<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997
REGISTRATION NO. 333-37583
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
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 Number) Identification
No.)
</TABLE>
ADVANCED UROSCIENCE, INC.
1290 HAMMOND ROAD
ST. PAUL, MN 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, MN 55110
(612) 653-8512
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
DOBSON WEST, ESQ. BRUCE A. MACHMEIER, ESQ.
MELODIE R. ROSE, ESQ. MICHAEL J. KOLAR, ESQ.
Fredrikson & Byron, P.A. Oppenheimer Wolff & Donnelly
900 Second Avenue South, Suite 1100 45 South Seventh Street, Suite 3400
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 347-7000 (612) 607-7000
------------------------
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 for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock (no par value)................ 2,875,000 $12.00 $34,500,000 $10,455
</TABLE>
(1) Includes 375,000 shares purchasable by the Underwriters to cover
over-allotments.
(2) In accordance with Rule 457(a) under the Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS 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 NOVEMBER 18, 1997
2,500,000 SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Advanced
UroScience, Inc. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company has applied for inclusion of its Common Stock on the Nasdaq
National Market under the symbol "AURO."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
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
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................... $ $ $
Total(3).................... $ $ $
</TABLE>
(1) 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 estimated offering expenses of $400,000 payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to 375,000 additional
shares of Common Stock to cover over-allotments, if any. If this option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and are
subject to the right of the Underwriters to withdraw such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of Common
Stock will be made on or about , 1997.
DAIN BOSWORTH INCORPORATED ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS
, 1997
<PAGE>
[LOGO]
Advanced UroScience has developed ACYST, an injectable bulking agent designed to
treat stress urinary incontinence. ACYST is a proprietary composition of
pyrolytic carbon-coated micro-beads suspended in a carrier gel. ACYST is
designed to provide permanent bulking around the urethra to close the bladder
neck and restore the patient to urinary continence.
<TABLE>
<S> <C> <C>
[SERIES OF ANATOMICAL
DEPICTIONS
DEMONSTRATING THE ACYST
INJECTION PROCEDURE]
Before treatment, an ACYST is injected to The
open bladder neck bulk the tissue at or injection
results in urine near the bladder neck. is
leakage. repeated
at
other
sites
until
the
bladder
neck
is
closed,
immediately
restoring
urinary
control.
</TABLE>
ACYST is currently undergoing human clinical trials under an investigational
device exemption granted by the U.S. Food and Drug Administration ("FDA"). ACYST
has not received marketing clearance from the FDA for sale in the U.S., and
there can be no assurance that such approval will be received. See
"Business--Government Regulations."
ACYST-TM- is a trademark of the Company. This Prospectus also includes trade
names and trademarks of companies other than Advanced UroScience, Inc.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
AND (II) REFLECTS THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A
PREFERRED STOCK INTO 1,413,500 SHARES OF COMMON STOCK UPON COMPLETION OF THIS
OFFERING. SEE "UNDERWRITING" AND "DESCRIPTION OF SECURITIES."
THE COMPANY
Advanced UroScience, Inc. ("Advanced UroScience" or the "Company") has
developed ACYST, an injectable bulking agent designed to treat stress urinary
incontinence. 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 provide permanent
bulking around the urethra to close the bladder neck. The injection procedure
for ACYST is minimally invasive, can be accomplished in less than 30 minutes in
an outpatient setting and is designed to immediately restore the patient to
normal urinary continence. ACYST incorporates micro-beads that are designed to
be non-absorbable, non-migratory, biocompatible and intended to provide a
permanent solution, thereby minimizing the potential need for retreatment.
It is estimated that there are 13 million adults with urinary incontinence
in the U.S., of which approximately 85% are women. Approximately 9 million
adults with urinary incontinence suffer from stress urinary incontinence. The
Company believes that the majority of these people may benefit from treatment
with ACYST. Initially, the Company will seek U.S. Food and Drug Administration
("FDA") approval to market ACYST for the treatment of stress urinary
incontinence due to intrinsic sphincter deficiency, which the Company estimates
affects approximately 1.5 million adults. The Company intends to conduct future
human clinical trials to support expanded applications of ACYST in order to
address a larger segment of the population suffering from stress urinary
incontinence.
Through November 10, 1997, 79 patients had been treated with ACYST in the
Company's clinical studies. Most of these 79 patients experienced immediate
improvement in incontinence, suffered no post-treatment complications and were
able to return to normal activities within days. The Company is currently
conducting clinical trials at several U.S. locations under an investigational
device exemption ("IDE") granted by the FDA, and expects to use the data
gathered in its clinical trials to support an application for premarket approval
("PMA"), which the Company intends to file with the FDA in 1999. The Company is
also conducting human clinical trials outside of the U.S. and expects to receive
ISO 9001 certification and to meet the requirements for use of the CE mark in
1998, which will allow the Company to market its products in the European Union
("EU").
Advanced UroScience believes that ACYST offers significant advantages over
existing treatment options for sufferers of stress urinary incontinence. Unlike
adult diapers and other methods of managing the problem, ACYST is designed to
restore continence. 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. Compared with traditional surgical treatments, the Company
believes the minimally invasive ACYST procedure is less traumatic to patients
and will be associated with significantly reduced costs. Because it is designed
to be biocompatible, non-migratory and non-absorbable, the Company believes
ACYST addresses significant issues posed by commercially available injectable
bulking agents.
The Company's objective is to be a leader in the development and marketing
of innovative products for the treatment of urinary incontinence and to expand
applications of its proprietary bulking technology to areas other than urology.
The Company's strategy is to (i) focus on obtaining regulatory approval for
ACYST in the U.S. and internationally, (ii) develop additional marketing and
sales capabilities,
3
<PAGE>
(iii) enhance its manufacturing capabilities, (iv) explore complementary
technologies and (v) expand applications of ACYST technology.
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.
RECENT DEVELOPMENTS
PROSPECTIVE STRATEGIC ALLIANCE
On November 7, 1997, the Company entered into a letter of intent with Boston
Scientific Corporation ("BSC") to grant BSC the exclusive right to market and
sell ACYST worldwide, except for in the U.S. The proposed alliance is subject to
the completion of definitive documents and the approval by senior management of
the Company and BSC. The terms of the proposed alliance include (i) a seven-year
term with an option for a five-year renewal based on mutual agreement, and BSC
will have the right to terminate the agreement with six months' advance notice,
(ii) the Company will receive a percent of BSC's average sales price for each
unit of ACYST sold, with minimum sales levels to be established based on mutual
agreement, (iii) upon execution of a definitive agreement, BSC will purchase
$500,000 of the Company's common stock at a market based price per share and
warrants to purchase an additional $500,000 of common stock at the same price,
(iv) the Company and BSC will collaborate on obtaining the required
international regulatory approvals and will share in the costs of mutually
agreed upon market studies in key countries, (v) BSC will have a 90 day first
right of negotiation for any other products that may be developed by the
Company, and a 90 day first right of negotiation for U.S. distribution rights of
ACYST in the event the Company decides to utilize a distributor in the U.S. and
(vi) the Company will indemnify BSC for certain liabilities it may incur as a
distributor of ACYST.
The Company believes that BSC, a worldwide developer, manufacturer and
marketer of minimally invasive medical devices, will provide for international
sales growth, while allowing the Company to focus on its primary goal of
obtaining regulatory approval from the FDA to market ACYST in the U.S. This
proposed alliance with BSC will also minimize the costs and reduce the
infrastructure associated with developing an extensive, international sales and
marketing network. However, no assurance can be given that the Company and BSC
will enter into a definitive agreement or that it will have the anticipated
effect on the Company stated herein.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered.................................. 2,500,000 shares
Common Stock to be outstanding after the offering..... 7,626,720 shares (1)
Use of proceeds....................................... To fund ongoing and future human clinical trials,
research and development, international sales and
marketing, expansion of manufacturing capabilities, and
working capital and general corporate purposes.
Proposed Nasdaq National Market symbol................ AURO
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED PERIOD FROM
DECEMBER 31, SEPTEMBER 30, INCEPTION
-------------------- -------------------- (AUGUST 1, 1994) TO
1995 1996 1996 1997 SEPTEMBER 30, 1997
--------- --------- --------- --------- --------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (2):
Research and development expense....................... $ 353 $ 764 $ 485 $ 1,040 $ 2,190
General and administrative expense..................... 165 778 578 1,091 2,108
Net loss............................................... $ (524) $ (1,508) $ (1,035) $ (2,010) $ (4,152)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per share..................................... $ (0.12) $ (0.29) $ (0.20) $ (0.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding................................... 4,486 5,224 5,184 5,347
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
DECEMBER 31, AS ADJUSTED
1996 ACTUAL (3)
------------ --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................... $ 354 $ 3,385 $ 28,560
Working capital....................................................... 88 3,412 28,587
Total assets.......................................................... 623 4,197 29,372
Total liabilities..................................................... 407 383 383
Deficit accumulated during the development stage...................... (2,411) (4,421) (4,421)
Total stockholders' equity............................................ 216 3,814 28,989
</TABLE>
- ------------------------
(1) Does not include, as of the date of this Prospectus, (i) 920,880 shares of
Common Stock issuable upon exercise of outstanding options, (ii) 174,000
shares reserved for future grants of options under the Company's 1996 Stock
Option Plan and (iii) 620,000 shares issuable upon exercise of outstanding
warrants. See "Management--Stock Options" and "Description of Securities."
(2) The Company has generated no revenues to date.
(3) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
hereby (at an assumed Price to Public of $11.00 per share) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THIS
PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S PLANS, ESTIMATES AND BELIEFS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
NEED FOR FURTHER CLINICAL TESTING
ACYST, the Company's sole product, is a new product which has undergone only
a limited number of preclinical and clinical studies. As of November 10, 1997,
only 79 patients had been treated with ACYST in clinical trials and there does
not exist a statistically significant body of clinical data from which to draw
conclusions concerning the effectiveness and long-term outcomes associated with
ACYST. The Company cannot market ACYST in the U.S. unless and until substantial
human trials are successfully completed and premarket approval has been granted
by the FDA. The Company's ability to market ACYST internationally will require
similar approvals from appropriate regulatory bodies in foreign jurisdictions.
There can be no assurance that ACYST will prove to be safe and effective to the
satisfaction of the FDA or such other regulatory bodies upon completion of the
clinical trials. The Company initially will seek FDA approval to market ACYST
for the treatment of stress urinary incontinence due to intrinsic sphincter
deficiency, and will likely be required to conduct future clinical trials to
support additional filings with the FDA for approval of expanded applications of
ACYST. There can be no assurance that there will not be any delays in the
completion of clinical testing or that required regulatory approvals will be
obtained on a timely basis, if at all. Any delay or failure by the Company in
achieving acceptable clinical results, obtaining approvals for any necessary
future clinical trials or receiving regulatory approval for ACYST would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business-- Status of Clinical Trials" and
"Business--Government Regulations."
EXTENSIVE GOVERNMENTAL REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL
As a medical device company, Advanced UroScience is subject to extensive and
rigorous regulation by the FDA in the U.S. and by comparable agencies in foreign
countries. The FDA regulates the introduction of medical devices as well as
manufacturing, labeling, distribution, sale, marketing, advertising, promotion
and recordkeeping procedures for such products. The process of obtaining
marketing approval for new products and new applications for existing products
can be costly and time consuming, and there is no assurance that such approvals
will be granted or that FDA review will not involve delays that would adversely
affect the Company's ability to commercialize its products. The Company's ACYST
product will be subject to the lengthy and expensive PMA process and the Company
recently began the final phase of the clinical trials required to support its
PMA application. Due to the need for extensive clinical data to support a PMA
application, there can be no assurance regarding the timing of any such
application for ACYST or the review or approval of any such application by the
FDA, if at all. Even if regulatory approval to market ACYST is obtained from the
FDA, this approval may entail limitations on the indicated uses of the product
not anticipated by the Company. Failure to receive approval for a PMA
application for ACYST for uses currently contemplated by the Company, or any
delay in the timing of such filing or approval would have a material adverse
effect on the Company's business, financial condition and results of operations.
Even if marketing approval for ACYST is granted, such approval can be
withdrawn temporarily or permanently 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 ACYST and has the power to
6
<PAGE>
require the recall of such product. 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
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, 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. In addition, there can be no assurance that the
government regulations will not change, and thereby prevent the Company from
temporarily or permanently marketing ACYST. The withdrawal by the FDA of its
marketing approval for ACYST, the recall of ACYST or similar regulatory action
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's business strategy currently includes establishing
international marketing and sales capabilities to begin commercial sales of
ACYST in foreign jurisdictions prior to receipt of FDA approval. International
regulatory bodies have established varying regulations regarding medical device
standards, packaging, testing, manufacturing, labeling and quality control,
among others. To introduce ACYST in the EU, the Company must comply with the
"essential requirements" set forth in the Medical Devices Directive ("MDD") of
the EU, which define the safety, design and manufacturing requirements for
medical products. Typically, a full quality assurance system complying with
international quality standards is required to conform with the MDD. Compliance
with these requirements will allow the Company to apply the CE mark to ACYST,
allowing free sale in the EU, subject only to limited regulation by member
countries. The Company recently underwent an audit of its quality system, which
is required to obtain ISO 9001 certification and approval to apply the CE mark.
Based upon the audit findings, the auditors recommended the Company for ISO 9001
certification and approval to apply the CE mark to ACYST upon implementing
corrective actions for minor non-conformities noted during the audit. The
Company has addressed these non-conformities and believes it will receive ISO
9001 certification and approval to apply the CE mark in 1998. However, there can
be no assurance that the Company will receive ISO 9001 certification or obtain
approval to apply the CE mark on a timely basis, if at all. Failure to obtain
the CE mark, address other international regulations or obtain other foreign
regulatory approvals would limit the Company's ability to sell ACYST
internationally, and would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Government Regulations."
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES
The Company is a development stage company that has been primarily engaged
in research, development and testing of ACYST since its inception in August
1994. The Company has experienced continued and significant operating losses
since inception and, as of September 30, 1997, had an accumulated deficit of
approximately $4.4 million. In addition, the development and commercialization
by the Company of ACYST and other new products, if any, will require substantial
additional product development, clinical, regulatory and other 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 net proceeds
of this 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
a number of factors, including satisfactory completion of the Company's human
clinical trials for ACYST, the timing and successful completion of the
regulatory approval process and the costs and the related timing of expansion of
marketing, sales and manufacturing activities. In addition, even if regulatory
approval is obtained, there can be no assurance that the Company will generate
revenues or achieve profitability in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business--Status of Clinical Trials" and the Financial Statements.
7
<PAGE>
DEPENDENCE ON SINGLE PRODUCT
The Company's future success is entirely dependent on the successful
commercialization and market acceptance of ACYST, which has not been
demonstrated to be safe and effective and which has not been granted necessary
regulatory approval. Accordingly, any delay or failure by the Company in
demonstrating that ACYST is safe and effective, receiving required regulatory
approvals to market ACYST or commercializing ACYST successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE
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 effectiveness of ACYST is established and the necessary regulatory
approvals are obtained. Acceptance of ACYST by physicians over other treatment
options, including other bulking agents, will depend upon the demonstration of
its safety and effectiveness in clinical trials, the relative performance of
ACYST compared to other market approved products, the ease of use and the
relative cost compared to other bulking agents and treatment alternatives.
Physicians may elect not 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.
Cost effectiveness of bulking agents will be impacted by the need for additional
injections to maintain improved continence. There can be no assurance as to
whether or 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. There can be no
assurance that ACYST will achieve market acceptance relative to the competing
products or treatment options for urinary incontinence. Failure of ACYST to
achieve significant market acceptance among physicians, health care payers and
patients would have a material adverse effect on the Company's business,
financial condition and results of operations.
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
issued U.S. patent covering its ACYST technology and one pending U.S. patent
application and two corresponding Patent Cooperation Treaty applications. A
number of patents have been issued to others covering injectable bulking
materials. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. There can be no assurance that any pending or future patent
applications will result in issued patents, that any current or future patents
will not be challenged or invalidated, that others will not claim rights in or
ownership of the patents and proprietary rights held by the Company, that the
rights granted under its patents will provide any competitive advantage to the
Company or that the Company's products and processes will not infringe the
proprietary rights of others. There can be no assurance that others will not
independently develop or otherwise acquire substantially equivalent techniques
or otherwise gain access to and disclose the Company's proprietary technology.
There can also be no assurance that the Company's trade secrets or
confidentiality agreements will provide meaningful protection for the Company's
unpatented proprietary information.
Beginning shortly after its inception, the Company received a series of
communications from Uroplasty Inc. ("Uroplasty"), a competing manufacturer of
medical devices and products, alleging that the Company's issued patent may be
invalid, informing the Company of certain patents held by Uroplasty covering
implant materials and alleging that the activities of certain of the Company's
officers are in violation of non-competition and non-disclosure agreements. The
Company has received an opinion of its patent counsel, Nawrocki Rooney &
Sivertson, P.A., that the Company's issued patent is valid and
8
<PAGE>
enforceable relative to any known prior art and that the Company's products do
not infringe any of the claims under any U.S. patents known to be held by
Uroplasty. The Company has reviewed with its general counsel the claims and
allegations regarding violations of non-competition and non-disclosure
agreements by the Company's officers, and believes them to be without merit.
Uroplasty has not brought any legal action in connection with its claims and
allegations. There can be no assurance, however, that Uroplasty or any other
third party will not pursue legal action with respect to these matters. Because
an opinion of counsel is not binding on any court and because of the complex
legal and factual questions involved in intellectual property litigation, there
can be no assurance that any such action would not be determined in a manner
adverse to the Company or its officers.
Claims by competitors such as Uroplasty and other third parties that the
Company's products allegedly infringe the patent or other intellectual property
rights of others could have a material adverse effect on the Company. There has
been substantial litigation regarding patent and other intellectual property
rights in the medical device industry, and intellectual property litigation may
be used against the Company as a means of gaining a competitive advantage.
Intellectual property litigation is complex, time-consuming and expensive, and
the outcome of such litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse outcome in any litigation could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others, if licenses to such rights could be obtained, or require the
Company to cease making, using or selling certain 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, and could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Patents and Proprietary Rights."
COMPETITION AND TECHNOLOGICAL DEVELOPMENTS
The medical condition that can be treated using ACYST also may be 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.
The companies that offer these alternative treatments have greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs and facilities than the Company. There can be no
assurance that ACYST will be able to compete effectively with such alternative
products or techniques or with such competitors.
The Company competes in a market characterized by technological innovation,
extensive research efforts and significant competition. Improvements in existing
treatment options or developments of new treatment methods may have a material
adverse effect on the Company's ability to successfully commercialize ACYST and
any future products and may render such products noncompetitive or obsolete.
Other companies are currently engaged in the development of products and
innovative methods for treating stress urinary incontinence that are similar to,
or compete with, ACYST. Significant developments by any of these companies or
advances by medical researchers at universities, government research facilities
or private research laboratories could eliminate the market for ACYST or
otherwise render ACYST obsolete. See "Business--Competition."
LIMITED MARKETING AND SALES EXPERIENCE
To date, the Company has not sold any products and has only limited sales
and marketing personnel and capabilities. If the required regulatory approvals
are received, the Company expects to market and sell ACYST in the U.S. through
its own dedicated marketing staff and sales force and in international markets
through a network of independent distributors or a strategic alliance with a
medical device manufacturer or marketer. The Company's success will depend to a
significant extent upon its ability to recruit, train and
9
<PAGE>
retain a dedicated marketing staff and sales force capable of promoting ACYST in
the U.S. and to establish an international distribution channel for sales of
ACYST internationally. Significant additional expenditures, management resources
and time will be required for the Company to assemble a marketing staff and
sales force and establish foreign distribution capabilities. There can be no
assurance that the Company will be able to assemble domestic and international
marketing capabilities on a timely basis or at all, or that such marketing and
sales efforts will be successful. Failure by the Company to establish successful
domestic and foreign marketing and sales capabilities would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Marketing and Sales."
RISKS RELATED TO INTERNATIONAL SALES
The Company intends to sell ACYST and any future products to customers
outside of the U.S. International sales and operations entail a significant
number of inherent risks. International sales and operations may be limited or
disrupted by the imposition of government controls, political instability, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies often establish product
standards different from those in the U.S. and any inability to meet these
standards 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. Further, the Company will need to obtain approvals from
foreign regulatory authorities prior to making sales of its products in foreign
jurisdictions. There can be no assurance that the Company will be able to obtain
such foreign regulatory approvals or to successfully commercialize ACYST or any
future product in any foreign market. See "Business--Marketing and Sales" and
"Business-- Government Regulations."
LIMITED MANUFACTURING EXPERIENCE
The Company has limited manufacturing experience and to date has not
produced ACYST or any other product in commercial quantities. The Company's
facilities and the facilities of any contract manufacturers will need to comply
with applicable regulations, including the FDA's current Good Manufacturing
Practices ("GMP") regulations, ISO 9001 and EN46001 certification requirements
and other regulations. Any failure to comply with applicable requirements and
regulations by the Company and any such contract manufacturers could delay or
prohibit manufacturing of ACYST, which could have a material adverse effect on
the Company's business, financial condition and results of operations. Further,
there can be no assurance that the Company will be able to make the transition
to commercial production of ACYST under applicable regulations at acceptable
costs. As the Company begins to manufacture ACYST in commercial quantities, the
Company will need to hire and train additional staff and purchase additional
manufacturing equipment, which may result in delays in meeting manufacturing
quality and quantity requirements. If the Company is unable to make the
transition to commercial production at acceptable costs, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Manufacturing" and "Business--Government Regulations."
DEPENDENCE ON KEY SUPPLIERS
One of the primary raw materials and components for the manufacture of
ACYST, a material needed for the gel carrier, is available only from a single
source. The Company does not have an agreement with the supplier of this
material and is currently negotiating the terms and conditions of such an
agreement. Other primary raw materials and components for manufacturing of
ACYST, including pyrolytic carbon coating and micro-bead substrates, are
available only from a few suppliers. Interruptions in supplies of these
materials or any other raw materials or components, including pyrolytic carbon
coating and micro-bead substrates, 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
10
<PAGE>
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. In the event that
the Company is unable to obtain these key materials or components from its
current suppliers on acceptable terms, the Company could incur significant
delays and increased costs in replacing its current raw materials and components
with alternatives. These delays could be extended in certain situations where a
raw material or component substitution may require additional testing by the
Company and approval by the FDA and foreign regulatory authorities. 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."
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT
ACYST will be purchased by hospitals and other users, which bill various
third-party payers, such as government health programs, private health insurance
plans, managed care organizations and other similar programs, for the health
care products and services provided to their patients. Payers may deny
reimbursement if they determine that a product used in a procedure was not used
in accordance with established payer protocols regarding cost-efficient
treatment methods, was used for an unapproved indication or was not otherwise
covered. Third-party payers are increasingly challenging the prices charged for
medical products and services and, in some instances, have pressured medical
suppliers to lower their prices. In the U.S. and certain foreign countries,
third-party reimbursement is currently generally available for certain bulking
agents for urinary incontinence, but there is no uniform policy for such
reimbursement and no assurance that ACYST will receive the same level of
reimbursement, if any. The availability of third-party reimbursement for ACYST
or competitors' products and continuing efforts to reduce the costs of health
care by decreasing reimbursement rates may reduce the price received by the
Company for ACYST. Failure to receive sufficient reimbursement from health care
payers for procedures using ACYST or adverse changes in governmental and
third-party payers' policies toward reimbursement for such procedures would
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Third-Party Reimbursement."
RISK OF PRODUCT LIABILITY; NO ASSURANCE INSURANCE WILL BE ADEQUATE
The medical products industry is subject to substantial litigation. As a
manufacturer of a medical product injected into the body, the Company faces an
inherent business risk of exposure to product liability claims in the event that
the use of its product is alleged to have resulted in adverse effects to a
patient. The Company maintains product liability insurance with coverage limits
of $5.0 million per occurrence and $5.0 million in the aggregate annually. There
can be no assurance that these coverage limits are adequate to protect the
Company from any liabilities which it might incur in connection with the
clinical trials and commercialization of ACYST or any other product. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. Furthermore, the Company does not expect to be able to obtain
insurance covering its costs and losses as a result of any recall of its
products due to alleged defects, whether such a recall is instituted by the
Company or required by a regulatory agency. A product liability claim, recall or
other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business, financial
condition and results of operations of the Company. See "Business--Product
Liability."
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors will beneficially own
approximately 50.7% of the issued and outstanding shares of Common Stock upon
completion of this offering. As a result of such ownership, these stockholders,
individually and as a group, may have the ability to influence the outcome of
stockholder votes, including votes relating to elections of directors,
amendments of the Company's Articles of Incorporation and Bylaws, and approvals
of certain mergers or other similar transactions. Such
11
<PAGE>
control could also have the effect of delaying or preventing a change in control
of the Company and could adversely affect the voting and other rights of the
other holders of Common Stock. See "Principal Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a number of key management and technical
personnel. The Company's ability to obtain regulatory approvals and successfully
commercialize its products will depend in large part on the efforts of these
individuals. The Company's future success will also depend on its ability to
attract and retain highly skilled managerial, engineering, regulatory,
operations and marketing personnel, who are in great demand. The loss of the
services of one or more of these persons or the inability to hire qualified
personnel as needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained following this offering. The initial
public offering price will be determined through negotiations between the
Company and Dain Bosworth Incorporated and Adams, Harkness & Hill, Inc., as
representatives of the Underwriters (the "Representatives"). The initial public
offering price may bear no relationship to the price at which the Common Stock
will trade following this offering. There can be no assurance that future market
prices of the Common Stock will not be lower than the initial offering price.
See "Underwriting."
The market price of the Common Stock following the offering may be highly
volatile. Announcements of new products and services by the Company or its
competitors, technological innovations, disputes regarding patents or other
proprietary rights, regulatory developments and economic and other external
factors, as well as period-to-period fluctuations in the Company's financial
results, could cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market in general and, in particular the
market prices for medical technology companies, have historically experienced
significant volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating performance of
such companies. Such volatility may adversely affect the market price of the
Common Stock.
POSSIBLE ADVERSE MARKET EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options and warrants) in the public market following
this offering could have an adverse effect on the price of the Common Stock.
Such sales may also make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company
would deem appropriate. Upon completion of this offering, the Company will have
7,626,720 shares of Common Stock issued and outstanding. The 2,500,000 shares
offered hereby will be freely tradable following this offering, except for any
shares purchased by an "affiliate" of the Company, which will be subject to the
limitations of Rule 144 promulgated under the Securities Act of 1933, as amended
("Rule 144"). All officers and directors and certain stockholders of the
Company, owning an aggregate of 4,436,000 shares, have entered into "lock-up"
agreements, agreeing not to sell, transfer or otherwise dispose of any shares of
Common Stock without the consent of the Representatives for a period of 180 days
after the date of this Prospectus. The Representatives may waive these
restrictions at any time in their discretion. Taking such restrictions into
account, in addition to the 2,500,000 shares of Common Stock offered hereby, (i)
approximately 384,720 shares will be eligible for immediate sale on the date of
this Prospectus in accordance with Rule 144; (ii) approximately 193,500
additional shares will be eligible for sale beginning in December 1997; (iii)
approximately 112,500 additional shares will become eligible for sale in the
public market beginning 90 days after the date of this Prospectus in accordance
with Rule 144; and (iv) approximately 4,436,000
12
<PAGE>
additional shares will be eligible for sale beginning 180 days after the date of
this Prospectus upon the expiration of the lock-up agreements, subject, in
certain cases, to volume and manner of sale limitations under Rule 144. As of
the date of this Prospectus, options to purchase an aggregate of 920,880 shares
of Common Stock are outstanding, with 766,000 of the shares issuable upon
exercise of such options subject to vesting requirements and lock-up agreements.
