<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1996
REGISTRATION NO. 333-07285
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ADVANCED UROSCIENCE, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 3845 41-1786260
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>
ADVANCED UROSCIENCE, INC.
1290 HAMMOND ROAD
ST. PAUL, MINNESOTA 55110
(612) 653-8512
(Address and telephone number of principal executive offices)
DEAN A. KLEIN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ADVANCED UROSCIENCE, INC.
1290 HAMMOND ROAD
ST. PAUL, MINNESOTA 55110
(612) 653-8512
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Dobson West, Esq. Elizabeth C. Hinck, Esq.
Melodie R. Rose, Esq. Dorsey & Whitney LLP
Fredrikson & Byron, P.A. 220 South Sixth Street
900 Second Avenue South, Suite 1100 Minneapolis, Minnesota 55402
Minneapolis, Minnesota 55402 (612) 340-2600
(612) 347-7000
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If this Form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, please 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, please 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,
please check the following box: /X/
--------------------------
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 SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 6, 1996
PROSPECTUS
1,500,000 SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Shares") are being
sold by Advanced UroScience, Inc. ("Advanced UroScience" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $9.00 and $10.00 per Share. See "Underwriting" for the factors
considered in determining the initial public offering price. Application has
been made to have the Common Stock approved on the Nasdaq National Market under
the symbol "AURO" pending completion of the Offering.
------------------------
THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 AND "DILUTION" ON PAGE 12.
---------------------
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>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
(1) The Company has agreed to pay to John G. Kinnard and Company, Incorporated
and Pennsylvania Merchant Group Ltd, as representatives of the several
Underwriters (the "Representatives"), their accountable expenses in
connection with the Offering up to a maximum of $50,000. The Company has
also agreed to sell to the Representatives, for a nominal purchase price,
five-year warrants to purchase up to an aggregate of 150,000 shares of the
Common Stock, exercisable at 120% of the Price to Public. In addition, the
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $260,000
(including the Representatives' accountable expenses referenced in note 1
above). See "Underwriting."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
225,000 additional shares of Common Stock solely to cover overallotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The Shares are being offered by the several Underwriters subject to prior
sale, to withdrawal, cancellation or modification of the offer without notice,
to delivery to and acceptance by the Underwriters and to certain other
conditions. It is expected that delivery of the Shares will be made on or about
, 1996 in Minneapolis, Minnesota.
------------------------
JOHN G. KINNARD AND COMPANY, INCORPORATED
PENNSYLVANIA MERCHANT GROUP LTD
------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[ANATOMICAL DEPICTION OF ACYST IMPLANT PROCEDURE]
The Company's products have not been approved by the FDA and there can be
no assurance that the Company will receive approval from the FDA.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Acyst-TM- is a trademark of the Company. This Prospectus also includes trade
names, trademarks and registered trademarks of companies other than Advanced
UroScience.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN
(I) HAS BEEN ADJUSTED TO REFLECT A 6-FOR-5 STOCK SPLIT EFFECTED ON MAY 1, 1996
AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION (225,000
SHARES), THE REPRESENTATIVES' WARRANT (150,000 SHARES) OR OUTSTANDING OPTIONS
AND WARRANTS (1,169,880 SHARES). SEE "DESCRIPTION OF SECURITIES" AND
"UNDERWRITING."
THE COMPANY
Advanced UroScience, Inc. ("Advanced UroScience" or the "Company") is
developing Acyst, an injectable bulking agent, for the treatment of stress
urinary incontinence due to intrinsic sphincter deficiency. Stress urinary
incontinence is generally defined as the involuntary loss of urine as a result
of activities that increase intra-abdominal pressure, such as coughing,
laughing, exercising or simply standing up. Acyst is a proprietary composition
of pyrolytic carbon-coated micro-beads suspended in a carrier gel. Acyst is
designed to be injected into the mucosal lining of the urethra at the neck of
the bladder through a specially designed needle. The injection procedure
involves inserting the needle through a standard cystoscope, allowing the
physician to view the bulking of the tissue and the resulting closure of the
bladder opening. This minimally invasive outpatient procedure can be
accomplished in approximately 30 minutes and is designed to restore the patient
to urinary continence immediately after the injection procedure.
Advanced UroScience has recently commenced conducting human clinical trials
of Acyst at the Mayo Clinic in Rochester, Minnesota under an investigational
device exemption ("IDE") granted by the United States Food and Drug
Administration ("FDA"). The Company expects to use the data gathered in these
trials to support an application for premarket approval ("PMA") from the FDA.
The Company is also conducting human clinical trials outside of the United
States.
Advanced UroScience believes that Acyst offers significant advantages over
existing management and treatment options, including commercially available
injectable bulking agents for sufferers of stress urinary incontinence caused by
intrinsic sphincter deficiency. Unlike adult diapers and pads, which are methods
of managing the problem, Acyst is designed to treat and improve the condition.
Acyst is designed to provide results immediately after injection, unlike
behavioral therapy and pelvic muscle training exercises, which can take several
weeks or months before results are achieved and which require ongoing therapy.
Acyst was specifically designed to address the significant issues posed by
commercially available injectable bulking agents, namely, biocompatibility,
migration and absorption. Acyst utilizes nonabsorbable, nonmigratory,
biocompatible micro-beads designed to be permanent, thereby minimizing the
potential need for retreatment.
It is estimated that there are at least 13 million people with urinary
incontinence in the United States, of which 85% are women. Approximately 9
million of the people with urinary incontinence suffer from stress urinary
incontinence. The Company believes that the majority of these people suffer from
varying degrees of instrinsic sphincter deficiency and may benefit from Acyst.
Initially, the Company will seek FDA approval to market Acyst for the treatment
of the severest forms of instrinsic sphincter deficiency, which the Company
believes affect approximately 1.5 million people. The Company intends to conduct
future human clinical trials to support expanded applications of Acyst. Although
urinary incontinence is most prevalent in the elderly, it is also common among
women under the age of 60. It is expected that urinary incontinence will
continue to be a significant health care problem for the adult female and
elderly populations and will, in fact, increase as the growing population
continues to age.
The Company's current focus is to complete the human clinical trials of
Acyst and obtain approval to market from the FDA as well as approval to market
Acyst in countries outside of the United States. The Company's marketing
strategy will be to target the large number of women suffering from stress
urinary incontinence due to intrinsic sphincter deficiency by educating
physicians and other health care providers that treat these patients, the
patients themselves and the health care payers.
3
<PAGE>
The Company was incorporated in Minnesota on July 27, 1994. Its executive
offices are located at 1290 Hammond Road, St. Paul, Minnesota 55110 and its
telephone number is (612) 653-8512.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................ 1,500,000 Shares
Common Stock outstanding after the
Offering.................................. 5,213,220 shares
Use of proceeds............................. To fund human clinical trials, research and
development, international sales and marketing
and for working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... AURO
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM INCEPTION
INCEPTION FIVE MONTHS ENDED (AUGUST 1,
(AUGUST 1, 1994) MAY 31, 1994)
TO YEAR ENDED -------------------- TO
DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996 MAY 31, 1996
----------------- ----------------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development
expense....................... $ 33,500 $ 353,300 $ 109,000 $ 215,000 $ 601,900
General and administrative
expense....................... 73,700 164,800 48,600 309,700 548,200
Net loss........................ $ (108,900) $ (524,400) $(159,200) $(514,700) $(1,148,000)
----------------- ----------------- --------- --------- ---------------
----------------- ----------------- --------- --------- ---------------
Net loss per share.............. $ (0.03) $ (0.12) $ (.04) $ (.12)
----------------- ----------------- --------- ---------
----------------- ----------------- --------- ---------
Weighted average number of
common and common equivalent
shares outstanding............ 3,840,887 4,393,483 4,387,883 4,397,483
----------------- ----------------- --------- ---------
----------------- ----------------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
-----------------------------
DECEMBER 31, 1995 ACTUAL AS ADJUSTED(1)
----------------- ----------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................. $ 415,200 $ 1,244,600 $ 14,094,600
Total assets..................................................... 534,400 1,506,200 14,356,200
Total liabilities................................................ 277,400 186,300 186,300
Total stockholders' equity (2)................................... 257,100 1,319,900 14,169,900
</TABLE>
- ------------------------------
(1) Adjusted to reflect the sale of the Shares offered hereby and the
application of the net proceeds therefrom, assuming a Price to Public of
$9.50 per Share.
(2) No dividends have been declared or paid on the Company's Common Stock.
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL PURCHASERS IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OF THE COMPANY.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES;
PROFITABILITY UNCERTAIN
The Company is a development stage company that since its inception in
August 1994 has been primarily engaged in research, development and testing of
Acyst. The Company has experienced significant operating losses since inception
and, as of May 31, 1996, had an accumulated deficit of approximately $1,417,400.
In addition, the development and commercialization by the Company of Acyst and
other new products, if any, will require substantial product development
expenditures for the foreseeable future. The Company expects its operating
losses to increase over the foreseeable future and there can be no assurance
that the Company will be profitable in the future or that the net proceeds of
the Offering, together with the Company's existing capital resources and any
funds provided by future operations, will be sufficient to fund the Company's
needs, or that other sources of funding will be available. The Company's ability
to generate revenues from operations and achieve profitability is dependent upon
successful completion of clinical trials, regulatory approval and
commercialization of Acyst and the Company's successful transition from a
development stage company to a fully operating company. See "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements.
EARLY STAGE OF CLINICAL TESTING; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL
Acyst is a new product and is in the early stages of clinical testing. To
date, the Company has conducted primarily animal research and has only recently
begun conducting human clinical trials designed to test the safety and efficacy
of Acyst. The Company cannot market Acyst in the United States unless and until
substantial human clinical trials are successfully completed and a PMA is
prepared by the Company and approved by the FDA. Similarly, prior to
commercialization in foreign jurisdictions, receipt of regulatory approvals from
the appropriate regulatory bodies in those jurisdictions will be required. There
can be no assurance that Acyst will be shown by clinical trials to be safe and
effective or that such clinical trials will be seen by the FDA or others as
conclusive. In addition, the Company's clinical trials may identify significant
obstacles to be overcome prior to obtaining regulatory approval. The Company
initially will seek FDA approval to market Acyst for the treatment of the
severest forms of instrinsic sphincter deficiency, and may be required to
conduct future clinical trials to support an additional PMA filing with the FDA
for expanded applications of Acyst. The process of obtaining FDA approval and
other regulatory approvals is lengthy, expensive and uncertain, and there can be
no assurance that Acyst will be approved for marketing, either initially or for
expanded applications, on a timely basis or at all in the United States or
elsewhere. If Acyst does not prove to be safe and effective in clinical trials
to the satisfaction of the FDA and other regulatory authorities or if the
Company fails to receive the necessary regulatory approvals on a timely basis or
at all, the Company's business, financial condition and results of operations
will be materially adversely affected. See "Business -- Development and
Regulatory Status" and "Business -- Regulatory Affairs."
DEPENDENCE ON SINGLE PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future success is entirely dependent on the successful
commercialization and market acceptance of its single product, Acyst, the safety
and efficacy of which has not yet been demonstrated and the regulatory approval
of which has not been obtained in the United States or any foreign jurisdiction.
There can be no assurance that Acyst will achieve any significant degree of
market acceptance among physicians, health care payers or patients, even if the
safety and efficacy of Acyst is established and the necessary regulatory
approvals are obtained. Physicians may not elect to prescribe treatment using
Acyst unless adequate reimbursement from health care payers is available. Health
care payer acceptance of a treatment utilizing Acyst will require, among other
things, evidence of the cost effectiveness of this treatment as compared to
other treatment options. There can be no assurance as to whether and, if so, how
frequently patients will require additional injections of Acyst and whether any
such additional injections would be effective or would have a negative effect on
physician, payer or patient acceptance. Failure of Acyst to achieve significant
market acceptance among physicians, health care payers and/or patients would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business."
5
<PAGE>
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. The Company has one
patent relating to Acyst and has filed one related Patent Cooperation Treaty
patent application. No assurances can be given that the scope of any patent
protection will prevent competitors, most of which have financial and other
resources substantially greater than the Company, from introducing products
competitive with Acyst, that the Company's patent will be held valid if
subsequently challenged, that others will not claim rights in or ownership of
the patent and other proprietary rights held by the Company, or that the
Company's product and processes will not infringe, or be alleged to infringe,
the proprietary rights of others. A number of patents have been issued to others
in the area of injectable bulking agents. Patenting medical devices involves
complex legal and factual questions, and there is no consistent policy regarding
the breadth of claims which issue pertaining to such technologies or which will
be held valid if subsequently challenged. The Company also relies upon
unpatented trade secrets to protect its proprietary technology. No assurance can
be given that others will not independently develop or otherwise acquire
substantially equivalent techniques or gain access to and disclose the Company's
proprietary technology. Further, no assurance can be given that the Company can
ultimately protect meaningful rights to such unpatented proprietary technology.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. The Company has been notified by a competitor of the
existence of its patents relating to injectable bulking agents. The Company and
its patent counsel have reviewed these patents. Based on this review, the
Company believes that it is not infringing such patents. However, there can be
no assurance that the holders of these other patents will not pursue litigation
against the Company. In addition, litigation may be necessary to enforce any
patents issued to the Company, protect trade secrets or proprietary information
owned by the Company against claimed infringement of the rights of others or
determine the scope and validity of the proprietary rights of others. The
defense and prosecution of patent litigation or other legal or administrative
proceedings related to patents is both costly and time-consuming, regardless of
the outcome. An adverse outcome in any litigation could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others or require the Company to cease making, using or selling any
products. There can be no assurance that any licenses required under any patents
or proprietary rights would be made available on terms acceptable to the
Company, if at all. In addition to being costly, protracted litigation to defend
or prosecute intellectual property could result in the Company being unable to
commercialize Acyst on a timely basis or at all. See "Business -- Patents and
Proprietary Rights."
HIGHLY COMPETITIVE INDUSTRY
Competition in the urinary incontinence management and treatment products
market is intense. The Company's ability to compete in this market will depend
primarily upon physician, patient and health care payer acceptance of Acyst as a
safe, effective and cost effective treatment for stress urinary incontinence due
to intrinsic sphincter deficiency. The Company's ability to compete in this
market will also depend on product pricing and the consistency of its product
quality and delivery. Other factors within and outside the Company's control
include its product development and innovation capabilities, its ability to
obtain required regulatory approvals, its ability to protect its proprietary
technology, its manufacturing and marketing capabilities and its ability to
attract and retain skilled employees.
The medical condition that can be treated using the Company's product also
may be managed or treated using a variety of alternative products or techniques,
including adult diapers and absorbent pads, behavior therapy and pelvic muscle
exercise, drugs, surgery, implantable devices, other injectable bulking agents,
and other medical devices. There is no assurance that the Company's product will
be able to replace such alternative products or techniques or that advancements
in these alternative products or techniques will not make the Company's product
obsolete. In addition, the Company believes that some of its competitors that do
not currently have injectable bulking agents are attempting to develop
injectable bulking agents that will compete directly with Acyst. Many of the
Company's existing and potential competitors have substantially
6
<PAGE>
greater capital resources, name recognition and well-known and well-established
product lines. These competitors may also have greater expertise than the
Company in research and development, manufacturing, marketing and sales and
regulatory affairs. There is no assurance that the Company will be able to
successfully compete against such competitors and potential competitors. See
"Business -- Competition."
EXTENSIVE UNITED STATES AND INTERNATIONAL REGULATORY AFFAIRS
The Company's product, product development activities and manufacturing
processes are subject to extensive and rigorous regulation by the FDA and by
comparable agencies in foreign countries. In the United States, the FDA
regulates the introduction of medical devices as well as manufacturing,
labeling, distribution, sale, marketing, advertising, promotion and
recordkeeping procedures for such products. To introduce its product in Europe,
the Company must comply with the medical device directive of the European
Community which defines the safety, design and manufacturing requirements for
medical products. Typically a full quality assurance system complying with and
certified to international quality standards is required to conform with the
medical device directive. Other foreign jurisdictions have extensive regulatory
requirements for the introduction of medical devices in those jurisdictions. The
process of obtaining marketing approval for new medical products from the FDA
and complying with international quality standards in foreign countries can be
costly and time consuming, and there can be no assurance that the requisite
approvals or certifications will be granted for Acyst or any future products on
a timely basis or at all, or that such regulatory reviews will not involve
delays that would adversely affect the Company's ability to commercialize Acyst.
Even if regulatory approval to market a product is obtained from the FDA,
this approval may entail limitations on the indicated uses of the product.
Marketing approval can also be withdrawn by the FDA due to failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial approval. The Company may be required to make further filings with the
FDA under certain circumstances, such as the addition of product claims or
product reformulation. The FDA could also limit or prevent the manufacture or
distribution of the Company's products and has the power to require the recall
of such products. FDA regulations depend heavily on administrative
interpretation, and there can be no assurance that future interpretation made by
the FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. The FDA and various state agencies inspect the
Company and its facilities from time to time to determine whether the Company is
in compliance with regulations relating to medical device manufacturing
companies, including regulations concerning manufacturing, testing, quality
control and product labeling practices. A determination that the Company is in
material violation of such regulations could lead to the imposition of civil
penalties, including fines, product recalls, product seizures, or, in extreme
cases, criminal sanctions. See "Business -- Regulatory Affairs."
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT
The success of the Company will be dependent upon, among other things, the
extent to which satisfactory reimbursement for Acyst and the injection procedure
can be obtained from health care payers for physicians performing the implant
procedure. In the United States and many foreign countries, third-party
reimbursement is currently generally available for surgical procedures for
urinary incontinence, but there is no uniform policy for such reimbursements.
The availability of third-party reimbursement for Acyst or competitors' products
or surgical procedures and continuing efforts to reduce the costs of health care
by decreasing reimbursement rates may affect the pricing of Acyst or the
relative cost to the consumer. The Company is not able to predict the effect
that the availability or unavailability of third-party reimbursement for Acyst
may have on its commercialization abroad or in the United States. Third party
reimbursement will be dependent upon decisions by the Health Care Financing
Administration ("HCFA") for Medicare, individual managed care organizations,
private insurers, foreign governmental health programs and other payers. Failure
to establish sufficient reimbursement from health care payers or adverse changes
in governmental and private third party payers' policies toward reimbursement
for Acyst and its injection procedure could materially adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Third-Party Reimbursement."
7
<PAGE>
DEPENDENCE ON SUPPLIERS
Certain of the primary raw materials and components for the manufacture of
Acyst, such as the micro-beads and a material needed for the gel carrier, are
available only from single sources. In the event that the Company is unable to
obtain these materials or components from its current suppliers on acceptable
terms and is required to replace its current raw materials or components with
alternatives, additional testing may be required in order for Acyst to receive
regulatory approval. Interruptions in supplies of raw materials or components
may occur as a result of business risks particular to such suppliers or the
failure of the Company and any such supplier to maintain satisfactory terms.
Suppliers of the Company's raw materials and components may decide for reasons
beyond the control of the Company, such as concerns about potential medical
product liability risk in general, to cease supplying such materials for use in
medical devices generally. Any interruption in the supply of raw materials or
components currently used by the Company or the use of any alternatives could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing."
NEED FOR ADDITIONAL CAPITAL
The Company plans to continue to expend substantial funds on research and
product development, pursuit of regulatory approvals, expansion of its
manufacturing facilities and marketing and distribution of its product. The
Company also intends to invest in additional equipment in order to establish
sufficient manufacturing capabilities to supply commercial volumes of Acyst.
There can be no assurance that the net proceeds of the Offering, together with
the Company's existing capital resources and any funds generated from future
operations, will be sufficient to finance the Company's operations or that other
sources of equity or debt funding will be available. The Company does not have a
bank line of credit or other arrangement to obtain any needed additional
financing, and there can be no assurance that any required financing will be
available on acceptable terms or at all. Any additional equity financings may be
dilutive to purchasers in the Offering, and debt financing, if available, may
involve restrictive covenants. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its efforts to commercialize Acyst
or prevent such commercial introduction altogether. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LIMITED MARKETING AND SALES EXPERIENCE
The Company has not sold any products. The Company currently has limited
sales and marketing capabilities. There can be no assurance that the Company can
build an effective sales force, attract and retain its own qualified marketing
and sales group or otherwise design and implement an effective marketing and
sales strategy for Acyst or any future product developed by the Company. See
"Business -- Marketing Strategy."
LIMITED MANUFACTURING EXPERIENCE
To date the Company has not commenced manufacturing commercial quantities of
Acyst and has manufactured only limited quantities of Acyst. To be successful,
the Company must manufacture Acyst in compliance with regulatory requirements,
in a timely manner and in sufficient quantities while maintaining product
quality and acceptable manufacturing costs. There can be no assurance that the
Company will be able to manufacture commercial quantities of Acyst with the
consistent high quality and low cost required for the Company to become
profitable. See "Business -- Manufacturing."
RISK OF PRODUCT LIABILITY; NO ASSURANCE INSURANCE IS ADEQUATE
The medical products industry is subject to substantial litigation, and the
Company 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. 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 the clinical trials of Acyst
or the initial commercialization of Acyst. 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.
Consequently, a product liability claim 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 "Business -- Product Liability."
8
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management personnel. The Company generally does not
have employment agreements with nor maintain key person life insurance on its
key personnel. The Company believes that its future success will depend in large
part on its ability to attract and retain highly skilled managerial,
engineering, operations and marketing personnel, who are in great demand.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's results of operations. See "Management."
RISKS RELATED TO INTERNATIONAL SALES
The Company intends to sell Acyst and any future products to customers
outside of the United States. 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 United States and any inability to obtain foreign regulatory approvals on a
timely basis or at all 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 and difficulties in obtaining export
licenses. There can be no assurance that the Company will be able to
successfully commercialize Acyst or any future product in any foreign market.
See "Business -- Marketing Strategy."
CONTROL BY MANAGEMENT
Upon completion of the Offering, the Company's executive officers and
directors will beneficially own approximately 56.1% of the issued and
outstanding shares of Common Stock. As a result of such ownership, such
shareholders as a group may have the ability to elect or remove all members of
the Board of Directors and thereby control the affairs and management of the
Company and may have the power to approve most actions requiring shareholder
approval. Such a level of ownership can have the effect of delaying, deferring
or preventing a change in control of the Company and can adversely affect the
voting and other rights of the other holders of Common Stock. See "Principal
Shareholders."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained after the Offering. The initial public
offering price for the Shares will be determined by negotiation between the
Company and the Representatives and may bear no relationship to the market price
of the Shares subsequent to the Offering. Following the Offering, the market
price for the Common Stock may be highly volatile depending on various factors,
including the general economy, stock market conditions, announcements by the
Company, its distributors or competitors, and fluctuations in the Company's
operating results. See "Underwriting."
ADVERSE EFFECT OF FUTURE SALES OF COMMON STOCK
The availability for sale of certain shares of Common Stock held by
shareholders of the Company after the Offering could adversely affect the market
price of the Common Stock. Of the 5,213,220 shares of Common Stock to be
outstanding following the Offering, 1,500,000 will be freely tradeable without
restrictions or additional registration under the Securities Act of 1933, as
amended (the "Securities Act"). The remaining 3,713,220 shares will be available
for resale under Rule 144 after the expiration of applicable holding periods.
Holders of 3,176,100 of the outstanding shares have agreed not to offer, sell or
otherwise dispose of any of their shares for a period of 180 days after the
effective date of the Offering, without the prior written consent of John G.
Kinnard and Company, Incorporated. Sales of a substantial amount of the
currently outstanding shares of Common Stock in the public market may adversely
affect the market price of the Common Stock. See "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
9
<PAGE>
ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS AND UNDESIGNATED STOCK
The effect of certain provisions of the Minnesota Business Corporation Act
and the ability of the Board of Directors of the Company to issue preferred
stock from its class of 2,000,000 shares of undesignated stock without
shareholder approval may have the effect of delaying or preventing a change in
control or merger of the Company, which could operate to the detriment of other
shareholders. Further, the anti-takeover effects of the issuance of preferred
stock may deny shareholders the receipt of a premium on their Common Stock and
may also have a depressive effect on the market price. See "Description of
Securities."
IMMEDIATE, SUBSTANTIAL DILUTION TO PURCHASERS IN THE OFFERING
Purchasers of the Shares offered hereby will incur immediate and substantial
dilution in the net tangible book value of their purchased Shares (approximately
$6.79 per Share assuming an offering price of $9.50 per share). Investors may
also experience additional dilution as a result of the exercise of outstanding
stock options and warrants. See "Dilution."
NO DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying such dividends for the foreseeable future. See "Dividend
Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 Shares
offered to the public hereby at an assumed initial public offering price of
$9.50 per Share are estimated to be $12,850,000 ($14,816,500 if the
Underwriters' overallotment option is exercised in full) after deducting the
underwriting discount and estimated expenses of the Offering payable by the
Company. The Company currently intends to apply approximately $5,000,000 of
these proceeds to conduct human clinical trials, $2,000,000 to fund research and
development efforts and $1,000,000 for international sales and marketing
activities. The remaining proceeds and any additional proceeds received upon the
exercise of the overallotment option or the Representatives' Warrants are
intended to be used for working capital and general corporate purposes.
Pending utilization of the net proceeds of the Offering, the Company plans
to invest such net proceeds in short-term money market investments and/or
short-term investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain any earnings for use in the operation
and expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. See "Description of Securities."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1996 and as adjusted to reflect the sale by the Company of the 1,500,000
Shares offered to the public hereby at an assumed Price to Public of $9.50 per
Share. See "Use of Proceeds."
<TABLE>
<CAPTION>
MAY 31, 1996
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Stockholders' equity:
Class A Preferred Stock, no par value; 2,000,000 shares authorized; no
shares issued and outstanding......................................... $ -- $ --
Common Stock, no par value; 20,000,000 shares authorized; 3,713,220
shares issued and outstanding; 5,213,220 shares issued and
outstanding, as adjusted.............................................. 2,527,300 15,377,300
Contributed capital..................................................... 210,000 210,000
Deficit accumulated during the development stage........................ (1,417,400) (1,417,400)
------------- -------------
Total stockholders' equity............................................ $ 1,319,900 $ 14,169,900
------------- -------------
------------- -------------
</TABLE>
10
<PAGE>
DILUTION
The following gives effect to the issuance of the 1,500,000 Shares offered
hereby at an assumed Price to Public of $9.50 per Share, but does not give
effect to any exercise of outstanding options and warrants to purchase an
aggregate of 1,169,880 shares of Common Stock. The net tangible book value of
the Company's Common Stock at May 31, 1996 was $1,290,800 or $.35 per share.
