<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998
REGISTRATION NO. 333-49791
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UROSURGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3845 04-3222411
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2660 CROSSPARK ROAD
CORALVILLE, IOWA 52241
(319) 626-8311
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID H. MAUPIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UROSURGE, INC.
2660 CROSSPARK ROAD
CORALVILLE, IOWA 52241
(319) 626-8311
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
CHRISTOPHER D. MITCHELL, ESQ. ALISON S. RESSLER, ESQ.
WILSON SONSINI GOODRICH & ROSATI SULLIVAN & CROMWELL
PROFESSIONAL CORPORATION 444 S. FLOWER STREET, SUITE 1200
650 PAGE MILL ROAD LOS ANGELES, CALIFORNIA 90071
PALO ALTO, CALIFORNIA 94304 (213) 955-8000
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE , 1998
SHARES
LOGO
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby (the "Offering") are being
issued and sold by UroSurge, Inc. ("UroSurge" or the "Company"). Prior to the
Offering, there has been no public market for the Common Stock. It is
anticipated that the initial public offering price will be between $ and
$ per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied to have the Common Stock approved for quotation on the Nasdaq National
Market, under the symbol "URSG."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total(3)................................. $ $ $
==============================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of this Offering payable by the Company, estimated
at $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to additional shares of
Common Stock at the Price to Public per share, less the Underwriting
Discounts for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
will be made against payment on or about , 1998, at the offices
of CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial Center, New
York, New York 10281.
------------------------
CIBC OPPENHEIMER
The date of this Prospectus is , 1998
<PAGE> 3
[PICTURES OF SANS, UROVIVE, UROTHERM, SPIRASTENT AND FILASTENT.]
UroSurge(R), UroVive(TM), SANS(TM), SpiraStent(TM), FilaStent(TM),
AcuTrainer(R) and UroTherm(R) are trademarks of the Company. Trade names and
trademarks of other companies appearing in this Prospectus are the property of
their respective holders.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements and
notes thereto appearing elsewhere in this Prospectus. Except as otherwise
indicated, all information in this Prospectus assumes (i) the filing of the
Company's Restated Certificate of Incorporation authorizing a class of
undesignated Preferred Stock, to be effective upon the completion of this
offering, (ii) a - for- reverse stock split of the Company's Common Stock to
be effected prior to the completion of this offering, (iii) the conversion of
all outstanding shares of Preferred Stock into 5,834,404 shares Common Stock
upon the completion of this offering and (iv) no exercise of the Underwriters'
over-allotment option. See "Description of Capital Stock" and "Underwriting."
THE COMPANY
UroSurge develops, manufactures and markets medical devices for the
treatment and management of genito-urinary disorders. The Company is developing
a broad range of proprietary products to address segments of the urology market
that are currently underserved as a result of ineffective or costly therapies.
The Company is initially focusing much of its efforts on addressing urinary
incontinence ("UI"), which afflicts approximately 13 million people in the U.S.
and accounts for approximately $15 billion in annual treatment costs. The UI
market presents a significant opportunity because approximately two-thirds of UI
sufferers are dissatisfied with current treatment alternatives according to a
1996 U.S. study by the National Association for Continence. The Company believes
that its lead products, UroVive for stress UI and the Stoller Afferent Nerve
Stimulation ("SANS") devices for urge UI, represent superior alternatives to
existing therapies by offering minimally invasive, cost-effective, long-term
solutions for patients suffering from these conditions. The Company launched
these products in Europe in March 1998 and is currently conducting pivotal
(late-stage) clinical trials in the U.S. Additionally, the Company is developing
and marketing a number of other products to treat a variety of urological
conditions.
UroVive is a minimally invasive urethral bulking system for the treatment
of certain types of stress UI. The UroVive procedure involves the permanent
implantation of one or more hydrogel-filled microballoons around the urethra and
is designed to close the bladder neck and immediately restore urinary
continence. The procedure can be performed in about 20 minutes in an outpatient
setting under local anesthesia. The Company believes that UroVive is a
practical, safe, long-term solution and is more convenient and cost-effective
than palliative approaches such as diapers and urethral plugs that do not cure
the problem. The Company also believes that UroVive offers significant
advantages over competing injectable urethral bulking agents that suffer from
problems of absorption and migration (which can lead to the need for repeat
procedures or raise safety concerns) and are not easily retrievable should
urinary retention occur. UroVive also provides an advantage over invasive
surgical procedures, which are costly and can result in post-surgical
complications. The Company is marketing and selling UroVive in Europe under CE
mark certification, and is currently conducting pivotal clinical trials of
UroVive in the U.S. Results of pilot clinical trials indicate a 90% efficacy
rate for patients with the target indication for which the Company has 18-month
follow-up data. By comparison, clinical results of the only urethral bulking
agent sold commercially in the U.S. indicate only a 52% probability that such
patients will maintain their initial continence for one year. The Company
expects to submit a pre-market approval ("PMA") application to the U.S. Food and
Drug Administration ("FDA") for UroVive in mid-1999.
The Company has two SANS devices, percutaneous (through the skin) and
subcutaneous (below the skin), for the treatment of urge UI. Both are minimally
invasive systems that modulate bladder action through stimulation of the
afferent nerve fibers in the ankle area that lead to nerves located in the
spinal region that control bladder function. Such stimulation has been shown to
greatly reduce the likelihood that the patient will have an uncontrollable spasm
of the bladder wall muscle that can cause the bladder to empty. The percutaneous
SANS procedure entails approximately 30 minutes of electrical stimulation and is
repeated
3
<PAGE> 5
weekly in a physician's office. Percutaneous SANS consists of a generator and
lead wire assembly that delivers electrical impulses through a small disposable
needle, temporarily inserted near the ankle. To facilitate in-home use and
enhance patient convenience, the Company is developing a second generation,
subcutaneous SANS device that involves the permanent implant of a small,
thumbtack-shaped electronic receiver near the patient's ankle, eliminating the
need for the use of a needle with each treatment. Few products exist for
effectively treating urge UI and the Company believes that SANS is superior to
other commercially available products due primarily to its minimally invasive
nature and cost-effectiveness. Clinical studies to date on percutaneous SANS,
encompassing over 1,000 treatment procedures in 90 patients with average
follow-up in excess of two years, indicate an 80% efficacy rate and no
complications. By comparison, clinical results of the only commercially
available implantable electronic nerve stimulation device also indicate a
comparable efficacy rate, but a high rate of post-treatment complications that
required reoperation in approximately one-third of all cases. This competing
product involves an invasive surgical implant procedure in the spinal area that
is costly and requires extensive physician training. The Company is marketing
and selling percutaneous SANS in Europe and is currently conducting a pivotal
clinical trial in the U.S. The Company expects to submit a PMA application for
acute use of percutaneous SANS by early 1999.
As part of its strategy of offering a broad range of products to physicians
treating genito-urinary disorders, the Company has also developed or licensed
SpiraStent, FilaStent and a kidney stone grasper for use in removing kidney
stones; AcuTrainer for diagnosing and managing urge UI; UroTherm for warming
irrigation fluids used in various gynecological and urological procedures;
demineralized bone paste for use in treating vesicoureteral reflux ("VUR") in
infants and children; and a urethral pressure catheter for the diagnosis of
stress UI. The Company has received FDA 510(k) clearance for U.S. marketing of
SpiraStent and AcuTrainer and has submitted 510(k) clearance applications for
FilaStent and UroTherm. The Company is currently marketing and selling
SpiraStent, FilaStent and AcuTrainer in Europe and SpiraStent and AcuTrainer in
the U.S.
STRATEGY
The Company's objective is to establish itself as the leader in the
development and commercialization of clinically effective solutions for UI and
other genito-urinary disorders treated by urologists, urogynecologists and
gynecologists. The following are the key elements of the Company's strategy.
Accelerate Commercialization of Existing Products. The Company has
substantially developed the infrastructure, including international
distributors, manufacturing capabilities and sales and marketing management,
that will help accelerate the commercialization of its products. The Company
began marketing UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer
in Europe and other international markets in March 1998 and is recognizing
revenues from these efforts in the second quarter of 1998. The Company is also
marketing and selling SpiraStent and AcuTrainer in the U.S. and intends to
commence marketing of UroVive and SANS in the U.S. upon receipt of PMA approval.
Become the Leader in the Treatment of UI. UI is a significant problem for a
large number of adults, particularly women and the elderly, and is one of the
most intractable and debilitating conditions treated by urologists and
urogynecologists. The UI market offers significant potential due primarily to
the inadequacy of existing treatments. The Company intends to offer improved
approaches for all levels of care, ranging from diagnosis to surgery, and for
all types of UI. The Company is focusing on the development of products that are
highly effective and minimally invasive, as compared to many current approaches
for managing UI, which are either palliative, such as diapers, or involve
invasive surgical procedures.
Offer a Comprehensive Product Line. Urologists, urogynecologists and
gynecologists are responsible for treating most genito-urinary disorders and use
a wide range of products. The Company is developing a broad line of products to
address the needs of these physicians while focusing on product opportunities
that represent significant improvements over currently available therapies. As
part of these efforts, the Company intends to explore the applicability of its
current products and technologies to additional clinical indications. The
Company also continually evaluates product concepts and technologies that may
present potential solutions for
4
<PAGE> 6
unmet needs in its targeted markets and, in addition to internal development
efforts, actively seeks to license or acquire rights to such potential products
and technologies.
Penetrate International Markets. The Company believes that there is a
significant international market for its products. The Company distributes
products internationally through local distributors on a country-by-country
basis to access such distributors' established networks and specialized
expertise regarding the health care system, including reimbursement practices,
in their respective markets. The Company's current distributors cover 14
European countries, South Korea, Australia and Japan. In addition, as part of
its international marketing efforts, the Company has established clinical
research relationships with leading international urologists. The Company
believes that its country-specific approach will accelerate sales growth,
provide comprehensive geographic market coverage and enable the Company to
access particular markets and customers.
Build Specialized, Direct Sales Force in the U.S. According to industry
sources, there are approximately 8,000 urologists and 800 urogynecologists in
the U.S. The Company believes that this relatively small number of physicians to
which it will market its products affords a unique opportunity to develop a
cost-effective, direct sales effort. Accordingly, the Company has retained all
U.S. sales and marketing rights to its products and has commenced hiring of a
marketing and sales force in the U.S. To gain acceptance of its products, the
Company conducts physician training and disseminates clinical and patient
outcome data. In addition, the Company markets its products by raising patient
awareness of its available treatments through advertising, magazine articles and
other media.
HISTORY
UroSurge is a development stage company, had cumulative revenues from
inception to March 31, 1998 of $35,883 consisting primarily of sales of
AcuTrainer devices, and had an accumulated deficit of $12.5 million as of March
31, 1998. UroSurge was incorporated in Delaware in August 1993. Since its
inception, the Company has received, licensed or obtained an option or right to
license 10 issued or allowed U.S. patents and five pending U.S. patent
applications and has received three FDA investigational device exemption ("IDE")
approvals for U.S. clinical trials, two FDA 510(k) clearances and CE mark
certifications for two products. The Company's achievements to date are
attributable to the experience of its management team and to the Company's
relationships with opinion leaders at major research and treatment institutions,
which include Children's Hospital and Medical Center, an affiliate of Harvard
Medical School, University of Iowa, and University of California-San Francisco
("UCSF") School of Medicine. The Company is located at 2660 Crosspark Road,
Coralville, Iowa 52241 and its telephone number is (319) 626-8311.
Pilot clinical studies refer to initial studies in a small patient
population that are conducted primarily to confirm product safety and obtain
preliminary efficacy data. Pivotal clinical studies refer to studies involving a
larger patient population with the device intended to be commercialized and are
conducted primarily to obtain efficacy data and to support the submission of PMA
applications to the FDA.
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........... shares
Common Stock outstanding after the shares
Offering(1).................................
Use of proceeds............................... For increased research and development, including
clinical trials, expansion of sales and marketing
activities, repayment of borrowing under the
Company's line of credit, expansion of manufacturing
capabilities and general corporate purposes,
including working capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ URSG
</TABLE>
SUMMARY FINANCIAL INFORMATION
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
THREE MONTHS ENDED CUMULATIVE
YEAR ENDED DECEMBER 31, MARCH 31, TOTALS FROM
--------------------------- ------------------- INCORPORATION TO
1995 1996 1997 1997 1998 MARCH 31, 1998
------- ------- ------- --------- ------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues......................... $ -- $ 20 $ 12 $ 7 $ 4 $ 36
Operating expenses:
Cost of revenues................... -- 13 5 4 1 20
Research and development........... 848 1,941 3,595 509 1,398 8,020
Marketing and sales................ 2 271 392 48 576 1,241
General and administrative......... 466 771 1,480 236 537 3,084
------- ------- ------- --------- ------- --------
Total operating expenses.... 1,317 2,995 5,472 797 2,512 12,364
------- ------- ------- --------- ------- --------
Loss from operations................. (1,317) (2,975) (5,460) (790) (2,508) (13,048)
Net loss............................. $(1,234) $(2,777) $(5,251) $ (765) $(2,472) $(12,485)
======= ======= ======= ========= ======= ========
Pro forma net loss per share(2)...... $ (0.84) $ (.36)
Shares used in computing pro forma
net loss per share(2).............. 6,281,282 6,956,037
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 1,027 $
Working capital(4).......................................... 1,186
Total assets................................................ 4,060
Long-term debt, net of current maturities................... 164
Deficit accumulated during the development stage............ (12,485)
Total stockholders' equity.................................. 2,298
</TABLE>
- ------------------------------
(1) Based upon shares outstanding as of March 31, 1998. Excludes (i) 968,958
shares issuable upon exercise of options outstanding at a weighted average
exercise price of $0.65 per share, (ii) 300,000 shares reserved for future
issuance under the Company's 1998 Employee Stock Purchase Plan, (iii)
300,000 shares reserved for future issuance under the Company's 1998
Director Option Plan, (iv) 612,000 shares reserved for future issuance under
the Company's 1994 Amended and Restated Stock Plan and (v) warrants to
purchase up to 200,000 shares issuable in connection with a line of credit
with certain principal stockholders at a weighted average exercise price
equal to the initial public offering price per share. See "Capitalization,"
"Management -- Incentive Stock Plans" and "Description of Capital Stock."
(2) See Note 1 of notes to the Company's financial statements for an explanation
of the method used to determine pro forma net loss per share.
(3) As adjusted to reflect the sale of shares of Common Stock offered
hereby at an assumed initial public offering price of $ per share and the
receipt of the net proceeds therefrom.
(4) Working capital consists of current assets minus current liabilities.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the following risk factors as well as those discussed
elsewhere in this Prospectus. The following risk factors should be considered
carefully in evaluating the Company and its business before purchasing the
shares of Common Stock offered hereby.
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT
Of the Company's products, only UroVive, percutaneous SANS, SpiraStent,
FilaStent and AcuTrainer are being marketed in Europe; only SpiraStent and
AcuTrainer have been cleared for marketing in the U.S.; and only AcuTrainer has
been approved for marketing in Japan. The products the Company is marketing in
Europe may not reach the U.S. market and future products may not reach Europe,
the U.S. or any other market for a number of reasons. Such reasons include the
possibilities that the potential products will be found ineffective or cause
harmful side effects during preclinical testing or clinical trials, fail to
receive necessary regulatory approvals or clearances, be difficult to
manufacture on a large scale, be uneconomical, fail to achieve market acceptance
or be precluded from commercialization by proprietary rights of third parties.
No assurance can be given that any of the Company's development programs will be
successfully completed, that clinical trials will generate anticipated results
or will commence or be completed as planned, that required regulatory approvals
or clearances will be obtained on a timely basis, if at all, or that any
products for which approval is obtained will contain acceptable labeling or be
commercially successful. If any of the foregoing do not occur as planned, the
Company's business, financial condition and results of operations would be
materially adversely affected.
The Company's business is subject to the risks inherent in the development,
licensing and acquisition of new products using new technologies and approaches.
There can be no assurance that unforeseen problems will not develop with these
technologies or applications, that the Company will be able to successfully
address technological challenges it encounters in its research and development
programs or that commercially feasible products will ultimately be developed,
licensed or acquired by the Company. See "Business -- Research and Development."
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATIONS OF FUTURE LOSSES
The Company has a limited operating history upon which its prospects can be
evaluated. Such prospects must be considered in light of the substantial risks,
expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. To date, the Company has engaged
primarily in research and development efforts, and a number of the Company's key
management and technical personnel have only recently joined the Company. To
date, the Company has only generated minimal revenues from product sales and
marketed only four of its products in Europe since March 1998. The Company has
experienced net losses since its inception and, as of March 31, 1998, the
Company had an accumulated deficit of $12.5 million. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other expenditures. The
Company expects its net losses to continue through at least 1999 as it continues
to expend substantial resources to build its marketing and sales organizations,
continue research and development, obtain regulatory clearances or approvals and
expand manufacturing capabilities. There can be no assurance that the Company
will ever achieve profitability or that profitability, if achieved, will be
sustained. Results of operations may fluctuate significantly from quarter to
quarter and will depend upon numerous factors, including actions relating to
regulatory and reimbursement matters, progress of clinical trials, discounts to
distributors, introduction of alternative therapies for UI and competition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Sales and Marketing," "-- Manufacturing,"
"-- Competition and Technological Change" and "-- Government Regulation."
7
<PAGE> 9
LACK OF EXTENSIVE CLINICAL DATA
UroVive and percutaneous SANS are in the pivotal stages of clinical testing
in the U.S., and clinical data obtained to date is insufficient to demonstrate
the safety and efficacy of these products under applicable FDA regulations and
regulatory guidelines. The Company completed pilot clinical trials and received
FDA approval to conduct pivotal trials for UroVive in the U.S. in December 1996.
The Company obtained European Community ("EC") approval for UroVive in March
1998 and anticipates submitting a PMA application to the FDA in mid-1999.
Percutaneous SANS received an Investigational Device Exemption ("IDE") approval
in the U.S. in January 1998. There can be no assurance that UroVive or
percutaneous SANS will prove to be safe and effective in clinical trials. In
addition, the clinical trials may identify significant technical or other
obstacles to be overcome prior to obtaining necessary regulatory or
reimbursement approvals. There can be no assurance that UroVive or SANS will
receive marketing approval from the FDA or that any of the Company's other
products will prove to be safe and effective or will be approved or cleared by
appropriate regulatory authorities or by health care payors. If UroVive, SANS
and the Company's other products under development do not prove to be safe and
effective in clinical trials, the Company's business, financial condition and
results of operations will be materially and adversely affected. The rate of
completion of the Company's clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment or adverse events occurring
during clinical trials. Completion of preclinical and clinical activities may
take several years, and the length of time for completion of the required
studies is unpredictable. In addition, data obtained from preclinical and
clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. No assurance can be given that any
of the Company's clinical trials will be successfully completed on a timely
basis, or at all, that additional clinical trials will be allowed by the FDA or
other regulatory authorities or that such clinical trials will commence as
planned. See "Business -- Products and Products Under Development."
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the U.S. and internationally. There
can be no assurance that the Company's pending or future patent applications
will issue, or that the claims of the Company's issued or licensed patents, or
any patents that may issue in the future, will provide any competitive
advantages for the Company's products or that they will not be successfully
challenged, narrowed, invalidated or circumvented in the future. The Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws and believes the
protection afforded by foreign patents or any other foreign intellectual
property protection, if obtained, may be more limited than that provided
domestically. In addition, there can be no assurance that competitors will not
seek to apply for and obtain patents that will prevent, limit or interfere with
the Company's ability to make, use, offer for sale, sell and import its products
in the U.S. or internationally. Because patent applications in the U.S. are
confidential until the patents issue, and publication of discoveries in the
scientific and patent literature tends to lag behind actual discoveries, the
Company cannot be certain that Company inventors or licensors were the first to
conceive of inventions covered by pending patent applications or that the
Company was the first to file patent applications for such inventions.
The Company licenses certain technologies and may desire to or may be
required to obtain additional licenses to patents or proprietary rights of
others. No assurance can be given that any licenses required under any patents
or proprietary rights of third parties would remain or be made available on
terms acceptable to the Company, or at all. If the Company does not maintain or
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around or otherwise avoid such patents, or it could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. In addition, the medical device industry has been characterized by
litigation regarding patents and other intellectual property rights, and many
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. Litigation may be necessary to
defend against or assert claims of patent infringement or invalidity, to enforce
or defend patents issued to or licensed by the Company, to protect trade
8
<PAGE> 10
secrets or know-how owned by the Company, or to determine the scope and validity
of the proprietary rights of others. In addition, interference proceedings in
the U.S. Patent and Trademark Office, or opposition proceedings in a foreign
patent office, may be necessary to determine the priority of inventions with
respect to patent applications of the Company or its licensors. Litigation,
interference or opposition proceedings could result in substantial costs to and
diversion of effort by the Company, and adverse determinations in any such
proceedings could prevent the Company from manufacturing, marketing or selling
its products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its employees and consultants. The Company also
has invention or patent assignment agreements with its employees and certain,
but not all, consultants. There can be no assurance that relevant inventions
will not be developed by a person not bound by an invention assignment
agreement. There can be no assurance that binding agreements 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 or be independently
discovered by competitors. See "Business -- Patents and Proprietary Technology."
LACK OF REGULATORY APPROVALS
The design, manufacturing, labeling, distribution and marketing of the
Company's products is subject to extensive and rigorous government regulation in
the U.S. and certain other countries where the process of obtaining and
maintaining required regulatory clearance or approvals is lengthy, expensive and
uncertain. In order for the Company to market its products in the U.S., the
Company must obtain clearance or approval from the FDA. The Company is required
to obtain a PMA prior to U.S. commercial sales of its two lead products, UroVive
and SANS. The PMA process can take several years from the initial filing and
requires the submission of extensive supporting data and clinical information.
The Company has received 510(k) clearance in the U.S. for SpiraStent and
AcuTrainer and marketing approval in Europe for UroVive and AcuTrainer. The
Company also has submitted applications seeking clearance to market FilaStent
and UroTherm through the 510(k) premarket notification process and will be
required to submit PMA or 510(k) applications for additional products it is
developing or may develop, license or acquire in the future. There can be no
assurance that the FDA will act favorably or quickly on such PMA or 510(k)
submissions, or that significant difficulties and costs will not be encountered
during efforts to obtain FDA clearance or approval. Specifically, the FDA may
request additional data or require additional clinical trials be conducted to
obtain clearance. In addition, there can be no assurance that the FDA will not
impose strict labeling, training or other requirements as a condition to 510(k)
clearances or PMA approvals, any of which could limit the Company's ability to
market its products. Further, if the Company wishes to modify a product after
FDA clearance of a 510(k) premarket notification or approval of a PMA, including
changes in indications or other modifications that could affect safety and
efficacy, additional clearances or approvals will be required from the FDA. Any
request by the FDA for additional data or any requirement by the FDA that the
Company conduct additional clinical trials or submit to the more rigorous and
lengthier PMA process could result in a significant delay in bringing such
products to market and substantial additional research and other expenditures by
the Company. Similarly, any labeling, training or other conditions or
restrictions imposed by the FDA on the marketing of the Company's products could
hinder the Company's ability to effectively market its products in the U.S. Any
of the foregoing actions by the FDA could delay or prevent altogether the
Company's ability to market and distribute its products and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In order for the Company to market its products under development in Europe
and certain other foreign jurisdictions, the Company and its distributors and
agents must obtain required regulatory registrations or approvals and otherwise
comply with extensive regulations regarding safety, efficacy and quality in
those jurisdictions. Specifically, certain foreign regulatory bodies have
adopted various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. There can be no
assurance that the Company will be successful in maintaining ISO 9001 or CE mark
certification. Failure to maintain ISO 9001 or
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<PAGE> 11
CE mark certification or to obtain or maintain other foreign regulatory
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will obtain any required regulatory registrations or approvals in
such countries or that it will not be required to incur significant costs in
obtaining or maintaining such regulatory registrations or approvals. Delays in
obtaining any registrations or approvals required to market the Company's
products, failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company will be required to adhere to applicable FDA Quality System
Regulations ("QSR"), which incorporate the FDA's former Good Manufacturing
Practice ("GMP") regulations, and similar regulations in other countries that
impose testing, control and documentation requirements. Ongoing compliance with
applicable QSRs and other applicable regulatory requirements will be strictly
enforced in the U.S. through periodic inspections by state and federal agencies,
including the FDA, and in foreign jurisdictions by comparable agencies. Failure
to comply with applicable regulatory requirements could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of approvals previously obtained and criminal prosecution. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's products are based upon new methods of treating UI and there
can be no assurance that these products will gain commercial acceptance among
physicians, patients and health care payors, even if necessary international and
U.S. marketing approval is obtained. The Company believes that recommendations
and endorsements by physicians will be essential for market acceptance of its
products and there can be no assurance that any such recommendations or
endorsements will be obtained. Market acceptance of the Company's products will
also be dependent upon the Company's ability to convince health care payors and
providers that such products represent cost-effective alternatives to existing
therapies. Such assessments of cost-effectiveness will depend in large part upon
the duration of relief from UI provided by the Company's products, and a
thorough analysis of long-term patient follow-up data may be necessary to assess
such durability. Failure of the Company's products to achieve significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Products and
Products Under Development."
COMPETITION
The medical device industry in general and the market for products and
treatments in the area of UI in particular are highly competitive. In Europe,
the Company competes and, in the U.S., the Company will compete with other
providers of products and treatments for UI. There is currently one urethral
bulking agent for stress UI and one implantable nerve stimulation device for
urge UI approved for commercial sale in the U.S. and other such products are in
development. In addition, a number of competitors are currently marketing
products, such as absorbents and pharmaceuticals, to treat UI. Some of these
products are widely accepted in the health care industry and have a long history
of use.
Many of the Company's current and potential competitors have substantially
greater financial, research, technical, manufacturing, marketing and
distribution resources than the Company and have greater name recognition and
lengthier operating histories in the health care industry. There can be no
assurance that the Company will be able to compete effectively against these and
other competitors or that the Company's products will replace any currently used
devices or systems. Furthermore, there can be no assurance that the Company's
competitors will not succeed in developing, either before or after the
development and commercialization of the Company's products, devices and
technologies that permit more efficient, less expensive and less invasive
treatment of UI. It is also possible that one or more pharmaceutical or other
health care
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<PAGE> 12
companies will develop therapeutic drugs, treatments or other products that will
substantially reduce the prevalence of UI or otherwise render the Company's
products obsolete or irrelevant. Such competition could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition and Technological Change."
LIMITED MANUFACTURING EXPERIENCE
The Company is currently scaling up its manufacturing facilities for
clinical and early commercial production of its products. The Company does not
have experience in manufacturing its products in commercial quantities. There
can be no assurance that the Company will be able to attract, train and retain
the required personnel or will be able to manufacture commercial quantities of
its products in a timely manner, or at all. Manufacturers often encounter
difficulties in scaling up production of their products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. There can be no assurance that the Company's
manufacturing scale-up efforts will be successful or that reliable, high-volume
manufacturing can be established or maintained at commercially reasonable costs
on a timely basis, or at all. In addition, there can be no assurance that the
Company will not encounter unanticipated problems and delays in connection with
its contract manufacturers and suppliers. Delays associated with or difficulties
encountered in establishing high-volume manufacturing, or problems encountered
with contract manufacturers and suppliers, would result in disruptions of
product supply. Any of the foregoing would have a material adverse affect on the
Company's business, financial condition and results of operations.
Medical devices, such as the Company's products, can experience performance
problems in the field that require review and possible corrective action by the
manufacturer. There can be no assurance that component failures, manufacturing
errors or design defects that could result in an unsafe condition or injury to
the patient will not occur. If any such failures or defects were deemed serious,
the Company could be required to withdraw or recall products, which could result
in significant costs to the Company. Any future product problems could result in
market withdrawals or recalls of products, which could have a material adverse
affect on the Company's business, financial condition and results of operations.
Furthermore, prior to approval of a PMA application, the Company's facilities,
procedures and practices, and the facilities, procedures and practices of its
third-party manufacturers, will be subject to a preapproval inspection by the
FDA. In addition, if the Company wishes to significantly modify its
manufacturing processes or change the supplier of a critical component,
additional approvals will be required from the FDA before the change can be
implemented. Failure to maintain compliance with the applicable regulatory
requirements of various regulatory agencies would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Manufacturing."
DEPENDENCE UPON KEY SUPPLIERS
One of the primary components for the manufacture of UroVive, the
microballoon, is purchased by the Company from a single source supplier, the
Target Therapeutics division of Boston Scientific Corporation, under a mutually
exclusive supply agreement that expires in April 2000, subject to an automatic
two-year extension in the event the Company has not received PMA approval for
UroVive by April 1999. The Company does not expect to receive such approval by
such date. Other raw materials and components used in the Company's products are
purchased from various suppliers. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience shortages of materials in the future. Delays
associated with any such future shortages of materials or components,
particularly as the Company scales up its manufacturing activities in support of
commercial sales, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing."
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<PAGE> 13
LIMITED MARKETING AND SALES CAPABILITIES
The Company currently has limited experience in marketing and selling its
products. In order to achieve commercial success for any product, UroSurge must
increase its marketing and sales capabilities or enter into arrangements with
third parties to market and sell its products. There can be no assurance that
UroSurge will successfully develop such marketing and sales capabilities or
experience. As the Company develops its own marketing and sales capabilities, it
will compete with other companies that currently have experienced and
well-funded marketing and sales operations.
