
 
THIRD-PARTY REIMBURSEMENT
 
     In the United States and in foreign countries, third-party reimbursement is
generally available for medical devices such as intermittent, Foley, external
and suprapubic catheters for the management of urinary outflow dysfunction,
including incontinence and retention. Certain patient-administered products such
as diapers and absorbents that are widely used for incontinence management
generally do not receive third-party reimbursement and are paid for by the
patient.
 
     The Company believes, based on the availability of third-party
reimbursement for certain other medical devices, that the On-Command will likely
be eligible for coverage by third-party reimbursement programs. There can be no
assurance, however, that such reimbursement will be available. Currently, the
Company is unable to determine whether the On-Command reimbursement amount, if
available, will be sufficient to cover the cost of the product. The Company
currently estimates the price of the Male On-Command will be in
 
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excess of $100 per month, and furthermore assumes the use of one device per
month. The exact pricing of the Male On-Command has not yet been set. The
pricing for the Female On-Command is anticipated to be in the same range as the
Male On-Command. Current medical reimbursement amounts for existing catheters
(Foleys, etc.) are often significantly less than $100. The Company's long-term
strategy is to obtain separate reimbursement codes for the male and female
products and analyze the cost effectiveness of the On-Command compared to other
device, absorbent and treatment modalities. There can be no assurance that the
Company will receive such separate codes or any codes or sufficient amounts, or
reimbursement at all or successfully perform or complete such analyses.
 
     If third-party reimbursement is unavailable, consumers will have to pay for
the On-Command themselves resulting in out-of-pocket costs for the device. The
Company does not expect that third-party reimbursement will be available, if at
all, unless and until FDA and foreign regulatory approval is received. After
such time, if ever, as applicable regulatory approval is received, third-party
reimbursement for the On-Command will be dependent upon decisions by the Health
Care Financing Administration (and its associates) ("HCFA") for Medicare in the
United States and similar authorities abroad, as well as by private insurers and
other payers who base their reimbursement decisions in part on HCFA's policies
and their own independent analysis of the cost of effectiveness of such
procedures.
 
     Changes in the availability of third-party reimbursement for the
On-Command, for products of the Company's competitors or for surgical procedures
may affect the pricing of the On-Command or the relative cost to the patient.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the On-Command will be required to obtain reimbursement.
There can be no assurance that such physician advocacy will be obtained or that
reimbursement for the On-Command will be available in the United States or in
international markets under either governmental or private reimbursement
systems, or that physicians will support the On-Command. The foregoing
discussion regarding third-party reimbursement for the On-Command is generally
applicable to BMT's proprietary line of airway management products as well. The
Company is not aware of any significant reimbursement issues impacting sales of
BMT's proprietary products. Failure to obtain third-party reimbursement for any
of the Company's products may have a material adverse effect on the Company's
business, financial condition and results of operations.
 
AIRWAY MANAGEMENT PRODUCTS AND OEM SALES
 
     The Company manufactures and markets a series of proprietary airway
management products under the BMT label. These products consist primarily of
silicone based medical devices used in a wide variety of clinical applications,
including tracheostomy and endotracheal tubes for airway management and voice
prostheses for voice restoration. BMT 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. Through BMT, the Company currently
produces limited quantities of the On-Command for use in its clinical trials and
marketing evaluation studies.
 
     BMT 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
the Company's net sales are currently derived from sales in international
markets.
 
     The current proprietary airway management product line includes over 400
different products sold to approximately 9,000 customers in 40 different
countries. The OEM product line includes approximately 500 additional products
sold to 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 the Company's net sales. Sales to one
customer, Abbott Laboratories, accounted for approximately 19% of total net
sales. Although BMT continues to develop its OEM business, there can be no
assurance that its OEM customers will continue to use BMT as a manufacturing
resource. The loss of OEM customers could have a material adverse effect on the
Company's business, financial conditions and results of operations.
 
     The OEM business is serviced by a team of contract sales agents with
support from BMT's engineering staff. BMT is positioned as a value added
manufacturer providing complete product development, regulatory
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affairs, manufacturing and packaging service. BMT emphasizes its broad expertise
in complex catheter manufacturing, silicone fabrication techniques and surface
enhancement technologies.
 
GOVERNMENT REGULATION
 
     The Company's products, including the On-Command, 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 the
Company's products may be sold may impose additional or varying regulatory
requirements. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution. The FDA also has authority to
request recall, repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
 
     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. The Company will be required to adhere to applicable FDA regulations
regarding Good Manufacturing Practices ("GMP") and similar regulations in other
countries, which include testing, control, and documentation requirements, and
with Medical Device Reporting ("MDR") requirements. Ongoing compliance with GMP
and other applicable regulatory requirements will be monitored through periodic
inspections by state and federal agencies, including the FDA, and by comparable
agencies in other countries. In addition, changes in existing regulations or
adoption of new governmental regulations or policies could prevent or delay
regulatory approval of the Company's products.
 
     The Company 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 the Company
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 the Company'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 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
 
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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 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. During 1997, the Company received the right to affix the CE
mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives, to the
On-Command. Some countries in which the Company is considering selling devices
through
                                        8
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distributors either do not currently regulate medical devices such as the
On-Command or have minimal registration requirements. However, these countries
may develop more extensive regulations in the future that could impact the
Company's ability to market the On-Command.
 
     There can be no assurance that the Company will be able to obtain FDA
approval to market the On-Command or other products in the United States for
their intended uses on a timely basis or at all, and delays in receipt of or
failure to receive such clearances or approvals, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations.
 
     BMT, as a developer and manufacturer of Class I and Class II medical
devices, is also subject to all of the foregoing regulatory requirements of the
FDA. BMT is also registered with the FDA as a distributor, initial importer,
repackager and relabeler of medical devices. Among its activities, BMT markets a
range of proprietary and OEM products, most of which require and have received
510(k) clearance. BMT has made modifications to one or more of its cleared
proprietary devices that BMT believes do not require the submission of new
510(k) notices. There can be no assurance, however, that the FDA would agree
with any of BMT's determinations not to submit a new 510(k) notice for any of
these changes or would not require BMT to submit a new 510(k) notice for any of
the changes made to BMT's devices. If the FDA requires BMT to submit a new
510(k) notice for any device modification, BMT may be prohibited from marketing
the modified device until the 510(k) notice is cleared by the FDA.
 
     In January 1998, BMT received a Warning Letter from the FDA following BMT's
response to the FDA regarding certain deficiencies noted during an on-site FDA
inspection in December 1997. BMT management addressed the FDA's concerns noted
in the Warning Letter in both written and verbal communication in January and
February 1998. In March 1998, BMT received a letter in which the FDA
acknowledged BMT's responses and planned actions to address the FDA's concerns
and informed BMT that the FDA was planning a follow-up inspection in 1998. The
FDA has subsequently extended the time for the follow-up inspection into 1999.
While the Company 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 BMT
to adequately address the FDA's concerns could cause the FDA to take additional
actions that might cause disruptions in BMT's operations. These disruptions
could have a material, adverse effect on the Company's business, financial
condition and results of operations.
 
     BMT has received certification of its conformance to ISO-9001 Standards.
BMT 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. BMT'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.
 
MANUFACTURING
 
     BMT has specialized in the manufacture of medical devices using
predominantly silicone technology for over 25 years. BMT manufactures a broad
range of silicone-based catheter-type products used in various segments of the
health care industry. BMT has obtained ISO-9001 certification from BSI Product
Certification of the United Kingdom, which is based on adherence to established
standards in the area of quality assurance and manufacturing process control,
and CE mark status. There can be no assurance that BMT will be able to maintain
such standards and certifications.
 
     BMT purchases certain of the components used to manufacture the On-Command
from several single source suppliers, with whom BMT has no long-term agreements.
Any interruptions or delays associated with any component shortages,
particularly as BMT scales up its manufacturing activities in support of
commercial sales of the On-Command, could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
                                        9
   11
 
     BMT'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. BMT 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.
 
     BMT 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, BMT'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, BMT 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 BMT currently has excess manufacturing capacity.
 
     The manufacture of the On-Command over the past three years has included
design and process steps which have evolved over this period to its current
design. The processes and techniques required to manufacture and assemble the
On-Command are similar to those currently used by BMT to manufacture other
silicone catheter-type devices. The On-Command also requires the procurement of
several non-silicone components. The sources for each component have been
identified and a limited inventory of certain components is currently available.
In addition, the Company is seeking to develop alternative sources for such
components.
 
     The Company may encounter difficulties, delays and significant expenses as
BMT scales up production of the On-Command, including potential problems
involving production yields, quality control, component supply and shortage of
qualified personnel. The Company may also experience higher than expected
manufacturing costs that could prevent the Company from selling the On-Command
at a commercially reasonable price. Notwithstanding BMT's manufacturing
expertise, there can be no assurance that difficulties or unfavorable costs will
not be encountered in mass-production of the On-Command and, in such event,
these difficulties or costs could result in a material adverse effect on the
Company's business, financial condition and results of operations.
 