The remaining 154,880 shares issuable upon exercise of outstanding options will
become available for exercise and sale upon vesting and effectiveness of
Registration Statements on Form S-8, which the Company intends to file
immediately upon completion of this offering. Following the completion of this
offering, the holders of an aggregate of 1,413,500 shares will also be entitled
to registration rights with respect to such shares. See "Shares Eligible for
Future Sale."
MANAGEMENT DISCRETION IN THE USE OF PROCEEDS
While the Company expects that a portion of the proceeds of this offering
will be used for clinical trials, research and development activities and
expansion of marketing, sales and manufacturing capabilities, the majority of
the proceeds are expected to be used for working capital and other general
corporate purposes. Accordingly, the Company's management will have broad
discretion to allocate the proceeds of this offering and to determine the timing
of expenditures. See "Use of Proceeds."
ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS; UNDESIGNATED STOCK
Upon closing of this offering, automatic conversion of the outstanding
Series A Preferred Stock and cancellation of unissued Series A and Series A1
Preferred Stock, there will be 1,586,500 shares of undesignated stock. The Board
of Directors of the Company will have the authority, without any action by the
stockholders, to fix the rights, preferences, privileges and restrictions,
including voting rights, of the undesignated shares and to issue such shares as
preferred stock from time to time. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be created and issued in the future. In
addition, as a Minnesota corporation, the Company is subject to certain
anti-takeover provisions of the Minnesota Business Corporation Act (the "MBCA").
Both the authority of the Board with regard to the undesignated stock and the
anti-takeover provisions of the MBCA could have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Company's Common Stock at a premium over the then prevailing market
price of the Common Stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, Common Stock. See "Description of
Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will incur immediate
and substantial dilution of the net tangible book value of their purchased
shares. Investors may also experience additional dilution as a result of the
exercise of outstanding stock options and warrants, or the issuance by the
Company of additional equity securities. 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."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,500,000 shares of Common Stock offered hereby, after deducting estimated
underwriting discounts and commissions and offering expenses, are estimated to
be $25.2 million ($29.0 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $11.00 per
share.
The Company currently intends to use approximately $5.0 million of the net
proceeds to fund ongoing and future human clinical trials for ACYST. An
additional estimated $3.0 million of the net proceeds is intended to fund
further research and development, primarily focused on additional applications
of the Company's proprietary injectable bulking agent. Further, the Company
plans to use approximately $2.0 million to support international sales and
marketing activities. Finally, an estimated $2.0 million will be used to expand
the Company's manufacturing capabilities for the production of commercial
quantities of ACYST, assuming regulatory approvals for the marketing of ACYST
are received. The balance of the net proceeds will be used for working capital
and general corporate purposes. A portion of the net proceeds may also be used
to acquire technologies, products or businesses that complement the Company's
current business. The Company does not currently have any agreements,
arrangements or understandings, and is not involved in any negotiations, with
respect to any such acquisitions, and no portion of the net proceeds has been
allocated for any specific acquisition.
The timing and amount of expenditures will vary depending upon numerous
factors, including progress of the Company's human clinical trials for ACYST,
the timing and successful completion of the regulatory approval process and the
costs and the related timing of expansion of marketing, sales and manufacturing
activities. The Company's management will have broad discretion to allocate the
proceeds of this offering and to determine the timing of expenditures. Pending
application of the net proceeds as described above, the Company intends to
invest in investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared nor paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in the
development and growth of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the receipt and application of the
net proceeds from the sale of 2,500,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Common Stock, no par value; 20,000,000 shares authorized; 5,126,720 shares issued and
outstanding; 7,626,720 shares issued and outstanding, as adjusted (1)................. $ 7,915 $ 33,090
Contributed capital..................................................................... 320 320
Deficit accumulated during the development stage........................................ (4,421) (4,421)
--------- -----------
Total stockholders' equity and capitalization......................................... $ 3,814 $ 28,989
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Does not include (i) 900,880 of Common Stock shares issuable upon exercise
of outstanding options at a weighted average exercise price of $2.26 per
share, (ii) 194,000 shares reserved for future grants of options under the
Company's 1996 Stock Option Plan and (iii) 620,000 shares issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$1.88 per share. See "Management-- Stock Options" and "Description of
Securities."
15
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of September
30, 1997 was $3.8 million or $0.74 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 September 30,
1997. See "Capitalization." Net tangible book value dilution per share
represents the difference between the initial public offering price per share
and the net tangible book value per share after this offering. Without taking
into account any changes in the Company's net tangible book value per share
after September 30, 1997, other than to give effect to the sale of the 2,500,000
shares offered hereby at an assumed initial public offering price of $11.00 per
share (after deduction of underwriting discounts and commissions and estimated
offering expenses), the net tangible book value of the Company at September 30,
1997 would have been $29.0 million or $3.80 per share. This represents an
immediate increase in net tangible book value to the existing stockholders of
$3.06 per share and an immediate net tangible book value dilution to purchasers
of the shares of $7.20 per share, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 11.00
Net tangible book value per share as of September 30, 1997......... $ 0.74
Increase per share attributable to new investors................... 3.06
---------
Net tangible book value per share after this offering................ 3.80
---------
Net tangible book value dilution per share to new investors.......... $ 7.20
---------
---------
</TABLE>
The following table summarizes as of September 30, 1997, the difference
between the existing stockholders and the purchasers of shares in this offering
(at an assumed offering price of $11.00 per share) with respect to the number of
shares purchased from the Company, the total consideration paid and the average
price paid per share. The table assumes that no shares are purchased in this
offering by existing stockholders. To the extent existing stockholders purchase
shares in this offering, their percentage ownership, total consideration and
average price per share will be greater than is shown.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION (1) AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................. 5,126,720 67.2% $ 8,192,200 23.0% $ 1.60
New investors.......................................... 2,500,000 32.8 27,500,000 77.0% $ 11.00
---------- --------- ------------- ---------
Total.............................................. 7,626,720 100.0% $ 35,692,200 100.0%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</TABLE>
- ------------------------
(1) Does not reflect any deductions for commissions or expenses paid or incurred
in connection with the issuance of such shares.
The foregoing tables and calculations exclude, as of September 30, 1997 (i)
900,800 shares of Common Stock issuable upon exercise of outstanding options at
a weighted average exercise price of $2.26 per share, (ii) 194,000 shares
reserved for future grants of options under the Company's 1996 Stock Option Plan
and (iii) 620,000 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.88 per share. See "Management--Stock
Options," "Description of Securities" and Note 5 to the Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for the
fiscal years ended December 31, 1995 and 1996 have been derived from, and are
qualified by reference to, the financial statements of the Company which have
been audited by McGladrey & Pullen, LLP, independent auditors, included
elsewhere in this Prospectus. The selected financial data as of and for the nine
months ended September 30, 1996 and 1997 and for the period from inception
(August 1, 1994) through September 30, 1997 have been derived from the Company's
unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements reflect, in the opinion of management, all
adjustments of a normal recurring nature necessary for a fair presentation of
the Company's financial position as of such dates and its results of operations
for these periods. The results of operations for the nine months ended September
30, 1997 are not necessarily indicative of the results which may be expected for
the entire fiscal year ending December 31, 1997, or for any other subsequent
period. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Financial Statements and related Notes and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED PERIOD FROM
DECEMBER 31, SEPTEMBER 30, INCEPTION
-------------------- -------------------- (AUGUST 1, 1994) TO
1995 1996 1996 1997 SEPTEMBER 30, 1997
--------- --------- --------- --------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Research and development expense....................... $ 353 $ 764 $ 485 $ 1,040 $ 2,190
General and administrative expense..................... 165 778 578 1,091 2,108
Net loss............................................... $ (524) $ (1,508) $ (1,035) $ (2,010) $ (4,152)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per share..................................... $ (0.12) $ (0.29) $ (0.20) $ (0.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding................................... 4,486 5,224 5,184 5,347
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............................. $ 475 $ 354 $ 3,385
Working capital............................................................... 415 88 3,412
Total assets.................................................................. 534 623 4,197
Total liabilities............................................................. 277 407 383
Deficit accumulated during the development stage.............................. (903) (2,411) (4,421)
Total stockholders' equity.................................................... 257 216 3,814
</TABLE>
- ------------------------
(1) The Company has generated no revenues to date.
17
<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 purchased the technology for ACYST from Brennen Medical,
Inc., whose principal stockholders are directors of the Company. The Company has
generated no revenues and has been unprofitable since inception. As of September
30, 1997, the Company had an accumulated deficit of $4.4 million 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's primary focus will continue to be FDA approval of ACYST for
commercialization in the U.S. Based upon the recently completed audit of the
Company's quality system, the Company believes that it will receive ISO 9001
certification and authority to apply the CE mark to ACYST in 1998, which will
allow it to market and distribute ACYST in the EU. Upon receiving such
authority, the Company plans to conduct market studies in Europe to gain product
acceptance and prepare for its anticipated international product launch in late
1998. The Company intends to market ACYST in Europe through a network of
independent distributors or a strategic alliance with a medical device
manufacturer or marketer. Upon receiving FDA approval, the Company plans to
market ACYST domestically through a direct sales force. The Company believes
that ACYST has both product and cost advantages which will provide for
attractive margins. In addition, as the Company expands its manufacturing
capabilities it will explore the potential for vertical integration in a further
attempt to increase its product margins and enhance productivity.
The discussion contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations necessarily includes certain
forward-looking statements which reflect the Company's plans, estimates and
beliefs. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in this Prospectus.
PLAN OF OPERATION
The Company has been granted an IDE by the FDA and has recently begun Phase
2 of the human clinical trials for ACYST. The Company plans to devote
substantially all of its efforts during the next 18 months to conducting these
clinical trials. Over the next 18 months, the Company also intends to begin its
initial sales efforts in Europe and other foreign markets and to further develop
its commercial manufacturing capabilities. The Company anticipates hiring
approximately 10 additional employees in sales and marketing, administration and
manufacturing. Expenditures related to manufacturing equipment are expected to
approximate $2.0 million. Research and development activities are anticipated to
include investigating and pursuing the development of other products to treat
urinary incontinence and 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 for at least the next 18 months.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Research and development expenses include costs associated with the
development and clinical testing of ACYST. Research and development expenses
were $1.0 million in the first nine months of 1997 and $485,000 for the same
period in 1996. The increase was primarily due to costs associated with human
clinical trials. Human clinical trial costs consist largely of payments to
investigators and product costs
18
<PAGE>
related to the clinical 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 $1.1 million in the first nine
months of 1997 and $578,000 for the same period in 1996. The increase was
primarily due to higher compensation expenses of $387,000, as additional
personnel were hired to meet expanded operational needs, a $172,000 increase in
non-cash charges related to stock options granted and a $110,000 increase in
general operating costs to support increased activities. This increase was
partially offset by a $156,000 decrease in professional fees related to
financing efforts.
Interest expense was $0 for the first nine months of 1997 and $5,000 for the
same period in 1996. Interest expense relates to interest incurred on a note
payable to a related party. This note was paid in full in May 1996.
Interest income was $121,000 for the first nine months of 1997 and $32,000
for the same period in 1996. The increase between periods was due to a higher
average cash, cash equivalents and short-term investments balances, resulting
from proceeds received from sales of securities.
Net loss was $2.0 million for the first nine months of 1997 and $1.0 million
for the same period in 1996. As discussed herein, the increase was primarily due
to overall increases in research and development expenses and general and
administrative expenses required to support increased operating activities.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Research and development expenses were $764,000 in 1996 and $353,000 in
1995. The increase was due to higher levels of activity related to the
development of ACYST and human clinical trials. This increase included
additional compensation and travel costs of $211,000, increased clinical
investigator costs of $129,000 and higher levels of product development costs of
$47,000.
General and administrative expenses were $778,000 in 1996 and $165,000 in
1995. This increase was attributable to higher compensation of $202,000 due to
additional personnel, $203,000 of costs related to a financing in 1996 which was
not completed due to unfavorable market conditions, with the remaining due to
higher operational costs resulting from increased levels of activity.
Interest expense was $5,000 in 1996 and $16,000 in 1995. Interest expense
relates to interest incurred on a note payable to a related party. This note was
paid in full in May 1996.
Interest income was $39,000 in 1996 and $10,000 in 1995. The increase
between periods resulted from higher average cash and cash equivalent balances
as a result of net proceeds from sales of Common Stock.
Net loss was $1.5 million in 1996 and $524,000 in 1995. As discussed herein,
the increase was primarily due to increased personnel costs, financing costs and
increased operational activities in both general and administrative and research
and development expenses.
As a result of the net losses through 1996, the Company has net operating
loss ("NOL") carryforwards of $1.9 million at December 31, 1996, which will
expire at various dates through 2011. 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 securities. Through September 30, 1997, the Company had
received $7.9 million in net proceeds through the private sales of securities.
For the period from inception (August 1, 1994) through September 30, 1997, the
Company had used cash of $3.8 million to fund operations, $457,000 to purchase
equipment, leasehold
19
<PAGE>
improvements and intangible assets, and $300,000 for principal payments to a
related party for a note payable under an asset purchase agreement. At September
30, 1997, the Company had cash, cash equivalents and short-term investments of
$3.4 million and working capital of $3.4 million. See "Certain Transactions."
The Company expects to continue to incur substantial expenses 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 such time frame. Further, there can be no
assurance that additional financing will be available at all or that, if
available, such financing would be obtainable on terms favorable to the Company.
See "Use of Proceeds."
INFLATION
Historically, inflation has not had a material impact on the Company. The
cost of the Company's product is influenced by the cost of raw materials and
labor. There can be no assurance that the Company will be able to pass on any
increased costs due to inflation 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 was effective in fiscal year 1996. The
Company has elected to continue to apply the intrinsic value-based method of
accounting for stock options.
The FASB has issued Statement No. 128 EARNINGS PER SHARE, which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations. All entities required to present per share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted. The Adoption of
Statement No. 128 would have had no effect on reported loss per share.
20
<PAGE>
BUSINESS
GENERAL
Advanced UroScience has developed ACYST, an injectable bulking agent
designed to treat stress urinary incontinence. 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
provide permanent bulking around the urethra to close the bladder neck. The
injection procedure for ACYST is minimally invasive, can be accomplished in less
than 30 minutes in an outpatient setting and is designed to immediately restore
the patient to normal urinary continence. ACYST incorporates micro-beads that
are designed to be non-absorbable, non-migratory, biocompatible and intended to
provide a permanent solution, thereby minimizing the potential need for
retreatment.
It is estimated that there are 13 million adults with urinary incontinence
in the U.S., of which approximately 85% are women. Approximately 9 million
adults with urinary incontinence suffer from stress urinary incontinence. The
Company believes that the majority of these people may benefit from treatment
with ACYST. Initially, the Company will seek FDA approval to market ACYST for
the treatment of stress urinary incontinence due to intrinsic sphincter
deficiency, which the Company estimates affects approximately 1.5 million
adults. The Company intends to conduct future human clinical trials to support
expanded applications of ACYST in order to address a larger segment of the
population suffering from stress urinary incontinence.
Through November 10, 1997, 79 patients had been treated with ACYST in the
Company's clinical studies. Most of the 79 patients experienced immediate
improvement in incontinence, suffered no post-treatment complications and were
able to return to normal activities within days. The Company is currently
conducting clinical trials at several U.S. locations under an IDE granted by the
FDA, and expects to use the data gathered in its clinical trials to support an
application for PMA, which the Company intends to file with the FDA in 1999. The
Company is also conducting human clinical trials outside of the U.S. and expects
to receive ISO 9001 certification and to meet the requirements for use of the CE
mark in 1998, which will allow the Company to market its products in the EU.
Advanced UroScience believes that ACYST offers significant advantages over
existing treatment options for sufferers of stress urinary incontinence. Unlike
adult diapers and other methods of managing the problem, ACYST is designed to
restore continence. 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. Compared with traditional surgical treatments, the Company
believes the minimally invasive ACYST procedure is less traumatic to patients
and will be associated with significantly reduced costs. Because it is designed
to be biocompatible, non-migratory and non-absorbable, the Company believes
ACYST addresses significant issues posed by commercially available injectable
bulking agents.
URINARY INCONTINENCE
There are significant economic and social costs associated with urinary
incontinence. According to a 1996 publication from the U.S. Department of Health
and Human Services, direct costs associated with urinary incontinence in the
U.S. alone were estimated to exceed $15 billion annually. The perceived stigma
associated with urinary system dysfunction discourages sufferers from seeking
treatment and hinders public awareness of the widespread incidence of urinary
incontinence. For the patients who are affected, the problems can be tremendous.
Consequences of urinary incontinence can include depression, discomfort and
embarrassment about appearance and odor. As a result, patients suffering from
urinary incontinence may withdraw from social interaction with others, including
friends and family.
In the normal urinary tract, continence, or appropriate storage and release
of urine, is maintained by a complex interplay of anatomic structures, as
depicted by the diagram below. The primary structures
21
<PAGE>
responsible for controlling continence are the bladder neck and the urinary
sphincter. The urinary sphincter is a muscle at the base of the bladder which
surrounds the bladder neck and urethra 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. As the bladder fills and relaxes, the
urinary sphincter contracts to prevent urination. During urination, the urinary
sphincter relaxes as the bladder contracts to evacuate urine through the bladder
neck and urethra. In normal continence, the urinary sphincter also tightens to
prevent loss of urine when the bladder is subject to intra-abdominal pressure. A
malfunction in any part of the urinary tract can result in urinary incontinence.
A broad range of conditions and disorders are believed to cause urinary
incontinence, including birth defects, child birth, injuries to the pelvic
region or to the spinal cord, neurological diseases and degenerative changes
associated with aging.
[ANATOMICAL DEPICTION OF THE URINARY TRACT]
BLADDER
BLADDER NECK
URETHRA MUCOSAL LINING
URINARY SPHINCTER
[LOGO]
TYPES OF URINARY INCONTINENCE
The four major types of urinary incontinence are stress, urge, mixed and
overflow urinary incontinence.
- Stress urinary incontinence is 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, accounting
for over half of all cases of urinary incontinence in the U.S. This
condition varies in severity from those people 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 the
weakening of the 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 to contract
and sufficiently close the bladder neck.
- Urge urinary incontinence is the involuntary loss of urine due to unwanted
bladder contractions which are 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.
- Mixed urinary incontinence is a mixture of stress and urge urinary
incontinence.
22
<PAGE>
- Overflow urinary incontinence is the incomplete emptying of the bladder
due to an obstruction or to the inability to produce sufficient bladder
contractions.
URINARY INCONTINENCE MARKET
The Agency for Health Care Policy and Research, an affiliate of the U.S.
Department of Health and Human Services, reports that there are approximately 13
million adults with urinary incontinence in the U.S., although exact figures are
difficult to obtain as a result of the believed under-reporting due to the
stigma associated with the condition. Although urinary incontinence is most
prevalent in the elderly, it is also common among women under the age of 60. Of
the estimated 13 million adults with urinary incontinence in the U.S.,
approximately 85% are women. It is expected that urinary incontinence will
continue to be a significant health care problem in the adult female, elderly
and institutionalized populations and individuals suffering from the condition
will increase in number as the population continues to age.
Approximately 9 million adults with urinary incontinence suffer from stress
urinary incontinence. The Company believes that the majority of these people may
benefit from treatment with ACYST. Initially, the Company will seek FDA approval
to market ACYST for the treatment of stress urinary incontinence due to
intrinsic sphincter deficiency, which the Company estimates affects
approximately 1.5 million adults. The Company intends to conduct future human
clinical trials to support expanded applications of ACYST in order to address a
larger segment of the population suffering from stress urinary incontinence.
CURRENT TREATMENTS AND THEIR LIMITATIONS
Urinary incontinence is currently treated in a variety of ways. The Company
believes that the majority of patients are managed with techniques that treat
the symptoms of urinary incontinence, but do not restore urinary continence.
Most curative approaches to the treatment of urinary incontinence require
significant surgical intervention.
MANAGEMENT OF URINARY INCONTINENCE
DIAPERS AND ABSORBENT PADS. Most cases of urinary incontinence 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. Industry sources suggest retail sales of
adult diapers and absorbent pads exceed $1 billion annually.
VAGINAL AND URETHRAL INSERTS. Vaginal inserts 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, tissue erosion and
discomfort. Urethral inserts, which have recently become available in the U.S.,
act as an expandable stopper to block the flow of urine when inserted in the
urethra. Potential adverse side effects include urinary tract infections, pain
and tissue reactions.
INDWELLING (FOLEY) CATHETERS. Variations of the indwelling, or Foley,
catheter are the main products used to manage urinary incontinence in a medical
environment. The Foley catheter is passed into the bladder through the urethra.
Once in place, the catheter is either clamped at the exit point from the body or
connected to an external urine collection bag. Aside from the physical and
emotional discomfort experienced by patients, the direct path from the exterior
to the bladder provides a conduit for bacteria, and often results in bladder
infections.
PHARMACEUTICALS. Drug treatment is used to manage multiple types of urinary
incontinence. These drugs tend to fall into one of two categories: those that
manage urge urinary incontinence by affecting the contraction of the muscle
tissue of the bladder and those that manage stress urinary incontinence by
either
23
<PAGE>
affecting contraction of the muscle tissue of the bladder neck or improving the
quality of the mucosal lining of the bladder neck and urethra. Drugs seldom cure
stress urinary incontinence and the potential side effects include urinary
retention, nausea, dizziness, blurred vision and the possibility of unwanted
interactions with other drugs.
BEHAVIORAL THERAPY AND PELVIC MUSCLE TRAINING EXERCISES. Behavioral therapy
and related techniques attempt to manage urinary incontinence through bladder
and habit training, pelvic muscle exercises (known as Kegel exercises),
biofeedback and electrical stimulation. These therapies and techniques first
teach the patient to be aware of the group of muscles in the perineal area and
to contract them in a way that builds muscle tone around the bladder neck.
Pelvic floor electrical stimulation devices can be used to augment other pelvic
muscle rehabilitation therapies. Adverse reactions are minimal but include pain
and discomfort. These treatments are time consuming, take several weeks or
months before results are evident, present uncertain outcomes and must be
adhered to regularly.
CURATIVE TREATMENT OF URINARY INCONTINENCE
SUSPENSION AND SLING PROCEDURES. Bladder neck suspension and sling
procedures involve surgical intervention to elevate and stabilize the urethra
and the bladder neck in order to treat stress urinary incontinence. In a bladder
neck suspension, the bladder neck and urethra are elevated to prevent urethral
and bladder neck prolapse (descent) during exertion. In a sling procedure,
either an autologous (patient tissue) or synthetic piece of material is placed
under the urethral-bladder junction, pulling it forward in a way that reinforces
and strengthens the sphincter. Surgeries of this nature are 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.
Although attempts have been made to minimize the invasiveness of this procedure,
the trauma is often significant, recovery time can be lengthy and the cost of
the hospital-based major surgical procedure can be high.
ARTIFICIAL SPHINCTERS. Artificial sphincters are implantable, miniature,
hydraulic medical devices consisting of an inflatable cuff placed around the
urethra and the pump and tubing required to activate the cuff. Artificial
sphincter implantation currently requires a major inpatient surgical procedure
and hospitalization with associated discomfort, lengthy recovery period and high
expense. Initial complications that may arise are mainly associated with
post-operative infection or urethral or bladder injury during implantation.
Delayed complications include mechanical problems such as pump malfunctioning,
fluid leaks, tubing kinks and tissue atrophy.
BULKING AGENTS. Bulking agents are either biologically derived or synthetic
materials designed to be injected or implanted in or near the bladder neck to
increase tissue bulk. Bulking procedures are gaining acceptance as a method of
treating certain types of stress urinary incontinence. The 1996 Clinical
Practice Guidelines published by the U.S. 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. However,
biologically-derived bulking agents may be absorbed by the body, requiring
retreatment, and synthetic bulking agents currently available have experienced
problems with migration and biocompatibility.
THE ADVANCED UROSCIENCE SOLUTION
Advanced UroScience has developed ACYST, an injectable bulking agent
designed to treat stress urinary incontinence. ACYST is a proprietary
composition of pyrolytic carbon-coated micro-beads suspended in a carrier gel.
ACYST is designed to provide permanent bulking around the urethra to close the
bladder opening. Consistent with newly established clinical practice guidelines,
the injection procedure for ACYST is minimally invasive, can be accomplished in
less than 30 minutes in an outpatient setting and is designed to immediately
restore the patient to normal urinary continence. 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
24
<PAGE>
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 (greater than
250um) is at a minimum more than three times the maximum particle size known to
migrate in the body.
INTENDED BENEFITS OF ACYST
ACYST is believed to have several advantages over other management and
treatment options for urinary incontinence. Unlike adult diapers and other
methods of managing the problem, ACYST is designed to restore continence. 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. Compared
with traditional surgical treatments, the Company believes the minimally
invasive ACYST procedure is less traumatic to patients and will be associated
with significantly reduced costs.
Further, the Company believes ACYST has several features that offer
significant advantages over other commercially available 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 ACYST micro-beads improves biocompatibility by
reducing the potential for chronic inflammatory tissue response. Chronic
inflammatory reactions in the urinary tract have been associated with the use of
bulking agents consisting of polytetrafluoroethylene ("PTFE") particles. Another
bulking agent uses silicone, which may be controversial in the U.S. due to the
unresolved issues relating to silicone gel breast implants.
NO ABSORPTION. Since the ACYST micro-beads are synthetic, they will not be
absorbed by the body, thus minimizing the potential need for retreatment. In
contrast, biologically-derived bulking agents may be absorbed by the body over
time. As a result, patients treated with this type of bulking agent typically
require additional costly treatments to maintain urinary continence.
NO MIGRATION. The size of the ACYST micro-beads was specifically chosen to
prevent them from migrating away from the injection site. Other known commercial
bulking agents use particles of PTFE that are generally in a size range of 1 to
100um or silicone which is reported to have approximately 25% of its injected
particles below 80um. These smaller particles have been associated with
migration in the body, which has raised questions of safety.
COST EFFECTIVE. The injection of ACYST entails a minimally-invasive
procedure in an outpatient setting and is designed to provide immediate
improvement in urinary continence following the procedure. The Company believes
that the combination of a minimally invasive procedure that produces immediate
results and minimizes need for retreatment should make ACYST a cost-effective
treatment option for the incontinent patient.
BUSINESS STRATEGY
The Company's objective is to be a leader in the development and marketing
of innovative products for the treatment of urinary incontinence and to expand
applications of its proprietary bulking technology to areas other than urology.