The Company markets and sells its products outside the U.S. primarily
through a network of international distributors, and the Company's international
sales are largely dependent on the marketing efforts of, and sales by, these
distributors. Sales through distributors are subject to several risks, including
the risk of financial instability of the distributors and the risk that
distributors will not effectively promote the Company's products. There can be
no assurance that the efforts of these third parties for the marketing and sale
of the Company's products will be successful. See "Business -- Sales and
Marketing."
INTERNATIONAL SALES AND OPERATING RISKS
The Company's limited sales of UroVive, percutaneous SANS, SpiraStent and
FilaStent have been outside the U.S., and the Company anticipates that a
significant portion of its revenues for the next several years will also be
derived from international sales of its products. A number of risks are inherent
in international operations and transactions. International sales and operations
may be limited or disrupted by the imposition of government controls, export
license requirements, political instability, trade restrictions, changes in
tariffs or difficulties in staffing and managing international operations.
Foreign regulatory agencies often establish product standards different from
those in the U.S. and any inability to obtain foreign regulatory approvals on a
timely basis could have an adverse effect on the Company's international
business and its financial condition and results of operations. Additionally,
the Company's business, financial condition and results of operations may be
adversely affected by fluctuations in currency exchange rates as well as
increases in duty rates. There can be no assurance that the Company will be able
to successfully commercialize its existing or future products in any foreign
market. See "Business -- Sales and Marketing."
NO ASSURANCE OF ABILITY TO MANAGE GROWTH
If demand for the Company's products develops and grows, there can be no
assurance that the Company will be able to develop the necessary manufacturing
capability for its products; build the international sales and marketing
capability for products; attract, retain and integrate the required personnel;
or implement the financial and management systems necessary to meet the growing
demand for its products. Failure of the Company to successfully manage its
growth could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing,"
"-- Manufacturing," "-- Employees," "-- Facilities" and "Management."
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company has product liability
insurance subject to specified coverage limits. There can no assurance that such
insurance coverage will be adequate to protect the Company from any liabilities,
including any adverse judgments or settlements, it might incur in connection
with the development, clinical testing, manufacture and sale of its products. In
addition, product liability insurance is expensive and may in the future not be
available to the Company on acceptable terms, if at all. A successful product
liability claim or series of claims brought against the Company that results in
an adverse judgment against or settlement by the Company in excess of any
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Product Liability."
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<PAGE> 14
POSSIBLE FUTURE CAPITAL REQUIREMENTS
To the extent that the Company is unable to successfully commercialize its
products or experiences delays in completing product testing and clinical trials
or obtaining regulatory approvals and clearances, it may be required to raise
additional funds through public or private financing or other arrangements. The
Company believes that its existing capital resources and the net proceeds of
this offering will be sufficient to satisfy its funding requirements through
1999. There can be no assurance that any required additional funding, if needed,
will be available on terms attractive to the Company, or at all, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT
The Company's success will be dependent upon, among other things, the
ability of users of its products to obtain satisfactory reimbursement from
health care payors for the Company's products and procedures employing such
products. In the U.S. and international markets, sales of medical products are
dependent, in part, on the ability of consumers of these products to obtain
reimbursement for all or a portion of their cost from third-party payors, such
as government and private insurance plans. Currently, third-party reimbursement
is available for some existing therapies used in the treatment of UI (other than
for diapers and absorbents). After such time, if ever, as FDA approval or
clearance is received, third-party reimbursement for UroVive and SANS will be
dependent upon decisions by the Health Care Financing Administration ("HCFA")
for Medicare and Medicaid, as well as by individual health maintenance
organizations, private insurers and other payors. Such reimbursement approvals
will depend in part on the Company's ability to convince payors that such
products represent cost-effective alternatives to existing therapies. Such
assessments of cost-effectiveness will depend in large part upon the duration of
the relief from UI provided by the Company's products, and a thorough analysis
of long-term patient follow-up data may be necessary to assess such durability.
In addition, the Company has not applied for or received either Medicare or
private payor reimbursement approvals for SpiraStent or AcuTrainer, and growth
in SpiraStent or AcuTrainer sales in the U.S. will be dependent upon the
Company's ability to obtain such reimbursement approvals.
Reimbursement systems in international markets vary significantly by
country. Many international markets have governmentally managed health care
systems that govern reimbursement for new devices and procedures. In most
markets, there are private insurance systems as well as governmentally managed
systems. Market acceptance of the Company's products will depend on the
availability of reimbursement in international markets targeted by the Company
and will require reimbursement approvals in addition to those already obtained.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. There can be no assurance that reimbursement will be available or
sufficient to allow the Company to sell its products on a competitive basis, or
that physicians will support reimbursement for the Company's procedures.
Furthermore, the Company could be adversely affected by changes in reimbursement
policies of governmental or private health care payors. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors or adverse changes in governmental and
private third party payor's policies toward reimbursement for procedures
employing the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Third-Party Reimbursement."
DEPENDENCE UPON KEY PERSONNEL
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. None of these key employees has an employment contract
with the Company nor are any of these employees covered by key person or similar
insurance. The Company faces intense competition for
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<PAGE> 15
qualified personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the Company will be able to attract
and retain such personnel. The loss of key personnel or inability to hire and
retain additional qualified personnel in the future could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Employees."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price, in addition to prevailing market conditions, will
be the history of and the prospects for the industry in which the Company
competes, the past and present operations of the Company, the historical results
of operations of the Company, the Company's capital structure, estimates of the
business potential and earnings prospects of the Company, an overall assessment
of the Company, an assessment of the Company's management and the consideration
of the above factors in relation to market valuation of companies in related
businesses. There can be no assurance that an active trading market will develop
for the Common Stock or as to the price at which the Common Stock may trade in
the public market from time to time subsequent to the Offering made hereby. See
"Underwriting."
RISKS ASSOCIATED WITH INTERIM FINANCING ARRANGEMENT
The Company has entered into an interim financing arrangement with certain
of its principal stockholders to provide funding to assist the Company in
meeting working capital requirements during the period prior to completion of
this offering. Under this arrangement, the Company may borrow up to $5.0 million
and has issued to the stockholders that have committed to provide such
financing, warrants to purchase 50,000 shares of Common Stock at an exercise
price equal to the initial public offering price. The Company will be required
to issue warrants to purchase an additional 30,000 shares for each $1.0 million
borrowed under this arrangement. As of June 12, 1998, the Company has borrowed
$3.0 million under this arrangement. Any borrowings under this arrangement will
be repaid with the proceeds of this offering. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
BROAD MANAGEMENT DISCRETION TO ALLOCATE OFFERING PROCEEDS
A substantial portion of the estimated net proceeds of this offering have
not been allocated to specific uses. Accordingly, management of the Company will
have broad discretion to allocate the proceeds of this offering and to determine
the amount and timing of expenditures. The failure of management to apply such
funds effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Use of Proceeds."
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of medical device companies have
historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
the Company's operating results, announcements of technological innovations or
new therapeutic products by the Company or others, clinical trial results,
government regulation, developments in patent or other proprietary rights,
public concern as to the safety of products developed by the Company or others,
future sales of substantial amounts of Common Stock by existing stockholders,
comments by securities analysts and general market conditions can have an
adverse effect on the market price of the Common Stock. In addition, the
realization of any of the risks described in these "Risk Factors" could have a
dramatic and material adverse impact on the market price of the Company's Common
Stock.
CONTROL BY EXISTING STOCKHOLDERS
After the completion of this offering, current stockholders, including
certain executive officers and directors of the Company and their affiliates,
will own approximately % of the outstanding Common
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<PAGE> 16
Stock. As a result, these stockholders will, to the extent they act together,
continue to have the ability to exert significant influence and control over
matters requiring the approval of the Company's stockholders, including the
election of a majority of the Company's Board of Directors. See "Principal
Stockholders."
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date code field, and were not
designed to account for the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process data related to the year 2000. The Company relies on
its systems, applications and devices in operating and monitoring all major
aspects of its business, including financial systems (such as general ledger,
accounts payable and accounts receivable modules), customer services and
infrastructure. The Company also relies, directly and indirectly, on external
systems of customers, suppliers, creditors, financial organizations and
governmental entities, both domestic and international, for accurate exchange of
data. Despite the Company's efforts to address the year 2000 impact on its
internal systems, the Company has not fully identified such impact or whether it
can resolve such impact without disruption of its business or without incurring
significant expense. Based on the information currently available, the Company
believes that the costs associated with the year 2000 issue, and the
consequences of incomplete or untimely resolution of the year 2000 issue, will
not have a material adverse effect on its business, operating results and
financial condition in any given year. In addition, even if the internal systems
of the Company are not materially affected by the year 2000 issue, the Company
could be materially adversely affected through disruption in the operation of
the enterprises with which the Company interacts.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity securities or
equity-related securities in the future. Upon completion of this offering, the
Company will have shares of Common Stock outstanding, of which
the shares offered hereby will be freely tradable (unless held by
affiliates of the Company). As a result of lock-up agreements between certain
stockholders and CIBC Oppenheimer Corp., the remaining 6,956,037 shares will not
become available for sale in the public market until 180 days after the date of
this Prospectus, subject in some cases to the volume and other restrictions of
Rule 144 and Rule 701 under the Securities Act of 1933, as amended (the
"Securities Act"). However, CIBC Oppenheimer Corp. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to the lock-up agreements. See "Shares Eligible for Future Sale" and
"Underwriting."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS ON PRICE OF COMMON
STOCK
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 limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions allow the Company to issue Preferred Stock without any vote
or further action by the stockholders, eliminate the right of stockholders to
act by written consent without a meeting and specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings. Certain provisions of Delaware law applicable to the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholders for a period of three years unless certain
conditions are met, could also delay or make more difficult a merger, tender
offer or proxy contest involving the Company. The possible issuance of Preferred
Stock, the procedures required for director nominations and stockholder
proposals and Delaware law could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Description of Capital
Stock -- Preferred Stock" and "-- Certain Charter and Bylaws Provisions and
Delaware Anti-Takeover Statute."
DILUTION
Purchasers of Common Stock in this offering will experience immediate and
substantial dilution of $
per share in the net tangible book value of the Common Stock from the initial
public offering price. Additional dilution is likely to occur upon the exercise
of options, warrants and conversion rights granted by the Company. See
"Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby at an assumed initial public offering price of
per share are estimated to be million ( million if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discounts and commissions and the estimated expenses of this
offering.
The Company expects to use a majority of the net proceeds to fund increased
research and development activities, including clinical trials, expansion of
marketing and sales activities, expansion of manufacturing capabilities and
capital expenditures. The Company intends to use the remaining net proceeds for
working capital, general and administrative expenses and general corporate
purposes. The amounts actually expended for each purpose and the timing of such
expenditures may vary significantly depending upon numerous factors, including
the timing of regulatory actions regarding the Company's products, the cost and
timing of expansion of marketing, sales and manufacturing activities, results of
clinical trials and competition. The Company may also use a portion of the net
proceeds for the licensing or acquisition of technologies, businesses or
products that are complementary to those of the Company. No such acquisitions
are currently planned or are being negotiated, and no portion of the net
proceeds has been allocated for any specific licensing or acquisition. Pending
such uses, the Company intends to invest the net proceeds of this offering in
short-term, interest-bearing, investment grade securities. The Company expects
that the net proceeds of this offering will be sufficient to meet the Company's
operating and capital requirements through 1999. The Company future financing
requirements will depend upon a variety of factors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In addition, a portion of the net proceeds will be used to repay certain
amounts the Company has borrowed from stockholders under a financing
arrangement. Under this arrangement, which was entered into in June 1998,
certain principal stockholders will provide the Company with a line of credit of
up to $5.0 million in the event that the Company requires any additional funding
prior to receiving the net proceeds from this offering. In exchange for this
line, the Company has agreed to issue warrants to the stockholders to purchase
an aggregate of 50,000 shares of Common Stock at an exercise price equal to the
initial public offering price per share. The warrants will have a term of three
years. The Company will issue warrants on the same terms to purchase an
additional 30,000 shares of Common Stock for each $1.0 million borrowed under
this arrangement. Borrowings under this arrangement will not bear interest. As
of June 12, 1998, the Company has borrowed $3.0 million under this arrangement.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock.
The Company does not anticipate declaring or paying any cash dividends in the
foreseeable future.
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DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1998, was $2,065,000 or $0.30 per share. Pro forma net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding after giving effect to the conversion of outstanding shares of
Preferred Stock into Common Stock upon the completion of the Offering. After
giving effect to the sale of the shares of Common Stock offered hereby (at an
assumed initial public offering price of $ per share) and after deducting
underwriting discounts and commissions and estimated offering expenses, the
Company's pro forma net tangible book value as of March 31, 1998 would have been
approximately $ or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at March 31,
1998................................................... $ 0.30
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after the
Offering..................................................
--------
Dilution per share to new investors...............
$
========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by
existing stockholders and by investors purchasing shares in the Offering
(assuming an initial public offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 6,956,037 $14,428,653 % $ 2.07
New investors.................
--------- ----- ----------- -----
Total............... 100.0% 100.0%
========= ===== =========== =====
</TABLE>
The foregoing computations are based on the number of shares of Common
Stock outstanding as of March 31, 1998 and exclude 968,958 shares of Common
Stock issuable upon exercise of stock options outstanding at a weighted average
exercise price of $0.65 per share, 300,000 shares of Common Stock reserved for
future issuance under the Company's 1998 Employee Stock Purchase Plan, 300,000
shares of Common Stock reserved for future issuance under the Company's 1998
Director Option Plan, 612,000 shares of Common Stock reserved for future
issuance under the Company's 1994 Stock Plan and warrants to purchase up to
200,000 shares of Common Stock issuable in connection with a line of credit with
certain stockholders at a weighted average exercise price equal to the initial
public offering price. See "Management's Discussion and Analysis of Results of
Operations -- Liquidity and Capital Resources." To the extent that any of these
options or warrants are exercised, there could be further dilution to new
investors.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
reflecting the conversion of all outstanding shares of Preferred Stock into
Common Stock, and (iii) the as adjusted capitalization of the Company reflecting
the sale of the shares of Common Stock offered hereby (at an
assumed initial public offering price of $ per share) and receipt of
the proceeds therefrom, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company; and the restatement of
the Company's Certificate of Incorporation to increase the authorized number of
shares of Common Stock to 50,000,000 shares and create a class of undesignated
Preferred Stock. See "Use of Proceeds." This table should be read in conjunction
with "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
Long-term debt (including current maturities)............. $ 231 $ 231 $ 231
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
7,220,000 shares authorized, 5,834,404 shares issued
and outstanding on an actual basis; 5,000,000 shares
authorized, none issued and outstanding as
adjusted............................................. 58 -- --
Common Stock, par value $0.01 per share; 15,000,000
shares authorized, 1,121,633 shares issued and
outstanding on an actual basis; 15,000,000 shares
authorized, 6,956,037 shares issued and outstanding
on a pro forma basis; 50,000,000 shares authorized,
shares issued and outstanding as
adjusted(1).......................................... 11 70
Additional paid-in capital.............................. 16,384 16,384
Deferred compensation................................... (1,671) (1,671) (1,671)
Deficit accumulated during the development stage........ (12,485) (12,485) (12,485)
-------- -------- --------
Total stockholders' equity...................... 2,298 2,298
-------- -------- --------
Total capitalization............................ $ 2,530 $ 2,530 $
======== ======== ========
</TABLE>
- ------------------------------
(1) Based upon shares outstanding as of March 31, 1998. Excludes (i) 968,958
shares issuable upon exercise of options outstanding at a weighted average
exercise price of $0.65 per share, (ii) 300,000 shares reserved for future
issuance under the Company's 1998 Employee Stock Purchase Plan (the
"Purchase Plan"), (iii) 300,000 shares reserved for future issuance under
the Company's 1998 Director Option Plan, (iv) 612,000 shares reserved for
future issuance under the Company's 1994 Stock Plan (v) and warrants to
purchase up to 200,000 shares issuable in connection with a line of credit
with certain stockholders at a weighted average exercise price equal to the
initial public offering price. See "Management -- Incentive Stock Plans" and
"Description of Capital Stock."
18
<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the Company's
financial statements as of and for the years ended December 31, 1994, 1995, 1996
and 1997, are derived from financial statements of the Company that have been
audited by Deloitte & Touche, LLP, independent auditors. The statement of
operations data for the three months ended March 31, 1997 and 1998 and the
cumulative totals from inception to March 31, 1998 and the balance sheet data at
March 31, 1998 are derived from unaudited financial statements included
elsewhere in this Prospectus and include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at that date and results
of operations for those periods. The results for the three months ended
March 31, 1998 are not necessarily indicative of the results for any future
period. The selected financial data set forth below is qualified in its entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
The Company was classified as a development stage company for all periods
presented below.
<TABLE>
<CAPTION>
CUMULATIVE
THREE MONTHS TOTALS
ENDED FROM
YEAR ENDED DECEMBER 31, MARCH 31, INCORPORATION
------------------------------------- ---------------- TO MARCH 31,
1994(1) 1995 1996 1997 1997 1998 1998
------- ------- ------- ------- ------ ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues....................................... $ $-- $ -- $ 20 $ 12 $ 7 $ 4 $ 36
Operating expenses:
Cost of revenues................................. -- -- 13 5 4 1 20
Research and development......................... 238 848 1,941 3,595 509 1,398 8,020
Marketing and sales.............................. -- 2 271 392 48 576 1,241
General and administrative....................... 549 466 771 1,480 236 537 3,084
------ ------- ------- ------- ------ ------- ---------
Total operating expenses.................. 787 1,317 2,995 5,472 797 2,512 12,364
------ ------- ------- ------- ------ ------- ---------
Loss from operations............................... (787) (1,317) (2,975) (5,460) (790) (2,508) (13,048)
Interest income.................................... 37 85 184 187 21 31 524
Interest expense................................... -- (2) (6) (9) (1) (3) (21)
Income tax credits................................. -- -- 20 31 5 8 60
------ ------- ------- ------- ------ ------- ---------
Net loss.................................. $ (751) $(1,234) $(2,777) $(5,251) $ (765) $(2,472) $ (12,485)
====== ======= ======= ======= ====== ======= =========
Basic and diluted net loss per share(2)............ $(1.04) $ (1.23) $ (2.58) $ (4.72) $(0.70) $ (2.20)
Weighted average shares outstanding(2)............. 723 1,000 1,077 1,111 1,098 1,122
Pro forma net loss per share(2).................... $ (0.84) $ (0.36)
Shares used in computing pro forma net loss per
share(2)......................................... 6,281 6,956
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- MARCH 31,
1994(1) 1995 1996 1997 1998
------- ------- ------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 919 $ 4,821 $ 2,113 $ 3,266 $ 1,027
Working capital(3).......................................... 845 4,742 1,687 3,545 1,186
Total assets................................................ 1,033 5,374 2,891 5,526 4,059
Long-term debt, net of current maturities................... -- 107 93 110 164
Deficit accumulated during the development stage............ (751) (1,985) (4,762) (10,012) (12,485)
Total stockholders' equity.................................. 926 5,023 2,254 4,474 2,298
</TABLE>
- ------------------------------
(1) The Company was incorporated August 6, 1993 and commenced operations in
March 1994.
(2) See Note 1 of notes to the Company's financial statements for an explanation
of the method used to determine basic and diluted net loss per share,
weighted average shares outstanding and pro forma net loss per share.
(3) Working capital is current assets minus current liabilities.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" as well as those discussed elsewhere in this Prospectus. The
following discussion should be read in conjunction with the Company's financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
UroSurge develops, manufactures and markets medical devices for the
treatment and management of genito-urinary disorders. The Company believes that
its lead products, UroVive and SANS, represent a significant revenue opportunity
in Europe and the U.S. Additionally, the Company has a number of other products
approved or in development to treat a variety of urological conditions. The
Company commenced marketing UroVive, percutaneous SANS, SpiraStent, FilaStent
and AcuTrainer in Europe and other international markets in March 1998 and is
recognizing revenues from these efforts in the second quarter of 1998. The
Company is marketing SpiraStent and AcuTrainer in the U.S. and intends to
commence marketing UroVive and percutaneous SANS in the U.S. upon receipt of PMA
approval. In addition, the Company has submitted 510(k) clearance applications
for FilaStent and UroTherm.
UroSurge is a development stage company. Since its inception, the Company
has financed operations primarily through the private placement of equity
securities totaling $14.4 million. The Company has incurred net losses in each
year since its inception, including net losses of $2.5 million for the three
months ended March 31, 1998, $5.3 million in 1997, $2.8 million in 1996 and $1.2
million in 1995. The Company's net losses have resulted primarily from expenses
incurred in connection with the Company's research and development activities,
including clinical and preclinical trials, development of manufacturing
processes, general and administrative expenses and sales and marketing expenses.
The Company expects to incur net losses through at least 1999 and may incur net
losses in subsequent periods although the amount of future net losses and time
required by the Company to reach profitability are highly uncertain. Although
the Company only sold limited numbers of AcuTrainers in 1996 and 1997, it is
recognizing revenues from the sale of UroVive, percutaneous SANS, SpiraStent,
FilaStent and AcuTrainer in Europe in the second quarter of 1998. The Company
will not generate revenues from commercial sales of UroVive, percutaneous SANS
and FilaStent in the U.S. unless FDA approvals are received.
The Company has entered into license agreements with various parties under
which the Company obtained certain intellectual property rights relating to its
products. See "Business -- Patents and Proprietary Rights." The Company is
obligated to pay royalties of up to 6% on sales of all of its products, except
for FilaStent and UroTherm, under such license agreements. The Company currently
accounts for such royalties as operating expenses. The Company is also obligated
to make certain milestone payments under these license agreements, which could
aggregate approximately $1.0 million.
The Company intends to sell its products through a direct sales force in
the U.S. and through local distributors in foreign markets with non-exclusive
rights in their respective designated territories. The Company expects gross
margins on U.S. sales to be higher than gross margins on international sales due
to distributor discounts. The Company believes its gross margins will be
primarily affected by product mix, manufacturing costs, sales channels and
product pricing.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue decreased to $4,000 for the three months ended March 31, 1998 from
$7,000 for the three months ended March 31, 1997 due to a lack of orders for the
AcuTrainer product as marketing efforts focused primarily on the UroVive and
SANS.
20
<PAGE> 22
Cost of sales decreased to $1,000 for the three months ended March 31, 1998
from $4,000 for the three months ended March 31, 1997. Gross profit margin
increased to 64.1% in the three months ended March 31, 1998 compared to 48.0% in
the three months ended March 31, 1997 primarily due to an increase in the
percentage of direct sales which have a higher gross margin than indirect sales.
Research and development expense increased to $1,398,000 for the three
months ended March 31, 1998 from $509,000 for the three months ended March 31,
1997. This increase was primarily due to the increased cost of development,
including materials costs, of UroVive and SANS clinical trials and preclinical
activities for the Company's other products. The increase also resulted from the
Company's build-up of its research and development personnel and the recording
of a stock compensation charge as noted below and in Note 5 to the financial
statements.
Marketing and sales expense increased to $576,000 for the three months
ended March 31, 1998 from $48,000 for the three months ended March 31, 1997.
This increase was due to the Company's build-up of its marketing and sales
personnel. In addition, the Company continued to develop promotional materials,
train physicians and attend trade shows, which also contributed to the increase
in such expense. During the three months ended March 31, 1998, the Company
participated in three international and two U.S. trade shows and held physician
and distributor training sessions at these and other locations.
General and administrative expense increased to $537,000 for the three
months ended March 31, 1998 from $236,000 for the three months ended March 31,
1997. This increase was due primarily to the Company's increase in personnel and
expenses necessary to establish appropriate administrative functions to support
the Company's expanding operations and to prepare the Company to become a public
company.
Interest income increased to $31,000 for the three months ended March 31,
1998 from $21,000 for the three months ended March 31, 1997 primarily due to
higher average investment balances in 1998. Interest Expense increased to $8,000
for the three months ended March 31, 1998 from $1,000 for the three months ended
March 31, 1997 due to the higher level of equipment financing in 1998.
Income tax credits increased to $8,000 for the three months ended March 31,
1998 from $5,000 for the three months ended March 31, 1997.
With respect to certain stock options granted during 1996, 1997 and the
three months ended March 31, 1998, the Company is recognizing $296,000 in
compensation charges in the three months ended March 31, 1998. See Note 5 of
notes to the Company's financial statements.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
Net revenues decreased to $12,000 in 1997 from $20,000 in 1996. AcuTrainer
was the only product sold commercially by the Company during these periods and
is expected to comprise only a small portion of the Company's future revenues.
The Company's primary focus has been on the development of UroVive and SANS and,
as a result, the Company did not devote significant sales efforts to AcuTrainer
sales. The Company is recognizing revenues from sales of UroVive and
percutaneous SANS in Europe in the second quarter of 1998.
Research and development expenses increased to $3.6 million in 1997 from
$1.9 million in 1996. This increase was due primarily to increased costs of
development, including materials for UroVive and SANS pivotal clinical trials
and preclinical animal testing for the Company's other products. In addition,
the increase in expense is associated with the Company's build-up of its
research and development personnel as well as payments to consultants. The
Company currently employs 17 individuals in research and development and
manufacturing on a full-time basis and five individuals on a part-time basis.
Research and development expenses are expected to increase as the Company
continues to develop its products.
Marketing and sales expenses increased to $392,000 in 1997 from $271,000 in
1996. This increase was due to the Company's build-up of its sales and marketing
personnel, which currently includes six executives and two telemarketers. In
addition, the Company is continuing to develop promotional materials, train
physicians and attend trade shows, which also contributes to the increase in
such expenses. Marketing and
21
<PAGE> 23
sales expenses are expected to increase as the Company commercializes its
products and completes the hiring of a direct sales force in the U.S.
General and administrative expenses increased to $1.5 million in 1997 from
$771,000 in 1996. This increase was due primarily to increased personnel costs
and associated costs related to obtaining product clearances and establishing
administrative functions to support the Company's operations. General and
administrative expenses are expected to increase as additional personnel are
hired to support the Company's operations and needs as a public company, but at
a lower rate than research and development and marketing and sales expenses.
Interest income increased to $187,000 in 1997 from $184,000 in 1996.
Interest expense increased to $9,000 in 1997 from $6,000 in 1996.
With respect to certain stock options granted during 1996 and 1997, the
Company is recognizing compensation charges of $860,000. The Company recognized
$122,000 of the compensation charges in 1997, and will recognize the remainder
over the related vesting period. The future compensation charges are subject to
reduction for any employee who terminates employment prior to the expiration of
such employee's vesting period. See Note 5 of notes to the Company's financial
statements.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Net revenues were $20,000 in 1996 as a result of sales of AcuTrainers. No
revenues were recorded in 1995.
Research and development expenses increased to $1.9 million in 1996 from
$848,000 in 1995. This increase was due to increased costs for the development
of UroVive and SANS, including pilot clinical studies and preclinical animal
testing, the associated costs for the hiring of research and development
personnel and consultants and increased material and prototype expenses.
Marketing and sales expenses increased to $271,000 in 1996 from $2,000 in
1995. This increase was due primarily to advertising costs for AcuTrainer and
image brochures regarding the Company.
General and administrative expenses increased to $771,000 in 1996 from
$466,000 in 1995. This increase was due primarily to increased personnel and
associated costs related to obtaining an IDE for UroVive and a 510(k) clearance
for AcuTrainer and establishing administrative functions to support the
Company's operations.
Interest income increased to $184,000 in 1996 from $85,000 in 1995. This
increase is due primarily to higher cash balances as a result of a $5.3 million
private placement of equity securities completed in September and October 1995.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1997, the Company has financed
operations primarily through the private placement of equity securities totaling
$14.4 million. The Company's principal source of liquidity consisted of cash,
cash equivalents and short-term investments of $3.3 million as of December 31,
1997 and $1.0 million as of March 31, 1998. The Company's cash used in operating
activities increased to $5.7 million in 1997 from $2.5 million in 1996,
primarily resulting from an increase in the Company's net loss due to increased
research and development, sales and marketing, and general and administrative
expenses for preparation and support of clinical trials for UroVive and
percutaneous SANS. Cash used in operating activities in the first quarter of
1998 increased to $2.0 million from $1.0 million in the first quarter of 1997
primarily as a result of an increase in the Company's net loss due to increased
research and development, marketing and sales, and general and administrative
expenses as noted above.
As of December 31, 1997, the Company had approximately $175,000 in
long-term debt and had approximately $231,000 in long-term debt as of March 31,
1998. This increase resulted primarily from the receipt of a community
development loan to support the improvements to a leased building to be used as
a manufacturing facility. The Company entered into a financing arrangement with
certain of its principal
22
<PAGE> 24
stockholders in June 1998. Under this arrangement, such stockholders will
provide the Company with a line of credit of up to $5.0 million in the event
that the Company requires any additional funding prior to receiving the net
proceeds of this offering. In exchange for this line, the Company has agreed to
issue warrants to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share. The
warrants will have a term of three years. The Company will issue warrants on the
same terms to purchase an additional 30,000 shares of Common Stock for each $1.0
million borrowed under this arrangement. Borrowings under this arrangement will
not bear interest. As of June 12, 1998, the Company has borrowed $3.0 million
under this arrangement.