ENVIRONMENTAL COMPLIANCE
 
     Many raw materials used in the manufacturing process are subject to various
environmental laws and regulations. Proper disposal of waste including metals
and chemicals used in the manufacturing process is a major consideration for
medical device manufacturers. In the event of a violation of environmental laws,
the Company could be held liable for damages, the costs of remedial actions and
could also be subject to revocation of permits necessary to conduct its
business. Any such revocations could require the Company to cease or limit
production at its facilities, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is also subject to environmental laws relating to the storage, use and disposal
of chemicals, solid waste and other hazardous materials, as well as air quality
regulations. Changes or restrictions on discharge limits, emissions levels, or
material storage or handling might require a high level of unplanned capital
investment and/or subsequent relocation. Although the Company 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 the Company will be able to comply with the discharge levels
mandated or that the costs of complying with such regulations will not require
additional capital expenses. Furthermore, there can be no assurance that
compliance with such regulations will not have a material adverse effect on the
Company's business, financial condition and results of operations.
 
                                       10
   12
 
RESEARCH AND DEVELOPMENT
 
     The Company's current research and development efforts are focused
primarily on Male and Female On-Command and BMT proprietary and OEM products.
The Company also intends to continue to build upon its clinical knowledge and
relationships to develop additional advanced and innovative products.
Accordingly, the Company intends to continue to devote 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.
 
     The Company has a fully-staffed pilot production laboratory with a range of
capabilities including product molding, extrusion, testing and assembly as well
as extensive experience in silicone manufacturing and in materials selection for
specific applications. The research and development staff consists of 16
engineers and 10 skilled technicians.
 
Products in development include:
 
  Male On-Command
 
     The Male On-Command is being developed for use in male patients requiring
acute and chronic management of urinary outflow dysfunctions. The basic
configuration incorporates a magnet valve and is intended to treat community
dwelling patients in the urologist office.
 
  Female On-Command
 
     The Female On-Command is being developed for use in female patients
requiring acute management of urinary outflow as in post-surgical procedures.
This same configuration is applicable in chronic patients as well.
 
  On-Command Control
 
     The On-Command Control is being developed for use with semi-ambulatory or
bed-ridden male and female patients in long-term or home care environments. The
On-Command Control incorporates a valve system that can be easily opened or
closed by the patient or most importantly by a caregiver to facilitate patient
voiding. The Company believes the device will be useful in the management of
incontinence in nursing homes and extended care settings, replacing adult
diapers, Foley catheters, male external catheters and suprapubic catheters.
 
  On-Command Convertible
 
     The On-Command Convertible is being developed for use in patients requiring
temporary bladder management in a clinical setting where a Foley or intermittent
type catheter would normally be used and can then be converted to a valved
configuration with the features of the Male and Female On-Command. The
On-Command Convertible would initially function like a Foley catheter allowing
for continuous bladder drainage. When continuous monitoring is no longer
necessary and continence has not yet returned, the On-Command Convertible can be
configured to function in the controlled flow mode. The patient can then move
about without restriction or without the attendant problems associated with an
indwelling Foley catheter, external tubing and collection bag.
 
  Snap-Shot Urine Chemistry Test System
 
     The urine chemistry test system, to be identified under the trademark
"Snap-Shot," is a simple disposable device used for the chemical analysis of
urine samples. The product is a completely closed system in which urine can be
easily collected and tested for various chemical components. Two product
configurations are being explored. One to provide urinalysis for the physicians
office market and another to perform drug screening testing.
 
                                       11
   13
 
     The Company believes that the Snap-Shot will be classified as a Class I
device, and therefore the Company anticipates seeking FDA marketing clearance or
approval through a 510(k) premarket notification. The Snap-Shot is in the
prototype stage of development and there can be no assurance that the Company
will be able to develop it as a product, will receive regulatory approval, will
be accepted by the market or generate significant sales. The Company has not
sold any Snap-Shot products to date.
 
COMPETITION
 
     Competition in the market for treatment and management of urological
disorders is intense and is expected to increase. The Company believes that the
primary competitive factors for its products will include the level of physician
and consumer awareness and acceptance of available management methods, the
degree, rate and severity of potential complications, price and related
benefits, lifestyle implications, available reimbursement and the training of
health care professionals and consumers in the use of available management
methods. The Company's ability to compete in this market will also be affected
by its product development capabilities and innovation, its ability to obtain
required regulatory approval, its ability to protect the proprietary technology,
its manufacturing and marketing capabilities and its ability to attract and
retain skilled employees.
 
     The Company believes its principal competition will come from existing
incontinence management modalities, such as adult diapers and absorbents, with
additional competition from existing catheter, surgical or implantable products.
Current major competitors who compete in the adult absorbent market include
Kimberly-Clark Corporation, Procter & Gamble Company, Johnson & Johnson Co.,
Confab Technologies, Inc. and INBRAND Corporation. Current major competitors who
compete in the catheter/urine collection bag drainage system market include C.R.
Bard, Inc., Kendall Co., Mentor Corporation, Convatec and Baxter Technologies,
Inc. Current major competitors who compete in the market for surgical or
implantable products for incontinence include American Medical Systems, Inc.,
C.R. Bard, Inc., Mentor Corporation, Johnson & Johnson Co., Boston Scientific
Corporation and Medtronic, Inc. The Company is not aware of any new products or
technologies currently being tested that compete directly with the On-Command in
the male urinary outflow dysfunction market although several companies have
expressed interest in this market segment.
 
     The Company is aware that UroMed Corp., Imagyn Medical Technologies, Inc.,
Rochester Medical Corporation, HK Medical Technologies, Inc., Influence, Inc.
and others are developing a number of alternative products for the management of
female incontinence.
 
     BMT 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. BMT specializes in complete
device assemblies of complex products. Because virtually all of BMT's
proprietary and OEM products incorporate silicone components, any cost increase
or other negative development associated with this material could adversely
affect its business, financial condition and results of operations.
 
     BMT'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 BMT
market areas, including InHealth in voice restoration and Xomed Surgical
Products, Inc. in ENT. Competition in the markets for BMT's proprietary products
is also intense.
 
     Most of the Company's competitors and potential competitors have
significantly greater financial, technical, research, manufacturing, marketing,
sales, distribution and other resources than the Company. It is possible that
other large health care and consumer product companies may also enter the
Company'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 the
Company.
 
     There can be no assurance that the Company's competitors will not succeed
in developing or marketing technologies and products that are more effective or
commercially attractive than any which may be offered by
 
                                       12
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the Company, or that such competitors will not succeed in obtaining regulatory
approval, introducing or commercializing any such products prior to the Company.
Such developments could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
PATENTS AND PROPRIETARY RIGHTS
 
     The Company'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. The Company's strategy regarding the protection of
its proprietary rights and innovations is to seek patents on those portions of
its technology that it believes are patentable and to protect as trade secrets
other confidential information and proprietary know-how. There can be no
assurance that the Company's issued patents, or any patents which may be issued
as a result of the Company's applications, will offer any degree of protection.
Legal standards related to the enforceability, scope and validity of patents are
in transition and are subject to uncertainty due to broad judicial discretion
and evolving case law. Moreover, there can be no assurance that any of the
Company's patents or patent applications will not be challenged, invalidated or
circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantial resources and have made significant
investments in competing technologies, will not seek to apply for and obtain
patents that may prevent, limit or interfere with the Company's ability to make,
use or sell its products either in the United States or internationally.
 
     UroQuest 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. Four United States
patents relate to the Snap Shot chemistry test system. The issued United States
patents include both method and device claims. UroQuest's first two patents,
which relate to the On-Command, expire in 2000 and 2001 and the remainder of all
other patents, including six related to the On-Command, expire in the years from
2007 through 2018. In addition, BMT holds fifteen United States patents and nine
foreign patents relating to proprietary airway management products. 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 the Company's issued
patents, or any patents which may be issued as a result of the Company's
applications, will offer any degree of protection. Moreover, there can be no
assurance that any of the Company's patents or patent applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many of whom have substantial resources and have
made significant investments in competing technologies, will not apply for and
obtain patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or
internationally.
 
     Some of the technology used in, and that may be important to, the Company's
products is not covered by any patent or patent application of the Company.
Therefore, the Company also relies on trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with certain employees, consultants and other parties. The Company's proprietary
information agreements with employees and consultants contain standard
confidentiality provisions and, in certain instances, require such individuals
to assign to the Company, without additional consideration, any inventions
conceived or reduced to practice by them while employed or retained by the
Company, subject to customary exceptions. There can be no assurance that
proprietary information agreements with employees, consultants and others will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. Moreover, litigation associated with the
enforcement by the Company of its trade secrets and proprietary know-how can be
lengthy and costly, with no guarantee of success.
 
     The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. The Company is aware of patents held by other
participants in the urological disorder management market, and there can be no
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings before the PTO.
The defense and prosecution of intellectual property suits, PTO interference
proceedings and related legal and administrative proceedings are both costly and
time consuming. Litigation may be necessary to
                                       13
   15
 
enforce patents issued to the Company, to protect trade secrets or know how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others.
 