"Net tangible book value" represents the tangible assets less total liabilities
of the Company, and "net tangible book value per share" was determined by
dividing the net tangible book value of the Company by the number of shares of
Common Stock outstanding on May 31, 1996. See "Capitalization." "Net tangible
book value dilution" represents the difference between the Price to Public per
Share and the net tangible book value per share after the Offering. Without
taking into account any changes in the Company's net tangible book value per
share after May 31, 1996, other than to give effect to the sale of the Shares
offered hereby at an assumed price of $9.50 per Share (net of the underwriting
discount and estimated expenses of the Offering), the net tangible book value of
the Company at May 31, 1996 would have been $14,140,800 or $2.71 per Share. This
represents an immediate increase in net tangible book value to the existing
shareholders of $2.36 per Share and an immediate net tangible book value
dilution to purchasers of the Shares of $6.79 per share, as illustrated by the
following table:
<TABLE>
<S> <C> <C>
Assumed Price to Public per Share............................. $ 9.50
Net tangible book value per share at May 31, 1996........... $ .35
Increase per share attributable to new investors............ 2.36
---------
Net tangible book value per share after the Offering.......... 2.71
---------
Net tangible book value dilution per Share to new investors... $ 6.79
---------
---------
</TABLE>
The following table summarizes the difference between the number of shares
of Common Stock purchased from the Company by officers, directors and principal
shareholders, by other current shareholders and by new investors in the
Offering, the total consideration paid to the Company and the average price paid
per share. The table assumes that none of the 1,500,000 Shares offered hereby
are purchased in the Offering by existing shareholders. To the extent existing
shareholders purchase in the Offering, their percentage ownership, total
consideration and average consideration per share will be greater than is shown.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Officers, directors and principal shareholders... 3,134,100 60.1% $ 1,598,100 9.5% $ .51
Other current shareholders....................... 579,120 11.1% 940,125 5.6% $ 1.62
New investors.................................... 1,500,000 28.8% 14,250,000 84.9% $ 9.50
---------- ----- ------------- -----
Total........................................ 5,213,220 100.0% $ 16,788,225 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of and for the period from
inception (August 1, 1994) through December 31, 1994, and as of and for the
fiscal year ended December 31, 1995 have been derived from the financial
statements of the Company which have been audited by McGladrey & Pullen, LLP,
independent auditors, whose report appears elsewhere in this Prospectus. The
financial data as of May 31, 1995 and 1996 and for the five month periods ended
May 31, 1995 and 1996 and for the period from inception (August 1, 1994) through
May 31, 1996 have been derived from the Company's unaudited financial
statements. The unaudited financial statements reflect, in the opinion of
management, all adjustments of a normal recurring nature necessary for a fair
presentation of financial position and results of operations. The results for
the five months ended May 31, 1996 are not necessarily indicative of the results
to be expected for the entire year. The selected financial data should be read
in conjunction with Management's Discussion and Analysis of Results of
Operations and Financial Condition and the Financial Statements and Notes
thereto, all of which are contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(AUGUST 1, FIVE MONTHS ENDED INCEPTION
1994) TO YEAR ENDED MAY 31, (AUGUST 1,
DECEMBER 31, DECEMBER 31, -------------------------- 1994) TO MAY
1994 1995 1995 1996 31, 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expense....... $ 33,500 $ 353,300 $ 109,000 $ 215,000 $ 601,900
General and administrative expense..... 73,700 164,800 48,600 309,700 548,200
Net loss............................... $ (108,900) $ (524,400) $ (159,200) $ (514,700) $ (1,148,000)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net loss per share..................... $ (0.03) $ (0.12) $ (.04) $ (.12)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares
outstanding.......................... 3,840,887 4,393,483 4,387,883 4,397,483
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
---------------------- ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 367,500 $ 415,200 $ 231,800 $ 1,244,600
Total assets................................................. 453,500 534,400 285,300 1,506,200
Total liabilities............................................ 247,900 277,400 218,900 186,300
Total stockholders' equity (1)............................... 205,600 257,100 66,400 1,319,900
</TABLE>
- ------------------------
(1) No dividends have been declared or paid on the Company's Common Stock.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a development stage enterprise. Since its inception in August
1994, the Company has been engaged in the research, development and testing of
Acyst. The Company acquired this technology from Brennen Medical, whose
principal shareholders are majority shareholders of the Company. To date the
Company has generated no revenues and has been unprofitable since inception. As
of May 31, 1996, the Company has an accumulated deficit of $1,417,400 and
expects that its operating losses will continue and increase due to significant
expenditures for clinical trials, regulatory matters, expansion of marketing and
sales activities and scale-up of commercial manufacturing capabilities. See
"Certain Transactions."
The Company was granted an IDE by the FDA and recently began human clinical
trials of Acyst. There can be no assurance that these clinical trials will be
successful, that the Company will receive FDA or other regulatory approval, that
Acyst will ever be successfully commercialized or achieve market acceptance,
that the Company will ever have significant sales, or that the Company will ever
achieve profitability. See "Risk Factors."
PLAN OF OPERATION
The Company plans to devote substantially all of its efforts during the next
eighteen months to conduct clinical trials and to obtain FDA and other
regulatory approval for Acyst. The Company also intends to expand its sales and
marketing capabilities in connection with its initial sales efforts in Europe
and other foreign markets and to further develop its commercial manufacturing
capabilities. It is anticipated that up to ten additional employees will be
hired and that expenditures related to manufacturing equipment will not be
significant. Research and development activities are anticipated to include
investigating and pursuing other applications related to the Company's existing
technology. The Company believes that its existing cash resources and the
proceeds to be obtained from the Offering will be sufficient to satisfy its cash
requirements over the next eighteen months.
RESULTS OF OPERATIONS
FIVE MONTHS ENDED MAY 31, 1996 COMPARED TO FIVE MONTHS ENDED MAY 31, 1995
Research and development expense includes costs associated with the
development and preclinical testing related to Acyst. Research and development
expenses were $215,000 in the 1996 period and $109,000 in the 1995 period. This
increase was primarily a result of additional personnel costs of $59,000 and
increased preclinical testing costs of $47,000. The preclinical testing costs
consist largely of payments to investigators and product costs for the
preclinical work. The Company anticipates that it will continue to devote
substantial resources for the foreseeable future to conducting clinical trials
and other regulatory matters.
General and administrative expenses were $309,700 in the 1996 period and
$48,600 in the 1995 period. The increase was due to a $160,000 non-cash charge
related to stock option grants, a $38,500 increase in compensation, and a
$62,500 increase in general operating costs including insurance, professional
fees and travel to support increased operating activities. The Company
anticipates that general and administrative expenses will continue to increase
during the foreseeable future with the building of its marketing and sales
efforts and increases in general operating costs associated with being a public
company.
Interest expense was $4,700 for the 1996 period and $6,700 for the 1995
period. Interest expense relates to interest incurred on a note payable to a
related party. This note payable was paid in full in May 1996.
Interest income was $14,800 for the 1996 period and $5,000 for the 1995
period. Interest income represents interest earned by the Company on its cash
balances. The increase between periods was due to a higher average cash balance,
resulting from proceeds received through sales of Common Stock, net of operating
expenses.
Net loss was $514,700 for the 1996 period and $159,200 for the 1995 period.
As discussed herein, the increase was primarily due to overall increases in
research and development and general and administrative expenses required to
support increased operating activities.
13
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO PERIOD FROM INCEPTION (AUGUST 1,
1994) TO DECEMBER 31, 1994
Research and development expenses were $353,300 for fiscal 1995 and $33,500
for the five month period from inception to December 31, 1994. This increase was
due to the combined effect of a full year of operations and significant
preclinical testing costs of $181,000 and consulting expenditures of $51,000 for
fiscal 1995. The preclinical testing costs consisted largely of payments to
investigators and product costs for the preclinical work.
General and administrative expenses were $164,800 in fiscal 1995 and $73,700
for the five month period from inception to December 31, 1994. This increase was
due to the combined effect of a full year of operations and overall increases in
costs due to increased activities. Significant costs in fiscal 1995 included
compensation of $120,000 and professional fees of $10,000.
Interest expense was $16,000 for fiscal 1995 and $3,300 for the five month
period from inception 1994. Interest expense relates solely to interest incurred
on a note payable to a related party.
Interest income was $9,700 in fiscal 1995 and $1,600 for the five month
period from inception to December 31, 1994. Interest income represents interest
earned on the Company's cash balances. The average cash balance was higher in
fiscal 1995 due to proceeds received from the sales of Common Stock, net of
operating expenses.
Net loss was $524,400 for fiscal 1995 and $108,900 for the five month period
from inception to December 31, 1994. As discussed, this was due to the effect of
a full year of operations and overall increases in research and development and
general and administrative expenses required to support higher levels of
activity.
As a result of the net losses in 1995 and 1994, the Company has net
operating loss ("NOL") carryforwards of $628,000 at December 31, 1995, which
will expire at various dates through 2010. These NOL carryforwards may be
subject to certain annual limitations, resulting from additional sales of equity
securities and other changes in ownership. Such events could limit the eventual
tax utilization of these NOL carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily through
the private sales of common stock. Through May 31, 1996, the Company had
received approximately $2.5 million in net proceeds through the private sales of
common stock. As of May 31, 1996, the Company had used cash of $812,300 to fund
operations, $65,100 to purchase equipment and intangible assets, $300,000 for
principal payments to Brennen Medical, Inc., a related party, for a note payable
under an asset purchase agreement, and had cash of $1,349,900 and working
capital of $1,244,600. See "Certain Transactions."
The Company expects to continue to incur substantial expense in support of
additional research and development activities, clinical trials, manufacturing
start up, establishment of a sales and marketing organization and ongoing
administrative activities. Although the Company believes that the net proceeds
from the Offering and its existing cash will be adequate to meet its cash needs
for at least 18 months, there can be no assurance that the Company will not
require additional financing within this time frame. In the event the Company
requires additional financing to support its operating requirements or for other
purposes, it may seek to raise such additional financing through public or
private equity financing or from other sources, and/or modify the timing of its
scheduled clinical trials and research and development activities. There can be
no assurance that financing from the Offering or any additional financing will
be available at all or that, if available, such financing would be obtainable on
terms favorable to the Company. See "Risk Factors -- Need for Additional
Capital" and "Use of Proceeds."
14
<PAGE>
INFLATION
Historically, inflation has not had a material impact on the Company. The
cost of the Company's products is influenced by the cost of raw materials and
labor. There can be no assurance that the Company will be able to pass on
increased costs to its customers in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which establishes a fair-value-based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company
has elected to continue to apply the intrinsic value-based method of accounting
for stock options.
BUSINESS
GENERAL
Advanced UroScience is developing Acyst, an injectable bulking agent, for
the treatment of stress urinary incontinence due to intrinsic sphincter
deficiency. Stress urinary incontinence is generally defined as the involuntary
loss of urine as a result of activities that increase intra-abdominal pressure,
such as coughing, laughing, exercising or simply standing up. Acyst is a
proprietary composition of pyrolytic carbon-coated micro-beads suspended in a
carrier gel. Acyst is designed to be injected into the mucosal lining of the
urethra at the neck of the bladder through a specially designed needle. The
injection procedure involves inserting the needle through a standard cystoscope,
allowing the physician to view the bulking of the tissue and the resulting
closure of the bladder opening. This minimally invasive outpatient procedure can
be accomplished in approximately 30 minutes and is designed to restore the
patient to urinary continence immediately after the injection procedure.
Advanced UroScience has recently commenced human clinical trials of Acyst at
the Mayo Clinic in Rochester, Minnesota under an IDE granted by the FDA. The
Company expects to use the data gathered in these trials to support an
application for a PMA from the FDA. The Company is also conducting human
clinical trials outside of the United States.
Advanced UroScience believes that Acyst offers significant advantages over
existing management and treatment options and commercially available injectable
bulking agents for sufferers of stress urinary incontinence caused by intrinsic
sphincter deficiency. Unlike adult diapers and pads, which are methods of
managing the problem, Acyst is designed to treat and improve the condition.
Acyst is designed to provide results immediately after injection, unlike
behavioral therapy and pelvic muscle training exercises, which can take several
weeks or months before results are achieved and require ongoing therapy. Acyst
was specifically designed to address the significant issues posed by
commercially available injectable bulking agents, namely, biocompatability,
migration and absorption. Acyst utilizes nonabsorbable, nonmigratory,
biocompatible micro-beads designed to be permanent, thereby minimizing the
potential need for retreatment.
It is estimated that there are at least 13 million people with urinary
incontinence in the United States, of which 85% are women. Approximately 9
million of the people with urinary incontinence suffer from stress urinary
incontinence. The Company believes that the majority of these people suffer from
varying degrees of instrinsic sphincter deficiency and may benefit from Acyst.
Initially, the Company will seek FDA approval to market Acyst for the treatment
of the severest forms of instrinsic sphincter deficiency, which the Company
believes affect approximately 1.5 million people. The Company intends to conduct
future human clinical trials to support expanded applications of Acyst. Although
urinary incontinence is most prevalent in the elderly, it is also common among
women under the age of 60. It is expected that urinary incontinence will
continue to be a significant health care problem for the adult female and
elderly populations and will, in fact, increase as the growing population
continues to age.
15
<PAGE>
The Company's current focus is to complete the human clinical trials of
Acyst and obtain approval to market from the FDA as well as approval to market
Acyst in countries outside of the United States. The Company's marketing
strategy will be to target the large number of women suffering from stress
urinary incontinence due to intrinsic sphincter deficiency by educating
physicians and other health care providers that treat these patients, the
patients themselves and the health care payers.
On August 1, 1994, the Company purchased for $300,000 all equipment, patents
and other intellectual property rights relating to Acyst from Brennen Medical
Inc., a company controlled by Mr. Timothy Lawin, Chairman of the Board of the
Company. A note for the purchase price was repaid in full in 1996. See Note 2 to
the Financial Statements.
URINARY INCONTINENCE
There are significant economic and social costs associated with urinary
incontinence. According to a 1996 publication from the United States Department
of Health and Human Services, direct costs associated with urinary incontinence
were estimated to exceed $15 billion annually. The perceived stigma associated
with urinary system dysfunction discourages sufferers from seeking treatment and
tends to hinder public awareness of the wide spread incidence of these
disorders. For the patients who are affected, the problems can be tremendous.
Patients suffering from urinary incontinence may withdraw from social
interaction with others, including friends and family, causing a degree of
emotional trauma to all concerned.
TYPES AND CAUSES OF URINARY INCONTINENCE
In the normal urinary tract, continence, or appropriate storage of urine, is
maintained by a complex interplay of anatomic structures. The urinary sphincter
is a muscle at the base of the bladder which surrounds the bladder neck and
urethra (the tube through which the urine flows when the bladder empties) and
aids the bladder in maintaining continence. In a normal system, the bladder neck
and urinary sphincter work in a coordinated fashion to act as a valve. The
various body components are under muscle control to maintain continence.
A malfunction in any part of the urinary tract system can result in urinary
incontinence. A broad range of conditions and disorders are believed to cause
urinary incontinence, including birth defects, injuries to the pelvic region or
to the spinal cord, neurological diseases and degenerative changes associated
with aging. The three major types of urinary incontinence are stress, urge and
mixed (a mixture of stress and urge) urinary incontinence.
Stress urinary incontinence 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. Stress urinary
incontinence is the most common type of urinary incontinence in women under the
age of 60. This condition varies in severity from those women who leak urine as
a result of certain sudden movements or physical activities to those who leak
urine simply upon standing up. It is generally believed that stress urinary
incontinence is caused by one of two conditions or a combination of them: (i)
hypermobility, a lack of anatomic stability caused primarily by weak tissue
around the bladder neck, which results in the abnormal movement of the bladder
neck and urethra in response to sufficient intra-abdominal pressure or exertion;
or (ii) intrinsic sphincter deficiency, the inability of the urinary sphincter
valve muscle to contract and sufficiently close the bladder neck.
Urge urinary incontinence refers to the involuntary loss of urine due to an
unwanted bladder contraction which is associated with a strong, uncontrollable
desire to urinate, often referred to as urgency. Causes of urge urinary
incontinence include an overactive bladder muscle, neurologic abnormalities,
such as those caused by a stroke, and urethral instability or abnormal
relaxation patterns.
NUMBER OF PEOPLE AFFECTED
The Agency for Health Care Policy and Research, an affiliate of the United
States Department of Health and Human Services reports that there are at least
13 million people with urinary incontinence in the United States, although exact
figures are difficult to obtain as a result of the believed under-reporting due
to
16
<PAGE>
the stigma associated with the condition. It is expected that urinary
incontinence will continue to be a significant health care problem in the adult
female, elderly and institutionalized populations and will increase as the
population continues to age.
Of the estimated 13 million people with urinary incontinence, the Company
believes that approximately 9 million suffer from stress urinary incontinence
due to either hypermobility or intrinsic sphincter deficiency, or some
combination thereof. The Company believes that stress urinary incontinence in
the majority of cases is due to a combination of hypermobility and instrinsic
sphincter deficiency. Initially, the Company will seek FDA approval to market
Acyst for the treatment of the severest forms of instrinsic sphincter
deficiency, which the Company believes affect approximately 1.5 million people.
The Company intends to conduct future human clinical trials to support expanded
applications of Acyst.
LIMITATIONS OF EXISTING URINARY INCONTINENCE MANAGEMENT AND TREATMENT OPTIONS
Urinary incontinence is currently managed and treated in a variety of ways.
In many cases the problem is simply managed through the use of adult diapers and
absorbent pads. Physicians currently treat urinary incontinence by following a
program that corresponds to the severity of the condition and the physician's
familiarity with the available management and treatment options discussed below.
DIAPERS AND ABSORBENT PADS. Most cases of urinary incontinence are not
treated but rather are managed through the use of adult diapers or absorbent
pads. The cost of these diapers and pads can be substantial and is usually not
covered by medical insurance, creating a continuous financial burden for the
patient. This management technique requires frequent changing of diapers and
pads to control odor and can be an embarrassment to the patient. However,
patients do have the convenience and privacy of purchasing these products
without seeing a physician. Industry sources suggest retail sales of adult
diapers and absorbent pads exceed $1 billion annually.
BEHAVIORAL THERAPY AND PELVIC MUSCLE TRAINING EXERCISES. Behavioral therapy
and related techniques include bladder and habit training, pelvic muscle
exercises (known as Kegel exercises), biofeedback and electrical stimulation.
These exercises 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 exercises can be enhanced by the use of vaginal cones,
egg shaped devices with the same shape and volume but with progressively more
weight. The patient is asked to retain the vaginal cone by contracting the
uro-genital diaphragm, which strengthens the muscles around the bladder. Pelvic
floor electrical stimulation devices can be used to augment other pelvic muscle
rehabilitation therapies. An electrical current is delivered to the patient
which stimulates the bladder muscles to contract thereby strengthening them to
achieve better bladder control. Adverse reactions are minimal but include pain
and discomfort.
These relatively non-invasive therapies could attract patients who would
otherwise not seek treatment. Although some patients will be cured and some will
improve, these treatments may be time consuming, take several weeks or months
before results are evident, present uncertain outcomes and must be adhered to
regularly. Further, if the pelvic exercises are done incorrectly, the urinary
incontinence can worsen.
VAGINAL AND URETHRAL INSERTS. Vaginal inserts are another form of
management for stress urinary incontinence that are less invasive than surgery.
Vaginal inserts are roughly the size and shape of contraceptive diaphragms and
are used to obstruct the bladder neck and urethra by applying pressure through
the neighboring vaginal cavity. While often helpful, these devices are seldom
completely effective in preventing leakage as it is difficult to fit a patient
properly and apply enough pressure to eliminate the leakage of urine without
causing pain. Other potential adverse side effects include vaginal discharge and
tissue erosion. Urethral inserts act as an expandable stopper to block the flow
of urine when inserted in the urethra. These products are not commercially
available in the United States, although they are currently undergoing human
clinical trials. Potential adverse side effects include urinary tract
infections, pain and tissue reactions.
PHARMACEUTICALS. Drug treatment is used to control multiple types of
urinary incontinence, including stress urinary incontinence due to intrinsic
sphincter deficiency. These drugs tend to fall into one of two categories; those
that affect the contraction of the muscle tissue of the bladder (urge urinary
incontinence)
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and those that improve the quality of the mucosal lining of the bladder neck and
urethra (stress urinary incontinence). The incidence of cure is low and the
potential side effects include urinary retention, nausea, dizziness, blurred
vision and the possibility of unwanted interactions with other drugs.
INDWELLING (FOLEY) CATHETERS. Variations of the indwelling, or Foley,
catheter are the main products used to control urinary incontinence in a medical
environment. Their use involves passing a catheter into the bladder via the
urethra and either clamping the end of the catheter at the exit point from the
body, or connecting the catheter to an external urine collection bag. Aside from
the constant 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.
SLING PROCEDURES. The sling procedure involves elevating and stabilizing
the urethra and the bladder neck to treat instrinsic sphincter deficiency. In
the 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. The surgical approach can be
either through the abdomen, the vagina or a combination of both. Surgeries of
this nature are delicate and complicated procedures in which the outcome depends
on a number of factors, including the degree of the pathology and the operating
physician's experience. Since this procedure is invasive, the potential for
severe complications exists. Though attempts have been made to minimize the
invasiveness of this procedure, the trauma is often significant and the cost of
the procedure high.
ARTIFICIAL SPHINCTERS. The implantable artificial sphincter is a miniature,
hydraulic medical device that requires an inflatable cuff be placed around the
urethra. The artificial sphincter requires a major surgical procedure and
hospitalization with the associated discomfort and high expense. Initial
complications are mainly associated with urethral or bladder injury during
implantation. Delayed complications include mechanical problems such as pump
malfunctioning, fluid leak or tubing kinks, infection and tissue atrophy.
INJECTABLE BULKING AGENTS. Bulking procedures involve the injection of the
bulking agent in the mucosal lining of the neck of the bladder, thereby closing
the bladder neck, allowing the patient to regain urinary control. Bulking
procedures are gaining acceptance as a method of treating certain types of
stress urinary incontinence. The 1996 Clinical Practice Guidelines published by
the United States Department of Health and Human Services recommend periurethral
bulking agents as first line treatment for men with intrinsic sphincter
deficiency and for women with intrinsic sphincter deficiency who do not have
co-existing hypermobility.
Bulking procedures have several advantages over other management and
treatment options for urinary incontinence due to intrinsic sphincter
deficiency. Adult diapers and absorbent pads can only manage the condition, but
bulking procedures are designed to return the patient to urinary control. Unlike
behavioral therapy and pelvic muscle training exercises, bulking procedures are
designed to provide results immediately following the injection procedure and
are not dependent on the patient complying with an ongoing exercise regimen that
requires the patient's active participation in the therapy. Bulking procedures
are designed to avoid many of the potential side effects of vaginal and urethral
inserts, pharmaceutical treatments, catheters and invasive surgical procedures.
In addition, because the bulking procedure can be accomplished on an outpatient
basis, this procedure can significantly reduce the costs associated with
surgery. Side effects that may be associated with injectable bulking agents are
urgency, pain on urination, retention and frequency during the first 24-hour
post-operative period.
The Company believes that, to be successful, an injectable bulking agent
must be biocompatible, must not migrate away from the injection site, must not
be absorbed by the body and must be cost effective. There are two major types of
commercially available injectable bulking agents, those of biological derivation
and those, like Acyst, that are based on synthetic materials.
Biologically derived bulking agents are absorbed by the body over time
thereby typically returning the patient to urinary incontinence. While this type
of bulking agent can prove initially successful, additional treatments with the
additional inconvenience and cost may be required to maintain the patient's
urinary
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<PAGE>
control. The major product in this category is made from a form of processed
bovine collagen. Additionally, some practitioners are harvesting the patient's
own fat and re-injecting it at the bladder neck. This procedure has the
additional disadvantage of increasing the complexity and invasiveness of the
patient's procedure.
The Company is aware of two synthetic bulking materials currently being used
for soft tissue augmentation in the urinary tract. The first of these is a
teflon paste, which consists of particles of polytetrafluoroethylene ("PTFE"),
glycerin and polysorbate. The particles of PTFE are generally in a size range of
1 to 100mm. The smaller particles in this size range have been associated with
migration in the body which has raised questions of safety. Periurethral
inflammatory reactions have been associated with the use of PTFE particles as
bulking agents.
Another synthetic product uses a combination of solid silicone particles and
polyvinylpyrrolidone ("PVP") gel. This product has not been approved for
marketing in the United States by the FDA. The use of silicone may be
controversial in the United States due to the unresolved issues relating to
silicone gel breast implants. Also, the product does have some particles that
are below a size threshold of 80mm where migration is believed to occur.
THE ADVANCED UROSCIENCE SOLUTION
Acyst is designed to provide the advantages of bulking procedures over the
other methods of managing and treating stress urinary incontinence due to
intrinsic sphincter deficiency while avoiding the principal drawbacks associated
with the commercially available injectable bulking agents, namely,
biocompatibility, migration and absorption. Like other injectable bulking
agents, Acyst is injected under the mucosal lining of the urethra to add bulk to
the tissue and close the opening in the urethra leading from the bladder,
thereby minimizing or eliminating involuntary urinary drainage in patients who
suffer from urinary incontinence.
Acyst is a proprietary composition of solid micro-beads coated with
pyrolytic carbon, which is the bulk-enhancing material, and a gel carrier
substance, which suspends the micro-beads, thus allowing the micro-beads to be
introduced through a needle to the injection site. The micro-beads are made of a
substrate material coated with pyrolytic carbon, giving them biocompatible
properties. The biocompatible nature of pyrolytic carbon coating has been
demonstrated through its extensive use in the heart valve industry since the
late 1960s. The synthetic nature and physical size of the solid micro-beads of
Acyst were selected by the Company to avoid absorption by the body, migration
from the injection site and the potential for chronic inflammatory tissue
response. The micro-bead size range chosen (251 to 300mm) is at a minimum more
than three times the particle size known to migrate in the body.
Acyst is packaged in a sterile syringe and is designed to be injected
through a specially designed needle that is inserted down a standard cystoscope.
During the injection process, the physician views the bladder neck through a
standard cystoscope and advances the needle under the mucosal lining of the
bladder neck. The injection site is viewed while injecting the material to
observe the expansion of the mucosal lining which results in increased volume or
bulk at the bladder neck. Typically a total of three or four milliliters of
Acyst will be injected in two or three sites at the bladder neck until the sides
of the bladder neck have closed due to the increase in bulk, allowing the
patient to regain control of urine flow.
This minimally invasive procedure in an outpatient setting is consistent
with newly established clinical practice guidelines for the treatment of urinary
incontinence that call for minimally invasive therapies to be attempted first.
The time required for implantation in patients is approximately 30 minutes and
is accomplished without surgical incision. It is anticipated that immediately
following the injection procedure, the patient is likely to experience results.
When Acyst is initially injected, the carrier gel acts as a transport medium
for the pyrolytic carbon coated micro-beads. Over a short period of time, the
body encapsulates the micro-beads with its own collagen, which results in
bulking.
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The Company believes Acyst will have several significant advantages over the
commercially available injectable bulking agents:
BIOCOMPATIBLE. The pyrolytic carbon coated micro-beads used in Acyst
were chosen for their demonstrated, long-term biocompatibility. Pyrolytic
carbon coating has been used by the heart valve industry since the late
1960s. Additionally, the size of the micro-beads was chosen to improve
biocompatibility by reducing the potential for chronic inflammatory tissue
response.
NO ABSORPTION. Since the micro-beads are synthetic, they will not be
absorbed by the body, thus minimizing the potential need for retreatment.
NO MIGRATION. The size of the micro-beads was specifically chosen to
prevent them from migrating away from the injection site. As a result, the
bulking remains in place.
COST EFFECTIVE. The injection of Acyst can be done using a minimally
invasive surgical procedure in an outpatient setting and is designed to
provide relief immediately following the injection procedure. As a result,
the Company believes Acyst to be a cost effective treatment option for the
patient.
DEVELOPMENT AND REGULATORY STATUS
Phase 1 clinical trials, designed to determine the safety and efficacy of
Acyst, recently commenced at the Mayo Clinic in Rochester, Minnesota, under an
IDE granted by the FDA. The Company is also conducting clinical trials outside
of the United States. It is anticipated that a total of 50 patients will be
injected with Acyst during the United States and foreign clinical trials.
The data gathered from Phase 1 clinical trials will be used to establish the
exact protocol for the final phase, Phase 2, clinical trials in the United
States. The Phase 2 clinical trials are designed to obtain data to support the
PMA that must be obtained from the FDA before Acyst can be marketed in the
United States. The Company anticipates that at least 200 patients will be
enrolled in approximately 10 sites throughout the United States. These patients
will be followed for two years after treatment to completely assess the safety
and efficacy of Acyst. The Company will make periodic reports to the FDA
concerning this phase of the clinical testing. There can be no assurance,
however, that the Company will ever receive marketing approval for Acyst from
the FDA. See "Risk Factors -- Early Stage of Clinical Testing; Uncertainty of
Regulatory Approval."
MARKETING STRATEGY
Advanced UroScience's Acyst is designed to treat stress urinary incontinence
due to intrinsic sphincter deficiency. The majority of people that suffer from
this condition are women. As a result, the Company will focus its marketing
effort on the physicians and other health care professionals that treat women,
including gynecology, urology, geriatrics and the developing specialty of
uro-gynecology.
The Company's strategy is to conduct an educational campaign to raise the
awareness of both physicians and patients of the availability of Acyst and its
potential advantages over the existing methods of treatment. The Company will
approach the physicians directly with a direct sales force in the United States
and a network of distributors outside of the United States.