The Company is completing improvements to a leased building to be used as a
manufacturing facility. Leasehold improvements and other capital equipment
purchases with an estimated cost of $500,000 are anticipated through the second
quarter of 1998. The Company does not anticipate that material capital or other
expenditures will be necessary in connection with internal computer problems
associated with year 2000 concerns. Like most other companies operating on a
worldwide basis, there are significant interdependencies with suppliers,
distributors and customers. It is not possible at this time to estimate the cost
to the Company of unfavorable effects caused by year 2000 issues on these other
parties.
The Company believes that the proceeds from this offering together with
current cash balances will be sufficient to meet the Company's operating and
capital requirements through 1999. The Company's liquidity and capital
requirements will depend on numerous factors, including the extent to which the
Company's products gain market acceptance, the timing of regulatory actions
regarding the Company's products, the costs and timing of expansion of sales,
marketing and manufacturing activities, obtaining and enforcing patents
important to the Company's business, results of clinical trials and competition.
There can be no assurance that the Company will not be required to raise
additional capital, or that such capital will be available on acceptable terms,
or at all.
23
<PAGE> 25
BUSINESS
OVERVIEW
UroSurge develops, manufactures and markets medical devices for the
treatment and management of genito-urinary disorders. The Company is developing
a broad range of proprietary products to address segments of the urology market
that are currently underserved as a result of ineffective or costly therapies.
The Company is initially focusing much of its efforts on addressing UI, which
afflicts approximately 13 million people in the U.S. and accounts for
approximately $15 billion in annual treatment costs. The UI market presents a
significant opportunity because approximately two-thirds of UI sufferers are
dissatisfied with current treatment alternatives according to a 1996 U.S. study
by the National Association for Continence. The Company believes that its lead
products, UroVive for stress UI and SANS devices for urge UI, represent superior
alternatives to existing therapies by offering minimally invasive,
cost-effective, long-term solutions for patients suffering from these
conditions. The Company launched these products in Europe in March 1998 and is
currently conducting pivotal clinical trials in the U.S. Additionally, the
Company is developing and marketing a number of other products to treat a
variety of urological conditions.
UroVive is a minimally invasive urethral bulking system for the treatment
of certain types of stress UI. The UroVive procedure involves the permanent
implantation of one or more hydrogel-filled microballoons around the urethra and
is designed to close the bladder neck and immediately restore urinary
continence. The procedure can be performed in about 20 minutes in an outpatient
setting under local anesthesia. The Company believes that UroVive is a
practical, safe, long-term solution and is more convenient and cost-effective
than palliative approaches such as diapers and urethral plugs that do not cure
the problem. The Company also believes that UroVive offers significant
advantages over competing injectable urethral bulking agents that suffer from
problems of absorption and migration (which can lead to the need for repeat
procedures or raise safety concerns) and are not easily retrievable should
urinary retention occur. UroVive also provides an advantage over invasive
surgical procedures, which are costly and can result in post-surgical
complications. The Company is marketing UroVive in Europe under CE mark
certification, and is currently conducting pivotal clinical trials of UroVive in
the U.S. Results of pilot clinical trials indicate a 90% efficacy rate for
patients with the target indication for which the Company has 18-month follow-up
data. Pilot clinical studies refer to initial studies in a small patient
population that are conducted primarily to confirm product safety and obtain
preliminary efficacy data. Pivotal clinical studies refer to studies involving a
larger patient population with the device intended to be commercialized and are
conducted primarily to obtain efficacy data and to support the submission of PMA
to the FDA. By comparison, clinical results of the only urethral bulking agent
sold commercially in the U.S. indicate only a 52% probability that such patients
will maintain their initial continence for one year. The Company expects to
submit a PMA application to the FDA for UroVive in mid-1999.
The Company has two SANS devices, percutaneous (through the skin) and
subcutaneous (below the skin), for the treatment of urge UI. Both are minimally
invasive systems that modulate bladder action through stimulation of the
afferent nerve fibers in the ankle area that lead to nerves located in the
spinal region that control bladder function. Such stimulation has been shown to
greatly reduce the likelihood that the patient will have an uncontrollable spasm
of the bladder wall muscle that can cause the bladder to empty. The percutaneous
SANS procedure entails approximately 30 minutes of electrical stimulation and is
repeated weekly in a physician's office. Percutaneous SANS consists of a
generator and lead wire assembly that delivers electrical impulses through a
small disposable needle, temporarily inserted near the ankle. To facilitate in-
home use and enhance patient convenience, the Company is developing a second
generation, subcutaneous SANS device that involves the permanent implant of a
small, thumbtack-shaped electronic receiver near the patient's ankle,
eliminating the need for the use of a needle with each treatment. Few products
exist for effectively treating urge UI and the Company believes that SANS is
superior to other commercially available products due primarily to its minimally
invasive nature and cost-effectiveness. Clinical studies to date on percutaneous
SANS, encompassing over 1,000 treatment procedures in 90 patients with average
follow-up in excess of two years, indicate an 80% efficacy rate and no
complications. By comparison, clinical results of the only commercially
available implantable electronic nerve stimulation device also indicate a
comparable efficacy rate, but a high rate of post-treatment complications that
required reoperation in approximately one-third of all cases. This competing
product involves an invasive surgical implant procedure in the spinal area
24
<PAGE> 26
and requires extensive physician training. The Company is marketing percutaneous
SANS in Europe and is currently conducting a pivotal clinical trial in the U.S.
The Company expects to submit a PMA application for acute use of percutaneous
SANS by early 1999.
As part of its strategy of offering a broad range of products to physicians
treating genito-urinary disorders, the Company has also developed or licensed
SpiraStent, FilaStent and a kidney stone grasper for use in removing kidney
stones; AcuTrainer for diagnosing and managing urge UI; UroTherm for warming
irrigation fluids used in various gynecological and urological procedures;
demineralized bone paste for use in treating VUR in infants and children; and a
urethral pressure catheter for the diagnosis of stress UI. The Company has
received FDA 510(k) clearance for U.S. marketing of SpiraStent and AcuTrainer,
and has submitted 510(k) clearance applications for FilaStent and UroTherm. The
Company is marketing SpiraStent, FilaStent and AcuTrainer in Europe and
SpiraStent and AcuTrainer in the U.S.
STRATEGY
The Company's objective is to establish itself as the leader in the
development and commercialization of clinically effective solutions for UI and
other genito-urinary disorders treated by urologists, urogynecologists and
gynecologists. The following are the key elements of the Company's strategy.
Accelerate Commercialization of Existing Products. The Company has
substantially developed the infrastructure, including international
distributors, manufacturing capabilities and sales and marketing management,
that will help accelerate the commercialization of its products. The Company
began marketing UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer
in Europe and other international markets in March 1998 and is recognizing
revenues from these efforts in the second quarter of 1998. The Company is also
marketing SpiraStent and AcuTrainer in the U.S. and intends to commence
marketing of UroVive and SANS in the U.S. upon receipt of PMA approval.
Become the Leader in the Treatment of UI. UI is a significant problem for a
large number of adults, particularly women and the elderly, and is one of the
most intractable and debilitating conditions treated by urologists and
urogynecologists. The UI market offers significant potential due primarily to
the inadequacy of existing treatments. The Company intends to offer improved
approaches for all levels of care, ranging from diagnosis to surgery, and for
all types of UI. The Company is focusing on the development of products that are
highly effective and minimally invasive, as compared to many current approaches
for managing UI, which are either palliative, such as diapers, or involve
invasive open surgical procedures.
Offer a Comprehensive Product Line. Urologists, urogynecologists and
gynecologists are responsible for treating most genito-urinary disorders and use
a wide range of products. The Company is developing a broad line of products to
address the needs of these physicians while focusing on product opportunities
that represent significant improvements over currently available therapies. As
part of these efforts, the Company intends to explore the applicability of its
current products and technologies to additional clinical indications. The
Company also continually evaluates product concepts and technologies that may
present potential solutions for unmet needs in its targeted markets and, in
addition to internal development efforts, actively seeks to license or acquire
rights to such products and technologies.
Penetrate International Markets. The Company believes that there is a
significant international market for its products. The Company distributes
products internationally through local distributors on a country-by-country
basis to access such distributors' established networks and specialized
expertise regarding the health care system, including reimbursement practices,
in their respective markets. The Company's current distributors cover 14
European countries, South Korea, Australia and Japan. In addition, as part of
its international marketing efforts, the Company has established clinical
research relationships with leading international urologists. The Company
believes that its country-specific approach will accelerate sales growth,
provide comprehensive geographic market coverage and enable the Company to
access particular markets and customers.
Build Specialized, Direct Sales Force in the U.S. According to industry
sources, there are approximately 8,000 urologists and 800 urogynecologists in
the U.S. The Company believes that this relatively small number
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<PAGE> 27
of physicians to which it will market its products affords a unique opportunity
to develop a cost-effective, direct sales effort. Accordingly, the Company has
retained all U.S. sales and marketing rights to its products and has commenced
building a sales and marketing sales force in the U.S. To gain acceptance of its
products, the Company conducts physician training and disseminates clinical and
patient outcome data. In addition, the Company markets its products by raising
patient awareness of its available treatments through advertising, magazine
articles and other media.
URINARY INCONTINENCE
In the normal urinary tract, continence, or the appropriate storage of
urine, is maintained by a complex interplay of anatomic structures. The primary
structures responsible for controlling continence are the bladder neck and the
urinary sphincter. The urinary sphincter is a muscle at the base of the bladder
that surrounds the bladder neck and urethra and aids the bladder in maintaining
continence. In a normal system, the bladder neck and the urinary sphincter work
in a coordinated fashion to act as a valve. As the bladder fills and relaxes,
the urinary sphincter contracts to prevent urination. During urination, the
urethra and urinary sphincter muscle relax and open, the bladder contracts and
the bladder neck opens, all in a coordinated fashion, causing the passage of
urine. In normal continence, when the bladder neck opens involuntarily in
response to intra-abdominal pressure, the lower portion of the urinary sphincter
tightens in turn so as to maintain continence. Similarly, the urethra is also
under muscular control so as to keep this tube closed during the urine storage
phase. The following diagram depicts the anatomy of the urinary tract.
[DIAGRAM OF ANATOMY OF THE URINARY
TRACT SHOWING KIDNEY, URETER, BLADDER AND URETHRA]
A malfunction in any part of this system can cause UI. The most common
anatomic incontinence pathology is bladder neck or urethral hypermobility, which
results from a lack of bladder neck support caused primarily by weak surrounding
tissue. The weakening of tissue surrounding the bladder, urethra and bladder
neck arises most commonly in women as a consequence of pelvic trauma cause by
pregnancy and childbirth. Other causes of UI include birth defects, injuries to
the pelvic region or to the spinal cord, neurological diseases and degenerative
changes associated with aging.
UI may cause depression, discomfort and embarrassment about appearance and
odor. Patients suffering from UI may withdraw from social interaction with
others, including friends and family, and sexual activity may be restricted or
avoided entirely. Spouses and other intimates also may share the burden of the
condition. There are three main categories of UI.
Stress urinary incontinence. Stress UI refers to the involuntary loss of
urine during coughing, laughing, sneezing, jogging or any other physical
activity which causes a sufficient increase in intra-abdominal pressure. This
condition varies in severity from those women who leak urine as a result of
certain sudden movements or
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<PAGE> 28
physical activities to those who leak urine simply upon standing up. Stress UI
is caused by one of two conditions (i) urethral hypermobility, a lack of
anatomic stability caused primarily by weak surrounding tissues, which results
in the abnormal movement of the bladder neck and urethra in response to
sufficient intra-abdominal pressure or exertion; and (ii) intrinsic sphincter
deficiency, or the inability of the urinary sphincter valve muscle to function
properly due to atrophy of the urinary sphincter muscle. Approximately 15% of
stress UI cases are solely the result of intrinsic sphincter deficiency.
Urethral hypermobility is the principal cause of the remaining 85% of stress UI
cases; however, the Company believes that many of these patients have a mix of
urethral hypermobility and intrinsic sphincter deficiency.
Urge urinary incontinence. Urge UI refers to the involuntary loss of urine
due to an unexpected bladder contraction that is associated with a strong,
uncontrollable desire to urinate, often referred to as urgency. Causes of urge
UI include an overactive bladder muscle, neurologic abnormalities, such as those
caused by a stroke, and urethral instability or abnormal bladder relaxation
patterns.
Mixed urinary incontinence. Mixed UI is a mixture of stress and urge UI.
URINARY INCONTINENCE MARKET
The U.S. Department of Health and Human Services reports that approximately
13 million adults suffer from UI in the U.S., although precise figures are
uncertain because of underreporting due to the stigma associated with the
condition. The National Association for Continence estimates that approximately
31% of adults with UI suffer from stress UI, approximately 21% of adults with UI
suffer from urge UI, and approximately 30% of adults with UI suffer from mixed
UI. The U.S. Department of Health and Human Services has estimated that the
annual cost for treatment of UI in the U.S. exceeds $15 billion. This amount
includes all costs associated with the treatment of UI, including physician fees
and nursing home and long-term care costs. The Company believes that medical
devices for UI, which amounted to an estimated $250 million in U.S. sales in
1997, represent a relatively small portion of the potential market due primarily
to the limitations of currently available devices.
UI particularly affects the elderly and women. Industry sources estimate
that approximately 19% of people over 65 living in non-institutional settings
and 40% of such persons living in institutional settings suffer from UI. UI is
believed to be a primary reason for admission to long-term nursing care
facilities. In addition to being prevalent in the elderly, UI is a major women's
health concern with women accounting for approximately 85% of the estimated 13
million adults with UI in the U.S. The higher incidence of UI among women is
generally attributed to pelvic trauma during pregnancy and childbirth, menopause
and abdominal surgery. UI will continue to be a significant health care problem
in the elderly and institutionalized populations and among adult females, and
the number of individuals suffering from UI is expected to increase as the
population continues to age.
CURRENT TREATMENTS AND THEIR LIMITATIONS
The Company views the treatment of UI at five levels of intervention: (i)
diagnosis; (ii) simple self-management through the use of products and
approaches that manage, but do not cure the condition, such as disposable or
reusable absorbents, behavioral therapy and pelvic muscle training exercises;
(iii) complex self-management through the use of products or procedures that can
be performed by the patient but require a device to be manually inserted in the
body, such as urethral and vaginal inserts and plugs; (iv) minimally invasive
treatments that can be accomplished on an outpatient basis, such as urethral
bulking agents, pharmaceuticals and Foley catheters; and (v) invasive surgery
under general anesthesia that involves suspension and sling procedures,
artificial sphincters and implantable nerve stimulation devices.
Disposable or reusable absorbents. Many cases of stress and urge UI are
managed through the use of disposable adult diapers, shields and reusable
absorbent pads. These products are palliative and do not treat the causes of the
patient's UI. The cost of diapers and pads over time can be substantial and is
not covered by medical insurance, creating a continuous financial burden for the
patient. Industry sources estimate that the annual sales of disposable diapers
and pads in the U.S. constitutes a $1.0 to $2.0 billion market. In addition,
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this management technique requires frequent changing of diapers and pads to
control odor. Diapers and pads are also uncomfortable and wearing them can be an
embarrassment to the patient.
Behavioral therapy and pelvic muscle training exercises. Behavioral therapy
and related techniques are also used to manage UI through bladder and habit
training, pelvic muscle exercises (known as Kegel exercises) and biofeedback.
These techniques are primarily used in managing stress UI but can also be used
by persons suffering from urge UI. These therapies and techniques first teach
the patient to be aware of the group of muscles in the perineal area and to
contract them in a way that builds muscle tone around the bladder neck. These
treatments are time consuming, take several weeks or months before results are
evident, present uncertain outcomes and require strict patient compliance.
Urethral and vaginal inserts and plugs. Urethral inserts act as expandable
stoppers to block the flow of urine when inserted in the urethra. When the
patient feels the need to urinate, these devices are either opened or removed to
allow the patient to urinate. The insertion method and the need to periodically
replace or remove these devices require a high degree of complex self-management
by the patient, which limits the usefulness of these devices to a small segment
of highly-motivated, extremely compliant patients. Potential adverse side
effects include urinary tract infections. Vaginal inserts are used to manage
stress UI by obstructing the bladder neck and urethra by applying pressure
through the neighboring vaginal cavity. These devices are frequently ineffective
in preventing leakage because it is difficult to fit patients properly and apply
sufficient pressure to eliminate the leakage of urine without causing
discomfort. Potential side effects observed with vaginal inserts include vaginal
discharge and tissue erosion.
Urethral bulking agents. Bulking agents are either biologically derived or
synthetic materials designed to be injected or implanted in or near the bladder
neck to treat stress UI by increasing tissue bulk. These bulking agents decrease
the urethral opening at the sphincter and compensate for the lack of muscle tone
that is needed to offset the hydrodynamic pressure of the bladder, thus
preventing urine leakage under stress. Bulking procedures are gaining acceptance
as a method of treating certain types of stress UI as a result of the high
efficacy rates achieved in clinical trials. However, biologically-derived
bulking agents currently available have experienced problems with absorption by
the body and may require retreatments within six to twelve months. Synthetic
bulking agents currently available have experienced problems with migration
because particles may be small enough to migrate to other areas of the body such
as the brain, lungs or lymphatic system. In addition, both synthetic and
biologically-derived bulking materials are not encapsulated and cannot be
contained after injection and therefore are not easily retrievable in the event
of chronic urinary retention.
Pharmaceuticals. Drug treatments can be used to manage both urge UI and
stress UI, but have demonstrated a limited efficacy, particularly in managing
stress UI. Drugs for the management of urge UI affect the contraction of the
muscle tissue of the bladder. Drugs for the management of stress UI attempt to
either affect contraction of the muscle tissue of the bladder neck or improve
the quality of the mucosal lining of the bladder neck and urethra. Drugs seldom
represent a long-term, effective solution and potential side effects include
dryness of the eyes (resulting in blurred vision) and mouth, urinary retention,
nausea, dizziness and the possibility of adverse drug interactions.
Foley catheters. Foley catheters, which are typically used to assist
patients unable to urinate post-surgery, may also be used to manage UI in
hospitals and long-term care facilities. The Foley catheter is inserted through
the urethra into the bladder. Once in place, the catheter is either clamped at
the exit point from the body or connected to an external urine collection bag.
Aside from the physical and emotional discomfort experienced by patients, the
direct path from the exterior to the bladder provides a conduit for bacteria,
and often results in bladder infections.
Suspension and sling procedures. Bladder neck suspension and sling
procedures involve invasive surgical intervention to elevate and stabilize the
urethra and the bladder neck in order to treat stress UI. In a bladder neck
suspension, the bladder neck and urethra are elevated to prevent urethral and
bladder neck prolapse (descent) during exertion. In a sling procedure, either an
autologous (patient tissue) or synthetic piece of material is placed under the
urethral-bladder junction, pulling it forward in a way that reinforces and
strengthens the sphincter. Surgeries of this nature are costly, delicate and
complicated procedures in which the
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outcome depends on a number of factors, including the degree of severity of the
patient's condition and the surgeon's experience.
Artificial sphincters. Artificial sphincters are implantable, miniature,
hydraulic medical devices consisting of an inflatable cuff placed around the
urethra and a pump and tubing required to activate the cuff. The most common
applications are for post-prostatectomy incontinence and patients with
neuropathic bladders. Artificial sphincter implantation currently requires a
major inpatient surgical procedure and hospitalization with associated
discomfort, lengthy recovery period and high expense. Initial complications that
may arise are mainly associated with post-operative infection or urethral or
bladder injury during implantation. Delayed complications include mechanical
problems such as pump malfunctioning, fluid leaks, tubing kinks and tissue
atrophy.
Implantable Nerve Stimulation Devices. Implantable nerve stimulation
devices stimulate the nerve bundle located in the spinal column that controls
bladder activity in an attempt to reduce the bladder spasms that cause urge UI.
The only such device currently sold commercially is derived from traditional
pacemaker technology, and the implantation of the device is an open surgical
procedure which is usually performed by a urologist and assisted by a
neurosurgeon, if necessary. This device involves a lead that is attached to the
spinal column and connected to an electrical stimulation device (which contains
a battery) implanted in the abdomen. Periodically, the patient must submit to
additional surgical procedures in order to change the batteries or replace the
implanted device. Implantation of the device requires costly major invasive
surgery including exposure of the spine. In clinical testing, the device showed
efficacy in approximately 75% of patients. However, 35% of patients reported
long-term pain from the device and required additional surgery to reposition the
implant.
THE UROSURGE SOLUTION
Stress UI solution. The Company believes that UroVive is an effective
method for treating stress UI and addresses the major problems associated with
existing treatments. UroVive is a minimally invasive system that is initially
being targeted for the treatment of stress UI caused by intrinsic sphincter
deficiency. The Company may seek to expand the targeted indications for UroVive
by conducting additional clinical trials and seeking additional regulatory
approvals.
The Company believes that the following are the principal advantages of
UroVive compared to other urethral bulking agents and other approaches for
treating stress UI:
- No absorption. The membrane of the UroVive microballoon completely
contains the hydrogel filler material, preventing loss of volume through
absorption. In contrast, other injectibles such as collagen can be
absorbed by the body, resulting in the potential need for retreatments
within six to twelve months in order to maintain bulk in the urethral
sphincter. With UroVive, long-term bulking of the urethral sphincter can
be achieved in a single procedure.
- No migration. UroVive does not spread along tissue planes or migrate to
other parts of the body like unencapsulated bulking agents such as
teflon or silicone microparticles. Migration causes difficulty in
maintaining bulk in the desired area, requiring the injection of large
amounts of material as well as possible retreatment. Furthermore,
migration to other parts of the body may result in the occurrence of
unpredictable and unintended side effects.
- Ease of use and patient convenience. Placement of UroVive microballoons
is a relatively easy procedure that takes approximately 20 minutes and
is performed using a cystoscope, a visualization device that is commonly
used in urinary tract procedures. In addition, UroVive is convenient for
the patient who experiences immediate continence and who is not required
to adhere to ongoing treatment regimens, which are necessary with
reusable or disposable absorbents, behavioral therapy, pelvic muscle
training exercises, pharmaceuticals and urethral and vaginal inserts and
plugs.
- Minimally invasive procedure. The UroVive procedure is minimally
invasive and can be performed in an outpatient or physician office
setting under local anesthesia. Unlike suspension and sling
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<PAGE> 31
procedures and artificial sphincters that may require several days of
hospitalization, patient recovery time is minimal and hospitalization is
not required.
- Long-term, cost-effective solution. The UroVive procedure is designed to
provide immediate, long-term continence from a one-time treatment. As
such, UroVive offers a cost-effective solution compared to palliative
measures that do not restore continence, other urethral bulking agents
that often require costly retreatments or invasive surgery.
- Retrievability. In cases of chronic urinary retention, it may be
necessary to retrieve the urethral bulking agent. UroVive microballoons
are retrievable transurethrally through a small incision in the urethra.
No practical method exists for retrieving competing urethral bulking
agents, all of which are unencapsulated.
Urge UI solution. The Company believes that SANS is an effective system for
treating urge UI and addresses many of the problems with existing treatments.
SANS is a minimally invasive system that modulates bladder action through
stimulation of the afferent nerve fibers in the ankle area that lead to nerves
located in the spinal region that control bladder function.
The Company believes that the following are the principal advantages of
SANS compared to the only commercially available implantable electronic nerve
stimulation device and other approaches for treating urge UI:
- Effective and less invasive solution. SANS stimulates the same nerves
and achieves equivalent efficacy with significantly reduced invasiveness
and risk as compared to the only commercially available implantable
electronic nerve stimulation device, which requires an invasive
implantation of an electrical lead in close proximity to the spinal
column along with a battery operated electronic stimulation device in
the abdomen. Furthermore, clinical trials indicated that 35% of patients
treated with this spinal implant device required surgical reintervention
due to lead migration and other complications.
- Patient comfort. Percutaneous SANS delivers electrical stimulation
through a small diameter needle temporarily inserted in the ankle area
and subcutaneous SANS will deliver electrical stimulation through a
small receiver implanted in the ankle area. In contrast, the spinal
implant system delivers electrical stimulation through an implanted
device that is complex and bulky, which can result in patient
discomfort.
- Cost-effectiveness. The percutaneous SANS procedure is performed in
periodic, short visits to the doctor's office and uses a relatively
inexpensive disposable needle and lead wire assembly. By contrast, the
competing spinal implant entails the implantation of a costly,
self-contained electrical stimulation device in an invasive surgical
procedure, requiring retreatments for battery replacement and
reintervention due to complications. In addition, subcutaneous SANS
should enable the Company to reduce the cost of each SANS treatment by
ultimately enabling SANS treatments to be performed at home. Unlike the
spinal implant, SANS will not require reoperation for battery
replacement.
- Ease of use. Both percutaneous and subcutaneous SANS procedures are
relatively easy and will be performed in a physician office setting. The
percutaneous SANS treatment can be performed in approximately 30 minutes
by the urologist and implantation of the subcutaneous SANS receiver will
be performed in a short, outpatient procedure under local anesthesia.
- Curative approach. Other than a spinal implant, few approaches exist for
treating urge UI. SANS is designed to be a curative approach for
treating urge UI, unlike palliative approaches such as diapers. In
addition, SANS does not present the side-effects often associated with
pharmaceuticals, which also may have short-term effectiveness.
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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table summarizes the status of the Company's products and
products under development as of March 31, 1998:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PRIMARY INDICATION STATUS
<S> <C> <C> <C>
PRINCIPAL PRODUCTS
UroVive Self-detachable, self- Stress UI due to Commenced marketing in
sealing microballoon intrinsic sphincter Europe in March 1998.
implanted into the deficiency Pivotal clinical trials
urethral sphincter and in U.S. PMA expected to
permanently inflated be submitted in mid-
with a biocompatible 1999.
hydrogel.
Percutaneous SANS Needle device to Urge UI Commenced marketing in
electrically stimulate Europe in March 1998.
peripheral nerve fibers Pivotal clinical trials
located in ankle area in U.S. PMA expected to
that regulate bladder be submitted by early
and pelvic floor 1999.
function.
Subcutaneous SANS Implantable device to Urge UI IDE to be submitted in
electrically stimulate late 1998.
peripheral nerve fibers
located in ankle area
that regulate bladder
and pelvic floor
function.
OTHER PRODUCTS
SpiraStent Spiral-shaped stent Kidney drainage (i.e. Commenced marketing in
designed to facilitate urine, stones) U.S. and Europe in March
urine flow and removal 1998. 510(k) clearance
of kidney stones from received.
the kidney and ureter.
FilaStent Filament-reinforced Kidney drainage (i.e. Commenced marketing in
stent designed to urine, stones) Europe in March 1998.
facilitate urine flow 510(k) clearance
and removal of kidney application submitted.
stones from the kidney
and ureter.
AcuTrainer Non-invasive electric Urge UI Marketed in U.S. and
device to assist Europe.
patients with bladder
retraining exercises.
UroTherm Device to warm BPH surgical 510(k) clearance
irrigation fluids. procedures application submitted.
Kidney stone grasper Device to facilitate Kidney stones 510(k) clearance
removal of multiple application expected to
small and large kidney be submitted in late
stones from the ureter. 1998.
Demineralized bone paste Biologically derived VUR in infants and IDE approved in U.S.
paste. children
Urethral pressure catheter Hardware and disposable Intrinsic sphincter Functional prototype
device for measuring deficiency diagnosis expected by late 1998.
stress UI due to
intrinsic sphincter
deficiency.
</TABLE>
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PRINCIPAL PRODUCTS
UROVIVE
UroVive system. The UroVive system includes a delivery system, a
microballoon and a syringe filled with biocompatible hydrogel, which will be
sold in an integrated kit. The microballoons are made of cross-linked silicone
polymer and are available in various sizes depending on the amount necessary to
provide the muscular tension for continence. The hydrogel material is a
hydrophilic, or water-absorbing polymer, which has been demonstrated to be safe
when used in other devices, including contact lenses. The microballoons can be
delivered periurethrally or transurethrally.
In a periurethral UroVive procedure, a cystoscope is inserted through the
urethra and used for visualization of the sphincter muscle while a catheter and
deflated microballoon are delivered directly into the sphincter muscle using a
needle and sheath. After proper needle positioning, the needle is removed, the
sheath is retracted and the deflated balloon is exposed in the tissue pocket
created in the sphincter muscle. Once inside the pocket, a syringe connected to
the catheter containing hydrogel is used to inflate the microballoon. When the
microballoon is sufficiently filled, the sheath and catheter are retracted, the
microballoon is detached, seals itself and remains in place. In a transurethral
UroVive procedure, a cystoscope is inserted in the urethra and a needle and
sheath are advanced through the working channel of the cystoscope and inserted
into the sphincter muscle, creating a small tissue pocket. The closed-end needle
is removed, leaving the sheath in place. A catheter and a deflated microballoon
are inserted through the lumen of the delivery sheath until the balloon is
positioned in the tissue pocket. As in a periurethral procedure, when the
microballoon is sufficiently filled, the microballoon is detached, seals itself
and remains in place.
SIX DIAGRAMS SHOWING PERIURETHRAL UROVIVE PROCEDURE.]
CAPTIONS:
1. Attach balloon to distal end of primed catheter.
2. Slide sheath into holder and advance until sheath holder is fully
seated against holder. Slide needle into sheath.
3. Insert needle into periurethral tissue, with needle bevel facing
urethra.
4. Unscrew the needle and remove it from the delivery system, leaving
the sheath and holder in place. Carefully place the balloon and
catheter into the sheath.