     Any litigation or interference proceedings would result in substantial
expense to the Company and significant diversion of attention by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms or at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     To date, no claims have been brought against the Company alleging that its
technology or products infringe intellectual property rights of others. However,
there can be no assurance that such claims will not be brought against the
Company in the future or that any such claims will not be successful.
 
     The Company seeks to protect its trademarks through registration.
UroQuest(R) and On-Command(R) are registered trademarks of 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. BMT
also 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. There can be no assurance,
however, that registration of the Company's trademarks will provide any
significant protection.
 
PRODUCT LIABILITY AND INSURANCE
 
     The business of the Company entails significant product liability and
recall risks. Product liability may exist despite regulatory approval and future
court decisions may also affect the Company's risk of product liability. The
Company maintains product liability insurance on products it currently sells and
those currently under clinical evaluation in the amount of $5 million and
evaluates its insurance requirements on an ongoing basis. A successful product
liability claim or series of claims brought against the Company that are not
covered by insurance or are in excess of existing insurance coverage could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that future
product recalls, which could have a material adverse effect on the Company's
business, financial condition and results of operations, will not occur.
 
EMPLOYEES
 
     As of December 31, 1998, the Company employed a total of 278 full-time
employees. Of these full-time employees, 16 are related to urology and 262 are
related to BMT. The Company believes that it has been successful in attracting
experienced and capable personnel. However, there can be no assurance that the
Company will continue to do so.
 
     None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good. In
the past eight years, BMT has faced two union election contests at its
manufacturing facility, each of which failed. There can be no assurances that
the Company will not face additional attempts to unionize its employees. In the
event the Company becomes subject to a collective bargaining agreement, it may
experience increased labor and related costs that could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
ADDITIONAL RISK FACTORS
 
     The statements contained in this Report that are not purely historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All forward looking
 
                                       14
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statements involve various risks and uncertainties and include statements that
indicate what the Company anticipates regarding the Company's product
developments, commercial opportunities, regulatory approval, expectations,
strategies, plans and intentions for the future. All forward-looking statements
are made as of this date based on information available to the Company as of
such date, and the Company assumes no obligation to update any forward-looking
statement. It is important to note that such statements may not prove to be
accurate and that the Company's actual results and future events could differ
materially from those anticipated in such statements. Among the factors that
could cause actual results to differ materially from the results discussed in
the forward-looking statements are described below and elsewhere in this Report.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this Section and other factors included elsewhere in this Report.
See other portions of this Item 1. "Business" and see Item 7. "Management's
Discussion and Analysis of Financial Condition" and "Results of Operations."
 
  Dependence Upon the On-Command
 
     Although the operations of BMT are expected to be the sole source of
revenues in the short-term, the Company's long-term revenues and future success
are substantially dependent upon its ability to market and commercialize the
On-Command in the United States and abroad. The failure of the Company to
successfully commercialize the On-Command or to realize significant revenues
therefrom would have a material adverse effect on the business, financial
condition and results of operations of the Company. See "Urology Products."
 
  Uncertainty of Market Acceptance
 
     The On-Command represents a new management modality for urinary outflow
dysfunction, and there can be no assurance that the On-Command will gain any
significant degree of market acceptance among physicians, health care payers or
patients, even if necessary domestic or international regulatory and
reimbursement approvals are obtained. The Company believes that recommendations
of the On-Command by physicians will be essential for market acceptance of the
On-Command, and there can be no assurance that any such recommendations will be
obtained. Broad use of the On-Command will require the training of numerous
physicians and the time required to complete such training could result in a
delay or dampening of market acceptance. Moreover, health care payers' approval
of reimbursement for the On-Command will be an important factor in establishing
market acceptance. Patient acceptance of the device will depend on many factors,
including physician recommendations, the degree, rate and severity of potential
complications, the cost and benefits compared to competing products, lifestyle
implications, available reimbursement, the patient's ability to operate the
product, the patient's tolerance of an intraurethral device and other
considerations. Failure of the On-Command to achieve substantial market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Marketing and Sales of the
On-Command," and "Third Party Reimbursement."
 
  Limited Operating History; History of Losses and Expectation of Future Losses
 
     The Company has a limited history of operations. Since its inception in
April 1992, the urology portion of Company has been primarily engaged in
research and development of the On-Command. The Company has experienced
substantial operating losses since inception and, as of December 31, 1998, had
an accumulated deficit of approximately $12.9 million. The Company expects its
operating losses to continue until the On-Command achieves significant market
acceptance. The Company continues to expend substantial resources in funding
clinical trials in support of regulatory and reimbursement approvals, expansion
of marketing and sales activities, and research and development. There can be no
assurance that the Company will achieve or sustain profitability in the future.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
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  Risks Associated with BMT
 
     The acquisition of BMT 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 the Company's
earnings. There can be no assurance that the anticipated benefits of the
acquisition will be realized. In particular, approximately 41% of BMT's net
sales during 1998 were derived from its manufacture of OEM medical device
products. BMT maintains no long-term OEM customer contracts and, during 1998,
BMT derived approximately 19% of its net sales from one such customer Abbott
Laboratories. Although BMT continues to develop its OEM business, there can be
no assurance that BMT will be successful in its efforts or that its OEM
customers will continue to use BMT as a manufacturing resource.
 
     Through BMT, the Company purchases certain of the components used to
manufacture the On-Command from several single source suppliers with whom the
Company has no long-term agreements. Any interruptions or delays associated with
any component shortages, particularly as the Company scales up its manufacturing
activities in support of commercial sales of the On-Command, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Manufacturing."
 
     Although the business operations of BMT have continued since 1971, there
can be no assurance that BMT's revenues, cash flow or current profitability and
growth rate will continue in the future. Furthermore, BMT is subject to general
business risks associated with operations of its size and, in particular, to the
same risks faced by other companies that manufacture and market medical device
products. Because virtually all of BMT's proprietary and OEM products
incorporate silicone components, any cost increase or other negative development
associated with this material could adversely affect its business, financial
condition and results of operations. BMT has faced two labor union election
contests in the past eight years and may face additional elections in the
future. In the event BMT becomes subject to a collective bargaining agreement,
it may experience increased labor and related costs that could have a material
adverse effect on the Company's business, financial condition and results of
operations. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Employees."
 
  Future Capital Needs; Uncertainty of Additional Funding
 
     The Company's capital requirements depend on numerous factors, including
the extent to which the On-Command and other products gain market acceptance,
actions relating to regulatory and reimbursement matters, progress of clinical
trials, the effect of competitive products, the cost and effect of future
marketing programs, the resources the Company devotes to manufacturing and
developing its products, the success of non-urological operations, general
economic conditions and various other factors. The timing and amount of such
capital requirements cannot adequately be predicted. Consequently, although the
Company believes existing cash balances and cash anticipated to be generated
from BMT operations will provide adequate funding for its capital requirements
through calendar year 1999, there can be no assurance that the Company will not
require additional funding or that such additional funding, if needed, will be
available on terms satisfactory to the Company, if at all. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve significant restrictive covenants. Failure to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
 
  Dependence Upon Key Employees
 
     The Company 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 the Company. The Company'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. The Company's success will also
depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
 
                                       16
   18
 
qualified personnel, and there can be no assurance that the Company 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, the Company
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. The Company 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.
 
  Environmental Risks
 
     BMT utilizes many raw materials in the manufacturing process that are
subject to various environmental laws and regulations. Proper disposal of waste
including metals and chemicals used in the manufacturing process is a major
consideration for medical device manufacturers. In the event of a violation of
environmental laws, the Company could be held liable for damages and for the
costs of remedial actions and could also be subject to revocation of permits
necessary to conduct its business. Any such revocations could require BMT to
cease or limit production at its facilities, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
BMT is also subject to environmental laws relating to the storage, use and
disposal of chemicals, solid waste and other hazardous materials, as well as air
quality regulations. Changes or restrictions on discharge limits, emissions
levels, or material storage or handling might require a high level of unplanned
capital investment and/or subsequent relocation to another location. There can
be no assurance that BMT will be able to comply with the discharge levels
mandated or that the costs of complying with such regulations will not require
additional capital expenses. Furthermore, there can be no assurance that
compliance with such regulations will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Manufacturing."
 
  Control by Directors, Executive Officers and Affiliated Entities
 
     The Company's directors, executive officers and entities affiliated with
them, in the aggregate, beneficially own approximately 49% of the Company's
Common Stock. As a result, these stockholders, if acting together, are able to
exert substantial influence over and could possibly control all matters
requiring approval by the stockholders of the Company, including the election of
directors and mergers or other business combination transactions. In addition,
each of Warburg, Pincus Investors, L.P. ("Warburg"), the Company's principal
stockholder, and Vertical Fund Associates, L.P. ("Vertical") is entitled to
designate, in certain circumstances, three members of the Board of Directors,
which may not have more than 11 directors without consent of each such
stockholder. In this event, Warburg and Vertical, if acting together, would be
able to control the direction, management and policies of the Company.
 