To establish credibility for Acyst, it will be necessary to build a team of
respected medical consultants who conduct clinical evaluations and statistical
studies reflecting the benefits of the product. Further, they will be encouraged
to publish the results of their work in medical journals and act as
spokespersons for the Company at medical meetings and seminars once the product
has been given regulatory approval. Advanced UroScience also intends to maintain
a presence at appropriate medical conventions, meetings and seminars to inform
the physicians and other appropriate health care professionals of the existence
and uses for Acyst, giving information on the injection procedure and generating
sales leads.
The Company expects to begin marketing its product internationally before
the formal introduction in the United States. The Company has obtained a limited
number of export licenses and is seeking regulatory approvals to permit
international sales of Acyst. It is the intent of the Company to set up a sales
network of
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<PAGE>
foreign distributors to provide access to customers in the international
marketplace. Following receipt of the requisite FDA approvals, the Company
anticipates utilizing a direct sales force to market Acyst in the United States.
The Company has not yet established pricing for Acyst. The Company intends
to price the treatment at a level that will position Acyst at prevailing market
prices for other injectable bulking agents per treatment, currently estimated to
be approximately $1,100. The Company believes that this pricing could offer
considerable total savings over alternative treatment and management regimens
since the product is designed to eliminate the ongoing expense of adult diapers,
absorbent pads or additional treatments. The average selling price outside the
United States is expected to be less due to the reimbursement rates of various
national health plans and the Company's intention to use distributors.
RESEARCH AND DEVELOPMENT
To date, the Company has been engaged primarily in the research, development
and testing of Acyst. Since inception, the Company has incurred approximately
$601,900 in research and development expense. The Company believes that it is in
the final stages of its product development of Acyst, although it is continuing
to develop technology internally and with the assistance of outside research
expertise to optimize the materials and performance of Acyst and to further
develop its manufacturing processes. Management has allocated $5,000,000 of the
net proceeds of the Offering to conduct the requisite clinical trials of Acyst.
The Company hopes to develop concepts for new products and new product
applications, including the possible use of the injectable bulking agent for
other bulking applications. Of the net proceeds of the Offering, $2,000,000 has
been allocated for such research and development efforts.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are important to the Company's
business. Advanced UroScience uses patents and other techniques to protect its
proprietary technology. The Company's policy is to file patent applications to
protect technology, inventions and improvements that it believes are important
to its business. On September 19, 1995, a United States patent covering certain
aspects of Acyst was issued to the Company. The Company has filed one
corresponding Patent Cooperation Treaty application. However, there can be no
assurance that the Company's product will not be copied by competitors or that
claims will not be made that the Company's product infringes upon patents or
proprietary rights owned by others.
The Company also relies heavily upon trade secrets, know-how and continuing
technological innovation to develop a competitive position. The Company seeks to
maintain the confidentiality of its proprietary technology that may not be
covered by patent protection by requiring employees who work with proprietary
information to sign a confidentiality agreement and by limiting access by
parties outside the Company to such confidential information. There can be no
assurance, however, that these measures will prevent the unauthorized disclosure
or use of this information, or that others will not be able to independently
develop such information. Moreover, as is the case with any intellectual
property rights, enforcement by the Company of its legal rights can be lengthy
and costly, with no guarantee of success. See "Risk Factors -- Dependence on
Patents and Proprietary Rights."
COMPETITION
Competition in the urinary incontinence management and treatment products
market is intense. The Company's ability to compete in this market will depend
primarily upon physician, patient and health care payer acceptance of Acyst as a
safe, effective and cost effective treatment for stress urinary incontinence.
The Company's ability to compete in this market will also depend on the
consistency of its product quality and delivery and product pricing. Other
factors within and outside the Company's control include its product development
and innovation capabilities, its ability to obtain required regulatory
approvals, its ability to protect its proprietary technology, its manufacturing
and marketing capabilities and its ability to attract and retain skilled
employees.
Advanced UroScience views its competition on the basis of management of the
condition versus treatment of the condition. Management of the condition is
achieved through the use of adult diapers and absorbent pads. Current major
competitors who compete in this market include Kimberly-Clark Corp. and
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Procter & Gamble Co. In the treatment portion of the market current major
competitors are Empi, Inc. with its electrical pelvic floor stimulators, Abbott
Laboratories, Warners Wellcome, Hoechst Marion Roussell for the pharmaceutical
treatment; C. R. Bard, Inc., Kendall Co., Mentor Corp., ConvaTec Ltd. and Baxter
International for catheter/urine collection bag drainage systems; American
Medical Systems, Inc., a division of Pfizer, Boston Scientific and Johnson &
Johnson for the sling procedures and artificial sphincter implants; and C. R.
Bard, Inc., Mentor Corp. and Uroplasty, Inc. for injectable bulking agents. The
Company believes that some of its current competitors and others that do not
have injectable bulking products are also seeking to develop competing bulking
agents.
Many of the Company's competitors and potential competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Company. It is possible that other
large health care and consumer products companies may enter this industry in the
future. Furthermore, smaller companies, academic institutions, governmental
agencies and other public and private research organizations will continue to
conduct research, seek patent protection and establish arrangements for
commercializing products. Such products may compete directly with any products
which may be offered by the Company. Finally, competitors in the medical device
industry have in the past and may in the future employ litigation to gain a
competitive advantage.
REGULATORY AFFAIRS
Government regulation in the United States and in foreign countries are
significant factors in the Company's business. Under the 1976 amendments to the
Federal Food, Drug and Cosmetic Act (the "FDC Act") and regulations promulgated
thereunder, manufacturers of medical devices must comply with certain
regulations governing the testing, manufacture, packaging and marketing of
medical devices. Under the FDC Act, as amended, medical devices are classified
by the FDA into one of three classes, depending upon the degree of regulation
the FDA deems necessary to assure the safety and efficacy of the devices. Class
I devices are subject to only general controls, while Class II devices must
comply with certain specified performance standards, in addition to the general
controls. Class III medical devices (consisting of life support/life sustaining,
diagnostic or implanted devices) must receive premarket approval by the FDA
prior to their commercial distribution in the United States. The industry norm
for successful passage through the process for a Class III device is three to
seven years.
Acyst is considered a Class III device. As such, the FDA, with independent
protocol review and approval by participating medical institutions, must approve
the Company's application for an IDE, permitting clinical evaluations of
products on human subjects under controlled experimental conditions. The Company
recently commenced Phase 1 clinical trials at the Mayo Clinic in Rochester,
Minnesota under an IDE granted by the FDA. See "Business -- Development and
Regulatory Status."
The countries of the European Community ("EC") are moving towards common
regulatory requirements. By June 1998, all medical devices sold in those
countries must conform to the medical device directive of the EC. The directive
is designed to eliminate barriers to trade within that community. Until such
time as all devices conform to the medical device directive, many devices will
stay on the market in those countries through conformity with the applicable
national laws. There is, then, a parallel path for device manufacturers at this
time. The Company plans to evaluate both pathways, conformity with the EC
directive and national certification, in each of its key markets to determine
the most efficient method to market its products. Approval under the new EC
regime will permit manufacturers to affix a "CE" mark to their products, making
them eligible to be sold in all the countries of the EC.
THIRD-PARTY REIMBURSEMENT
Third-party payers such as private insurance companies, self-insured
employers, health maintenance organizations and governmental payers under
Medicare and Medicaid programs are an important source of reimbursement, but
there is no uniform policy on reimbursement among third-party payers. The Health
Care Financing Administration ("HCFA"), which sets rates for Medicare, has
stated that Medicare Part B will cover certain endoscopic injections of implant
material for urinary incontinence due to intrinsic sphincter deficiency. The
Company's Acyst may meet current criteria for reimbursement. Potential changes
in reimbursement could drive prices down and may adversely affect the Company's
reimbursement rates.
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Reimbursement authorities can also be considered customers of Advanced
UroScience. They are customers since often the payer will have to authorize
treatment prior to it being reimbursed. The Company will be proactive in
influencing both the Medicare/HCFA national programs and individual private
insurance firms. One aspect of doing this is to build "outcomes assessment" into
the clinical evaluation of the product. Outcomes assessment involves looking at
all the factors that are a part of a particular care regime and comparing the
results of that regime to others. In this way, the cost and relative efficacy of
a mode of treatment is evaluated not only independent of other treatments, but
in comparison to other standards.
PRODUCT LIABILITY
The medical products industry is subject to substantial litigation, and the
Company 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. 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 the clinical trials of Acyst
or the initial commercialization of Acyst. 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.
Consequently, a product liability claim 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. The Company currently maintains a product liability insurance policy in
the aggregate amount of $5,000,000.
MANUFACTURING
The Company will manufacture Acyst at its facilities from components and raw
materials obtained from outside suppliers. The Company will purchase the
micro-beads from qualified suppliers and send them to an outside vendor to be
coated with pyrolytic carbon. The Company will purchase the raw materials for
the carrier gel and formulate the carrier gel itself. The manufacturing process
will involve the Company mixing the beads with the carrier gel and filling
standard syringes with this mixture. The filled syringes will be packaged and
sent to an outside vendor for sterilization and returned to the Company for
final inspection.
Certain of the primary raw materials and components for the manufacture of
Acyst, such as the micro-beads and the material needed for the gel carrier, are
currently available to the Company from single sources. In the event that the
Company is unable to obtain these materials or components from its current
suppliers on acceptable terms and is required to replace its current raw
materials or components with alternatives, additional testing may be required in
order for Acyst to receive regulatory approval. The Company has no supply
agreements with any of its identified vendors, although the Company has entered
into a business relationship agreement regarding one of the main ingredients for
the carrier gel. See "Risk Factors -- Dependence on Suppliers."
The Company intends to conduct all of its manufacturing activities in a
class 1,000 clean room in accordance with Good Manufacturing Practices as
required by the FDA and/or ISO 9000 certification.
FACILITIES, EQUIPMENT AND PERSONNEL
Presently, the Company occupies office and laboratory space in a facility
located in St. Paul, Minnesota. The Company leases this space under a two-year
lease agreement, which began on May 1, 1996 and terminates on May 1, 1998. Lease
payments are made monthly at a rate of $3,000 per month. Presently, the Company
has six full-time employees and one part-time employee and expects to hire
additional staff as needed.
LITIGATION
The Company is not involved in any material litigation.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The directors, executive officers and key personnel of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------------------
<S> <C> <C>
Timothy P. Lawin (1) 35 Chairman of the Board of Directors and Chief Financial Officer
Dean A. Klein 42 President and Chief Executive Officer
Daniel A. White 44 Vice President -- Sales and Marketing
Thomas M. Jaeger 39 Director of Finance
Michael Czura 43 Director of Manufacturing
Richard G. Holcomb 46 Director of Regulatory Affairs
Bruce A. Lawin (2) 62 Director
Mark G. Nosbush (1)(2) 47 Director
Paul E. Colombo (2) 35 Director
James M. Knoblach (1) 38 Director
Harry E. Wells, III 54 Director
</TABLE>
- ------------------------
(1) Compensation Committee
(2) Audit Committee
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
of the Company are appointed by and serve at the discretion of the Board of
Directors. The Compensation Committee provides recommendations concerning
salaries and incentive compensation for employees of the Company and the Audit
Committee will review the results and scope of the audit and other services
provided by the Company's independent public accountants.
TIMOTHY P. LAWIN has served as the Chairman of the Board of Directors and
Chief Financial Officer of the Company since its inception. Mr. Lawin, the
founder of the Company, originally developed Acyst within Brennen Medical, Inc.,
a company specializing in wound care management, where he has served as Chief
Executive Officer and Chairman of the Board since its formation in 1993. From
1984 to 1993 Mr. Lawin was with Bioplasty, Inc., a medical device manufacturer
and distributor. He first served as controller of Bioplasty in 1984, was
appointed to executive vice president in 1989, served as president from 1991 to
1993, and chief executive officer from 1992 to 1993. Mr. Lawin was also a
director of Bioplasty from 1990 until 1993. From 1989 to 1991, Mr. Lawin served
as the Chairman of the Board for Bio Manufacturing, Inc., which was a related
manufacturing company of Bioplasty, Inc. Subsequent to Mr. Lawin's resignation
from Bioplasty, Inc. in 1993, Bioplasty, Inc. filed a petition for bankruptcy,
resulting from litigation regarding its breast implant product. Mr. Lawin holds
a B.A. degree in Accounting from the University of St. Thomas in St. Paul,
Minnesota. Mr. Bruce Lawin is Timothy Lawin's father.
DEAN A. KLEIN has served as the Company's President and Chief Executive
Officer since its inception in 1994. Mr. Klein was the President of the urology
products division of Brennen Medical, Inc. from May to August 1994 when that
division was transferred to the Company. From 1991 to 1994, Mr. Klein was
employed by Medical Care America as a General Manager of the Critical Care
America business units in Minneapolis, Minnesota and Omaha, Nebraska. From 1983
to 1991, Mr. Klein was employed in a variety of sales and management positions
with Baxter International, Physicians Diagnostics Division and its successor
MediSense, Inc. Mr. Klein's career in the medical products industry began in
1977 with Abbott Laboratories. He holds a B.S. degree in Pharmacy from North
Dakota State University.
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DANIEL A. WHITE joined the Company in November 1994 and serves as the
Company's Vice President -- Sales and Marketing. Mr. White has over fifteen
years of experience with implantable devices for the treatment of urological
disorders. From 1992 to 1994, Mr. White served as Vice President of Sales and
Marketing for Uroplasty, Inc. where he established international distribution
for that company's implantable urology product. Prior to that time, he served as
Vice President of Sales and Marketing for Bioplasty, Inc. from 1990 to 1992.
From 1981 to 1990, Mr. White was with American Medical Systems, Inc., a division
of Pfizer focused on the treatment of urologic dysfunctions including urinary
incontinence with implantable devices. Mr. White held a number of positions at
American Medical Systems, Inc. including most recently the Director of Domestic
Sales. Mr. White's career in the urology products industry began in 1978 with C.
R. Bard, Inc. He holds a degree in Business Administration from Mankato State
University.
THOMAS M. JAEGER has been the Company's Director of Finance since May 1996.
From 1988 to 1996, Mr. Jaeger served as the Chief Financial Officer of Winsor
Grain, Inc., a company involved in the international export of agricultural
commodities. From 1979 to 1988, he was employed by Arthur Andersen LLP where he
was audit manager for the last three years of his tenure there. Mr. Jaeger is a
Certified Public Accountant and received his B.S.B.A. in accounting from the
University of North Dakota.
MICHAEL CZURA has served as the Company's Director of Manufacturing since
January of 1996. From 1993 to 1996, Mr. Czura was employed by a medical division
of the Ascom Corporation, initially as Operations Manager and later as Director
of Quality Assurance. Mr. Czura was the Production Manager at CIMA Labs from
1991 to 1993. Prior to that time, Mr. Czura spent six years in a variety of
manufacturing related positions at The Upjohn Company. Mr. Czura holds a B.S.
degree in Industrial Engineering from Bradley University and a Masters in
Business Administration from Western Illinois University.
RICHARD G. HOLCOMB, PH.D. joined the Company on a part-time basis in May
1996 as Director of Regulatory Affairs. Dr. Holcomb consults on biostatistics,
clinical studies, and regulatory affairs to the medical device industry in the
United States and Europe and has served as the Company's regulatory affairs
consultant since inception. He has over 20 years experience in the medical
device industry with companies such as Diva Medical and Cardiac Pacemakers, Inc.
Dr. Holcomb has a B.S. degree from Michigan Tech. University and a M.S. degree
and Ph.D. degree from the University of Minnesota.
BRUCE A. LAWIN has been a director of the Company since its inception in
1994 and is Mr. Timothy Lawin's father. Mr. Lawin has served as President of The
Specialty Mfg. Co., a company that specializes in flow control products, plastic
injection molding and contract manufacturing since 1969. Mr. Lawin is a director
and a shareholder of Brennen Medical. Mr. Lawin holds a B.A. degree in Business
Administration from St. Cloud University.
MARK G. NOSBUSH has served as a director of the Company since February 1996.
Mr. Nosbush has served as Vice President of The Specialty Mfg. Co. since 1979.
Mr. Nosbush holds a B.A. from the University of Minnesota.
PAUL E. COLOMBO has served as a director of the Company since February 1996.
Mr. Colombo founded and has been the President of Chorus Corporation, a
multi-national company that specializes in the manufacture of semiconductor
processing equipment since 1986. Mr. Colombo holds a B.S. degree in engineering
from the University of Minnesota.
JAMES M. KNOBLACH has served as a director of the Company since February
1996. Mr. Knoblach founded and has served as President of North Star Resources,
an investment and venture capital firm, since 1995. Prior to that time, Mr.
Knoblach served as President of North Star Direct which he founded in 1987. From
1983 to 1985, Mr. Knoblach served as division manager for Genetics
International, Inc., the predecessor of MediSense, Inc. Mr. Knoblach is a
director of Harbinger Medical, Inc., a privately held medical device company.
Mr. Knoblach holds a M.B.A. from Harvard University, a M.A. from Georgetown
University, a B.S. from St. John's University and is a Certified Public
Accountant.
HARRY E. WELLS, III has served as a director of the Company since April
1996. Mr. Wells has been employed by Adams, Harkness & Hill, Inc. since 1969.
Mr. Wells has served as Managing Director in charge
25
<PAGE>
of Money Management since 1990 and prior to that served as Director of Research
from 1981 to 1990. Mr. Wells holds an B.A. from Albion College, M.B.A. from the
University of Michigan and is a Chartered Financial Analyst.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth certain information regarding compensation
earned or awarded to the President and Chief Executive Officer. No other
executive officer of the Company received annual salary and bonus compensation
in excess of $100,000 for 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -----------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- ----------------------------------------------- ------------ --------- --------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Dean A. Klein, ................................ 1994(1) $ 8,400 -- $ 1,100(2) 240,000
President and Chief Executive Officer 1995 $ 75,000 $ 35,000 $ 6,600(2) 30,000
</TABLE>
- ------------------------
(1) From the Company's date of inception (August 1, 1994) through December 31,
1994.
(2) Represents car allowance.
AGGREGATE OPTIONS EXERCISED IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995
The Chief Executive Officer did not exercise any options in 1995. The
following table sets forth certain information regarding the number and value of
exercisable and unexercisable options to purchase shares of Common Stock held as
of the end of the Company's 1995 fiscal year by the Chief Executive Officer:
AGGREGATED 1995 FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/95 AT 12/31/95 ($)(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C>
Dean A. Klein.......................................... 270,000 0 $ 151,200 0
</TABLE>
- ------------------------
(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value per share of Common Stock at
December 31, 1995 and the option exercise price per share multiplied by the
number of shares subject to options. The fair market value as of December
31, 1995 was $1.67 per share as determined by the Board of Directors, based
on the sales price of common stock sold through a private placement during
this time frame.
OPTIONS GRANTED
The following table sets forth the options that have been granted to the
Chief Executive Officer during the Company's last fiscal year ended December 31,
1995.
OPTION GRANTS IN FISCAL YEAR 1995
(Individual Grants)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SHARE) DATE
- ---------------------------------------------------- --------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Dean A. Klein....................................... 30,000(1) 18.5% $ 1.67 12/31/2005
</TABLE>
- ------------------------
(1) 100% vested on date of grant.
26
<PAGE>
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. Each member of
the current Board of Directors has received a nonqualified stock option to
purchase 12,000 shares of Common Stock. In addition, the 1996 Stock Option Plan
provides for the automatic grant to each director of a nonqualified option to
purchase 5,000 shares of Common Stock upon the completion of each year of
service.
EMPLOYMENT AGREEMENTS AND COMPENSATION PLANS
The Company does not currently have any employment agreements with its
executive officers. During 1994 and 1995, Mr. Klein was compensated pursuant to
the terms of an employment agreement which agreement was terminated on May 1,
1996.
Effective May 1, 1996, the Compensation Committee of the Board established a
management by objective compensation plan for the Chairman of the Board and the
Chief Executive Officer. Pursuant to this plan, these officers each receive an
annual base salary of $135,000 and are eligible to receive a bonus based upon
the accomplishment of certain business objectives.
STOCK OPTIONS
The Board of Directors and shareholders of the Company recently adopted the
1996 Stock Option Plan (the "Plan") in order to provide for the granting of
stock purchase options to employees, directors and officers of the Company. The
Plan permits the granting of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and also
nonqualified stock options which do not meet the requirements of Section 422.
The Company has reserved 500,000 shares of its Common Stock for issuance upon
exercise of options granted under the Plan. The Company has outstanding options
to purchase 599,880 shares outside of the Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation, as amended, limit the liability of
directors in their capacity as directors to the Company or its shareholders to
the full extent permitted by Minnesota law. The Articles provide that a director
shall not be liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for dividends, stock repurchases and other distributions
made in violation of Minnesota law or for violations of the Minnesota securities
laws, (iv) for any transaction from which the director derived an improper
personal benefit or (v) for any act or omission occurring prior to the effective
date of the provision in the Company's Articles of Incorporation, as amended,
limiting such liability. These provisions do not affect the availability of
equitable remedies, such as an action to enjoin or rescind a transaction
involving a breach of fiduciary duty, although, as a practical matter, equitable
relief may not be available. The above provisions also do not limit liability of
the directors for violations of, or relieve them from the necessity of complying
with, the federal securities law.
The Bylaws of the Company also provide that the Company will exercise, to
the extent permitted by law, its power of indemnification. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
CERTAIN TRANSACTIONS
Acyst product technology, patent application and certain relevant equipment
was acquired from Brennen Medical, Inc., whose principal shareholders are
majority shareholders of the Company. The terms of the acquisition included an
interest bearing note (8% per annum) in the amount of $300,000 of which $100,000
was paid in 1994 and $200,000 was paid in 1996. Total interest paid in
connection with this note was $24,000.
27
<PAGE>
On May 1, 1996, the Company entered into a two-year lease agreement with
Lawin Enterprises, LLC for the facilities presently occupied by the Company. The
lease covers approximately 2,700 square feet of office and laboratory space at a
rate of $3,000 per month and is on terms believed to be no less favorable to the
Company than those obtainable from an unrelated third party. Lawin Enterprises,
LLC is owned by Timothy Lawin, an executive officer, director and a principal
shareholder of the Company, and Bruce Lawin, a director and principal
shareholder of the Company.
Upon formation of the Company, Timothy Lawin purchased 1,512,000 shares at
aggregate purchase price of $70. Subsequently, Timothy Lawin transferred 756,000
to his wife, Lisa Lawin. In the December 1995 private placement by the Company,
Timothy Lawin purchased 7,500 units (each unit consisting of one share and one
warrant) and Brennen Medical, Inc. purchased 36,000 units at $1.67 per unit. In
the December 1994 private placement by the Company, Ms. Lawin purchased 120,000
shares at $.83 per share. In December 1995, Timothy Lawin received a ten-year
nonqualified stock option to purchase 30,000 shares at $1.67 per share.
Upon formation of the Company, Dean Klein purchased 108,000 shares at an
aggregate purchase price of $5. In the December 1994 private placement by the
Company, Mr. Klein purchased 60,600 shares at $.83 per share. In the December
1995 private placement by the Company, Mr. Klein purchased 7,500 units at $1.67
per unit. In August 1994, Mr. Klein received a ten-year nonqualified stock
option to purchase 240,000 shares at $1.04 per share. In December 1995, Mr.
Klein received a ten-year nonqualified stock option to purchase 30,000 shares at
$1.67 per share.
Upon formation of the Company, Bruce Lawin purchased 540,000 shares at an
aggregate purchase price of $25. In December 1994 and May 1995, Bruce Lawin
transferred an aggregate of 108,000 shares to his son, Timothy Lawin, 108,000
shares to his daughter-in-law, Lisa Lawin, and 108,000 shares to a trust for the
benefit of his granddaughter, Elizabeth Lawin. In the December 1994 private
placement by the Company, Bruce Lawin purchased 120,000 shares at $.83 per
share. In the December 1995 private placement by the Company, Bruce Lawin
purchased 30,000 units at $1.67 per unit. In December 1995, Bruce Lawin received
a ten-year nonqualified stock option to purchase 12,000 shares at $1.67 per
share.
28
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of the Shares offered hereby, certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) the Chief
Executive Officer and (iv) all executive officers and directors of the Company
as a group. The following information assumes that the named individuals will
not be purchasing any Shares in the Offering.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT BEFORE PERCENT AFTER
NAME AND ADDRESS OWNED (1) OFFERING OFFERING
- --------------------------------------------------- -------------------- ----------------- ---------------
<S> <C> <C> <C>
Timothy P. Lawin (2)(3)............................ 2,073,000 54.7% 39.2%
Dean A. Klein (2)(4)............................... 453,600 11.4% 8.3%
Bruce A. Lawin (5)(6).............................. 408,000 10.9% 7.8%
Mark G. Nosbush (7)................................ 27,000 * *
Paul E. Colombo (6)(8)............................. 192,000 5.1% 3.7%
James M. Knoblach (9).............................. 147,000 3.9% 2.8%
Harry E. Wells, III (10)........................... 162,000 4.3% 3.1%
Lisa Lawin (11).................................... 2,073,000 54.7% 39.2%
Marcellus P. Knoblach (12)......................... 390,000 10.0% 7.2%
All executive officers and directors as a group (8
persons) (13)..................................... 3,612,600 82.1% 61.2%
</TABLE>
- ------------------------
* Less than one percent.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of the date of the Prospectus, or
within 60 days of such date, are treated as outstanding when determining the
percent of the class owned by such individual and when determining the
percent owned by the group. For purposes of calculating the percent of class
owned after the Offering, it was assumed that the officers, directors and
principal shareholders will not be purchasing Shares in the Offering. Unless
otherwise indicated, each person named or included in the group has sole
voting and investment power with respect to the shares of Common Stock set
forth opposite the shareholder's name.
(2) The address of the executive officers is 1290 Hammond Road, St. Paul, MN
55110.
(3) Includes 984,000 shares held by Lisa Lawin (Mr. Timothy Lawin's wife),
108,000 shares held by Mr. Timothy Lawin's daughter, 36,000 shares held by
Brennen Medical (a corporation controlled by Mr. Timothy Lawin), 36,000
shares which may be purchased upon exercise of a currently exercisable
warrant held by Brennen Medical, and 37,500 shares which may be purchased
upon exercise of currently exercisable options and warrants held by Mr.
Timothy Lawin.
(4) Includes 277,500 shares which may be purchased upon exercise of currently
exercisable options and warrants.
(5) Mr. Bruce Lawin's address is 5858 Centerville Road, St. Paul, MN 55110.
(6) Includes 42,000 shares which may be purchased upon exercise of currently
exercisable options and warrants.
(7) Includes 19,500 shares which may be purchased upon exercise of currently
exercisable options and warrants. Mr. Nosbush's address is 5858 Centerville
Road, St. Paul, MN 55110.
(8) Mr. Colombo's address is 1290 Hammond Road, St. Paul, MN 55110.
29
<PAGE>
(9) Includes 72,000 shares which may be purchased upon exercise of currently
exercisable options and warrants. Mr. James Knoblach's address is 1552
Prairie Hill Road, St. Cloud, MN 56301.
(10) Includes 12,000 shares that are not outstanding but may be purchased upon
exercise of currently exercisable options and 150,000 shares held by Adams,
Harkness and Hill Partners Fund. Mr. Wells is the Managing Director in
charge of Money Management and a director of Adams, Harkness and Hill, Inc.
and a director of Adams, Harkness and Hill Partners Fund. His address is 60
State Street, 12th Floor, Boston, MA 02109.
(11) Includes 871,500 shares held by Timothy P. Lawin (Ms. Lawin's husband),
108,000 shares held by their daughter, 36,000 shares held by Brennen Medical
(a corporation controlled by Mr. Timothy Lawin), 36,000 shares which may be
purchased upon exercise of a currently exercisable warrant held by Brennen
Medical, and 37,500 shares which may be purchased upon exercise of currently
exercisable options and warrants held by Mr. Timothy Lawin. Ms. Lawin's
address is c/o Advanced UroScience, Inc., 1290 Hammond Road, St. Paul, MN
55110.