FOCUS ON OBTAINING REGULATORY APPROVAL FOR ACYST. The Company's primary
focus is to obtain approval to market ACYST in the U.S. and internationally.
Initially, the Company will seek FDA approval to market ACYST for the treatment
of stress urinary incontinence due to intrinsic sphincter deficiency, which the
Company believes affect approximately 1.5 million people. Clinical
investigations have demonstrated that injectable bulking agents can be equally
effective in patients suffering from stress urinary incontinence due to urethral
hypermobility as well as due to intrinsic sphincter deficiency. The Company
25
<PAGE>
intends to conduct future human clinical trials to support expanded applications
of ACYST in order to address a larger segment of the population suffering from
stress urinary incontinence.
DEVELOP ADDITIONAL MARKETING AND SALES CAPABILITIES. Initially, the Company
intends to market and sell ACYST internationally through a network of
independent distributors or a strategic alliance with a medical device
manufacturer or marketer. After receiving the requisite marketing approvals from
the FDA, the Company intends to sell ACYST in the U.S. through a direct sales
force. The Company intends to use a portion of the proceeds of this offering to
conduct international market studies, establish an international distribution
channel and hire additional marketing and sales personnel. In its sales and
marketing efforts, the Company intends to cultivate further strong relationships
with its clinical investigators and others in the medical community to
accelerate the market acceptance of ACYST.
ENHANCE MANUFACTURING CAPABILITIES. To date, the Company has used its
current facilities to produce limited quantities of ACYST for use in clinical
trials. To enhance its ability to produce ACYST in commercial quantities, the
Company intends to expand its manufacturing capacity by purchasing additional
equipment and upgrading its manufacturing facilities, to pursue the possibility
of vertically integrating aspects of its manufacturing process and to hire
additional personnel.
EXPLORE COMPLEMENTARY TECHNOLOGY. The Company believes that opportunities
exist for it to expand its product line, through acquisitions or internal
research and development efforts, with additional innovative products for the
treatment of urological disorders. The market for urology products is highly
fragmented and is expected to continue to grow due to the aging population. The
Company believes that many of the currently available treatments manage rather
than cure the disorders they address and as a result there are opportunities for
new products in the market.
EXPAND APPLICATIONS OF ACYST TECHNOLOGY. The Company believes that its
proprietary bulking technology may be applicable for the treatment of medical
disorders other than urinary incontinence. The Company intends to develop
additional products using this technology as the market opportunities for such
additional products arise. For example, the Company is in the early stages of
developing bulking products, based on ACYST technology, for the treatment of
gastric reflux and fecal incontinence.
INJECTION PROCEDURE
As illustrated below, 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. When ACYST is initially
injected, the carrier gel acts as a transport medium for the pyrolytic carbon
coated micro-beads. Over time, the body encapsulates the micro-beads with its
own collagen, which results in sustained bulking. ACYST is packaged in a sterile
syringe and is designed to be injected through the Company's specially designed
needle that is inserted down a cystoscope.
[SERIES OF ANATOMICAL DEPICTIONS DEMONSTRATING THE ACYST INJECTION PROCEDURE]
A CYTOSCOPE IS INSERTED INTO THE
URETHRA AND AN INJECTION NEEDLE
IS ADVANCED THROUGH THE WORKING
CHANNEL OF THE CYTOSCOPE.
THE NEEDLE TIP IS INSERTED UNDER
THE MUCOSAL LINING AND ACYST
IS INJECTED.
THE INJECTION IS REPEATED AT OTHER
SITES UNTIL THE BLADDER NECK IS
CLOSED.
26
<PAGE>
During the injection process, the physician views the bladder neck through a
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 four to six one-milliliter syringes of ACYST
will be injected in three to four sites at the bladder neck until the increase
in bulk causes the sides of the bladder neck to close, allowing the patient to
regain control of urine flow. This procedure can be accomplished in less than 30
minutes in an outpatient setting, and is therefore consistent with newly
established clinical practice guidelines for the treatment of urinary
incontinence that call for minimally invasive therapies to be attempted first.
ACYST is intended to result in improved urinary continence immediately following
the injection procedure.
STATUS OF CLINICAL TRIALS
In May 1996, Advanced UroScience initiated clinical testing of ACYST under
an IDE approved by the FDA. In May 1997, the Company received FDA approval to
enroll up to 160 additional patients at up to 10 sites in Phase 2 clinical
studies. The Phase 2 clinical studies are designed to obtain data to support PMA
that must be obtained from the FDA before ACYST can be marketed in the U.S. This
study has been designed as a prospective, multi-center study with the patients
randomized to be treated with either ACYST or a bulking agent approved for
marketing in the U.S. The relative percentages of men and women to be enrolled
in Phase 2 approximates the prevalence of urinary incontinence in the U.S. adult
population. Phase 2 patients will be followed for at least one year after
treatment to assess the safety and effectiveness of ACYST.
The first of two primary endpoints of the Company's clinical trials measures
the change in the continence grade score of the patient from baseline to
post-treatment. The continence grades used for this study were defined by Stamey
in 1979 and are as follows:
<TABLE>
<S> <C>
Grade 0: The patient is continent (dry).
Grade 1: The patient will lose urine with sudden increases in abdominal
pressure, but never in bed at night.
Grade 2: The patient's incontinence worsens with lesser degrees of stress,
such as walking, standing erect from a sitting position or sitting
up in bed.
Grade 3: The patient has total incontinence and urine is lost without any
relation to physical activity or position.
</TABLE>
A decrease in the continence grade of one or more grades is considered a
success for purposes of evaluation.
The second primary endpoint of the Company's clinical trials measures the
urine loss of patients who undergo a prescribed set of activities which may
induce stress incontinence. The urine loss is quantified through the use of pads
which are worn by the patients, and then weighed at the completion of the
activities.
The Company's clinical studies conducted through November 10, 1997 indicate
that most of the 79 patients (49 treated in accordance with the U.S. IDE study
and 30 treated in feasibility research studies internationally) who were treated
with ACYST experienced immediate improvement in incontinence, suffered no
post-treatment complications and were able to return to normal activities within
days. Although there does not exist a statistically significant body of clinical
data from which to draw conclusions concerning the effectiveness and long-term
outcomes associated with ACYST: (i) of the 44 patients followed at six months,
30 showed improvement at one month (no patients were retreated) and 32 showed
improvement at six months (three patients were retreated) relative to their
pretreatment continence grades and (ii) of the 12 patients followed at one year,
nine showed improvement at one month (no patients were retreated) and 10 showed
improvement at one year (no patients were retreated) relative to their
27
<PAGE>
pretreatment continence grades. These initial clinical studies have demonstrated
better results in women than in men. Minor complications commonly associated
with cystoscope-based bulking procedures have been observed during the Company's
clinical trials. These complications, which include painful voiding,
frequency of voiding, retention and blood in the urine, were not of a serious
nature and subsided after a short period of time. The Company expects that one
or more of these minor and temporary complications will occur in a limited
number of future patients.
To introduce ACYST internationally, the Company must comply with a number of
foreign regulations. The Company is conducting human clinical trials outside of
the U.S. and expects to receive ISO 9001 certification and to meet the
requirements for use of the CE mark in 1998, which will allow the Company to
market its products in the EU. There can be no assurance, however, that the
Company will receive marketing approval from the FDA or authority to use the CE
mark on a timely basis, if at all. See "Business--Manufacturing" and
"Business--Government Regulations."
MARKETING AND SALES
The Company's marketing and sales strategy is aimed at increasing awareness
of ACYST within the medical community and the potential patient population in
addition to developing a strong sales capability. Since the majority of
sufferers of stress urinary incontinence are women, Advanced UroScience intends
to focus its sales and marketing effort on gynecologists, urologists,
uro-gynecologists and geriatrists. The Company's sales strategy is to first
establish ACYST internationally and then follow with domestic sales and
distribution upon receipt of FDA approval to market ACYST domestically.
ESTABLISH INTERNATIONAL MARKETING CAPABILITIES. The Company intends to
market ACYST internationally through a network of independent distributors or a
strategic alliance with a medical device manufacturer or marketer. The Company
will pursue such a network or strategic alliance where appropriate to accelerate
sales growth, increase geographic market coverage and more effectively access
particular markets and customers. The Company's initial target market for sale
of ACYST will be in Europe, with Asian and Latin American countries to follow.
The strategy for penetration in these markets will be to establish ACYST in
individual countries by working with key medical centers who use the product in
studies. The Company plans for these market studies to be reported on by key
opinion leaders at meetings and congresses, further setting the stage for
international market launch. Concurrently, the Company will work with local
reimbursement authorities to assure that maximum market potential can be
achieved.
DEVELOP DOMESTIC SALES ORGANIZATION. Following receipt of regulatory
approval from the FDA, the Company anticipates utilizing a direct sales force to
market ACYST in the U.S. The Company plans to begin building its direct sales
force prior to receipt of FDA premarket approval. This sales force will provide
training in the indications for and the use of ACYST, as well as financial
models that demonstrate the potential cost advantages of using ACYST to payers
and physicians.
CONDUCT EDUCATIONAL CAMPAIGN. The Company intends to capitalize on its
clinical investigation beyond merely gaining approval to market in the U.S. by
using its clinical data in presentations at key medical meetings and congresses,
as well as presenting such data for publication in professional journals.
Advanced UroScience will also maintain a presence at appropriate medical
conventions, meetings and seminars to inform physicians and other health care
professionals of the existence and applications for ACYST, providing information
and gaining sales leads. Finally, the Company's plans include a public relations
campaign, following receipt of U.S. regulatory approval, in which the public is
made aware that incontinence is a common problem and that help through treatment
using ACYST is available.
RESEARCH AND DEVELOPMENT
To date, the Company has been engaged primarily in the research, development
and clinical testing of ACYST. The Company believes that its future success is
dependent in part on its ability to develop new products. Therefore, management
has allocated a portion of the proceeds of this offering to continue the
requisite clinical trials of ACYST and to fund additional research and
development efforts.
28
<PAGE>
In addition to developing concepts for new products to treat urinary
incontinence, the Company intends to expand the use of ACYST technology for
other bulking applications outside of the urologic market. For example, the
Company is in the early stages of developing bulking products based on ACYST
technology for the treatment of gastric reflux and fecal incontinence.
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 seeks to
protect its technology by filing patent applications for patentable technologies
that it considers important to the development of its business, based on an
analysis of the cost of obtaining a patent, the likely scope of protection and
the relative benefits of patent protection compared to trade secret protection,
among other considerations. The Company currently holds one issued U.S. patent
covering its ACYST technology, two corresponding Patent Cooperation Treaty
applications and one pending U.S. patent application covering improvements to
such technology, involving the use of alternative substrates in an injectable
bulking composition. The claims of the Company's patent are directed to a
composition for soft tissue augmentation, consisting of pyrolytic carbon-coated
substrate materials suspended in a carrier gel. The Company also relies upon
trade secrets, know-how and continuing technological innovation to develop and
maintain its competitive position.
There can be no assurance that any of the Company's pending or future U.S.
or foreign patent applications will result in issued patents, or that any issued
patents will be of sufficient scope or strength to provide meaningful protection
of the Company's products. The coverage sought in a patent application can be
denied or significantly reduced before the patent is issued. In addition, there
can be no assurance that any current or future U.S. or foreign patents of the
Company will not be challenged or circumvented by competitors or others, or that
such patents will be found to be valid or sufficiently broad to protect the
Company's technology or provide the Company with any competitive advantage.
Should attempts be made to challenge, circumvent or invalidate the Company's
patents in the U.S. Patent and Trademark Office or courts of competent
jurisdiction, including administrative boards or tribunals, the Company may have
to participate in legal or quasi-legal proceedings therein, to maintain, defend
or enforce its rights in these patents. Any legal proceedings to maintain,
defend or enforce the Company's patent rights can be lengthy and costly, with no
guarantee of success.
The Company also relies heavily upon trade secrets and unprotected
proprietary technology. The Company seeks to maintain the confidentiality of
such information by requiring employees, consultants and other parties to sign
confidentiality agreements and by limiting access by parties outside the Company
to such 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. Additionally,
there can be no assurance that any agreements regarding confidentiality and
non-disclosure will not be breached, or, in the event of any breach, that
adequate remedies would be available to the Company.
Beginning shortly after its inception, the Company received a series of
communications from Uroplasty, a competing manufacturer of medical devices and
products, alleging that the Company's issued patent may be invalid, informing
the Company of certain patents held by Uroplasty covering implant materials and
alleging that the activities of certain of the Company's officers are in
violation of non-competition and non-disclosure agreements. The Company has
received an opinion of its patent counsel, Nawrocki Rooney & Sivertson, P.A.,
that the Company's issued patent is valid and enforceable relative to any known
prior art and that the Company's products do not infringe any of the claims
under any U.S. patents known to be held by Uroplasty. The Company has reviewed
with its general counsel the claims and allegations regarding violations of
non-competition and non-disclosure agreements by the Company's officers, and
believes them to be without merit. Uroplasty has not brought any legal action in
connection with its claims and allegations. There can be no assurance, however,
that Uroplasty or any other third party will not pursue legal action with
respect to these matters. Because an opinion of counsel is not binding on
29
<PAGE>
any court, and, because of the complex legal and factual questions involved in
intellectual property litigation, there can be no assurance that any such action
would not be determined in a manner adverse to the Company or its officers.
Claims by competitors such as Uroplasty and other third parties that the
Company's products allegedly infringe the patent or other intellectual property
rights of others could have a material adverse effect on the Company. There has
been substantial litigation regarding patent and other intellectual property
rights in the medical device industry, and intellectual property litigation may
be used against the Company as a means of gaining a competitive advantage.
Intellectual property litigation is complex, time-consuming and expensive, and
the outcome of such litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse outcome in any litigation could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others, if licenses to such rights could be obtained, or require the
Company to cease making, using or selling certain 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, and could have a material adverse effect on
the Company's business, financial condition and results of operations.
COMPETITION
Competition in the urinary incontinence products market is intense. The
Company faces competition from existing manufacturers of management and curative
treatments for urinary incontinence, including competing manufacturers of
commercially available bulking agents, as well as from companies developing new
or improved treatment methods for urinary incontinence. The Company believes
that the principal competitive factors among treatment methods for urinary
incontinence include physician and patient acceptance of the method in managing
or curing incontinence, cost and the availability of third-party reimbursement,
marketing and sales capability and the existence of meaningful patent
protection. The Company's ability to compete in this market also will 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.
Current major competitors who compete in this market include Kimberly-Clark
Corp. and Procter & Gamble Co. for adult diapers and absorbent pads; Empi, Inc.
and MedCare Technologies, Inc. with electrical pelvic floor stimulators and
behavioral treatments; Abbott Laboratories, Warners Wellcome and Hoechst Marion
Roussell for pharmaceutical treatments; C. R. Bard, Inc., Kendall Co., Mentor
Corp. and Baxter International for catheter/urine collection bag drainage
systems; and American Medical Systems, Inc., a division of Pfizer, Boston
Scientific Corporation, Influence, Inc. and Johnson & Johnson for sling
procedures and artificial sphincter implants. 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.
In the bulking agent market, the Company competes with companies such as C.
R. Bard, Inc., Mentor Corp. and Uroplasty, Inc. that market biologically derived
agents or synthetic agents. Biologically-derived bulking agents may be absorbed
by the body over time. Patients treated with this type of bulking agent
typically return to urinary incontinence within months and require additional
treatments to maintain urinary 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.
30
<PAGE>
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 that consists of particles of PTFE, glycerin and polysorbate. The
particles of PTFE are generally in a size range of 1 to 100um. 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 solid silicone particles. This product has
not been approved for marketing in the U.S. by the FDA. The use of silicone may
be controversial in the U.S. due to the unresolved issues relating to silicone
gel breast implants.
Many of the Company's competitors and potential competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Company. In addition, many of the
Company's competitors offer broader product lines within the urology market,
which may give such competitors the ability to negotiate exclusive, long-term
supply contracts and to offer comprehensive pricing for their products. 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.
MANUFACTURING
The Company manufactures limited quantities of ACYST at its facilities from
components and raw materials obtained from outside suppliers. The Company
purchases the micro-beads from qualified suppliers and send them to an outside
vendor to be coated with pyrolytic carbon. The Company purchases the raw
materials for the carrier gel in bulk and formulates the carrier gel itself. The
portion of the manufacturing process performed by the Company involves mixing
the beads with the carrier gel and filling standard syringes with this mixture.
The filled syringes are packaged and sent to an outside vendor for sterilization
and returned to the Company for final inspection. As the Company expands its
manufacturing capabilities to enable it to produce commercial quantities of
ACYST, it will consider vertical integration, which may include bringing the
sterilization process or other manufacturing processes in-house.
One of the primary raw materials and components for the manufacture of
ACYST, the material needed for the gel carrier, is currently available to the
Company from a single source. Other primary raw materials and components for
manufacturing of ACYST, including pyrolytic carbon coating and micro-bead
substrates, are available only from a few suppliers. In the event that the
Company is unable to obtain these materials or other raw 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. The Company is currently
negotiating the terms and conditions of an agreement with the supplier of the
material needed for the gel carrier.
Prior to commercial sale of ACYST in the U.S., the Company will be required
to demonstrate compliance of its manufacturing operations with current GMP,
which establish requirements for assuring quality by controlling components,
processes and document traceability and retention, among other things. The
Company's facilities will also be subject to unscheduled inspections by the FDA,
and certain requirements of state, local and federal governments must also be
complied with in the manufacture of the Company's products.
The Company recently underwent an audit of its quality system, which is
required to obtain ISO 9001 certification and approval to apply the CE mark to
ACYST. Based upon the audit findings, the auditors recommended the Company for
ISO 9001 certification and approval to apply the CE mark to ACYST upon
implementing corrective actions for minor non-conformities noted during the
audit. The Company has addressed these non-conformities and believes it will
receive ISO 9001 certification and approval to
31
<PAGE>
apply the CE mark in 1998. However, there can be no assurance that the Company
will receive ISO 9001 certification or obtain approval to apply the CE mark on a
timely basis, if at all.
GOVERNMENT REGULATIONS
Government regulation in the U.S. and in foreign countries are significant
factors in the Company's business. Under 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
effectiveness 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)
generally must receive premarket approval by the FDA prior to their commercial
distribution in the U.S.
ACYST is considered a Class III device subject to premarket approval by the
FDA to ensure its safety and effectiveness. A PMA application must be filed and
must be supported by valid scientific evidence, including human clinical trial
data to demonstrate the safety and effectiveness of the device. The Company is
currently conducting Phase 2 clinical trials under an IDE granted by the FDA.
The PMA application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature, and training methods (if required).
See "Business--Status of Clinical Trials."
An FDA review of a PMA application generally takes one to two years from the
date the PMA application is accepted for filing, but may take significantly
longer. The review time may be significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
The FDA is not bound by the recommendations of the advisory panel. Toward the
end of the PMA review process, the FDA generally will conduct an inspection of
the manufacturer's facilities to ensure that the facilities are in compliance.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will issue an approval letter, which usually
contains a number of conditions which must be met in order to secure final
approval of the PMA. The FDA may also determine that additional clinical trials
are necessary, in which case PMA approval may be significantly delayed while
additional clinical trials are conducted. The PMA process can be expensive,
uncertain and lengthy and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the U.S. are required to adhere to FDA procedural and documentation
requirements with respect to device design, development, manufacturing, and
quality assurance activities. Manufacturers must also comply with Medical Device
Reporting requirements that require the manufacturer to report to the FDA any
incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, it would be likely to cause or contribute to death or serious
injury.
The Company is subject to routine inspection by the FDA. Although the
Company's facilities and manufacturing procedures are designed to comply with
FDA requirements, there can be no assurance that the FDA would find them in
compliance with all relevant aspects of the requirements. See "Business--
Manufacturing."
32
<PAGE>
Labeling and promotion activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. The Company
is also subject to a variety of state laws and regulations in those states or
localities where its product will be marketed. Any applicable state or local
regulations may hinder the Company's ability to market its products in those
states or localities. Manufacturers are also subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations now or in the future or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to do business.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future or that laws or regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations.
To introduce ACYST in Europe, the Company must comply with the "essential
requirements" set forth in the MDD of the EU which define the safety, design and
manufacturing requirements for medical products. Typically, a full quality
assurance system complying with international quality standards is required to
conform with the MDD. Compliance with these requirements will allow the Company
to apply the CE mark to ACYST, allowing free sale in the EU, subject only to
certain member country national laws. The Company recently underwent an audit of
its quality system to determine compliance with ISO 9001, EN46001 standards and
the essential requirements of the MDD, and expects to be ISO certified in 1998.
See "Business--Manufacturing."
THIRD-PARTY REIMBURSEMENT
ACYST will be purchased by hospitals and other users, which bill various
third-party payers, such as government health programs, private health insurance
plans, managed care organizations and other similar programs, for the health
care products and services provided to their patients. Payers may deny
reimbursement if they determine that a product used in a procedure was not used
in accordance with established payer protocols regarding cost-efficient
treatment methods, was used for an unapproved indication or was not otherwise
covered. Third-party payers are increasingly challenging the prices charged for
medical products and services and, in some instances, have pressured medical
suppliers to lower their prices.
In the U.S. and certain foreign countries, third-party reimbursement is
currently generally available for certain bulking agents for urinary
incontinence. The Medicare reimbursement rate for commercially available
injectable bulking agents is currently at $310 per two and one-half milliliter
syringe. The Company believes that there are typically three to five syringes of
such bulking agents used during an injection procedure. However, there is no
uniform policy for such reimbursement and no assurance that ACYST will receive
the same level of reimbursement, if any. The availability of third-party
reimbursement for ACYST or competitors' products and continuing efforts to
reduce the costs of health care by decreasing reimbursement rates may reduce the
price received by the Company for ACYST.
PRODUCT LIABILITY
The medical products industry is subject to substantial litigation, and the
Company, as a manufacturer of a medical product to be used in the body, faces an
inherent business risk of exposure to product liability claims in the event that
the use of its products is alleged to have resulted in adverse effects to a
patient. The Company currently has product liability insurance that provides
coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate
annually. 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
33
<PAGE>
be no assurance that liability claims will not exceed coverage limits. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. Furthermore, the Company does not expect to be able to obtain
insurance covering its costs and losses as a result of any recall of its
products due to alleged defects, whether such a recall is instituted by the
Company or required by a regulatory agency. A product liability claim, recall or
other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business, financial
condition and results of operations of the Company.
FACILITIES, EQUIPMENT AND PERSONNEL
Presently, the Company occupies approximately 7,700 square feet of office
and manufacturing space in a facility located in St. Paul, Minnesota. The
Company leases this space under a five-year lease agreement with a related
party, which began on August 1, 1997 and terminates on August 1, 2002. Lease
payments are made monthly at a rate of $5,200 per month in the first year with
rate increases of 2.5%, 3.0%, 3.5% and 4.0% in year two through year five of the
lease, respectively. The Company believes that these facilities are sufficient
for its current needs but will explore additional facilities as it develops
greater manufacturing capabilities. As of November 10, 1997, the Company had 15
full-time employees and one part-time employee. The Company is not a party to
any collective bargaining agreements and believes that its relations with its
employees are good. See "Certain Transactions."
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Timothy P. Lawin (1) 36 Chairman of the Board
Dean A. Klein 43 President and Chief Executive Officer
Thomas M. Jaeger 40 Vice President, Finance and Chief Financial Officer
Daniel A. White 45 Vice President, Sales and Marketing
Richard G. Holcomb, Ph.D. 48 Vice President, Regulatory Affairs
Bruce A. Lawin (2) 63 Director
Mark G. Nosbush (1)(2) 48 Director
Paul E. Colombo (2) 37 Director
James M. Knoblach (1) 40 Director
Harry E. Wells, III 56 Director
Jeffrey R. Tollefson 35 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
TIMOTHY P. LAWIN is a founder of the Company and has served as Chairman of
the Board of Directors of the Company since July 1994. Since 1993, Mr. Lawin,
has served as Chief Executive Officer and Chairman of the Board of Brennen
Medical, Inc., a company specializing in wound care management. Mr. Lawin
devotes a majority of his time to his duties as Chairman of the Board of the
Company. From 1984 to 1993, Mr. Lawin was employed by Bioplasty, Inc., a medical
device manufacturer and distributor, serving in a variety of capacities,
including President from 1990 to 1993 and Chief Executive Officer from 1992 to
1993. From 1989 to 1991, Mr. Lawin also served as the Chairman of the Board for
Bio Manufacturing, Inc., which was a related manufacturing company of Bioplasty,
Inc. During a portion of his employment with Bioplasty, Inc., Mr. Lawin was a
director of Uroplasty, Inc., then a wholly-owned subsidiary of Bioplasty, Inc.
Mr. Lawin resigned from Bioplasty, Inc. in February 1993. In April 1993,
Bioplasty, Inc. filed a petition for bankruptcy with the U.S. Bankruptcy Court
for the District of Minnesota, resulting from litigation regarding its breast
implant product. Mr. Lawin's father is Mr. Bruce Lawin, a director of the
Company.
DEAN A. KLEIN has served as President and Chief Executive Officer of the
Company since August 1994. Mr. Klein was employed by Brennen Medical, Inc. as
President of its urology division from May to August 1994, at which time the
assets of the division were acquired by the Company. From 1991 to May 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
1986 to 1991, Mr. Klein was employed in a variety of sales and management
positions with the Physicians Diagnostics Division of Baxter International and
its successor MediSense, Inc. Mr. Klein's career in the medical products
industry began in 1977 with Abbott Laboratories.
THOMAS M. JAEGER has served as Vice President, Finance and Chief Financial
Officer of the Company since May 1997. From May 1996 to May 1997, Mr. Jaeger
served as Director of Finance of the Company. From 1988 to May 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, serving as an audit manager from 1985 to
1988. Mr. Jaeger is a Certified Public Accountant.
35
<PAGE>
DANIEL A. WHITE has served as Vice President, Sales and Marketing of the
Company since May 1996 and as its General Manager from November 1994 to May
1996. From 1992 to July 1994, Mr. White served as Vice President of Sales and
Marketing for Uroplasty, Inc. where he established the international
distribution channel for that company's implantable urology product. Mr. White
served as Vice President of Sales and Marketing for Bioplasty, Inc. from
February 1991 to 1992. In April 1993, Bioplasty, Inc. filed a petition for
bankruptcy with the U.S. Bankruptcy Court for the District of Minnesota,
resulting from litigation regarding its breast implant product. From 1981 to
October 1990, Mr. White was employed by American Medical Systems, Inc., a
division of Pfizer, Inc. focused on the treatment of urologic dysfunctions,
including urinary incontinence, through implantable devices. Mr. White held a
number of positions at American Medical Systems, most recently serving as the
Director of Domestic Sales. Mr. White has over 15 years of experience with
companies producing implantable devices for the treatment of urological
disorders, beginning with his employment with C. R. Bard, Inc. in 1978.