  Possible Volatility of Stock Price
 
     The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock has been volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products by
the Company or its competitors, FDA and international regulatory actions,
actions with respect to reimbursement matters, developments with respect to
patents or proprietary rights, public concern as to the safety of products
developed by the Company or others, changes in health care policy in the United
States and internationally, changes in stock market analyst recommendations
                                       17
   19
 
regarding the Company, other medical device companies or the medical device
industry generally and general market conditions may have a significant effect
on the market price of the Common Stock. In addition, it is likely that during
future quarterly periods, the Company's results of operations may fluctuate
significantly or may fail to meet the expectations of stock market analysts and
investors and, in such event, the Company's stock price could be materially
adversely affected. In the past, securities class action litigation has been
initiated following periods of volatility in the market price of a company's
securities. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  Certain Anti-Takeover Effects of Charter, Bylaw and Other Provisions
 
     Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could discourage bids for the Common Stock at a premium
over its market price or otherwise limit the price that certain investors might
be willing to pay in the future for shares of the Common Stock. The Board of
Directors may issue Preferred Stock without any vote or further action by the
stockholders, which issuance may have the effect of preventing or delaying a
change in control of the Company and may adversely affect the rights of the
holders of the Common Stock.
 
  Absence of Dividends
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company's wholly
owned subsidiary, BMT, is restricted from declaring dividends to the Company due
to a restrictive covenant contained in a bank loan agreement.
 
ITEM 2. PROPERTIES
 
     The Company's principal administrative offices are located in Menlo Park,
California and its manufacturing and distribution facility is located in Gary,
Indiana. The Company believes that its facilities are adequate for its current
operations.
 
     Since August 1997, the Company has leased approximately 5,000 square feet
in Menlo Park, California pursuant to a lease expiring in October 1999. The
annual rate on the lease is $123,700. Current space is dedicated to
administration, marketing and regulatory activities.
 
     The Company 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, the Company 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.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company is not currently involved in any significant legal proceedings.
There can be no assurance, however, that the Company will not experience
material litigation with respect to the operation of its business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     The Company did not have any submission of matters to a vote of security
holders during the fourth quarter of 1998.
 
                                       18
   20
 
                                    PART II
 
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's stock is traded on the Nasdaq National Market under the
Symbol: UROQ. The Company's stock commenced trading on October 24, 1996
following the Company's IPO.
 
     The following table shows the market range for the Company's Common Stock:
 


                                                              HIGH      LOW
                                                             ------    ------
                                                                 
Fourth Quarter, 1998.......................................  $1.750    $1.000
Third Quarter, 1998........................................   2.813     1.625
Second Quarter, 1998.......................................   3.875     2.500
First Quarter, 1998........................................   5.500     2.125
Fourth Quarter, 1997.......................................   6.500     2.375
Third Quarter, 1997........................................   6.500     3.313
Second Quarter, 1997.......................................   7.000     5.000
First Quarter, 1997........................................   7.125     5.375

 
     At December 31, 1998, there were approximately 172 record holders of the
Company's Common Stock.
 
     The closing price of the Registrant's Common Stock as reported by The
Nasdaq National Market on March 19, 1999 was $1.250.
 
     The Company has never declared or paid dividends on its stock and does not
anticipate paying dividends in the foreseeable future.
 
ITEM 6. SELECTED FINANCIAL DATA
 


                                                       YEARS ENDED DECEMBER 31,
                                 --------------------------------------------------------------------
                                     1998          1997          1996          1995          1994
                                 ------------   -----------   -----------   -----------   -----------
                                                                           
OPERATING DATA(1):
Net sales......................  $ 17,603,575   $16,541,161   $ 2,299,895   $        --   $     2,801
Cost of sales..................     8,931,951     9,307,272     1,308,730            --         2,381
                                 ------------   -----------   -----------   -----------   -----------
Gross profit...................     8,671,624     7,233,889       991,165            --           420
Research and development
  expenses.....................     4,297,713     2,901,050     2,173,312     1,106,631       431,295
General and administrative
  expenses.....................     4,695,635     3,997,210     1,091,857       397,523       483,399
Sales and marketing expenses...     2,579,834     2,258,963       297,587        46,262        30,257
Severance costs................            --     1,600,000            --            --            --
Amortization of goodwill.......       632,184       643,355        90,982            --            --
                                 ------------   -----------   -----------   -----------   -----------
Operating loss.................    (3,533,742)   (4,166,689)   (2,662,573)   (1,550,416)     (944,531)
Other income (expense), net....       311,955       420,745        41,863        36,669      (260,663)
                                 ------------   -----------   -----------   -----------   -----------
Loss before taxes..............    (3,221,787)   (3,745,944)   (2,620,710)   (1,513,747)   (1,205,194)
Provision for income taxes.....       100,000       130,000            --            --            --
                                 ------------   -----------   -----------   -----------   -----------
Net loss.......................  $ (3,321,787)  $(3,875,944)  $(2,620,710)  $(1,513,747)  $(1,205,194)
                                 ============   ===========   ===========   ===========   ===========
Basic and diluted net loss
  per share....................  $      (0.28)  $     (0.33)  $     (0.55)  $     (0.47)  $     (0.39)
                                 ============   ===========   ===========   ===========   ===========
Shares used in computing basic
  and diluted net loss per
  share........................    12,058,861    11,872,647     4,726,807     3,194,243     3,098,033

 
                                       19
   21
 


                                                             DECEMBER 31,
                                 --------------------------------------------------------------------
                                     1998          1997          1996          1995          1994
                                 ------------   -----------   -----------   -----------   -----------
                                                                           
BALANCE SHEET DATA(1):
Cash and cash equivalents......  $  6,980,128   $11,054,088   $12,694,047   $ 1,113,594   $   564,097
Working capital................    10,145,602    13,204,642    15,991,290       463,594       325,723
Total assets...................    28,159,047    31,923,751    35,039,517     1,721,027     1,205,273
Long-term debt, excluding
  current portion..............       921,654     1,293,175     1,787,437            --       552,188
Accumulated deficit............   (12,864,039)   (9,542,252)   (5,666,308)   (3,045,598)   (1,531,851)
Stockholders' equity (2).......    24,438,920    27,403,975    30,486,314     1,047,126       412,621

 
- ---------------
(1) On October 30, 1996, concurrent with the closing of Company's initial public
    offering, the Company completed its acquisition of BMT, Inc. The
    transaction, which was accounted for as a purchase, was effected through the
    payment of $10 million cash, and the issuance of 2.5 million newly issued
    shares of UroQuest Common Stock.
 
(2) On October 24, 1996, the Company 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, the Company realized net proceeds of
    $22,894,082.
 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Report. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties. The
Company's actual results of operations could differ materially from those
anticipated in such forward-looking statements as a result of certain factors
discussed under Item 1. "Business" and elsewhere in this Report.
 
OVERVIEW
 
     Since its inception in April 1992, the Company has devoted its efforts to
the design and development of advanced products for the management and diagnosis
of both male and female urological disorders. The Company's principal product,
the On-Command, is an intraurethral (inside the urethra) catheter incorporating
a proprietary anchoring system and a proprietary patient controlled,
magnetically activated valve used to regulate urine flow. The On-Command is
designed to enable persons with either urinary incontinence or urinary retention
to manage their condition without the restricted mobility, medical
complications, discomfort and embarrassment generally associated with many of
the existing management alternatives, including intermittent, Foley, external
and suprapubic catheters, diapers and absorbents, and penile clamps. The On-
Command is an investigational device that has not been approved by the FDA and
will not be available for commercial distribution in the United States unless
and until such approval is obtained.
 
     Since 1996, Bivona Medical Technologies ("BMT") has been a wholly owned
subsidiary of the Company. BMT develops, manufactures and markets a line of
proprietary silicone medical device products and provides engineering design,
development and manufacturing services for silicone products on an OEM basis for
other medical device companies. All of the Company's current revenues relate to
sales of BMT products. BMT is one of a limited number of specialty manufacturers
of silicone catheters in the United States. BMT manufactures the Company's
On-Command currently being used in clinical trials and market evaluation
studies.
 
     The Company has experienced substantial losses since inception and, as of
December 31, 1998, had an accumulated deficit of $12.9 million. In October 1996,
the Company raised approximately $17.8 million through the initial public
offering of its Common Stock ("IPO").
 
                                       20
   22
 
RESULTS OF OPERATIONS
 
     The Company evaluates 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 years ended December
31, 1998, 1997 and 1996 are highlighted as follows:
 


                                           UROLOGY      AIRWAY MANAGEMENT/
                                          PRODUCTS         OEM PRODUCTS          TOTAL
                                         -----------    ------------------    -----------
                                                                     
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)

 
     See Item 8. "Financial Statements and Supplementary Data" for additional
segment information.
 
  Net sales and cost of sales
 
     Net sales, which were generated from sales by BMT of primarily proprietary
airway management products and other medical device products to OEM customers,
increased 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' BMT sales of proprietary airway
management products and other medical device products to OEM customers; included
in 1996 net sales were only two months' BMT sales following the acquisition. On
a pro forma twelve month basis, BMT sales for 1996 were $14,635,000. Cost of
sales of $9,307,000 and $1,309,000 related to the BMT sales in 1997 and two
months in 1996 following the acquisition, respectively. On a pro forma twelve
month basis, BMT cost of sales for 1996 was $8,232,000. Gross profit of
$7,234,000 and $991,000 related to BMT sales in 1997 and two months in 1996,
respectively. On a pro forma twelve month basis, BMT 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 BMT totaling $1,636,000; included in 1996
expenses were only two months' research and development expenses related to
 
                                       21
   23
 
BMT totaling $213,000 and a $783,000 write-off of in-process research and
development costs when the Company acquired BMT. 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 BMT totaling $3,035,000; included in 1996
expenses were only two months' general and administrative expenses related to
BMT 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 the Company'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.
 