(12) Includes 180,000 shares which may be purchased upon exercise of a currently
exercisable warrant. Mr. Marcellus P. Knoblach's address is 4170 Thielman
Lane, St. Cloud, MN 56301.
(13) Includes 688,500 shares which may be purchased upon exercise of currently
exercisable options and warrants.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 22,000,000 shares of
capital stock, no par value, of which 20,000,000 shares are Common Stock and
2,000,000 shares are undesignated as to class ("Undesignated Stock"). In a
recent shareholders' meeting the Class A Preferred Stock was replaced with
Undesignated Stock. The Company has approximately 40 shareholders of record of
its capital stock.
COMMON STOCK
The Company has 3,713,220 shares of Common Stock issued and outstanding. The
holders of the Common Stock: (i) have equal ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all the assets
of the Company available for distribution to holders of the Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription or conversion rights and there are no
redemption or sinking fund provisions applicable thereto; and (iv) are entitled
to one vote per share on all matters which shareholders may vote on at all
meetings of shareholders. All shares of the Common Stock now outstanding are
fully paid and nonassessable.
The holders of the Common Stock do not have cumulative voting rights, which
means that the holders of more than 50 percent of such outstanding shares voting
for the election of directors can elect all of the directors of the Company to
be elected, if they so choose. In such event, the holders of the remaining
shares will not be able to elect any of the Company's directors.
UNDESIGNATED STOCK
Under governing Minnesota law and the Company's Amended Articles of
Incorporation, no action by the Company's shareholders is necessary, and only
action of the Board of Directors is required, to authorize the issuance of any
of the Undesignated Stock. The Board of Directors is empowered to establish, and
to designate the name of, each class or series of shares of the Undesignated
Stock and to set the terms of such shares (including terms with respect to
redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences). Accordingly, the Board of Directors, without
shareholder approval, may issue Undesignated Stock with terms (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences) that could adversely affect the
voting power and other rights of holders of the Common Stock.
The existence of Undesignated Stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common Stock,
to acquire control of the Company with a view to
30
<PAGE>
effecting a merger, sale or exchange of assets or a similar transaction. The
anti-takeover effects of the Undesignated Stock may deny shareholders the
receipt of a premium on their Common Stock and may also have a depressive effect
on the market price of the Common Stock.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Business Corporation Act provides that,
unless the acquisition of certain new percentages of voting control of the
Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or other
person is approved by the holders of a majority of the outstanding voting stock
other than shares held by the acquirer (if already a shareholder) and officers
and directors who are also employees of the Company, the shares acquired above
any such new percentage level of voting control will not be entitled to voting
rights. In addition, if the requirements of this Section are not satisfied, the
Company may redeem the shares so acquired by the acquirer at their market value.
Section 302A.671 generally does not apply to a cash offer to purchase all shares
of voting stock of the issuing corporation if such offer has been approved by a
majority vote of disinterested directors of the issuing corporation.
Section 302A.673 of the Minnesota Business Corporation Act restricts certain
transactions between the Company and a shareholder who becomes the beneficial
holder of 10% or more of any class of the Company's outstanding voting stock (an
"interested shareholder") unless a majority of the disinterested directors of
the Company have approved, prior to the date on which the shareholder acquired a
10% interest, either the business combination transaction suggested by such a
shareholder or the acquisition of shares that made such a shareholder a
statutory interested shareholder. If such prior approval is not obtained, this
section imposes a four-year prohibition from the interested shareholder's share
acquisition date on mergers, sales of substantial assets, loans, substantial
issuance of stock and various other transactions involving the Company and the
interested shareholder or its affiliates.
In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. The Section does not apply if a
committee of the Board consisting of all of its disinterested directors
(excluding present and former officers of the corporation) approves the
subsequent acquisition before the shares are acquired pursuant to the earlier
tender offer.
These statutory provisions could have the effect of delaying or preventing a
change in the control of the Company in a transaction or series of transactions
not approved by the Board of Directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Company's Common Stock
is Norwest Bank Minnesota, N.A.
31
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 3,713,200 shares of Common Stock. In addition,
as of the date of this Prospectus, the Company has outstanding 599,880 shares
reserved for issuance upon exercise of options granted. Of the 5,213,220 shares
to be outstanding after the Offering, 1,500,000 will be freely tradeable without
restrictions or registration under the Securities Act. The remaining 3,713,220
shares are subject to restrictions and will become transferable under Rule 144
after the expiration of applicable holding periods. Of the outstanding shares,
3,176,100 shares are subject to lockup agreements pursuant to which the holders
of such shares agreed not to offer, sell or otherwise dispose of any of their
shares for a period of 180 days after the effective date of the Offering,
without the prior written consent of John G. Kinnard and Company, Incorporated.
In general, under Rule 144 a person (or persons whose sales are aggregated)
who beneficially owns shares acquired privately from the Company or an affiliate
of the Company at least two years previously and an affiliate of the Company who
beneficially owns shares acquired (whether or not such shares were acquired
privately) from the Company or an affiliate of the Company at least two years
previously, are entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock or the average weekly trading volume in the Company's
Common Stock during the four calendar weeks preceding the filing of notice with
the Commission in connection with such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about the Company. A person who has
not been an affiliate of the Company at any time during the three months
preceding a sale and who beneficially owns shares acquired from the Company or
an affiliate of the Company at least three years previously is entitled to sell
all such shares under Rule 144 without regard to any of the limitations of the
Rule.
In addition, Rule 144A under the Securities Act, as currently in effect, in
general, permits unlimited resales of certain restricted securities of any
issuer provided that the purchaser is an institution that owns and invests on a
discretionary basis at least $100 million in securities or is a registered
broker-dealer that owns and invests $10 million in securities. Rule 144A allows
the existing shareholders of the Company to sell their shares to such
institutions and registered broker-dealers without regard to any volume or other
restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A
to nonaffiliates do not lose their status as restricted securities.
The Company cannot predict the effect, if any, that sales of the securities
subject to the previously described lockup or Rule 144 restrictions or the
availability of such securities for sale could have on the market price, if any,
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Company's securities, including the securities offered hereby, could adversely
affect prevailing market prices of the Company's securities and the Company's
ability to raise additional capital by occurring at a time when it would be
beneficial for the Company to sell securities.
32
<PAGE>
UNDERWRITING
The Underwriters named below, for which John G. Kinnard and Company,
Incorporated and Pennsylvania Merchant Group Ltd are acting as representative(s)
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement with the Company to purchase from the
Company the 1,500,000 shares of Common Stock offered hereby. The number of
Shares that each Underwriter has agreed to purchase is set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------- -----------------
<S> <C>
John G. Kinnard and Company, Incorporated..............
Pennsylvania Merchant Group Ltd........................
-----------------
Total.............................................. 1,500,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the 1,500,000 Shares offered hereby, if any are
purchased.
The Underwriters propose to offer the shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other brokers and dealers. After the initial public offering,
the Price to Public, concession and reallowance may be changed by the
Representatives. Additionally, the Company has agreed to pay the Representatives
their accountable expenses up to a maximum of $50,000. The Company has paid the
Representatives $10,000 as an advance against the accountable expenses.
The Company has granted the Underwriters an option exercisable within 30
days after the effective date of the Registration Statement of which this
Prospectus is a part, to purchase up to an additional 225,000 shares of Common
Stock at the Price to Public, less the Underwriting Discount shown on the cover
page of this Prospectus. The Underwriters may exercise such option only for the
purpose of covering any overallotments in the sale of the Shares of Common Stock
offered hereby.
The Company has agreed to sell to the Representatives, for nominal
consideration, warrants to purchase an aggregate of up to 150,000 shares of
Common Stock (the "Representatives' Warrants"). The Representatives' Warrants
may be exercised in whole or in part commencing twelve months after the
effective date of the Registration Statement of which this Prospectus is a part
and for a period of four years thereafter, at an exercise price equal to 120% of
the Price to Public. During the term of the Representatives' Warrants, they may
not be transferred, sold, assigned or hypothecated except to officers of the
Representatives. The Representatives' Warrants contain anti-dilution provisions
providing for appropriate adjustments on the occurrence of certain events, and
contains customary demand and participatory registration rights. Any profits
realized by the Representatives upon the sale of such warrant or the securities
issuable upon exercise thereof may be deemed to constitute additional
underwriting compensation.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriters and their controlling persons against civil
liabilities in connection with the Offering, including liabilities under the
Securities Act of 1933, as amended. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.
33
<PAGE>
Holders of Common Stock of the Company, who beneficially own in the
aggregate 3,176,100 shares, have agreed that they will not, without the prior
consent of John G. Kinnard and Company, Incorporated, publicly offer, sell or
grant any option to sell any securities of the Company in the open market or
otherwise for a period of 180 days from the effective date of the Offering.
Prior to the Offering there has been no public trading market for the Common
Stock. The initial public offering price of the Shares has been determined by
negotiations between the Company and the Representatives and bears no relation
to the Company's current earnings, book value, net worth or financial statement
criteria of value. Among the factors considered in such negotiations were
prevailing market conditions, estimates of the business potential of the
Company, the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representatives believed to be comparable to the Company and the present
state of the Company's development.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and the Representatives' Warrants and does not purport to be a
complete statement of their terms and conditions. The Underwriting Agreement and
the Representatives' Warrants have been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Fredrikson & Byron, P.A. Certain legal matters for the Underwriters
will be passed upon by Dorsey & Whitney LLP.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement have been audited by McGladrey &
Pullen, LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Prior to the Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. The Company has filed with
the Washington, D.C. Office of the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
sale of the Shares. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares, reference is made to the
Registration Statement, including the exhibits thereto. Statements contained in
this Prospectus as to 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. The Registration Statement may be inspected by anyone without charge
at the principal office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, or at one of the Commission's regional offices: 500 West Madison,
Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th Floor,
New York, New York, 10048. Copies of all or any part of such material may be
obtained upon payment of the prescribed fees from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to distribute to its shareholders annual reports
containing audited financial statements and interim reports containing unaudited
financial statements.
34
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.......................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and May 31, 1996 (unaudited).......... F-3
Statements of Operations for the Period from August 1, 1994 (Date of Inception) to
December 31, 1994, Year Ended December 31, 1995, Five Months Ended May 31, 1995 and
1996 (unaudited), and Period from August 1, 1994 to May 31, 1996 (unaudited).......... F-4
Statements of Stockholders' Equity for the Period from August 1, 1994 (Date of
Inception) to December 31, 1994, Year Ended December 31, 1995, Five Months Ended May
31, 1995 and 1996 (unaudited), and Period from August 1, 1994 to May 31, 1996
(unaudited)........................................................................... F-5
Statements of Cash Flows for the Period from August 1, 1994 (Date of Inception) to
December 31, 1994, Year Ended December 31, 1995, Five Months Ended May 31, 1995 and
1996 (unaudited), and Period from August 1, 1994 to May 31, 1996 (unaudited).......... F-6
Notes to Financial Statements......................................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Advanced UroScience, Inc.
St. Paul, Minnesota
We have audited the accompanying balance sheets of Advanced UroScience, Inc.
(A Development Stage Company) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for the period
since inception (August 1, 1994) through December 31, 1994 and for the year
ended December 31, 1995. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced UroScience, Inc. as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the period since inception (August 1, 1994) through December 31, 1994
and for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
January 26, 1996
F-2
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MAY 31,
1994 1995 1996
--------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 2)
Current Assets
Cash and cash equivalents.............................. $ 352,833 $ 474,749 $1,349,909
Other current assets................................... 62,630 17,849 80,980
--------- --------- ----------
TOTAL CURRENT ASSETS................................. 415,463 492,598 1,430,889
--------- --------- ----------
Equipment, less accumulated depreciation, 1994 -- $1,204,
1995 -- $6,839, 1996 -- $10,773........................ 16,921 18,364 46,182
Intangible Assets, less accumulated amortization 1994 --
$1,770,
1995 -- $7,087, 1996 -- $9,621......................... 21,160 23,484 29,124
--------- --------- ----------
TOTAL ASSETS..................................... $ 453,544 $ 534,446 $1,506,195
--------- --------- ----------
--------- --------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................... $ 35,367 $ 43,558 $ 96,195
Accrued expenses....................................... 12,562 33,805 90,068
--------- --------- ----------
TOTAL CURRENT LIABILITIES........................ 47,929 77,363 186,263
--------- --------- ----------
Related-Party Long-Term Debt (Note 2).................... 200,000 200,000 --
--------- --------- ----------
Commitments and Contingencies (Notes 3, 4, and 5)
Stockholders' Equity (Notes 2, 3, 4, and 6)
Class A preferred stock, no par value; 2,000,000 shares
authorized; no shares issued and outstanding......... -- -- --
Common stock, no par value; 20,000,000 shares
authorized; issued and outstanding: 1994 -- 2,811,600
shares; 1995 -- 3,170,220 shares, 1996 -- 3,713,220
shares............................................... 533,900 1,109,812 2,527,312
Contributed capital.................................... 50,000 50,000 210,000
Deficit accumulated during the development stage....... (378,285) (902,729) (1,417,380)
--------- --------- ----------
205,615 257,083 1,319,932
--------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 453,544 $ 534,446 $1,506,195
--------- --------- ----------
--------- --------- ----------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 1, 1994 AUGUST 1, 1994
(DATE OF FIVE MONTHS ENDED (DATE
INCEPTION), YEAR ENDED MAY 31, OF INCEPTION),
TO DECEMBER 31, DECEMBER 31, ------------------------- TO MAY 31,
1994 1995 1995 1996 1996
--------------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expenses
Research and development.... $ 33,504 $ 353,334 $ 108,973 $ 215,040 $ 601,878
General and administrative
(Notes 3 and 4)........... 73,705 164,771 48,574 309,732 548,208
Interest expense to related
party (Note 2)............ 3,333 16,000 6,667 4,667 24,000
--------------- ------------ ----------- ----------- --------------
110,542 534,105 164,214 529,439 1,174,086
--------------- ------------ ----------- ----------- --------------
Interest Income............... 1,632 9,661 4,972 14,788 26,081
--------------- ------------ ----------- ----------- --------------
NET LOSS.............. $ (108,910) $ (524,444) $ (159,242) $ (514,651) $ (1,148,005)
--------------- ------------ ----------- ----------- --------------
--------------- ------------ ----------- ----------- --------------
Net loss per share............ $ (0.03) $ (0.12) (0.04) $ (0.12)
--------------- ------------ ----------- -----------
--------------- ------------ ----------- -----------
Weighted average number of
common and common equivalent
shares outstanding.......... 3,840,887 4,393,483 4,387,883 4,397,483
--------------- ------------ ----------- -----------
--------------- ------------ ----------- -----------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO MAY 31, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE TOTAL
--------------------- CONTRIBUTED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
--------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, August 1, 1994 (Date
of Inception)............... -- $ -- $ -- $ -- $ --
Initial sale of common stock
in August 1994............ 2,160,000 100 -- -- 100
Acquisition of assets from
Brennen Medical (Note
2)........................ -- -- -- (269,375) (269,375)
Capital contribution from
Brennen (Note 3).......... -- -- 50,000 -- 50,000
Private placement issuance
of common stock in
November and December at
$0.83 per share, net of
stock issuance costs of
$9,200.................... 651,600 533,800 -- -- 533,800
Net loss.................... -- -- -- (108,910) (108,910)
--------- ---------- ----------- ----------- -------------
Balance, December 31, 1994.... 2,811,600 533,900 50,000 (378,285) 205,615
Private placement issuance
of common stock in
February at $0.83 per
share..................... 24,000 20,000 -- -- 20,000
Private placement issuance
of common stock in
November and December at
$1.67 per share, net of
stock issuance costs of
$1,713.................... 334,500 555,787 -- -- 555,787
Exercise of common stock
options at $1.04 per
share..................... 120 125 -- -- 125
Net loss.................... -- -- -- (524,444) (524,444)
--------- ---------- ----------- ----------- -------------
Balance, December 31, 1995.... 3,170,220 1,109,812 50,000 (902,729) 257,083
Private placement issuance
of common stock in January
and February at $1.67 per
share (unaudited)......... 235,500 392,500 -- -- 392,500
Private placement issuance
of common stock in April
and May at $3.33 per share
(unaudited)............... 307,500 1,025,000 -- -- 1,025,000
Compensation element of
common stock options
issued (unaudited) (Note
4)........................ -- -- 160,000 -- 160,000
Net loss (unaudited)........ -- -- -- (514,651) (514,651)
--------- ---------- ----------- ----------- -------------
Balance, May 31, 1996
(unaudited)................. 3,713,220 $2,527,312 $210,000 $(1,417,380) $1,319,932
--------- ---------- ----------- ----------- -------------
--------- ---------- ----------- ----------- -------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 1, 1994 AUGUST 1, 1994
(DATE FIVE MONTHS ENDED MAY 31, (DATE
OF INCEPTION), YEAR ENDED OF INCEPTION),
TO DECEMBER 31, DECEMBER 31, ------------------------- TO MAY 31,
1994 1995 1995 1996 1996
--------------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net loss.................... $(108,910) $(524,444) $(159,242) $ (514,651) $ (1,148,005)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation.............. 1,204 5,635 1,850 3,934 10,773
Amortization.............. 1,770 5,317 2,712 2,534 9,621
Noncash expenses (Notes 3
and 4).................. 50,000 -- -- 160,000 210,000
Changes in assets and
liabilities:
Other current assets.... (19,130) 1,281 7,692 (63,131) (80,980)
Accounts payable........ 35,367 8,191 (29,766) 52,637 96,195
Accrued expenses........ 12,562 21,243 741 56,263 90,068
--------------- ------------ ----------- ----------- --------------
NET CASH USED IN
OPERATING
ACTIVITIES.......... (27,137) (482,777) (176,013) (302,414) (812,328)
--------------- ------------ ----------- ----------- --------------
Cash Flows From Investing
Activities
Purchase of equipment....... -- (7,078) -- (31,752) (38,830)
Purchase of intangible
assets.................... (10,430) (7,641) (1,055) (8,174) (26,245)
--------------- ------------ ----------- ----------- --------------
NET CASH USED IN
INVESTING
ACTIVITIES.......... (10,430) (14,719) (1,055) (39,926) (65,075)
--------------- ------------ ----------- ----------- --------------
Cash Flows From Financing
Activities
Net proceeds from issuance
of common stock........... 490,400 619,412 62,500 1,417,500 2,527,312
Payments on note payable to
related party............. (100,000) -- -- (200,000) (300,000)
--------------- ------------ ----------- ----------- --------------
NET CASH PROVIDED BY
FINANCING
ACTIVITIES.......... 390,400 619,412 62,500 1,217,500 2,227,312
--------------- ------------ ----------- ----------- --------------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS......... 352,833 121,916 (114,568) 875,160 1,349,909
Cash and cash equivalents:
Beginning................... -- 352,833 352,833 474,749 --
--------------- ------------ ----------- ----------- --------------
Ending...................... $ 352,833 $ 474,749 $ 238,265 $ 1,349,909 $ 1,349,909
--------------- ------------ ----------- ----------- --------------
--------------- ------------ ----------- ----------- --------------
</TABLE>
F-6
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 1, 1994 AUGUST 1, 1994
(DATE OF FIVE MONTHS ENDED MAY 31, (DATE
INCEPTION), TO YEAR ENDED OF INCEPTION),
DECEMBER 31, DECEMBER 31, ------------------------- TO MAY 31,
1994 1995 1995 1996 1996
--------------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental Disclosures of
Cash Flow Information
Cash payments for
interest.................. $ -- $ 18,166 $ 8,000 $ 5,834 $ 24,000
--------------- ------------ ----------- ----------- --------------
--------------- ------------ ----------- ----------- --------------
Supplemental Schedule of
Noncash Investing and
Financing Activities
Acquisition of assets of
Brennen Medical (Note 2):
Cash purchase price....... $ -- $ -- $ -- $ -- $ --
--------------- ------------ ----------- ----------- --------------
--------------- ------------ ----------- ----------- --------------
Carrying value of
equipment acquired...... $ 18,125 $ -- $ -- $ -- $ 18,125
Carrying value of
intangibles acquired.... 12,500 -- -- -- 12,500
Issuance of note
payable................. (300,000) -- -- -- (300,000)
Distribution to Brennen's
stockholders............ 269,375 -- -- -- 269,375
--------------- ------------ ----------- ----------- --------------
$ -- $ -- $ -- $ -- $ --
--------------- ------------ ----------- ----------- --------------
--------------- ------------ ----------- ----------- --------------
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS, DEVELOPMENT STAGE RISKS, AND SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS: Advanced UroScience, Inc.
(the Company) was incorporated on July 27, 1994 for the purpose of manufacturing
and selling medical products specifically designed to correct human urinary
incontinence. The technology for the Company's first and only product currently
under development was purchased from Brennen Medical, Inc. (Brennen), a company
related through common majority owners (see Note 2). The Company will be
required to obtain regulatory approval from the Food and Drug Administration
(FDA) prior to selling the product within the United States. Foreign regulatory
approval must also be obtained prior to selling the product internationally.
The Company is in the development stage and has yet to obtain regulatory
approval for its product. The Company is currently beginning the preliminary
phase of the clinical trials of their product. In order to obtain regulatory
approval, the Company must satisfactorily complete clinical trials which will
result in significant costs to the Company. The Company will be unable to
complete their United States clinical trials unless additional capital is
raised. Even if the required capital is raised and the clinical trials are
completed, there is no assurance that regulatory approval will be obtained and,
if obtained, that a market will develop for the Company's product. Additionally,
substantial time may pass before significant revenue may be realized by the
Company. In addition to the proceeds from the private placements of common stock
received subsequent to year end, the Company plans to raise the needed capital
through a public offering of common stock.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers all unrestricted cash and Treasury bills, commercial paper,
and money market funds with an original maturity of three months or less to be
cash equivalents.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ
from those estimates.
CONCENTRATIONS OF RISK: The Company maintains deposits at banks which, at
times, exceed federally insured limits and in money market accounts which are
not federally insured. The Company has not experienced any losses in such
accounts.
Certain of the raw materials and components for the manufacture of its
product are available only from single sources. In the event that the Company is
unable to maintain these single sources of supply and is required to replace its
current raw materials or components with alternatives, additional testing may be
required in order to receive regulatory approval. Any interruption in the supply
of raw materials or components currently used by the Company or the usage of any
alternatives could adversely affect the Company's operations.
RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development
are charged to operations as incurred.
EQUIPMENT: Depreciation of equipment is computed over estimated useful
lives of five to seven years using accelerated methods.
INTANGIBLE ASSETS: Intangible assets, consisting of organizational costs
and patents, are amortized on the straight-line basis over five years.
F-8
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS, DEVELOPMENT STAGE RISKS, AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LOSS PER COMMON AND COMMON EQUIVALENT SHARE: The net loss per common and
common equivalent share is based upon the weighted average number of common and
common equivalent shares outstanding during each period. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, stock issued and stock
options and warrants granted with exercise prices below the assumed initial
public offering price during the 12 month period preceding the date of the
initial filing of the Registration Statement have been included in the
calculation as if they were outstanding for all periods presented using the
treasury stock method. The weighted average number of common and common
equivalent shares outstanding and the net loss per share have been adjusted for
all periods presented to reflect the stock split described in Note 6.
INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
operating loss 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. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
CASH EQUIVALENTS: The carrying amount approximates fair value.
LONG-TERM DEBT: The fair value of the long-term debt is estimated based
on interest rates for the same or similar debt offered to the Company having
the same or similar remaining maturities and collateral requirements. The
carrying value of the long-term debt approximates fair value.
RECENTLY ISSUED ACCOUNTING STANDARDS: In October 1995, the FASB issued SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which establishes a
fair-value-based method for financial accounting and reporting for stock-based
employee compensation plans. However, the new standard allows compensation to
continue to be measured by using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, but requires expanded disclosures. SFAS No. 123 is
effective in fiscal year 1996. The Company has elected to continue to apply the
intrinsic value-based method of accounting for stock options.
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and
notes related thereto as of May 31, 1996, and for the five-month period ended
May 31, 1995 and 1996, and from August 1, 1994 (date of inception), to May 31,
1996, are unaudited, but in the opinion of management include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations. The operating
results for the interim periods are not indicative of the operating results to
be expected for a full year or for other interim periods. Not all disclosures
required by generally accepted accounting principles necessary for a complete
presentation have been included.
NOTE 2. ASSET PURCHASE FROM RELATED PARTY
On August 1, 1994, the Company purchased certain assets of Brennen relating
to a product to treat urinary incontinence (as discussed in Note 1) for
$300,000. The note bears interest at 8 percent per annum and is payable monthly.
Interest expense of $3,333 and $16,000 was incurred under this note agreement
for
F-9
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ASSET PURCHASE FROM RELATED PARTY (CONTINUED)
the period ended December 31, 1994 and the year ended December 31, 1995,
respectively. The note is secured by substantially all the assets of the
Company. $100,000 was repaid on the note in December, 1994 with the balance
repaid in 1996.
The approximate total value of the assets purchased was as follows:
<TABLE>
<S> <C>
Equipment.......................................................... $ 18,125
Intangibles........................................................ 12,500
---------
TOTAL ASSETS PURCHASED......................................... $ 30,625
---------
---------
</TABLE>
Because the Company and Brennen are under common control, the Company, for
accounting purposes, is precluded from recording the acquired assets at any
amount other than Brennen's carrying cost. Accordingly, the excess purchase
price of $269,375 has been treated as a distribution to Brennen's stockholders
and is recorded as a charge directly to deficit accumulated during development
stage.
NOTE 3. RELATED-PARTY TRANSACTIONS
CONTRIBUTED CAPITAL: During the period from August 1, 1994 to November 1,
1994, Brennen agreed to pay, on the Company's behalf, certain operating expenses
(primarily salary, rent, and certain administrative expenses) amounting to
$50,000. As those expenses were incurred by the Company and paid by Brennen, the
Company expensed those amounts and recorded a credit in the same amount to
contributed capital.
OPERATING LEASE: Through April, 1996, the Company subleased its office and
research facility from Brennen on a monthly basis. Rent expense to Brennen
amounted to $1,000 for the period ended December 31, 1994, $6,000 for the year
ended December 31, 1995. In May, 1996, the Company signed a two year lease
directly with the landlord (also a related party) for $36,000 annually.
NOTE 4. STOCKHOLDER TRANSACTIONS
STOCK ISSUANCE AND WARRANT ARRANGEMENTS: Since inception, the Company has
raised approximately $2.5 million from the issuance of common stock through
private placements. During 1995, the Company had a private placement which
resulted in the issuance of a total of 334,500 shares of common stock. Under the
1995 Private Placement Agreement, each investor was also granted one warrant for
each share of common stock purchased. Each warrant allows the investor to
purchase one additional share of common stock at $1.67 per share. A total of
334,500 warrants are exercisable and outstanding at December 31, 1995. These
warrants expire during fiscal 2000.
F-10
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. STOCKHOLDER TRANSACTIONS (CONTINUED)
STOCK OPTIONS: The Company granted nonqualified options to purchase 600,000
shares of common stock to certain employees, directors, and other individuals.
All options are currently exercisable. A summary of outstanding stock options
follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
SHARES PRICE DATE
------------ ------------- -------------
<S> <C> <C> <C>
Balance, August 1, 1994 (date of inception)
Options granted.......................................... 300,000 $ 0.83 - 1.04 2004
------------ -------------
Balance, December 31, 1994................................. 300,000 0.83 - 1.04
Options granted.......................................... 210,000 1.04 - 1.67 2000 - 2005
Options exercised........................................ (120) 1.04
------------ -------------
Balance, December 31, 1995................................. 509,880 0.83 - 1.67 2000 - 2005
Options granted.......................................... 90,000 1.67 - 3.33 2006
------------ -------------
Balance, May 31, 1996...................................... 599,880 $ 0.83 - 3.33 2000 - 2006
------------ -------------
------------ -------------
</TABLE>
The 1994 and 1995 options were granted at prices which approximated the fair
value on the dates of grant and, accordingly, no compensation expense was
recorded. In 1996, compensation expense of $160,000 was recorded related to
option grants.