RICHARD G. HOLCOMB, PH.D. has served as Vice President, Regulatory Affairs
of the Company since October 1997. From May 1996 to October 1997, Dr. Holcomb
served as Director of Regulatory Affairs. During the past 15 years, Dr. Holcomb
has consulted on clinical studies and regulatory matters for companies in the
medical industry such as Urologix, Inc., Guidant Corporation, American Medical
Systems, Inc., a division of Pfizer, Inc., and SCIMED Life Systems, Inc., a
subsidiary of Boston Scientific Corporation. Dr. Holcomb will continue to devote
a portion of his time as an independent consultant to other medical device
companies.
BRUCE A. LAWIN has served as a director of the Company since July 1994.
Since 1969, 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. Mr. Lawin is a director and a stockholder of Brennen
Medical, Inc. Mr. Lawin's son, Mr. Timothy Lawin, is Chairman of the Board of
the Company.
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.
PAUL E. COLOMBO has served as a director of the Company since February 1996.
In 1987, Mr. Colombo founded Chorus Corporation, a multi-national company that
specializes in the manufacture of semiconductor processing equipment, and has
served as its President since that time.
JAMES M. KNOBLACH has served as a director of the Company since February
1996. In 1995, Mr. Knoblach founded North Star Resources, an investment and
venture capital firm, and has served as its President since that time. Prior to
that time, Mr. Knoblach served as President of North Star Direct, a mail order
company, 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, and is also 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., an investment
banking firm, since 1969. Mr. Wells has served as a Managing Director of Adams,
Harkness & Hill, Inc. in charge of Money Management since 1990 and served as a
Director of Research from 1981 to 1990. Mr. Wells has also served as the
Managing General Partner of the AH&H Partners Fund Limited Partnership since
1990. Mr. Wells is a Chartered Financial Analyst.
JEFFREY R. TOLLEFSON has served as a director of the Company since June
1997. Since 1995, Mr. Tollefson has served as Vice President of IAI Ventures,
Inc., the venture capital investment arm of Investment Advisers, Inc., a global
investment management firm. IAI Ventures, Inc. is the general partner of IAI
U.S. Venture Fund, L.P. and IAI U.S. Venture Fund II, L.P. Mr. Tollefson also
serves as the Vice President of Eagle Ventures, LLC and Eagle Ventures II, LLC.
From 1990 to 1995, Mr. Tollefson was the Vice President of FBL Financial Group,
an insurance holding company, and as such managed its private equity investment
portfolios.
36
<PAGE>
The Bylaws of the Company provide that the number of directors shall not
exceed eight, as determined by the Board or the stockholders. The Bylaws also
provide for the election of three classes of directors with terms staggered so
as to require the election of only one class of directors each year. Mr.
Tollefson was elected in 1997 to serve a three-year term as a director of the
Company pursuant to an agreement entered into in connection with the Company's
Series A Preferred Stock offering. Under such agreement, which terminates upon
completion of this offering, Messrs. Timothy Lawin, Bruce Lawin and Dean Klein,
as well as the other participants in such offering, agreed to vote their shares
in favor of up to two persons nominated by a majority of the holders of Series A
Preferred Stock.
The Board of Directors has established a Compensation Committee and an Audit
Committee. 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.
Directors serving in 1996 received a nonqualified stock option to purchase
12,000 shares of Common Stock. Directors also receive options under the
Company's 1996 Stock Option Plan (the "1996 Plan"), which provides for the
automatic grant of ten-year, non-qualified options to purchase 6,000 shares of
Common Stock to each non-employee director and five-year incentive stock options
to purchase 6,000 shares of Common Stock to each employee director, at the end
of each year of service. Directors do not receive any cash compensation for
attending meetings, other than reimbursement of expenses. Executive officers of
the Company are appointed by and serve at the discretion of the Board of
Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth certain information regarding compensation
earned or awarded to the Company's President and Chief Executive Officer and
each other executive officer of the Company who received annual salary and bonus
compensation in excess of $100,000 during the year ended December 31, 1996 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
OTHER ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($)(1)
- ---------------------------------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
Dean A. Klein, President and Chief Executive Officer........................ 124,000 -- 7,000
Daniel A. White, Vice President, Sales and Marketing........................ 88,000 20,000 5,000
</TABLE>
- ------------------------
(1) Represents car allowance.
OPTION GRANTS AND YEAR-END OPTION VALUES
The Named Executive Officers did not exercise any options and were not
granted any options by the Company during the year ended December 31, 1996. 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 December 31, 1996 by the Named Executive Officers.
37
<PAGE>
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED OPTIONS MONEY OPTIONS AT 12/31/96
AT 12/31/96(#) ($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Dean A. Klein............................................. 270,000 -- 780,000 --
Daniel A. White........................................... 150,000 -- 438,000 --
</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, 1996 and the option exercise price per share multiplied by the
number of shares subject to options. The fair market value as of December
31, 1996 was $4.00 per share as determined by the Board of Directors.
EMPLOYMENT AGREEMENTS AND COMPENSATION PLANS
The Company does not currently have any employment agreements with its Named
Executive Officers. Effective July 1997, 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 $175,000 and $140,000, respectively, and
are eligible to receive a bonus based upon the accomplishment of certain
business objectives.
STOCK OPTIONS
In 1996, the Board of Directors and stockholders of the Company adopted the
1996 Plan in order to provide for the granting of stock purchase options to
employees, consultants, directors and officers of the Company. The 1996 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 1996 Plan. As of the date of this
Prospectus, the Company has outstanding options to purchase 321,000 shares under
the 1996 Plan and 599,880 shares outside of the 1996 Plan.
CERTAIN TRANSACTIONS
On August 1, 1994, the Company acquired the ACYST product technology, patent
application for the Company's issued patent and certain relevant equipment from
Brennen Medical, Inc. ("Brennen"), a wound care company whose principal
stockholders, Timothy Lawin and Bruce Lawin, are majority stockholders 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.
Because the Company and Brennen were under common control at the time of the
acquisition, the acquired assets were purchased for an amount equal to Brennen's
carrying cost of $18,125 for equipment and $12,500 for intangibles. The excess
purchase price of $269,375 was recorded by the Company as a charge directly to
deficit accumulated during the development stage.
On August 1, 1997, the Company entered into a five-year lease agreement with
Lawin Enterprises, LLC for the facilities presently occupied by the Company. The
lease covers approximately 7,700 square feet of office and manufacturing space
at a rate of $5,200 per month in the first year with rate increases of 2.5%,
3.0%, 3.5% and 4.0% in year two through year five of the lease, respectively.
The Company believes that this lease is on terms 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
stockholder of the Company, and Bruce Lawin, a director and principal
stockholder of the Company. Prior
38
<PAGE>
to this time, the Company leased 2,700 square feet of office and manufacturing
space from Lawin Enterprises, LLC at the rate of $3,000 per month, pursuant to a
two-year lease.
Adams, Harkness & Hill, Inc., one of the Representatives, is the Advising
General Partner of AH&H Partners Fund Limited Partnership, which has purchased
shares of the Company's capital stock in private placements on the same terms as
other investors who purchased in such placements. In April 1996, the AH&H
Partners Fund Limited Partnership purchased 150,000 shares of Common Stock at a
purchase price of $3.33 per share, for an aggregate purchase price of $500,000.
In April 1997, the AH&H Partners Fund Limited Partnership purchased 125,000
shares of the Company's Series A Preferred Stock at a purchase price of $4.00
per share, for an aggregate purchase price of $500,000, and was granted
five-year warrants to purchase 31,250 shares of Common Stock at an exercise
price of $4.00 per share. For services provided to the Company in connection
with the April 1997 private placement, Adams, Harkness & Hill, Inc. was granted
five-year warrants to purchase 18,750 shares of Common Stock at an exercise
price of $4.80 per share, and received a fee of $219,620 and reimbursement of
certain expenses of $5,759. Harry E. Wells, III, a Managing Director of Adams,
Harkness & Hill, Inc., is the Managing General Partner of the AH&H Partners Fund
Limited Partnership. See "Management" and "Underwriting."
One of the directors of the Company, Jeffrey R. Tollefson, is a Vice
President of IAI Ventures, Inc. which serves as a general partner to several
venture capital limited partnerships, including IAI U.S. Venture Fund II, L.P.,
a principal stockholder of the Company. In the aggregate, this venture fund and
three others controlled by IAI Ventures, Inc. hold 875,000 shares of Common
Stock of the Company. Each of the foregoing funds participated in the Series A
Preferred Stock private placement conducted by the Company in April 1997. As
part of this offering, Messrs. Timothy Lawin, Bruce Lawin and Dean Klein, as
well as the other participants in such offering, agreed to vote their shares in
favor of up to two persons nominated by a majority of the holders of Series A
Preferred Stock. Mr. Tollefson was elected pursuant to such agreement at the
Company's annual stockholders meeting held in June 1997. Although this agreement
terminates upon the completion of this public offering, Mr. Tollefson's current
term as a Class A director does not expire until the year 2000 annual meeting of
stockholders.
Upon formation of the Company, Timothy Lawin purchased 1,512,000 shares at
an 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 non-qualified stock option to purchase 30,000 shares at $1.67 per
share. In December 1996 and January 1997, Timothy Lawin transferred 50,000
shares to family members. In June 1997 and September 1997 Timothy Lawin received
five-year incentive stock options to purchase 6,000 and 50,000 shares of common
stock at $4.40 per share. The option granted for 6,000 shares vests immediately
and the option granted for 50,000 vests 30% after one year, an additional 30%
after two years and 40% after three years.
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 non-qualified stock
option to purchase 240,000 shares at $1.04 per share. In December 1995, Mr.
Klein received a ten-year non-qualified stock option to purchase 30,000 shares
at $1.67 per share. In December 1996 and January 1997, Dean Klein transferred
60,000 shares to his spouse and 13,600 to other family members. In September
1997, Dean Klein received a five-year incentive stock option to purchase 50,000
shares of common stock at $4.00 per share. This option vests 30% after one year,
an additional 30% after two and years and 40% after three years.
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
39
<PAGE>
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 non-qualified stock option to purchase 12,000
shares at $1.67 per share. In June 1997, Bruce Lawin received a ten-year
nonqualified stock option to purchase 6,000 shares of common stock at $4.00 per
share.
All future transactions between the Company and its officers, directors,
principal stockholders or other affiliates, will be approved by a majority of
the independent and disinterested members of the Board of Directors and will be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of November 10, 1997, 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 Named Executive Officers and
(iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF SHARES ------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) OFFERING OFFERING
- ------------------------------------------------------------------------- -------------------- ----------- -----------
<S> <C> <C> <C>
Timothy P. Lawin (2)(3).................................................. 1,979,000 38.0% 25.7%
Dean A. Klein (2)(4)..................................................... 430,000 8.0 5.4
Daniel A. White (2)(5)................................................... 151,250 2.9 1.9
Bruce A. Lawin (6)(7).................................................... 414,000 8.0 5.4
Mark G. Nosbush (8)...................................................... 33,000 * *
Paul E. Colombo (7)(9)................................................... 198,000 3.8 2.6
James M. Knoblach (10)................................................... 178,000 3.4 2.3
Harry E. Wells, III (11)................................................. 343,000 6.6 4.5
Jeffrey R. Tollefson (12)................................................ 875,000 17.1 11.5
Lisa Lawin (13).......................................................... 1,979,000 38.0 25.7
Investment Advisers, Inc. (14)........................................... 824,807 16.1 10.8
Marcellus P. Knoblach (15)............................................... 415,000 7.8 5.3
Adams, Harkness & Hill, Inc. (16)........................................ 325,000 6.3 4.2
All executive officers and directors as a group (11 persons)(17)......... 4,691,250 78.9% 55.5%
</TABLE>
- ------------------------
* Less than one percent.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or a member of a group to acquire them as of November 10, 1997
or within 60 days of such date are treated as outstanding only 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 this offering, it was assumed that the
officers, directors and principal stockholders will not be purchasing
shares in this 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 his name.
(2) The address of the executive officers is 1290 Hammond Road, St. Paul, MN
55110.
(3) Includes 43,500 shares which may be purchased by Mr. Lawin upon the
exercise of options and warrants. Also includes 934,000 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, Inc. (a
corporation controlled by Mr. Timothy Lawin) and 36,000 shares which may be
purchased upon exercise of a warrant held by Brennen Medical, Inc. Mr. and
Ms. Lawin share voting and investment power over the shares held by them.
(4) Includes 277,500 shares which may be purchased by Mr. Klein upon the
exercise of options and warrants and 50,000 shares held by Mr. Klein's
wife.
(5) Includes 150,000 shares which may be purchased by Mr. White upon the
exercise of options.
(6) Mr. Bruce Lawin's address is 5858 Centerville Road, St. Paul, MN 55110.
(7) Includes 48,000 shares which may be purchased upon the exercise of options
and warrants.
(8) Includes 25,500 shares which may be purchased by Mr. Nosbush upon the
exercise of options and warrants. Mr. Nosbush's address is 5858 Centerville
Road, St. Paul, MN 55110.
41
<PAGE>
(9) Mr. Colombo's address is 1290 Hammond Road, St. Paul, MN 55110.
(10) Includes 78,000 shares which may be purchased by Mr. Knoblach upon the
exercise of options. Also includes 100,000 shares held by Mr. Knoblach as
Trustee for the James M. Knoblach Revocable Trust. Mr. Knoblach's address
is c/o North Star Publishing, 1240 Eleventh Street North, Sauk Rapids, MN
56379.
(11) Includes 18,000 shares which may be purchased by Mr. Wells upon the
exercise of options. Also includes 275,000 shares and warrants to purchase
31,250 shares held by AH&H Partners Fund Limited Partnership and warrants
to purchase 18,750 shares held by Adams, Harkness & Hill, Inc. Mr. Wells,
is a Managing Director of Adams, Harkness & Hill, Inc., and the Managing
General Partner of the AH&H Partners Fund Limited Partnership. His address
is 60 State Street, 12th Floor, Boston, MA 02109.
(12) Includes 25,639 shares held by Eagle Ventures, LLC, 24,554 shares held by
Eagle Ventures II, LLC, 161,861 shares held by IAI U.S. Venture Fund L.P.
and 662,946 shares held by IAI U.S. Venture Fund II, L.P. Mr. Tollefson is
a Vice President of IAI Ventures, Inc., the general partner of IAI U.S.
Venture Fund L.P. and IAI U.S. Venture Fund II, L.P., and the Vice
President and a member of Eagle Ventures, LLC and Eagle Ventures II, LLC.
Mr. Tollefson's address is 3800 First Bank Place, Minneapolis, Minnesota
55402.
(13) Includes 821,500 shares held by Timothy P. Lawin (Ms. Lawin's husband),
108,000 shares held by their daughter, 36,000 shares held by Brennen
Medical, Inc. (a corporation controlled by Mr. Timothy Lawin), 36,000
shares which may be purchased upon exercise of a warrant held by Brennen
Medical, Inc. and 43,500 shares which may be purchased upon the exercise of
options and warrants held by Mr. Timothy Lawin. Mr. and Ms. Lawin share
voting and investment power over the shares held by them. Ms. Lawin's
address is c/o Advanced UroScience, Inc., 1290 Hammond Road, St. Paul, Mn
55110.
(14) Includes 662,946 shares held by IAI U.S. Venture Fund II, L.P. and 161,861
shares held by IAI U.S. Venture Fund, L.P. IAI Ventures, Inc. is a
wholly-owned subsidiary of Investment Advisers, Inc. and the general
partner of each of such funds. The address of IAI Ventures, Inc. is 3800
First Bank Place, Minneapolis, Minnesota 55402. Does not include shares
held by Eagle Ventures, LLC or Eagle Ventures II, LLC, the members of which
are certain persons affiliated with Investment Advisers, Inc..
(15) Includes 180,000 shares which may be purchased by the Marcellus P. Knoblach
Revocable Trust upon the exercise of a warrant. Also includes 25,000 shares
held by the Vivian J. Knoblach Revocable Trust. Marcellus and Vivian
Knoblach are husband and wife. Mr. Marcellus P. Knoblach's address is 3807
E. Amberwood Drive, Phoenix, AZ 85044.
(16) Includes 18,750 shares which may be purchased upon the exercise of a
warrant held by Adams, Harkness & Hill, Inc. Also includes 275,000 shares
and warrants to purchase 31,250 shares held by the AH&H Partners Fund
Limited Partnership. Adams, Harkness & Hill, Inc. is the Advising General
Partner of the AH&H Partners Fund Limited Partnership. The address of
Adams, Harkness & Hill, Inc. is 60 State Street, 12th Floor, Boston,
Massachusetts 02109.
(17) Includes 822,500 shares which may be purchased upon the exercise of options
and warrants.
42
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company currently consists of 23,000,000
shares of capital stock, no par value, of which 20,000,000 shares are Common
Stock, 1,500,000 shares are Series A Preferred Stock and 1,500,000 shares are
Series A1 Preferred Stock. Upon closing of this offering, automatic conversion
of the outstanding shares of Series A Preferred Stock into Common Stock, and
cancellation of the Company's Series A and Series A1 Preferred Stock, the
Company's authorized capital will consist of 20,000,000 shares of Common Stock,
no par value, and 1,586,500 shares of undesignated stock. The Company has
approximately 70 shareholders of record of its capital stock.
COMMON STOCK
The Company has 5,126,720 shares of Common Stock issued and outstanding,
assuming conversion of outstanding shares of Series A Preferred Stock. The
holders of Common Stock are entitled to one vote per share on all matters which
shareholders may vote on at all meetings of shareholders. Subject to the rights
of any future series of preferred stock that may be designated, the holders of
the Common Stock have equal ratable rights to dividends from funds legally
available therefor, when, as and if declared by the Board of Directors of the
Company and 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. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
shares of Common Stock. All outstanding shares of the Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable.
The holders of the Common Stock do not have cumulative voting rights.
Subject to the rights of any future series of preferred stock, 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.
SERIES A AND SERIES A1 PREFERRED STOCK
The Company has 1,413,500 shares of Series A Preferred Stock issued and
outstanding. Upon the closing of this offering, each outstanding share of Series
A Preferred Stock will be converted automatically into one share of Common
Stock. There are no shares of Series A1 Preferred Stock issued or outstanding.
Upon closing of this offering, the shares of Series A Preferred Stock
converted into shares of Common Stock will be canceled and cannot be reissued,
and no shares of preferred stock will be outstanding at such time. The Company
will take the necessary steps to cancel the designation of the remaining 86,500
unissued shares of Series A Preferred Stock and 1,500,000 unissued shares of
Series A1 Preferred Stock, at which time these shares will become undesignated.
The Board of Directors will have the authority, without action by the
stockholders, to designate and issue any of such undesignated shares in one or
more series of preferred stock and to fix the rights, preferences, privileges
and restrictions, including voting rights, of each series, any or all of which
may be greater than the rights of the Common Stock.
It is not possible to state the actual effect of the issuance of any shares
of preferred stock upon the rights of holders of the Common Stock until the
Board of Directors determines the specific rights of the holders of such
preferred stock. However, the effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock, impairing the liquidation rights of the Common Stock and delaying
or preventing a change in control of the Company without further action by the
shareholders. The Company has no present plans to issue any shares of preferred
stock.
43
<PAGE>
WARRANTS
The Company currently has outstanding warrants to purchase an aggregate of
620,000 shares of Common Stock. This includes five-year warrants, to purchase an
aggregate of 570,000 shares of Common Stock at an exercise price of $1.67 per
share, that were issued to stockholders in connection with private sales of
units (each unit consisting of one share and one warrant) in November 1995
through February 1996. In April 1997, (i) the AH&H Partners Fund Limited
Partnership was granted five-year warrants to purchase 31,250 shares of Common
Stock at an exercise price of $4.00 per share and (ii) Adams, Harkness & Hill,
Inc. was granted five-year warrants to purchase 18,750 shares of Common Stock at
an exercise price of $4.80 per share.
REGISTRATION RIGHTS
Pursuant to an Investor's Rights Agreement among the Company and holders of
Series A Preferred Stock, dated April 4, 1997, such investors have certain
registration rights with respect to the shares of Common Stock issuable upon
conversion of their shares of Series A Preferred Stock, including shares to be
issued upon conversion of the outstanding Series A Preferred Stock upon
completion of this offering. Under the terms of the Investors' Rights Agreement,
if the Company proposes to register any of its securities under the Securities
Act for its own account or for the account of others, the holders are entitled
to receive notice thereof and request inclusion of their conversion shares
therein, subject to any limitation by the underwriters of any such offering on
the number of shares included in such registration. In addition, such persons
also have the right to request, under certain circumstances, that the Company
register the sale of their conversion stock by filing a registration statement
under the Securities Act. The Company is required to use its best efforts to
effect all such registrations, subject to certain conditions and limitations.
Such persons do not have registration rights under the Investors' Rights
Agreement with respect to this offering.
MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its stockholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20
percent or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a majority vote of the stockholders of the
Company prior to its consummation. In general, shares acquired in the absence of
such approval are denied voting rights and are redeemable at their then fair
market value by the Company within 30 days after the acquiring person has failed
to give a timely information statement to the Company or the date the
stockholders voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
stockholder which purchases 10 percent or more of the Company's voting shares
(an "interested stockholder") within four years following such interested
stockholder's share acquisition date, unless the business combination is
approved by a committee of all of
44
<PAGE>
the disinterested members of the Board of Directors of the Company serving
before the interested stockholder's share acquisition date.
CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
The Company's Restated Articles limit the personal liability of its
directors. Specifically, directors of the Company will not be personally liable
to the Company or its shareholders for monetary damages for any breach of their
fiduciary duty as directors, except to the extent that the elimination or
limitation of liability is not permitted under Section 302A.527 of the Minnesota
Business Corporation Act, as amended. This provision will generally not limit
liability under state or federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business corporation
shall indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Bylaw 37 of the Company's Amended and Restated Bylaws provides that each
director, officer and employee of the Company shall be indemnified by the
Company in accordance with, and to the fullest extent permissible by, applicable
law.
In addition, each of the Company's directors has entered into an indemnity
agreement that provides that the Company will indemnify directors against any
costs and expenses, judgments, settlements and fines incurred in connection with
any claim involving a director by reason of his position as a director; provided
that the director meets certain standards of conduct for claims that (i) have
been successfully defended or (ii) a majority of impartial directors or an
independent counsel has determined that, with respect to the conduct giving rise
to such claim, the director acted in good faith. No indemnification may be made,
however, for claims in which the director has been adjudicated in a final
judgment to be liable to the Company except to the extent that the court finds
indemnification to be proper.
The Company maintains an insurance policy covering director and officer
liability.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Company
pursuant to the foregoing provisions, the Company 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 and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Company's Common Stock
is Norwest Bank Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the open market
may adversely affect the market price of the Common Stock offered hereby and the
ability of the Company to raise equity capital in the future.
Upon consummation of the offering, the Company will have outstanding an
aggregate of 7,626,720 shares of Common Stock (assuming no exercise of the
Underwriters' over-allotment option). Of the aggregate number of outstanding
shares of Common Stock, the 2,500,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities
45
<PAGE>
Act, unless purchased by an "affiliate" of the Company, as that term is defined
by Rule 144 promulgated under the Securities Act (an "Affiliate"), whose sales
would be subject to certain volume limitations and other restrictions described
below. The remaining 5,126,720 shares of Common Stock originally issued and sold
by the Company in private transactions in reliance upon exemptions from the
Securities Act held by stockholders upon the consummation of this offering will
be "restricted securities" as that term is defined in Rule 144 under the
Securities Act, and may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144, 144(k) or 701 or
otherwise.
All officers and directors and certain stockholders of the Company, owning
an aggregate of 4,436,000 shares, have entered into "lock-up" agreements,
agreeing not to, directly or indirectly, sell, assign, transfer, encumber, offer
to sell, grant any option for the sale of, or otherwise dispose of, any shares
of Common Stock without the consent of the Representatives for a period of 180
days after the date of this Prospectus. The Representatives may waive these
restrictions at any time in their discretion. Taking such restrictions into
account, in addition to the 2,500,000 shares of Common Stock offered hereby, (i)
approximately 384,720 shares will be eligible for immediate sale on the date of
this Prospectus in accordance with Rule 144; (ii) approximately 193,500
additional shares will become eligible for sale in the public market beginning
in December 1997; (iii) approximately 112,500 additional shares will become
eligible for sale in the public market beginning 90 days after the date of this
Prospectus in accordance with Rule 144; and (iv) approximately 4,436,000
additional shares will be eligible for sale beginning 180 days after the date of
this Prospectus upon the expiration of the lock-up agreements, subject, in the
case of Affiliates, to volume and manner of sale limitations under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owns shares last acquired
privately from the Company or an Affiliate at least one year previously is
entitled to sell, in "brokers' transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 76,300 shares immediately
after the offering); or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are generally subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who beneficially owns shares last
acquired from the Company or an Affiliate at least two years previously, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may therefore be sold immediately upon the
consummation of this Offering.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
non-Affiliates to sell their Rule 701 shares without complying with the public
information, holding period, volume limitation or notice provisions of Rule 144
and which permits Affiliates to sell their Rule 701 shares without complying
with the Rule 144 holding period restrictions, in each case commencing 90 days
after the date of this Prospectus.
The Company intends to file Registration Statements on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance upon
exercise of stock options, thus permitting the resale of such shares by
non-Affiliates in the public market without restrictions under the Securities
Act and by Affiliates subject to volume and manner of sale limitations under
Rule 144. Such Registration Statements are expected to become effective shortly
after the date of this Prospectus. As of the date of this Prospectus, options to
purchase 920,880 shares of Common Stock were outstanding, with 766,000 of the
shares issuable upon exercise of such options subject to vesting requirements
and lock-up agreements. The remaining 154,880 shares issuable upon exercise of
such options will become available for exercise and sale upon vesting and
effectiveness of such Registration Statements on Form S-8.
46
<PAGE>
REGISTRATION RIGHTS
In connection with their acquisition of securities of the Company,
stockholders who will hold an aggregate of 1,413,500 shares of Common Stock upon
completion of this offering (and the automatic conversion of their Series A
Preferred Stock into Common Stock) entered into an Investors' Rights Agreement
with the Company under which the stockholders have the right to have their
shares of Common Stock included in future registration statements filed by the
Company under the Securities Act. In addition, beginning six months from the
effective date of the offering covered by this Prospectus, upon the request of
stockholders holding fifty percent of the securities covered under the
Investors' Rights Agreement, the Company is required to file a registration
statement with the Commission covering these securities. In addition, these
stockholders also have demand registration rights at such time as the Company is
eligible to use a Registration Statement Form S-3, requiring the Company to file
a registration statement on such Form upon the request of stockholders holding
twenty-five percent of the securities covered under the Investors' Rights
Agreement. Such stockholders do not have registration rights under the
Investors' Rights Agreement with respect to this offering. See "Description of
Securities."
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Dain Bosworth Incorporated and Adams,
Harkness & Hill, Inc. are acting as the Representatives, have severally agreed
to purchase from the Company an aggregate of 2,500,000 shares of Common Stock at
the Price to Public less the Underwriting Discounts and Commissions set forth on
the cover page of this Prospectus, in the amounts set forth below opposite their
respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Dain Bosworth Incorporated.......................................................
Adams, Harkness & Hill, Inc......................................................