5. Rotate the catheter hub (1), which retracts sheath and exposes
the balloon. Gradually inflate balloon with filler material until
there is sufficient bulking of the urethra.
6. Carefully retract system from periurethral tissue. Balloon will detach
automatically.
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A typical UroVive procedure will involve the placement of three balloons
around the perimeter of the sphincter muscle to achieve closure. The procedure
can be performed in about 20 minutes in an outpatient setting and is designed to
immediately restore the patient to normal urinary continence. A typical
procedure using three or four microballoons is comparable to other urethral
bulking agents.
UroVive clinical trials. In February 1996, the Company initiated clinical
testing of UroVive in a pilot study involving 27 women with stress UI due to
intrinsic sphincter deficiency. The study was completed in February 1997. The
Company's clinical investigators have been following the progress of these
patients, and the Company currently has one to two year follow-up data. Results
indicate a 90% efficacy rate for female patients with stress UI due to intrinsic
sphincter deficiency for which the Company has 18-month follow-up data. The
UroVive treatment is considered effective if the patient is either dry
(continent) or achieves an improvement on a scale, known as the Stamey Scale,
which is used to measure the grade and severity of UI symptoms.
The Company received FDA approval to enroll up to 216 patients at up to 10
U.S. sites in a pivotal clinical trial of UroVive for the treatment of females
with stress UI caused by intrinsic sphincter deficiency. This is a controlled,
randomized study in which two-thirds of the patients will be randomized into the
UroVive treated group and one-third will be randomized into a control group. The
control group patients will be treated with a commercially available collagen
urethral bulking agent. As of March 31, 1998, approximately 100 patients had
been enrolled with 70 patients in the UroVive treated group and 30 patients in
the control group. This clinical trial is designed to obtain data to support a
PMA application for UroVive, which the Company expects to submit in mid-1999.
The Company is conducting clinical trials for the treatment of other UI
indications using UroVive. For example, another indication in clinical trials
involves males who experience stress UI after undergoing a radical
prostatectomy. The Company is currently in the pilot phase of this trial in
which 10 patients will be treated. The Company plans to pursue regulatory
approvals for these other indications to expand UroVive's application.
SANS
Percutaneous SANS. The percutaneous SANS system consists of a generator
that delivers electrical impulses through a small disposable needle and lead
wire assembly. In a SANS procedure, the physician temporarily inserts the needle
into the proper location in the ankle area. After the lead wire and electrode
are attached, the SANS device is turned on and amplitude is slowly increased
until the patient's large toe starts to curl or the toe digits fan out,
indicating proximity to the nerve bundle. Amplitude is then reduced slightly and
the patient receives intermittent electrical pulses for approximately 30 minutes
per visit. The treatment is repeated weekly in a physician office setting and
after approximately 10 weeks, the physician can assess patient progress. If
improvement is significant, the physician may place the patient on a regimen
requiring less frequent treatments. SANS was originally developed by Dr.
Marshall Stoller, a leading urologist at UCSF School of Medicine.
Percutaneous SANS clinical trials. Clinical studies to date, encompassing
90 patients with average follow-up in excess of two-years, demonstrated an 80%
efficacy rate in the treatment of urinary urgency, frequency and pelvic pain
with no complications in over 1,000 treatment procedures. Efficacy is defined as
an at least 50% improvement in one or more of a patient's urge UI symptoms.
In the first quarter of 1998, the Company received FDA approval to enroll
up to 60 patients at up to four sites in a nonrandomized, pivotal clinical
trial. In this study, urgency and frequency will be used as benchmarks for
measuring patient progress over a period of at least 10 weeks and up to one
year. This clinical trial is designed to obtain data to support a PMA
application for percutaneous SANS, which the Company expects to submit in early
1999.
Subcutaneous SANS. To ultimately facilitate in-home use and enhance patient
convenience, the Company is developing a second generation, subcutaneous SANS
that involves the permanent implant of a small, thumbtack-shaped receiver near
the patient's ankle, eliminating the need for the use of a needle with
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<PAGE> 35
each treatment. The patient may then visit a physician weekly to receive the
electrical stimulus or perform the treatment on himself or herself at home.
Because the permanent implant is simply a receiver for a magnetic pulse, it will
not require batteries and the patient will not have to undergo subsequent
implants for battery replacement.
Subcutaneous SANS clinical status. The Company is currently conducting
preclinical animal studies of subcutaneous SANS and, depending upon the outcome
of these studies, expects to file an IDE for FDA approval to conduct pilot and
pivotal clinical trials in late 1998.
OTHER PRODUCTS
SpiraStent and FilaStent
SpiraStent and FilaStent are ureteral stents designed to facilitate urine
flow and the passage of kidney stone fragments generated by lithotripsy or other
procedures. Approximately 200,000 lithotripsy procedures are performed annually
in the U.S. for kidney stone removal. Currently available ureteral stents are
simple tubes with intermittent side holes along their length. To date, the
principal purpose of ureteral stents has been to dilate the ureter to allow
urine passage around the stone fragments. Stones typically do not pass through
the center lumen of the stent or through the side holes, but will move along the
outside wall of the stent. With conventional smooth walled stents, the natural
peristaltic motion of the ureter causes stone fragments to oscillate back and
forth along the outer wall of the stent, resulting in slow downward progression.
SpiraStent is differentiated by its extrusion screw-like shape, which is
designed to overcome the problem of slow movement by allowing stones to pass
down the channel of the screw as natural peristalsis and urine flow occur. The
ability of SpiraStent to provide improved expulsion of stone fragments has been
demonstrated in preclinical animal trials.
FilaStent is a smooth ureteral stent with an embedded high strength
filament within its wall designed to facilitate post-encrustation removal of the
device. In some cases, ureteral stents may be left in place for 30 days or
longer, particularly when used to provide a conduit for urine passage after
certain types of kidney and ureteral surgeries. As a result, stents may become
encrusted and brittle, resulting in breakage during removal. With conventional
stents, encrustation and breakage can lead to the need for surgical intervention
to remove the fractured stent. With FilaStent, in the event of encrustation and
fracture of the stent, the fragments would remain bonded to the filament and be
retrieved upon removal of the stent.
AcuTrainer
AcuTrainer is a hand-held, battery-operated device that facilitates
behavior modification by chiming or vibrating at increasing time intervals to
prompt urge UI patients to urinate. Patients with urge UI often attempt to keep
their bladder as empty as possible at all times to avoid accidental urination.
However, the more frequently they urinate, the more frequently they get the urge
to urinate. Bladder retraining, when used as a first-line treatment modality,
has been shown to non-invasively improve or correct the condition in many
patients. AcuTrainer circumvents the need for the patient to keep cumbersome
voiding diaries and provides the clinician with an effective tool for monitoring
several parameters pertaining to patient progress. After urinating, the patient
presses a button which resets the internal clock of the device. When a patient
has an incontinence or leak episode, they will press another button, registering
this event in the device memory. The physician can choose the initial time
interval, and the device automatically advances the patient to the next time
interval only after a specific success rate is achieved. The physician may
access AcuTrainer memory to determine patient compliance, frequency of
urination, nocturia (urinating during sleep) and urge UI episodes.
UroTherm
The Company is developing UroTherm, a device for warming irrigation fluids
used in surgical procedures to treat benign prostatic hyperplasia ("BPH"),
laparoscopic surgical procedures and other types of gynecological and urological
procedures. Approximately 200,000 BPH surgical procedures are performed annually
in the U.S.
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During a typical laparoscopic or BPH surgical procedure, urologists may use
up to 30 liters of irrigation solution such as saline, which is warmed to body
temperature. Studies indicate that warmed irrigation fluid for urological
applications reduces infections, speeds healing and shortens hospital stays. The
current practice of heating bags of fluid is to place them in an oven and
replenish them from time to time as they are used. This process is inconvenient
and inefficient. To address this problem, the Company is developing UroTherm, a
system which will heat the solution in-line, eliminating the need to
continuously heat and replenish bags. UroTherm will consist of a small heating
unit that can be mounted onto an IV pole. The hardware unit will provide an
actual irrigation fluid temperature readout and an advanced electronic
temperature control system. The unit will consist of a plastic cartridge that is
disposable and will be included as part of the TURP infusion set. As the
irrigation solution flows through the disposable unit, it is warmed to body
temperature. The Company has submitted a 510(k) clearance application to the FDA
for UroTherm.
Kidney Stone Grasper
The Company is developing a kidney stone grasping device for removing
multiple small and large kidney stones or stone fragments from the ureter or
bladder. Current kidney stone graspers are typically either wire baskets or
pincers. These devices have sharp cutting edges, which can be painful and
traumatic to the patient. In addition, they typically can only grasp one stone
at a time. The Company's kidney stone grasper is designed with a soft,
collapsible polymeric net that can be opened in the ureter. Multiple stone
fragments can be snared as the net collapses around them and can then be
withdrawn through the ureteral catheter, minimizing trauma to the patient. The
Company plans to submit a 510(k) clearance application for the kidney stone
grasper in late 1998.
Demineralized Bone Paste
The Company is developing an injectable demineralized bone paste for
treatment of VUR in infants and children. VUR is a condition caused by an
abnormal interface between the ureter and the bladder resulting in backflow or
"reflux" of urine from the bladder to the kidney when the child urinates. VUR
can cause chronic urinary tract infections and necrosis of the kidney. Severe
cases of VUR must be treated with invasive and expensive surgery. The Company's
demineralized bone paste, which has been shown in preclinical trials
encompassing two years of data to be biocompatible, nonimmunogenic, nonmigratory
and nonresorbable, is injected at the junction of the bladder and uretero in a
minimally invasive outpatient procedure to restore proper functioning of the
child's urinary system. In January 1998, the Company received IDE approval to
commence a pilot study for treatment of VUR. This study is scheduled to begin in
July 1998 and is expected to be followed by a non-randomized pivotal trial.
Child Healthcare Corporation of America is collaborating and consulting with the
Company in connection with the planned clinical trials for this product. The
Company also intends to explore the use of the demineralized bone paste in other
UI indications, including the treatment of urethral hypermobility.
Urethral Pressure Catheter
Urethral or sphincter pressure is an important factor in diagnosing
intrinsic sphincter deficiency. Establishing whether a patient's stress UI is
caused by intrinsic sphincter deficiency or another category of stress UI is
important because the treatments are specific to the indicated type of UI.
The current methods of testing for stress UI caused by intrinsic sphincter
deficiency consist of a video urodynamic profile procedure that costs
approximately $1,000 or use of a balloon catheter such as a Foley catheter that
is inflated partially in the bladder and then pulled past the sphincter muscle
to measure sphincter resistance. The urodynamic profile method is expensive and
the latter method can be inaccurate due to inconsistencies associated with the
pressure transducers in the balloon.
The Company's urethral pressure catheter will consist of a catheter with a
custom-designed tip. The tip has the appearance of an inverted umbrella. The
umbrella is folded shut and advanced into the bladder "handle first." The
umbrella tip can be opened to various degrees, thereby tailoring the
circumference of the device. After the umbrella tip is opened, the catheter is
retracted through the urethra. Pull force as a function
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of umbrella opening diameter and urethral distance are measured. A correlation
between pull force and intrinsic sphincter strength can be generated to obtain a
diagnosis of intrinsic sphincter deficiency. The Company's urethral pressure
catheter is designed to provide diagnostic accuracy comparable to urodynamic
profiling at significantly reduced cost. The Company expects to have completed
development of a functional prototype by late 1998.
SALES AND MARKETING
The Company began marketing UroVive, percutaneous SANS, SpiraStent,
FilaStent and AcuTrainer in Europe and other international markets in March 1998
and is recognizing revenues from these efforts in the second quarter of 1998.
The Company's current distributors cover 14 European countries, South Korea,
Australia and Japan. Each distributor has non-exclusive rights in its designated
territory. The Company distributes its products internationally through
distributors on a country-by-country basis to access such distributors'
established networks and specialized expertise regarding the healthcare system,
including reimbursement practices, in their respective markets. In addition, the
Company has established clinical research relationships with leading
international urologists. The Company believes that its country-specific
approach will accelerate sales growth, provide comprehensive geographic market
coverage and enable the Company to access particular markets and customers.
The Company is also marketing SpiraStent and AcuTrainer in the U.S. and
intends to commence marketing of UroVive and SANS in the U.S. upon receipt of
PMA approval. The Company's U.S. direct sales and marketing staff currently
consists of six sales and marketing executives and two telemarketers. The
Company has retained U.S. marketing rights to its products and plans to continue
expanding its direct sales effort as regulatory approvals and clearances are
received. Industry sources estimate that there are approximately 8,000
urologists and 800 urogynecologists in the U.S. to which the Company could
market its products. The Company believes that this relatively small number of
physicians can initially be served by a sales force of fewer than 20 people. See
"Risk Factors -- Limited Marketing and Sales Capabilities."
MANUFACTURING
The Company is currently manufacturing AcuTrainer and is scaling up its
manufacturing facilities for the clinical and early commercial production of its
other products. The Company recently leased an additional 11,500 square foot
space adjacent to the Company's headquarters in order to meet its anticipated
supply requirements. Historically, the Company has relied on contract
manufacturers to produce development prototypes and products for clinical
trials. However, as products receive regulatory clearance, the Company intends
to manufacture its own products, beginning with the assembly or manufacture of
percutaneous SANS hardware and disposables, UroVive kits, SpiraStent and
FilaStent kits and the preparation of demineralized bone paste. The Company is
currently in the process of building out its facility which is expected to be
completed in July 1998. This facility will contain a class 10,000 clean room.
See "Risk Factors -- Limited Manufacturing Experience."
The Company purchases raw materials and components used in its products
from various suppliers. The Target Therapeutics division of Boston Scientific
Corporation provides the Company with the microballoons used in the UroVive
system under a mutually exclusive supply agreement executed in April 1995. The
agreement expires in April 2000 subject to an automatic two-year extension if
the Company does not receive the FDA's approval of the Company's PMA application
for UroVive by April 1999, which approval the Company does not expect to receive
by such date. In addition to UroVive balloons, certain materials and components
are currently purchased by the Company from single sources. To date, these
materials have generally been readily available and the Company has not
experienced supply shortages. See "Risk Factors -- Dependence Upon Key
Suppliers."
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. Furthermore, prior to
approval of a PMA application, the Company's facilities, procedures and
practices, and the facilities, procedures and practices of its third-party
manufacturers, will be subject to a preapproval inspection by the FDA. In
addition, if the Company wishes to significantly modify its
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manufacturing processes or change the supplier of a critical component,
additional approvals will be required from the FDA before the change can be
implemented. The Company has not yet undergone an FDA QSR inspection of its
facilities, but may undergo such an inspection before or after submission of its
initial PMA application. See "Risk Factors -- Government Regulation."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part upon
its ability to enhance its existing products and to develop other new products.
Accordingly, the Company intends to continue to devote significant funds and
efforts to research and development. The Company currently employs 17
individuals on a full-time basis and five individuals on a part-time basis for
its research and development and manufacturing efforts, including five
individuals with advanced degrees.
To the extent that the Company's medical advisors develop new products
which the Company believes represent attractive opportunities, the Company will
seek to negotiate licenses to the technology related to such products.
For the years ended December 31, 1995, 1996, 1997 and the three months
ended March 31, 1998, the Company's research and development expenses were $0.8
million, $1.9 million, $3.6 million and $1.4 million, respectively.
PATENTS AND PROPRIETARY RIGHTS
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, 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
that provide a competitive advantage and to protect as trade secrets other
confidential and proprietary information.
The Company has received, licensed or has obtained an option or right to
license 10 issued or allowed U.S. patents and has five pending U.S. patent
applications. The Company or its licensors have obtained or applied for
corresponding patents for certain of these U.S. patents and applications in a
limited number of foreign countries. These patent rights relate to UroVive,
SANS, AcuTrainer, SpiraStent, FilaStent, UroTherm, the kidney stone grasper,
demineralized bone paste and the urethral pressure catheter. The issued U.S.
patents have expiration dates ranging from 2009 to 2015.
Patents and patent applications related to the Company's products are
either held directly by the Company or licensed from others. Much of the
original technology for the Company's products other than FilaStent and UroTherm
is licensed from others. In particular, the UroVive technology was licensed from
Children's Medical Center Corporation of Boston, Massachusetts and the SANS
technology was licensed from the University of California-San Francisco. The
Company has developed improvements to the licensed technologies related to
UroVive and has filed additional patent applications to broaden the coverage of
existing patents for such improvements. See "Risk Factors -- Dependence on
Patents and Proprietary Technology."
The Company has licensed technologies relating to UroVive, SANS,
SpiraStent, AcuTrainer, the kidney stone grasper, demineralized bone paste and
the urethral pressure catheter. The Company holds an exclusive worldwide right
and license to the technologies underlying UroVive, subject to a royalty-free,
nonexclusive license granted to the U.S. government (for patents developed with
U. S. government funding) and a royalty-free, nonexclusive, irrevocable license
retained by the licensor to employ the licensed technologies and processes for
research purposes only. The Company has also obtained an exclusive license to
all U. S. and foreign patents and patent applications related to the technology
underlying SANS, as well as the right to issue sublicenses to third parties in
regard to SANS-related patents. The Company has also obtained similar licenses
related to technologies underlying SpiraStent and the kidney stone grasper from
the same licensor for SANS. All of such licenses for SANS, SpiraStent and the
kidney stone grasper are subject to the right of the licensor to use the
technologies for educational and research purposes. The Company also holds an
exclusive,
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worldwide license to and right to sublicense AcuTrainer as well as a right of
first refusal to any future intellectual property or patent rights held by the
AcuTrainer licensor. The Company also has exclusive, worldwide licenses to and
the right to grant sublicenses to demineralized bone paste (for urological
applications) and the urethral pressure catheter, subject to rights held by the
U. S. government and the licensors. All of the licenses generally remain in
effect for the term of the underlying patents, unless earlier terminated by the
Company, upon the Company's breach or operation of law. For a discussion of
royalties payable under these licenses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and the
Company's financial statements and notes thereto.
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 no be brought against the
Company in the future or that any such claims will not be successful. See "Risk
Factors -- Dependence on Patents and Proprietary Technology."
COMPETITION AND TECHNOLOGICAL CHANGE
The medical device industry, including in particular the UI product
industry, is highly competitive. The Company believes that primary competitive
factors include the level of physician and consumer awareness and acceptance of
available treatment methods, product efficacy, consistency of product quality
and delivery, price, technical capability and the training of health care
professionals and consumers in the use of available treatment methods. The
Company's ability to compete in this industry will also be affected by its
product development capabilities and innovation, its ability to obtain required
regulatory clearances, its ability to protect the proprietary technology
included in its products, its manufacturing and marketing capabilities and its
ability to attract and retain skilled employees.
C.R. Bard, Inc. sells the only urethral bulking agent currently sold
commercially in the U.S. and Medtronic, Inc. sells the only commercially
available implantable electronic nerve stimulation device for urge UI. Current
major competitors who compete in the urethral bulking agent market include C.R.
Bard, Inc., Uroplasty, Inc., Advanced UroScience, Inc., BioMatrix, Inc. and
Mentor Corporation. Current major competitors who compete in the stent market
include Boston Scientific Corporation, Circon Corporation and Cook Incorporated.
The Company's competitors may have greater experience in developing
products, conducting clinical trials, obtaining regulatory approvals, and
manufacturing and marketing products than the Company. Certain of these
competitors may obtain patent protection, approval or clearance by the FDA or
foreign countries or product commercialization earlier than the Company, any of
which could materially adversely affect the Company. Furthermore, if the Company
commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it currently has limited experience. See "Risk
Factors -- Competition."
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.
GOVERNMENT REGULATION
United States
The Company's products and its research and development activities are
subject to stringent regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign regulatory agencies. The
Federal Food, Drug, and Cosmetic Act (the "FDC Act"), as amended, the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the preclinical and clinical testing,
design, manufacture, safety, efficacy, labeling, storage, record keeping,
advertising and promotion of medical devices.
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In the U.S., medical devices are classified into three different classes,
class I, II and III, on the basis of controls deemed necessary to reasonably
ensure the safety and effectiveness of the device. Class I devices are subject
to general controls (e.g., labeling, premarket notification and adherence to
FDA's QSRs) and class II devices are subject to general and special controls
(e.g., performance standards, postmarket surveillance, patient registries, and
FDA guidelines). Generally, class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices).
Percutaneous SANS is a class II medical device that requires PMA approval
prior to marketing in the U.S. UroVive, subcutaneous SANS and demineralized bone
paste are class III devices that require PMA approval prior to marketing in the
U.S. SpiraStent, FilaStent, AcuTrainer, UroTherm, the kidney stone grasper and
the urethral pressure catheter are eligible for clearance under the 510(k)
premarket notification process.
Generally, before a new medical device can be marketed, marketing clearance
must be obtained through a 510(k) premarket notification or approval of a PMA
application. A 510(k) clearance will typically be granted by the FDA if it can
be established that the device is substantially equivalent to a "predicate
device," which is a legally marketed class I or II device or a class III device
for which the FDA has not called for PMAs. The FDA has been requiring an
increasingly rigorous demonstration of substantial equivalence and this may
include a requirement to submit human clinical trial data. It generally takes
four to twelve months from the date of a 510(k) submission to obtain clearance,
but it may take longer. The Company made its 510(k) submission for FilaStent in
March 1998 and for UroTherm in November 1996.
The FDA may determine that a medical device is not substantially equivalent
to a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) clearances.
A PMA application must be submitted if a proposed device is not
substantially equivalent to a legally marketed class I or class II device, or if
it is a preamendment class III device for which the FDA has called for PMAs. A
PMA application must be supported by valid scientific evidence to demonstrate
the safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising, and any training materials. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing. The Company
has not submitted a PMA application for UroVive, the SANS devices or
demineralized bone paste.
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 the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins 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.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, may be convened to review and evaluate the application and provide a
recommendation to the FDA as to whether the device should be approved. The FDA
accords substantial weight to the recommendation but is not bound by it. Toward
the end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable QSRs,
which include elaborate testing, control documentation and other quality
assurance procedures. The Company has not yet undergone an FDA QSR inspection
and does not anticipate that it will
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undergo such an inspection until after filing of its initial PMA application.
Separate preapproval inspections are required for each PMA application.
If FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"complete response" letter. The FDA may determine that additional clinical
trials are necessary, in which case the PMA may be delayed for one or more years
while additional clinical trials are conducted and submitted in an amendment to
the PMA. Modifications to a device that is the subject of an approved PMA, its
intended use 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, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The Company has received an IDE for
UroVive, percutaneous SANS and the demineralized bone paste and expects to file
an IDE application for subcutaneous SANS. 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 two or more appropriate IRBs without the need for FDA approval.
Submission of an IDE does not give assurance 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 the studies support the safety and efficacy of the device or
warrant the continuation of clinical trials. Sponsors of clinical trials are
permitted to sell investigational devices distributed in the course of the study
provided such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. 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.
If clearance or approval is obtained, any device manufactured or
distributed by the Company will be subject to pervasive and continuing
regulation by the FDA. The Company will be subject to routine inspection by the
FDA and other international regulatory authorities and will have to comply with
the host of regulatory requirements that usually apply to medical devices
marketed in the U.S., including labeling regulations, QSR requirements, the
Medical Device Reporting ("MDR") regulation (which requires a manufacturer to
report to the FDA certain types of adverse events involving its products), and
the FDA's general prohibitions against promoting products for unapproved or
"off-label" uses.
If the FDA believes that a company is not in compliance with law, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on its
business, financial condition and results of operations.
Among the requirements for product approval is the requirement that the
prospective manufacturer conform to the FDA's Quality Standard Regulation
("QSR") requirements, which incorporate the FDA's former GMP regulations. QSR
addresses the design and other applicable controls, methods, facilities and
quality assurance controls used in the manufacture, packaging, storing and
installation of products. In complying with the QSR regulations, manufacturers
must continue to expend time, money and effort in product, record keeping and
quality control to assure that the product meets applicable specifications and
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other requirements. The FDA periodically inspects device and drug manufacturing
facilities in the U.S. in order to assure compliance with applicable QSR
requirements. Failure of the Company to comply with the QSR regulations or other
FDA regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDA Act and other provisions in the Act affecting the
regulation of devices. Among other things, the changes will affect the 510(k)
and PMA processes, and also will affect device standards and data requirement
procedures relating to humanitarian and breakthrough devices, tracking and
postmarket surveillance, accredited third-party review, and the dissemination of
off-label information. The Company cannot predict how or when these changes will
be implemented or what effect the change will have on the regulation of the
Company's products.
International
In order for the Company and its distributors to market its products in
Europe and other foreign countries, the Company and/or its distributors must
obtain required regulatory approvals and comply with extensive regulations
governing safety, quality and manufacturing processes. These regulations vary
significantly from country to country and with respect to the nature of the
particular medical device. The time required to obtain approval to market the
Company's products may be longer or shorter than that required in the U.S., and
requirements for licensing may differ from FDA requirements.
In order to market the Company's products in the member countries of the
European Union, the Company will be required to comply with the Medical Devices
Directive ("MDD") and obtain CE mark certification. CE mark certification is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. Under the system established
by the MDD, all medical devices other than certain Class I devices and in-vitro
diagnostic products must qualify for CE marking by June 14, 1998. In August
1997, the Company was granted ISO 9001 certification for its Coralville, Iowa
facility. The ISO 9001 designation, and certain other certifications received by
UroSurge under the auspices of a notified body designated under the MDD, allows
UroSurge to self-certify certain categories of products for the CE mark, other
than permanent implantables such as the subcutaneous SANS, which will require a
separate CE mark application through a designated notified body.
In order to sell a medical device in Japan, a company must obtain
regulatory approval from the Japanese Ministry of Health ("MOH"). UroSurge is
currently negotiating a consulting agreement with a contract research
organization to begin the registration process for UroVive. AcuTrainer is
currently being sold in Japan and does not require registration with the MOH.
THIRD-PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company may be required to seek international reimbursement
approvals. If required, there can be no assurance that any such approvals will
be obtained in a timely manner, or at all, and failure to receive such
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
In the U.S., health care providers, such as hospitals and physicians, that
purchase medical devices such as the Company's products, generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of the treatment.
In the U.S., third-party reimbursement is generally available for surgical
procedures and minimally invasive treatments for UI but generally is unavailable
for patient management products such as diapers and pads.
In the U.S. and certain other countries, third-party reimbursement is
currently generally available for certain bulking agents for UI. The Medicare
reimbursement rate for commercially available injectable bulking agents is
currently approximately $300 per two and one-half milliliter syringe. The
Company believes that typically three to five syringes of such bulking agents
are used during an injection procedure. However, there is no uniform policy for
such reimbursement and there is no assurance UroVive will receive the same level
of reimbursement, if any. In the
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U.S. and certain other countries, third-party reimbursement is currently
generally available for SpiraStent, FilaStent and the kidney stone retriever as
they represent improvements on products that are currently being sold and
reimbursed. In the U.S., reimbursement has been available from certain private
payors and from Medicare for implantable nerve stimulation devices. Accordingly,
the Company believes that reimbursement may become available for the Company's
SANS devices following regulatory approval, subject to the Company's ability to
demonstrate the cost-effectiveness and clinical utility of such products to
third-party payors. The availability of third-party reimbursement for its
products or competitors' products and continuing efforts to reduce the costs of
health care by decreasing reimbursement rates may reduce the price received by
the Company for its products or the ability of the Company's products to gain
market acceptance.
Reimbursement for the Company's products and procedures employing such
products in the U.S. will be dependent on the Company's ability to obtain FDA
clearances and approvals to market products in the U.S. and on the Company's
ability to demonstrate the clinical utility and cost-effectiveness of its
products through clinical trials, peer reviewed articles in medical journals and
long-term follow-up data regarding the efficacy of its products. The Company
intends to work with managed care organizations to explore the possibility of
reimbursement for the use of its products in the U.S. Any such reimbursement is
likely to be variable among third-party payors. See "Risk Factors -- Uncertainty
Relating to Third-Party Reimbursement."
EMPLOYEES
As of March 31, 1998, the Company employed 34 persons. Of these employees,
22 are in research and development and manufacturing, nine are in sales and
marketing and three are in finance and administration and other business
functions. None of the Company's current employees is represented by a labor
union or is the subject of a collective bargaining agreement. The Company
believes that it maintains good relations with its employees.
PRODUCT LIABILITY
Although the Company has not been the subject of any product liability
litigation to date, the medical products industry is subject to substantial
litigation, and the Company, as a manufacturer of a medical products to be used
in the body, faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
adverse effects to a patient. The Company currently has product liability
insurance with certain coverage limitations. There can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the Company
from any liabilities which it might incur in connection with clinical trials or
the commercialization of its products. There can be no assurance that liability
claims will not exceed coverage limits. Such insurance is expensive and in the
future may not be available on acceptable terms, if at all. Furthermore, the
Company does not expect to be able to obtain insurance covering its costs and
losses as a result of any recall of its products due to alleged defects, whether
such recall is instituted by the Company or required by a regulatory agency. A
product liability claim, recall or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the business, financial condition and results of operations of the
Company. See "Risk Factors -- Product Liability Risk; Limited Insurance
Coverage."