NOTE 5. INCOME TAXES
The components of deferred taxes at December 31, 1994 and 1995, are as
follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.............................................. $ 40,000 $ 220,000
Tax credits................................................................... -- 11,000
Amortization of Brennen asset purchase (1).................................... 92,000 85,000
Valuation allowance........................................................... (132,000) (316,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) As discussed in Note 2, the excess purchase price related to the Brennen
asset purchase was recorded as a distribution for financial reporting
purposes. For tax purposes, the amount is amortized over a fifteen year
period. Accordingly, at inception, the Company recorded a valuation
allowance of $95,000 on this deferred tax asset.
At December 31, 1995, the Company recorded a valuation allowance of $316,000
on the deferred tax assets to reduce the total to an amount that management
believes will ultimately be realized. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period that
deductible temporary differences and carryforwards are expected to be available
to reduce taxable income.
The Company's income tax benefit differed from the statutory federal rate as
follows:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Statutory rate applied to loss before tax...................................... $ (37,000) $ (184,000)
Change in valuation allowance.................................................. 37,000 184,000
---------- -----------
$ -- $ --
---------- -----------
---------- -----------
</TABLE>
F-11
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES (CONTINUED)
At December 31, 1995, the Company had net operating losses of approximately
$628,000 expiring as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
- ------------------------------------------------------------------------ ----------
<S> <C>
2009.................................................................... $ 116,000
2010.................................................................... 512,000
</TABLE>
These net operating losses may be subject to certain annual limitations
resulting from future stock offerings.
NOTE 6. SUBSEQUENT EVENTS (UNAUDITED)
STOCK SPLIT: In May, 1996, the Company effected a six for five common stock
split. The effect of this common stock split has been retroactively reflected in
these financial statements and notes for all periods presented.
PRIVATE PLACEMENTS: Subsequent to December 31, 1995, the Company completed
its 1995 private placement by selling an additional 235,500 shares of common
stock, resulting in proceeds of approximately $392,500. In connection with these
sales of common stock, an additional 235,500 of warrants were granted at an
exercise price of $1.67 per share.
In May, 1996, the Company completed a private placement with the sale of
307,500 shares of common stock at $3.33 per share for proceeds of $1,025,000.
PUBLIC OFFERING: On May 23, 1996, the Company signed a letter of intent
with an investment banker to undertake a public offering of 1,500,000 shares of
common stock at a price based on market conditions at the time of effectiveness.
The letter of intent includes an overallotment option to sell an additional
225,000 shares and provides that the Company will issue the investment banker a
warrant for the purchase of 150,000 shares. The Company plans to use the
proceeds to conduct clinical trials, for sales and marketing, research and
development, and general corporate purposes.
STOCK OPTIONS: On June 25, 1996, the Board of Directors adopted, and the
shareholders subsequently approved, the 1996 Stock Option Plan. The Company has
reserved 500,000 shares of its common stock for issuance upon exercise of
options under the plan.
COMPENSATION PLANS: Effective May 1, 1996, the Compensation Committee of
the Board established a management by objective compensation plan for the
Chairman of the Board and the Chief Executive Officer. Pursuant to this plan,
these officers each receive an annual salary of $135,000 and are eligible to
receive a bonus based upon the accomplishment of certain business objectives.
The Company does not have any employment agreements with its executive officers.
CAPITAL STOCK: Subsequent to year end, the Company amended its Articles of
Incorporation to provide for 22,000,000 shares which shall have no par value.
The resolution further provided the shares shall consist of 20,000,000 shares of
common stock, 2,000,000 undesignated shares, and canceled the Class A preferred.
F-12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE AFFAIRS OF THE COMPANY SINCE THAT DATE HEREOF OR THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 10
Dividend Policy................................ 10
Capitalization................................. 10
Dilution....................................... 11
Selected Financial Data........................ 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 13
Business....................................... 15
Management..................................... 24
Certain Transactions........................... 27
Principal Shareholders......................... 29
Description of Securities...................... 30
Shares Eligible for Future Sale................ 32
Underwriting................................... 33
Legal Matter................................... 34
Experts........................................ 34
Available Information.......................... 34
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JOHN G. KINNARD AND COMPANY,
INCORPORATED
PENNSYLVANIA MERCHANT GROUP LTD
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company involving service as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3,
requires payment by the Company, upon written request, of reasonable expenses in
advance of final disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested majority of the Board
of Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
shareholders, or by a court.
Provisions regarding indemnification of officers and directors of the
Company are contained in Bylaw 37 of the Company's Bylaws (Exhibit 3.2 to this
Registration Statement).
The Company maintains a director and officer liability policy.
Under Section 6 of the Underwriting Agreement, filed as Exhibit 1.1 hereto,
the Underwriters agree to indemnify, under certain conditions, the Company, its
directors, certain of its officers and persons who control the Company within
the meaning of the Securities Act of 1933, as amended, against certain
liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC registration fee, NASD fee and Nasdaq listing fee, are
estimated.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 5,949
NASD Fee.......................................................... 2,225
Nasdaq National Market Listing Fee................................ 29,000
Legal Fees........................................................ 75,000
Representatives' Accountable Expenses............................. 50,000
Accountants' Fees and Expenses.................................... 40,000
Printing Expenses................................................. 40,000
Blue Sky Fees and Expenses........................................ 5,000
Miscellaneous..................................................... 12,826
---------
Total........................................................... $ 260,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the securities listed
below pursuant to exemptions from registration under the Securities Act. The
information below is presented on a post-stock split basis.
II-1
<PAGE>
1. In August 1994, an aggregate of 2,160,000 shares of Common Stock were
issued at an aggregate purchase price of $100 as follows: 1,512,000 shares to
Timothy Lawin, 540,000 shares to Bruce Lawin and 108,000 shares to Mr. Klein.
2. From December 1994 through February 1995, an aggregate of 675,600 shares
of Common Stock were issued at $0.83 per share pursuant to a private placement.
Of the 675,600 shares sold in the private placement, 120,000 shares were
purchased by each of Bruce Lawin, Mr. Colombo and Ms. Lawin, 60,600 shares were
purchased by Mr. Klein.
3. In December 1995, 120 shares of Common Stock were purchased at $1.04 per
share by a consultant to the Company in connection with an exercise of an
option.
4. In November 1995, units consisting of 240,000 shares of Common Stock and
warrants to purchase 240,000 shares of Common Stock at an exercise price of
$1.67, were sold at $1.67 per share in a private placement to James Knoblach
(60,000 units) and Mark Knoblach (180,000 units).
5. From December 1995 through February 1996, units consisting of 330,000
shares of Common Stock and warrants to purchase 330,000 shares of Common Stock
at an exercise price of $1.67 per share were sold at $1.67 per share in a
private placement. Of the total 330,000 units sold in the private placement,
30,000 were purchased by Bruce Lawin, 7,500 were purchased by Timothy Lawin,
7,500 were purchased by Mr. Klein, 30,000 were purchased by Mr. Colombo, 7,500
were purchased by Mr. Nosbush and 36,000 were purchased by Brennen Medical, Inc.
6. In April 1996 and May 1996, an aggregate of 307,500 shares of Common
Stock were issued at $3.33 per share pursuant to a private placement. Of the
307,500 shares sold in the private placement, 30,000 shares were purchased by
Mark Knoblach, 15,000 were purchased by James Knoblach and 150,000 shares were
purchased by Adams, Harkness & Hill Partners Fund of which Harry Wells is a
director.
The sales of securities above were made in reliance upon Section 4(2) and
Regulation D of the Securities Act, which provide exemptions for transactions
not involving a public offering. The purchasers of securities described above
acquired them for their own account and not with a view to any distribution
thereof to the public. The certificates evidencing the securities bear legends
stating that the shares are not to be offered, sold or transferred other than
pursuant to an effective registration statement under the Securities Act, or an
exemption from such registration requirements. No underwriting commissions or
discounts were paid with respect to the sales of unregistered securities
described above.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement, including form of Representatives' Warrants
3.1 Articles of Incorporation, as amended
3.2 Amended and Restated Bylaws
4.1 Form of Stock Certificate
4.2 Articles of Incorporation, as amended (filed as Exhibit 3.1)
4.3 Amended and Restated Bylaws (filed as Exhibit 3.2)
4.4 Form of Representatives' Warrants (filed as part of Exhibit 1.1)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.
10.1 1996 Stock Option Plan
10.2 Form of Stock Option Agreement
10.3 Form of Stock Purchase Warrant
10.4 Agreement for Purchase and Sale from Brennen Medical, Inc. of Urology Business and Assets dated August
1, 1994
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.5 Employment Agreement with Dean A. Klein dated August 1, 1994, including consent to termination of
employment agreement
10.6 Lease Agreement by and between Lawin Enterprises, Inc. and the Registrant dated May 1, 1996
10.7 Business Relationship Agreement (to be filed by amendment)
11 Statement re computation of per share earnings
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2 Consent of McGladrey & Pullen, LLP independent public accountants
24 Power of Attorney (included on signature page of the Registration Statement)
27 Financial Data Schedule
</TABLE>
ITEM 28. 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 Securities Act
of 1933 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 Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant further 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.
(3) It will provide to the underwriters at the closing 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on August 6, 1996.
ADVANCED UROSCIENCE, INC.
By /s/ DEAN A. KLEIN
------------------------------------
Dean A. Klein,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
SIGNATURES TITLE
- ----------------------------------- -------------------------
Chairman of the Board,
* Chief Financial Officer
- ----------------------------------- (principal financial and
Timothy P. Lawin accounting officer)
/s/ DEAN A. KLEIN
- ----------------------------------- President and Chief
Dean A. Klein Executive Officer
*
- ----------------------------------- Director
Bruce A. Lawin
*
- ----------------------------------- Director
Mark G. Nosbush
*
- ----------------------------------- Director
Paul E. Colombo
*
- ----------------------------------- Director
James M. Knoblach
*
- ----------------------------------- Director
Harry E. Wells, III
*By /s/ DEAN A.
KLEIN
- -----------------------------------
Dean A. Klein
ATTORNEY-IN-FACT
August 6, 1996
II-4
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
ADVANCED UROSCIENCE, INC.
EXHIBIT INDEX TO FORM SB-2
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement, including form of Representatives' Warrants
3.1 Articles of Incorporation, as amended*
3.2 Amended and Restated Bylaws*
4.1 Form of Stock Certificate
4.2 Articles of Incorporation, as amended (filed as Exhibit 3.1)
4.3 Amended and Restated Bylaws (filed as Exhibit 3.2)
4.4 Form of Representatives' Warrants (filed as part of Exhibit 1.1)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.
10.1 1996 Stock Option Plan
10.2 Form of Stock Option Agreement*
10.3 Form of Stock Purchase Warrant*
10.4 Agreement for Purchase and Sale from Brennen Medical, Inc. of Urology Business and Assets dated
August 1, 1994*
10.5 Employment Agreement with Dean A. Klein dated August 1, 1994, including consent to termination
of employment agreement*
10.6 Lease Agreement by and between Lawin Enterprises, Inc. and the Registrant dated May 1, 1996*
10.7 Business Relationship Agreement (to be filed by amendment)
11 Statement re computation of per share earnings
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2 Consent of McGladrey & Pullen, LLP, independent public accountants
24 Power of Attorney (included on signature page of the Registration Statement)
27 Financial Data Schedule*
</TABLE>
- ------------------------
*Previously filed.
<PAGE>
Draft 8/5/96
1,500,000 SHARES
ADVANCED UROSCIENCE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
___________________, 1996
JOHN G. KINNARD AND COMPANY, INCORPORATED
PENNSYLVANIA MERCHANT GROUP LTD
As Representatives of the Several Underwriters
c/o John G. Kinnard and Company, Incorporated
920 Second Avenue South
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Advanced UroScience, Inc., a Minnesota corporation (the "Company")
proposes to sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you are acting as representatives (the
"Representatives"), an aggregate of One Million Five Hundred Thousand
(1,500,000) shares (the "Firm Shares") of Common Stock, no par value, of the
Company (the "Common Stock"). In addition, to cover overallotments in
connection with the sale of the Firm Shares, the Company proposes to grant to
the Underwriters an option to purchase an additional number of shares not
exceeding 225,000 in the aggregate. The shares subject to the option are herein
called the "Option Shares." The Firm Shares and any Option Shares purchased
pursuant to this Underwriting Agreement are herein called the "Shares." As used
in this Agreement, the term "Underwriter" includes any party substituted for an
Underwriter under Section 11 hereof.
As Representatives, you have advised the Company (i) that you are
authorized to enter into this Underwriting Agreement on behalf of the
Underwriters and (ii) that the Underwriters are willing, acting severally and
not jointly, to purchase the numbers of the Firm Shares, aggregating in total
1,500,000 shares, set forth opposite their respective names in Schedule I, plus
their pro rata portion of the Option Shares purchased if you elect to exercise
the overallotment option in whole or in part for the accounts of the
Underwriters.
<PAGE>
The Company hereby confirms its agreement to issue to the
Representatives a warrant for the purchase of 150,000 shares of the Company's
Common Stock as described in Section 5 hereof (the "Representatives' Warrant"),
contingent upon the purchase by the Underwriters of the Firm Shares. The shares
issuable upon exercise of the Representatives' Warrant are referred to in this
Underwriting Agreement as the "Warrant Shares."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (File No. 333-07285) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). If the Company has elected to
rely upon Rule 462(b) under the Act to increase the size of the offering
registered under the Act, the Company will prepare and file with the Commission
a registration statement with respect to such increase pursuant to Rule 462(b).
The registration statement, as amended, including a registration statement (if
any) filed pursuant to Rule 462(b) under the Act and the information (if any)
deemed to be part thereof pursuant to Rules 430A and 434(d) under the Act, is
herein called the "Registration Statement." The prospectus included in the
Registration Statement at the time it is or was declared effective by the
Commission is hereinafter called the "Prospectus," except that if any prospectus
(including any term sheet meeting the requirements of Rule 434 under the Act
provided by the Company for use with a prospectus subject to completion within
the meaning of Rule 434 in order to meet the requirements of Section 10(a) of
the Act) filed by the Company with the Commission pursuant to Rule 424(b) (and
Rule 434, if applicable) under the Act or any other such prospectus provided to
the Underwriters by the Company for use in connection with the offering of the
Shares (whether or not required to be filed by the Company with the Commission
pursuant to Rule 424(b) under the Act) differs from the prospectus on file at
the time the Registration Statement is or was declared effective by the
Commission, the term "Prospectus" shall refer to such differing prospectus
(including any term sheet within the meaning of Rule 434 under the Act) from and
after the time such prospectus is filed with the Commission or transmitted to
the Commission for filing pursuant to Rule 424(b) (and Rule 434, if applicable)
or from and after the time it is first provided to the Underwriters by the
Company for such use. The term "Preliminary Prospectus" as used herein means
any preliminary prospectus included in the Registration Statement prior to the
time it becomes or became effective under the Act and any prospectus subject to
completion as described in Rule 430A or 434 under the Act. Copies of the
Registration Statement, including all exhibits and schedules thereto, any
amendments thereto and all Preliminary Prospectuses have been delivered to you.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
-2-
<PAGE>
[(i) The Registration Statement has been declared effective
under the Act, and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. No stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose has been instituted or
threatened by the Commission.]
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in
all material respects to the requirements of the Act and the rules and
regulations of the Commission promulgated thereunder, and did not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, the Company makes no
representation or warranty as to information contained in or omitted
in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through
the Representatives, expressly for use in the preparation thereof.
(iii) As of the time the Registration Statement was declared
effective by the Commission, upon the filing or first delivery to the
Underwriters of the Prospectus and at the First Closing Date and
Second Closing Date (each as hereinafter defined), (A) the
Registration Statement and Prospectus conformed or will conform in all
material respects to the requirements of the Act and the rules and
regulations of the Commission promulgated thereunder, (B) the
Registration Statement did not or will not include an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and (C) the Prospectus did not or will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they are or were made,
not misleading; provided, however, that the Company makes no
representation or warranty as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, expressly for use in the
preparation thereof.
(iv) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota. The Company owns no capital stock or other equity or
-3-
<PAGE>
ownership or proprietary interest in any corporation, partnership,
association, trust or other entity. The Company has the power and
authority to own or lease its properties and conduct its business as
described in the Prospectus, and is duly qualified to transact
business in all jurisdictions in which the conduct of its business or
its ownership or leasing of property requires such qualification and
the failure so to qualify would have a material adverse effect on the
condition (financial or otherwise), business, property, prospects, net
worth or results of operations of the Company.
(v) The outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable. The Shares to be issued and sold by the Company to the
Underwriters pursuant to this Agreement have been duly authorized and,
when issued and paid for as contemplated herein, will be validly
issued, fully paid and nonassessable. The Warrant Shares have been
duly authorized and reserved for issuance and, when issued and paid
for pursuant to the terms of the Representatives' Warrant, will be
validly issued, fully paid and nonassessable. Except as described in
the Prospectus, there are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or
transfer of, any shares of capital stock of the Company pursuant to
the Company's Amended Articles of Incorporation, Bylaws or any
agreement or other instrument to which the Company is a party or by
which the Company is bound. Neither the filing of the Registration
Statement nor the offering or the sale of the Shares as contemplated
by this Agreement gives rise to any rights for, or relating to, the
registration of any shares of capital stock or other securities of the
Company, except such rights which have been validly waived or
satisfied. Except as described in the Prospectus, there are no
outstanding options, warrants, agreements, contracts or other rights
to purchase or acquire from the Company any shares of its capital
stock. The Company has an authorized and outstanding capitalization
as set forth under the heading "Capitalization" in the Prospectus.
The outstanding capital stock of the Company conforms, and the Shares
to be issued by the Company to the Underwriters will conform, to the
description thereof contained in the Prospectus.
(vi) The financial statements (together with the notes thereto)
included in the Registration Statement and Prospectus comply in all
material respects with the requirements of the Act and present fairly
the financial position, results of operations and changes in
stockholders' equity and cash flows of the Company on the basis stated
in the Registration Statement, at the indicated dates and for the
indicated periods. Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
-4-
<PAGE>
applied throughout the periods involved, and all adjustments necessary
for a fair presentation of results for such periods have been made,
except as otherwise stated therein; and the supporting schedules
included in the Registration Statement present fairly the information
required to be stated therein. No other financial statements or
schedules are required to be included in the Registration Statement.
The summary and selected consolidated financial data included in the
Registration Statement present fairly the information shown therein on
the basis stated in the Registration Statement and have been compiled
on a basis consistent with the financial statements presented therein.
McGladrey & Pullen LLP, which has expressed its opinion with respect
to the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the rules and regulations of the Commission promulgated
thereunder.
(vii) There is no action or proceeding pending or, to the
knowledge of the Company, threatened or contemplated against the
Company before any court or administrative or regulatory agency,
authority or body, or any arbitrator, which might result, individually
or in the aggregate, in a material adverse change in the condition
(financial or otherwise), business, property, prospects, net worth or
results of operations of the Company, except as set forth in the
Registration Statement and the Prospectus.
(viii) The Company has good and marketable title to all
properties and assets reflected as owned in the financial statements
hereinabove described or in the Prospectus, in each case free and
clear of all liens, encumbrances, claims, security interests or
defects, except such as are described in the Prospectus or do not
substantially affect the value of such properties and assets and do
not materially interfere with the use made and proposed to be made of
such properties and assets by the Company; and any real property and
buildings held under lease by the Company are held under valid,
subsisting and enforceable leases with only such exceptions with
respect to any particular lease as are not material and do not
interfere in any material respect with the use made and proposed to be
made of such property and buildings by the Company.
(ix) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, (A) there has not
been any material adverse change in or affecting, or any event,
occurrence or development in the business of the Company that, taken
together with other events, occurrences and developments with respect
to such business, would have or would reasonably be expected to have a
material adverse effect on, the general affairs, condition (financial
-5-
<PAGE>
or otherwise), business, key personnel, property, prospects, net worth
or results of operations of the Company (whether or not occurring in
the ordinary course of business), (B) the Company has not entered
into any transaction not in the ordinary course of business which is
material to the Company, other than transactions described or
contemplated in the Registration Statement and the Prospectus, (C) the
Company has not incurred any material liabilities or obligations,
direct or contingent, (D) the Company has not sustained any material
loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by
insurance, (E) there has not been any change in the capital stock of
the Company (other than upon the exercise of options and warrants
described in the Registration Statement and the Prospectus), or any
material increase in the short-term or long-term debt (including
capitalized lease obligations) of the Company, and (F) there has not
been any issuance of warrants, options, convertible securities or
other rights to purchase or acquire any capital stock of the Company.
(x) The Company is not in violation of or in default under its
Amended Articles of Incorporation or Bylaws, or any statute, rule,
regulation, order, judgment, decree or authorization of any
governmental or administrative agency, court or other body having
jurisdiction over the Company or any of its properties, or any
indenture, mortgage, deed of trust, loan agreement, lease, franchise,
license or other agreement or instrument to which the Company is a
party or by which it is bound or to which any property or assets of
the Company are subject, which violation or default would have a
material adverse effect on the business, condition (financial or
otherwise), results of operations, stockholders' equity or prospects
of the Company or the ability of the Company to consummate the
transactions contemplated hereby.
(xi) The Company has the power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company, and constitutes a valid, legal and binding obligation of the
Company, enforceable in accordance with its terms, except as rights to
indemnity hereunder may be limited by federal or state securities laws
and except as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of equity. The
execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result
in a breach or violation of any provision of the Amended Articles of
Incorporation or Bylaws of the Company or any statute, rule,
regulation, order, judgment, decree or authorization of any
-6-
<PAGE>
governmental or administrative agency, court or other body having
jurisdiction over the Company or any of its properties, and will not
conflict with, result in a breach or violation of, or constitute,
either by itself or upon notice or passage of time or both, a default
under any indenture, mortgage, deed of trust, loan agreement, lease,
franchise, license or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which any
property or assets of the Company are subject. No approval, consent,
order, authorization, designation, declaration or filing by or with
any governmental or administrative agency, court or other body is
required for the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein
contemplated, except as may be required under the Act or any state
securities or blue sky laws.
(xii) The Company holds and is operating in compliance with all
licenses, authorizations, approvals, certificates and permits from
governmental and regulatory authorities, foreign and domestic, which
are necessary to the conduct of its business as described in the
Prospectus, except where the failure to comply would not have a
material adverse effect on the business, condition (financial or
otherwise), results of operations, stockholders' equity or prospects
of the Company; and all such licenses, authorizations, approvals,
certificates and permits are in full force and effect.
(xiii) No labor disturbance or dispute by the employees
or consultants or contractors to the Company exists, or to the
Company's knowledge, is threatened which could reasonably be expected
to have a material adverse effect on the conduct of the Company's
business as described in the Prospectus or on the condition (financial
or otherwise), property, prospects, net worth or results of operations
of the Company.
(xiv) The Company has the power and authority to enter into the
Representatives' Warrant and to issue and sell the Warrant Shares as
contemplated thereby. The Representatives' Warrant and the Warrant
Shares have been duly authorized. The Representatives' Warrant, when
issued and delivered to the Representatives, will constitute a valid
and binding obligation of the Company, enforceable in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of equity.
(xv) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorization; (B) transactions are recorded as necessary to
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permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and
(D) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to, or which has constituted, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
(xvii) The Company's application for listing on the Nasdaq
National Market ("Nasdaq") has been approved, and, on the date the
Registration Statement became effective, the Company's Registration
Statement on Form 8-A or other applicable form under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), became
effective.
(xviii) The Company has obtained and delivered to the
Representatives written agreements, in form and substance satisfactory
to the Representatives, of each of its directors and executive
officers and the shareholders named in Schedule II hereto, that no
offer, sale, contract to sell, other disposition of any Common Stock
of the Company will be made for a period of 180 days after the
effective date of the Registration Statement, directly or indirectly,
by such holder otherwise than with the prior written consent of the
Representatives.
(xix) The Company has not distributed and will not distribute
any prospectus or other offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectus
or the Prospectus or other materials permitted by the Act to be
distributed by the Company.
(xx) The Company has filed all federal, state, local and foreign
tax returns or reports required to be filed by it and has paid in full
all taxes indicated by said returns or reports and all assessments
received by it to the extent that such taxes have become due and
payable, except where the Company is contesting in good faith such
taxes and assessments.
(xxi) The Company maintains insurance of the type and in the
amounts it believes meets the Company's needs, including without
limitation, product liability insurance and insurance covering all
real
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and personal property owned or leased by it, all of which is in full
force and effect.
(xxii) The Company owns or is licensed to use all patents,
patent applications, inventions, trademarks, tradenames, applications
for registration of trademarks, copyrights, know-how, trade secrets,
licenses and rights in any thereof which are material to the business
of the Company as now conducted and as proposed to be conducted, in
each case as described in the Prospectus (the "Proprietary Rights").
The Company does not have knowledge of, and the Company has not given
or received any notice of any pending conflicts with or infringement
of, the rights of others with respect to any Proprietary Rights or
with respect to any license of Proprietary Rights. No action, suit,
arbitration or legal, administrative or other proceeding, or domestic
or foreign governmental investigation is pending, or to the best of
the Company's knowledge, threatened, which involves any Proprietary
Rights. The Company is not subject to any judgment, order, writ,
injunction or decree of any court or any federal, state, local,
foreign or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any arbitrator, or
has entered into or is a party to any contract which restricts or
impairs the use of any such Proprietary Rights. To the best of the
Company's knowledge, no Proprietary Rights used by the Company
conflict with or infringe upon any proprietary rights of or available
to any third party. The Company has not received written notice of
any pending conflict with or infringement upon such third-party
proprietary rights. The Company has not entered into any consent,
indemnification, forbearance to sue or settlement agreement with
respect to Proprietary Rights other than in the ordinary course of
business. No claims have been asserted by any person with respect to
the validity of or the Company's ownership or right to use the
Proprietary Rights and, to the best knowledge of the Company, there is
no reasonable basis for any such claim to be successful. The
Proprietary Rights are valid and enforceable and no registration
relating thereto has lapsed, expired or been abandoned or cancelled or
is the subject of cancellation or other adversarial proceedings, and
all applications therefor are pending and are in good standing. The
Company has complied with its respective contractual obligations
relating to the protection of the Proprietary Rights used pursuant to
licenses. To the best knowledge of the Company, no person is
infringing on or violating the Proprietary Rights owned or used by the
Company.
(xxiii) To the Company's knowledge, none of the Company's
officers, directors or security holders has any affiliations with the
National Association of Securities Dealers, Inc., except as set forth
in
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the Registration Statement or as otherwise disclosed in writing to the
Representatives.
(xxiv) The Company intends to apply the proceeds from the sale
of the Shares by it to the purposes and substantially in the manner
set forth in the Prospectus.
(xxv) No person is entitled, directly or indirectly, to
compensation from the Company or the Underwriters for services as a
finder in connection with the transactions contemplated by this
Agreement.
(xxvi) The conditions for use of a registration statement on
Form SB-2 for the distribution of the Shares have been satisfied with
respect to the Company.
(xxvii) The Company has not sold any securities in violation of
Section 5 of the Act.
(xxviii) The Company has complied and will comply with all
provisions of Florida Statutes Section 517.075 (Chapter 92-198, Laws
of Florida). Neither the Company, nor any affiliate thereof, does
business with the government of Cuba or with any person or affiliate
located in Cuba.
(b) Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel to the Underwriters shall be
deemed to be a representation and warranty of the Company to each
Underwriter as to the matters covered thereby.
2. PURCHASE AND SALE; DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties, and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company agrees to sell to each of the Underwriters, and the
Underwriters agrees, severally and not jointly, to purchase, at a purchase
price equal to ninety-two percent (92%) of the per share price to public of
$______, the respective amount of Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto. The Underwriters will
collectively purchase all of the Firm Shares if any are purchased.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriters to purchase an
aggregate of up to 225,000 Option Shares, at the same purchase price as the
Firm Shares, for use solely in covering any overallotments made by the
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Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once)
within 30 days after the date on which the Registration Statement was
declared effective under the Act, as described in Section 1(a)(i) hereof
(the "Effective Date") upon notice (confirmed in writing) by the
Representatives to the Company setting forth the aggregate number of Option
Shares as to which the Underwriters are exercising the option and the date
on which certificates for such Option Shares are to be delivered. Option
Shares shall be purchased severally for the account of each Underwriter in
proportion to the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto.