----------
Total.......................................................................... 2,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if the Underwriters purchase any
shares. The Representatives have advised the Company that the several
Underwriters may offer the shares of Common Stock directly to the public at the
Price to Public set forth on the cover page of this Prospectus and to certain
dealers at the Price to Public less a concession not exceeding $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not exceeding $ per share to other dealers. After the initial public
offering, the Representatives may change the offering price and other selling
terms.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the same per share price as the initial
shares to be purchased by the Underwriters. The Underwriters may purchase these
shares solely to cover over-allotments, if any, in connection with the sale of
Common Stock offered hereby. If the Underwriters exercise the over-allotment
option, the Underwriters will be obligated, subject to certain conditions, to
purchase additional shares in approximately the same proportion as those in the
table above.
This offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Securities Dealers, Inc. ("NASD") which provides
that, among other things, when a NASD member participates in an offering of
equity securities of a company with which such member is affiliated or has a
"conflict of interest" (as defined in Rule 2720), the initial public offering
price may be no higher than that recommended by a "qualified independent
underwriter" (a "QIU"). A QIU must (i) be a NASD member experienced in the
securities or investment banking business; (ii) not be an affiliate of the
issuer of the securities; and (iii) agree to undertake the responsibilities and
liabilities of an underwriter under the Securities Act. In accordance with this
requirement, Dain Bosworth Incorporated is serving as a QIU in this offering.
The initial public offering price of the Common Stock offered hereby will not be
higher than Dain Bosworth Incorporated's recommended initial public offering
price. Dain Bosworth Incorporated has performed due diligence investigations and
reviewed and participated in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. Dain Bosworth
Incorporated will receive no additional compensation in its capacity as QIU in
connection with this offering.
48
<PAGE>
The Underwriting Agreement provides that the Company and the Underwriters
will indemnify each other against certain liabilities, including liabilities
under the Securities Act.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company, its officers, directors and certain of its current
stockholders, holding an aggregate of 4,436,000 shares of Common Stock, have
agreed not to directly or indirectly, sell, assign, transfer, encumber, offer to
sell, grant any option for the sale of or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representatives.
In order to facilitate the offering of Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
Common Stock. Specifically, the Underwriters may over-allot Common Stock in
connection with the offering, creating a short position in Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing Common Stock
in the offering, if the Underwriters repurchase previously distributed Common
Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of Common Stock in market making transactions and impose penalty bids.
These activities may stabilize or maintain the market price of Common Stock
above market level that may otherwise prevail. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Prior to this offering, there has been no public market for Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between the Company and the Representatives. In determining the
initial price to public, the Company and the Representatives will consider,
among other things, the history of and prospects for the industry in which the
Company competes, the qualifications of the Company's management, the present
state of the Company's development, the results of operations of the Company in
recent periods, the prospects for growth of the Company's revenues and earnings,
the current state of the U.S. economy, the general condition of the securities
markets at the time of this offering and the market prices for other publicly
traded companies that are comparable to the Company. There can be no assurance,
however, that the prices at which Common Stock will sell in the public market
after this offering will not be lower than the Price to Public.
Adams, Harkness & Hill, Inc., one of the Representatives, is the Advising
General Partner of AH&H Partners Fund Limited Partnership, which has purchased
shares of the Company's capital stock in private placements on the same terms as
other investors who purchased in such placements. In April 1996, the AH&H
Partners Fund Limited Partnership purchased 150,000 shares of Common Stock at a
purchase price of $3.33 per share, for an aggregate purchase price of $500,000.
In April 1997, the AH&H Partners Fund Limited Partnership purchased 125,000
shares of the Company's Series A Preferred Stock at a purchase price of $4.00
per share, for an aggregate purchase price of $500,000, and was granted
five-year warrants to purchase 31,250 shares of Common Stock at an exercise
price of $4.00 per share. For services provided to the Company in connection
with the April 1997 placement, Adams, Harkness & Hill, Inc. was granted
five-year warrants to purchase 18,750 shares of Common Stock at an exercise
price of $4.80 per share, and received a fee of $219,620 and reimbursement of
certain expenses of $5,759. Harry E. Wells, III, a Managing Director of Adams,
Harkness & Hill, Inc., is the Managing General Partner of the AH&H Partners Fund
Limited Partnership. See "Management" and "Certain Transactions."
49
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Fredrikson & Byron, P.A., Minneapolis, Minnesota Certain legal
matters for the Underwriters will be passed upon by Oppenheimer Wolff &
Donnelly, Minneapolis, Minnesota.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and the Registration Statement have been audited by McGladrey & Pullen, LLP,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report and upon the
authority of such firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors--Dependence on Patents and Proprietary Rights" and "Business--Patents
and Proprietary Rights" have been reviewed and approved by Nawrocki, Rooney &
Sivertson, P.A., patent counsel to the Company, as experts on such matters, and
are included herein in reliance upon that review and approval.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement and exhibits and schedules filed therewith. Although all
material terms and provisions of any material contract or other document filed
are referred to in this Prospectus and described herein, such descriptions are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and exhibits and schedules may be
inspected without charge and copied 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. The Commission maintains a World Wide Website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
Prior to this offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. After completion of this
offering, the Company intends to comply with such requirements, including
distributing to its stockholders an annual report containing audited financial
statements.
50
<PAGE>
ADVANCED UROSCIENCE, INC.
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditor.............................................................................. F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)......................... F-3
Statements of Operations for the Years Ended December 31, 1995 and 1996, Nine Months Ended September 30,
1996 and 1997 (unaudited) and the Period from August 1, 1994 (Date of Inception) to September 30, 1997
(unaudited).............................................................................................. F-4
Statements of Stockholders' Equity for the Period from August 1, 1994 (Date of Inception) and December 31,
1994, Years Ended December 31, 1995 and 1996, Nine Months Ended September 30, 1997 (unaudited)........... F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, Nine Months Ended September 30,
1996 and 1997 (unaudited) and Period from August 1, 1994 (Date of Inception) to September 30, 1997
(unaudited).............................................................................................. F-6
Notes to Financial Statements.............................................................................. F-7
</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, 1995 and 1996, and the related
statements of operations and cash flows for the years ended December 31, 1995
and 1996, and the statements of stockholders' equity for the period since
inception (August 1, 1994) through December 31, 1996. 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, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
MCGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 25, 1997, except for Note 4, as to which
the date is April 29, 1997
F-2
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997
1995 1996 -------------
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................ $ 474,749 $ 354,216 $ 1,971,300
Short-term investments............................................... -- -- 1,413,768
Inventories.......................................................... 13,589 126,121 243,588
Other current assets................................................. 4,260 15,018 165,452
------------ ------------ -------------
TOTAL CURRENT ASSETS............................................... 492,598 495,355 3,794,108
Equipment and Leasehold Improvements, less accumulated depreciation,
1995 $6,839; 1996 $25,620; 1997 $63,976.............................. 18,364 100,479 368,701
Intangible Assets, less accumulated amortization 1995 $7,087; 1996
$13,665; 1997 $20,165................................................ 23,484 27,369 33,823
------------ ------------ -------------
TOTAL ASSETS....................................................... $ 534,446 $ 623,203 $ 4,196,632
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 43,558 $ 131,328 $ 125,091
Accrued expenses..................................................... 33,805 276,134 257,361
------------ ------------ -------------
TOTAL CURRENT LIABILITIES.......................................... 77,363 407,462 382,452
------------ ------------ -------------
Related Party Long-Term Debt (Note 2).................................. 200,000 -- --
------------ ------------ -------------
Commitments and Contingencies (Notes 3 and 7)..........................
Stockholders' Equity (Notes 2, 3, 4, and 5)
Common stock, no par value; 20,000,000 shares authorized; issued and
outstanding: 1995 3,170,220 shares; 1996 3,713,220 shares; 1997
5,126,720 shares................................................... 1,109,812 2,527,312 7,915,202
Contributed capital.................................................. 50,000 99,000 320,000
Deficit accumulated during the development stage..................... (902,729) (2,410,571) (4,421,022)
------------ ------------ -------------
257,083 215,741 3,814,180
------------ ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 534,446 $ 623,203 $ 4,196,632
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1997,
AND THE PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
NINE MONTHS ENDED SEPTEMBER (DATE OF
YEARS ENDED DECEMBER 31 30 INCEPTION) TO
---------------------------- ---------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------- ------------- ------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expenses:
Research and development........ $ 353,334 $ 763,796 $ 485,178 $ 1,039,722 $ 2,190,356
General and administrative (Note
3)............................ 164,771 778,227 577,523 1,091,267 2,107,970
Interest expense to related
party (Note 2)................ 16,000 4,667 4,667 -- 24,000
------------- ------------- ------------- ------------- -----------------
534,105 1,546,690 1,067,368 2,130,989 4,322,326
Interest income................... 9,661 38,848 31,949 120,538 170,679
------------- ------------- ------------- ------------- -----------------
NET LOSS...................... $ (524,444) $ (1,507,842) $ (1,035,419) $ (2,010,451) $ (4,151,647)
------------- ------------- ------------- ------------- -----------------
------------- ------------- ------------- ------------- -----------------
Net loss per share................ $ (0.12) $ (0.29) $ (0.20) $ (0.38)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted-average number of common
and common equivalents shares
outstanding..................... 4,485,694 5,224,309 5,183,517 5,346,684
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</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 SEPTEMBER 30, 1997
<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, 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......................................... 24,000 20,000 -- -- 20,000
Private placement issuance of common stock in
November and December, net of stock issuance
costs of $1,713.................................. 334,500 555,787 -- -- 555,787
Exercise of common stock options................... 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............................. 235,500 392,500 -- -- 392,500
Private placement issuance of common stock in April
and May.......................................... 307,500 1,025,000 -- -- 1,025,000
Compensation element of common stock options issued
(Note 5)......................................... -- -- 49,000 -- 49,000
Net loss........................................... -- -- -- (1,507,842) (1,507,842)
---------- ----------- ----------- ------------ ------------
Balance, December 31, 1996........................... 3,713,220 2,527,312 99,000 (2,410,571) 215,741
Private placement issuance of Series A Preferred
Stock in April 1997, and assumed conversion to
common stock, net of offering costs of $266,110
(Note 4)......................................... 1,413,500 5,387,890 -- -- 5,387,890
Compensation element of common stock options issued
(unaudited) (Note 5)............................. -- -- 221,000 -- 221,000
Net loss (unaudited)............................... -- -- -- (2,010,451) (2,010,451)
---------- ----------- ----------- ------------ ------------
Balance, September 30, 1997 (unaudited).............. 5,126,720 $ 7,915,202 $ 320,000 $ (4,421,022) $3,814,180
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1997, AND THE PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO SEPTEMBER
30, 1997
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED PERIOD FROM AUGUST
DECEMBER 31 SEPTEMBER 30 1, 1994 (DATE OF
---------------------- ------------------------ INCEPTION) TO
1995 1996 1996 1997 SEPTEMBER 30, 1997
--------- ----------- ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss......................................... $(524,444) $(1,507,842) $(1,035,419) $(2,010,451) $ (4,151,647)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................... 5,635 18,781 9,333 39,300 64,920
Amortization................................... 5,317 6,578 4,934 6,500 20,165
Noncash expenses (Notes 3 and 5)............... -- 49,000 49,000 221,000 320,000
Changes in assets and liabilities:
Inventories.................................. (13,589) (112,532) (99,644) (117,467) (243,588)
Other current assets......................... 14,870 (10,758) (20,123) (150,434) (165,452)
Accounts payable............................. 8,191 87,770 58,705 (6,237) 125,091
Accrued expenses............................. 21,243 242,329 158,332 (18,773) 257,361
--------- ----------- ----------- ----------- ------------------
NET CASH USED IN OPERATING ACTIVITIES...... (482,777) (1,226,674) (874,882) (2,036,562) (3,773,150)
--------- ----------- ----------- ----------- ------------------
Cash Flows From Investing Activities
Purchase of short-term investments............... -- -- -- (1,513,768) (1,513,768)
Proceeds upon maturity of short-term
investments.................................... -- -- -- 100,000 100,000
Purchase of equipment............................ (7,078) (100,896) (90,560) (307,522) (415,496)
Purchase of intangible assets.................... (7,641) (10,463) (10,036) (12,954) (41,488)
--------- ----------- ----------- ----------- ------------------
NET CASH USED IN INVESTING ACTIVITIES...... (14,719) (111,359) (100,596) (1,734,244) (1,870,752)
--------- ----------- ----------- ----------- ------------------
Cash Flows From Financing Activities
Net proceeds from issuance of common stock....... 619,412 1,417,500 1,417,500 -- 2,527,312
Net proceeds from issuance of Series A Preferred
Stock.......................................... -- -- -- 5,387,890 5,387,890
Payments on note payable to related party........ -- (200,000) (200,000) -- (300,000)
--------- ----------- ----------- ----------- ------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................... 619,412 1,217,500 1,217,500 5,387,890 7,615,202
--------- ----------- ----------- ----------- ------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 121,916 (120,533) 242,022 1,617,084 1,971,300
Cash and Cash Equivalents
Beginning........................................ 352,833 474,749 474,749 354,216 --
--------- ----------- ----------- ----------- ------------------
Ending........................................... $ 474,749 $ 354,216 $ 716,771 $ 1,971,300 $ 1,971,300
--------- ----------- ----------- ----------- ------------------
--------- ----------- ----------- ----------- ------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for interest....................... $ 18,166 $ 5,834 $ 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
Carrying value of intangibles acquired......... -- -- -- -- 12,500
Issuance of note payable....................... -- -- -- -- (300,000)
Distribution to Brennen Medical's
stockholders................................. -- -- -- -- 269,375
--------- ----------- ----------- ----------- ------------------
$ -- $ -- $ -- $ -- $ --
--------- ----------- ----------- ----------- ------------------
--------- ----------- ----------- ----------- ------------------
</TABLE>
See Notes to Financial Statements.
F-6
<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, and has developed ACYST, an
injectable bulking agent used to treat stress urinary incontinence. The
technology for the Company's ACYST product was purchased from Brennen Medical,
Inc. (Brennen), a related company (see Note 2).
The Company is in the development stage and has yet to obtain regulatory
approval for its product. 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 currently
conducting 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. 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 placement of preferred stock received subsequent to
year end (see Note 4), the Company may need to raise additional capital before
profitability is achieved.
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.
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.
One of the primary raw materials and components for the manufacture of
ACYST, a material needed for the carrier gel, is available only from a single
source. The Company does not have an agreement with the supplier of this
material and is currently negotiating the terms and conditions of such an
agreement. In the event that the Company is unable to maintain this single
source of supply or is required to replace any of 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 use of any alternatives could
adversely affect the Company's operations.
SHORT-TERM INVESTMENTS: The Company follows the provisions of FASB
Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Statement No. 115 requires that management determine the appropriate
classification of securities at the date individual securities are acquired, and
that the appropriateness of such classification be reassessed at each balance
sheet date.
The Company's short-term investments consist of U.S. government, mortgage
backed, and corporate debt securities. These securities are classified as
held-to-maturity as the Company has the positive intent and ability to hold to
maturity. The securities mature during 1997. These securities are stated at fair
value, which approximates cost at September 30, 1997.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of raw materials for use in
research and development activities.
F-7
<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)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Depreciation of equipment is computed
over estimated useful lives of five to seven years using accelerated methods.
Leasehold improvements are depreciated using the straight-line method over the
life of the lease.
INTANGIBLE ASSETS: Intangible assets, consisting of organizational costs
and patents, are amortized using the straight-line basis over five years.
LONG-LIVED ASSETS: The Company reviews its long-lived assets periodically
to determine potential impairment by comparing the carrying value of the
long-lived assets with the estimated future net undiscounted cash flows expected
to result from the use of the assets, including cash flows from disposition.
Should the sum of the expected future net cash flows be less than the carrying
value, the Company would recognize an impairment loss at that date. An
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value (estimated discounted future cash flows) of the
long-lived assets. To date, management has determined that no impairment of
long-lived assets exists.
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.
LOSS PER SHARE: Loss per 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, common
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.
The FASB has issued Statement No. 128, EARNINGS PER SHARE, which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants, and convertible securities, outstanding that trade in a
public market. Those entities that have only common stock outstanding are
required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per-share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.
The adoption of Statement No. 128 would have had no effect on reported loss
per share.
RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development
are charged to operations as incurred.
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)
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 AND SHORT-TERM INVESTMENTS: The carrying amount
approximates fair value because of the short maturities of these
instruments.
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 amounts of assets and
liabilities and disclosure of contingent 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.
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and
notes related thereto as of September 30, 1997, and for the nine months ended
September 30, 1996 and 1997, and the period from August 1, 1994 (date of
inception), to September 30, 1997, 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 interest rate on the note was 8 percent per annum with interest
payable monthly. Interest expense of $16,000 and $4,667 was incurred under this
note agreement for 1995 and 1996, respectively. The note was 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 were 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 the
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.
F-9
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)
OPERATING LEASE: Through April 1996, the Company subleased its office and
research facility from Brennen on a monthly basis. In May 1996, the Company
signed a two-year lease directly with the landlord (also a related party) for
$36,000 annually. As of August 1, 1997 the two year lease was cancelled and a
new five-year lease was entered into with the landlord. Monthly lease payments
will be approximately $5,200 with scheduled rate increases over the lease term.
Related party rent expense was $17,000 and $32,000 for the nine months ended
September 30, 1996 and 1997, and $6,000 and $26,000 in 1995 and 1996,
respectively.
As of September 30, 1997, the approximate future lease commitments for years
ended December 31, are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 16,000
1998............................................................... 63,000
1999............................................................... 65,000
2000............................................................... 67,000
2001............................................................... 69,000
Thereafter......................................................... 41,000
</TABLE>
NOTE 4. REDEEMABLE PREFERRED STOCK
In April 1997, the Company completed a private placement transaction by
selling 1,413,500 shares of Series A Preferred Stock at $4.00 per share for
gross proceeds of $5,654,000 before offering costs and commissions of
approximately $265,000. In conjunction with the transaction, the selling agent
was granted five-year warrants to purchase a total of 50,000 shares of common
stock at exercise prices ranging from $4.00 to $4.80 per share.
The Series A Preferred Stock has an initial stated value and liquidation
preference of $4.00 per share, plus a 30 percent annual rate of return to a
maximum of $4.80 per share. The Series A Preferred Stock is voting, has no
dividend preferences, and is convertible at any time into common stock on a
one-for-one basis, subject to certain adjustments as defined by the agreement.
Each share of Preferred Stock is automatically converted into shares of common
stock upon the consummation of a qualified public offering as defined in the
agreement and the number of authorized shares are reduced accordingly. In
addition, the holders of Series A Preferred Stock can demand redemption of the
shares at any time after March 28, 2005, at the higher of (i) the original issue
price ($4.00) or (ii) fair market value as determined by an independent
appraisal.
These financial statements assume all of the outstanding shares of Series A
Preferred Stock have been converted into 1,413,500 shares of common stock due to
the automatic conversion requirement upon completion of an initial public
offering (see Note 8). These converted shares will be canceled and cannot be
reissued. The Company will take the necessary steps to cancel the designation of
the remaining unissued 86,500 shares of Series A Preferred Stock. Also in
conjuction with the April 1997 placement, the Board of Directors authorized
1,500,000 shares of Series A1 Preferred Stock. Upon completion of the offering,
the Company will also take the necessary steps to cancel this designation.
Therefore, there will be 1,586,500 shares of undesignated capital stock.
F-10
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS OF COMMON STOCK: During 1995, the Company had a private
placement which resulted in the issuance of a total of 334,500 shares of common
stock, with net proceeds of approximately $556,000. 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.
In February 1996, the Company completed its 1995 private placement by
selling an additional 235,500 shares of common stock, resulting in proceeds of
$392,500. In connection with these sales of common stock, warrants to purchase
an additional 235,500 shares of common stock 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 for proceeds of $1,025,000.
Warrants to purchase a total of 570,000 shares of common stock are
exercisable and outstanding at December 31, 1996. These warrants expire during
fiscal 2000 and 2001.
STOCK OPTIONS: The Company granted nonqualified options to purchase 600,000
shares of common stock to certain employees, directors, and other individuals.
Also, in June 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. As of December 31, 1996, no options were granted under the plan.
Through September 30, 1997, 306,000 options were granted under the plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
Under APB Opinion No. 25, the Company recorded compensation expense of $49,000
in 1996, and $221,000 for the nine months ended September 30, 1997 for option
grants. Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant date for awards in 1995 and 1996
and the nine months ended September 30, 1997, consistent with the provisions of
SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
Net loss, as reported.............................. $ (524,444) $ (1,507,842) $(2,010,451)
Net loss, pro forma................................ (597,487) (1,556,650) (2,010,907)
Net loss per share, as reported.................... (0.12) (0.29) (0.38)
Net loss per share, pro forma...................... (0.13) (0.30) (0.38)
</TABLE>
The above pro forma effects on net loss and net loss per share are not
likely to be representative of the effects on reported net income (loss) for
future years because options vest over several years and additional awards
generally are made each year.
F-11
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996 and the nine months ended September
30, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield.............................................. $ -- $ -- $ --
Risk-free interest rate.............................................. 5.80% 6.25% 5.99%
Expected life of options (years)..................................... 5 4 2
</TABLE>
A summary of outstanding stock options follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance, August 1, 1994 (date of inception)..................... -- $ --
Options granted............................................... 300,000 1.00
----------- -----
Balance, December 31, 1994...................................... 300,000 1.00
Options granted............................................... 210,000 1.38
Options exercised............................................. (120) 1.04
----------- -----
Balance, December 31, 1995...................................... 509,880 1.16
Options granted............................................... 90,000 2.44
----------- -----
Balance, December 31, 1996...................................... 599,880 1.35
Options granted (unaudited)................................... 306,000 4.07
Options forfeited (unaudited)................................. (5,000) 4.00
----------- -----
Balance, September 30, 1997 (unaudited)......................... 900,880 $ 2.26
----------- -----
----------- -----
</TABLE>
The weighted-average fair value of options granted during 1995, 1996, and
the nine months ended September 30, 1997, was $0.35, $1.09, and $3.55,
respectively.
The following table summarizes information about stock options outstanding
and exercisable as of September 30, 1997:
OPTIONS OUTSTANDING AND EXERCISABLE (UNAUDITED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ------------------------
REMAINING WEIGHTED- WEIGHTED-
NUMBER OF CONTRACTUAL AVERAGE NUMBER AVERAGE
OPTIONS LIFE EXERCISE OF OPTIONS EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.83 - $1.04.................. 395,880 6.8 $ 1.01 395,880 $ 1.01
$1.67.......................... 162,000 8.2 1.67 162,000 1.67
$3.33.......................... 42,000 8.6 3.33 42,000 3.33
$4.00 - $4.40.................. 301,000 4.7 4.07 51,000 4.05
----------- ----- ----------- -----
900,880 $ 2.26 650,880 $ 1.56
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
F-12
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES
The components of deferred taxes at December 31, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................................... $ 220,000 $ 660,000
Tax credits......................................................... 11,000 36,000
Amortization of Brennen asset purchase (1).......................... 85,000 79,000
Accrued expenses and other.......................................... -- 101,000
Valuation allowance................................................. (316,000) (876,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</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 15-year period.
Accordingly, at inception, the Company recorded a valuation allowance of
$95,000 on this deferred tax asset.
At December 31, 1996, the Company recorded a valuation allowance of $876,000
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>
DECEMBER 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Statutory rate applied to loss before tax........................... $ (184,000) $ (528,000)
Tax benefits not utilized........................................... 184,000 528,000
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $1,885,000 expiring as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
2009............................................................................ $ 116,000
2010............................................................................ 511,000
2011............................................................................ 1,258,000
</TABLE>
The utilization of the net operating losses in the future may be subject to
certain annual limitations resulting from future stock offerings.
NOTE 7. COMMITMENTS AND CONTINGENCIES
401(K) PLAN: During 1996, the Company adopted a 401(k) plan covering all
employees who meet the requirements set forth in the plan. Under the plan, the
employees may make voluntary contributions up to 15 percent of their
compensation, and the Company, at its discretion, may match a percentage of the
employee contributions. The Company's contribution to the plan was approximately
$5,800 in 1996.
F-13
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PATENTS: Beginning shortly after its inception, the Company received a
series of communications from a competitor in which such competitor has alleged
that the Company's issued patent may be invalid, informed the Company of certain
patents held by such competitor covering implant materials and alleged that the
activities of certain of the Company's officers were in violation of
non-competition and non-disclosure agreements. Such competitor has not yet
brought any legal action in connection with any of these claims and allegations.
The Company has received an opinion from its patent counsel that its issued
patent is valid and enforceable relative to known prior art and that the
Company's products do not infringe any of the claims under any U.S. patents
known to be held by such competitor. Further, the Company has reviewed, with its
general counsel, the claims and allegations relating to the activities of
certain officers of the Company and believe them to be without merit. If legal
action is brought, the Company intends to vigorously defend against any such
action.
NOTE 8. SUBSEQUENT EVENT (UNAUDITED)
INITIAL PUBLIC OFFERING: In October 1997, the Company filed a registration
statement for an underwritten public offering of up to 2,500,000 shares of
common stock at a price based on market conditions at the time of effectiveness.
The Company will grant the underwriters of such offering an option, exercisable
within 30 days of the prospectus date, to purchase up to 375,000 additional
shares to cover overallotments, if any. The Company plans to use the proceeds to
fund ongoing and future human clinical trials, research and development,
international sales and marketing activities, expansion of manufacturing
capabilities, and for working capital and general corporate purposes.
F-14
<PAGE>
ACYST
- AN INJECTABLE BULKING AGENT DESIGNED TO BE....
- BIOCOMPATIBLE
- The pyrolytic carbon-coated micr-beads used in ACYST were
chosen for their demonstrated long-term biocompatibility
- NON-ABSORBABLE
- The ACYST micro-beads are synthetic and will not be absorbed
by the body, thus minimizing the need for retreatment
- NON-MIGRATORY
- The size of the ACYST micro-beads was specifically chosen
to prevent them from migrating away from the injection site
- COST EFFECTIVE
- The injection of ACYST entails a minimally-invasive
procedure in an outpatient setting
[Photograph of syringe of ACYST and needle]
[LOGO]
ACYST is currently undergoing human clinical trials under an investigational
device exemption granted by the U.S. Food and Drug Administration ("FDA").
ACYST has not received marketing clearance from the FDA for sale in the U.S.,
and there can be no assurance that such approval will be received. See
"Business--Government Regulations."
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY FROM, ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 21
Management..................................... 35
Certain Transactions........................... 38
Principal Stockholders......................... 41
Description of Securities...................... 43
Shares Eligible for Future Sale................ 45
Underwriting................................... 48
Legal Matters.................................. 50
Experts........................................ 50
Available Information.......................... 50
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1998 (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.
2,500,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
[DAIN BOSWORTH INCORPORATED]
ADAMS, HARKNESS & HILL, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
stockholders, or by a court.
Bylaw 37 of the Company's Amended and Restated Bylaws (Exhibit 3.2 to this
Registration Statement) provides that each director, officer and employee of the
Company shall be indemnified by the Company in accordance with, and to the
fullest extent permissible by, applicable law.