FACILITIES
The Company's principal operations are conducted in Coralville, Iowa, in an
approximately 10,000 square foot facility. This facility serves as the site for
the Company's corporate headquarters. In addition, the Company occupies an
approximately 11,500 square foot manufacturing facility next to its corporate
headquarters. The Company is in the process of building out its manufacturing
facility and expects to be completed by July 1998. Both facilities are occupied
under a triple-net lease which expires in 2000. The Company has the option of
renewing the lease on both buildings for an additional five-year period. The
Company believes that these facilities are sufficient to meet the Company's
requirements through at least the next several years.
LEGAL PROCEEDINGS
The Company is not currently a party to any material pending legal
proceedings.
42
<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company and
their ages as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David H. Maupin................ 54 President, Chief Executive Officer and Director
Michael J. Magliochetti,
Ph.D. ....................... 34 Senior Vice President and Chief Technical Officer
Donald R. Beussink............. 43 Vice President of Sales and Marketing
Randal L. Owens................ 53 Vice President of Finance and Chief Financial Officer
Steven J. Preiss............... 42 Vice President of Clinical and Regulatory Affairs
Dick P. Allen(1)............... 53 Director
William E. Engbers(2).......... 55 Director
Robert E. Curry, Ph.D.(2)...... 51 Director
Joseph F. Lovett(1)............ 49 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
David H. Maupin has been President, Chief Executive Officer and a Director
since joining UroSurge in February 1994. Before joining UroSurge, Mr. Maupin
served as President and Chief Executive Officer of Menlo Care, Inc., a medical
device company, from June 1989 to February 1994. Prior to joining Menlo Care,
Inc., Mr. Maupin was President of Gambro, Inc., a Swedish dialysis company,
where he was responsible for all operations in the Western Hemisphere. Mr.
Maupin holds an M.A. and an M.B.A. from the University of Chicago and a B.A.
from Harvard College.
Michael J. Magliochetti, Ph.D. has been Senior Vice President and Chief
Technical Officer of the Company since February 1997. From 1994 to February
1997, Dr. Magliochetti was Vice President of Research and Development and Chief
Technical Officer of the Company. From 1992 to 1994, Dr. Magliochetti was
Director of Advanced Development for the Haemonetics Corporation, a medical
device company. Prior to joining Haemonetics, Dr. Magliochetti held various
positions with Delta Suprenant Corporation, a polymer products company, serving
most recently as Director of New Product Development. Dr. Magliochetti is
currently an adjunct professor in the Department of Biomedical Engineering at
the University of Iowa and the Chairman of the Industry Development Committee
for the National Foundation for Bladder Research. Dr. Magliochetti holds a Ph.D.
in Chemical Engineering from the University of Massachusetts at Amherst, an
M.B.A. from Northeastern University and a B.S. in Chemical Engineering from
Northeastern University.
Donald R. Beussink has been Vice President of Sales and Marketing of the
Company since May 1997. From August 1995 to May 1997, Mr. Beussink was
responsible for U.S., Canadian and Latin American Sales at Meadox Medicals, a
subsidiary of Boston Scientific. Prior to joining Meadox Medicals, Mr. Beussink
spent fifteen years in various positions, most recently as Director of Sales and
Senior Marketing Manager, at Mallinckrodt Medical and Mallinckrodt Veterinary.
Mr. Beussink holds an M.B.A. from Lindenwood College.
Randal L. Owens has been Vice President of Finance and Chief Financial
Officer of the Company since February 1998. Prior to joining the Company, Mr.
Owens was the president of Owens & Associates, an international management
consulting firm from 1994 to 1998. From 1974 to 1993, Mr. Owens served in
numerous financial management positions at NCR Corporation, a computer systems
manufacturing and marketing company, including Chief Financial Officer of the
Pacific Group. Mr. Owens holds a B.S.E. from the University of Pennsylvania,
Wharton School of Business and an M.B.A. from the University of Michigan.
Steven J. Preiss has been Vice President of Clinical and Regulatory Affairs
of the Company since April 1997. Mr. Preiss was president of CPROS, a regulatory
consulting firm, from May 1996 to April 1997. From August 1992 to May 1996, Mr.
Preiss held various positions at Bio-Pharm Clinical Services, a clinical
43
<PAGE> 45
research organization, including Vice President of Clinical Programs and Data
Management. Prior to joining Bio-Pharm Clinical Services, Mr. Preiss was
Clinical Programs Director at Ioptex Research, Inc., a medical device company.
Mr. Preiss holds a B.S. in Chemistry from St. Lawrence University.
Dick P. Allen joined the Company's Board of Directors in July 1994. Mr.
Allen has been President of DIMA Ventures, Inc., a private investment firm since
1987. Mr. Allen was a Founder and Vice-President of Caremark, Inc., a home
infusion therapy company acquired by Baxter International in 1987. He also
serves on the Board of Directors of MicroTherapeutics, Inc., a publicly traded
company. Mr. Allen holds an M.B.A. from Stanford University Graduate School of
Business and a B.S. from Yale University.
William E. Engbers joined the Company's Board of Directors in September
1995. Since 1996, Mr. Engbers has been a Director of Venture Capital for
Allstate Insurance Company. From 1989 to 1996, Mr. Engbers was Venture Group
Manager for Allstate Insurance Co. He also serves on the Board of Directors of
La Jolla Pharmaceutical Company and DM Management, each of which is publicly
traded.
Robert E. Curry, Ph.D. joined the Company's Board of Directors in September
1995. Since 1991, Dr. Curry has been a General Partner and Vice President of the
Sprout Group, a venture capital management firm and affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation. Dr. Curry also serves on the Boards of
Directors of AutoCyte, Inc., Biocircuits Corp., Diatide, Inc., Nanogen, Inc.,
and Photon Technology International, Inc. and several private companies. He
holds an M.S. and Ph.D. in Chemistry from Purdue University and received his
B.S. from the University of Illinois.
Joseph F. Lovett joined the Company's Board of Directors in August 1993.
Since 1988, Mr. Lovett has been a General Partner of Medical Science Partners
venture fund. From 1985 to 1988, Mr. Lovett was Executive Vice President of
Damon Biotech, a biotechnology company. Mr. Lovett holds an M.B.A. from
California State Polytechnic Institute and received his B.A. from the University
of Vermont.
MEDICAL ADVISORS
The Company has assembled a Medical Advisory Board comprised of six
individuals who are prominent in the field of urology research. Members of the
Medical Advisory Board review the Company's research and development activities
and are available for consultation with the Company's management and staff
relating to their respective areas of expertise. Several of the members of the
Medical Advisory Board meet more frequently, on an individual basis, with the
Company's management and staff to discuss the Company's ongoing research and
development projects.
The names and background of the current members of the Medical Advisory
Board are set forth below:
Anthony M. Atala, M.D. has been a member of the Department of Urology at
Children's Hospital and Medical Center, an affiliate of Harvard Medical School,
since 1990.
Michael Marberger, M.D., Ph.D. has been Professor and Chairman of the
Department of Urology of the Klinik Fur Urologie of the University of Vienna in
Vienna, Austria since 1990.
W. Scott McDougal, M.D. has been the Chief of Urology at Massachusetts
General Hospital (Harvard Medical School) since 1991.
Martin Resnick, M.D. has been a Professor and Chairman of the Department of
Urology of Case Western University of Cleveland, Ohio since 1981. Dr. Resnick is
also affiliated with Metropolitan Hospital, the V.A. Hospital of Cleveland and
Henry Ford Hospital.
Thomas Stamey, M.D. has been a Professor at Stanford University since 1961.
From 1961 to 1994, Dr. Stamey was the Chairman of the Department of Urology of
Stanford University.
Richard Williams, M.D. has been the Chairman of the Department of Urology
of the University of Iowa Hospitals and Clinics since 1984. Dr. Williams also
holds the Rubin H. Flock Endowed Chair in Urology.
44
<PAGE> 46
BOARD COMPOSITION
The Company currently has five directors. In accordance with the terms of
the Company's Restated Certificate of Incorporation, effective upon the closing
of this offering, the terms of office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held at the annual meeting of stockholders to be held in
1999; Class II, whose term will expire at the annual meeting of stockholders to
be held in 2000; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2001. The Class I directors are Robert E. Curry,
Ph.D. and Joseph F. Lovett, the Class II director is David H. Maupin and the
Class III directors are Dick P. Allen and William E. Engbers.
At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the Company's Bylaws provide that the
authorized number of directors may be changed only by resolution of the Board of
Directors. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than its
nonemployee directors, devote such time to the affairs of the Company as is
necessary to discharge their duties. There are no family relationships among any
of the directors, officers or key employees of the Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors (consisting of Dick P. Allen
and Joseph F. Lovett) reviews the internal accounting procedures of the Company
and consults with and reviews the services provided by the Company's independent
accountants. The Compensation Committee of the Board of Directors (consisting of
Robert E. Curry, Ph.D. and William E. Engbers) reviews and recommends to the
Board the compensation and benefits of all executive officers of the Company and
establishes and reviews general policies relating to compensation and benefits
of employees of the Company. The Board does not have a nominating committee or
any committee currently performing the functions of a nominating committee.
DIRECTOR COMPENSATION
The Company does not pay its directors for attending meetings of the Board
of Directors or for serving on Committees of the Board of Directors. Directors
are reimbursed for their out-of-pocket expenses incurred in attending meetings.
From time to time, certain directors of the Company have received grants of
options to purchase shares of the Company's Common Stock pursuant to the 1994
Stock Option Plan. After the closing of this offering, directors of the Company
will be eligible to receive grants of options to purchase Common Stock pursuant
to the 1998 Stock Option Plan. See "-- Incentive Stock Plans" and "Certain
Transactions."
45
<PAGE> 47
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information for the year ended December 31, 1997 regarding the compensation of
the Company's Chief Executive Officer and the other executive officers of the
Company whose salary and bonus for such fiscal year were in excess of $100,000
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
1997 ANNUAL ------------
COMPENSATION SECURITIES ALL OTHER
--------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)
<S> <C> <C> <C> <C>
David H. Maupin................................. 203,963 -- 50,000 --
President and Chief Executive Officer
Michael J. Magliochetti, Ph.D................... 176,947 -- 50,000 15,000(1)
Senior Vice President and Chief Technical
Officer
Donald R. Beussink.............................. 74,360 -- 75,000 30,263(2)
Vice President, Sales and Marketing
Steven J. Preiss................................ 75,000 -- 55,000 82,974(3)
Vice President, Clinical and Regulatory
Affairs
</TABLE>
- ------------------------------
(1) Dr. Magliochetti received a $60,000 housing assistance loan on October 3,
1994, which was forgiven in 1995, 1996 and 1997 in the amount of $15,000 per
year plus accrued interest.
(2) Mr. Beussink was hired by the Company in June 1997 and received $30,263 for
relocation expenses.
(3) Mr. Preiss was hired by the Company in April 1997. Mr. Preiss received
$36,074 for relocation expenses, and a $46,900 loan to assist with housing
costs, which has been repaid in full as of March 31, 1998.
Option Grants in Last Fiscal Year. The following table sets forth each
grant of stock options made during the fiscal year ended December 31, 1997 to
each of the Named Executive Officers:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OF BASE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL 1997(%)(1) ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
David H. Maupin............... 50,000 15.9 0.20 02/04/02 2,763 6,105
Michael J. Magliochetti,
Ph.D........................ 25,000 8.0 0.20 02/04/02 1,381 3,053
25,000 8.0 0.50 12/05/02 3,454 7,631
Donald R. Beussink............ 75,000 23.9 0.50 06/17/02 10,361 22,894
Steven J. Preiss.............. 35,000 11.2 0.20 04/01/02 1,934 4,274
20,000 6.4 0.50 12/05/02 2,763 6,105
</TABLE>
- ------------------------------
(1) In 1997, the Company granted employees options to purchase an aggregate of
313,500 shares of Common Stock.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. Each option was granted at an
exercise price equal to the fair market value of the Company's Common Stock
as determined by the Board as of the date of grant. Each determination of
fair market value was made by the Board based on its assessment of the
business, operations and prospects of the Company as of each date options
were granted. The Board includes individuals with considerable experience in
the start-up and valuation of medical device and life sciences companies.
These assumed annual compound rates of stock price appreciation are mandated
by the rules
46
<PAGE> 48
of the Commission and do not represent the Company's estimate or projection
of future Common Stock prices.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. No
options were exercised by the Named Executive Officers in 1997. The following
table sets forth for each of the Named Executive Officers the number and value
of securities underlying unexercised options held at December 31, 1997:
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1997 AND
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
David H. Maupin................................ 38,750 88,750
Michael J. Magliochetti, Ph.D.................. 104,167 95,833
Donald R. Beussink............................. -- 75,000
Steven J. Preiss............................... -- 55,000
</TABLE>
- ------------------------------
(1) Based upon an assumed initial public offering price of $ less the
exercise price per share.
INCENTIVE STOCK PLANS
1994 Stock Plan. The Company's 1994 Stock Plan, as amended and restated
(the "1994 Plan") provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), and for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights ("SPRs").
The 1994 Plan, as amended and restated, was approved by the Board of Directors
in April 1998 and is expected to be approved by the stockholders in May 1998.
Unless terminated sooner, the 1994 Plan will terminate automatically in July
2004. A total of 1,610,000 shares of Common Stock are currently reserved for
issuance pursuant to the 1994 Plan. The 1994 Plan may be administered by the
Board of Directors or a committee of the Board (the "Administrator"), which
Administrator shall, in the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, consist of two or more "outside directors" within the meaning of Section
162(m) of the Code. The Administrator has the power to determine the terms of
the options or SPRs granted, including, but not limited to, the exercise price,
the number of shares subject to each option or SPR, the exercisability thereof,
and the form of consideration payable upon such exercise. In addition, the Board
has the authority to amend, suspend or terminate the 1994 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1994 Plan. Options and SPRs granted
under the 1994 Plan are not generally transferable by the optionee, other than
by will or the laws of descent and distribution, and each option and SPR is
exercisable during the lifetime of the optionee only by such optionee. Options
granted under the 1994 Plan must generally be exercised within three months of
the end of optionee's status as an employee or consultant of the Company, or
within twelve months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's ten year term. In the
case of SPRs, unless the Administrator determines otherwise, the restricted
stock purchase agreement shall grant the Company a repurchase option exercisable
upon the voluntary or involuntary termination of the purchaser's employment with
the Company for any reason (including death or disability). The purchase price
for shares repurchased pursuant to the restricted stock purchase agreement shall
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Administrator. The exercise price of all
incentive stock options granted under the 1994 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant, unless adjusted
by the Administrator to the fair market value on the date of such adjustment if
the fair market value of the Company's Common Stock shall have declined since
the date the option was granted. The exercise price of nonstatutory stock
options and SPRs granted under the 1994 Plan is determined by the Administrator,
but with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must at least be equal to the fair market value of the
Common
47
<PAGE> 49
Stock on the date of grant, unless adjusted by the Administrator to the fair
market value on the date of such adjustment if the fair market value of the
Company's Common Stock shall have declined since the date the option was
granted. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock or
any parent or subsidiary, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 1994 Plan may not exceed ten years. The 1994
Plan provides that in the event of a merger of the Company with or into another
corporation, a sale of substantially all of the Company's assets or a like
transaction involving the Company, options may be granted with a per share
exercise price of less than fair market value on the date of the grant and each
option shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted as
described in the preceding sentence, the Administrator shall provide for the
optionee to have the right to exercise the option or SPR as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or SPR exercisable in full in
the event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or SPR shall be fully exercisable for a period of
fifteen days from the date of such notice, and the option or SPR will terminate
upon the expiration of such period.
1998 Director Option Plan. Non-employee directors are entitled to
participate in the 1998 Director Option Plan (the "Director Plan"). The Director
Plan was adopted by the Board of Directors in April 1998 and was approved by the
stockholders in May 1998. The Director Plan has a term of ten years, unless
terminated sooner by the Board. A total of 300,000 shares of Common Stock have
been reserved for issuance under the Director Plan. The Director Plan provides
for the automatic grant of 9,000 shares of Common Stock (the "First Option") to
each non-employee director on the effective date of the Offering. After the
First Option is granted to each non-employee director, he or she shall
automatically be granted an option to purchase 9,000 shares (a "Subsequent
Option") each year on the date of the annual stockholder's meeting of the
Company, if on such date he or she shall have served on the Board for at least
six months. Each First Option and each Subsequent Option shall have a term of 10
years and the shares subject to the option shall vest in equal monthly
increments over the one year period immediately following the date of grant. The
exercise price of the First Option shall be the initial price to public of the
shares offered in this Offering. The exercise price of each Subsequent Option
shall be 100% of the fair market value per share of the Common Stock, generally
determined with reference to the closing price of the Common Stock as reported
on the Nasdaq National Market on the date of grant. In the event of a merger of
the Company or the sale of substantially all of the assets of the Company, each
option shall become fully vested and exercisable for a period of thirty days
from the date the Board notifies the optionee of the option's full
exercisability, after which period the option shall terminate. Options granted
under the Director Plan must be exercised within three months of the end of the
optionee's tenure as a director of the Company, or within twelve months after
such director's termination by death or disability, but in no event later than
the expiration of the option's ten year term. No option granted under the
Director Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable, during the lifetime of
the optionee, only by such optionee.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was approved by the Board of Directors in
April 1998 and was approved by the stockholders in May 1998. The Company has
reserved a total of 300,000 shares of Common Stock for issuance thereunder. No
shares have been issued under the Purchase Plan to date. The Purchase Plan,
which is intended to qualify under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"), will be administered by the Board of Directors of
the Company or by a committee appointed by the Board of Directors. Under the
Purchase Plan, the Company will withhold a specified percentage (not to exceed
15%) of each salary payment to participating employees over certain offering
periods. Any employee who is currently employed for at least 30 hours per week
will be eligible to participate in the Purchase Plan. Unless the Board of
Directors or its committee determines otherwise, each offering period will run
for 24 months and will be divided into four consecutive purchase periods of
approximately six months. The first offering period will commence on the
effective date of this Prospectus and will end on December 31, 1999. The first
purchase period will commence on the effective date of this Prospectus and will
end on December 31, 1998. New 24 month offering periods
48
<PAGE> 50
will commence every January 1 and July 1 thereafter. In the event of a change in
control of the Company, including a merger of the Company with or into another
corporation, or the sale of all or substantially all of the assets of the
Company, the offering and purchase periods then in progress will be shortened
unless the rights to purchase stock are assumed by the successor or acquiring
company. The price at which Common Stock will be purchased under the Purchase
Plan is equal to 85% of the fair market value of the Common Stock on the first
day of the applicable offering period or the last day of the applicable purchase
period, whichever is lower. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. The maximum number
of shares that a participant may purchase on the last day of any offering period
is determined by dividing the payroll deductions accumulated during the purchase
period by the purchase price. However, no person may purchase shares under the
Purchase Plan to the extent such person would own and/or hold outstanding
options to purchase 5% or more of the total combined value or voting power of
all classes of the capital stock of the Company or of any of its subsidiaries,
or to the extent that such person's rights to purchase stock under all employee
stock purchase plans would accrue at a rate that exceeds $25,000 worth of stock
for any calendar year. The Board of Directors may amend the Purchase Plan at any
time. The Purchase Plan will terminate in April 2008, unless terminated earlier
in accordance with the provisions of the Purchase Plan.
CHANGE OF CONTROL ARRANGEMENTS
David H. Maupin and Michael J. Magliochetti, PhD. have been granted options
to purchase 127,500 and 175,000 shares of Common Stock, respectively, pursuant
to option agreements that provide for acceleration of vesting of certain options
so that such options shall immediately become fully exercisable in the event of
a merger or consolidation of the Company with or into another corporation,
entity or person, provided that the shareholders of the Company own less than
50% of the voting securities of the surviving or acquiring corporation, entity
or person immediately after such transaction. The Company has no present plan or
intention of granting options with provisions for acceleration of vesting upon a
change of control; however, the Company may in the future grant options on such
terms.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for
(i) any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit. Such limitation of liability does
not apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
The Company will, prior to the completion of this offering, enter into
agreements to indemnify its directors and executive officers, in addition to
indemnification provided for in the Company's Bylaws. These agreements, among
other things, indemnify the Company's directors and executive officers for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by or in the right of the Company arising out of such person's services
as a director or executive officer of the Company, any subsidiary of the Company
or any other company or enterprise to which the person provides services at the
request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
49
<PAGE> 51
CERTAIN TRANSACTIONS
In September and October 1995, the Company issued shares of Series B
Preferred Stock to certain entities affiliated with directors of the Company and
certain 5% stockholders of the Company at a purchase price of $2.00 per share.
In June 1997, the Company issued shares of Series C Preferred Stock to certain
entities affiliated with directors of the Company and certain 5% stockholders of
the Company at a purchase price of $5.00 per share. The number of shares of
Common Stock issuable upon conversion of such shares of Series B Preferred Stock
and Series C Preferred Stock issued to each such entity is set forth below. Upon
completion of this offering, each share of Preferred Stock will automatically
convert into 5,834,404 shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
----------------------------------
SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK
NAME OF INVESTOR --------------- ---------------
<S> <C> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Entities affiliated with Medical Science Partners II, L.P.
(Joseph F. Lovett)........................................ 507,025 --
Entities affiliated with DIMA Ventures, Inc. (Dick P.
Allen).................................................... 8,775 9,000
Entities affiliated with Allstate Insurance Company (William
E. Engbers)............................................... 310,000 164,000
Entities affiliated with Sprout Capital VII, L.P. (Robert E.
Curry).................................................... 1,250,000 278,000
OTHER 5% STOCKHOLDERS
Medtronic, Inc.............................................. 200,000 118,000
</TABLE>
Pursuant to an Investor Rights Agreement, the holders of the Company's
Preferred Stock agreed to vote their shares of Preferred Stock to fix the number
of directors at five. Pursuant to this agreement, the board was to consist of
one director designated by the holders of the Company's Series A Preferred
Stock, to be designated by Medical Science Partners, L.P.; one director
designated by the holders of the Company's Series B Preferred Stock, to be
designated by Sprout Capital VII, L.P.; the duly elected, qualified and acting
President of the Company; and two directors designated jointly by the President
of the Company and all holders of the Company's Preferred Stock. Directors
Robert E. Curry, Ph.D. and David H. Maupin have served as members of the board
pursuant to this voting arrangement, which terminates upon completion of this
offering.
The Company entered into an agreement in March 1994 with David H. Maupin
containing antidilution provisions which allowed Mr. Maupin to purchase
additional shares of Common Stock at fair market value based upon a certain
formula. In November 1995, the Company issued 42,500 shares of Common Stock at
$0.20 per share under the agreement as a result of a change in this percentage
ownership of the Company caused by a financing transaction. No additional shares
are issuable to Mr. Maupin as a result of the Offering or any other current
agreement.
The Company entered into a financing arrangement with certain of its
principal stockholders in June 1998. The participants in this transaction will
include Medical Science Partners II, L.P., Allstate Insurance Company,
Medtronic, Inc., Premier Medical Partner Fund L.P. and Sprout Capital VII, L.P.
Under this arrangement, such stockholders will provide the Company with a line
of credit of up to $5.0 million in the event that the Company requires any
additional funding prior to receiving the net proceeds of this offering. In
exchange for this line, the Company has agreed to issue warrants to the
stockholders to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share. The
warrants will have a term of three years. The Company will issue warrants on the
same terms to purchase an additional 30,000 shares of Common Stock for each $1.0
million borrowed under this arrangement. Borrowings under this arrangement will
not bear interest. As of June 12, 1998, the Company has borrowed $3.0 million
under this arrangement.
The Company has from time to time granted options and other compensation to
its directors and executive officers.
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
50
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998 and as adjusted to
reflect the sale by the Company of the Common Stock offered hereby, by (i) each
director of the Company, (ii) each Named Executive Officer, (iii) each person
known to the Company to be the beneficial owner of more than 5% of the Company's
Common Stock and (iv) all directors and executive officers of the Company as a
group. Except as otherwise indicated, based on information furnished by the
beneficial owners of the Common Stock listed below, the Company believes that
such owners have sole investment and voting power with respect to such shares,
subject to community property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
VOTING STOCK
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED(1) OFFERING OFFERING
<S> <C> <C> <C>
Entities affiliated with Medical Science Partners II,
L.P.(2)................................................... 1,331,519 19.4%
20 Williams Street, Suite 250
Wellesley, MA 02181
Entities affiliated with Sprout Capital VII, L.P.(3)........ 1,528,000 22.0
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025
Entities affiliated with Allstate Insurance Company(4)...... 974,000 14.0
3075 Sanders Road, Suite G5D
Northbrook, IL 60062-2721
Medtronic, Inc.(5).......................................... 648,000 9.3
7000 Central Avenue, N.E
Minneapolis, MN 55432
Premier Medical Partner Fund, L.P.(6)....................... 400,000 5.8
12225 El Camino Real
San Diego, CA 92130
Dick P. Allen(7)............................................ 58,525 *
Donald R. Beussink(8)....................................... 18,750 *
Robert E. Curry, Ph.D.(9)................................... 1,540,000 22.1
William E. Engbers(10)...................................... 986,000 14.2
Joseph F. Lovett(11)........................................ 1,343,519 19.3
David H. Maupin(12)......................................... 392,448 5.6
Michael J. Magliochetti, Ph.D.(13).......................... 127,603 1.8
Steven J. Preiss(14)........................................ 9,479 *
All directors and executive officers as a group(9 persons)
(15)...................................................... 4,476,324 61.7
</TABLE>
- ------------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Percentage of beneficial ownership is based on
6,956,037 shares of Common Stock outstanding as of March 31, 1998 and
shares of Common Stock outstanding after completion of this
offering (including shares of Common Stock issuable upon conversion of
Preferred Stock). Shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days after March 31, 1998
are deemed outstanding for computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other person.
(2) Includes 897,430 shares held by Medical Science Partners II, L.P., 330,000
shares held by Medical Science Partners, L.P., 98,583 shares held by
Medical Science II Co-Investment, L.P.("MSP II"), 2,753 shares held by
Eagle Constellation Fund Ltd. ("Eagle"), and 2,753 shares held by UEMCO XI
Limited Partnership ("UEMCO"). MSP II, Eagle and UEMCO are limited partners
of Medical Science Partners II, L.P. Excludes 12,000 shares issuable upon
exercise of stock options exercisable within 60 days of March 31, 1998 held
by Joseph F. Lovett. Excludes warrants to purchase up to 59,800 shares of
Common Stock issuable in connection with a bridge financing arrangement.
See Note 9 of notes to the Company's financial statements.
(3) Includes 1,410,582 shares held by Sprout Capital VII, L.P. and 117,418
shares held by DLJ Capital Corporation. Excludes 12,000 shares issuable
upon exercise of stock options exercisable within 60 days of March 31, 1998
held by Robert E. Curry, Ph.D. See Note 7. Sprout Capital VII, L.P. and DLJ
Capital
51
<PAGE> 53
Corporation are affiliates of DLJ, one of the Underwriters in this
offering. Excludes warrants to purchase up to 60,400 shares of Common Stock
issuable in connection with a bridge financing arrangement.
(4) Includes 602,840 shares held by Allstate Insurance Company, 283,500 shares
held by Allstate Life Insurance Company, 40,500 shares held by Continental
Trust Company, as Trustee for the Allstate Retirement Plan, 32,400 shares
held by Continental Trust Company, as Trustee for the Agents Pension Plan,
8,200 shares held by CTC Illinois Trust Company, as Trustee for the
Allstate Retirement Plan, and 6,560 shares held by CTC Illinois Trust
Company, as Trustee for the Agents Pension Plan. Excludes 12,000 shares
issuable upon exercise of stock options exercisable within 60 days of March
31, 1998 held by William E. Engbers. Excludes warrants to purchase up to
38,400 shares of Common Stock issuable in connection with a bridge
financing arrangement. See Note 8.
(5) Excludes warrants to purchase up to 25,600 shares of Common Stock issuable
in connection with a bridge financing arrangement.
(6) Excludes warrants to purchase up to 15,800 shares of Common Stock issuable
in connection with a bridge financing arrangement.
(7) Includes 13,500 shares held by DIMA Ventures Inc., 1,500 shares held by the
Brett Richard Allen Trust DTD 10/12/81, 1,500 shares held by the Jennifer
Lee Allen Trust DTD 10/12/81, and 1,275 shares held in the Allen Investment
Partnership. Also includes 40,750 shares issuable upon exercise of stock
options exercisable within 60 days of March 31, 1998. Mr. Allen is a
director of the Company and President of DIMA Ventures, Inc. Mr. Allen
disclaims beneficial ownership of the shares held by the Brett Richard
Allen Trust DTD 10/12/81, the Jennifer Lee Allen Trust DTD 10/12/81 and the
Allen Investment Partnership except to the extent of his proportionate
partnership interest therein.
(8) Includes 18,750 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998.
(9) Includes 1,410,582 shares held by Sprout Capital VII, L.P. and 117,418
shares held by DLJ Capital Corporation. Dr. Curry is a director of the
Company and a general partner of Sprout Capital VII, L.P. Dr. Curry
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate partnership interest therein. Sprout
Capital is an affiliate of DLJ, one of the underwriters in this offering.
Also includes 12,000 shares issuable upon exercise of stock options
exercisable within 60 days of March 31, 1998.
(10) Includes 602,840 shares held by Allstate Insurance Company, 283,500 shares
held by Allstate Life Insurance Company, 40,500 shares held by Continental
Trust Company, as Trustee for the Allstate Retirement Plan, 32,400 shares
held by Continental Trust Company, as Trustee for the Agents Pension Plan,
8,200 shares held by CTC Illinois Trust Company, as Trustee for the
Allstate Retirement Plan, and 6,560 shares held by CTC Illinois Trust
Company, as Trustee for the Agents Pension Plan. Mr. Engbers is a director
of the Company and a Director of Venture Capital at Allstate Insurance
Company. Mr. Engbers disclaims beneficial ownership of the shares held by
such entities except to the extent of his proportionate interest therein.