(c) The Company will deliver the Firm Shares to the Representatives
at the offices of Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota 55402, unless some other place is agreed upon, at
10:00 a.m., Minneapolis time, against payment of the purchase price as set
forth in Section 2(a), on the third full business day after commencement of
the offering or, if the offering commences after 4:30 p.m., on the fourth
full business day after commencement of the offering, or such earlier time
as may be agreed upon by the Representatives and the Company, such time and
place being herein referred to as the "First Closing Date."
(d) The Company will deliver the Option Shares being purchased by the
Underwriters to the Representatives at the offices of Dorsey & Whitney LLP
as set forth in Section 2(c) above, unless some other place is agreed upon,
at 10:00 a.m., Minneapolis time, against payment of the purchase price at
the same place, on the date determined by the Representatives and of which
the Company has received notice as provided in Section 2(b), which shall
not be earlier than two nor later than three full business days after the
exercise of the option as set forth in Section 2(b), or at such other time
not later than ten full business days thereafter as may be agreed upon by
the Representatives and the Company, such time and date being herein
referred to as the "Second Closing Date."
(e) Certificates for the Shares to be delivered will be registered in
such names and issued in such denominations as the Underwriters shall
request at least two business days prior to the First Closing Date or the
Second Closing Date, as the case may be. The certificates will be made
available to the Underwriters in definitive form for the purpose of
inspection and packaging at least 24 hours prior to each respective closing
date.
(f) Payment to the Company for the Shares sold shall be made by wire
transfer to the account designated by the Company or by certified or
official bank check or checks in Clearing House funds, payable to the order
of the Company.
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(g) The Underwriters will make a public offering of the Shares
directly to the public (which may include selected dealers who are members
in good standing of the National Association of Securities Dealers, Inc.
("NASD") or foreign dealers not eligible for membership in the NASD but who
have agreed to abide by the interpretation of the NASD's Board of Governors
with respect to free-riding and withholding) as soon as the Underwriters
deem practicable after the Registration Statement becomes effective at the
public offering price set forth in Section 2(a) above subject to the terms
and conditions of this Agreement and in accordance with the Prospectus;
concessions from the public offering price may be allowed selected dealers
who are members of the NASD as the Underwriters determine and the
Underwriters will furnish the Company with such information about the
distribution arrangements as may be necessary for inclusion in the
Registration Statement. It is understood that the public offering price
and concessions may vary after the public offering. The Underwriters shall
offer and sell the Shares only in jurisdictions in which the offering of
Shares has been duly registered or qualified, or is exempt from
registration or qualification, and shall take reasonable measures to effect
compliance with applicable state securities laws.
(h) It is understood that the Representatives, individually and not
as Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for the Shares to be purchased by
such Underwriter or Underwriters. No such payment by the Representatives
shall relieve such Underwriter or Underwriters from any of its or their
other obligations hereunder.
(i) On the First Closing Date, the Company shall issue and deliver to
you the Representatives' Warrant, against payment by the Representatives of
$50.00 as set forth in Section 5 of this Agreement.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters that:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Company will prepare and file a Prospectus (or term sheet within the
meaning of Rule 434 under the Act) containing the information omitted
therefrom pursuant to Rule 430A under the Act with the Commission within
the time period required by, and otherwise in accordance with the
provisions of, Rules 424(b), 430A and 434, if applicable, under the Act; if
the Company has elected to rely upon Rule 462(b) under the Act to increase
the size of the offering registered under the Act, the Company will prepare
and file a registration statement with respect to such increase with the
Commission within the time period required by, and otherwise in accordance
with the provisions of, Rule 462(b) under the Act; the Company will prepare
and file with the Commission, promptly upon the request of the
Representatives, any
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amendments or supplements to the Registration Statement or Prospectus
(including any term sheet within the meaning of Rule 434 under the Act)
that, in the opinion of the Representatives, may be necessary or advisable
in connection with distribution of the Securities by Underwriters; and the
Company will not file any amendment or supplement to the Registration
Statement or Prospectus (including any term sheet within the meaning of
Rule 434 under the Act) to which the Representatives shall reasonably
object by notice to the Company after having been furnished with a copy a
reasonable time prior to the filing.
(b) The Company will advise the Representatives promptly of any
request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, or of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus,
of the suspension of the qualification of the Shares for offering or sale
in any jurisdiction, or of the institution or threatening of any
proceedings for that purpose, and the Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the
use of the Prospectus or suspending such qualification and to obtain as
soon as possible the lifting thereof, if issued.
(c) The Company will endeavor to qualify the Shares for sale under
the securities laws of such jurisdictions as the Representatives may
reasonably have designated in writing and will, or will cause counsel for
the Company to, make such applications, file such documents, and furnish
such information as may be reasonably requested by the Representatives,
provided that the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file such
statements, reports and other documents as are or may be required to
continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) The Company will furnish the Underwriters with as many copies of
any Preliminary Prospectus as the Representatives may reasonably request
and, during the period when delivery of a prospectus is required under the
Act, the Company will furnish the Underwriters with as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may, from time to time, reasonably request. The Company
will deliver to the Representatives, at or before the First Closing Date,
three signed copies of the Registration Statement and all amendments
thereto including all exhibits filed therewith, and will deliver to the
Representatives such number of copies of the Registration Statement,
without exhibits, and of all amendments thereto, as the Representatives may
reasonably request.
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<PAGE>
(e) If, during the period in which a prospectus is required by law to
be delivered by an Underwriter or dealer, any event shall occur as a result
of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or if for any other reason it shall be necessary
at any time to amend or supplement the Prospectus to comply with any law,
the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein in light of
the circumstances in which they are made, when it is so delivered, not
misleading, or so that the Prospectus will comply with law. In case any
Underwriter is required to deliver a prospectus in connection with sales of
any Shares at any time nine months or more after the effective date of the
Registration Statement, upon the request of the Representatives but at the
expense of such Underwriter, the Company will prepare and deliver to such
Underwriter as many copies as the Representatives may request of an amended
or supplemented Prospectus complying with Section 10(a)(3) of the Act.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158
thereunder and will advise you in writing when such statement has been so
made available.
(g) The Company will, for five years from the First Closing Date,
deliver to the Representatives copies of its annual report and copies of
all other documents, reports and information furnished by the Company to
its security holders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act.
(h) No offering, sale or other disposition of any Common Stock or
other capital stock of the Company, or warrants, options, convertible
securities or other rights to acquire such Common Stock or other capital
stock (other than pursuant to employee stock option plans, outstanding
options or on the conversion of convertible securities outstanding on the
date of this Agreement) will be made for a period of 180 days after the
date of this
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Agreement, directly or indirectly, by the Company otherwise than hereunder
or with the prior written consent of the Representatives.
(i) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
purposes set forth under "Use of Proceeds" in the Prospectus and will file
such reports with the Commission with respect to the sale of the Shares and
the application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(j) The Company will use its best efforts to maintain the designation
of the Common Stock on the Nasdaq National Market.
(k) Subject to the provisions set forth below, the Company shall be
responsible for and pay all costs and expenses incident to the performance
of its obligations under this Agreement including, without limiting the
generality of the foregoing, (i) all costs and expenses in connection with
the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits), Preliminary Prospectuses,
the Prospectus and any amendments thereof or supplements to any of the
foregoing; (ii) the issuance and delivery of the Shares, including taxes,
if any; (iii) the cost of all certificates representing the Shares; (iv)
the fees and expenses of the Transfer Agent for the Shares; (v) the fees
and disbursements of counsel for the Company; (vi) all fees and other
charges of the independent public accountants of the Company; (vii) the
cost of furnishing and delivering to the Underwriters and dealers
participating in the offering copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectuses, the Prospectus
and any amendments of, or supplements to, any of the foregoing; (viii) the
NASD filing fee; (ix) all accountable fees and expenses of counsel for the
Company and counsel for the Representatives incurred in qualifying the
Shares for sale under the laws of such jurisdictions upon which the
Representatives and the Company may agree (including filing fees); and (x)
the accountable expenses, not to exceed $50,000, of the Representatives
including but not limited to the reasonable fees and expenses of the
Representatives' counsel, costs and expenses of conducting a due diligence
investigation of the Company and due diligence meetings, costs of travel in
connection with the selling effort and tombstone advertisements. The
Representatives acknowledge receipt of a $10,000 advance against the
$50,000 accountable expense allowance referred to in the preceding
sentence. In the event this Agreement is terminated pursuant to Section 11
below, the Company shall remain obligated to pay the Representatives their
actual accountable out-of-pocket expenses, not to exceed $50,000, plus any
fees and expenses described in (ix) above.
(l) The Company will not take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in, or
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which has constituted, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares, and will
not effect any sales of any security of the Company which are required to be
disclosed in response to Item 701 of Regulation S-B of the Commission which have
not been so disclosed in the Registration Statement.
4. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The respective obligations of the Underwriters to purchase and pay for
the Shares as provided herein shall be subject to the accuracy of the
representations and warranties of the Company, in the case of the Firm Shares as
of the date hereof and the First Closing Date (as if made on and as of the First
Closing Date), and in the case of the Option Shares, as of the date hereof and
the Second Closing Date (as if made on and as of the Second Closing Date), to
the performance by the Company (in the case of the First Closing Date) of its
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Shares
and on or before the Second Closing Date in the case of the Option Shares:
(a) All filings required by Rules 424, 430A and 434 under the Act
shall have been timely made; no stop order suspending the effectiveness of
the Registration Statement, as amended from time to time, or any part
thereof shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Representatives.
(b) The Representatives shall have received the opinion of Fredrikson
& Byron, P.A., counsel for the Company, dated as of the First Closing Date
or the Second Closing Date, as the case may be, addressed to the
Underwriters and satisfactory in form and substance to the Representatives
and their counsel, substantially to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus. The Company is duly qualified and in
good standing as a foreign corporation in each jurisdiction where the
conduct of its business makes such qualification necessary and the
failure to so qualify would have a material adverse effect on the
business, properties, condition (financial or otherwise), results of
operations, stockholders' equity or prospects of the Company.
(ii) The Company has authorized and outstanding capital stock as
described in the Prospectus. The outstanding shares of the
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Company's capital stock have been duly authorized and validly issued
and are fully paid and nonassessable. The Shares to be issued and sold
by the Company pursuant to this Agreement have been duly authorized
and, when issued and paid for as contemplated herein, will be validly
issued, fully paid and nonassessable. No preemptive rights pursuant
to corporate law or, to the knowledge of such counsel, other
preemptive or similar subscription rights of shareholders of the
Company, or of holders of warrants, options, convertible securities or
other rights to acquire shares of capital stock of the Company, exist
with respect to any of the Shares or the issue and sale thereof. To
the knowledge of such counsel, no rights to register outstanding
shares of the Company's capital stock, or shares issuable upon the
exercise of outstanding warrants, options, convertible securities or
other rights to acquire shares of such capital stock, exist which have
not been validly exercised or waived with respect to the Registration
Statement. The capital stock of the Company, including the Shares,
conforms in all material respects to the description thereof contained
in the Prospectus.
(iii) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order or
proceedings with respect thereto have been instituted or are pending
or threatened by the Commission.
(iv) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the rules and
regulations thereunder (except that such counsel need express no
opinion as to the financial statements, related schedules or other
financial data included therein).
(v) To such counsel's knowledge, there are no statutes,
regulations or legal or governmental proceedings required to be
described in the Prospectus that are not described as required and no
franchises, leases, contracts, agreements or documents of a character
required to be disclosed in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not
disclosed or filed, as required.
(vi) The statements (A) in the Prospectus under the caption
"Description of Securities" and (B) in the Registration Statement in
Item 24, insofar as such statements constitute a summary of matters of
law, are accurate summaries and fairly present the information called
for with respect to such matters.
(vii) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein
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contemplated do not and will not conflict with or result in a
violation of or default under the Amended Articles of Incorporation or
Bylaws of the Company, or (assuming compliance with all applicable
state securities and blue sky laws) under any statute, rule or
regulation of the United States or the State of Minnesota applicable
to the Company or any permit, order, judgment or decree known to such
counsel, or any indenture, mortgage, loan agreement or other material
agreement, instrument or obligation known to such counsel to which the
Company is a party or by which it or its material properties are
bound.
(viii) The Company has the corporate power and authority to
enter into this Agreement and to authorize, issue and sell the Shares
as contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by the Company and constitutes a
valid, legal and binding obligation of the Company enforceable in
accordance with its terms, except as rights to indemnity hereunder may
be limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors
generally and subject to general principles of equity.
(ix) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by
state securities and blue sky laws, as to which such counsel need
express no opinion) except such as have been obtained or made,
specifying the same.
(x) To such counsel's knowledge, there are no legal or
governmental proceedings, pending or threatened, before any court or
administrative body or regulatory agency to which the Company is a
party or to which any of the properties of the Company is subject.
(xi) The form of certificate for the Shares is in due and proper
form and complies with all applicable statutory requirements.
(xii) The Company has the corporate power and authority to
issue the Representatives' Warrant. The Representatives' Warrant has
been duly authorized, executed and delivered by the Company and
constitutes the valid and binding obligation of the Company
enforceable in accordance with its terms, except as enforceability
thereof may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting the rights of creditors generally and subject
to general principles of equity; the Warrant Shares issuable upon
exercise of the
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Representatives' Warrant have been duly authorized and reserved for
issuance upon exercise of the Representatives' Warrant, and, upon
exercise of the Representatives' Warrant and receipt by the Company of
the consideration for such shares in accordance with the terms
thereof, such Warrant Shares will be validly issued, fully paid and
nonassessable.
In rendering the opinions described above, counsel for the Company may
rely, as to matters of fact with respect to the Company, upon
representations of the Company contained in this Agreement and certificates
of officers of the Company provided that copies of such certificates are
delivered to the Representatives.
In addition to the matters set forth above, each such opinion shall
also include a statement to the effect that, although such counsel cannot
guarantee the accuracy, completeness or fairness of any of the statements
contained in the Registration Statement or Prospectus and such counsel
makes no representation that it has independently verified the accuracy,
completeness or fairness of such statements, in connection with such
counsel's representation and inquiry of the Company in the preparation of
the Registration Statement and Prospectus, nothing came to the attention of
such counsel which caused it to conclude that, as of the time the
Registration Statement became effective and as of the First Closing Date or
the Second Closing Date, as the case may be, the Registration Statement or
any further amendment thereto (other than the financial statements, related
schedules and other financial data included therein, as to which such
counsel need express no opinion) contained or contains an untrue statement
of a material fact or omitted or omits to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading or that, as of the date of the Prospectus or any amendment or
supplement thereto and as of the First Closing Date or the Second Closing
Date, as the case may be, the Prospectus or any amendment or supplement
thereto (other than the financial statements, related schedules and other
financial data included therein, as to which such counsel need express no
opinion) contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading.
(c) The Representatives shall have received on the First Closing Date
or the Second Closing Date, as the case may be, the opinion of Moore &
Hanson, intellectual property counsel for the Company, dated the First
Closing Date or the Second Closing Date, as the case may be, addressed to
the Underwriters, and satisfactory in form and substance to the
Representatives and their counsel, substantially to the effect that:
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(i) To the best of such counsel's knowledge, the statements in
the Registration Statement and the Prospectus under the caption
"Business-Patents and Proprietary Rights" are accurate and complete
statements or summaries of the matters therein set forth.
(ii) To the best of such counsel's knowledge, the Company owns or
is licensed to use all patents, trade secrets, trademarks, service
marks or other proprietary information or know-how necessary to
conduct the business now being or proposed to be conducted by the
Company as described in the Prospectus (the "Proprietary Rights").
(iii) To the best of such counsel's knowledge, there are no
pending legal proceedings relating to the Proprietary Rights, and no
such proceedings are threatened or contemplated.
(iv) To the best of such counsel's knowledge after due inquiry,
the Company is not infringing or otherwise violating, and the conduct
of the business of the Company as intended to be conducted as
described in the Prospectus will not infringe or otherwise violate,
any patents, trade secrets, trademarks, service marks, copyrights or
other proprietary information or know-how of any persons, and no
person is infringing or otherwise violating any of the Proprietary
Rights in a way which could materially affect the ownership or use
thereof by the Company.
(v) The Company is listed in the records of the United States
Patent and Trademark Office as the sole owner or assignee of record of
the patent listed on an appendix to such opinion (the "Patent"). To
the best of such counsel's knowledge, there are no asserted or
unasserted claims of any persons relating to the scope or ownership of
the Patent, and there are no liens which have been filed against the
Patent.
(vi) The Company is listed in the records of the appropriate
foreign patent offices as the sole assignee of record of each of the
foreign applications listed on an appendix to such opinion (the
"Foreign Applications"). To the best of such counsel's knowledge,
there are no asserted or unasserted claims of any persons relating to
the scope or ownership of the Foreign Applications, there are no liens
which have been filed against any of the Foreign Applications, there
are no material defects of form in the preparation or filing of the
Foreign Applications, the Foreign Applications are being diligently
prosecuted, and none of the Foreign Applications has been finally
rejected or abandoned. Such counsel has no reason to believe that the
Foreign Applications will not eventuate in issued patents, or that any
patents issued in respect of any such Foreign Applications will not be
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valid or will not afford the Company reasonable patent protection
relative to the subject matter thereof.
(vii) Nothing has come to the attention of such counsel that
causes such counsel to believe that the discussion of the Proprietary
Rights set forth in (A) the Registration Statement or any amendment
thereof, at the time the Registration Statement became effective and
as of the First Closing Date or the Second Closing Date, as the case
may be, contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or
(B) the Prospectus as amended or supplemented, as of the date of the
Prospectus or any such amendment of supplement and as of the First
Closing Date or the Second Closing Date, as the case may be, contained
or contains any untrue statement of a material fact or omitted or
omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(d) The Representatives shall have received from Dorsey & Whitney
LLP, counsel for the Underwriters, an opinion dated the First Closing Date
or the Second Closing Date, as the case may be, with respect to such
matters as the Representatives may reasonably request, and such counsel
shall have received such documents and information as they may reasonably
request to enable them to pass upon such matters.
(e) The Representatives shall have received on each of the date
hereof, the First Closing Date and the Second Closing Date, as the case may
be, a signed letter, dated as of the date hereof, the First Closing Date or
the Second Closing Date, as the case may be, in form and substance
satisfactory to the Representatives, from McGladrey & Pullen LLP, to the
effect that they are independent public accountants with respect to the
Company within the meaning of the Act and the related rules and regulations
and containing statements and information of the type ordinarily included
in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as
contemplated or referred to in the Prospectus, the Company shall not have
incurred any direct or contingent liabilities or obligations material to
the Company, or entered into any material transactions, except liabilities,
obligations or transactions in the ordinary course of business, or declared
or paid any dividends or made any distribution of any kind with respect to
its capital stock; and there shall not have been any change in the capital
stock
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(other than a change in the number of outstanding shares of Common Stock
due to the exercise of options or warrants described in the Registration
Statement and the Prospectus), or any change in the short-term debt or
long-term debt (including capitalized lease obligations) of the Company,
or any issuance of options, warrants, convertible securities or other
rights to purchase the capital stock of the Company or any change or any
development involving a prospective change in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in the judgment of the Representatives
makes it impracticable or inadvisable to proceed with the public offering
or the delivery of the Shares being delivered on the terms and in the
manner contemplated in the Prospectus.
(g) The Representatives shall have received from the Company a
certificate, dated as of the First Closing Date or Second Closing Date, as
the case may be, of the chief executive officer, the chief operating
officer and the chief financial officer of the Company to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of each closing
date. The Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at, or
prior to, such date.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceeding for that
purpose has been instituted or is pending or, to the knowledge of such
officers, is contemplated under the Act.
(iii) Neither the Registration Statement nor the Prospectus nor
any amendment thereof or supplement thereto included any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth;
provided, however, that such certificate does not require any
representation concerning statements in, or omissions from, the
Registration Statement or Prospectus or any amendment thereof or
supplement thereto, which are based solely upon and conform to written
information furnished to the Company by any of the Underwriters
specifically for use in the preparation of the Registration Statement
or the Prospectus or any such amendment or supplement.
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(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as contemplated or referred to in the Prospectus, the Company has not
incurred any direct or contingent liabilities or obligations material
to the Company, or entered into any material transactions, except
liabilities, obligations or transactions in the ordinary course of
business, or declared or paid any dividend or made any distribution of
any kind with respect to its capital stock, and there has not been any
change in the capital stock (other than a change in the number of
outstanding shares of Common Stock due to the exercise of options or
warrants described in the Registration Statement and the Prospectus),
short-term debt, or long-term debt (including capitalized lease
obligations) of the Company, or any issuance of options, warrants,
convertible securities or other rights to purchase the capital stock
of the Company or any material adverse change or any development
involving a prospective material adverse change (whether or not
arising in the ordinary course of business) in or affecting the
general affairs, condition (financial or otherwise), business, key
personnel, property, prospects, net worth or results of operations of
the Company.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company
has not sustained any material loss of, or damage to, its business or
properties, whether or not covered by insurance.
(vi) Except as is otherwise expressly stated in the Registration
Statement and Prospectus there are no material actions, suits or
proceedings pending before any court or governmental agency, authority
or body, or, to such officers' knowledge, threatened, to which the
Company is a party or of which the business or property of the Company
is the subject.
(h) The Representatives shall have received, dated as of the First
Closing Date or Second Closing Date, as the case may be, from the Secretary
of the Company a certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute, deliver and perform this
Agreement. Attached to such certificate shall be a copy of the Bylaws of
the Company and the resolutions of the Board of Directors of the Company
authorizing the execution, delivery and performance of this Agreement.
Such certificate shall also certify that such resolutions, the Amended
Articles of Incorporation of the Company and the Bylaws of the Company have
been validly adopted and have not been amended or modified, except as
described in the Prospectus.
(i) The Representatives shall have received a written agreement from
each of the officers, directors and shareholders named in Schedule II
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hereto, that no offer, sale, contract to sell, other disposition of any
Common Stock of the Company will be made for a period of 180 days after the
effective date of the Registration Statement, directly or indirectly, by
such holder otherwise than with the prior written consent of the
Representatives.
(j) The Shares shall have been approved for listing on the Nasdaq
National Market.
(k) The Company shall have furnished to the Underwriters, dated as of
the date of each closing date, such further certificates and documents as
the Representatives shall have reasonably required.
(l) All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Representatives and its legal counsel. All statements
contained in any certificate, letter or other document delivered pursuant
hereto by, or on behalf of, the Company shall be deemed to constitute
representations and warranties of the Company.
(m) The Representatives may waive in writing the performance of any
one or more of the conditions specified in this Section 4 or extend the
time for their performance.
5. REPRESENTATIVES' WARRANT.
On the First Closing Date, the Company shall sell to you, in
consideration of a payment by the Representatives to the Company of Fifty
Dollars ($50.00), the Representatives' Warrant, which shall first become
exercisable one year after the Effective Date and shall remain exercisable for a
period of four years thereafter. The Representatives' Warrant shall be subject
to certain transfer restrictions and shall be in substantially the form filed as
an exhibit to the Registration Statement and attached as Appendix A hereto.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or each such
controlling person may become subject, under the Act, the Exchange Act, the
common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of, or are based
upon: (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereof, or
the omission or alleged omission to state in the Registration Statement or
any amendment thereof a material fact required to be stated therein or
necessary to make the
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<PAGE>
statements therein not misleading; (ii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any application or other
statement executed by the Company or based upon written information furnished by
the Company and filed in any jurisdiction in order to qualify the Shares under,
or exempt the Shares or the sale thereof from qualification under, the
securities laws of such jurisdiction, or the omission or alleged omission to
state in such application or statement a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and will reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or controlling person (subject
to the limitations of Section 6(c) below) in connection with investigating or
defending against any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of, or is based upon, an
untrue statement, or alleged untrue statement, omission or alleged omission,
made in reliance upon and in conformity with information furnished to the
Company by, or on behalf of, any Underwriter in writing specifically for use in
the preparation of the Registration Statement or any such post effective
amendment thereof, any such Preliminary Prospectus or the Prospectus or any such
amendment thereof or supplement thereto; provided, further that the foregoing
indemnity agreement is subject to the condition that, insofar as it relates to
any untrue statement, alleged untrue statement, omission or alleged omission
made in any Preliminary Prospectus but eliminated or remedied in the Prospectus,
such indemnity agreement shall not inure to the benefit of any Underwriter (or
to the benefit of any person who controls such Underwriter), if the person
asserting any loss, claim, damage or liability purchased the Shares from such
Underwriter which are the subject thereof, was not sent or given a copy of the
Prospectus with, or prior to, the written confirmation of the sale of such
Shares to such person. This indemnity agreement is in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter severally, but not jointly, agrees to indemnify
and hold harmless the Company, each of the Company's directors, each of the
Company's officers who has signed the Registration Statement, and each
person who controls the Company within the meaning of Section 15 of the
Act against any losses, claims, damages or liabilities, joint or several,
to which the Company or any such director, officer, or controlling person
may become subject, under the Act, the Exchange Act, the common law or
otherwise, insofar as such losses, claims, damages, or liabilities (or
actions in respect
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<PAGE>
thereof) arise out of, or are based upon: (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, or the omission or alleged omission to
state in the Registration Statement or any amendment thereof, a material
fact required to be stated therein or necessary to make the statements
therein not misleading; (ii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact contained
in any application or other statement executed by the Company or by any
Underwriter or based upon written information furnished by the Company or
the Underwriters and filed in any jurisdiction in order to qualify the
Shares under, or exempt the Shares or the sale thereof from qualification
under, the securities laws of such jurisdiction, or the omission or alleged
omission to state in such application or statement a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; in each of
the above cases to the extent, but only the extent, that such untrue
statement, alleged untrue statement, omission or alleged omission, was made
in reliance upon and in conformity with information furnished to the
Company by, or on behalf of, any Underwriter in writing specifically for
use in the preparation of the Registration Statement or any such
post-effective amendment thereof, any such Preliminary Prospectus or the
Prospectus or any such amendment thereof or supplement thereto, or in any
application or other statement executed by the Company or by any
Underwriter and filed in any jurisdiction; and each Underwriter will
reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, or controlling person in connection with
investigating or defending against any such loss, claim, damage, liability
or action. This indemnity agreement is in addition to any liability which
the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against any indemnifying party
under this Section 6, notify in writing the indemnifying party of the
commencement thereof. The omission to so notify the indemnifying party
will not relieve it from any liability under this Section 6 as to the
particular item for which indemnification is then being sought, unless such
omission so to notify prejudices the indemnifying party's ability to defend
such action. In case any such action is brought against any indemnified
party and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party
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<PAGE>
similarly notified, to assume the defense thereof with counsel who shall be
reasonably satisfactory to such indemnified party; and after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided,
however, that if, in the reasonable judgment of the indemnified party or
parties, it is advisable for such party or parties and any controlling
persons to be represented by separate counsel, any indemnified party shall
have the right to employ separate counsel to represent it and other parties
and their controlling persons who may be subject to liability arising out
of any claim in respect of which indemnity may be sought by any party
hereunder, in which event the fees and expenses of such separate counsel
shall be borne by the indemnifying party. In such event, the indemnifying
party will not be obligated to pay the fees and expenses of more than one
counsel for the indemnified parties with respect to such claim. Any such
indemnifying party shall not be liable to any such indemnified party on
account of any settlement of any claim or action effected without the prior
written consent of such indemnifying party.