In addition, each of the Company's directors has entered into an indemnity
agreement that provides that the Company will indemnify the directors against
any costs and expenses, judgments, settlements and fines incurred in connection
with any claim involving a director by reason of his position as a director;
provided that the director meets certain standards of conduct for claims that
(i) have been successfully defended or (ii) a majority of impartial directors or
an independent counsel has determined that, with respect to the conduct giving
rise to such claim, the director acted in good faith. No indemnification may be
made, however, for claims in which the director has been adjudicated in a final
judgment to be liable to the Company except to the extent that the court finds
indemnification to be proper.
The Company maintains a director and officer liability policy.
Under Section 7 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 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.
II-1
<PAGE>
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 10,455
NASD Fee.......................................................... 3,950
Nasdaq National Market Listing Fee................................ 36,567
Legal Fees........................................................ 85,000
Accountants' Fees and Expenses.................................... 60,000
Printing Expenses................................................. 50,000
Blue Sky Fees and Expenses........................................ 2,000
Transfer Agent Fees and Expenses.................................. 7,000
Miscellaneous..................................................... 145,028
---------
Total........................................................... $ 400,000
---------
---------
</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.
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 Dean 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 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).
4. 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.
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 AH&H Partners Fund Limited Partnership ("AH&H Fund") of which Harry
Wells is the director and Adams, Harkness & Hill, Inc., one of the
Representatives, is the general partner.
7. In April 1997, an aggregate of 1,413,500 shares of Series A Preferred
Stock were issued at $4.00 per share pursuant to a private placement to 20
accredited investors. Of these shares, 875,000 shares were purchased by funds
managed by IAI Ventures, Inc., of which Jeffrey Tollefson is a Vice President,
125,000 shares by AH&H Fund, 1,250 shares by Daniel White, 25,000 shares by
James Knoblach, and 25,000 shares by the wife of Marcellus Knoblach. AH&H Fund
also received five-year warrants to purchase 31,250 shares of Common Stock at an
exercise price of $4.00 per share in connection with the private placement. For
services provided to the Company in connection with this private placement,
Adams, Harkness & Hill, Inc. was granted five-year warrants to purchase 18,750
shares of Common Stock at an exercise price of $4.80 per share, and received a
fee of $219,620 and reimbursement of certain expenses of $5,759.
II-2
<PAGE>
The sale 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 AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation*
3.2 Amended and Restated Bylaws*
4.1 Form of Stock Certificate*
4.2 Restated Articles of Incorporation (filed as Exhibit 3.1)
4.3 Amended and Restated Bylaws (filed as Exhibit 3.2)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.*
10.1 1996 Stock Option Plan*
10.2 Form of Non-Plan Stock Option Agreement*
10.3 Form of Stock Purchase Warrant*
10.4 Lease Agreement by and between Lawin Enterprises, Inc. and the Registrant dated August 1, 1997*
10.5 Form of Indemnification Agreement with Directors*
10.6 Investors' Rights Agreement
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 accountants
23.3 Consent of Nawrocki, Rooney & Sivertson, P.A., patent counsel*
24 Power of Attorney (included on signature page of the Registration Statement)*
27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
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.
II-3
<PAGE>
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.
II-4
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ADVANCED UROSCIENCE, INC.
EXHIBIT INDEX TO FORM SB-2
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation*
3.2 Amended and Restated Bylaws*
4.1 Form of Stock Certificate*
4.2 Restated Articles of Incorporation (filed as Exhibit 3.1)
4.3 Amended and Restated Bylaws (filed as Exhibit 3.2)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.*
10.1 1996 Stock Option Plan*
10.2 Form of Non-Plan Stock Option Agreement*
10.3 Form of Stock Purchase Warrant*
10.4 Lease Agreement by and between Lawin Enterprises, Inc. and the Registrant dated August 1, 1997*
10.5 Form of Indemnification Agreement with Directors*
10.6 Investors' Rights Agreement
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 accountants
23.3 Consent of Nawrocki, Rooney & Sivertson, P.A., patent counsel*
24 Power of Attorney (included on signature page of the Registration Statement)*
27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
<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 November 17,
1997.
<TABLE>
<S> <C> <C>
ADVANCED UROSCIENCE, INC.
By /s/ DEAN A. KLEIN
-----------------------------------------
Dean A. Klein,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Chairman of the Board of *
Timothy P. Lawin Directors
President and Chief
/s/ DEAN A. KLEIN Executive Officer
- ------------------------------ (principal executive November 17, 1997
Dean A. Klein officer)
Vice President, Finance
* and Chief Financial
- ------------------------------ Officer (principal *
Thomas M. Jaeger financial and accounting
officer)
*
- ------------------------------ Director *
Bruce A. Lawin
*
- ------------------------------ Director *
Mark G. Nosbush
*
- ------------------------------ Director *
Paul E. Colombo
*
- ------------------------------ Director *
James M. Knoblach
*
- ------------------------------ Director *
Harry E. Wells, III
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director *
Jeffrey R. Tollefson
</TABLE>
*By: -------------------------
Dean A. Klein, an
attorney-in-fact
Date: November 17, 1997
<PAGE>
2,500,000 SHARES
ADVANCED UROSCIENCE, INC.
COMMON STOCK
NO PAR VALUE
UNDERWRITING AGREEMENT
_____________, 1997
Dain Bosworth Incorporated
Adams, Harkness & Hill, Inc.
As Representatives of the several Underwriters
c/o Dain Bosworth Incorporated
Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Advanced UroScience, Inc., a Minnesota corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and
sell to the several Underwriters named in Schedule A hereto (the
"Underwriters"), for which you are acting as representatives (the
"Representatives"), an aggregate of 2,500,000 shares (the "Firm Shares") of
Common Stock, no par value, of the Company (the "Common Stock"), and up to an
additional 375,000 shares of Common Stock at the election of the Underwriters
(the "Option Shares"). The Firm Shares and the Option Shares are herein
collectively called the "Shares."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (File No. 333-_________)
and a related preliminary prospectus for the registration of the Shares under
the Securities Act of 1933, as amended (the "Act"). The registration
statement, as amended at the time it was declared effective, including the
information (if any) deemed to be part thereof pursuant to Rule 430A under
the Act is herein referred to as the "Registration Statement." The form of
prospectus first filed by the Company with the Commission pursuant to Rules
424(b) and 430A under the Act is referred to herein as the "Prospectus."
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective or filed with the Commission pursuant to Rule
424(a) under the Act is referred to herein as a "Preliminary Prospectus."
Copies of the Registration Statement, including all exhibits and schedules
thereto, any amendments thereto and all Preliminary Prospectuses have been
delivered to you.
<PAGE>
The Company hereby confirms its agreements with respect to the purchase of
the Shares by the Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(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, that 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) The Registration Statement conforms, and the
Prospectus and any amendments or supplements thereto will conform,
in all material respects to the requirements of the Act and the
rules and regulations thereunder. Neither the Registration
Statement nor any amendment thereto, and neither the Prospectus nor
any supplement thereto, contains or will contain, as the case may
be, any untrue statement of a material fact or omits or will omit
to state any 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, 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 is a "small business issuer" as such term is
defined in Rule 405 and Item 10 of Regulation S-B under the Act, and
is qualified to register the Shares on Form SB-2.
2
<PAGE>
(v) The Company has been duly organized, is validly existing
as a corporation in good standing under the laws of the State of
Minnesota, has the corporate 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 business or condition, financial or otherwise, of the Company.
The Company's Articles of Incorporation, as restated on __________,
as corrected on ___________, 1997, were duly adopted by the
Company's shareholders on _________, 1997.
(vi) The Company does not own any stock or other equity
interest in any corporation, partnership, joint venture,
unincorporated association or other entity.
(vii) The outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable. All offers and sales by the Company of outstanding
shares of capital stock and other securities of the Company, prior
to the date hereof, were made in compliance with the Act and all
applicable state securities or blue sky laws. 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. 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 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 the authorized and outstanding
capital stock as set forth under the heading "Capitalization" in
the Prospectus. The outstanding capital stock of the Company,
including the Shares, conforms, and the Shares to be issued by the
Company to the Underwriters will conform, to the description
thereof contained in the Prospectus.
(viii) The financial statements, together with the related
notes and schedules as set forth in the Registration Statement and
Prospectus, present fairly the financial position, results of
operations and changes in financial position 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 applied
3
<PAGE>
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. The summary and selected
financial and statistical 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.
(ix) 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
which, if determined adversely to the Company, would, individually
or in the aggregate, result in a material adverse change in the
business or condition (financial or otherwise), results of
operations, stockholders' equity or prospects of the Company,
except as set forth in the Registration Statement.
(x) The Company has good and marketable title to all
properties and assets reflected as owned in the financial
statements hereinabove described (or as described as owned in the
Prospectus), in each case free and clear of all liens, encumbrances
and 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 such exceptions
as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company.
(xi) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or
supplemented, (A) there has not been any material adverse change,
or any development involving a prospective material adverse change,
in or affecting the condition, financial or otherwise, of the
Company or the business affairs, management, financial position,
shareholders' equity or results of operations of the Company,
whether or not occurring in the ordinary course of business, (B)
there has not been any transaction not in the ordinary course of
business entered into by the Company which is material to the
Company, other than transactions described or contemplated in the
Registration Statement, (C) the Company has not incurred any
material liabilities or obligations, which are not in the ordinary
course of business or which could result in a material reduction in
the future earnings of the Company, (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 or in connection with a strategic alliance as
specifically described in the Registration Statement), or any
material increase in the short-term or long-term debt (including
capitalized lease
4
<PAGE>
obligations) of the Company, (F) there has not been any declaration
or payment of any dividends or any distributions of any kind with
respect to the capital stock of the Company, other than any
dividends or distributions described or contemplated in the
Registration Statement, or (G) there has not been any issuance of
warrants, options, convertible securities or other rights to
purchase or acquire capital stock of the Company.
(xii) The Company is not in violation of, or in default under,
its Articles of Incorporation or Bylaws, or any statute, or any
rule, regulation, order, judgment, decree or authorization of any
court or governmental or administrative agency or 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 is 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.
(xiii) The issuance and sale of the Shares by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions contemplated
herein will not violate any provision of the Articles of
Incorporation or Bylaws of the Company or any statute or any order,
judgment, decree, rule, regulation or authorization of any court or
governmental or administrative agency or 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 is subject. No approval,
consent, order, authorization, designation, declaration or filing
by or with any court or governmental agency or 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.
(xiv) The Company holds and is operating in compliance with
all licenses, 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. The Company has not received notice of or has
knowledge of any basis for any proceeding or action relating
specifically to the Company for the revocation or suspension of any
such consent, authorization, approval, order, license, certificate,
permit or any other action or proposed action by any regulatory
authority having jurisdiction over the Company that would have
material adverse effect on the Company.
5
<PAGE>
(xv) The Company has the power and authority to enter into
this Agreement and to authorize, issue and sell the Shares it will
sell hereunder as contemplated hereby. This Agreement has been
duly and validly authorized, executed and delivered by the Company.
(xvi) McGladrey & Pullen, LLP, which has certified certain of
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 thereunder.
(xvii) 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.
(xviii) The Company's registration statement pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), has been declared effective by the
Commission, and the Shares have been approved for designation upon
notice of issuance on the Nasdaq National Market under the symbol
"AURO."
(xix) The Company has obtained and delivered to the
Representatives written agreements, in form and substance
satisfactory to the Representatives, of each of its directors,
executive officers and five percent or greater shareholders that no
offer, sale, assignment, transfer, encumbrance, contract to sell,
grant of an option to purchase or other disposition of any Common
Stock or other capital stock of the Company will be made for a
period of 180 days after the date of the Prospectus, directly or
indirectly, by such holder otherwise than hereunder or with the
prior written consent of the Representatives.
(xx) 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.
(xxi) The Company is in compliance with all provisions of
Florida Statutes Section 517.075 (Chapter 92-198, laws of Florida).
The Company does not do any business, directly or indirectly, with
the government of Cuba or with any person or entity located in Cuba.
(xxii) The Company has filed all federal, state, local and
foreign tax returns or reports required to be filed, 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.
6
<PAGE>
(xxiii) The Company owns or possesses all patents, patent
applications, trademarks, service marks, tradenames, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and other similar rights necessary for
the conduct of its business as described in the Prospectus. No
name which the Company uses, product of the Company described in
the Prospectus and no other aspect of the business of the Company
involves or gives rise to any infringement of or conflict with, or
license or similar fees for, any patents, patent applications,
trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade
secrets or other similar rights of others. Except as set forth in
the Prospectus, the Company has not received any notice or claim of
conflict with the asserted rights of others with respect any of the
foregoing.
(xxiv) The Company is not, and upon completion of the sale of
Shares contemplated hereby will not be, required to register as an
"investment company" under the Investment Company Act of 1940, as
amended.
(xxv) 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 permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (C) access to records 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.
(xxvi) Other than as contemplated by this Agreement and that
certain letter of intent dated September 18, 1997 between the
Company and Dain Bosworth Incorporated, the Company has not
incurred any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated
hereby.
(xxvii) There has been no unlawful storage, treatment or
disposal of waste by the Company (or any of its
predecessors-in-interest) at any of the facilities owned or leased
thereby, except for such violations which would not have a material
adverse effect on the condition, financial or otherwise, or the
earnings, affairs or business prospects of the Company; there has
been no material spill, discharge, leak, emission, ejection,
escape, dumping or release of any kind onto the properties owned or
leased by the Company, or into the environment surrounding those
properties, of any toxic or hazardous substances, as defined under
any federal, state or local regulations, laws or statutes, except
for those releases permissible under such regulations, laws or
statutes or otherwise allowable under applicable permits and except
for such releases which would not
7
<PAGE>
have a material adverse effect on the condition, financial or
otherwise, or the earnings, affairs or business prospects of the
Company.
(xxviii) No material labor dispute with the employees of the
Company exists or is imminent.
(xxix) Each employee benefit plan (as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) ("Employee Benefit Plan"), and each bonus, retirement,
pension, profit sharing, stock bonus, thrift, stock option, stock
purchase, incentive, severance, deferred or other compensation or
welfare benefit plan, program, agreement or arrangement of, or
applicable to employees or former employees of, the Company or with
respect to which the Company could have any liability ("Benefit
Plans"), was or has been established, maintained and operated in
all material respects in compliance with all applicable federal,
state, and local statutes, orders, governmental rules and
regulations, including, but not limited to, ERISA and the Internal
Revenue Code of 1986, as amended (the "Code"). No Benefit Plan is
or was subject to Title IV of ERISA or Section 302 of ERISA or
Section 412 of the Code. The Company does not, either directly or
indirectly as a member of a controlled group within the meaning of
Sections 414(b), (c), (m) and (o) of the Code ("Controlled Group"),
have any material liability that remains unsatisfied or arising
under Section 502 of ERISA, Subchapter D of Chapter 1 of Subtitle A
of the Code or under Chapter 43 of Subtitle D of the Code. No
action, suit, grievance, arbitration or other matter of litigation
or claim with respect to any Benefit Plan (other than routine
claims for benefits made in the ordinary course of plan
administration for which plan administrative procedures have not
been exhausted) is pending or, to the Company's knowledge,
threatened or imminent against or with respect to any Benefit Plan,
any member of a Controlled Group that includes the Company, or any
fiduciary within the meaning of Section 3(21) of ERISA with respect
to a Benefit Plan which, if determined adversely to the Company,
would have a material adverse effect on the Company. Neither the
Company nor any member of a Controlled Group that includes the
Company, has any knowledge of any facts that could give rise to any
action, suit, grievance, arbitration or any other manner of
litigation or claim with respect to any Benefit Plan.
(xxx) The Company maintains insurance, including without
limitation, product liability insurance, of the types and in the
amounts generally deemed adequate in its business and consistent
with insurance coverage maintained by similar companies and
businesses, and as required by the rules and regulations of all
governmental agencies having jurisdiction over the Company, all of
which insurance is in full force and effect.
(xxxi) Since August 19, 1996, the Company has not received any
communication, oral or written, from, or on behalf of, Uroplasty
Incorporated
8
<PAGE>
("Uroplasty") with respect to any alleged infringement by the
Company of any rights or alleged rights of Uroplasty under any
patents, patent applications or any alleged trade secrets of
Uroplasty, nor with respect to any alleged breach by the Company or
any of its officers, directors or employees of any agreements or
alleged agreements or arrangements relating to confidentiality,
non-disclosure or non-competition.
(xxxii) All transactions between the Company and its officers,
directors and holders of more than five percent of any class of its
voting securities required to be disclosed pursuant to Item 404 of
Regulation S-B under the Act have been accurately disclosed in the
Prospectus.
(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, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties and
covenants contained herein, and subject to the terms and conditions
herein set forth, the Company agrees to sell to each Underwriter and
each Underwriter agrees, severally and not jointly, to purchase from the
Company, at a price of $________ per share, the number of Firm Shares
set forth opposite the name of each Underwriter in Schedule A hereto,
subject to adjustments in accordance with Section 8 hereof.
In addition, on the basis of the representations, warranties
and covenants herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants to the several Underwriters
an option to purchase, at their election, up to 375,000 Option Shares at
the same price per share as set forth for the Firm Shares in the
paragraph above, for the sole purpose of covering overallotments in the
sale of the Firm Shares. The option granted hereby may be exercised in
whole or in part, but only once, and at any time upon written notice
given within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting
forth the number of Option Shares as to which the several Underwriters
are exercising the option and the time and date at which certificates
are to be delivered. If any Option Shares are purchased, each
Underwriter agrees, severally and not jointly, to purchase that portion
of the number of Option Shares as to which such election shall have been
exercised (subject to adjustment to eliminate fractional shares)
determined by multiplying such number of Option Shares by a fraction the
numerator of which is the maximum number of Option Shares which such
Underwriter is entitled to purchase as set forth opposite the name of
such Underwriter in Schedule A hereto and the denominator of which is
the maximum number of Option Shares which all of the Underwriters are
entitled to purchase hereunder. The time and date at which certificates
for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than two or later than ten full
business days after the exercise of such option, and shall not in any
event be prior
9
<PAGE>
to the Closing Date. If the date of exercise of the option is three or
more full days before the Closing Date, the notice of exercise shall set
the Closing Date as the Option Closing Date.
(b) Certificates in definitive form for the Shares to be purchased
by each Underwriter hereunder, and in such denominations and registered
in such names as Dain Bosworth Incorporated may request upon at least
forty-eight hours' prior notice to the Company, shall be delivered by or
on behalf of the Company to you for the account of such Underwriter at
such time and place as shall hereafter be designated by the
Representatives, against payment by such Underwriter or on its behalf of
the purchase price therefor by certified or official bank check or
checks, payable to the order of the Company in next day funds, or by
wire transfer. The time and date of such delivery and payment shall be,
with respect to the Firm Shares, 8:30 a.m. Minneapolis time, at the
offices of Fredrikson & Byron, P.A., on ____________, 1997, or such
other time and date as you and the Company may agree upon in writing,
such time and date being herein referred to as the "Closing Date," and,
with respect to the Option Shares, at the time and on the date specified
by you in the written notice given by you of the Underwriters' election
to purchase the Option Shares, or such other time and date as you and
the Company may agree upon in writing, such time and date being referred
to herein as the "Option Closing Date." Such certificates will be made
available for checking and packaging at least twenty-four hours prior to
the Closing Date or the Option Closing Date, as the case may be, at a
location as may be designated by you.
3. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to make a public offering of the Firm Shares as soon as
the Representatives deem it advisable to do so. The Firm Shares are to be
initially offered to the public at the initial public offering price set
forth in the Prospectus. The Representatives may from time to time
thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Underwriters will offer such Option Shares to the public on the
foregoing terms.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters that:
(a) The Company will prepare and timely file with the Commission
under Rule 424(b) under the Act a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A under the Act, and will not file any
amendment to the Registration Statement or supplement to the Prospectus
of which the Representatives shall not previously have been advised and
furnished with a copy and as to which the Representatives shall have
objected in writing promptly after reasonable notice thereof or which is
not in compliance with the Act or the rules and regulations thereunder.
(b) The Company will advise the Representatives promptly of any
request of the Commission for amendment of the Registration Statement or
for any supplement to
10
<PAGE>
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
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 Closing Date, two (2) 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.
(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 existing 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
11
<PAGE>
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 18 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 such period up to five years from
the 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. The
Company will deliver to the Representatives similar reports with respect
to significant subsidiaries, as that term is defined in the rules and
regulations under the Act, which are not consolidated in the Company's
financial statements.
(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 or in connection with a
strategic relationship specifically described in the Registration
Statement) will be made for a period of 180 days after the date of this
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.
(j) The Company will use its best efforts to maintain the
designation of the Common Stock on the Nasdaq National Market.
5. COSTS AND EXPENSES. The Company will pay (directly or by
reimbursement) all costs, expenses and fees incident to the performance of
the obligations of the Company under this Agreement, including, without
limiting the generality of the foregoing, the following: accounting fees of
the Company; the fees and disbursements of counsel for the Company; the cost
of preparing, printing and filing of the Registration Statement, Preliminary
Prospectuses and the Prospectus and any amendments and supplements thereto
and the printing, mailing and delivery to the Underwriters and dealers of
copies thereof and of this Agreement, any Selected Dealers Agreement, the
Underwriters' Selling Memorandum, any Blue Sky Memorandum and any supplements
or amendments thereto (excluding, except as provided below, fees and expenses
12
<PAGE>
of counsel to the Underwriters); the filing fees of the Commission; the
filing fees and expenses (including legal fees and disbursements of counsel
for the Underwriters) incident to securing any required review by the NASD of
the terms of the sale of the Shares (including any fees, expenses, legal fees
or disbursements incident to qualification of Dain Bosworth Incorporated as a
"Qualified Independent Underwriter" with respect to the sale of Shares);
listing fees, if any, transfer taxes and the expenses, including the fees and
disbursements of counsel for the Underwriters incurred in connection with the
qualification of the Shares under state securities or Blue Sky laws; the fees
and expenses incurred in connection with the designation of the Shares on the
Nasdaq National Market; the costs of preparing stock certificates; the costs
and fees of any registrar or transfer agent and all other costs and expenses
incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section 5. In addition, the
Company will pay all travel and lodging expenses incurred by management of
the Company in connection with any informational "road show" meetings held in
connection with the offering and will also pay for the preparation of all
materials used in connection with such meetings. The Company shall not,
however, be required to pay for any of the Underwriters' expenses (other than
those related to qualification of the Shares under state securities or Blue
Sky laws and those incident to securing any required review by the NASD of
the terms of the sale of the shares) except that, if this Agreement shall not
be consummated because the conditions in Section 6 hereof are not satisfied,
or because this Agreement is terminated by the Representatives pursuant to
Section 10(b) hereof, or by reason of any failure, refusal or inability on
the part of the Company to perform any undertaking or satisfy any condition
of this Agreement or to comply with any of the terms hereof on its part to be
performed, unless such failure to satisfy said condition or to comply with
said terms shall be due to the default or omission of any Underwriter, then
the Company shall promptly upon request by the Representatives reimburse the
several Underwriters for all out-of-pocket accountable expenses, including
fees and disbursements of counsel, incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of
performing their obligations hereunder; but the Company shall not in any
event be liable to any of the several Underwriters for damages on account of
loss of anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several
obligations of the Underwriters to purchase the Firm Shares on the Closing
Date and the Option Shares, if any, on the Option Closing Date, are subject
to the condition that all representations and warranties of the Company
contained herein are true and correct, at and as of the Closing Date or the
Option Closing Date, as the case may be, the condition that the Company shall
have performed all of its covenants and obligations hereunder and to the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 4(a) hereof; 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.
13
<PAGE>
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Fredrikson &
Byron, P.A., counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters,
to the effect that:
(i) The Company has been duly organized 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
Prospectus. The Company's Articles of Incorporation, as restated
on ____________, as corrected on ___________, 1997, were duly
adopted by the Company's shareholders on ____________, 1997, and
are in full force and effect under, and have been filed in
accordance with all applicable requirements of, Minnesota corporate
law.
(ii) To the knowledge of such counsel, the Company does not
own any stock or other equity interest in any corporation,
partnership, joint venture, unincorporated association or other
entity.
(iii) The Company has authorized and outstanding capital stock
as described in the Prospectus. The outstanding shares of the
Company's capital stock have been duly authorized and validly
issued and are fully paid and nonassessable. The form of
certificate for the Shares is in due and proper form and complies
with all applicable statutory requirements. 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 or, to the knowledge of such counsel, other 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.
(iv) The Registration Statement has become effective under
the Act and, to the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are
pending or threatened by the Commission.
(v) 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 and related
14
<PAGE>
schedules included therein). The Company is a "small business
issuer" as such term is defined in Rule 405 and Item 10 of
Regulation S-B under the Act.
(vi) The statements (A) in the Prospectus under the captions
"Risk Factors -- Extensive Governmental Regulation; Uncertainty of
Obtaining Regulatory Approval," "-- Uncertainty Relating to
Third-Party Reimbursement," "-- Possible Adverse Market Effect of
Shares Eligible for Future Sale," " -- Adverse Effect of
Anti-Takeover Provisions; Undesignated Stock," "Business -- Status
of Clinical Trials," " -- Manufacturing," "-- Government
Regulations," "-- Third Party Reimbursement," "Description of
Capital Stock" and "Shares Eligible for Future Sale" 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) Such counsel does not know of any contracts, agreements,
documents or instruments required to be filed as exhibits to the
Registration Statement, incorporated by reference into the
Prospectus, or described in the Registration Statement or the
Prospectus which are not so filed, incorporated by reference or
described as required; and insofar as any statements in the
Registration Statement or the Prospectus constitute summaries of
any contract, agreement, document or instrument to which the
Company is a party, such statements are accurate summaries and
fairly present the information called for with respect to such
matters.
(viii) Such counsel knows of no legal or governmental
proceeding, 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
that are required to be described in the Registration Statement or
Prospectus and are not so described, or statutes or regulations
that are required to be described in the Registration Statement or
the Prospectus that are not so described.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and
will not conflict with or result in a violation of, or default
under, the charter or bylaws of the Company, or under any statute,
permit, judgment, decree, order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties, or under
any lease, contract, indenture, mortgage, loan agreement or other
agreement or other instrument or obligation known to such counsel
to which the Company is a party or by which the Company is bound or
to which any property or assets of the Company is subject, except
such agreements, instruments or obligations with respect to which
valid consents or waivers have been obtained by the Company.
15
<PAGE>
(x) 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.
(xi) 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 and delivery 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.
(xii) The Company is not, and immediately upon completion of
the sale of Shares contemplated hereby will not be, required to
register as an "investment company" under the Investment Company
Act of 1940, as amended.
(xiii) Such counsel has no reason to believe that, as of its
effective date, the Registration Statement or any further amendment
thereto made by the Company prior to the Closing Date or the Option
Closing Date, as the case may be, (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to the
Closing Date or the Option Closing Date, as the case may be, (other
than the financial statements and related schedules therein, as to
which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as
of the Closing Date or the Option Closing Date, as the case may be,
either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to the
Closing Date or the Option Closing Date, as the case may be, (other
than the financial statements and related schedules therein, as to
which such counsel need express no opinion) contains an untrue
statement of a material fact 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; and they do
not know of any amendment to the Registration Statement required to
be filed.