Also includes 12,000 shares issuable upon exercise of stock options
exercisable within 60 days of March 31, 1998.
(11) Includes 897,430 shares held by Medical Science Partners II, L.P., 330,000
shares held by Medical Science Partners, L.P., 98,583 shares held by MSP
II, 2,753 shares held by Eagle and 2,753 shares held by UEMCO. MSP II,
Eagle, and UEMCO are limited partners of Medical Science Partners II, L.P.
Mr. Lovett is a director of the Company and a general partner of Medical
Science Partners II, L.P., and Medical Science Partners, L.P. Mr. Lovett
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate partnership interest therein. Also
includes 12,000 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998.
(12) Includes 62,448 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998.
(13) Includes 127,603 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998.
(14) Includes 9,479 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998.
(15) Includes 295,030 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998.
52
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 50,000,000 shares of
Common Stock, par value $0.01 per share and 5,000,000 shares of Preferred Stock,
par value $0.01 per share. As of March 31, 1998, 1,121,633 shares of Common
Stock were issued and outstanding and held by 12 stockholders and 5,834,404
shares of Preferred Stock were issued and outstanding and held by 46
stockholders. All outstanding shares of Preferred Stock will be converted into
shares of Common Stock upon completion of this offering.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation or
dissolution of the Company, holders of Common Stock would be entitled to share
in the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
by the Company in this offering, when issued and paid for, will be, fully paid
and nonassessable. The rights, preferences and privileges of the holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without stockholder approval, from time to time to provide for the
issuance of one or more series of Preferred Stock, each of such series to have
such rights and preferences, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the Board of Directors. Issuances of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 5,834,404 shares of Common Stock (assuming the
conversion of all outstanding shares of Preferred Stock into Common Stock upon
completion of this offering) (the "Registrable Securities") or their transferees
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. These rights are provided under the terms of an
agreement between the Company and the holders of Registrable Securities. The
holders of at least 35% of the Registrable Securities may require, on two
occasions, that the Company use its best efforts to register the Registrable
Securities for public resale, provided, among other limitations, that the
proposed aggregate selling price to the public is at least $2 million. If the
Company registers any of its Common Stock either for its own account or for the
account of other security holders, the holders of Registrable Securities are
entitled to include their shares of Common Stock in the registration, subject to
the ability of the underwriters to limit the number of shares included in the
offering. The holders of at least 15% of the Registrable Securities may also
require the Company, on four occasions, but not more than once during any
12-month period, to register all or a portion of their Registrable Securities on
Form S-3 when use of such form becomes available to the Company, provided, among
other limitations, that the proposed aggregate selling price (net of any
underwriters' discounts or commissions) is at least $250,000. The Company will
not be required to effect any registration, other than a registration on
53
<PAGE> 55
Form S-3 or any successor form relating to secondary offerings within six months
after the effective date of any other Registration Statement of the Company. All
registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered. The holders of Registrable Securities have waived
their right to have shares of Common Stock registered under the Securities Act
as part of this offering and for a period of 180 days after the date of this
Prospectus.
CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUE
Certain provisions of the Company's Restated 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 limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder; the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also officers
and by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date,
the business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A. Its telephone number is (800) 468-9716.
54
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company. Sales of substantial amounts of Common Stock of the Company in the
public market or the availability of such shares for sale, could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon the completion of this offering, the Company will have
shares of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option. Of these shares, the shares sold in this
offering will be freely tradable without restriction under the Securities Act,
unless held by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act. As a result of lock-up agreements between certain
stockholders and the Underwriters, the remaining 6,956,037 shares will not
become available for sale in the public market until 180 days after the date of
this Prospectus subject in some cases to the volume and other restrictions of
Rule 144 and Rule 701 of the Securities Act. Shares of Common Stock outstanding
upon completion of this offering and held by existing stockholders will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the 1933 Act, which rules are
summarized below. Sales of the Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell in "broker's transactions" or to market makers, within
any three-month period, a number of shares that does not exceed the greater of
(i) one percent of the number of shares of Common Stock then outstanding
(approximately shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are generally subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the effective date of this offering are
entitled to sell such shares 90 days after the closing of this offering in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144.
Each of the Company, its executive officers and directors and certain
stockholders of the Company has agreed, subject to certain exceptions, not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable for
Common Stock or (ii) enter into any swap or other arrangement that transfers all
or substantially all or a portion of the economic consequences associated with
the ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of the Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus without the prior written consent of CIBC
Oppenheimer Corp. In addition, during such period, the Company has also agreed
not to file any registration statement with respect to, and each of its
stockholders has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock without CIBC
Oppenheimer Corp.'s prior written consent.
Approximately 90 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering shares issuable
under the Company's 1994 Stock Plan (including shares subject to then
outstanding options under such plans), 1998 Director Option Plan and 1998
Employee Stock Purchase Plan, thus permitting the resale of such shares in the
public market without restriction under the Securities Act after expiration of
the applicable lock-up agreements.
55
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), UroSurge has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom CIBC Oppenheimer Corp. and are acting as the representatives
(the "Representatives"), has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite the name of each
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
CIBC Oppenheimer Corp.......................................
---------
Total.............................................
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and at such price less a concession of not in excess of $ per
share to certain security dealers, of which a concession not in excess of $
per share may be reallowed to certain other securities dealers. After the
Offering, the public offering price, allowances, concessions and other selling
terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase Common Stock are subject to certain conditions,
including that if any of the Common Stock is purchased by the Underwriters
pursuant to the Underwriting Agreement, all such shares must be so purchased
(other than those covered by the over-allotment option described below).
The Company has granted to the Underwriters an option, exercisable for up
to 30 days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them bears to the
shares of Common Stock offered hereby. UroSurge will be obligated,
pursuant to the over-allotment option granted to the Underwriters, to sell
Common Stock to the Underwriters to the extent that such over-allotment option
is exercised.
The Company's executive officers, directors and certain stockholders of the
Company have agreed that they will not directly or indirectly sell, offer,
contract to sell, assign, transfer, encumber, grant an option to purchase, or
otherwise dispose of any shares of Common Stock beneficially owned (within the
meaning of Rule 13d-3 of the Exchange Act) by them, for 180 days after the date
of the Underwriting Agreement, without the prior written consent of the
Underwriter, subject to certain limited exceptions. The Company has also agreed
not to issue, sell or register with the Commission, or otherwise dispose of
directly or indirectly, any equity securities of the Company (or any securities
convertible into or exercisable or exchangeable for equity securities of the
Company) for a period of 180 days after the date of the Underwriting Agreement,
without the prior written consent of the Underwriter, subject to certain limited
exceptions. The Underwriter may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.
The Company has agree to indemnify the Representatives and the several
Underwriters against certain liabilities, including, without limitation,
liabilities under the Securities Act, and to contribute, under certain
circumstances, to certain payments that the Underwriters may be required to make
in respect thereof.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of Common Stock offered hereby to accounts
over which they exercise discretionary authority.
56
<PAGE> 58
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price, in addition to prevailing market conditions, will
be the history of and the prospects for the industry in which the Company
competes, the past and present operations of the Company, the historical results
of operations of the Company, the Company's capital structure, estimates of the
business potential and earnings prospects of the Company, an overall assessment
of the Company, an assessment of the Company's management and the consideration
of the above factors in relation to market valuation of companies in related
businesses. There can be no assurance that an active trading market will develop
for the Common Stock or as to the price at which the Common Stock may trade in
the public market from time to time subsequent to the Offering made hereby.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
At the request of the Company, the Underwriters have reserved up to
of the shares of Common Stock offered hereby for sale at the initial
public offering price to employees of the Company and other persons associated
with the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California and for the Underwriters by Sullivan & Cromwell, Los Angeles,
California. Mario M. Rosati and Christopher D. Mitchell, members of Wilson
Sonsini Goodrich & Rosati, are the Secretary and Assistant Secretary of the
Company. Members of an investment partnerships affiliated with Wilson Sonsini
Goodrich & Rosati beneficially own 3,350 shares of the Company's Common Stock.
57
<PAGE> 59
EXPERTS
The financial statements included in this Prospectus have been audited by
Deloitte & Touche, LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
CHANGE OF INDEPENDENT AUDITORS
On April 17, 1998, Deloitte & Touche, LLP was engaged as the Company's
independent auditors. McGladrey & Pullen, LLP were dismissed as the Company's
independent auditors as of such date. The appointment of Deloitte & Touche, LLP
was approved by the Company's Board of Directors. Prior to April 17, 1998, the
Company had not consulted with Deloitte & Touche, LLP on items which included
the Company's accounting principles or the form of audit report to be issued on
the Company's financial statements.
The reports of McGladrey & Pullen, LLP on the financial statements of the
Company for the years ended December 31, 1995, 1996 and 1997, did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope, or accounting principles.
In connection with the audits of McGladrey & Pullen, LLP of the Company for
the years ended December 31, 1995, 1996 and 1997, and during the subsequent
interim period through April 17, 1998, there were no disagreements between the
Company and McGladrey & Pullen, LLP on any matter of accounting principles or
practice, financial statement disclosure or auditing scope or procedures, which
if not solved to the satisfaction of McGladrey & Pullen, LLP, would have caused
them to make reference to the matter in their report. McGladrey & Pullen, LLP
has not audited or reported on any financial statements of the Company
subsequent to December 31, 1997.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1,
including amendments thereto, under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the securities offered hereby, reference is made to such Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the principal
office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from such office upon the
payment of prescribed fees. Such information is also available electronically by
means of the Commission's web site on the Internet at http://www.sec.gov.
58
<PAGE> 60
UROSURGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
FINANCIAL STATEMENTS
Balance sheets............................................ F-3
Statements of operations.................................. F-4
Statements of stockholders' equity........................ F-5
Statements of cash flows.................................. F-6
Notes to financial statements............................. F-7
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
UroSurge, Inc.
Coralville, Iowa
We have audited the accompanying balance sheets of UroSurge, Inc., (a
development stage company), as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997, and for the period from
August 6, 1993 (date of incorporation) to December 31, 1997. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of UroSurge, Inc., as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, and for the period from August 6,
1993 (date of incorporation) to December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE, LLP
Cedar Rapids, Iowa
May 22, 1998
F-2
<PAGE> 62
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $2,113,202 $ 136,990 $ 527,009
Short-term investments.................................... -- 3,129,396 500,000
Trade and other receivables............................... 18,663 140,495 130,553
Inventories............................................... 50,385 930,204 1,541,178
Prepaid expenses.......................................... 47,556 149,589 83,179
---------- ----------- -----------
Total current assets............................... 2,229,806 4,486,674 2,781,919
---------- ----------- -----------
LEASEHOLD IMPROVEMENTS AND EQUIPMENT (Note 3)
Leasehold improvements.................................... 257,130 353,764 501,981
Furniture and office equipment............................ 189,944 369,731 388,740
Production equipment...................................... 63,370 285,125 405,377
---------- ----------- -----------
510,444 1,008,620 1,296,098
Less accumulated depreciation............................. 96,956 203,237 242,395
---------- ----------- -----------
413,488 805,383 1,053,703
---------- ----------- -----------
INTANGIBLES, PRIMARILY LICENSES, LESS ACCUMULATED
AMORTIZATION
1996 $57,444; 1997 $93,996; 1998 $104,875 (Note 2)........ 247,251 233,762 223,618
---------- ----------- -----------
$2,890,545 $ 5,525,819 $ 4,059,240
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 3)............. $ 34,415 $ 64,963 $ 67,000
Accounts payable.......................................... 375,001 816,263 1,365,283
Accrued expenses.......................................... 1,424 10,465 139,113
License fees payable (Note 2)............................. 132,400 50,000 25,000
---------- ----------- -----------
Total current liabilities.......................... 543,240 941,691 1,596,396
---------- ----------- -----------
LONG-TERM DEBT (Note 3)..................................... 92,870 109,728 164,377
---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 6, and 8)
STOCKHOLDERS' EQUITY (Note 4)
Preferred stock, $.01 par value; participating;
convertible; authorized 7,220,000 shares; to be issued
in Series:
Series A, issued 1,685,000 shares, liquidation
preference $1,685,000................................. 16,850 16,850 16,850
Series B, issued 2,675,000 shares, liquidation
preference $5,350,000................................. 26,750 26,750 26,750
Series C, issued 1,474,404 shares, liquidation
preference $7,372,020................................. -- 14,744 14,744
Common stock, $.01 par value; authorized 15,000,000
shares; issued 1996 1,097,591 shares; 1997 and 1998
1,121,633 shares........................................ 10,976 11,216 11,216
Additional paid-in capital................................ 6,961,661 15,155,720 16,384,460
Deferred compensation (Note 5)............................ -- (738,444) (1,670,792)
Deficit accumulated during the development stage.......... (4,761,802) (10,012,436) (12,484,761)
---------- ----------- -----------
Total stockholders' equity......................... 2,254,435 4,474,400 2,298,467
---------- ----------- -----------
$2,890,545 $ 5,525,819 $ 4,059,240
========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 63
UROSURGE, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
CUMULATIVE TOTALS FROM
TOTALS FROM THREE MONTHS ENDED INCORPORATION
YEAR ENDED DECEMBER 31, INCORPORATION MARCH 31, TO
--------------------------------------- TO MARCH 31, ------------------------- MARCH 31,
1995 1996 1997 1998 1997 1998 1998
----------- ----------- ----------- ------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES............... $ -- $ 20,166 $ 11,707 $ 31,873 $ 7,402 $ 4,010 $ 35,883
----------- ----------- ----------- ------------ ----------- ----------- ------------
OPERATING EXPENSES:
Cost of revenues......... -- 12,649 5,432 18,081 3,849 1,438 19,519
Research and
development............ 848,301 1,940,795 3,594,613 6,621,921 509,039 1,397,649 8,019,570
Marketing and sales...... 2,200 270,823 391,877 664,900 47,620 576,004 1,240,904
General and
administrative......... 466,207 771,047 1,479,722 3,266,223 236,432 537,364 3,083,587
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total operating
expenses......... 1,316,708 2,995,314 5,471,644 10,571,125 796,940 2,512,455 12,363,580
----------- ----------- ----------- ------------ ----------- ----------- ------------
Loss from
operations....... (1,316,708) (2,975,148) (5,459,937) (10,539,252) (789,538) (2,508,445) (13,047,697)
FINANCIAL INCOME (EXPENSE):
Interest income.......... 85,003 184,099 187,010 492,980 21,483 30,815 523,795
Interest expense......... (2,454) (6,386) (9,023) (17,863) (1,486) (2,695) (20,558)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Loss before income
taxes............ (1,234,159) (2,797,435) (5,281,950) (10,064,135) (769,541) (2,480,325) (12,544,460)
INCOME TAX CREDITS (Note
7)....................... -- 20,383 31,316 51,699 5,000 8,000 59,699
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net loss........... $(1,234,159) (2,777,052) (5,250,634) (10,012,436) (764,541) $(2,472,325) $(12,484,761)
=========== =========== =========== ============ =========== =========== ============
BASIC AND DILUTED LOSS PER
SHARE.................... $ (1.23) $ (2.58) $ (4.72) $ (0.70) $ (2.20)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING.............. 999,510 1,076,987 1,111,267 1,097,591 1,121,633
=========== =========== =========== =========== ===========
PRO FORMA BASIC AND DILUTED
LOSS PER SHARE........... $ (.84) $ (0.36)
=========== ===========
SHARES USED IN COMPUTING
PRO FORMA BASIC AND
DILUTED LOSS PER SHARE... 6,281,282 6,956,037
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 64
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 6, 1993, DATE OF
INCORPORATION.............................. -- $ -- -- $ -- -- $ -- -- $ --
Issuance of common stock to founders:
March 9, 1994 ($.01 per share)........... -- -- -- -- -- -- 660,000 6,600
October 3, 1994 ($.01 per share)......... -- -- -- -- -- -- 330,000 3,300
Issuance of preferred stock:
March 11, 1994 ($1.00 per share)......... 1,675,000 16,750 -- -- -- -- -- --
November 2, 1994 ($1.00 per share)....... 10,000 100 -- -- -- -- -- --
Stock issuance costs..................... -- -- -- -- -- -- -- --
Net (loss)................................. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
BALANCE, DECEMBER 31, 1994.................. 1,685,000 16,850 -- -- -- -- 990,000 9,900
Issuance of preferred stock:
September 29, 1995 ($2.00 per share) -- -- 2,550,000 25,500 -- -- -- --
October 24, 1995 ($2.00 per share) -- -- 125,000 1,250 -- -- -- --
Stock issuance costs..................... -- -- -- -- -- -- -- --
Collection of stock subscription
receivable............................... -- -- -- -- -- -- -- --
Issuance of common stock under license
agreement on November 7, 1995............ -- -- -- -- -- -- 63,112 631
Net (loss)................................. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
BALANCE, DECEMBER 31, 1995.................. 1,685,000 16,850 2,675,000 26,750 -- -- 1,053,112 10,531
Issuance of common stock ($.20 per share)
on June 14, 1996 (Note 4)................ -- -- -- -- -- -- 42,500 425
Exercise of stock options (Note 5)......... -- -- -- -- -- -- 1,979 20
Net (loss)................................. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
BALANCE, DECEMBER 31, 1996.................. 1,685,000 16,850 2,675,000 26,750 -- -- 1,097,591 10,976
Exercise of stock options (Note 5)......... -- -- -- -- -- -- 24,042 240
Issuance of preferred stock:
June 13, 1997 ($5.00 per share) -- -- -- -- 1,464,404 14,644 -- --
August 12, 1997 ($5.00 per share) -- -- -- -- 10,000 100 -- --
Stock issuance costs..................... -- -- -- -- -- -- -- --
Deferred compensation related to grant of
stock options (Note 5)................... -- -- -- -- -- -- -- --
Amortization of deferred compensation...... -- -- -- -- -- -- -- --
Net (loss)................................. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
BALANCE, DECEMBER 31, 1997.................. 1,685,000 16,850 2,675,000 26,750 1,474,404 14,744 1,121,633 11,216
Deferred compensation related to grant of
stock options* (Note 5).................. -- -- -- -- -- -- -- --
Amortization of deferred compensation*..... -- -- -- -- -- -- -- --
Net (loss)*................................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
BALANCE, MARCH 31, 1998*.................... 1,685,000 $16,850 2,675,000 $26,750 1,474,404 $14,744 1,121,633 $111,216
========= ======= ========= ======= ========= ======= ========= =======
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DEFERRED DURING THE STOCK
PAID-IN COMPENSATION DEVELOPMENT SUBSCRIPTION
CAPITAL (NOTE 5) STAGE RECEIVABLE TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 6, 1993, DATE OF
INCORPORATION.............................. $ -- $ -- $ -- $ -- $ --
Issuance of common stock to founders:
March 9, 1994 ($.01 per share)........... -- -- -- -- 6,600
October 3, 1994 ($.01 per share)......... -- -- -- (3,300) --
Issuance of preferred stock:
March 11, 1994 ($1.00 per share)......... 1,658,250 -- -- -- 1,675,000
November 2, 1994 ($1.00 per share)....... 9,900 -- -- -- 10,000
Stock issuance costs..................... (14,838) -- -- -- (14,838)
Net (loss)................................. -- -- (750,591) -- (750,591)
----------- ----------- ------------ ------- -----------
BALANCE, DECEMBER 31, 1994.................. 1,653,312 -- (750,591) (3,300) 926,171
Issuance of preferred stock:
September 29, 1995 ($2.00 per share) 5,074,500 -- -- -- 5,100,000
October 24, 1995 ($2.00 per share) 248,750 -- -- -- 250,000
Stock issuance costs..................... (23,154) -- -- -- (23,154)
Collection of stock subscription
receivable............................... -- -- -- 3,300 3,300
Issuance of common stock under license
agreement on November 7, 1995............ -- -- -- -- 631
Net (loss)................................. -- -- (1,234,159) -- (1,234,159)
----------- ----------- ------------ ------- -----------
BALANCE, DECEMBER 31, 1995.................. 6,953,408 -- (1,984,750) -- 5,022,789
Issuance of common stock ($.20 per share)
on June 14, 1996 (Note 4)................ 8,075 -- -- -- 8,500
Exercise of stock options (Note 5)......... 178 -- -- -- 198
Net (loss)................................. -- -- (2,777,052) -- (2,777,052)
----------- ----------- ------------ ------- -----------
BALANCE, DECEMBER 31, 1996.................. 6,961,661 -- (4,761,802) -- 2,254,435
Exercise of stock options (Note 5)......... 2,164 -- -- -- 2,404
Issuance of preferred stock:
June 13, 1997 ($5.00 per share) 7,307,376 -- -- -- 7,322,020
August 12, 1997 ($5.00 per share) 49,900 -- -- -- 50,000
Stock issuance costs..................... (25,866) -- -- -- (25,866)
Deferred compensation related to grant of
stock options (Note 5)................... 860,485 (860,485) -- -- --
Amortization of deferred compensation...... -- 122,041 -- -- 122,041
Net (loss)................................. -- -- (5,250,634) -- (5,250,634)
----------- ----------- ------------ ------- -----------
BALANCE, DECEMBER 31, 1997.................. 15,155,720 (738,444) (10,012,436) -- 4,474,400
Deferred compensation related to grant of
stock options* (Note 5).................. 1,228,740 (1,228,740) -- -- --
Amortization of deferred compensation*..... -- 296,392 -- -- 296,392
Net (loss)*................................ -- -- (2,472,375) -- (2,472,375)
----------- ----------- ------------ ------- -----------
BALANCE, MARCH 31, 1998*.................... $16,384,460 $(1,670,792) $ 12,484,761 $ -- $(2,298,467)
=========== =========== ============ ======= ===========
</TABLE>
- ---------------
* Unaudited
See Notes to Financial Statements.
F-5
<PAGE> 65
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, TOTALS FROM MARCH 31,
--------------------------------------- INCORPORATION TO -------------------------
1995 1996 1997 DECEMBER 31, 1997 1997 1998
----------- ----------- ----------- ----------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss)................. $(1,234,159) $(2,777,052) $(5,250,634) $(10,012,436) $ (764,541) $(2,472,325)
Adjustments to reconcile
net (loss) to net cash
(used in) operating
activities:
Depreciation............. 33,570 64,462 106,281 204,879 -- 39,158
Amortization of
intangibles............ 17,271 32,824 38,489 99,260 12,795 10,879
Amortization of deferred
compensation........... -- -- 122,041 122,041 10,875 296,392
Accretion of discount on
short-term
investments............ (35,561) (58,876) (31,650) (126,087) -- (1,443)
Changes in certain
working capital items:
Trade and other
receivables.......... 3,329 7,323 (121,832) (140,495) (6,266) 9,942
Inventories............ -- (50,385) (879,819) (930,204) (383,543) (610,974)
Prepaid expenses....... (93,325) 57,769 (102,033) (149,589) 11,464 66,410
Accounts payable and
accrued expenses..... 108,530 211,176 450,303 826,727 121,720 677,668
----------- ----------- ----------- ------------ ----------- -----------
Net cash (used in)
operating
activities......... (1,200,345) (2,512,759) (5,668,854) (10,105,904) (997,496) (1,984,293)
----------- ----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of short-term
investments.............. (3,505,417) -- (6,097,746) (10,930,444) -- --
Proceeds from maturities of
short-term investments... 1,147,218 3,000,000 3,000,000 7,927,135 -- 2,630,839
Payments for license
agreements............... (50,000) (90,933) (107,400) (273,333) (3,327) (25,735)
Purchase of leasehold
improvements and
equipment................ (322,858) (134,297) (450,728) (911,588) (137,948) (287,478)
Other...................... -- (4,617) -- (9,689) -- --
----------- ----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) investing
activities......... (2,731,057) 2,770,153 (3,655,874) (4,197,919) (141,275) 2,317,626
----------- ----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from long-term
debt..................... 120,000 -- 40,000 160,000 63,887 70,000
Payments on long-term
debt..................... (11,111) (32,829) (40,042) (83,982) -- (13,314)
Proceeds from issuance of
capital stock, net of
issuance costs........... 5,330,777 8,698 7,348,558 14,364,795 -- --
----------- ----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) financing
activities......... 5,439,666 (24,131) 7,348,516 14,440,813 63,887 56,686
----------- ----------- ----------- ------------ ----------- -----------
Increase (decrease)
in cash and cash
equivalents........ 1,508,264 233,263 (1,976,212) $ 136,990 (1,074,884) 390,019
CASH AND CASH EQUIVALENTS:
Beginning.................. 371,675 1,879,939 2,113,202 -- 2,113,202 136,990
----------- ----------- ----------- ------------ ----------- -----------
Ending..................... $ 1,879,939 $ 2,113,202 $ 136,990 $ 136,990 $ 1,038,318 $ 527,009
=========== =========== =========== ============ =========== ===========
<CAPTION>
CUMULATIVE
TOTALS FROM
INCORPORATION TO
MARCH 31, 1998
----------------
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss)................. $(12,484,761)
Adjustments to reconcile
net (loss) to net cash
(used in) operating
activities:
Depreciation............. 244,037
Amortization of
intangibles............ 110,139
Amortization of deferred
compensation........... 418,433
Accretion of discount on
short-term
investments............ (127,530)
Changes in certain
working capital items:
Trade and other
receivables.......... (130,553)
Inventories............ (1,541,178)
Prepaid expenses....... (83,179)
Accounts payable and
accrued expenses..... 1,504,395
------------
Net cash (used in)
operating
activities......... (12,090,197)
------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of short-term
investments.............. (10,930,444)
Proceeds from maturities of
short-term investments... 10,557,974
Payments for license
agreements............... (299,068)
Purchase of leasehold
improvements and
equipment................ (1,199,066)
Other...................... (9,689)
------------
Net cash provided by
(used in) investing
activities......... (1,880,293)
------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from long-term
debt..................... 230,000
Payments on long-term
debt..................... (97,296)
Proceeds from issuance of
capital stock, net of
issuance costs........... 14,364,795
------------
Net cash provided by
(used in) financing
activities......... 14,497,499
------------
Increase (decrease)
in cash and cash
equivalents........ 527,009
CASH AND CASH EQUIVALENTS:
Beginning.................. --
------------
Ending..................... $ 527,009
============
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 66
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: UroSurge, Inc. ("the Company") develops, manufactures
and markets medical devices for the treatment and management of genito-urinary
disorders. The Company has acquired various licenses that allow it to develop,
manufacture and market such devices.
Risk and uncertainties: The Company is in the development stage. It needs
to obtain regulatory approval from the Food and Drug Administration ("FDA")
prior to selling many of its products within the United States, and foreign
regulatory approval must be obtained to sell many of its products
internationally. There can be no assurance that the Company's products will
receive regulatory approvals and a substantial amount of time may pass before
significant revenue is realized. In addition, the primary component of one of
the Company's products is purchased from a single supplier under an agreement
that expires in 2000, subject to an automatic two-year extension.
Accounting estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies follows:
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all instruments with a maturity of three months or less when
purchased, to be cash equivalents.
Short-term investments: Short-term investments include certificates of
deposit and held to maturity U.S. Government securities which the Company has
the positive intent and ability to hold to maturity and are stated at amortized
cost. The fair value of U.S. Government securities, which matured in early 1998,
approximates their carrying value.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market. The inventories consist primarily of purchased
materials available for sale and to be used in research and development
activities.
Leasehold improvements and equipment: Leasehold improvements and equipment
are stated at cost. Depreciation of furniture and equipment is computed
primarily by accelerated methods over estimated useful lives of five to seven
years. Leasehold improvements are amortized by the straight-line method over the
terms of the leases, plus optional renewals.
Licenses: License acquisition costs are amortized by the straight-line
method over their estimated economic life which varies between five and fifteen
years. These licenses are periodically reviewed for impairment based upon an
assessment of future operations.
Revenue recognition: Sales of medical devices are recognized as the
products are shipped.
Research and development: Research and development costs are charged to
expense as incurred.
Deferred income taxes: Deferred income taxes are provided under the
liability method whereby deferred tax assets are recognized for deductible
temporary differences and net operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases.
F-7
<PAGE> 67
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Stock options issued to employees and directors: Compensation expense for
stock issued through a stock option plan is accounted for using the intrinsic
value based method of accounting prescribed by APB Opinion 25, Accounting for
Stock Issued to Employees. Under this method, compensation is measured as the
difference, if any, between the fair value of the stock at the date of award
less the amount required to be paid for the stock. The difference, if any, is
charged to expense over the periods of service.
The estimated fair value used for the stock options granted was determined
on a periodic basis by the Company's Board of Directors.
Stock options issued to nonemployees: The Company uses the Black-Scholes
model to determine the fair value of stock options issued to nonemployees. The
fair value of options granted is amortized and expensed over the period of
service.