7. CONTRIBUTION.
(a) If the indemnification provided for in Section 6 is unavailable
under applicable law to any indemnified party in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, and
the Underwriters from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the parties
in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The Company and the Underwriters agree that
contribution determined by per capita allocation (even if the Underwriters
were considered a single person) would not be equitable. The respective
relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as the total net proceeds from the
offering of the Shares (before deducting expenses) received by the Company
bears to the total underwriting discount received by the Underwriters, in
each case as set forth in the Prospectus. The relative fault of the
parties shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information
supplied by the parties and the parties' relative intent, knowledge, access
to information and
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<PAGE>
opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages and
liabilities referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto. The Underwriters' obligation to
contribute pursuant to this Section 7 are several and not joint in
proportion to their respective Underwriting Obligations. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section 7, each
person who controls an Underwriter within the meaning of the Act or the
Exchange Act shall have the same rights to contribution as such
Underwriter, each person who controls the Company within the meaning of the
Act or the Exchange Act shall have the same rights to contribution as the
Company and each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company.
(b) Promptly after receipt by a party to this Agreement of notice of
the commencement of any action, suit, or proceeding, such person will, if a
claim for contribution in respect thereof is to be made against another
party (the "Contributing Party"), notify the Contributing Party of the
commencement thereof, but the omission so to notify the Contributing Party
will not relieve the Contributing Party from any liability which it may
have to any party other than under this Section 7, unless such omission so
to notify prejudices the Contributing Party's ability to defend such
action. Any notice given pursuant to Section 6 hereof shall be deemed to
be like notice hereunder. In case any such action, suit or proceeding is
brought against any party, and such person notifies a Contributing Party of
the commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing
Party similarly notified.
8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective the later of (a) the date
and time that this Agreement is executed and delivered by the parties
hereto and (b) at 10:00 a.m., Minneapolis time, on the first full business
day following the Effective Date, or at such earlier time after the
Effective Date as the Representatives in its discretion shall first release
the Shares for offering
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<PAGE>
to the public. For purposes of this Section 10, the Shares shall be deemed
to have been released to the public upon release by the Representatives of
the publication of a newspaper advertisement relating to the Shares or upon
release of a telegram or a letter offering the Shares for sale to
securities dealers, whichever shall first occur.
(b) The Representatives shall have the right to terminate this
Agreement by giving notice to the Company as hereinafter specified at any
time prior to the First Closing Date, and the option referred to in Section
2(b), if exercised, may be canceled at any time by the Representatives by
giving such notice to the Company at any time prior to the Second Closing
Date, if (i) the Company shall have failed, refused or been unable, at or
prior to the First Closing Date, to perform any material agreement on its
part to be performed hereunder; (ii) any other condition of the
Underwriters' obligations hereunder is not fulfilled; (iii) trading in
securities generally on the New York Stock Exchange, American Stock
Exchange or the Nasdaq Stock Market shall have been suspended, or minimum
or maximum prices for trading shall have been required or established by
the Commission or by any such exchange or the Nasdaq Stock Market; (iv) a
banking moratorium shall have been declared by federal, New York or
Minnesota authorities; (v) there shall have been such a material adverse
change in general economic, monetary, political or financial conditions, or
the effect of international conditions on the financial markets in the
United States shall be such as, in the judgment of the Representatives,
makes it impractical or inadvisable to proceed with the completion of the
sale of and payment for the Shares; (vi) there shall have been the
enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of any court or other governmental
authority, which in the judgment of the Representatives materially and
adversely affects or will materially and adversely affect the business or
operations of the Company; or (vii) there shall be an outbreak of major
hostilities (or an escalation thereof) in which the United States is
involved or a formal declaration of war by the United States of America
shall have occurred or any other substantial national or international
calamity or any other event or occurrence of a similar character shall have
occurred since the execution of this Agreement that, in the judgment of the
Representatives, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Shares. Any such termination
shall be without liability of any party to any other party, except as
provided in Sections 6 and 7 hereof; provided, however, that the Company
shall remain obligated to pay costs and expenses to the extent provided in
Section 3(k) hereof.
(c) If the Representatives elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 8, they shall notify the Company by telegram or telephone,
confirmed by letter sent to the address specified in Section 11 hereof. If
the Company shall elect to prevent this Agreement from becoming effective,
it shall notify the
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Representatives promptly by telegram or telephone, confirmed by letter sent
to the address specified in Section 11 hereof.
(d) If the Company shall fail at the First Closing Date to sell and
deliver the number of Shares which it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any
Underwriter. No action taken pursuant to this Section 8(d) shall relieve
the Company from liability, if any, in respect of such default.
9. DEFAULT OF UNDERWRITER.
If on the First Closing Date or the Second Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representatives of the Underwriters, shall use your best efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from the Company such amounts as may be agreed upon, and upon the
terms set forth herein, of the Firm Shares or Option Shares, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (A) if the aggregate number of Shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase or (B) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except for expenses to be borne by the Company,
and the Underwriters as provided in Section 3(k) hereof and the indemnity and
contribution agreements in Sections 6 and 7 hereof. In the event of a default
by any Underwriter or Underwriters, as set forth in this Section 9, the First
Closing Date or Second Closing Date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes, not including a reduction in the number of
Firm Shares, in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter" includes any
person substituted for a defaulting Underwriter. Any action taken under this
Section 9
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shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND
REPRESENTATIONS.
The respective indemnity and contribution agreements of the Company
and the Underwriters contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Section 1 hereof, and
the covenants of the Company set forth in Section 3 hereof, respectively, shall
remain operative and in full force and effect, regardless of any investigation
made by, or on behalf of, the Underwriters, the Company, any of its officers and
directors, or any controlling person referred to in Sections 6 and 7, and shall
survive the delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person,
or any legal representatives of such controlling person, as the case may be,
shall be entitled to the benefit of the respective indemnity and contribution
agreements.
11. NOTICES.
All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to the Representatives
or any of the Underwriters, shall be mailed, delivered, or telecopied and
confirmed, to John G. Kinnard and Company, Incorporated, 920 Second Avenue
South, Minneapolis, Minnesota 55402, Attention: [Jerry Johnson], with a copy to
Elizabeth C. Hinck, Esq., Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota 55402; if sent to the Company, shall be mailed,
delivered, or telecopied, and confirmed, to Advanced UroScience, Inc., 1290
Hammond Road, St. Paul, Minnesota 55110, Attention: Dean A. Klein, with a copy
to Dobson West, Esq., Fredrikson & Byron, P.A., 1100 International Centre, 900
Second Avenue South, Minneapolis, Minnesota 55402.
12. INFORMATION FURNISHED BY THE UNDERWRITER.
The statements relating to the stabilization activities of the
Underwriters and the statements in paragraphs three and eight under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitute
the only information furnished by, or on behalf of, the Underwriters in writing
specifically for use in the preparation of the Registration Statement or any
post-effective amendment thereof, any preliminary Prospectus or the Prospectus
or any amendment thereof or supplement thereto, or in any application or other
statement executed by the Company or by any Underwriter and filed in any
jurisdiction as referred to in Section 6 hereof.
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13. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Underwriters and the Company, their respective successors and assigns and the
officers, directors and controlling persons referred to in Sections 6 and 7.
Nothing expressed in this Agreement is intended or shall be construed to give
any person or corporation, other than the parties hereto, their respective
successors and assigns and the controlling persons, officers and directors
referred to in Sections 6 and 7 any legal or equitable right, remedy or claim
under, or in respect of, this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors, assigns and such controlling
persons, officers and directors, and for the benefit of no other person or
corporation. No purchaser of any Shares from the Underwriters shall be
construed a successor or assign merely by reason of such purchase.
14. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the
laws of the State of Minnesota without regard to its conflict of law provisions.
-32-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed counterpart of this
Agreement, whereupon it will become a binding agreement between the Company and
each of the Underwriters in accordance with its terms.
Very truly yours,
ADVANCED UROSCIENCE, INC.
__________________________
By:
Its:
The foregoing Underwriting Agreement is
hereby confirmed and accepted by us for
ourselves and as Representatives of the
Underwriters referred to in the foregoing
Agreement as of the date first above written.
JOHN G. KINNARD AND COMPANY,
INCORPORATED
PENNSYLVANIA MERCHANT
GROUP LTD
By: John G. Kinnard and Company, Incorporated
__________________________
By:
Its:
-33-
<PAGE>
SCHEDULE I
NAME OF UNDERWRITER NUMBER OF FIRM SHARES
- ------------------- ---------------------
John G. Kinnard and
Company, Incorporated
Pennsylvania Merchant Group Ltd
Total 1,500,000
---------
---------
-34-
<PAGE>
SCHEDULE II
Schedule of Shareholders Required to Execute Lock-up Agreements
Total
Lock-up Shares
Investor Name Number of Shares
- ------------- ----------------------------
-35-
<PAGE>
APPENDIX A
WARRANT
TO PURCHASE 150,000 SHARES OF
COMMON STOCK OF
ADVANCED UROSCIENCE, INC.
THIS CERTIFIES THAT, for good and valuable consideration received, [John G.
Kinnard and Company, Incorporated/Pennsylvania Merchant Group Ltd] (the
"Representative"), or its registered assigns, is entitled to subscribe for and
purchase from Advanced UroScience, Inc., a Minnesota corporation (the
"Company"), at any time after August __, 1997 (one year after Effective Date as
defined in the Underwriting Agreement), up to and including August __, 2001,
[150,000] fully paid and nonassessable shares of the Common Stock of the Company
at the price of $___ per share (the "Warrant Exercise Price"), subject to the
antidilution provisions, and to the provisions of Section 10, of this Warrant.
Reference is made to this Warrant in the Underwriting Agreement dated August __,
1996, by and between the Company and the Representatives. The shares which may
be acquired upon exercise of this Warrant are referred to herein as the "Warrant
Shares." As used herein, the term "Holder" means the Representatives, any party
who acquires all or a part of this Warrant as a registered transferee of the
Representatives, or any record holder or holders of the Warrant Shares issued
upon exercise, whether in whole or in part, of the Warrant; and the term "Common
Stock" means and includes the Company's presently authorized common stock, no
par value, and shall also include any capital stock of any class of the Company
hereafter authorized which shall not be limited to a fixed sum or percentage in
respect of the rights of the holders thereof to participate in dividends or in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution, or winding up of the Company.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of
Common Stock), by written notice of exercise (in the form attached hereto)
delivered to the Company at the principal office of the Company prior to
the expiration of this Warrant and accompanied or preceded by the surrender
of this Warrant along with a check in payment of the Warrant Exercise Price
for such shares or without payment of cash pursuant to Section 10 hereof.
(b) This Warrant may not be sold, assigned, hypothecated, or
otherwise transferred, other than by will or pursuant to the operation of
law,
A-1
<PAGE>
except to a person who is an officer of the Representatives. Further, this
Warrant may not be sold, transferred, assigned, hypothecated or divided
into two or more Warrants of smaller denominations, nor may any Warrant
Shares issued pursuant to exercise of this Warrant be transferred, except
as provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT.
Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon
the surrender hereof by the Holder to the Company at its principal office for
new Warrants of like tenor representing in the aggregate the right to purchase
the number of Warrant Shares purchasable hereunder, each of such new Warrants to
represent the right to purchase such number of Warrant Shares (not to exceed the
aggregate total number purchasable hereunder) as shall be designated by the
Holder at the time of such surrender. 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 surrender and cancellation of
this Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant; provided, however, that if the
Representatives shall be such Holder, an agreement of indemnity by such Holder
shall be sufficient for all purposes of this Section 2. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all expenses, taxes (other
than stock transfer taxes), and other charges payable in connection with the
preparation, execution, and delivery of Warrants pursuant to this Section 2.
3. ISSUANCE OF THE WARRANT SHARES.
(a) The Company agrees that the shares of Common Stock purchased
hereby shall be and are deemed to be issued to the Holder as of the close
of business on the date on which this Warrant shall have been surrendered
and the payment made for such Warrant Shares as aforesaid. Subject to the
provisions of the next section, certificates for the Warrant Shares so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding fifteen (15) days after the rights represented by this Warrant
shall have been so exercised, and, unless this Warrant has expired, a new
Warrant representing the right to purchase the number of Warrant Shares, if
any, with respect to which this Warrant shall not then have been exercised
shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of
this Warrant except in accordance with exemptions from the applicable
securities registration requirements or registrations under applicable
securities laws. Nothing herein, however, shall obligate the Company to
A-2
<PAGE>
effect registrations under federal or state securities laws, except as
provided in Section 9. If registrations are not in effect and if
exemptions are not available when the Holder seeks to exercise the Warrant,
the Warrant exercise period will be extended, if need be, to prevent the
Warrant from expiring, until such time as either registrations become
effective or exemptions become available, and the Warrant shall then remain
exercisable for a period of at least 45 calendar days from the date the
Company delivers to the Holder written notice of the availability of such
registrations or exemptions. The Holder agrees to execute such documents
and make such representations, warranties, and agreements as may be
required solely to comply with the exemptions relied upon by the Company,
or the registrations made for the issuance of the Warrant Shares.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees that all Warrant Shares will, upon
issuance, be duly authorized and issued, fully paid, nonassessable, and free
from all taxes, liens, and charges with respect to the issue thereof. The
Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented this Warrant.
5. ANTIDILUTION ADJUSTMENTS.
The provisions of this Warrant are subject to adjustment as provided
in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time
such that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock
into a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately
prior to such event shall (until adjusted again pursuant hereto) be
adjusted immediately after such event to a price determined by dividing (a)
the total number of shares of Common Stock outstanding immediately prior to
such
A-3
<PAGE>
event (including the maximum number of shares of Common Stock issuable in
respect of any securities convertible into Common Stock), multiplied by the
then existing Warrant Exercise Price, by (b) the total number of shares of
Common Stock outstanding immediately after such event (including the
maximum number of shares of Common Stock issuable in respect of any
securities convertible into Common Stock), and the resulting quotient shall
be the adjusted Warrant Exercise Price per share. An adjustment made
pursuant to this subsection shall become effective immediately after the
record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this subsection, the Holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive shares
of two or more classes of capital stock or shares of Common Stock and other
capital stock of the Company, the Board of Directors (whose determination
shall be conclusive) shall determine the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. All calculations under
this subsection shall be made to the nearest cent. In the event that at
any time as a result of an adjustment made pursuant to this subsection, the
holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive any shares of the Company other than shares of Common
Stock, the Warrant Exercise Price of such other shares so receivable upon
exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions
with respect to Common Stock contained in this Section.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until
another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of shares, calculated to the nearest full share,
obtained by multiplying the number of shares specified in such Warrant (as
adjusted as a result of all adjustments in the Warrant Exercise Price in
effect prior to such adjustment) by the Warrant Exercise Price in effect
prior to such adjustment and dividing the product so obtained by the
adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially
as an entirety, or in the case of any statutory exchange of securities with
another corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), there shall be no
adjustment under subsection (a) of this Section above but the Holder of
each Warrant then outstanding shall have the right thereafter to convert
such Warrant into the kind and amount of shares of stock and other
securities and property which
A-4
<PAGE>
he would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale, or conveyance had such
Warrant been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale, or conveyance and in any
such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section with respect to the
rights and interests thereafter of any Holders of the Warrant, to the end
that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in
relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Warrant. The provisions of
this subsection shall similarly apply to successive consolidations,
mergers, statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in
each such case, the Company shall give written notice thereof, by first-
class mail, postage prepaid, addressed to the Holder as shown on the
books of the Company, which notice shall state the Warrant Exercise
Price resulting from such adjustment and the increase or decrease, if
any, in the number of shares of Common Stock purchasable at such
adjusted Warrant Exercise Price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
6. NO VOTING RIGHTS.
This Warrant shall not entitle the Holder to any voting rights or
other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restriction set forth in Section 1 hereof, the Holder, by acceptance
hereof, agrees to give written notice to the Company before transferring
this Warrant or transferring any Warrant Shares of such Holder's intention
to do so, describing briefly the manner of any proposed transfer. Promptly
upon receiving such written notice, the Company shall present copies
thereof to the Company's counsel and to counsel to the original purchaser
of this Warrant. If in the opinion of each such counsel the proposed
transfer may be effected without registration or qualification (under any
federal or state securities laws), the Company, as promptly as practicable,
shall notify the Holder of such opinion, whereupon the Holder shall be
entitled to transfer this Warrant or to dispose of Warrant Shares received
upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by the Holder to the Company; provided that
an appropriate legend may be endorsed on this Warrant or the certificates
for such Warrant Shares respecting restrictions upon transfer thereof
necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further
A-5
<PAGE>
transfers which would be in violation of Section 5 of the Securities Act of
1933, as amended (the "1933 Act"), and applicable state securities laws;
and provided further that the prospective transferee or purchaser shall
execute such documents and make such representations, warranties, and
agreements as may be required solely to comply with the exemptions relied
upon by the Company for the transfer or disposition of the Warrant or
Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such
Warrant Shares described in the written notice given pursuant to this
Section 7 may not be effected without registration or qualification of this
Warrant or such Warrant Shares, the Company shall promptly give written
notice thereof to the Holder and the Holder will limit its activities in
respect to this Warrant or such Warrant shares to such activities as, in
the opinion of both such counsel, are permitted by law.
8. FRACTIONAL SHARES.
Fractional shares shall not be issued upon the exercise of this
Warrant, but in any case where the Holder would, except for the provisions of
this Section, be entitled under the terms hereof to receive a fractional share,
the Company shall, upon the exercise of this Warrant for the largest number of
whole shares then called for, pay a sum in cash equal to the sum of (a) the
excess, if any, of the Market Price on the date of exercise of such fractional
share over the proportional part of the Warrant Exercise Price represented by
such fractional share, plus (b) the proportional part of the Warrant Exercise
Price represented by such fractional share. For purposes of this Section, the
term "Market Price" as of a particular date with respect to shares of Common
Stock of any class or series means the last reported sale price on such date or,
if none, the average of the last reported closing bid and asked prices on any
national securities exchange or quoted in the National Association of Securities
Dealers, Inc.'s Automated Quotations System (Nasdaq), or if not listed on a
national securities exchange or quoted in Nasdaq, the average of the last
reported closing bid and asked prices as reported by Metro Data Company, Inc.
from quotations by market makers in such Common Stock on the Minneapolis-St.Paul
local over-the-counter market.
9. REGISTRATION RIGHTS.
(a) If at any time after August __, 1997, and prior to the end of the
two-year period following complete exercise of this Warrant or August __,
2003, whichever occurs earlier, the Company proposes to register under the
1933 Act (except by a Form S-4 or Form S-8 Registration Statement or any
successor forms thereto or such other form as would not allow the
registration of such shares) or qualify for a public distribution under
Section 3(b) of the 1933 Act, any of its equity securities or debt with
equity features, it will give written notice to all Holders of this
Warrant, any Warrants issued
A-6
<PAGE>
pursuant to Section 2 and/or Section 3(a) hereof, and any Warrant Shares of
its intention to do so and, on the written request of any such Holder given
within twenty (20) days after receipt of any such notice (which request
shall specify the interest in the Warrant Shares intended to be sold or
disposed of by such Holder and describe the nature of any proposed sale or
other disposition thereof), the Company will use its best efforts to cause
all such Warrant Shares, the Holders of which shall have requested the
registration or qualification thereof, to be included in such registration
statement proposed to be filed by the Company; provided, however, that if a
greater number of Warrant Shares is offered for participation in the
proposed offering than in the reasonable opinion of the managing
underwriter of the proposed offering can be accommodated without adversely
affecting the proposed offering, then the amount of Warrant Shares proposed
to be offered by such Holders for registration, as well as the number of
securities of any other selling shareholders participating in the
registration, shall be proportionately reduced to a number deemed
satisfactory by the managing underwriter.
(b) On a one-time basis during the four-year period commencing August
__, 1997 (one year after the Effective Date as defined in the Underwriting
Agreement), upon request by the Holder or Holders of a majority in interest
of this Warrant, of any Warrants issued pursuant to Section 2 and/or
Section 3(a) hereof, and of any Warrant Shares, the Company will promptly
take all necessary steps to register on Form S-3 under the 1933 Act (if
such Form is then available to the Company) and the securities laws of such
states as the Holders may reasonably request, the number of Warrant Shares
issued and to be issued upon exercise of the Warrants requested by such
Holders in their request to the Company. The Company shall keep effective
and maintain any registration, qualification, notification, or approval
specified in this subparagraph (b) for such period (not to exceed 9 months)
as may be reasonably necessary for such Holder or Holders of such Warrant
Shares to dispose thereof and from time to time shall amend or supplement
the prospectus used in connection therewith to the extent necessary in
order to comply with applicable law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following
fees, costs, and expenses: all registration, filing and NASD fees, Nasdaq
fees, printing expenses, fees and disbursements of counsel and accountants
for the Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the offering is underwritten and the
Company is otherwise required to bear such fees and disbursements), all
internal expenses, the premiums and other costs of policies of insurance
against liability arising out of the public offering, and legal fees and
disbursements and other expenses of complying with state securities laws of
any jurisdictions in which the securities to be offered are to be
registered or qualified. Fees and disbursements of special counsel and
accountants for the
A-7
<PAGE>
selling Holders, underwriting discounts and commissions, and transfer
taxes for selling Holders and any other expenses relating to the sale of
securities by the selling Holders not expressly included above shall be
borne by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of any Warrant
Shares included in any such registration, and the officers and directors,
if any, who control such Holders, within the meaning of Section 15 of the
1933 Act, against all losses, claims, damages, and liabilities caused by
(1) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus (and as amended or
supplemented if the Company shall have furnished any amendments thereof or
supplements thereto), any Preliminary Prospectus or any state securities
law filings; (2) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, or liabilities are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such Holder
or any underwriter expressly for use therein; and each such Holder by its
acceptance hereof severally agrees that it will indemnify and hold harmless
the Company, each of its directors, each of its officers who signs such
Registration Statement, and each person, if any, who controls the Company,
within the meaning of Section 15 of the 1933 Act, with respect to losses,
claims, damages, or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company by
such Holder expressly for use therein.
10. ADDITIONAL RIGHT TO CONVERT WARRANT.
(a) The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after
it is exercisable, but prior to its expiration, into shares of Company
Common Stock as provided for in this Section 10. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment
by the Holder of any Warrant Exercise Price) that number of shares of
Company Common Stock equal to the quotient obtained by dividing (x) the
value of the Warrant at the time the Conversion Right is exercised
(determined by subtracting the Warrant Exercise Price for a Warrant Share
in effect immediately prior to the exercise of the Conversion Right from
the Fair Market Value of a Warrant Share immediately prior to the date of
the exercise of the Conversion Right and multiplying that number by the
number of Warrant Shares for which the Conversion Right is being exercised)
by (y) the Fair Market Value of a Warrant Share immediately prior to the
exercise of the Conversion Right.
A-8
<PAGE>
COMMON SHARES COMMON SHARES
[LOGO]
ADVANCED UROSCIENCE, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 00756X 10 3
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
- ------------------------ -----------------------
- ------------------------ ADVANCED UROSCIENCE, 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 UNLESS COUNTERSIGNED BY THE TRANSFER AGENT-REGISTRAR.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS.
DATED:
[SIGNATURE] [SIGNATURE]
SECRETARY PRESIDENT
<PAGE>
The corporation will furnish to any shareholder, upon request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class or series authorized to be
issued, so far as they have been determined, and the authority of the
board to determine the relative rights and preferences of subsequent
classes or series.
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 Transfers to Minors
survivorship and not as Act______ ________________________
tenants in common (State)
UNIF TRF MIN ACT-- _____________Custodian (until age___)
(Cust)
_____________under Uniform Transfers
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 OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
___________________________________________________________________ Shares
of the capital 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 _____________________________
NOTICE: _______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND 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 _____________________________________
<PAGE>
Direct Dial No.
(612) 347-7111
August 6, 1996
Advanced UroScience, Inc.
1290 Hammond Road
St. Paul, Minnesota 55110
RE: REGISTRATION STATEMENT ON FORM SB-2 - EXHIBIT 5.1
Gentlemen/Ladies:
We have acted as counsel for Advanced UroScience, Inc. (the "Company")
in connection with the Company's filing of a Registration Statement on Form
SB-2 (the "Registration Statement") relating to the registration under the
Securities Act of 1933 (the "Act") of 1,725,000 shares of Common Stock,
including 225,000 shares subject to an over-allotment option (the "Shares").
In connection with rendering this opinion, we have reviewed the
following:
1. The Company's Articles of Incorporation;
2. The Company's Bylaws; and
3. Certain corporate resolutions, including resolutions of the Company's
Board of Directors pertaining to the issuance by the Company of the
Shares covered by the Registration Statement.
Based upon the foregoing and upon representations and information
provided by the Company, we hereby advise you that in our opinion:
1. The Company's Articles of Incorporation validly authorize the issuance
of the Shares registered pursuant to the Registration Statement.
2. Upon the delivery and payment therefor in accordance with the terms of
the Registration Statement and the Underwriting Agreement described in
the Registration Statement, the Shares to be issued and sold by the
Company will be validly issued, fully paid and nonassessable.
<PAGE>
August 6, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" included in the Registration Statement and the related
Prospectus.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By /s/ Dobson West
-------------------------------
Dobson West
- ---------
564087/DH
<PAGE>
ADVANCED UROSCIENCE, INC.
1996 STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Affiliates" shall mean a Parent or Subsidiary of the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Committee" shall mean a Committee of two or more directors who shall
be appointed by and serve at the pleasure of the Board. In the event the
Company's securities are registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, each of the members of the
Committee shall be a "disinterested" person within the meaning of Rule
16b-3, or any successor provision, as then in effect, of the General Rules
and Regulations under the Securities Exchange Act of 1934 as amended. As
of the effective date of the Plan, a "disinterested" person under Rule
16b-3 generally means a person who, among other things, has not been, at
any time within one year prior to his or her appointment to the Committee
(or, if shorter, during the period beginning with the initial registration
of the Company's equity securities under Section 12 of the Securities
Exchange Act of 1934, as amended, and ending with the director's
appointment to the Committee) and who will not be, while serving on such
Committee, granted or awarded options under the Plan, or under any other
plan of the Company or any of its Affiliates entitling participants to
acquire stock, stock options, stock appreciation rights or similar rights
that have an exercise or conversion privilege or a value derived from
equity securities issued by the Company or its Affiliate, except to the
extent permitted by Rule 16b-3, or any successor provision.
(d) "Common Stock" shall mean common stock of the Company.
(e) The "Company" shall mean Advanced UroScience, Inc., a Minnesota
corporation.
(f) "Director" shall mean a member of the Board of Directors.
(g) "Fair Market Value" of the Common Stock as of any applicable date
shall mean: (i) if such stock is reported in the national market system or
is listed upon an established exchange or exchanges, the reported closing
price of such stock in such national market system or on such stock
exchange or exchanges on the date the option is granted or, if no sale of
such stock shall have occurred on that date, on the next preceding day on
which there was a sale of stock; (ii) if such stock is not so reported in
the national market system or listed upon an exchange, the average of the
closing "bid" and "asked" prices quoted by a recognized specialist in the
Common Stock of the Company on the date the option is granted, or if there
are no quoted "bid" and "asked" prices on such date, on the next preceding
date for which there are such quotes; or (iii) if such stock is not
publicly traded as of the date the option is
<PAGE>
granted, the per share value as determined by the Board, or the Committee,
in its sole discretion by applying principles of valuation with respect to
all such options.
(h) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(i) "Option Agreement" shall mean a written stock option agreement
evidencing an option granted under the Plan.
(j) "Option Stock" shall mean Common Stock (subject to adjustment as
described in Section 13) reserved for options pursuant to this Plan.
(k) "Parent" shall mean any corporation which owns, directly or indirectly
in an unbroken chain, fifty percent (50%) or more of the total voting power
of the Company's outstanding stock.
(l) The "Plan" means the Advanced UroScience, Inc. 1996 Stock Option Plan,
as amended hereafter from time to time, including the form of Option
Agreements as they may be modified by the Board from time to time.
(m) A "Subsidiary" shall mean any corporation of which fifty percent (50%)
or more of the total voting power of outstanding stock is owned, directly
or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and its
Subsidiaries by facilitating the employment and retention of competent personnel
and by furnishing incentive to officers, directors, employees, consultants and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, and through the granting of "non- qualified stock options" pursuant
to Sections 10 and 11 of this Plan. Adoption of this Plan shall be and is
expressly subject to the condition of approval by the shareholders of the
Company within twelve (12) months after the adoption of the Plan by the Board.