     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 BMT totaling $1,841,000; included in 1996 expenses were only
two month's sales and marketing expenses related to BMT 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 the Company's European marketing evaluation studies of
its Male and Female On-Command product that have been initiated in the fourth
quarter of 1998.
 
  Severance costs
 
     The Company did not recognize any severance costs in 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 BMT in October 1996. The goodwill is being amortized over an
estimated life of 20 years.
 
  Other income (expense)
 
     Other income (expense) decreased to net interest income of $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 the Company is repaying existing loans and has not incurred any new loans.
                                       22
   24
 
     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 the Company'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 BMT totaling $176,000;
included in 1996 expense were only two months' interest expense related to BMT
totaling $33,000.
 
  Provision for income taxes
 
     The Company 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 BMT in Indiana 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. 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, the Company reduced the
valuation allowance to the extent of the deferred tax liabilities generated
primarily through the acquisition of BMT and recorded a corresponding reduction
in goodwill.
 
     As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $8,500,000. The Company also had federal research
and development tax credit carryforwards of approximately $80,000. 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 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 carryforwards before utilization.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has financed its operations primarily through the public and
private sale of equity securities and through bank-provided working capital
financing, short-term borrowings and equipment lease financing and, beginning in
1997, cash generated from operations at BMT. Since inception, the Company has
raised approximately $28 million in net proceeds of equity financing which
includes the net proceeds of $17.8 million generated through the initial public
offering of the Company's Common Stock in October 1996.
 
     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 BMT's operations and cash provided from investment income.
 
     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 BMT. Included
in the additions of $132,000 in 1996 were two months of BMT additions following
the acquisition. On a pro forma basis as if the BMT acquisition had occurred at
the beginning of the year, additions for the year ended December 31, 1996 were
$682,000. The Company expects additional purchases of property and equipment to
continue in 1999 to support the urological product development.
 
     During 1996, the Company issued 10% demand promissory notes totaling
$500,000 which were repaid by year end. The 12% secured promissory notes
totaling $390,000 issued by the Company in December 1994 were also repaid in
1996. In connection with the placement of the 12% secured promissory notes,
UroQuest issued
                                       23
   25
 
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.
 
     The Company's primary internal source of liquidity presently consists of
existing borrowings, cash balances and cash generated from BMT's operations. The
Company's primary external sources of liquidity are equity financings and
bank-provided debt financing.
 
     As of 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 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.
 
     The Company's capital requirements depend on numerous factors, including
the extent to which the On-Command product and other products gain market
acceptance, actions relating to regulatory and reimbursement matters, progress
of clinical trials, the effect of competitive products, the cost and effect of
future marketing programs, the resources the Company devotes to manufacturing
and developing its products, the success of BMT's proprietary airway management
products and OEM sales, general economic conditions and various other factors.
The timing and amount of such capital requirements cannot adequately be
predicted. The Company believes that existing cash and cash equivalents and cash
anticipated to be generated from BMT's operations will provide adequate funding
for its currently anticipated capital requirements through the calendar year
1999. Prior to achieving profitability, the Company may require additional
capital and there can be no assurance that such additional funding will be
available on terms satisfactory to the Company, if at all. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve significant restrictive covenants. Failure to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     The Company expects its operating losses to continue until the On-Command
achieves significant market acceptance. The Company continues to expend
substantial resources in funding clinical trials in support of regulatory and
reimbursement approvals, expansion of marketing and sales activities, and
research and development. In addition, the Company's results of operations may
fluctuate significantly during future quarterly periods. All management
estimates regarding liquidity and capital requirements are subject to the
factors discussed above and those set forth under "Additional Risk Factors" and
elsewhere in Item 1. "Business."
 
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 a recently completed assessment, the Company believes that all its
computer programs and hardware that have date-sensitive software or embedded
chips will properly utilize dates beyond December 31, 1999, primarily as a
result of system upgrades, currently in process, which were originally planned
to enhance business operations.
 
     The completed assessment indicated that most of the Company's significant
information technology systems, if not upgraded or modified, could be affected.
These systems include accounting programs, internally developed software and
other PC-based applications. The Company is currently completing an upgrade to
its accounting system; such upgrade was originally intended to facilitate
increased business operations. The upgraded accounting system is certified by
the vendor that it is Year 2000 compliant. Regarding its internally developed
software, the Company determined that approximately 5% of the lines of codes in
the software had to be changed to resolve the Year 2000 Issue. The Company
believes such changes have been fully completed.
 
                                       24
   26
 
PC-based applications that are currently used by the Company are certified by
the vendors at time of purchase that they are Year 2000 compliant; therefore, no
replacements or upgrades are considered necessary. The assessment also indicated
that the embedded chips used in production and manufacturing equipment are not
date-sensitive and thus will not be affected by the Year 2000 Issue. The cost
directly related to addressing Year 2000 issues has been determined to be
immaterial.
 
     The Company is planning to purchase software to test all its information
technology systems regarding Year 2000 compliance. The Company is now
identifying and evaluating certain testing programs and anticipates completing
the testing process by the first half of calendar year 1999.
 
     The Company has also begun making queries to its significant suppliers of
their Year 2000 readiness. To date, the Company is not aware of any suppliers
with a Year 2000 Issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that its suppliers will be Year 2000 ready. The inability of
suppliers to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of noncompliance by suppliers is
not determinable.
 
     The Company presently believes that with upgrades or modifications of
existing computer systems, the Year 2000 Issue can be mitigated. However, if
such upgrades or modifications fail to address the Year 2000 issues, the
Company's business, financial condition and result of operations could be
materially adversely affected. The extent of the financial impact due to Year
2000 noncompliance cannot be reasonably estimated at this time.
 
     The Company currently has no contingency plans in place in the event that
its computer systems are not Year 2000 compliant. The Company plans to evaluate
and determine whether such a plan is necessary after the internal testing
process is completed in the first half of calendar year 1999. The Company is
developing certain strategies in the case that its key suppliers do not resolve
their Year 2000 issues in a timely manner.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks, including market risk associated with
interest rate movements. The Company 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, the Company does
not anticipate material losses in these areas.
 
     At December 31, 1998, the Company had total cash and cash equivalents of
approximately $6,980,000 consisting primarily of money market funds which have
variable interest rates and hence do not expose the Company to additional market
risk. The average interest rate on the money market funds account in 1998 was
4.95%.
 
     The Company 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
the Company to additional market risk.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements of the Company and its subsidiaries
are set forth on pages F-1 through F-20 hereof.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                       25
   27
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The required information concerning the Company's directors, as set forth
in the Company's definitive Proxy Statement to be filed with the Commission on
or before April 30, 1999, is incorporated herein by reference.
 
     As of December 31, 1998, the executive officers of the Registrant, who are
elected by the board of directors, are as follows:
 
     TERRY E. SPRAKER, Ph.D., age 50, has been a director and President and
Chief Executive Officer of the Company since May 1997. Before joining the
Company, Dr. Spraker was President and Chief Executive Officer of EP
Technologies, Inc., a manufacturer of interventional cardiac electrophysiology
products, from October 1992 until August 1996. Prior to joining EP Technologies,
Dr. Spraker was President of the Medical Systems Division of Ohmeda, an
anesthesia and critical care products company, from July 1992 until October 1992
and V.P./General Manager of Anesthesia Systems from July 1987 through June 1992.
Dr. Spraker held various general management and engineering positions with
Ohmeda and other medical device and equipment manufacturers from October 1977 to
June 1987. Dr. Spraker holds a B.S. in Electrical Engineering from the
University of Bridgeport, a M.S. in Electrical Engineering and a Ph.D. in
Bioengineering from Pennsylvania State University.
 
     THOMAS E. BRANDT, age 45, has been a director and Chief Operating Officer
since October 1996. Mr. Brandt has served as President and Chief Executive
Officer of Bivona, Inc. ("Bivona"), a subsidiary of the Company which produces
and markets medical products, since June 1989. Prior to joining Bivona, Mr.
Brandt held various management, marketing and engineering positions with Dow
Corning Corporation, a chemical company. Mr. Brandt holds a M.B.A. from Central
Michigan University and a B.S. in Engineering from Iowa State University.
 
     JEFFREY L. KAISER, age 48, has served as Vice President, Chief Financial
Officer, Treasurer, and Secretary since May 1997. From March 1990 until June
1996, Mr. Kaiser was Vice President, Finance and Administration and Chief
Financial Officer of EP Technologies, a manufacturer of interventional cardiac
electrophysiology products. From October 1988 until February 1990, Mr. Kaiser
provided independent financial and business consulting services to various
companies. From March 1982 until September 1988, Mr. Kaiser was Chief Financial
Officer of various companies that manufactured computer hardware, styrofoam
consumer products, and fermentation equipment. Previously, Mr. Kaiser held
various positions, including Senior Audit Manager, with Ernst & Young. Mr.
Kaiser holds a B.S. in Business Administration from Miami University, Oxford,
Ohio. He is a Certified Public Accountant.
 