Loss per share: The FASB has issued SFAS No. 128, "Earnings Per Share,"
which requires the presentation of basic and diluted earnings (loss) per share
by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities outstanding. Basic per share
amounts are computed by dividing net income (loss) (the numerator) by the
weighted-average number of common shares outstanding (the denominator). Diluted
per share amounts assume the conversion, exercise or issuance of all potential
common stock unless the effect is to reduce the loss or increase the income per
common share from continuing operations. The dilutive effect of stock options is
reflected by application of the treasury stock method and the dilutive effect of
convertible preferred stock is reflected by application of the if-converted
method. For each of the periods basic and diluted loss per share were the same
since the potentially dilutive securities were antidilutive. The potentially
dilutive securities relate to 4,834,404 shares of preferred stock which will
convert into common stock on a 1 for 1 basis (see Note 4) and 968,958 stock
options granted since incorporation (see Note 5). There are no issuances of
stock options that are considered "nominal issuances" under the Securities and
Exchange Commission's Staff Accounting Bulletin No. 98.
Pro forma basic and diluted loss per share for the year ended December 31,
1997 is computed using the weighted average number of outstanding shares of
common stock determined above and the weighted average shares of common stock
resulting from the assumed conversion of Series A, B and C convertible preferred
stock into common stock (as of their date of original issuance), which will
occur upon the completion of the initial public offering discussed in Note 9, as
contemplated herein.
Fair value of financial instruments: The fair value of all the financial
instruments approximates their carrying value since all are liquid or have short
maturities.
Recent accounting pronouncements: In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period, resulting from
transactions and other events and circumstances from nonowner sources. The
Company currently believes that SFAS No. 130 will not have any material impact
on its financial statement reporting requirements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other
F-8
<PAGE> 68
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operating decision maker.
Specific information to be reported for individual segments includes profit or
loss, certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided. SFAS No. 131 is effective for the Company in 1998. The
Company operates in one business segment.
Unaudited Interim Financial Statements: The interim financial statements
and the related information in the notes as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 are unaudited. Such interim financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial position, the results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
NOTE 2. LICENSES
The Company has acquired seven licenses that allow it to develop,
manufacture and market a number of products. The licenses require the payment of
royalties which vary up to 6% of the revenues related to the products.
One license requires additional fees totaling $75,000 contingently payable
if the Company is able to meet specified regulatory milestones and receives FDA
clearance for the licensed product. This license also requires additional
license fees of $900,000 over five years upon receiving FDA approval.
Royalty expense totaled $0, $637, $1,067 and $1,704 for the years ended
December 31, 1995, 1996 and 1997 and the period from August 6, 1993, date of
incorporation, to December 31, 1997.
NOTE 3. PLEDGED ASSETS AND RELATED DEBT
The Company has various notes payable, collateralized by equipment and
leasehold improvements, totaling $174,690 as of December 31, 1997. These notes
are due in various monthly and annual installments through June 2002.
NOTE 4. STOCKHOLDERS' EQUITY
The Company has issued three series of convertible preferred stock under
investment agreements as follows: 1,685,000 shares of Series A convertible
preferred stock, ($.01 par value) ("Series A") for $1.00 per share under an
Investment Agreement dated March 11, 1994, 2,675,000 shares of Series B
convertible preferred stock, ($.01 par value) ("Series B") for $2.00 per share
under an Investment Agreement dated September 29, 1995 and 1,474,404 shares of
Series C convertible preferred stock, ( $.01 par value) ("Series C") for $5.00
per share under an Investment Agreement dated June 13, 1997.
Dividends: In each fiscal year of the Company, the holders of Series A,
Series B and Series C (collectively, the "Preferred") shall be entitled to
receive, when and if declared by the Board of Directors, dividends in preference
to the holders of Common Stock ("Common") in an amount per share at least equal
to the product of (i) the per share amount, if any, of the cash dividend
declared, paid or set aside for the Common during such fiscal year, multiplied
by (ii) the number of whole shares of Common into which each such share of
Preferred is then convertible. Dividends on the Preferred shall not be
cumulative.
F-9
<PAGE> 69
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
Liquidation preference: In the event of any liquidation, dissolution or
winding up of the Company, the holders of Series A, Series B and Series C shall
be entitled to receive in preference to the holders of Common amounts equal to
$1.00, $2.00 and $5.00 per share, respectively, plus declared and unpaid
dividends. Thereafter the holders of Common shall receive the remaining assets
of the Company. A consolidation or merger or sale of all or substantially all of
the assets of the Company shall be deemed to be a liquidation, dissolution or
winding up for purposes of the liquidation preference.
Voting rights: Pursuant to an Investor Rights Agreement, the holders of
the Company's Preferred Stock agreed to vote their shares of Preferred Stock to
fix the number of directors at five. Pursuant to this agreement, the board was
to consist of one director designated by the holders of the Company's Series A
Preferred Stock, to be designated by Medical Science Partners, L.P.; one
director designated by the holders of the Company's Series B Preferred Stock, to
be designated by Sprout Capital VII, L.P.; the duly elected, qualified and
acting President of the Company and two directors designated jointly by the
President of the Company; and all holders of the Company's Preferred Stock.
Directors Robert E. Curry, Ph.D. and David H. Maupin have served as members of
the board pursuant to this voting arrangement, which terminates upon completion
of the initial public offering.
Protective provisions: So long as there shall be issued and outstanding at
least 67% of the total number of shares of Preferred ever issued, the Company
shall not, without first obtaining the affirmative vote of not less then 67% of
the then outstanding shares of Preferred (i) merge or consolidate into or with
any other corporation or sell all or substantially all of the Company's assets;
(ii) voluntarily or involuntarily liquidate, dissolve or wind up the Company or
its business; (iii) amend, repeal or add any provision to the Company's
Certificate of Incorporation if such action would alter or change any of the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the Preferred, or increase or decrease the total number of
authorized shares of Preferred; (iv) authorize or issue any new or existing
class or series of capital stock (or any securities convertible into or
exercisable for any shares of capital stock) having any preference or priority
as to amounts distributable upon liquidation superior to or on parity with the
Preferred; (v) reclassify any Common into shares having any preference or
priority as to amounts distributable upon liquidation superior to or on parity
with the Preferred; or (vi) pay or declare any dividend or distribution on any
shares of its capital stock, or redeem, retire, repurchase or acquire any shares
of its capital stock (except for shares repurchased in accordance with
restricted stock purchase agreements with employees, consultants or directors
previously approved by the Board of Directors.)
Conversion: Each share of Preferred may be converted at the holder's
option at any time into one share of Common, subject to adjustment as provided
below.
Automatic conversion: The Preferred will be automatically converted into
Common at its then applicable conversion rate upon the earlier of (i) the
closing of an underwritten public offering of more than $15,000,000 of Company
stock for not less than $7.50 per share (a "Qualified Public Offering"), or (ii)
the date on which there are issued and outstanding a number of shares of
Preferred equal to less than 33% of the total number of shares of Preferred ever
issued by the Company.
Conversion price adjustments: The conversion price of the Series A, Series
B and Series C shall be subject to adjustment (i) proportionately for stock
splits, stock dividends, recapitalization, reclassifications, reorganizations,
etc. and (ii) on a broad-based weighted-average basis if the Company issues
additional shares of Common or Common equivalents (other than a total of
1,010,000 shares of Common under board approved stock option/stock purchase
plans and certain other customary exclusions) at a purchase price less than the
applicable conversion price. The conversion prices of the Series A, Series B and
Series C shall initially be
F-10
<PAGE> 70
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
$1.00, $2.00 and $5.00, respectively. The holders of 67% of each of the
outstanding Series A, Series B and Series C may elect to waive any price-based
antidilution adjustment to the conversion price of their stock.
Right of first refusal: In the event that the Company issues equity
securities or securities convertible or exercisable for equity securities (other
than up to 1,010,000 shares of Common issued pursuant to board approved stock
option/stock purchase plans and certain other customary exclusions), each of the
holders of Preferred shall be given the right to purchase a percentage of such
securities, on the same basis as the other investors, equal to the percentage
ownership of the Company (on a fully diluted basis) it holds prior to such
issuance, with an additional right of overallotment. A holder of Preferred may
apportion such holder's rights among itself and such general partners, officers
and other affiliates in such proportions as it deems appropriate. These rights
shall terminate upon the closing of the Company's first Qualified Public
Offering.
NOTE 5. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan covering all employees
fulfilling minimum age and service requirements. Employee contributions to the
plan are optional. The plan does not provide for a contribution by the employer.
The Company has a Stock Option Plan for certain officers, directors,
employees and consultants whereby 1,610,000 shares of Common have been reserved
for issuance. Options for 998,000 (unaudited) shares of Common have been granted
as of March 31, 1998 to certain officers, directors, employees and consultants
at prices equal to the estimated fair value of the stock at the date of the
grant and are exercisable and vest in a range from immediately to over a
four-year period. The options expire five years from the date of the grants.
The Company recognizes as compensation expense the excess of the fair value
of the Common stock issuable upon exercise of options over the aggregate
exercise price of options. In connection with grants at below market value,
$2,089,225 (unaudited) of deferred compensation has been recorded as of March
31, 1998. This compensation expense is being amortized over the vesting period
of each option. Compensation expense under the Plan totaled $122,041 for the
year ended December 31, 1997 and $296,392 (unaudited) for the quarter ended
March 31, 1998.
F-11
<PAGE> 71
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
A summary of the status of the Company's Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at date of incorporation........................ -- $ --
Granted................................................... 177,000 0.10
-------
Outstanding at December 31, 1994............................ 177,000 0.10
Granted................................................... 43,500 0.10
Granted................................................... 137,000 0.20
-------
Outstanding at December 31, 1995............................ 357,500 0.14
Granted................................................... 33,500 0.20
Exercised on September 20, 1996........................... (1,979) 0.10
Forfeited................................................. (3,021) 0.10
-------
Outstanding at December 31, 1996............................ 386,000 0.15
Granted................................................... 174,000 0.20
Granted................................................... 198,500 0.50
Exercised:
April 26, 1997......................................... (10,000) 0.10
May 31, 1997........................................... (625) 0.10
June 10, 1997.......................................... (10,000) 0.10
October 3, 1997........................................ (2,667) 0.10
October 3, 1997........................................ (750) 0.20
-------
Outstanding at December 31, 1997............................ 734,458 0.26
Granted:
January 29, 1998 (unaudited)........................... 29,000 1.00
March 10, 1998 (unaudited)............................. 205,500 2.00
-------
Outstanding at March 31, 1998 (unaudited)................... 968,958 .65
=======
</TABLE>
F-12
<PAGE> 72
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
Other pertinent information related to the options outstanding at March 31,
1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
OPTIONS CONTRACTUAL OPTIONS
OUTSTANDING LIFE EXERCISABLE
EXERCISE PRICE (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
$0.10.................................. 192,208 1.6 169,542
0.20.................................. 343,750 3.6 161,301
0.50.................................. 198,500 4.7 4,583
1.00.................................. 29,000 4.8 249
2.00.................................. 205,500 5.0 12,000
------- -------
968,958 347,675
======= =======
</TABLE>
Upon merger or sale of the Company, an additional 171,460 shares would
become fully exercisable. As of March 31, 1998, options to purchase 612,000
(unaudited) shares of Common were available for future grants.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." Had the Company elected to measure compensation based on the
grant date fair value of awards granted (the method described in FASB Statement
No. 123), reported net loss and loss per share would have been changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, MARCH 31
----------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pro forma net loss... $(1,234,345) $(2,779,311) $(5,260,683) $(766,361) $(2,447,998)
Pro forma basic and
diluted loss per
share.............. $ (1.23) $ (2.58) $ (4.79) $ (.70) $ (2.18)
</TABLE>
The pro forma amounts shown above are estimated using the following
assumptions for grants in 1995, 1996, 1997 and 1998: no dividends, no price
volatility, risk-free interest rate of 5.84%, 6.27%, 5.71% and 5.71% (unaudited)
and expected life of options of four years.
In March 1998, the Company reserved an additional 600,000 shares
(unaudited) for future issuance under the plan discussed above, adopted a 1998
director stock option plan and a 1998 employee stock purchase plan. (see Note 9)
NOTE 6. LEASE COMMITMENTS
The Company leases its office building under a lease agreement that expires
June 30, 2000 with one five-year option to renew, whereby it pays monthly
rentals of $7,003 plus property taxes, special assessments, insurance and
maintenance costs. The Company signed a lease in December 1997 for an adjoining
building to be used for manufacturing. This lease commences on January 1, 1998
and requires monthly rentals of $8,050
F-13
<PAGE> 73
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
plus property taxes, special assessments, insurance and maintenance costs. The
lease term is 29 months with one five year option to renew. The Company plans to
exercise both renewal options.
Estimated future minimum lease payments as of December 31, 1997 under
operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
YEAR ENDING DECEMBER 31: ---------
<S> <C>
1998............................................ $ 180,634
1999............................................ 180,634
2000............................................ 82,268
---------
$ 443,536
=========
</TABLE>
The rent expense for the years ended December 31, 1995, 1996, 1997 and the
period from August 6, 1993, date of incorporation, to December 31, 1997 was
$54,414, $91,597, $91,597 and $239,153, respectively. Rent expense for the
periods ended March 31, 1997 and 1998 were $22,899 (unaudited) and $46,595
(unaudited) respectively.
NOTE 7. INCOME TAXES
The composition of the income taxes (credits) are as follows:
<TABLE>
<CAPTION>
AUGUST 6, AUGUST 6,
1993, 1993,
DATE OF DATE OF
INCORPORATION PERIOD ENDING INCORPORATION,
YEAR ENDED DECEMBER 31, TO MARCH 31, TO
-------------------------------- DECEMBER 31, ------------------ MARCH 31,
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- ------------- ------- ------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Current.............. $ -- $(20,383) $(31,316) $ (51,699) $(5,000) $(8,000) $(59,699)
Deferred............. -- -- -- -- -- -- --
-------- -------- -------- ------------ ------- ------- --------
-- $(20,383) $(31,316) $ (51,699) $(5,000) $(8,000) $(59,699)
======== ======== ======== ============ ======= ======= ========
</TABLE>
The effective income tax rate is different than the statutory federal tax
rate as follows:
<TABLE>
<CAPTION>
AUGUST 6,
1993,
DATE OF
INCORPORATION,
YEAR ENDED DECEMBER 31, TO
----------------------------------- DECEMBER 31,
1995 1996 1997 1997
--------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Income taxes (credits) at federal rate of
34%........................................ $(419,600) $(944,200) $(1,754,400) $(3,373,400)
State income taxes (credits) net of federal
benefit.................................... (74,000) (141,500) (279,500) (540,000)
Federal research and development tax
credits.................................... (27,300) (75,600) (229,400) (332,300)
State research and development tax credits... -- (20,383) (31,316) (51,699)
Nondeductible expenses....................... 900 2,400 5,500 9,600
Valuation allowance.......................... 520,000 1,158,900 2,257,800 4,236,100
--------- --------- ----------- -----------
$ -- $ (20,383) $ (31,316) $ (51,699)
========= ========= =========== ===========
</TABLE>
F-14
<PAGE> 74
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
Net deferred income taxes consist of the following components as of
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net operating loss carryforwards............................ $ 1,818,200 $ 3,836,500
Research and development credits 102,900 332,300
Other temporary differences................................. 57,200 67,300
Less valuation allowance.................................... (1,978,300) (4,236,100)
----------- -----------
Net deferred income taxes.......................... $ -- $ --
=========== ===========
</TABLE>
A valuation allowance totaling $4,236,100 as of December 31, 1997 was
established since it is uncertain if the Company will receive future income tax
benefit from loss carryovers. The amount of the carryforward is approximately
$9,591,000 of which $630,000 expires in 2009, $1,178,000 expires in 2010,
$2,690,000 expires in 2011 and $5,093,000 expires in 2012.
The above loss carryforwards are subject to certain annual limitations
resulting from issuances of equity securities and may be further limited by
additional issuances. Such events could limit the eventual tax utilization of
these carryforwards.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is completing improvements to a leased building to be used as a
manufacturing facility. Leasehold improvements and other capital equipment
purchases with an estimated cost of $500,000 are anticipated through the second
quarter of 1998.
NOTE 9. SUBSEQUENT EVENTS
In April 1998 the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to issue its common stock in an initial public offering.
The Company plans to use the proceeds to fund ongoing and future clinical
trials, research and development, marketing and sales activities, expansion of
manufacturing capabilities and for working capital and general corporate
purposes.
In April 1998 the Company's Board of Directors approved a Restated
Certificate of Incorporation which eliminates the previous class of preferred
stock, authorizes a class of undesignated preferred stock and changes the number
of common shares authorized to 50,000,000 shares. The Restated Articles are to
be filed following the effectiveness of the initial public offering.
In April 1998 the Company's Board of Directors approved a 1998 Director
Option Plan and has reserved 300,000 shares of common stock for issuance under
the plan. Nonemployee directors will annually be granted a nonstatutory option
to purchase 9,000 shares of common stock at the fair value on the date of the
grant, with the option vesting over four years.
In April 1998 the Company's Board of Directors approved a 1998 Employee
Stock Purchase Plan and has reserved 300,000 shares for issuance under the plan.
The Company will withhold up to 15% of salary for participating employees, who
may acquire common stock at 85% of fair value of the common stock on the dates
specified in the plan.
Financing Arrangement (unaudited). The Company entered into a financing
arrangement with certain of its principal stockholders in June 1998. Under this
arrangement, such stockholders will provide the
F-15
<PAGE> 75
UROSURGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT MARCH 31, 1998, FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998, AND FOR THE PERIOD FROM INCORPORATION
(AUGUST 6, 1993) THROUGH MARCH 31, 1998 IS UNAUDITED)
Company with a line of credit of up to $5.0 million in the event that the
Company requires any additional funding prior to receiving the net proceeds of
this offering. In exchange for this line, the Company has agreed to issue
warrants to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share. The
warrants will have a term of three years. The Company will issue warrants on the
same terms to purchase an additional 30,000 shares of Common Stock for each $1.0
million borrowed under this arrangement. Borrowings under this arrangement will
not bear interest. As of June 12, 1998, the Company has borrowed $3.0 million
under this arrangement.
F-16
<PAGE> 76
APPENDIX
Inside front cover
[PICTURES OF SANS, UROVIVE, UROTHERM, SPIRASTENT AND FILASTENT.]
[CAPTIONS]
Page 26
[DIAGRAM OF ANATOMY OF THE URINARY TRACT SHOWING KIDNEY, URETER, BLADDER AND
URETHRA]
Page 32
[SIX DIAGRAMS SHOWING PERIURETHRAL UROVIVE PROCEDURE.]
CAPTIONS:
1. Attach balloon to distal end of primed catheter.
2. Slide sheath into holder and advance until sheath holder is fully
seated against holder. Slide needle into sheath.
3. Insert needle into periurethral tissue, with needle bevel facing
urethra.
4. Unscrew the needle and remove it from the delivery system, leaving
the sheath and holder in place. Carefully place the balloon and
catheter into the sheath.
5. Rotate the catheter hub (1), which retracts sheath and exposes
the balloon. Gradually inflate balloon with filler material until
there is sufficient bulking of the urethra.
6. Carefully retract system from periurethral tissue. Balloon will detach
automatically.
<PAGE> 77
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 16
Dividend Policy....................... 16
Dilution.............................. 17
Capitalization........................ 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 43
Certain Transactions.................. 50
Principal Stockholders................ 51
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 58
Change of Independent Auditors........ 58
Additional Information................ 58
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CIBC OPPENHEIMER
, 1998
======================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,942
NASD filing fee............................................. 4,548
Nasdaq National Market listing fee.......................... 44,000
Printing and engraving costs................................ 150,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 150,000
Blue Sky fees and expenses.................................. 12,000
Transfer Agent and Registrar fees........................... 7,000
Miscellaneous expenses...................................... 170,510
--------
Total............................................. $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in the terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation (Exhibit 3.1 hereto) and the Registrant's Bylaws
(Exhibit 3.3 hereto) provides for indemnification of the Registrant's directors,
officers, employees and other agents to the extent and under the circumstances
permitted by the Delaware General Corporation Law. The Registrant also intends
to enter into agreements with its directors and executive officers that will
require the Registrant among other things to indemnify them against certain
liabilities that may arise by reason of their status or service as directors to
the fullest extent not prohibited by Delaware law.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the Underwriters, for certain liabilities,
including liabilities arising under the Act, and affords certain rights of
contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 31, 1995, the Registrant has issued and sold the following
unregistered securities:
(a) Since March 31, 1995, the Registrant has granted stock options to
employees, consultants and directors under its stock option plans covering
an aggregate of 782,500 shares of the Registrant's Common Stock, at
exercise prices ranging from $0.10 to $2.00 per share. Since March 31,
1995, the Registrant has issued 794,500 shares of Common Stock to
employees, consultants and directors upon exercise of stock options.
(b) In September and October 1995, Registrant sold 2,675,000 shares of
Series B Preferred Stock to 18 private investors at a purchase price of
$2.00 per share.
(c) In June 1997, Registrant sold 1,474,404 shares of Series C
Preferred Stock to 36 private investors at a purchase price of $5.00 per
share.
(d) In June 1998, the Company issued warrants to purchase 50,000
shares of Common Stock to five investors in connection with a bridge
financing arrangement. All five investors are venture capital investors and
are accredited investors within the meaning of Rule 501(a) under the
Securities Act of
II-1
<PAGE> 79
1933, as amended. The Company will issue warrants to purchase an additional
30,000 shares for each $1.0 million borrowed under the bridge financing
arrangement.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1*** Restated Certificate of Incorporation of the Registrant as
currently in effect.
3.2*** Form of Restated Certificate of Incorporation to be in
effect upon completion of offering.
3.3*** Bylaws of the Registrant, as currently in effect.
3.4*** Bylaws of the Registrant, as proposed to be amended in
connection with this offering.
4.1 Specimen Common Stock Certificate.
5.1* Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation.
10.1*** Form of Amended and Restated 1994 Stock Plan.
10.2*** Form of 1998 Employee Stock Purchase Plan.
10.3*** Form of 1998 Director Option Plan.
10.4*** Three-Party Agreement dated October 31, 1994 by and between
University of Iowa Research Park Corporation, Myriad
Developers, L.C. and the Registrant.
10.5*** Lease Agreement dated December 12, 1997 between Myriad
Developers, L.C. and the Registrant.
10.6** Development and Supply Agreement dated April 19, 1995 by and
between the Registrant and a contract supplier.
10.7** License Agreement dated October 14, 1993, as amended and
assigned to the Registrant on February 23, 1994, with
Children's Medical Center Corporation.
10.8** Exclusive License Agreement dated June 30, 1996 between The
Regents of the University of California and the Registrant
for Electrode Acupuncture System.
10.9*** Iowa Department of Economic Development CEBA Loan Agreement
dated August 21, 1997 by and between the Iowa Department of
Economic Development and the Registrant.
10.10*** Amendment No. 1 to Iowa Department of Economic Development
CEBA Loan Agreement dated September 22, 1994.
10.11*** Restated Investors Rights Agreement dated June 13, 1997.
10.12*** Form of Indemnification Agreement.
10.13 Note and Warrant Agreement.
11.1 Calculation of earnings per share.
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
16.1 Letter re: change in certifying accountant.
23.1 Consent of Deloitte & Touche, LLP, Independent Auditors.
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment has been requested for certain portions of this
exhibit.
*** Previously filed with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing as specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Coralville, State of Iowa, on the 11th day of June, 1998.
UROSURGE, INC.
By: /s/ DAVID H. MAUPIN
------------------------------------
David H. Maupin,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DAVID H. MAUPIN President, Chief Executive June 11, 1998
- ----------------------------------------------------- Officer and Director
David H. Maupin (Principal Executive Officer)
/s/ RANDAL L. OWENS Vice President of Finance and June 11, 1998
- ----------------------------------------------------- Chief Financial Officer
Randal L. Owens (Principal Financial and
Accounting Officer)
/s/ DICK P. ALLEN* Director June 11, 1998
- -----------------------------------------------------
Dick P. Allen
/s/ WILLIAM E. ENGBERS* Director June 11, 1998
- -----------------------------------------------------
William E. Engbers
/s/ ROBERT E. CURRY, PHD.* Director June 11, 1998
- -----------------------------------------------------
Robert E. Curry, PhD.
/s/ JOSEPH F. LOVETT* Director June 11, 1998
- -----------------------------------------------------
Joseph F. Lovett
*By: /s/ DAVID H. MAUPIN
------------------------------------------------
David H. Maupin, Attorney-in-fact
</TABLE>
II-4
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
----------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1*** Restated Certificate of Incorporation of the Registrant as
currently in effect.
3.2*** Form of Restated Certificate of Incorporation to be in
effect upon completion of offering.
3.3*** Bylaws of the Registrant, as currently in effect.
3.4*** Bylaws of the Registrant, as proposed to be amended in
connection with this offering.
4.1 Specimen Common Stock Certificate.
5.1* Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation.
10.1*** Form of Amended and Restated 1994 Stock Plan.
10.2*** Form of 1998 Employee Stock Purchase Plan.
10.3*** Form of 1998 Director Option Plan.
10.4*** Three-Party Agreement dated October 31, 1994 by and between
University of Iowa Research Park Corporation, Myriad
Developers, L.C. and the Registrant.
10.5*** Lease Agreement dated December 12, 1997 between Myriad
Developers, L.C. and the Registrant.
10.6** Development and Supply Agreement dated April 19, 1995 by and
between the Registrant and a contract supplier.
10.7** License Agreement dated October 14, 1993, as amended and
assigned to the Registrant on February 23, 1994, with
Children's Medical Center Corporation.
10.8** Exclusive License Agreement dated June 30, 1996 between The
Regents of the University of California and the Registrant
for Electrode Acupuncture System.
10.9*** Iowa Department of Economic Development CEBA Loan Agreement
dated August 21, 1997 by and between the Iowa Department of
Economic Development and the Registrant.
10.10*** Amendment No. 1 to Iowa Department of Economic Development
CEBA Loan Agreement dated September 22, 1994.
10.11*** Restated Investors Rights Agreement dated June 13, 1997.
10.12*** Form of Indemnification Agreement.
10.13 Note and Warrant Agreement.
11.1 Calculation of earnings per share.
16.1 Letter re: change in certifying accountant.
23.1 Consent of Deloitte & Touche, LLP, Independent Auditors.
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment has been requested for certain portions of this
exhibit.
*** Previously filed with the Commission.
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK [LOGO] COMMON STOCK
[SYMBOL] [SYMBOL]
UROSURGE, INC.
SEE REVERSE FOR CERTAIN
DEFINITIONS STATEMENTS
CUSIP 91728G 10 4
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
UROSURGE, INC.
transferable on the books of the Corporation by the holder hereof in person or
by attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid until countersigned and registered by the Transfer
Agent and the Registrar.
IN WITNESS WHEREOF the said Corporation has caused this certificate to
be signed by facsimile of its duly authorized officers.
Dated:
/s/ Christopher H. Mitchell Countersigned and Registered:
- --------------------------------------
ASSISTANT SECRETARY
Transfer Agent and Registrar
/s/ David H. Maupin By:
- -------------------------------------- ----------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
UROSURGE, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT --_____________Custodian____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors
survivorship and not as tenants Act_______________________________
in common (State)
UNIF TRF MIN ACT --____________Custodian (until age )
(Cust)
____________under Uniform Transfers
(Minor)
to Minors Act____________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign, and transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
- ----------------------
| |
| |
- ----------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________
X___________________________________
X___________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
NOTICE: WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_____________________________________
ALL GUARANTEES MUST BE MADE BY A FINANCIAL INSTITUTION (SUCH AS A BANK OR
BROKER) WHICH IS A PARTICIPANT IN THE SECURITIES TRANSFER AGENTS MEDALLION
PROGRAM ("STAMP"), THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE PROGRAM
("MSP"), OR THE STOCK EXCHANGES MEDALLION PROGRAM ("SEMP") AND MUST NOT BE
DATED, GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE.
<PAGE> 1
Exhibit 10.13
UROSURGE, INC.
NOTE AND WARRANT AGREEMENT
This Agreement is made effective as of May 26, 1998, among UroSurge,
Inc., a Delaware corporation (the "Company"), with its principal office at 2660
Crosspark Road, Coralville, Iowa 52241 and the Investors set forth on the
signature pages hereto (collectively, the "Investors").
1. Sale and Issuance of the Notes and the Warrants.
1.1 Loan and Issuance of Notes. The Investors severally agree,
on the terms of and subject to the conditions specified in this Agreement, to
lend to the Company up to the sum set forth on the signature page of this
Agreement. Each Investor's loan shall be evidenced by a subordinated promissory
note (the "Note") dated as of the Closing Date in the form attached hereto as
Exhibit A. These Notes, together with the other notes issued pursuant to this
Agreement, are collectively referred to as the "Notes."
1.2 Warrants. At the Closing, the Company shall issue to each
Investor a Stock Purchase Warrant (the "Warrant") dated as of the Closing Date
in the form attached hereto as Exhibit B to purchase a number of the class
and/or series of shares of the Company's capital stock issued in the Next
Financing (as defined in the Note). The capital stock expected to be issued in
the Next Financing is Common Stock of the Company. These Warrants, together with
the other stock purchase warrants issued pursuant to this Agreement, are
collectively referred to as the "Warrants." The securities for which the
Warrants are exercisable are referred to as the "Exercise Stock." The Notes and
the Warrants and the Exercise Stock, are collectively referred to as the
"Securities."
1.3 Place and Date of Closing. The closing of these
transactions (the "Closing") will be held at the offices of Wilson, Sonsini,
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California at 10:00 a.m. on
the date hereof, or at such other time and place as the parties shall mutually
agree (the "Closing Date").