In no event shall any stock options be exercisable prior to the date this Plan
is approved by the shareholders of the Company. If shareholder approval of this
Plan is not obtained within twelve (12) months after the adoption of the Plan by
the Board, any stock options previously granted shall be revoked.
SECTION 3.
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EFFECTIVE DATE OF PLAN
The Plan shall be effective upon its adoption by the Board, subject to
approval by the shareholders of the Company as required in Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Committee if one is in existence or
if not, by the Board. The Board or the Committee, as the case may be, shall
have all of the powers vested in it under the provisions of the Plan, including
but not limited to exclusive authority (where applicable and within the
limitations described herein) to determine, in its sole discretion, whether an
incentive stock option or nonqualified stock option shall be granted, the
individuals to whom, and the time or times at which, options shall be granted,
the number of shares subject to each option and the option price and terms and
conditions of each option. The Board, or the Committee, shall have full power
and authority to administer and interpret the Plan, to make and amend rules,
regulations and guidelines for administering the Plan, to prescribe the form and
conditions of the respective stock option agreements (which may vary from
optionee to optionee) evidencing each option and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's, or the Committee's, interpretation of the Plan, and all actions taken
and determinations made by the Board or the Committee pursuant to the power
vested in it hereunder, shall be conclusive and binding on all parties
concerned. No member of the Board or the Committee shall be liable for any
action taken or determination made in good faith in connection with the
administration of the Plan.
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board or the Committee, as the case may be, shall from time to time, at
its discretion and without approval of the shareholders, designate those
employees, directors, officers, consultants, and advisors of the Company or of
any Subsidiary to whom nonqualified stock options shall be granted under this
Plan; provided, however, that consultants or advisors shall not be eligible to
receive stock options hereunder unless such consultant or advisor renders bona
fide services to the Company or Subsidiary and such services are not in
connection with the offer or sale of securities in a capital-raising
transaction; provided, further, that a Director, other than a Director who is
also an employee of the Company, shall only be eligible to receive nonqualified
stock options pursuant to Section 11. The Board or the Committee, as the case
may be, shall, from time to time, at its discretion and without approval of the
shareholders, designate those employees of the Company or any Subsidiary to whom
incentive stock options shall be granted under this Plan. The Board or the
Committee may
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grant additional incentive stock options or nonqualified stock options under
this Plan to some or all participants then holding options or may grant
options solely or partially to new participants. In designating
participants, the Board or the Committee shall also determine the number of
shares to be optioned to each such participant. The Board may from time to
time designate individuals as being ineligible to participate in the Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. Five Hundred Thousand (500,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to
time during a period of ten (10) years from the effective date as defined in the
Plan. Nonqualified stock options may be granted pursuant to the Plan from time
to time after the effective date of the Plan and until the Plan is discontinued
or terminated by the Board.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, certified check, Common Stock of the Company valued at such
stock's then Fair Market Value, or such other form of payment as may be
authorized by the Board or the Committee. The Board or the Committee may, in
its sole discretion, limit the forms of payment available to the optionee and
may exercise such discretion any time prior to the termination of the option
granted to the optionee or upon any exercise of the option by the optionee.
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SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to the Plan shall be evidenced
by an Option Agreement. The Option Agreement shall be in such form as may be
approved from time to time by the Board or Committee and may vary from optionee
to optionee; provided, however, that each inactive stock option granted under
this Plan and each related Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To the
extent required to qualify the option as an incentive stock option under
Section 422 of the Internal Revenue Code, or any successor provision, the
option price per share shall not be less than one hundred percent (100%) of
the Fair Market Value of the Common Stock per share on the date the Board
or the Committee, as the case may be, grants the option; provided, however,
that if an optionee owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or
of its Parent or any Subsidiary, the option price per share of an incentive
stock option granted to such optionee shall not be less than one hundred
ten percent (110%) of the Fair Market Value of the Common Stock per share
on the date of the grant of the option. The Board or the Committee, as the
case may be, shall have full authority and discretion in establishing the
option price and shall be fully protected in so doing.
(b) TERM AND EXERCISABILITY OF INCENTIVE STOCK OPTION. The term during
which any incentive stock option granted under the Plan may be exercised
shall be established in each case by the Board or the Committee, as the
case may be. To the extent required to qualify the option as an incentive
stock option under Section 422 of the Internal Revenue Code, or any
successor provision, in no event shall any incentive stock option be
exercisable during a term of more than ten (10) years after the date on
which it is granted; provided, however, that if an optionee owns stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of its Parent or any Subsidiary,
the incentive stock option granted to such optionee shall be exercisable
during a term of not more than five (5) years after the date on which it is
granted. The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which the
option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the event
it is not exercised in full immediately shall be specified in the Option
Agreement. The Board or the Committee, as the case may be, may accelerate
the exercise date of any incentive stock option granted hereunder which is
not immediately exercisable as of the date of grant.
(c) OTHER PROVISIONS. The Option Agreement authorized under this Section
9 shall contain such other provisions as the Board or the Committee, as the
case may be, shall deem advisable. Any such Option Agreement shall contain
such limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered
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an "incentive stock option" as defined in Section 422 of the Internal
Revenue Code or to conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to the Plan shall be
evidenced by an Option Agreement. The Option Agreement shall be in such form as
may be approved from time to time by the Board or the Committee and may vary
from optionee to optionee; provided, however, that each nonqualified option
granted under this Section 10 and each related Option Agreement shall comply
with and be subject to the following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Board or the Committee, as the case may
be, the option price per share shall be one hundred percent (100%) of the
Fair Market Value of the Common Stock per share on the date the Board or
the Committee grants the option.
(b) TERM AND EXERCISABILITY OF NONQUALIFIED STOCK OPTION. The term during
which any nonqualified stock option granted under the Plan may be exercised
shall be established in each case by the Board or the Committee, as the
case may be. The Option Agreement shall state when the nonqualified stock
option becomes exercisable and shall also state the maximum term during
which the option may be exercised. In the event a nonqualified stock
option is exercisable immediately, the manner of exercise of the option in
the event it is not exercised in full immediately shall be specified in the
stock option agreement. The Board or the Committee, as the case may be,
may accelerate the exercise date of any nonqualified stock option granted
hereunder which is not immediately exercisable as of the date of grant.
(c) WITHHOLDING. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the optionee all legally required
amounts necessary to satisfy any and all federal, state and local
withholding and employment-related taxes attributable to the optionee's
exercise of a nonqualified stock option. In the event the optionee is
required under the Option Agreement to pay the Company, or make
arrangements satisfactory to the Company respecting payment of, such
federal, state and local withholding and employment-related taxes, the
Board or the Committee, as the case may be, may, in its discretion and
pursuant to such rules as it may adopt, permit the optionee to satisfy such
obligation, in whole or in part, by electing to have the Company withhold
shares of Common Stock otherwise issuable to the optionee as a result of
the option's exercise equal to the amount required to be withheld for tax
purposes. Any stock elected to be withheld shall be valued at its Fair
Market Value, as of the date the amount of tax to be withheld is determined
under applicable tax law. The optionee's election to have shares withheld
for this purpose shall be made on or before the date the option is
exercised or, if later, the date that the amount of tax to be withheld is
determined under applicable tax law. Such election shall also comply with
such rules as may be adopted by the Board or the Committee to assure
compliance with Rule
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16b-3, or any successor provision, as then in effect, of the General Rules
and Regulations under the Securities Exchange Act of 1934, if applicable.
(d) OTHER PROVISIONS. The Option Agreement authorized under this Section
10 shall contain such other provisions as the Board, or the Committee, as
the case may be, shall deem advisable.
SECTION 11
NONQUALIFIED STOCK OPTIONS FOR DIRECTORS
(a) GRANT OF NONQUALIFIED STOCK OPTIONS. All grants of nonqualified stock
options to Directors under this Section 11 shall be evidenced by an Option
Agreement. The Option Agreement shall be in such form as may be approved
from time to time by the Board or Committee and may vary from optionee to
optionee; provided, however, that each nonqualified stock option issued to
a Director other than a Director who is also an employee of the Company
shall be automatic and nondiscretionary and shall be made strictly in
accordance with the following provisions:
(1) AUTOMATIC GRANTS. No person shall have any discretion to select
the Directors that shall be eligible for nonqualified stock options
pursuant to this Section 11 or to determine the number of shares of
Common Stock to be subject to such options, the option price per share
or the date of grant.
(2) ANNUAL GRANTS. Each Director shall, on each anniversary date of
such Director's most recent election to the Board, be granted a
nonqualified stock option to purchase Five Thousand (5,000) shares of
Common Stock so long as such Director continues to serve on the Board.
(b) OPTION PRICE. The option price per share for all nonqualified stock
options granted pursuant to Section 11(a) above shall be one hundred
percent (100%) of the Fair Market Value of a share of Common Stock on the
date the nonqualified stock option is granted.
(c) DURATION AND EXERCISE OF OPTIONS.
(1) DURATION OF OPTIONS. Except as otherwise provided in this Plan,
the period during which any nonqualified stock option granted to
Directors under this Section 11 may be exercised shall be ten
(10) years after the date that the option is granted.
(2) EXERCISABILITY OF NONQUALIFIED STOCK OPTIONS.
a. In no event shall any nonqualified stock options granted to
Directors be exercisable prior to the date that the Plan is
approved by the shareholders of the Company. If shareholder
approval of the Plan is
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not obtained within twelve (12) months following its
adoption by the Board, any nonqualified stock options
previously granted to Directors shall be revoked.
b. All nonqualified stock options granted to Directors pursuant
to this Section 11 shall be immediately exercisable subject
only to the provisions of Section 11(c)(2)(a).
(d) PAYMENT OF OPTION PRICE. Upon the exercise of any nonqualified stock
option granted to a Director pursuant to this Section 11, the purchase
price for such shares of Common Stock subject to such option shall be
paid in cash or certified check, by the transfer from the Director to
the Company of previously acquired shares of Common Stock, or any
combination thereof. Any Common Stock so transferred shall be valued
at its fair market value. For purposes of this Section 11(d),
"previously acquired shares of Common Stock" shall include shares of
Common Stock that are already owned by the Director at the time of
exercise.
(e) COMPLIANCE WITH RULE 16B-3. All nonqualified stock options granted to
Directors must comply with the applicable provisions of Rule 16b-3, or
its successor, of the General Rules and Regulations of the Securities
Exchange Act of 1934, as amended.
(f) TERMINATION OF STATUS AS A DIRECTOR. In the event that a Director's
membership on the Board terminates, the following provisions shall
apply:
(1) If the Director's membership on the Board terminates for any
reason other than the Director's death, the Director shall be
entitled to exercise any nonqualified stock option granted to
such Director pursuant to this Section 11 which were exercisable
at the time of such termination until the earlier of (i) the
close of business on the 30th day after such termination, and
(ii) the expiration of the option as provided in Section 11(c)(1)
above. To the extent that the Director does not exercise such
option within the period specified in this Section 11(f)(1), all
rights of the Director under such option shall be forfeited.
(2) If the Director dies while a member of the Board, any
nonqualified stock option granted to such Director may be
exercised by the Director's estate or any person who acquired the
right to exercise any nonqualified stock option granted to such
Director pursuant to this Section 11 by bequest or inheritance
until the earlier of the expiration of the option as provided in
Section 11(c)(1) above or the close of business one hundred
eighty (180) days after the date of the Director's death.
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SECTION 12
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part, by
the optionee other than by will or by the laws of descent and distribution and,
during the optionee's lifetime, the incentive stock option may be exercised only
by the optionee. If the optionee shall attempt any transfer of any incentive
stock option granted under the Plan during the optionee's lifetime, such
transfer shall be void and the incentive stock option, to the extent not fully
exercised, shall terminate.
The Board or the Committee, as the case may be, may, in its sole
discretion, permit the transfer of a nonqualifed stock option to members of the
optionee's immediate family, to a trust for the benefit of such family members
or to a partnership in which such family members are the only partners. The
extent to which a nonqualified stock option is transferable shall be set forth
in the Option Agreement evidencing such nonqualified stock option.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the Option Agreement, in the event of the sale
by the Company of substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger, consolidation,
exchange, reorganization, reclassification, extraordinary dividend, divestiture
(including a spin-off) or liquidation of the Company (collectively referred to
as a "transaction"), the Board may, in connection with the Board's adoption of
the plan for such transaction, provide for one or more of the following: (i)
the equitable acceleration of the exercisability of any outstanding options
hereunder; (ii) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the Board (which
date shall give optionees a reasonable period of time in which to exercise the
options prior to the effectiveness of such transaction) and (iii) the
continuance of the Plan with respect to the exercise of options which were
outstanding as of the date of adoption by the Board of such plan for such
transaction and provide to optionees holding such options the right to exercise
their respective options as to an equivalent number of shares of stock of the
corporation succeeding the Company by reason of such transaction. The grant of
an option pursuant to the Plan shall not limit in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
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of its capital or business structure or to merge, exchange or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business or assets.
SECTION 14.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to the optionee, the Board or the Committee may require
the optionee to (a) represent that the shares of Option Stock are being acquired
for investment and not resale and to make such other representations as the
Board, or the Committee, as the case may be, shall deem necessary or appropriate
to qualify the issuance of the shares as exempt from the Securities Act of 1933
and any other applicable securities laws, and (b) represent that the optionee
shall not dispose of the shares of Option Stock in violation of the Securities
Act of 1933 or any other applicable securities laws. The Company reserves the
right to place a legend on any stock certificate issued upon exercise of an
option granted pursuant to the Plan to assure compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An optionee (or the optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the optionee without
the consent of the optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
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to optionees under the Plan, unless such revision or amendment is approved by
the shareholders of the Company. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code. In no event shall the Board or the Committee, either directly or
indirectly, amend the provisions of Section 11 relating to nonqualified stock
options that are granted to Directors more frequently than once every six (6)
months, unless such amendment is required to comply with changes in the Employee
Retirement Income Security Act of 1974, as amended, and the regulations
thereunder, or with the Internal Revenue Code of 1986, and the regulations
thereunder.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the optionee
in its employ for any period.
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FORM OF INCENTIVE STOCK OPTION AGREEMENT
ADVANCED UROSCIENCE, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this ____ day of ____________, 19____,
by and between Advanced UroScience, Inc., a Minnesota corporation (the
"Company"), and _________________________________ ("the Optionee");
W I T N E S S E T H:
WHEREAS, the Optionee on the date hereof is a key employee or officer of
the Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to the
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1996 Stock Option Plan (the "Plan"); and
WHEREAS, the Company's Board of Directors or Stock Option Committee has
authorized the grant of this incentive stock option to the Optionee;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee on the
date set forth above (the "Date of Grant"), the right and option (the "Option")
to purchase all or portions of an aggregate of _______________________________
_____________ (_______________) shares of Common Stock at a per share price of
$________ on the terms and conditions set forth herein, and subject to
adjustment pursuant to Section 13 of the Plan. This Option is intended to be an
incentive stock option within the meaning of Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate at the close of business on ______________, 20__, unless terminated
earlier under the provisions of Paragraphs 4(f) or 4(g) below. This Option
shall be exercisable as follows:
NUMBER OF SHARES WHEN EXERCISABLE
---------------- ----------------
If the Optionee does not purchase in any option year the full number of shares
which the Optionee is entitled to purchase that year, the Optionee may purchase
in any subsequent option year such previously unpurchased shares in addition to
those the Optionee is otherwise entitled to purchase.
<PAGE>
If this option has been granted prior to approval of the Plan by the
Company's shareholders, this option shall not be exercisable until such
approval is obtained.
b. During the lifetime of the Optionee, the accrued Option shall be
exercisable only by the Optionee or by the Optionee's guardian or other legal
representative, and shall not be assignable or transferable by the Optionee, in
whole or in part, other than by will or by the laws of descent and distribution.
3. MANNER OF EXERCISE.
a. The Option may be exercised only by the Optionee (or other proper
party in the event of death or incapacity), subject to the conditions of the
Plan and subject to such other administrative rules as the Board of Directors
may deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement.
b. Payment of the option price by the Optionee shall be in the form
of cash, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof; provided, however, that the Board or any
Committee appointed by the Board to administer the Plan may, in its sole
discretion, limit the form of payment to cash or certified check and may
exercise its discretion any time prior to the termination of this Option or upon
any exercise of this Option by the Optionee. Any stock so tendered as part of
such payment shall be valued at its fair market value as provided in the Plan.
As soon as practicable after the effective exercise of all or any part of the
Option, the Optionee shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership. All requisite original issue or transfer documentary stamp taxes
shall be paid by the Company. For purposes of this Agreement, "previously
acquired shares of Common Stock" shall include shares of Common Stock that are
already owned by the Optionee at the time of exercise.
4. MISCELLANEOUS.
a. EMPLOYMENT; RIGHTS AS SHAREHOLDER. This Agreement shall not
confer on the Optionee any right with respect to continuance of employment by
the Company or any of its Subsidiaries, nor will it interfere in any way with
the right of the Company to terminate such employment. The Optionee shall have
no rights as a shareholder with respect to shares subject to this Option until
such shares have been issued to the Optionee upon exercise of this Option. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 13 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of
this Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws. The
Optionee may be required by the Company, as a condition of
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<PAGE>
the effectiveness of any exercise of this Option, to agree in writing that
all Common Stock to be acquired pursuant to such exercise shall be held,
until such time that such Common Stock is registered and freely tradeable
under applicable state and federal securities laws, for the Optionee's own
account without a view to any further distribution thereof, that the
certificates for such shares shall bear an appropriate legend to that effect
and that such shares will be not transferred or disposed of except in
compliance with applicable state and federal securities laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off, liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in the Optionee's rights
with respect to any unexercised portion of the Option (I.E., the Optionee shall
have such "anti-dilution" rights under the Option with respect to such events,
but shall not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the term
of this Option reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION. In the event of
a disqualifying disposition of the shares acquired through the exercise of this
Option, the Optionee hereby agrees to inform the Company of such disposition.
Upon notice of a disqualifying disposition, the Company may take such action as
it deems appropriate to insure that, if necessary to provide the Company with
the opportunity to claim the benefit of any income tax deduction which may be
available to it upon such disqualifying disposition and to comply with all
applicable federal or state income tax laws or regulations, all applicable
federal and state payroll, income or other taxes are withheld from any amounts
payable by the Company to the Optionee. If the Company is unable to withhold
such federal and state taxes, for whatever reason, the Optionee hereby agrees to
pay to the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law. The Optionee may, subject to
the approval and discretion of the Board of Directors or such other
administrative rules it may deem advisable, elect to have all or a portion of
such tax withholding obligations satisfied by delivering shares of the Company's
Common Stock having a fair market value equal to such obligations.
f. TERMINATION OF EMPLOYMENT OTHER THAN BY DEATH OR DISABILITY OR
FOR CAUSE. If the Optionee ceases to be an employee of the Company or any
Subsidiary for any reason (including, without limitation, termination of
employment as a result of the reorganization, sale or liquidation by the Company
or the Subsidiary which employs the Optionee where the Optionee does not
thereafter continue as an employee of the Company or another Subsidiary), other
than because of death, disability or discharge for cause, this Option shall
completely terminate on the earlier of (i) the close of business on the one-
month anniversary date of such termination of employment, and (ii) the
expiration date of this Option stated in Paragraph 2 above. In such period
following such termination of employment, this Option shall be exercisable only
to the extent it had not previously been exercised. If the Optionee does not
exercise the Option within the time specified in this Paragraph 4(f), all rights
of the Optionee under this Option shall be forfeited.
g. DISABILITY. If the Optionee ceases to be an employee of the
Company or any Subsidiary due to disability (as such term is defined in Section
22(e)(3), or any successor provision,
-14-
<PAGE>
of the Code), this Option shall completely terminate on the earlier of (i)
the close of business on the twelve-month anniversary date of such
termination of employment, and (ii) the expiration date of this Option stated
in Paragraph 2 above. In such period following such termination of
employment, this Option shall be exercisable only to the extent it had not
previously been exercised. If the Optionee does not exercise the Option
within the time specified in this Paragraph 4(g), all rights of the Optionee
under this Option shall be forfeited.
h. DEATH. If the Optionee dies (i) while in the employ of the
Company or any Subsidiary; (ii) within the three-month period after the
termination of employment in the case of Paragraph 4(f) above; or (iii) within
the twelve-month period after the termination of employment in the case of
Paragraph 4(g) above, this Option shall terminate on the earlier of (i) the
close of business on the twelve-month anniversary date of the Optionee's death
and (ii) the expiration date of this Option stated in Paragraph 2 above. In
such period following the Optionee's death, this Option may be exercised only by
the person or persons to whom the Optionee's rights under this Option shall have
passed by the Optionee's will or by the laws of descent and distribution and
only to the extent the Option was exercisable on the date of death but had not
previously been exercised.
i. 1996 STOCK OPTION PLAN. The Option evidenced by this Agreement
is granted pursuant to the Plan, a copy of which Plan has been made available to
the Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
j. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 2(b) above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ADVANCED UROSCIENCE, INC.
By: ____________________________________________
Its: _______________________________________
Optionee _______________________________________
-15-
<PAGE>
FORM OF NONQUALIFIED STOCK OPTION AGREEMENT
AVANCED UROSCIENCE, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this ________ day of __________, 19__,
by and between Advanced UroScience, Inc., a Minnesota corporation (the
"Company"), and ______________________________________, ("the Optionee");
W I T N E S S E T H:
WHEREAS, the Optionee on the date hereof is a director of the Company; and
WHEREAS, Section 11 of the Company's 1996 Stock Option Plan (the "Plan")
provides for the grant of a nonqualified stock option to the Optionee to
purchase shares of the Company's Common Stock; and
WHEREAS, as of the effective date of this Agreement the fair market value
of the Company's Common Stock is $______ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee on the
date set forth above (the "Date of Grant"), the right and option (the "Option")
to purchase all or portions of an aggregate of Five Thousand (5,000) shares of
Common Stock at a per share price of $________ on the terms and conditions set
forth herein, and subject to adjustment pursuant to Section 13 of the Plan.
This Option is a nonqualified stock option and will not be treated as an
incentive stock option, as defined under Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate on ___________________, 20__, unless terminated earlier under the
provisions of Paragraphs 4(f) or 4(g) below. This Option shall be immediately
and fully exercisable on the Date of Grant, and the Optionee may exercise this
Option under the terms and conditions of this Agreement until the termination of
the Option as provided herein. If the Optionee does not purchase upon an
exercise of this Option the full number of shares which Optionee is then
entitled to purchase, the Optionee may purchase upon any subsequent exercise
prior to this Option's termination such previously unpurchased shares in
addition to those the Optionee is otherwise entitled to purchase.
b. During the lifetime of the Optionee, the accrued Option shall be
exercisable only by the Optionee or by the Optionee's guardian or other legal
representative, and shall not be assignable or transferable by the Optionee, in
whole or in part, other than by will or by the laws of descent and distribution.
<PAGE>
3. MANNER OF EXERCISE.
a. The Option may be exercised only by the Optionee (or other proper
party in the event of death or incapacity), subject to the conditions of the
Plan and subject to such other administrative rules as the Board of Directors
may deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement.
b. Payment of the option price by Optionee shall be in the form of
cash, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its fair market value as provided in the Plan. As
soon as practicable after the effective exercise of all or any part of the
Option, the Optionee shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership. All requisite original issue or transfer documentary stamp taxes
shall be paid by the Company. For purposes of this Agreement, "previously
acquired shares of Common Stock" shall include shares of Common Stock that are
already owned by the Optionee at the time of exercise.
4. MISCELLANEOUS.
a. RIGHTS AS SHAREHOLDER. This Agreement shall not confer on the
Optionee any right with respect to the continuance of any relationship with the
Company or any of its Subsidiaries, nor will it interfere in any way with the
right of the Company to terminate any such relationship. The Optionee shall
have no rights as a shareholder with respect to shares subject to this Option
until such shares have been issued to the Optionee upon exercise of this Option.
No adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 13 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of
this Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws. The
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for the Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
-17-
<PAGE>
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in the Optionee's rights
with respect to any unexercised portion of the Option (I.E., the Optionee shall
have such "anti-dilution" rights under the Option with respect to such events,
but shall not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the term
of this Option reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES. In order to provide the Company with the
opportunity to claim the benefit of any income tax deduction which may be
available to it upon the exercise of this Option and to permit the Company to
comply with all applicable federal or state income tax laws or regulations, the
Company may take such action as it deems appropriate to insure that, if
necessary, all applicable federal or state payroll, income or other taxes are
withheld from any amounts payable by the Company to the Optionee. If the
Company is unable to withhold such federal and state taxes, for whatever reason,
the Optionee hereby agrees to pay to the Company an amount equal to the amount
the Company would otherwise be required to withhold under federal or state law.
f. TERMINATION OF DIRECTORSHIP (OTHER THAN DEATH) OR DISABILITY. If
the Optionee ceases to be a director of the Company for any reason other than
because of death, this Option shall completely terminate on the earlier of (i)
the close of business on the 30th day after such termination of directorship and
(ii) the expiration date of this Option stated in Paragraph 2 above. If the
Optionee does not exercise the Option within the time period specified in this
Paragraph 4(f), all rights of the Optionee under this Option shall be forfeited.
g. DEATH. If the Optionee dies while serving as a nonemployee
director of the Company, this Option may be exercised by the Optionee, the
Optionee's estate or any person who acquired the right to exercise this Option
by bequest or inheritance, as the case may be, until the earlier of (i) the
close of business one hundred eighty (180) days after the date of the Optionee's
death and (ii) the expiration date of this Option stated in Paragraph 2 above.
If the Option is not exercised within the time specified in this Paragraph 4(g),
all rights of the Optionee under this Option shall be forfeited.
h. 1996 STOCK OPTION PLAN. The Option evidenced by this Agreement
is granted pursuant to the Plan, a copy of which Plan has been made available to
the Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
-18-
<PAGE>
i. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 2(b) above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ADVANCED UROSCIENCE, INC.
By: ____________________________________________
Its: _______________________________________
Optionee _______________________________________
-19-
<PAGE>
EXHIBIT 11
ADVANCED UROSCIENCE, INC.
COMPUTATION OF LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Period from
August 1,
1994 (Date of Five Months Ended May 31,
Inception), to Year Ended ---------------------------
December 31, December 31, 1995 1996
1994 1995 (Unaudited) (Unaudited)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Computation of weighted average
number of common shares
outstanding and common stock equivalent
shares: (A)
Common shares outstanding at
the beginning of the period -- 2,811,600 2,811,600 3,170,220
Weighted average number of
shares issued during the period 2,279,004 20,000 14,400 --
Common equivalent shares
attributed to stock options and
warrants granted (B) 684,263 684,263 684,263 684,263
Common stock issued (C) 877,620 877,620 877,620 543,000
----------- ---------- ----------- ----------
Weighted average number of
common and common
equivalent shares 3,840,887 4,393,483 4,387,883 4,397,483
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Net loss ($108,910) ($524,444) ($159,242) ($514,651)
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Loss per common and common
equivalent shares ($0.03) ($0.12) ($0.04) ($0.12)
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
(A) All shares have been adjusted to give effect to the 6 for 5 stock split
approved by the Board of Directors in May 1996
(B) All stock options and warrants are anti-dilutive, however, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB
83), stock options and warrants granted with the exercise price below the
assumed initial offering price during the twelve-month period preceding the
date of the initial filing of the Registration Statement have been included
in the calculation of common stock equivalent shares as if they were
outstanding for all periods presented, using the treasury stock method.
(C) Pursuant to the Securities and Exchange Commission SAB 83, all stock issued
at a price below the assumed initial offering price issued during the
twelve-month period preceding the date of the initial filing of the
Registration Statement has been included in the calculation of common stock
as if it was outstanding for all periods presented.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Advanced UroScience, Inc.
St. Paul, Minnesota
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report, dated January 26, 1996, relating to the financial statements of Advanced
UroScience, Inc., and to the reference to our Firm under the caption "Experts"
in the Prospectus.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
August 5, 1996