     ALAN L. MARQUARDT, age 46, has served as Vice President, Regulatory,
Clinical, and Quality Affairs since March 1998. From February 1993 to February
1998, Alan Marquardt was Vice President, Regulatory, Clinical and Quality
Affairs at Boston Scientific Corporation's San Jose, California operation. From
November 1988 to January 1993, Mr. Marquardt was Director of Clinical and
Regulatory Affairs at Pfizer, Inc.'s Schneider U.S. Stent Division. From 1986 to
November 1988, Mr. Marquardt was Senior Product Regulation Manager at Medtronic,
Inc. Prior to this time, Mr. Marquardt held various other positions at
Medtronic, Inc. and National Biocentric. Mr. Marquardt holds a Bachelor of
Science in Microbiology from the University of Minnesota.
 
     KEITH W. L. WARD, age 55, has served as Vice President, International since
August 1997. From January 1996 until July 1997, Mr. Ward was Sales and Marketing
Director, Europe, for the EP Technologies Division of Boston Scientific
Corporation, following its merger with EP Technologies, Inc. From October 1993
until January 1996, Mr. Ward was Vice President, International of EP
Technologies, a manufacturer of interventional cardiac electrophysiology
products. From February 1986 until September 1993, Mr. Ward held various
International Marketing and Business Development positions in Ohmeda, a medical
equipment and pharmaceutical manufacturer of anesthesia and critical care
products. Prior to this time, Mr. Ward held marketing and general management
positions in Sherwood Medical Industries and Abbott Laboratories. Mr. Ward holds
a B.Sc. Hons. In Chemical Engineering from the University of Surrey, England.
 
                                       26
   28
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The required information concerning executive compensation, as set forth in
the Registrant's definitive Proxy Statement to be filed with the Commission on
or before April 30, 1999, is incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The required statements concerning security ownership of certain beneficial
owners and management, as set forth in the Company's definitive Proxy Statement
to be filed with the Commission on or before April 30, 1999, are incorporated
herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The required statements concerning certain relationships and related
transactions, as set forth in the Company's definitive Proxy Statement to be
filed with the Commission on or before April 30, 1999, are incorporated herein
by reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) Documents filed as part of this report.
 
     1. Financial Statements.
 
     The financial statements of the Company are listed at Item 8 of this
Report.
 
     2. Financial Statement Schedules.
 
     No schedules are required in connection with the filing of this Report as
amounts are either immaterial or are disclosed in the financial statements.
 
     3. Exhibits
 
     
     3.1    Restated Certificate of Incorporation of UroQuest Medical
            Corporation, a Delaware corporation(5)
     3.2    Bylaws of UroQuest Medical Corporation, a Delaware
            corporation (5)
     3.3    Specimen Stock Certificate(6)
    10.1*   Form of Indemnification Agreement between the Registrant and
            each of its directors and officers(6)
    10.2*   1994 Stock Plan(4)
    10.3*   1996 Employee Stock Purchase Plan and form of Subscription
            and Contribution Election Form(6)
    10.4*   Employment Agreement dated January 2, 1998 between the
            Company and Terry E. Spraker, Ph.D.(3)
    10.5*   Employment Agreement dated January 2, 1998 between the
            Company and Jeffrey L. Kaiser(3)
    10.6    Lease dated December 16, 1995 between JVM Realty Corporation
            and Bivona, Inc.(6)
    10.8*   Employment Agreement dated January 2, 1998 between the
            Company and Keith W.L. Ward(3)
    10.9*   Employment Agreement effective June 1, 1995 for Terrance L.
            Domin(6)
    10.10*  Employment Agreement dated February 18, 1998 between the
            Company and Alan L. Marquardt(3)

    
 
                                       27
   29
     
    10.11*  Employment Agreement effective June 27, 1996 for Tom E.
            Brandt(6)
    10.12*  Letter dated August 15, 1996 from the Registrant to J.J.
            Donohue(6)
    10.13*  Right of First Refusal and Co-Sale Agreement dated June 15,
            1995 among the Registrant, Warburg, Pincus Investors, L.P.,
            Vertical Fund Associates, L.P. and Richard C. Davis, Jr.,
            M.D. (the "Co-Sale Agreement")(6)
    10.14*  Letter Agreement dated September 30, 1996, as amended
            October 23, 1996, among UroQuest Medical Corporation,
            Warburg, Pincus Investors, L.P., Vertical Fund Associates,
            L.P. and Richard C. Davis, Jr., M.D., amending the Co-Sale
            Agreement(6)
    10.15   Note and Security Agreement between the Company and Richard
            C. Davis Jr., M.D. dated January 9, 1998 (the note was
            repaid on March 30, 1998)(3)
    10.16   Note and Security Agreement between the Company and Alan
            Marquardt dated May 7, 1998(2)
    10.17*  Indemnification Agreement between the Company and Terry E.
            Spraker dated October 12, 1998(1)
    10.18*  Indemnification Agreement between the Company and Jeffrey L.
            Kaiser dated October 12, 1998(1)
    10.19*  Indemnification Agreement between the Company and Alan
            Marquardt dated October 12, 1998(1)
    10.20*  Indemnification Agreement between the Company and Keith Ward
            dated October 12, 1998(1)
    21.1    Subsidiaries of Registrant(6)
    23.1a   Consent of Ernst & Young LLP, Independent Auditors
    23.1b   Consent of KPMG LLP
    27.1    Financial Data Schedule for the year ended December 31, 1998

    
 
- ---------------
(1) Incorporated by Reference from the UroQuest Medical Corporation Quarterly
    Report on Form 10-Q dated November 13, 1998
 
(2) Incorporated by Reference from the UroQuest Medical Corporation Quarterly
    Report on Form 10-Q dated August 13, 1998
 
(3) Incorporated by Reference from the UroQuest Medical Corporation Quarterly
    Report on Form 10-Q dated May 14, 1998
 
(4) Incorporated by Reference from the UroQuest Medical Corporation Annual
    Report on Form 10-K dated March 30, 1998
 
(5) Incorporated by Reference from the UroQuest Medical Corporation Annual
    Report on Form 10-K dated March 27, 1997
 
(6) Incorporated by Reference from the UroQuest Medical Corporation Registration
    Statement on Form S-1, File No. 333-07277
 
 *  Management contract or compensatory plan arrangement
 
(b) Reports on Form 8-K:
 
     The Company did not file any reports on Form 8-K during the fourth quarter
of 1998.
 
(c) See Item 14(a) 3 above
 
(d) See Item 14(a) 2 above
 
                                       28
   30
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in Menlo Park,
California, on the 30th day of March 1999.
 
                                          UroQuest Medical Corporation
 
                                          By:  /s/ TERRY E. SPRAKER, PH.D.
 
                                            ------------------------------------
                                                  Terry E. Spraker, Ph.D.
                                               President and Chief Executive
                                                           Officer
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jeffrey L. Kaiser, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form-10K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Report.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
 


                  SIGNATURE                                    TITLE                        DATE
                  ---------                                    -----                        ----
                                                                                 
         /s/ TERRY E. SPRAKER, PH.D.             President, Chief Executive Officer    March 30, 1999
- ---------------------------------------------    and Director (Principal Executive
           Terry E. Spraker, Ph.D.                            Officer)
 
            /s/ JEFFREY L. KAISER                 Vice President, Chief Financial      March 30, 1999
- ---------------------------------------------    Officer, Secretary, and Treasurer
              Jeffrey L. Kaiser                       (Principal Financial and
                                                        Accounting Officer)
 
              /s/ TOM E. BRANDT                     Director and Chief Operating       March 30, 1999
- ---------------------------------------------                 Officer
                Tom E. Brandt
 
       /s/ RICHARD C. DAVIS, JR., M.D.            Director, Chairman of the Board      March 30, 1999
- ---------------------------------------------
         Richard C. Davis, Jr., M.D.
 