1.4 Delivery. At the Closing, the Company shall deliver to
each Investor a Note in the principal amount set forth on the signature page
hereof and a Warrant to purchase shares of the Company's capital stock. At the
Closing, each Investor shall deliver the amount of such Investor's loan as set
forth on the signature page hereof.
1.6 Subsequent Loans. The Company may request on three
occasions that each Investor loan to the Company additional funds equal to up to
the difference between each Investor's loan commitment set forth on the
signature pages hereto less the amount of each Investor's initial and any
subsequent loans. Each such request shall be made by giving thirty (30) days'
prior written notice and shall request that the Investors loan the Company an
aggregate amount of at least $1,000,000.00.
Any such additional loans shall be made by each Investor on a pro rata basis
based on the relationship that each Investor's loan commitment (set forth on the
signature page hereto) bears to the aggregate loan commitments of all of the
Investors.
-1-
<PAGE> 2
2. The Company's Representations and Warranties.
The Company hereby represents and warrants to the Investors as follows:
2.1 Organization and Standing. The Company is a corporation
duly organized and validly existing under, and by virtue of, the laws of
Delaware and is in good standing under such laws. The Company has the requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted. The Company is qualified to do business as
a foreign corporation in each jurisdiction in which the failure to be so
qualified would have a materially adverse impact on the business or financial
condition of the Company taken as a whole.
2.2 Corporate Power. The Company will have at the Closing Date
all requisite legal and corporate power to execute and deliver this Agreement,
to sell and issue the Notes and the Warrants hereunder, to issue the Warrant
Shares upon exercise of the Warrants, to issue the Warrant Shares and to carry
out and perform its obligations under the terms of this Agreement.
2.3 Subsidiaries. The Company has no subsidiaries or
affiliated companies and does not otherwise own or control, directly or
indirectly, any other corporation, association or business entity.
2.4 Authorization. All corporate action on the part of the
Company, its directors and shareholders necessary for the sale and issuance of
the Notes and Warrants and the performance of the Company's obligations under
this Agreement, the Notes and the Warrants will be taken prior to the Closing.
This Agreement, each Investor's Note and each Investor's Warrant are valid,
binding and enforceable obligations of the Company, subject to applicable
bankruptcy, insolvency, reorganization or similar laws relating to or affecting
the enforcement of creditor's rights and to the availability of the remedy of
specific performance. The execution and delivery of the Agreements, the Notes
and the Warrants and the performance by the Company of their respective terms do
not violate, conflict with or result in a material breach of (i) the Company's
Articles of Incorporation, as amended through the Closing Date; (ii) the
Company's Bylaws; (iii) any judgment, order or decree of any court or arbitrator
to which the Company is a party; or (iv) any contract, undertaking, indenture or
other agreement or instrument by which the Company is now bound or to which it
is now a party. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or arbitrator or
government agency or instrumentality. Except for notices required or permitted
to be filed with certain state and federal securities commissions, which notices
the Company agrees to file on a timely basis, the execution, delivery and
performance by the Company of this Agreement, the Notes and the Warrants in
compliance with their respective provisions do not require any governmental
consent or approval.
2.5 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial
-2-
<PAGE> 3
governmental authority on the part of the Company is required in connection with
the consummation of the transactions contemplated by this Agreement, except for
the filing pursuant to Section 25102(f) of the California Corporate Securities
Law of 1968, as amended, and the rules thereunder, which filing will be effected
within 15 days of the sale of the Notes and Warrants hereunder.
2.6 Litigation. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company which
questions the validity of this Agreement or the right of the Company to enter
into it, or to consummate the transactions contemplated hereby, or which might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The Company is not
a party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or arbitrator or government agency or instrumentality. There
is no action, suit, proceeding or investigation by the Company currently pending
or which the Company intends to initiate.
3. Representations, Warranties of the Investors. Each Investor, for
that Investor alone, represents and warrants to the Company upon the acquisition
of the Note and the Warrant and upon exercise of the Warrant as follows:
3.1 Binding Obligation. Each of this Agreement, the Note and
the Warrant issued to the Investor is a valid, binding and enforceable
obligation of the Investor, subject to applicable bankruptcy, insolvency,
reorganization or similar laws relating to or affecting the enforcement of
creditor's rights and to the availability of the remedy of specific performance.
3.2 Investment Experience. The Investor is either an
accredited investor within the meaning of Regulation D prescribed by the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), or (by virtue of the Investor's experience in evaluating
and investing in private placement transactions of securities in companies
similar to the Company) the Investor is capable of evaluating the merits and
risks of the Investor's investment in the Company and has the capacity to
protect the Investor's own interests.
3.3 Investment Intent. The Investor is acquiring the
Securities for investment for the Investor's own account and not with a view to,
or for resale in connection with, any distribution thereof. The Investor
understands that the Securities have not been registered under the Act by reason
of a specific exemption from the registration provisions of the Act that depends
upon, among other things, the bona fide nature of the investment intent as
expressed herein.
3.4 Rule 144. The Investor acknowledges that the Securities
must be held indefinitely unless subsequently registered under the Act, or
unless an exemption from such registration is available. The Investor is aware
of the provisions of Rules 144 and 144A promulgated under the Act that permit
limited resale of securities purchased in a private placement subject to the
satisfaction of certain conditions.
-3-
<PAGE> 4
3.5 Discussions with Management. The Investor has had an
opportunity to discuss the Company's business, management, and financial affairs
with the Company's management and to review the Company's facilities.
3.6 Transfer Among Affiliates. Without in any way limiting the
representations set forth in this Section 3, an Investor may transfer all or any
portion of the Securities to its partners or affiliated funds if the Company and
its counsel are satisfied that the transfer is exempt from the registration
requirements of federal and applicable state securities laws.
4. Conditions to Closing.
4.1 Conditions to Obligations of the Investors. Each
Investor's obligations at the Closing are subject to the fulfillment, on or
prior to the Closing Date, of all of the following conditions, any of which may
be waived in whole or in part by the Investor:
(a) The representations and warranties made by the
Company in Section 2 shall be true and correct when made, on the Closing Date
and on the effective date of each subsequent loan with the same force and effect
as if they had been made on and as of the same date.
(b) Except for the notices required or permitted to
be filed after the Closing Date with certain federal and state securities
commissions, the Company shall have obtained all governmental approvals required
in connection with the lawful sale and issuance of the Securities.
(c) At the Closing, the sale and issuance by the
Company, and the purchase by the Investor, of the Securities shall be legally
permitted by all laws and regulations to which the Investor or the Company is
subject.
(d) All corporate and other proceedings in connection
with the transactions contemplated at the Closing and all documents and
instruments incident to such transaction shall be reasonably satisfactory in
substance and form to the Investor.
4.2 Conditions to Obligations of the Company. The Company's
obligation to issue and sell the Securities at the Closing is subject to the
fulfillment, to the Company's satisfaction on or prior to the Closing Date, of
the following conditions, any of which may be waived in whole or in part by the
Company:
(a) Except for the notices required or permitted to
be filed after the Closing Date with certain federal and state securities
commissions, the Company shall have obtained all governmental approvals required
in connection with the lawful sale and issuance of the Securities.
(b) At the Closing, the sale and issuance by the
Company, and the purchase by the Investor, of the Securities shall be legally
permitted by all laws and regulations to which the Investor or the Company is
subject.
-4-
<PAGE> 5
5. Registration Rights.
5.1 Grant of Rights. The Company hereby grants to the
Investor, with respect to the "Registrable Securities" (as defined below) the
Registration Rights set forth in the Company's Restated Investors Rights
Agreement entered into in connection with the Company's June 1997 financing (as
the same may be have been amended to date). Each Investor hereby agrees to be
bound by and subject to the Restated Investors Rights Agreement. For purposes
hereof, Registrable Securities shall mean the Common Stock issued or issuable
upon exercise of the Warrants. Notwithstanding the foregoing, unless agreed to
by an Investor, lockup agreements entered into with managing underwriters in
connection with the Company's initial registered firm commitment underwritten
public offering will not be applicable to shares of Company Common Stock
purchased in such offering or in the open, public trading market.
5.2 Acceptance by Investors. Each Investor accepts the grant
of registration rights in the Restated Investors Rights Agreement and hereby
agrees to be bound by and subject to the aforementioned sections of the Restated
Investors Rights Agreement.
6. Miscellaneous.
6.1 Waivers and Amendments. With the written consent of the
record holders of more than 50% of the principal amount of Notes then
outstanding, the obligations of the Company and the rights of the holders of the
Securities under this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such waiver or supplemental agreement shall reduce
the aforesaid percentage of the principal amount of Notes the holders of which
are required to consent to any waiver or supplemental agreement; provided,
further, that no such waiver or supplemental agreement shall change the
principal or the maturity date of the Notes without the written consent of the
holders of the Notes. Upon the effectuation of each such waiver, consent,
agreement, amendment or modification the Company shall promptly give written
notice thereof to the record holders of the Securities who have not previously
consented thereto in writing. Neither this Agreement nor any provisions hereof
may be changed, waived, discharged or terminated orally, but only by a signed
statement in writing.
6.2 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.3 Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any Investor and
the Closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other
-5-
<PAGE> 6
instrument delivered by or on behalf of the Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
6.4 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
6.5 Entire Agreement. This Agreement (including the exhibits
attached hereto) and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof.
6.6 Notices, etc. All notices and other communications
required or permitted hereunder shall be effective upon receipt and shall be in
writing and may be delivered in person, by telecopy, electronic mail, overnight
delivery service or U.S. mail, in which event it may be mailed by first-class,
certified or registered, postage prepaid, addressed (a) if to an Investor, at
such Investor's address set forth on the signature page of this Agreement, or at
such other address as such Investor shall have furnished the Company in writing,
or, until any such holder so furnishes an address to the Company, then to and at
the address of the last holder of such Securities who has so furnished an
address to the Company, or (b) if to the Company, at its address set forth at
the beginning of this Agreement, or at such other address as the Company shall
have furnished to the Investor and each such other holder in writing.
6.7 Separability of Agreements; Severability of this
Agreement. The Company's agreement with each Investor is a separate agreement
and the sale of the Securities to each Investor is a separate sale; provided,
however, that this Agreement shall not become effective until such time as each
Investor has executed this Agreement. If any provision of this Agreement shall
be judicially determined to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
6.8 Termination. This Agreement shall terminate on the earlier
of (i) October 31, 1998 or (ii) the closing of the Company's initial firm
commitment underwritten public offering.
6.9 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Note and Warrant
Agreement to be duly executed and delivered as of the day and year first written
above.
THE COMPANY: UROSURGE, INC.
By: _____________________________
Randal L. Owens,
Vice President and
Chief Financial Officer
6
<PAGE> 7
THE INVESTORS:
ALLSTATE INSURANCE COMPANY
By:____________________________
Amount of Initial Loan: $ 524,160.00
Amount of Loan Commitment: $ 873,600.00
CTC ILLINOIS TRUST COMPANY,
as Trustee for the Allstate Retirement Plan
By:____________________________
Amount of Initial Loan: $ 28,800.00
Amount of Loan Commitment: $ 48,000.00
CTC ILLINOIS TRUST COMPANY,
as Trustee for the Agents Pension Plan
By:____________________________
Amount of Initial Loan: $ 23,040.00
Amount of Loan Commitment: $ 38,400.00
7
<PAGE> 8
MEDICAL SCIENCE PARTNERS, L.P.
By _____________________, its
General Partner
By:____________________________
Amount of Initial Loan: $ 897,000.00
Amount of Loan Commitment: $ 1,495,000.00
8
<PAGE> 9
MEDTRONIC ASSET MANAGEMENT, INC.
By:____________________________
Amount of Initial Loan: $ 384,000.00
Amount of Loan Commitment: $ 640,000.00
9
<PAGE> 10
PREMIER MEDICAL PARTNER FUND L.P.
By Premier Fund Capital Corp., its
General Partner
By:____________________________
Amount of Initial Loan: $ 237,000.00
Amount of Loan Commitment: $ 395,000.00
10
<PAGE> 11
SPROUT CAPITAL VII, L.P.
By ______________________, its
General Partner
By:____________________________
Amount of Initial Loan: $ 906,000.00
Amount of Loan Commitment: $ 1,510,000.00
11
<PAGE> 12
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
UROSURGE, INC.
SUBORDINATED PROMISSORY NOTE
Coralville, Iowa
$ _____________, 1998
1. Principal.
UROSURGE, INC. (the "Company"), a Delaware corporation, for
value received, hereby promises to pay to the order of ______________________ or
holder ("Payee") in lawful money of the United States at the address of Payee
set forth below, the principal amount of____________________ ($_________), or if
less, the amount actually lent by Payee to the Company pursuant to that certain
Note and Warrant Agreement of even date herewith (the "Agreement").
The loans made by the Payee to the Company shall be as
specified on the schedule of advances following the signature page hereto. Upon
the making of a loan by the Payee, such loan shall be reflected on such
schedule.
The principal on this Note is due and payable on the earlier
of (i) October 31, 1998 or (ii) the date which is two business days following
the closing of the Company's initial firm commitment underwritten public
offering. This Note may be prepaid without penalty, in whole or in part, at any
time.
Upon payment in full of all principal payable hereunder, this
Note shall be surrendered to the Company for cancellation.
12
<PAGE> 13
2. Subordination.
(a) "Senior Indebtedness" means the principal of and premium,
if any, and interest on indebtedness of the Company for money borrowed from
commercial banks, equipment lessors or other financial institutions under a
secured or unsecured line of credit, term loan or equipment lease.
(b) The Company agrees and the holder of each Note, by
acceptance thereof, agrees, expressly for the benefit of the present and future
holders of Senior Indebtedness, that, except as otherwise provided herein, upon
(i) an event of default under any Senior Indebtedness, or (ii) any dissolution,
winding up, or liquidation of the Company, whether or not in bankruptcy,
insolvency or receivership proceedings, the Company shall not pay, and the
holder of such Note shall not be entitled to receive, any amount in respect of
the principal of such Note unless and until the Senior Indebtedness shall have
been paid or otherwise discharged. Upon (1) an event of default under any Senior
Indebtedness, or (2) any dissolution, winding up or liquidation of the Company,
any payment or distribution of assets of the Company, which the holder of this
Note would be entitled to receive but for the provisions hereof, shall be paid
by the liquidating trustee or agent or other person making such payment or
distribution directly to the holders of Senior Indebtedness ratably according to
the aggregate amounts remaining unpaid on Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of Senior Indebtedness pursuant
to this paragraph 2(b)) to receive payments or distributions of assets of the
Company applicable to the Senior Indebtedness.
(c) This Section 2 is not intended to impair, as between the
Company, its creditors (other than the holders of Senior Indebtedness) and the
holder of this Note, the unconditional and absolute obligation of the Company to
pay the principal on the Note or affect the relative rights of the holder of
this Note and the other creditors of the Company, other than the holders of
Senior Indebtedness. Nothing in this Note shall prevent the holder of this Note
from exercising all remedies otherwise permitted by applicable law upon default
under the Note, subject to the rights, if any, of the holders of Senior
Indebtedness in respect to cash, property or securities of the Company received
upon the exercise of any such remedy.
3. Attorneys' Fees. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, the Company agrees to pay, in addition to the principal payable
hereunder, reasonable attorneys' fees and costs incurred by Payee.
4. Notices. Any notice, other communication or payment required or
permitted hereunder shall be in writing and shall be deemed to have been given
upon delivery if personally delivered or upon deposit if deposited in the United
States mail for mailing by certified mail, postage prepaid, and addressed as
follows:
13
<PAGE> 14
If to Payee: At the address set forth on the signature
page of the Agreement
If to Company: At the address of the Company's principal
executive office set forth on page 1 of the
Agreement.
Each of the above addressees may change its address for purposes of this
paragraph by giving to the other addressee notice of such new address in
conformance with this paragraph.
5. Acceleration. This Note shall become immediately due and payable if
(i) the Company commences any proceeding in bankruptcy or for dissolution,
liquidation, winding-up, composition or other relief under state or federal
bankruptcy laws; (ii) such proceedings are commenced against the Company, or a
receiver or trustee is appointed for the Company or a substantial part of its
property, and such proceeding or appointment is not dismissed or discharged
within 60 days after its commencement; or (iii) there is a default in any
agreement to which the Company is a party with a third party or parties
resulting in a right by such third party or parties, whether or not exercised,
to accelerate the maturity of indebtedness in an amount in excess of $100,000.
.
6. Waivers. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor. No
delay on the part of Payee in exercising any right hereunder shall operate as a
waiver of such right or any other right. This Note is being delivered in and
shall be construed in accordance with the laws of the State of California,
without regard to the conflicts of laws provisions thereof.
UROSURGE, INC.
By: ____________________________
Title:__________________________
SCHEDULE OF ADVANCES:
____________, 1998 (initial advance) $
____________, 1998 $____________________
____________, 1998 $____________________
14
<PAGE> 15
EXHIBIT B
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
STOCK PURCHASE WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
UROSURGE, INC.
THIS CERTIFIES that, for value received, _____________________ (the
"Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or prior to the close of business on the
date five (5) years after the date hereof, but not thereafter, to subscribe for
and purchase, from UROSURGE, INC., a Delaware corporation (the "Company"), a
number of shares of Common Stock determined as set forth below. The number of
shares of Common Stock issuable upon exercise of this Warrant shall equal the
sum of (i) ten (10) shares for each $1,000 that the Investor commits to loan to
the Company pursuant to the Agreement and (ii) thirty (30) shares for each
$1,000 that the Investor actually loans to the Company pursuant to the
Agreement.
The purchase price for one share of Company Common Stock under this
Warrant shall equal the per share price to public of one share of Common Stock
in the Company's initial firm commitment underwritten public offering of Common
Stock.
In the event that the Company's initial firm commitment public offering
of Common Stock is not consummated by October 31, 1998, this Warrant shall be
exercisable for shares of the Company's Series C Preferred Stock at a purchase
price of $5.00 per share.
The purchase price and the number of shares for which the Warrant is
exercisable shall be subject to adjustment as provided herein. The class and
series of shares of capital stock of the Company issuable upon exercise of this
Warrant is also subject to adjustment pursuant to Section 9 hereof.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company,
referred to in Section 2 hereof, by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant together with the Assignment
Form annexed hereto properly endorsed.
-1-
<PAGE> 16
2. Exercise of Warrant.
(a) The purchase rights represented by this Warrant are
exercisable by the registered holder hereof, in whole or in part, at any time
before the close of business on the date five (5) years after the date hereof,
by the surrender of this Warrant and the Subscription Form annexed hereto duly
executed at the office of the Company, in Coralville, Iowa (or such other office
or agency of the Company as it may designate by notice in writing to the
registered holder hereof at the address of such holder appearing on the books of
the Company), and upon payment of the purchase price of the shares thereby
purchased (by cash or by check or bank draft payable to the order of the Company
or by cancellation of indebtedness of the Company to the holder hereof, if any,
at the time of exercise in an amount equal to the purchase price of the shares
thereby purchased); whereupon the holder of this Warrant shall be entitled to
receive a certificate for the number of shares of Common Preferred Stock so
purchased. The Company agrees that if at the time of the surrender of this
Warrant and purchase the holder hereof shall be entitled to exercise this
Warrant, the shares so purchased shall be and be deemed to be issued to such
holder as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been exercised as aforesaid.
(b) In lieu of the cash payment set forth in paragraph 2(a)
above, the Holder shall have the right ("Conversion Right") to convert this
Warrant in its entirety (without payment of any kind) into that number of shares
of Common Stock equal to the quotient obtained by dividing the Net Value (as
defined below) of the shares issuable upon exercise of this Warrant by the Fair
Market Value (as defined below) of one share of Common Stock. As used herein,
(A) the Net Value of the Shares means the aggregate Fair Market Value of the
shares of Common Stock subject to this Warrant minus the aggregate purchase
price; and (B) the Fair Market Value of one share of Common Stock means:
(i) if the exercise occurs at a time during which the
Company's Common Stock is traded on a national securities exchange or on the
Nasdaq National Market, the Fair Market Value of one share of Common Stock means
the average last reported or closing sale price for the Company's Common Stock
on such exchange or market for the three trading days ending one business day
before the exercise of this Warrant;
(ii) if the exercise is in connection with a merger,
sale of assets or other reorganization transaction as described in Section 9(a)
below, the Fair Market Value of one share of Common Stock means the value
received by the holders of the Company's Common Stock pursuant to such Merger
Transaction; and
(iv) in all other cases, the Fair Market Value of one
share of Common Stock shall be determined in good faith by the Company's Board
of Directors.
(c) Certificates for shares purchased hereunder shall be
delivered to the holder hereof within a reasonable time after the date on which
this Warrant shall have been exercised as aforesaid. The Company covenants that
all shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be fully paid and nonassessable and free from all taxes, liens and
charges in respect of the
-2-
<PAGE> 17
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).
3. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon the exercise of
this Warrant, an amount equal to such fraction multiplied by the then current
price at which each share may be purchased hereunder shall be paid in cash to
the holder of this Warrant.
4. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
5. No Rights as Shareholders. This Warrant does not entitle the holder
hereof to any voting rights or other rights as a shareholder of the Company
prior to the exercise thereof.
6. Exchange and Registry of Warrant. This Warrant is exchangeable, upon
the surrender hereof by the registered holder at the above-mentioned office or
agency of the Company, for a new Warrant of like tenor and dated as of such
exchange.
The Company shall maintain at the above-mentioned office or
agency a registry showing the name and address of the registered holder of this
Warrant. This Warrant may be surrendered for exchange, transfer or exercise, in
accordance with its terms, at such office or agency of the Company, and the
Company shall be entitled to rely in all respects, prior to written notice to
the contrary, upon such registry.
7. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new Warrant of like tenor and dated as of such cancellation,
in lieu of this Warrant.
8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a legal holiday.
-3-
<PAGE> 18
9. Merger, Reclassification, etc.
(a) Merger, Sale of Assets, etc. If at any time the Company
proposes to merge with or into any other corporation, effect a reorganization,
or sell or convey all or substantially all of its assets to any other entity,
then the surviving entity shall be obligated to assume the obligations of this
Warrant and it shall be exercisable for the number of shares of stock or other
securities or property which the holder of this Warrant would have received in
the transaction if the holder had exercised the Warrant prior to the
consummation of the transaction. The exercise price shall, in such event, be
proportionately adjusted based on the exchange ratio for shares of the Company's
Common Stock in such transaction.
(b) Reclassification, etc. If the Company at any time shall,
by subdivision, combination or reclassification of securities or otherwise,
change any of the securities to which purchase rights under this Warrant exist
into the same or a different number of securities of any class or classes, this
Warrant shall thereafter be to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclas sification or other
change. If shares of the Company's Common Stock are subdivided or combined into
a greater or smaller number of shares of Common Stock, the purchase price under
this Warrant shall be proportionately reduced in case of subdivision of shares
or proportionately increased in the case of combination of shares, in both cases
by the ratio which the total number of shares of Common Stock to be outstanding
immediately after such event bears to the total number of shares of Common Stock
outstanding immediately prior to such event.
(c) Cash Distributions. No adjustment on account of cash
dividends or interest on the Company's Common Stock or other securities
purchasable hereunder will be made to the purchase price under this Warrant.
(d) Authorized Shares. The Company covenants that, through the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant.
-4-
<PAGE> 19
10. Miscellaneous.
(a) Issue Date. The provisions of this Warrant shall be
construed and shall be given effect in all respect as if it had been issued and
delivered by the Company on the date hereof. This Warrant shall be binding upon
any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws of the State of California and for all purposes shall be
construed in accordance with and governed by the laws of said state.
(b) Restrictions. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant may have restrictions
upon its resale imposed by state and federal securities laws.
(c) Waivers and Amendments. With the consent of the Holders
(as defined below) holding rights to purchase more than fifty percent (50%) of
the shares issuable upon exercise of the then outstanding Warrants (as defined
below), the obligations of the Company and the right of the Holders may be
waived (either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely), and
with the same consent the Company may enter into a supplementary agreement for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Warrants; provided, however, that no such waiver or
supplemental agreement shall reduce the aforesaid percentage which is required
for consent to any waiver or supplemental agreement, without the consent of all
of the Holders of the then outstanding Warrants; provided, further, that no such
waiver or supplemental agreement shall change the purchase price or the number
of shares for which the Warrant is exercisable without the written consent of
the Holders. As used in this paragraph 10(c), (i) the "Warrants" shall be the
warrants issued pursuant to the Agreement of even date herewith, and (ii) the
"Holders" shall be the record holders of the Warrants.
-5-
<PAGE> 20
IN WITNESS WHEREOF, UROSURGE INC. has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: ________, 1998
UROSURGE, INC.
By: ______________________________
Title: ______________________________
-6-
<PAGE> 21
NOTICE OF EXERCISE
To: UROSURGE, INC.
(1) The undersigned hereby elects to purchase ____________ shares of
Common Stock of UROSURGE, INC. pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) Please issue a certificate of certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
-----------------------------------------------
(Name)
-----------------------------------------------
-----------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares of Common
Stock are being acquired for the account of the undersigned for investment and
not with a view to, or for resale in connection with, the distribution thereof
and that the undersigned has no present intention of distributing or reselling
such shares.
- -------------------------- ------------------------------------------
(Date) (Signature)
-7-
<PAGE> 22
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
________________________________________________________________________________
(Please Print)
whose address is _______________________________________________________________
(Please Print)
________________________________________________________________________________
Dated: _____________________, 19____.
Holder's Signature: ________________________________
Holder's Address: __________________________________
____________________________________________________
Signature Guaranteed: __________________________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
-8-
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
--------------------------------------- ENDED MARCH 31,
1995 1996 1997 1997
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Shares of common stock, beginning........................ 990,000 1,053,112 1,097,591 1,121,633
=========== =========== =========== ===========
Shares of common stock, ending........................... 1,053,112 1,097,591 1,121,633 1,121,633
=========== =========== =========== ===========
Computation of weighted average number of basic and
diluted shares:
Common shares outstanding at the beginning of the
year................................................. 990,000 1,053,112 1,097,591 1,121,633
Weighted average number of net shares issued........... 9,510 23,875 133,676 --
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC).... 999,510 1,076,987 1,111,267 1,121,633
Weighted average of potential dilutive shares for:
Stock options granted, computed using the treasury
stock method....................................... -- -- -- --
Convertible preferred stock, computed using the "if
converted" method.................................. -- -- -- --
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES (DILUTED).... 999,510 1,076,987 1,111,267 1,121,633
=========== ===========
Weighted average of additional shares deemed
outstanding from the conversion of preferred
stock................................................ 5,170,015 5,834,404
----------- -----------
TOTAL PRO FORMA AVERAGE SHARES OUTSTANDING..... 6,281,282 6,956,037
=========== ===========
Net loss................................................. $(4,234,159) $(2,777,052) $(5,250,634) $(2,472,325)
=========== =========== =========== ===========
Basic and diluted loss per share......................... $ (1.23) $ (2.58) $ (4.72) $ (2.20)
=========== =========== =========== ===========
Pro forma basic and diluted loss per share............... $ (0.84) $ (0.36)
=========== ===========
</TABLE>
<PAGE> 1
Exhibit 16.1
[McGLADREY & PULLEN, LLP LETTERHEAD]
June 9, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Ladies and Gentlemen:
RE: UROSURGE, INC.
We have read the Change of Independent Auditors section in the Prospectus
constituting part of this Amendment No. 1 to the Registration Statement (File
No. 33-49791) on Form S-1 dated June 11, 1998 and are in agreement with the
statements contained therein relating to McGladrey & Pullen, LLP except that we
are not in a position to agree or disagree with the registrant's statement that
the resignation of McGladrey & Pullen, LLP was approved by the Company's Board
of Directors.
Very truly yours,
/s/ McGladrey & Pullen, LLP
------------------------------
McGLADREY & PULLEN, LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-49791 of UroSurge, Inc., of our report dated May 22, 1998 appearing in
the Prospectus, which is a part of such Registration Statement, and to the
reference to us under the headings "Selected Financial Data" and "Experts" in
such Prospectus.
/s/ Deloitte & Touche, LLP
Cedar Rapids, Iowa
June 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 MAR-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 136,990 527,009
<SECURITIES> 3,129,396 500,000
<RECEIVABLES> 140,495 130,553
<ALLOWANCES> 0 0
<INVENTORY> 930,204 1,541,178
<CURRENT-ASSETS> 4,486,674 2,781,919
<PP&E> 1,008,620 1,296,098
<DEPRECIATION> 203,237 242,395
<TOTAL-ASSETS> 5,525,819 4,059,240
<CURRENT-LIABILITIES> 941,691 1,596,396
<BONDS> 109,728 164,377
0 0
58,344 58,344
<COMMON> 11,216 11,216
<OTHER-SE> 4,404,840 2,228,907
<TOTAL-LIABILITY-AND-EQUITY> 5,525,819 4,059,240
<SALES> 11,707 4,010
<TOTAL-REVENUES> 11,707 4,010
<CGS> 5,432 1,438
<TOTAL-COSTS> 5,471,644 2,512,455
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9,023 2,695
<INCOME-PRETAX> (5,281,950) (2,480,325)
<INCOME-TAX> (31,316) (8,000)
<INCOME-CONTINUING> (5,250,634) (2,472,325)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,250,634) (2,472,325)
<EPS-PRIMARY> (4.72) (2.20)
<EPS-DILUTED> (4.72) (2.20)
</TABLE>