(c) The Representatives shall have received from Nawrocki Rooney &
Sivertson P.A., patent counsel to the Company, an opinion dated the
Closing Date or the Option Closing Date, as the case may be, addressed
to the Underwriters, in the form requested by the Representatives.
16
<PAGE>
(d) The Representatives shall have received from Oppenheimer Wolff
& Donnelly, counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares, the
Registration Statement, the Prospectus, and other related matters as the
Representatives may reasonably request, and such counsel shall have
received such papers 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 Closing Date and the Option Closing Date, as the case may
be, a signed letter, dated as of the date hereof, the Closing Date or
the Option 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 execution and delivery of this Agreement and
prior to the Closing Date or the Option Closing Date, as the case may
be, there shall not have been 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 your judgment, is material and adverse to the
Company and makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at the
Closing Date or the Option Closing Date, as the case may be, on the
terms and in the manner contemplated in the Prospectus.
(g) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or
certificates of the chief executive officer and the chief financial
officer of the Company to the effect that, as of the Closing Date or the
Option Closing Date, as the case may be, each of them severally
represents as follows:
(i) The Prospectus was filed with the Commission pursuant to
Rule 424(b) within the applicable period prescribed for such filing
by the rules and regulations under the Act and in accordance with
Section 4 of this Agreement; no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for such purpose have been initiated or are, to his
knowledge, threatened by the Commission.
(ii) The representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct at and as
of the Closing Date or the Option Closing Date, as the case may be,
and the Company has performed all
17
<PAGE>
of its obligations under this Agreement to be performed at or
prior to the Closing Date or the Option Closing Date, as the
case may be.
(h) The Company shall have furnished to the Representatives such
further certificates and documents as the Representatives may reasonably
have requested.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects reasonably satisfactory to the Representatives and to
Oppenheimer Wolff & Donnelly, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing
or by telegram at or prior to the Closing Date or the Option Closing Date, as
the case may be. In such event, the Company and the Underwriters shall not
be under any obligation to each other (except to the extent provided in
Sections 5 and 7 hereof).
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, each officer and director thereof, and each person, if any,
who controls any Underwriter within the meaning of the Act, against any
losses, claims, damages or liabilities to which such Underwriter or such
persons may became subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus or the Prospectus,
including any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated
therein, or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, or (iii) any act
or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Common
Stock or the offering contemplated hereby, and which is included as part
of or referred to in any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arising out of or based upon
matters covered by clause (i) or (ii) above, and will reimburse each
Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company
shall 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, or omission or alleged omission,
made in the Registration Statement, any Preliminary Prospectus or the
Prospectus, including any amendments or supplements thereto, in reliance
upon and in conformity with written information furnished to the Company
by any Underwriter through the Representatives specifically for use
therein; and provided, further, that the Company shall not be liable in
the case of any matter
18
<PAGE>
covered by clause (iii) above to the extent that it is determined in a
final judgment by a court of competent jurisdiction that such losses,
claims, damages or liabilities resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct.
(b) Each Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
under which they were made, and 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 any such action or claim as such expenses are incurred;
provided, however, that each Underwriter will be liable in each case to
the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made
in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity or contribution may be sought pursuant to this Section
7, such person (the "indemnified party") shall promptly notify the
person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 7(a) or
(b) or contribution provided for in Section 7(d) shall be available with
respect to a proceeding to any party who shall fail to give notice of
such proceeding as provided in this Section 7(c) if the party to whom
notice was not given was unaware of the proceeding to which such notice
would have related and was prejudiced by the failure to give such
notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may
have to the indemnified party otherwise than on account of the
provisions of Section 7(a), (b) or (c). In case any such proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to
retain its own counsel at its own expense. Notwithstanding the
foregoing, the
19
<PAGE>
indemnifying party shall pay promptly as incurred the reasonable fees
and expenses of the counsel retained by the indemnified party in the
event (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and the
indemnified party shall have reasonably concluded that there may be a
conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that
there may be legal defenses available to it or other indemnified parties
which are different from or additional to those available to the
indemnifying party. It is understood that the indemnifying party shall
not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the fees and expenses of more than one
separate firm at any time for all such indemnified parties. Such firm
shall be designated in writing by the Representatives and shall be
reasonably satisfactory to the Company in the case of parties
indemnified pursuant to Section 7(a) and shall be designated in writing
by the Company and shall be reasonably satisfactory to the
Representatives in the case of parties indemnified pursuant to Section
7(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus.
The relative fault 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 Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or
20
<PAGE>
omission. The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 7(d) were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to
above in this Section 7(d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereto) referred to
above in this Section 7(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions applicable to the Shares purchased by such
Underwriter; and 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. The Underwriters' obligations in this Section 7(d)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 7 shall
be in addition to any liability which the Company may otherwise have,
and the obligations of the Underwriters under this Section 7 shall be in
addition to any liability which the Underwriters may otherwise have.
8. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option
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, this Agreement
will terminate 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 5 hereof and the indemnity and
contribution agreements in Section 7 hereof. In the
21
<PAGE>
event of a default by any Underwriter or Underwriters, as set forth in this
Section 8, the Closing Date or Option 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 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 8 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
9. NOTICES. All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows: (i) if to the Underwriters, to Dain Bosworth
Incorporated, Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis, MN
55402-4422, Attention: Brian Reagan, with copies to Oppenheimer Wolff &
Donnelly, 45 South Seventh Street, Minneapolis, MN 55402-1609, Attention:
Bruce A. Machmeier, Esq.; and (ii) if to the Company, to Advanced UroScience,
Inc., 1290 Hammond Road, St. Paul, MN 55110, Attention: Dean A. Klein, with
copies to Fredrikson & Byron, P.A., 1100 International Centre, 900 Second
Avenue South, Minneapolis, MN 55402-3397, Attention: Dobson West, Esq.
10. TERMINATION. This Agreement may be terminated by you by notice to
the Company as follows:
(a) at any time prior to the earlier of (i) the time the
Shares are released by you for sale by notice to the Underwriters or
(ii) 4:00 p.m., Minneapolis time, on the first business day following
the later of the date on which the Registration Statement becomes
effective or the date of this Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
any material adverse change in or affecting the condition, financial or
otherwise, of the Company or the business affairs, management, financial
position, stockholders' equity or results of operations of the Company,
whether or not arising in the ordinary course of business, (ii) any
outbreak or escalation of hostilities or declaration of war or national
emergency after the date hereof or other national or international
calamity or crisis or change in economic or political conditions if the
effect of such outbreak, escalation, declaration, emergency, calamity,
crisis or change on the financial markets of the United States would, in
your judgment, make the offering or delivery of the Shares impracticable
or inadvisable, (iii) suspension of trading in securities on the New
York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading)
for securities on either such Exchange, or a halt or suspension of
trading in securities generally which are quoted on Nasdaq National
Market System, or (iv) declaration of a banking moratorium by either
federal or New York State authorities; or
(c) as provided in Sections 6 and 8 of this Agreement.
22
<PAGE>
This Agreement also may be terminated by you, by notice to the Company,
as to any obligation of the Underwriters to purchase the Option Shares, upon
the occurrence at any time prior to the Option Closing Date of any of the
events described in subparagraph (b) above or as provided in Sections 5 and 7
of this Agreement.
11. WRITTEN INFORMATION. For all purposes under this Agreement
(including, without limitation, Section 1, Section 2 and Section 7 hereof),
the Company understands and agrees with each of the Underwriters that the
following constitutes the only written information furnished to the Company
by or through the Representatives specifically for use in preparation of the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto: (i) the per share "Price to Public" and per
share "Underwriting Discounts and Commissions" set forth on the cover page of
the Prospectus, (ii) the information relating to stabilization set forth in
the last paragraph on page two of the Preliminary Prospectus and the
Prospectus, and (iii) the information set forth under the caption
"Underwriting" in the Preliminary Prospectus and the Prospectus.
12. SUCCESSORS. This Agreement has been and is made solely for the
benefit of and shall be binding upon the Underwriters, the Company and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Shares merely because of such purchase.
13. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties
and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or by
or on behalf of the Company or its directors and officers and (c) delivery of
and payment for the Shares under this Agreement.
Each provision of this Agreement shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of
this Agreement is held to be invalid, illegal or unenforceable under any
applicable law or rule in any jurisdiction, such provision will be
ineffective only to the extent of such invalidity, illegality or
unenforceability in such jurisdiction or any provision hereof in any other
jurisdiction
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
23
<PAGE>
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Minnesota.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
ADVANCED UROSCIENCE, INC.
By:
---------------------------------
Dean A. Klein
Its: President and Chief Executive Officer
The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.
DAIN BOSWORTH INCORPORATED
ADAMS, HARKNESS & HILL, INC.
As Representatives of the several Underwriters
By: Dain Bosworth Incorporated
By:
----------------------------------
Its:
------------------------------
24
<PAGE>
SCHEDULE A
Schedule of Underwriters
Number of Firm Maximum Number
Underwriter Shares to Be Purchased of Option Shares
- ----------- ---------------------- ----------------
Dain Bosworth Incorporated . . . . .
Adams, Harkness & Hill, Inc. . . . .
--------- -------
Total. . . . . . . 2,500,000 375,000
--------- -------
--------- -------
25
<PAGE>
INVESTORS' RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") made as of April 1997, by and among
Advanced UroScience, Inc. (the "Company"), Bruce A. Lawin, Timothy P. Lawin
and Dean A. Klein (collectively the "Founders"), and the persons listed on
SCHEDULE A attached hereto, which may be amended from time to time,
(individually an "Investor" and collectively, the "Investors").
BACKGROUND
The Company is duly organized and existing under the laws of the State of
Minnesota. Bruce A. Lawin owns 366,000 shares of Common Stock of the Company
and warrants or options to purchase an additional 42,000 shares of Common Stock
of the Company. Timothy P. Lawin owns 929,500 shares of Common Stock of the
Company and warrants or options to purchase an additional 37,500 shares of
Common Stock of the Company. Dean A. Klein owns 102,500 shares of Common Stock
of the Company and warrants or options to purchase an additional 277,500 shares
of Common Stock of the Company. Each of the Investors has purchased, pursuant
to the Series A Preferred Stock Purchase Agreement, by and among the Company
and the Investors dated April 4, 1997, that number of shares of Series A
Preferred Stock set forth opposite his, her or its name on SCHEDULE A hereto.
The Company, the Founders and the Investors of the Company have reached an
understanding concerning various aspects of their business relationship with
each other and the organization and operation of the Company and its business.
This Agreement sets forth the parties' understanding.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement:
(a) The term "Common Stock" means shares of Advanced UroScience, Inc.
common stock.
(b) The term "Co-Sales Shares" shall mean shares of the Company's
Preferred Stock or Common Stock now owned or subsequently acquired by a
Founder.
(c) The term "Designated Stockholder" means any officer, director or
holder of 5% or more of the Company's Common Stock and Preferred Stock, on an
as if converted basis, and who has agreed in writing to be bound by and to
comply with all applicable provisions of Section 6 of this Agreement.
Page 1
<PAGE>
(d) The term "Form S-3" means such form under the 1933 Act as in effect
on the date hereof or any registration form under the 1933 Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(e) The term "Founder" means each of Timothy P. Lawin, Bruce A. Lawin and
Dean A. Klein until, if such Founder is an employee of the Company, his
employment with the Company is terminated by the Company without cause; and, if
such Founder is a director, he is not reelected to the Board of Directors of
the Company in an election in which his name is on the ballot.
(f) The term "Fully-Exercising Investor" means a Major Investor which has
subscribed for all Shares offered thereto in connection with an offering
pursuant to Section 5 and will be determined on an offering by offering basis.
(g) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof.
(h) The term "Major Investor" means any Investor which holds at least 40%
of the number of shares of Series A Preferred Stock (or securities issued upon
conversion thereof) originally acquired by such Investor (adjusted for stock
splits, consolidations and the like).
(i) The term "1933 Act" means the Securities Act of 1933, as amended.
(j) The term "1934 Act" shall mean the Securities Exchange Act of 1934,
as amended.
(k) The term "Participant" means an Investor or Founder, as the case may
be, that elects to participate in a sale pursuant to section 7 of this
Agreement.
(l) The term "Participant's Pro Rata Share" shall be equal to the product
obtained by multiplying (i) the number of shares of Common Stock and Preferred
Stock, on an as if converted basis, in the unparticipating portion by (ii) a
fraction the numerator of which is the number of shares Common Stock and
Preferred Stock, on an as if converted basis, held by such Participant and the
denominator of which is the total number of shares of Common Stock and
Preferred Stock, on an as if converted basis, held by all of the Participants
and the Founder.
(m) The term "Permitted Transfer" means any transfer of securities of the
Company to an affiliated company in the case of a transferring Designated
Stockholder that is a corporation, to any of its general or limited partners or
any affiliate thereof in the case of a transferring Designated Stockholder that
is a partnership, and to any spouse, parents, brothers, sisters, children
(natural or adopted), stepchildren or grandchildren or a trust for any of their
benefit in the case of a transferring Designated Stockholder that is an
individual (each, a "Permitted
Page 2
<PAGE>
Transferee"); provided, that, prior to such transfer, such Permitted
Transferee shall agree in writing to be bound by the terms and conditions of
this Agreement.
(n) The term "Preferred Stock" shall mean the Series A Preferred Stock
and Series Al Preferred Stock.
(o) The term "Pro Rata Share" means, with respect to a Major Investor,
the proportion that the number of shares of Preferred Stock, on an as if
converted basis, and Common Stock then held by such Major Investor bears to the
total number of outstanding shares of Common Stock.
(p) The term "Qualified Public Offering" means a firmly underwritten
public offering of the Company's Common Stock, pursuant to a registration
statement (other than a registration statement relating either to the sale of
securities to employees or consultants of the Company pursuant to a stock
option, stock purchase or similar plan or a SEC Rule 145 transaction) under the
1933 Act in which the per share price is not less than (i) $8.00 (adjusted to
reflect subsequent stock dividends, stock splits or recapitalizations) if such
offering is consummated before September 30, 1998; or (ii) $10.00 (adjusted to
reflect subsequent stock dividends, stock splits or recapitalizations) if such
public offering is consummated after September 30, 1998 and the aggregate
offering price is $15,000,000 or more.
(q) The term "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(r) The term "Registrable Securities" means (i) the Common Stock issuable
or issued upon conversion of the Preferred Stock, and (ii) any Common Stock of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, option, right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in replacement of the
shares referenced in (i) above.
(s) The number of shares of "Registrable Securities then outstanding"
shall be the sum of number of shares of Common Stock outstanding which are
Registrable Securities, plus the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are Registrable
Securities.
(t) The term "Sale Shares" means securities of the Company that a
Designated Stockholder desires to transfer and which have been identified in a
First Refusal Notice.
(u) The term "SEC" shall mean the Securities and Exchange Commission.
1.2 OTHER DEFINITIONAL TERMS. Other terms not defined in Section 1.1 above,
shall have the meanings assigned to them elsewhere in this Agreement.
Page 3
<PAGE>
SECTION 2
REGISTRATION RIGHTS
2.1 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after the earlier of (A) the
third anniversary of the date hereof, or (B) 180 days after the effective date
of a Qualified Public Offering, a written request from the Holders of at least
50% of the Registrable Securities then outstanding that the Company file a
registration statement under the 1933 Act the Company shall:
(i) within ten (10) days of the receipt thereof, give written notice of
such request to all Holders; and
(ii) file the registration statement with the SEC and applicable state
regulatory authorities as soon as practicable, and in any event
within thirty (30) days of the receipt of such request, subject to
the limitations of subsection 2.1(b), the registration under the 1933
Act of all Registrable Securities which the Holders request to be
registered within twenty (20) days of the mailing of the notice
required by section 2.l (a) (i).
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to subsection 2.1(a) and the Company
shall include such information in the written notice referred to in subsection
2.1(a). The underwriter will be selected by the Company and shall be
reasonably acceptable to a majority in interest of the Initiating Holders. In
such event, the right of any Holder to include his Registrable Securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 2.3(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 2.1, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first
entirely excluded from the underwriting.
Page 4
<PAGE>
(c) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 2.1, a
certificate signed by the Chief Executive Officer of the Company stating that
in the good faith Judgment of the Board of Directors of the Company, it would
be seriously detrimental to the Company and its shareholders for such
registration to be effected and it is therefore essential to defer the filing
of such registration statement, the Company shall have the right to defer
taking action with respect to such filing for a period of not more than 120
days after receipt of the request of the Initiating Holders; provided, however,
that the Company may not utilize this right more than once in any twelve-month
period.
(d) In addition, the Company shall not be obligated to effect, or to take
any action to effect, any registration pursuant to this Section 2.1:
(i) After the Company has effected two registrations pursuant to this
Section 2.1 and such registrations have been declared or ordered
effective;
(ii) During the period starting with the date sixty (60) days prior to the
Company's good faith estimate of the date of filing of, and ending on
a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 2.2 hereof; provided that the Company
is actively employing in good faith all reasonable efforts to cause
such registration statement to become effective; or
(iii) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 2.1.1 below.
2.2 COMPANY REGISTRATION. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the 1933 Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely to the sale of securities to participants in a Company stock plan or a
registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder, each written notice of such registration.
Upon the written request of each Holder given within 20 days after mailing of
such notice by the Company, the Company shall, subject to the provisions of
Section 2.7, cause to be registered under the 1933 Act all of the Registrable
Securities that each such Holder has requested to be registered.
2.3 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 2 to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become
Page 5
<PAGE>
effective, and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such registration
statement effective until the earlier of the expiration of the 120-day period
following effectiveness of such registration statement or the completion of
the distribution contemplated in such registration statement; provided,
however, that such 120-day period shall be extended for a period of time
equal to the period the Holder refrains from selling any securities included
in such registration at the request of an underwriter of Common Stock (or
other securities) of the Company.
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of 1933
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities covered
by such registration statement under such other securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Holders; provided
that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, unless the Company is
already subject to service in such Jurisdiction and except as may be required
by the 1933 Act.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact regarding the
Company or omits to state a material fact regarding the Company required to be
stated therein or necessary to make the statements therein regarding the
Company not misleading in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant hereunder
to be listed on each securities exchange, Nasdaq National Market, Nasdaq
SmallCap Market or over-the-counter market on which similar securities issued
by the Company are then listed.
Page 6
<PAGE>
(h) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such
registration.
(i) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 2, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 2, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and is
customary even to underwriters in an underwritten public substance as offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants
to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities.
2.4 FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of the Company
to take any action pursuant to this Section 2 with respect to the Registrable
Securities of any selling Holder that such Holder shall furnish to the Company
such information regarding itself, the Registrable Securities held by it, and
the intended method of disposition of such securities as shall be required to
effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any registration
requested pursuant to Section 2.1 or Section 2.11 if, due to the operation of
subsection 2.4(a), the number of shares or the anticipated aggregate offering
price of the Registrable Securities to be included in the registration does not
equal or exceed the number of shares or the anticipated aggregate offering
price required to originally trigger the Company's obligation to initiate such
registration as specified in subsection 2.1(a) or subsection 2.11(b)(2),
whichever is applicable.
2.5 EXPENSES OF DEMAND REGISTRATION. All expenses other than underwriting
discounts and commissions related to Registrable Securities, incurred in
connection with registrations, filings or qualifications pursuant to
Section 2.1, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company (including fees and disbursements of counsel for the
Company in its capacity as counsel to the selling Holders hereunder; if
Company counsel does not make itself available for this purpose, the Company
will pay the reasonable fees and disbursements of one counsel for the selling
Holders) shall be borne by the Company; provided, however, that the Company
shall not be required to pay for any expenses of any registration proceeding
begun pursuant to Section 2.1 if the registration request is subsequently
withdrawn at the request of the Holders of a majority of the Registrable
Securities to be registered (in which case all participating Holders shall
bear such
Page 7
<PAGE>
expenses), unless the Holders of a majority of the Registrable Securities
agree to forfeit their right to one demand registration pursuant to Section
2.1; provided further, however, that if at the time of such withdrawal, the
Holders have learned of a material adverse change in the condition, business,
or prospects of the Company from that known to the Holders at the time of
their request and have withdrawn the request with reasonable promptness
following disclosure by the Company of such material adverse change, then the
Holders shall not be required to pay any of such expenses and shall retain
their rights pursuant to Section 2.l.
2.6 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all
expenses, other than underwriting discounts and commissions related to
Registrable Securities, incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 2.2 for each Holder (which right may be assigned as
provided in Section 2.12), including (without limitation) all registration,
filing, and qualification fees, printers and accounting fees relating or
apportionable thereto and the fees and disbursements of counsel for the Company
in its capacity as counsel to the selling Holders hereunder (if Company counsel
does not make itself available for this purpose, the Company will pay the
reasonable fees and disbursements of one counsel for the selling Holders
selected by them).
2.7 UNDERWRITING REQUIREMENTS. In connection with any offering involving an
underwriting of shares of the Company's capital stock, the Company shall not be
required under Section 2.2 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it, and then only in such
quantity as the underwriters determine in their sole discretion will not,
adversely affect the success of the offering by the Company. If the total
amount of securities, including Registrable Securities, requested by
shareholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion will not jeopardize the success of the offering (the
securities so included will first be apportioned pro rata among the Holders
requesting inclusion according to the total amount of securities entitled to be
included therein owned by each such Holders, then pro rata among the other
shareholders requesting inclusion) but in no event shall (i) the amount of
securities of the selling Holders included in the offering be reduced below
thirty percent (30%) of the total amount of securities included in such
offering, unless such offering is a Qualified Public Offering of the Company's
securities in which case the selling shareholders may be excluded if the
underwriters make the determination described above and no other shareholder's
securities are included or (ii) notwithstanding (i) above, any shares being
sold by a shareholder exercising a demand registration right similar to that
granted in Section 2.1 be excluded from such offering. For purposes of the
preceding parenthetical concerning apportionment, for any selling shareholder
which is a Holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and shareholders of such holder, or
the estates and family members of any such partners and retired partners, any
trusts for the benefit of any of the foregoing persons and any other affiliates
shall be
Page 8
<PAGE>
deemed to be a single "selling shareholder," and any pro rata reduction with
respect to such "selling shareholder" shall be based upon the aggregate
amount of shares carrying registration rights owned by all entities and
individuals included in such "selling shareholder", as defined in this
sentence.
2.8 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation
or implementation of this Section 2.
2.9 INDEMNIFICATION. In the event any Registrable Securities are included in
a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder, any underwriter (as defined in the 1933 Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the 1933 Act or the 1934 Act, against any losses, claims,
damages, or liabilities joint or several) to which they may become subject
under the 1933 Act, the 1934 Act or other federal or state securities laws,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the 1933 Act, the
1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage liability, or action; provided, however,
that the indemnity agreement contained in this subsection 2.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a Violation which occurs
in reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder (severally and
not jointly) will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the 1933 Act,
any underwriter, any other Holder selling securities in such registration
statement and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages, or liabilities joint or several) to which
any of the foregoing persons may become subject, under the 1933 Act, the 1934
Act or other federal or state securities laws, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
Page 9
<PAGE>
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 2.10(b), in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 2.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that, in no event shall
any indemnity under this subsection 2.10(b) exceed the gross proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section 2.9
of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 2.9, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
2.9, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 2.9.
(d) If the indemnification provided for in this Section 2.9 is held by a
court of competent Jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to herein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
Page 10
<PAGE>
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this Section 2.9
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 2, and otherwise.
2.10 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Holders the benefits of Rule 144 and Rule 144A promulgated
under the 1933 Act and any other rule or regulation of the SEC that may at any
time permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its Common
Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders
to utilize Form S-3 for the sale of their Registrable Securities, such action
to be taken as soon as practicable after the end of the fiscal year in which
the first registration statement filed by the Company for the offering of its
securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act;
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon written request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the 1933 Act and the 1934 Act (at
any time after it has become subject to such reporting requirements), or that
it qualifies as a registrant whose securities may be resold pursuant to Form S-
3 (at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably requested
availing any Holder of any rule or regulation of the SEC which permits selling
of any such securities without registration or pursuant to such form; and
(e) upon request promptly provide (but in any case within 15 days of a
request) to a Holder the following information: (a) a brief statement of the
nature of the business of the Company and the products and services they offer;
(b) the Company's most recent consolidated balance sheets and profit and loss
and retained earnings statements, and similar financial statements for such
part of the two preceding fiscal years prior to such request as the Company
Page 11
<PAGE>
has been in operation (such financial information shall be audited, to the
extent reasonably available); and (c) such other information about the
Company, and its business, financial condition and results of operations as
the requesting person shall request in order to comply with Rule 144A
promulgated under the Securities Act and the antifraud provisions of the
federal and state securities laws.
2.11 FORM S-3 REGISTRATION. If the Company receives from any Holder or Holders
of at least twenty percent (25%) of the Registrable Securities a written
request or requests that the Company effect a registration on Form S-3 and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances (including necessary state registrations and
filings) as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Holder's or Holders' Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any other Holder or Holders joining in such
specified in a written request given within 15 days after receipt of such
written notice from the Company; provided, however, that the Company shall not
be obligated to effect any such registration, qualification or compliance,
pursuant to this Section 2.1.1: (i) if Form S-3 is not available for such
offering by the Holders; (ii) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than $1,000,000; (iii) if the Company
shall furnish to the Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S3
registration statement for a period of not more than 60 days after receipt of
the request of the Holder or Holders under this Section 2.11; provided,
however, that the Company shall not utilize this right more than once in any
twelve month period; (iv) if the Company has, within the 6 month period
preceding the date of such request, already effected one registration on Form S-
3 for the Holders pursuant to this Section 2.11; or (vi) in any particular
jurisdiction in which the Company would be required to qualify to do business
or to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so
requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with
three (3) registrations requested pursuant to Section 2.11, including
(without limitation) all registration, filing, qualification, printer's and
accounting fees and the reasonable fees and disbursements of counsel for the
selling Holder or Holders and counsel for the Company, but
Page 12
<PAGE>
excluding any underwriters' discounts or commissions associated with
Registrable Securities, shall be borne by the Company and thereafter pro rata
by the Holder or Holders participating in the Form S-3 Registration.
Registrations effected pursuant to this Section 2.11 shall not be counted as
demands for registration or registrations effected pursuant to Sections 2.1
or 2.2, respectively.
2.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities pursuant to this Section 2 may be assigned (but
only with all related obligations) by a Holder to a transferee or assignee of
such securities, provided: (a) the Company is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 2.14 below;
and (c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the 1933 Act.
2.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of
this Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of the outstanding Registrable Securities, enter into any
agreement with any holder or prospective holder of any securities of the
company which would allow such holder or prospective holder (a) to include such
securities in any registration filed under Section 2.1 under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Holders which is
included or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in subsection 2.2(a) or within one hundred eighty (180)
days of the effective date of any registration effected pursuant to Section
2.1.