            /s/ JACK W. LASERSOHN                             Director                 March 30, 1999
- ---------------------------------------------
              Jack W. Lasersohn
 
               /s/ GARY E. NEI                                Director                 March 30, 1999
- ---------------------------------------------
                 Gary E. Nei
 
         /s/ ELIZABETH H. WEATHERMAN                          Director                 March 30, 1999
- ---------------------------------------------
           Elizabeth H. Weatherman

 
                                       29
   31
 
                          UROQUEST MEDICAL CORPORATION
 
                       CONSOLIDATED FINANCIAL INFORMATION
 


                                                              PAGE
                                                              ----
                                                           
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

 
                                       F-1
   32
 
               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
   33
 
                          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
   34
 
                          UROQUEST MEDICAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 


                                                              YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1998           1997           1996
                                                      -----------    -----------    -----------
                                                                           
Net sales...........................................  $17,603,575    $16,541,161    $ 2,299,895
Cost of sales.......................................    8,931,951      9,307,272      1,308,730
                                                      -----------    -----------    -----------
  Gross profit......................................    8,671,624      7,233,889        991,165
                                                      -----------    -----------    -----------
Operating expenses:
  Research and development..........................    4,297,713      2,901,050      2,173,312
  General and administrative........................    4,695,635      3,997,210      1,091,857
  Sales and marketing...............................    2,579,834      2,258,963        297,587
  Severance costs...................................           --      1,600,000             --
  Amortization of goodwill..........................      632,184        643,355         90,982
                                                      -----------    -----------    -----------
          Total operating expenses..................   12,205,366     11,400,578      3,653,738
                                                      -----------    -----------    -----------
Operating loss......................................   (3,533,742)    (4,166,689)    (2,662,573)
Other income (expense):
  Interest expense..................................     (131,593)      (180,634)       (82,364)
  Interest income...................................      443,548        601,379        124,227
                                                      -----------    -----------    -----------
     Other income (expense), net....................      311,955        420,745         41,863
Loss before provision for income taxes..............   (3,221,787)    (3,745,944)    (2,620,710)
Provision for income taxes..........................      100,000        130,000             --
                                                      -----------    -----------    -----------
Net loss............................................  $(3,321,787)   $(3,875,944)   $(2,620,710)
                                                      ===========    ===========    ===========
Basic and diluted net loss per share................  $     (0.28)   $     (0.33)   $     (0.55)
                                                      ===========    ===========    ===========
Weighted average shares used in computing basic and
  diluted net loss per share........................   12,058,861     11,872,647      4,726,807
                                                      ===========    ===========    ===========

 
          See accompanying notes to consolidated financial statements.
 
                                       F-4
   35
 
                          UROQUEST MEDICAL CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 


                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 1998           1997
                                                              -----------    -----------
                                                                       
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 6,980,128    $11,054,088
  Accounts receivable, net of allowance for doubtful
     accounts of $60,000 at December 31, 1998 and 1997......    3,145,490      2,610,764
  Inventories...............................................    2,557,618      2,449,072
  Prepaid expenses and other current assets.................      260,839        317,319
                                                              -----------    -----------
          Total current assets..............................   12,944,075     16,431,243
                                                              -----------    -----------
Property, plant and equipment, net..........................    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..............................................   10,315,481     11,079,377
Other noncurrent asset......................................      200,000             --
                                                              -----------    -----------
          Total assets......................................  $28,159,047    $31,923,751
                                                              ===========    ===========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   462,715    $   659,769
  Accrued compensation......................................      839,663        599,306
  Accrued selling and distribution expenses.................      154,610         73,124
  Accrued severance costs...................................           --        666,376
  Other accrued expenses....................................      970,870        737,666
  Current portion of long-term debt.........................      370,615        490,360
                                                              -----------    -----------
          Total current liabilities.........................    2,798,473      3,226,601
                                                              -----------    -----------
Long-term debt, net of current portion......................      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...........................................       12,356         11,954
  Additional paid-in capital................................   37,323,670     36,979,740
  Deferred compensation.....................................      (33,067)       (45,467)
  Accumulated deficit.......................................  (12,864,039)    (9,542,252)
                                                              -----------    -----------
          Total stockholders' equity........................   24,438,920     27,403,975
                                                              -----------    -----------
          Total liabilities and stockholders' equity........  $28,159,047    $31,923,751
                                                              ===========    ===========

 
          See accompanying notes to consolidated financial statements.
                                       F-5
   36
 
                          UROQUEST MEDICAL CORPORATION
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                 PREFERRED STOCK            VOTING             NON-VOTING
                                ISSUED IN SERIES         COMMON STOCK         COMMON STOCK     ADDITIONAL
                               -------------------   --------------------   ----------------     PAID-IN       DEFERRED
                                 SHARES     VALUE      SHARES      VALUE     SHARES    VALUE     CAPITAL     COMPENSATION
                               ----------   ------   ----------   -------   --------   -----   -----------   ------------
                                                                                     
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)
                               ==========   ======   ==========   =======   ========   ====    ===========     ========
 

 
                                                  TOTAL
                               ACCUMULATED    STOCKHOLDERS'
                                 DEFICIT         EQUITY
                               ------------   -------------
                                        
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
                               ============    ===========

 
          See accompanying notes to consolidated financial statements.
                                       F-6
   37
 
                          UROQUEST MEDICAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 


                                                              YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1998           1997           1996
                                                      -----------    -----------    -----------
                                                                           
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..........................................  $(3,321,787)   $(3,875,944)   $(2,620,710)
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation and amortization..................    1,666,921      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...........      245,755        195,635         83,541
     Changes in operating assets and liabilities:
       Accounts receivable..........................     (534,726)      (448,915)       155,432
       Inventories..................................     (354,301)       (21,895)        98,597
       Prepaid expenses and other assets............     (143,520)        54,529       (259,145)
       Accounts payable and accrued expenses........      357,993        678,963        293,523
       Accrued severance costs......................     (666,376)       666,376             --
                                                      -----------    -----------    -----------
          Net cash used in operating activities.....   (2,741,080)      (497,008)    (1,035,073)
                                                      -----------    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property, plant and equipment,
       net..........................................   (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..........................................           --             --         25,756
                                                      -----------    -----------    -----------
          Net cash used in investing activities.....   (1,185,946)      (591,420)   (10,006,649)
                                                      -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of common stock.........      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.........................................     (491,266)      (596,266)      (959,861)
                                                      -----------    -----------    -----------
          Net cash (used in) provided by financing
            activities..............................     (146,934)      (551,531)    22,622,175
                                                      -----------    -----------    -----------
Net increase (decrease) in cash and cash
  equivalents.......................................   (4,073,960)    (1,639,959)    11,580,453
Cash and cash equivalents at beginning of year......   11,054,088     12,694,047      1,113,594
                                                      -----------    -----------    -----------
Cash and cash equivalents at end of year............  $ 6,980,128    $11,054,088    $12,694,047
                                                      ===========    ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for interest............................  $   131,907    $   180,634    $    80,851
  Cash paid for income taxes........................       35,000        118,000        254,541

 
          See accompanying notes to consolidated financial statements.
                                       F-7
   38
 
                          UROQUEST MEDICAL CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998
 
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.
 
     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.
 
  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.
 
                                       F-8
   39
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
  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:
 


                                                               1998           1997
                                                            -----------    -----------
                                                                     
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
                                                            ===========    ===========

 
  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 recognized by the Company upon shipment.
 
  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 proforma basis, assuming
conversion of the preferred stock upon the completion of 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.
 
                                       F-9
   40
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
  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 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.
 
                                      F-10
   41
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
2. INVENTORIES
 
     Inventories at December 31 consist of the following:
 


                                                         1998          1997
                                                      ----------    ----------
                                                              
Finished goods......................................  $  581,383    $  589,169
Work-in-progress....................................   1,211,519     1,046,127
Raw materials and supplies..........................     764,716       813,776
                                                      ----------    ----------
                                                      $2,557,618    $2,449,072
                                                      ==========    ==========

 
3. PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment at December 31 consists of the following:
 


                                                         1998          1997
                                                      ----------    ----------
                                                              
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
                                                      ==========    ==========

 
     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:
 


                                                                 1998          1997
                                                              ----------    ----------
                                                                      
Long-term debt:
  Bankterm 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
                                                              ==========    ==========

 
     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.
 
                                      F-11
   42
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     Long-term debt matures as follows:
 


                  YEAR ENDING DECEMBER 31,
                  ------------------------
                                                           
1999........................................................  $  370,615
2000........................................................      93,277
2001........................................................      99,895
2002........................................................     106,983
2003........................................................     114,575
2004 and thereafter.........................................     506,924
                                                              ----------
                                                              $1,292,269
                                                              ==========

 
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. 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.
 
                                      F-12
   43
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     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:
 


                                                            YEARS ENDED
                                 ------------------------------------------------------------------
                                         1998                   1997                   1996
                                 --------------------    -------------------    -------------------
                                            WEIGHTED-              WEIGHTED-              WEIGHTED-
                                             AVERAGE                AVERAGE                AVERAGE
                                 SHARES     EXERCISE     SHARES    EXERCISE     SHARES    EXERCISE
                                  (000)       PRICE      (000)       PRICE      (000)       PRICE
                                 -------    ---------    ------    ---------    ------    ---------
                                                                        
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

 
     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:
 


                            OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                 ------------------------------------------   -----------------------
                              WEIGHTED
                              AVERAGE           WEIGHTED                  WEIGHTED
                 NUMBER      REMAINING          AVERAGE       NUMBER      AVERAGE
EXERCISE PRICE   (000)    CONTRACTUAL LIFE   EXERCISE PRICE   (000)    EXERCISE PRICE
- --------------   ------   ----------------   --------------   ------   --------------
                                                        
$0.700 - $1.750    618           5.6years        $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
                 =====                                         ===

 
     Options available for grant as of December 31, 1998 was 609,034 shares.
 
     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:
 


                                         1998           1997           1996
                                      -----------    -----------    -----------
                                                           
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)

 
     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.
 
                                      F-13
   44
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     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:
 


                                                                    EMPLOYEE STOCK
                                        STOCK OPTION PLAN           PURCHASE PLAN
                                 -------------------------------    --------------
                                  1998       1997        1996            1998
                                 -------    -------    ---------    --------------
                                                        
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

 
     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 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.
 
                                      F-14
   45
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     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:
 


                                                  1998           1997          1996
                                               -----------    -----------    ---------
                                                                    
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    $      --
                                               ===========    ===========    =========

 
     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:
 


                                                       1998           1997
                                                    -----------    -----------
                                                             
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....................  $        --    $        --
                                                    ===========    ===========

 
     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 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 $8,500,000. The Company also had federal research
and development tax credit carryforwards of approximately $80,000. 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 carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
loss carryforwards before utilization.
 
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.
 
                                      F-15
   46
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
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:
 
                                                       
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
                                                          ===========


 
     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.
 


                                                             1996
                                                          -----------
                                                       
Revenues................................................  $14,634,838
Net loss................................................     (483,601)
Basic and diluted net loss per share....................        (0.04)

 
     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.
 
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:
 


                           YEAR                              AMOUNT
                           ----                             --------
                                                         
1999......................................................  $104,000
2000......................................................     3,000
                                                            --------
Total.....................................................  $107,000
                                                            ========

 
                                      F-16
   47
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     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. The Company is considering marketing the
On-Command internationally through independent foreign distribution
arrangements, none of which are currently in place. 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
   48
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     The Company utilizes the following information for purposes of assessing a
segment's performance and making operating decisions:
 


                                                       UROLOGY     AIRWAY MANAGEMENT/
                                                      PRODUCTS        OEM PRODUCTS         TOTAL
                                                     -----------   ------------------   -----------
                                                                               
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

 
- ---------------
* 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.
 
                                      F-18
   49
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     A reconciliation of reportable segment amounts to the Company's
consolidated balances is as follows:
 


                                                       1998            1997            1996
                                                   ------------    ------------    ------------
                                                                          
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
                                                   ============    ============    ============
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
                                                   ============    ============    ============

 
  Geographic Area Data
 
     Sales by major geographic area are as follows (sales are attributed to
countries based on the location of customers):
 


                                                       1998            1997            1996
                                                   ------------    ------------    ------------
                                                                          
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
                                                   ============    ============    ============

 
     All assets are primarily located in the United States. Amount of inventory
and office equipment located outside the United States (in Europe) is
insignificant.
 
                                      F-19
   50
                          UROQUEST MEDICAL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
  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 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.
 
                                      F-20
   51
 
                                 EXHIBIT INDEX
 


                                                                             SEQUENTIALLY
    EXHIBIT                                                                    NUMBERED
    NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
    -------    ------------------------------------------------------------  ------------
                                                                       
     3.1       Restated Certificate of Incorporation of UroQuest Medical
               Corporation, a Delaware corporation(5)
     3.2       Bylaws of UroQuest Medical Corporation, a Delaware
               corporation (5)
     3.3       Specimen Stock Certificate(6)
    10.1*      Form of Indemnification Agreement between the Registrant and
               each of its directors and officers(6)
    10.2*      1994 Stock Plan(4)
    10.3*      1996 Employee Stock Purchase Plan and form of Subscription
               and Contribution Election Form(6)
    10.4*      Employment Agreement dated January 2, 1998 between the
               Company and Terry E. Spraker, Ph.D.(3)
    10.5*      Employment Agreement dated January 2, 1998 between the
               Company and Jeffrey L. Kaiser(3)
    10.6       Lease dated December 16, 1995 between JVM Realty Corporation
               and Bivona, Inc.(6)
    10.8*      Employment Agreement dated January 2, 1998 between the
               Company and Keith W.L. Ward(3)
    10.9*      Employment Agreement effective June 1, 1995 for Terrance L.
               Domin(6)
    10.10*     Employment Agreement dated February 18, 1998 between the
               Company and Alan L. Marquardt(3)
    10.11*     Employment Agreement effective June 27, 1996 for Tom E.
               Brandt(6)
    10.12*     Letter dated August 15, 1996 from the Registrant to J.J.
               Donohue(6)
    10.13*     Right of First Refusal and Co-Sale Agreement dated June 15,
               1995 among the Registrant, Warburg, Pincus Investors, L.P.,
               Vertical Fund Associates, L.P. and Richard C. Davis, Jr.,
               M.D. (the "Co-Sale Agreement")(6)
    10.14*     Letter Agreement dated September 30, 1996, as amended
               October 23, 1996, among UroQuest Medical Corporation,
               Warburg, Pincus Investors, L.P., Vertical Fund Associates,
               L.P. and Richard C. Davis, Jr., M.D., amending the Co-Sale
               Agreement(6)
    10.15      Note and Security Agreement between the Company and Richard
               C. Davis Jr., M.D. dated January 9, 1998 (the note was
               repaid on March 30, 1998)(3)
    10.16      Note and Security Agreement between the Company and Alan
               Marquardt dated May 7, 1998(2)
    10.17*     Indemnification Agreement between the Company and Terry E.
               Spraker dated October 12, 1998(1)
    10.18*     Indemnification Agreement between the Company and Jeffrey L.
               Kaiser dated October 12, 1998(1)
    10.19*     Indemnification Agreement between the Company and Alan
               Marquardt dated October 12, 1998(1)
    10.20*     Indemnification Agreement between the Company and Keith Ward
               dated October 12, 1998(1)
    21.1       Subsidiaries of Registrant(6)

   52
 


                                                                             SEQUENTIALLY
    EXHIBIT                                                                    NUMBERED
    NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
    -------    ------------------------------------------------------------  ------------
                                                                       
    23.1a      Consent of Ernst & Young LLP, Independent Auditors
    23.1b      Consent of KPMG LLP
    27.1       Financial Data Schedule for the year ended December 31, 1998

 
- ---------------
(1) Incorporated by Reference from the UroQuest Medical Corporation Quarterly
    Report on Form 10-Q dated November 13, 1998
 
(2) Incorporated by Reference from the UroQuest Medical Corporation Quarterly
    Report on Form 10-Q dated August 13, 1998
 
(3) Incorporated by Reference from the UroQuest Medical Corporation Quarterly
    Report on Form 10-Q dated May 14, 1998
 
(4) Incorporated by Reference from the UroQuest Medical Corporation Annual
    Report on Form 10-K dated March 30, 1998
 
(5) Incorporated by Reference from the UroQuest Medical Corporation Annual
    Report on Form 10-K dated March 27, 1997
 
(6) Incorporated by Reference from the UroQuest Medical Corporation Registration
    Statement on Form S-1, File No. 333-07277
 
 *  Management contract or compensatory plan arrangement

EX-23.1(A)

   1
                                                                   EXHIBIT 23.1a



               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-32725) pertaining to the 1994 Stock Plan and the 1996 Employee Stock
Purchase Plan of UroQuest Medical Corporation of our report dated February 12,
1999, with respect to the consolidated financial statements of UroQuest Medical
Corporation included in the Annual Report (Form-10-K) for the year ended
December 31, 1998.

                                                   /s/ ERNST & YOUNG LLP


   Palo Alto, California
   March 30, 1999

EX-23.1(B)

   1
                                                                   EXHIBIT 23.1b



                        CONSENT OF INDEPENDENT AUDITORS'



The Board of Directors and Stockholders
UroQuest Medical Corporation:


We consent to incorporation by reference in the Registration Statement (No.
333-32725) on Form S-8 of UroQuest Medical Corporation of our report dated
February 10, 1997, relating to the consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1996 of
UroQuest Medical Corporation and subsidiaries, which report appears in the
December 31, 1998 annual report on Form 10-K of UroQuest Medical Corporation.


                                                   /s/ KPMG LLP


Salt Lake City, Utah
March 30, 1999

EX-27.1

 

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF UROQUEST MEDICAL CORPORATION, INCLUDING THE
NOTES THERETO, OF DECEMBER 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                       6,980,128
<SECURITIES>                                         0
<RECEIVABLES>                                3,205,490
<ALLOWANCES>                                    60,000
<INVENTORY>                                  2,557,618
<CURRENT-ASSETS>                            12,944,075
<PP&E>                                       7,681,572
<DEPRECIATION>                               2,982,081
<TOTAL-ASSETS>                              28,159,047
<CURRENT-LIABILITIES>                        2,798,473
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        12,356
<OTHER-SE>                                  24,426,564
<TOTAL-LIABILITY-AND-EQUITY>                28,159,047
<SALES>                                     17,603,575
<TOTAL-REVENUES>                            17,603,575
<CGS>                                        8,931,951
<TOTAL-COSTS>                                8,931,951
<OTHER-EXPENSES>                            12,205,366
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             131,593
<INCOME-PRETAX>                            (3,221,787)
<INCOME-TAX>                                   100,000
<INCOME-CONTINUING>                        (3,321,787)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (3,321,787)
<EPS-PRIMARY>                                   (0.28)
<EPS-DILUTED>                                   (0.28)