2.14 TERMINATION OF REGISTRATION RIGHTS.
The right of any Holder to request registration or inclusion in any
registration pursuant to Section 2 shall terminate on the later of: (a) the
closing of the Qualified Public Offering if all shares of Registrable
Securities held or entitled to be held upon conversion by such Holder may
immediately be sold under Rule 144 during any 90 day period, or (b) on such
date after the closing of the Qualified Public Offering as all shares of
Registrable Securities held or entitled to be held upon conversion by such
Holder may immediately be sold under Rule 144 during any 90-day period.
Provided, however, that the rights of a Holder under Section 2 will not
terminate as to any Holder who owns more than two percent (2%) of the Company's
outstanding stock until such time as such Holder owns less than two percent
(2%) of the outstanding stock of the Company and such Holder may immediately
sell, under Rule 144, during any 90-day period all shares of Registrable
Securities held or entitled to be held upon conversion by such Holder.
Page 13
<PAGE>
SECTION 3
MARKET STAND-OFF
3.1 "MARKET STAND-OFF" AGREEMENT. Each of the parties hereto agree that,
during the period or duration specified by the Company and an underwriter of
Common Stock or other securities of the Company, following the effective date
of a registration statement of the Company filed under the Securities Act of
1933, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase
or otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of the Company held by it at any time during
such period except Common Stock included in such registration; provided,
however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
(b) all officers and directors of the Company, and all other persons with
registration rights (whether or not pursuant to this Agreement) enter into
similar agreements; and
(c) such market stand-off time period shall not exceed 180 days.
SECTION 4
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees that:
4.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each of
the Investors owning 250,000 (subject to adjustment for combinations, stock
splits and similar transactions) or more shares of Registrable Securities
("Qualified Investors"):
(a) as soon as practicable, but in any event within 120 days after the
end of each fiscal year of the Company, an income statement for such fiscal
year, a balance sheet of the Company and statement of shareholder's equity as
of the end of such year, and a schedule as to the sources and applications of
funds for such year, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting principles
("GAAP"), and audited and certified by an independent public accountants
approved by the Company's Board of Directors;
(b) as soon as practicable, but in any event within 30 days after the end
of each of the first three (3) quarters of each fiscal year of the Company, an
unaudited profit or loss statement, schedule as to the sources and application
of funds for such fiscal quarter and an unaudited balance sheet as of the end
of such fiscal quarter, prepared in accordance with GAAP (with the exception of
footnotes that may be required by GAAP).
Page 14
<PAGE>
(c) within thirty (30) days of the end of each month, an unaudited income
statement and schedule as to the sources and application of funds and balance
sheet for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event thirty (30) days prior to
the end of each fiscal year, a budget and business plan for the next two fiscal
years, prepared on a quarterly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company;
(e) with respect to the financial statements called for in subsections
(b) and (c) of this Section 4.1, an instrument executed by the President of the
Company and certifying that such financial statements were prepared in
accordance with the applicable subsection and fairly present the financial
condition of the Company and its results of operation for the period specified,
subject to year-end audit adjustment;
(f) such other information relating to the financial condition, business,
prospects or corporate affairs of the Company as the Qualified Investor or any
assignee of the Qualified Investor may from time to time request, provided,
however, that the Company shall not be obligated under this subsection (f) or
any other subsection of Section 4.1 to provide information which it deems in
good faith to be a trade secret or similar confidential information;
(g) Upon the reasonable request, the Company will deliver to such
Qualified Investor other information and data, not proprietary in nature (in
the good-faith judgment of the Company), pertaining to its business, financial
and corporate affairs to the extent that such delivery will not violate any
then applicable laws and any contracts of the Company with third persons. The
Company will permit any person designated by a Qualified Investor in writing,
at the expense of such Qualified Investor, to visit and inspect any of the
properties of the Company, including its records and books of account (and to
make photocopies thereof and extracts therefrom), and to discuss its affairs,
finances, and accounts with the Company's officers or directors, all at such
reasonable times and as often as a Qualified Investor may reasonably request,
all in a manner consistent with the reasonable security and confidentiality
needs of the Company, provided that the Company shall be under no such
obligation (i) with respect to information deemed in good faith by the Company
to be proprietary or (ii) if the Company's board of directors reasonably
believes such visit, inspection, or discussion would violate applicable laws or
any contract with third persons; and
(h) All information furnished under this Section is confidential and each
recipient shall (i) maintain the same in confidence and (ii) take all
reasonable measures to prevent any officer or agent of such recipient from
disclosing the same; and
4.2 TAXES AND OTHER LIABILITIES. The Company will pay and discharge,
before the same become delinquent and before penalties accrue thereon, all
taxes, assessments and governmental charges upon or against it or any of its
properties, and all its other material liabilities at any time existing as they
become due, except to the extent and so long as (a) the
Page 15
<PAGE>
same are being contested in good faith and by appropriate proceedings in such
manner as not to cause any materially adverse effect upon the financial
condition of the Company or the loss of any right of redemption from any sale
thereunder and (b) the Company shall have set aside on its books reserves
(segregated to the extent required by generally accepted accounting
principles) deemed by it adequate with respect thereto.
4.3 NOTICE OF LITIGATION AND DISPUTES. The Company will promptly notify
each Qualified Investor of any suits or litigation instituted against it, or
disputes that have a high probability of resulting in a suit of significance
against the Company.
4.4 FUTURE NONCOMPETITION AND PROPRIETARY RIGHTS AGREEMENTS.
(a) PROPRIETARY INFORMATION. The Company shall use its best efforts to
(i) insure that no person employed by the Company will wrongfully employ any
confidential information or documentation proprietary to any former employer,
(ii) protect, by maintenance of secrecy to the extent appropriate, all
technical and business information developed by and belonging to the Company
which has not been patented, (iii) cause to be patented all technological
information developed by and belonging to the Company, which, in the opinion of
the Company and its counsel, is patentable and is best protected by patenting,
and (iv) cause each person who becomes an employee of the Company and who shall
have access to confidential or proprietary information of the Company, to
execute an agreement relating to matters of noncompetition and nondisclosure
and assignment.
(b) LICENSES AND TRADEMARKS. The Company shall use its best efforts to
own, possess and maintain all patents, trademarks, service marks, trade names,
copyrights and licenses necessary or useful in the conduct of its business.
4.5 STOCK TRANSFER RESTRICTIONS. All officers, directors, and holders of 5%
or more of the Company's Capital Stock who are purchasers or transferees of any
shares of the Company's capital stock, regardless of class or series, will,
prior to such sale or transfer, be required to executed an agreement binding
such purchaser or transferee to provisions similar to the Market Standoff
Agreement and the Right of First Refusal sections of this Agreement.
4.6 COMPENSATION OF EXECUTIVE OFFICERS. The salary and other compensation,
including without limitation bonuses and fringe benefits, of the officers of
the Company shall be as approved from time to time by the Board of Directors of
the Company.
4.7 STOCK RESTRICTION AGREEMENTS FOR FUTURE EMPLOYEES. The Company and each
future employee or consultant purchasing or otherwise receiving shares of
Common Stock from the Company (other than persons receiving Common Stock upon
declaration of dividends or by conversion of Preferred Stock) will enter into a
stock restriction agreement (or, upon grant of a stock option, an option
agreement) in the form approved by the Board of Directors.
Page 16
<PAGE>
4.8 LIABILITY INSURANCE. The Company will maintain in full force and effect a
policy or policies of standard comprehensive general liability insurance
underwritten by a U.S. insurance company insuring its properties and business
against such losses and risks, and in such amounts as are adequate for its
business and as the Company's management deems adequate.
4.9 MAINTENANCE OF CORPORATE EXISTENCE. Unless otherwise determined by the
Board of Directors of the Company, each of the Company and its subsidiaries, if
any, will preserve, renew and keep in full force and effect, its corporate
existence, qualification in requisite jurisdictions and rights and privileges
necessary or desirable in the normal conduct of its business.
4.10 GOVERNMENTAL CONSENTS. The Company will obtain all consents, approvals,
licenses and permits required by federal, state, local and foreign law to carry
on its business.
4.11 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The covenants set
forth in Section 3 shall terminate as to Investors and be of no further force
or effect upon the consummation of a Qualified Public Offering or when the
Company first becomes subject to the periodic reporting requirements of
Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
SECTION 5
RIGHT OF FIRST OFFER
5.1 RIGHT OF FIRST OFFER. The Company hereby grants to each Major Investor
the right of first offer with respect to future sales by the Company of its
equity, securities (as defined in Section 3 (a)(11) of the 1934 Act) or debt
with equity features. Each time the Company proposes to offer any securities
it must first offer such securities to the Major Investors in accordance with
the following provisions:
(a) The Company shall deliver a notice by certified mail ("First Offer
Notice") to the Major Investors stating (i) its bona fide intention to offer
such securities, (ii) the number of such securities to be offered, and (iii)
the price and terms, if any, upon which it proposes to offer such securities.
(b) Within 20 calendar days after giving of the First Offer Notice, each
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the First Offer Notice, up to its Pro Rata Share of such
securities. The Company shall promptly (within 5 days of the termination of
such 20-day period), in writing, inform each Fully-Exercising Investor of any
other Major Investor's failure to do likewise. During the 10-day period
commencing after receipt of such information, each Fully-Exercising Investor
shall be entitled to obtain its Pro Rata Share of such securities for which
Major Investors were entitled to subscribe but which were not subscribed for by
the Major Investor.
(c) If all such securities referred to in the First Offer Notice which
the Major Investors are entitled to purchased are not elected to be purchase as
provided in subsection 4.2(b)
Page 17
<PAGE>
hereof, the Company may, during the 90 day period (subject to an extension of
up to 60 days with written consent of a majority of the Fully Exercising
Investors) following the expiration of the period provided in subsection
4.2(b) hereof, offer the remaining unsubscribed portion of such securities to
any person or persons at a price not less than, and upon terms no more
favorable to the offeree than those specified in the First Offer Notice. If
the Company does not sell such securities within such 30 days period, the
right provided hereunder shall be deemed to be revived and such securities
shall not be offered unless first reoffered to the Major Investors in
accordance herewith.
(d) The right of first offer in this Section 5 shall not be applicable
(i) to the issuance of to 1,099,880 shares of Common Stock issuable or issued
to employees, directors or consultants directly or pursuant to a plan,
arrangement or agreement approved by the Board of Directors; (ii) Common Stock
issuable upon conversion of Preferred Stock; (iii) up to 81,250 shares of
Common Stock issued upon exercise of the warrants issued to Adams, Harkness &
Hill in connection with the Series A Preferred Stock financing; (iv) 570,000
shares of Common Stock issuable upon exercise of Common Stock Purchase warrants
outstanding as of the date hereof; (v) to or after a Qualified Public Offering,
(vi) the issuance of securities pursuant to the conversion or exercise of
convertible or exercisable securities, or (vii) the issuance of securities in
connection with a bona fide business acquisition of or by the Company, whether
by merger, consolidation, sale of assets, sale or exchange of stock or
otherwise.
(e) A Major Investor may apportion its right of first offer among itself
and its partners and affiliates as it deems appropriate.
5.2 TERMINATION OF RIGHT OF FIRST OFFER. The terms of this Section 5 shall
terminate upon the consummation of a Qualified Public Offering.
SECTION 6
RIGHT OF FIRST REFUSAL
6.1 FIRST REFUSAL NOTICE. If a Designated Stockholder, desires to transfer
any securities of the Company owned by it, then at least 60 days prior to such
transfer, other than a Permitted Transfer, such Stockholder will deliver notice
(the "First Refusal Notice") to the Company and the Investors, of its intention
to effect such transfer. The First Refusal Notice will set forth (a) the
number and class of Sale Shares to be sold by the Designated Stockholder, (b)
the date or proposed date of such transfer and the name and address of the
transferee, (c) the principal terms of such transfer, including the cash or
other property or consideration to be received upon such transfer, and (d) the
percentage which the number of Sale Shares constitutes with respect to the
aggregate number of securities then held by the transferring Designated
Stockholder. The Company and the Investors agree to keep the information
contained in the First Refusal Notice confidential if so requested by the
Designated Stockholder.
Page 18
<PAGE>
6.2 COMPANY'S OPTION. The Company shall have the option, but not the
obligation, to purchase the Sale Shares on the same terms as specified in the
First Refusal Notice. Within 20 days after the receipt of the First Refusal
Notice, the Company shall give written notice to the transferring Designated
Stockholder and the remaining Investors stating whether or not it elects to
exercise its option to purchase the number of Sale Shares, and a date and time
for consummation of the purchase not less than 60 nor more than 90 days after
the giving of the First Refusal Notice. Failure by the Company to give such
notice within such time period shall be deemed an election by it not to
exercise its option.
6.3 INVESTORS' OPTION. If the Company falls to exercise the option with
respect to all of the Sale Shares, the remaining Investors shall thereupon have
the option, but not the obligation, to purchase the remaining Sale Shares on
the same terms as specified in the First Refusal Notice. After the expiration
of the 20 day period in Section 5.3 hereof, but within 30 days after the
receipt of the First Refusal Notice, any electing Investor shall give written
notice to the transferring Designated Stockholder and the Company stating that
it elects to exercise its option, the number of Sale Shares it elects to
purchase, and (unless a closing date has already been set) a date and time for
consummation of the purchase not more than 90 days after the giving of such
notice by the transferring Designated Stockholder. Failure by such an Investor
to give such notice within such time period shall be deemed an election by it
not to exercise its option. If more than one Investor exercises this option,
the number of remaining Sale Shares which each such Investor shall be entitled
to purchase shall be the equal to the product of total number of remaining Sale
Shares multiplied by a fraction the numerator of which is the number of shares
of Common Stock and Preferred Stock, on an as if converted basis, owned by the
Investor and the denominator of which is the number of Common Stock and
Preferred Stock, on an as if converted basis, owned by all Investors electing
to exercise the option pursuant to this Section 6.
6.4 TRANSFERS VOID. Any attempted transfer in violation of the terms of this
Section 6 shall be ineffective to vest in any transferee any interest held by
the transferring Designated Stockholder in the shares. Without limiting the
foregoing, any purported transfer in violation hereof shall be ineffective as
against the Company, and the Company shall have a continuing right and option
(but not an obligation), until the restrictions contained in this Section 5
terminate, to purchase the securities purported to be transferred by the
Designated Stockholder for a price and on terms the same as those at which the
purported transfer was effected.
6.5 TERMINATION OF RESTRICTIONS UPON QUALIFIED PUBLIC OFFERING. The terms of
this Section 6 shall terminate upon the consummation of a Qualified Public
Offering.
SECTION 7
CO-SALE
7.1 SALES BY FOUNDER.
(a) If a Founder proposes to sell or transfer any Co-Sale Shares then the
Founder shall promptly give written notice (the "Co-Sale Notice") to the
Company and to each of the Investors
Page 19
<PAGE>
at least 20 days prior to the closing of such sale or transfer. The Co-Sale
Notice shall describe in reasonable detail the proposed sale or transfer
including, without limitation, the number of Co-Sale Shares to be sold or
transferred, the nature of such sale or transfer, the consideration to be
paid, and the name and address of each prospective purchaser or transferee.
In the event that the sale or transfer is being made pursuant to the
provisions of Section 7.2 hereof, the Co-Sale Notice shall state under which
paragraph and subparagraph the sale or transfer is being made.
(b) Each Investor shall have the right, exercisable upon written notice
to such Founder within 15 days after receipt of the Co-Sale Notice, to
participate in such sale on the same terms and conditions specified in the Co-
Sale Notice. To the extent that one or more of the Investors exercise such
right of participation in accordance with the terms and conditions set forth
below, the number of Co-Sale Shares that the Founder may sell in the
transaction shall be correspondingly reduced. Each Participant may sell all or
any part of such Participant's Pro Rata Share.
(c) If any Investor falls to elect to fully participate in such Founder's
sale pursuant to this Section 7, the Founder shall give notice of such failure
to the Participants. Such notice may be made by telephone if confirmed in
writing within 2 days. The Participants shall have 5 days from the date such
notice was given to agree to sell their pro rata share of the unparticipating
portion.
(d) Each Participant shall effect its participation in the sale by
promptly delivering to the Founder for transfer to the prospective purchaser
one or more certificates, properly endorsed for transfer.
(e) The stock certificate or certificates that the Participant delivers
to the Founder pursuant to paragraph 7.2(f) shall be transferred to the
prospective purchaser in consummation of the sale of Co-Sale Shares pursuant to
the terms and conditions specified in the Co-Sale Notice, and the Founder shall
concurrently therewith remit to such Participant that portion of the sale
proceeds to which such Participant is entitled by reason of its participation
in such sale. To the extent that any prospective purchaser, or purchasers,
prohibits such assignment or otherwise refuses to purchase shares or other
securities from a Participant exercising its rights of co-sale hereunder, the
Founder shall not sell to such prospective purchaser or purchasers any Co-Sale
Shares unless and until, simultaneously with such sale, the Founder shall
purchase such Participant's Pro Rata Share from such Participant at the price
and on the terms specified in the Co-Sale Notice.
(f) The exercise or non-exercise of the rights of the Participants
hereunder to participate in one or more sales of Co-Sale Shares made by the
Founder shall not adversely affect their rights to participate in subsequent
sales of Co-Sale Shares subject to paragraph 7.2(a).
(g) If none of the Investors elects to participate in the sale of the Co-
Sale Shares subject to the Co-Sale Notice, the Founder may, not later than 60
days following receipt by the Company and each of the Investors of the Co-Sale
Notice, enter into an agreement providing for
Page 20
<PAGE>
the closing of the transfer of the Co-Sale Shares covered by the Co-Sale
Notice within 30 days of such agreement on terms and conditions not more
favorable to the transferor than those described in the Co-Sale Notice. Any
proposed transfer on terms and conditions more favorable than those described
in the Co-Sale Notice, as well as any subsequent proposed transfer of any of
the Co-Sale Shares by the Founder, shall again be subject to the co-sale
rights of the Investors and shall require compliance by the Founder with the
procedures described in this Section 6.
7.2 EXEMPT TRANSFERS.
(a) The provisions of Section 7.1 shall not apply to any transfer to the
ancestors, descendants or spouse of a Founder or to trusts for the benefit of
such persons; or any bona fide gift or pledge; provided that (A) the Founder
shall inform the Investors of such pledge, transfer or gift prior to effecting
it, and (B) the pledgor, transferee or donee shall agree in writing to be bound
by and comply with all provisions of Section 6 and any and all other stock
restrictions which the Investors may reasonably request. Such transferred Co-
Sale Shares shall remain "Co-Sale Shares" hereunder, and such pledgee,
transferee or donee shall be treated as a "Founder" for purposes of this
Agreement.
(b) The terms of this Section 7 shall terminate upon the consummation of
a Qualified Public Offering.
7.3 PROHIBITED TRANSFERS.
(a) If a Founder sells any Co-Sale Shares in contravention of Section 7
under this Agreement (a "Prohibited Transfer"), each Investor, in addition to
such other remedies as may be available at law, in equity or hereunder, shall
have the put option provided below, and the Founder shall be bound by the
applicable provisions of such option.
(b) In the event of a Prohibited Transfer, each Investor shall have the
option to sell to the Founder such Investors' Participant's Pro Rata Share.
Such sale shall be made on the following terms and conditions:
(i) The price per share at which the shares are to be sold to the Founder
shall be equal to the price per share paid by the purchaser to the
Founder in the Prohibited Transfer. The Founder shall also reimburse
each Investor for any and all reasonable fees and expenses, including
legal fees and expenses, incurred pursuant to the exercise or the
attempted exercise of the Investor's rights under Section 7.
(ii) Within 90 days after the later of the dates on which the Investor (A)
received notice of the Prohibited Transfer by the Founder or (B)
otherwise became aware of the Prohibited Transfer, each Investor
shall, if exercising the option created hereby, deliver to the
Founder the certificate or certificates representing shares to be
sold, each certificate to be properly endorsed for transfer.
Page 21
<PAGE>
(iii) The Founder shall, upon receipt of the certificate or
certificates for the shares to be sold by a Investor, pursuant to
this subparagraph, pay the aggregate purchase price therefor and the
amount of reimbursable fees and expenses, as specified in
subparagraph 7.3(b)(1), in cash or by other means acceptable to the
Investor.
(iv) Notwithstanding the foregoing, any attempt by a Founder to transfer
Co-Sale Shares in violation of Section 7 hereof shall be void and the
Company agrees it will not effect such a transfer nor will it treat
any alleged transferee as the holder of such shares without the
written consent of a majority in interest of the Investors.
SECTION 8
MEETINGS AND ELECTION OF DIRECTORS;
SPECIAL VOTING RIGHTS
8.1 OBLIGATIONS. The Founders and the Investors will take all steps
necessary, acting in their respective capacities as shareholders of the
Company, to perform their obligations and agreements under this Agreement with
respect to the election of directors and other voting agreements and to cause
the Company to perform its obligations and agreements under this Agreement with
respect to the election of directors and other voting agreements and to
implement and cause the Company to implement the provisions of this Agreement.
8.2 MEETINGS OF BOARD OF DIRECTORS. The Company will hold a minimum of six
Board of Directors' meetings during the 12 months following the date hereof and
thereafter will call, and use its best efforts to have, regular meetings of the
Board of Directors of the Company not less often than quarterly. The Company
shall pay all reasonable travel expenses and other out-of-pocket disbursements
incurred in connection with the Board members' attendance at such meetings.
8.3 ELECTION AND NUMBER OF DIRECTORS. At each annual meeting of the Company,
at each special meeting of the Company called for the purpose of electing
directors of the Company, and at any time at which shareholders of the Company
shall have the right to, or shall vote for or consent in writing to the
election of directors of the Company, then, and in each event, the Founders and
Investors must vote the shares of capital stock then held by them for the
election, to the Board of Directors of the Company, of up to two persons
nominated by a majority of the Series A Preferred (and other Shares issued upon
conversion thereof), voting as a single class, on an as converted basis. The
parties hereto further agree that the number of directors on the Company's
Board of Director's shall not exceed 8.
8.4 TERMINATION OF PROVISIONS UPON QUALIFIED PUBLIC OFFERING.
Notwithstanding the foregoing provisions of this Section 8, the obligations of
the Company, the Investors, and the Founders under this Section 8 shall
terminate upon the consummation of a Qualified Public Offering.
Page 22
<PAGE>
SECTION 9
MISCELLANEOUS
9.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any arty other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
9.2 GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of Minnesota as applied to agreements among Minnesota
residents entered into and to be performed entirely within Minnesota.
9.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
9.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
9.5 NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given In writing and shall be deemed effectively
given upon personal delivery to the party to be notified or 3 business days
after deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
9.6 EXPENSES. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
9.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of a majority of the Series A
Preferred Stock (and shares issued upon conversion thereof, voting on as a
single class and on an as converted basis then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of
all such Registrable Securities, and the Company.
9.8 SEVERABILITY. If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of
Page 23
<PAGE>
the Agreement shall be interpreted as if such provision were so excluded and
shall be enforceable in accordance with its terms.
9.9 AGGREGATION OF STOCK. All shares of Registrable Securities held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
9.10 ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto, if any)
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.]
Page 24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date above first written.
Eagle Ventures, LLC Eagle Ventures II, LLC
- --------------------------------- ---------------------------------
Jeffrey Tollefson, Vice President Jeffrey Tollefson, Vice President
IAI Ventures, Inc. as general partner of IAI Ventures, Inc. as general
partner of IAI U.S. Ventures, LP IAI U.S. Ventures II, LP
- --------------------------------- ---------------------------------
Jeffrey Tollefson, Vice President Jeffrey Tollefson, Vice President
FOUNDERS:
Adams, Harkness & Hill Partners Fund
By:
------------------------------ ---------------------------------
Timothy P. Lawin
Its:
----------------------------- ---------------------------------
Bruce A. Lawin
---------------------------------
Dean A. Klein
COMPANY
Advanced UroScience, Inc.
By:
------------------------------
Its: President and COO
Address: 1290 Hammond Road
White Bear Lake, MN 55110
Page 25
<PAGE>
The undersigned hereby acknowledges that he, she or it has read the
Advanced UroScience, Inc. Investors' Rights Agreement and understands that by
signing below he, she, or it will become a party to that Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date above first written.
Joint Tenant Information
Date of
Execution:
------------------
---------------------------------
Signature of Joint Tenant
- ------------------------------
Signature of Investor
---------------------------------
Type or Print Name
- ------------------------------
Type or Print Name
---------------------------------
- ------------------------------
---------------------------------
- ------------------------------
---------------------------------
- ------------------------------
---------------------------------
- ------------------------------ Address
- ------------------------------
Address
Page 26
'<PAGE>
EXHIBIT 11
ADVANCED UROSCIENCE, INC.
COMPUTATION OF NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Nine Months Ended September 30,
-------------------------------
December 31, December 31, 1996 1997
1995 1996 (Unaudited) (Unaudited)
---------------------------------------------------------
<S> <C> <C> <C> <C>
Computation of weighted
average number of common
and common equivalent
shares outstanding
Common shares outstanding at
the beginning of the period 2,811,600 3,170,220 3,170,220 3,713,220
Weighted average number of
shares issued during the
period 40,630 420,625 379,833 -
Common equivalent shares
attributed to stock
options and warrants
granted (A) 219,964 219,964 219,964 219,964
Common stock issued (B) 1,413,500 1,413,500 1,413,500 1,413,500
------------------------------------------------------
Weighted average number of
common and common
equivalent shares
outstanding 4,485,694 5,224,309 5,183,517 5,346,684
------------------------------------------------------
------------------------------------------------------
Net loss ($524,444) ($1,507,842) ($1,035,419) ($2,010,451)
------------------------------------------------------
------------------------------------------------------
Net loss per common and
common equivalent share ($0.12) ($0.29) ($0.20) ($0.38)
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
(A) 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.
(B) In April 1997, the Company sold 1,413,500 shares of Series A preferred
stock at $4.00 per share. These shares have been assumed, to be converted
into equal shares of common stock due to the automatic conversion
requirement upon completion of an initial public offering.
Pursuant to the Securities and Exchange Commission SAB 83, all stock
issued at a price below the assumed initial offering price 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 ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of
our report, dated March 25, 1997, except for Note 4, as to which the date is
April 29, 1997, relating to the financial statements of Advanced UroScience,
Inc. We also consent to the reference to our Firm under the captions "Experts"
and "Selected Financial Data" in the Prospectus.
/S/MCGLADREY & PULLEN, LLP
Minneapolis, Minnesota
November 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AND IS
QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 354,216 1,971,300
<SECURITIES> 0 1,413,768
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 126,121 243,588
<CURRENT-ASSETS> 495,355 3,794,108
<PP&E> 126,099 432,677
<DEPRECIATION> 25,620 63,976
<TOTAL-ASSETS> 623,203 4,196,632
<CURRENT-LIABILITIES> 407,462 382,452
<BONDS> 0 0
0 0
0 0
<COMMON> 2,527,312 7,915,202
<OTHER-SE> (2,311,571) (4,101,022)
<TOTAL-LIABILITY-AND-EQUITY> 623,203 4,196,632
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,542,023 2,130,989
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,667 0
<INCOME-PRETAX> (1,507,842) (2,010,451)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,507,842) (2,010,451)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,507,842) (2,010,451)
<EPS-PRIMARY> (0.29) (0.38)
<EPS-DILUTED> 0 0
</TABLE>
