<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
TITLE OF EACH CLASS OF DOLLAR AMOUNT TO AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) REGISTRATION FEE
<S> <C> <C>
Common Stock (no par value)....................................................... $34,500,000 $10,455
</TABLE>
(1) In accordance with Rule 457(o) 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.
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- --------------------------------------------------------------------------------
<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 OCTOBER 10, 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 $9.00 and $11.00 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, cancel, or modify 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.
<TABLE>
<S> <C>
[DAIN BOSWORTH INCORPORATED] ADAMS, HARKNESS & HILL, INC.
</TABLE>
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
<TABLE>
<S> <C> <C>
[SERIES OF ANATOMICAL Advanced UroScience has [LOGO]
DEPICTIONS developed ACYST, an
DEMONSTRATING THE ACYST injectable bulking agent
INJECTION PROCEDURE] 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>
<TABLE>
<S> <C> <C>
Before treatment, an open ACYST is injected to bulk The injection is repeated at
bladder neck results in the tissue at or near the other sites until the
urine leakage. bladder neck. 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."
2
<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 October 1, 1997, 60 patients had been treated with ACYST in the
Company's clinical studies. Most of these 60 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.
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 SIX MONTHS ENDED PERIOD FROM
DECEMBER 31, JUNE 30, INCEPTION
-------------------- -------------------- (AUGUST 1, 1994) TO
1995 1996 1996 1997 JUNE 30, 1997
--------- --------- --------- --------- --------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expense........................ $ 353 $ 764 $ 284 $ 548 $ 1,699
General and administrative expense...................... 165 778 355 692 1,709
Net loss................................................ $ (524) $ (1,508) $ (624) $ (1,173) $ (3,314)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per share...................................... $ (0.12) $ (0.30) $ (0.13) $ (0.22)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding.................................... 4,376 5,115 4,992 5,237
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
DECEMBER 31, AS ADJUSTED
1996 ACTUAL (2)
--------------- --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...................... $ 354 $ 4,394 $ 27,244
Working capital........................................................ 88 4,321 27,171
Total assets........................................................... 623 4,892 27,742
Total liabilities...................................................... 407 309 309
Total stockholders' equity............................................. 216 4,583 27,433
</TABLE>
- ------------------------
(1) Does not include, as of the date of this Prospectus, (i) 900,880 shares of
Common Stock issuable upon exercise of outstanding options, (ii) 199,000
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) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
hereby (at an assumed Price to Public of $10.00 per share) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
4
<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 October 1, 1997,
only 60 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
5
<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. While the Company is currently undergoing an assessment of its
quality system to verify compliance with ISO 9001, EN46001 standards and the
essential requirements of the MDD, there can be no assurance that the Company
will obtain approval to apply the CE mark on a timely basis, or 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 June 30, 1997, had an accumulated deficit of
approximately $3.6 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.
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
6
<PAGE>
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 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
7
<PAGE>
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 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
8
<PAGE>
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 successfully 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 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
9
<PAGE>
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
10
<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 354,600 shares will be eligible for immediate sale on the date of
this Prospectus in accordance with Rule 144; (ii) approximately 247,620
additional shares will be eligible for sale beginning in December 1997; (iii)
approximately 88,500 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
11
<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 900,880 shares
of Common Stock are outstanding, with 740,000 of the shares issuable upon
exercise of such options subject to vesting requirements and lock-up agreements.
The remaining 160,880 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."
12
<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 $22.9 million ($26.3 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $10.00 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.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
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 $10.00 per share.
<TABLE>
<CAPTION>
JUNE 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 $ 30,765
Contributed capital..................................................................... 251 251
Deficit accumulated during the development stage........................................ (3,583) (3,583)
--------- -----------
Total stockholders' equity and capitalization......................................... $ 4,583 $ 27,433
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Does not include (i) 725,880 of Common Stock shares issuable upon exercise
of outstanding options at a weighted average exercise price of $1.81 per
share, (ii) 374,000 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."
14
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of June 30,
1997 was $4.5 million or $0.89 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 June 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 June 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 $10.00 per share (after
deduction of underwriting discounts and commissions and estimated offering
expenses), the net tangible book value of the Company at June 30, 1997 would
have been $27.4 million or $3.59 per share. This represents an immediate
increase in net tangible book value to the existing stockholders of $2.70 per
share and an immediate net tangible book value dilution to purchasers of the
shares of $6.41 per share, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 10.00
Net tangible book value per share as of June 30, 1997.............. $ 0.89
Increase per share attributable to new investors................... 2.70
---------
Net tangible book value per share after this offering................ 3.59
---------
Net tangible book value dilution per share to new investors.......... $ 6.41
---------
---------
</TABLE>
The following table summarizes as of June 30, 1997, the difference between
the existing stockholders and the purchasers of shares in this offering (at an
assumed offering price of $10.00 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 24.7% $ 1.60
New investors.......................................... 2,500,000 32.8 25,000,000 75.3 $ 10.00
---------- --------- ------------- ---------
Total.............................................. 7,626,720 100.0% $ 33,192,200 100.0%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</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 June 30, 1997 (i)
725,880 shares of Common Stock issuable upon exercise of outstanding options at
a weighted average exercise price of $1.81 per share, (ii) 374,000 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.
15
<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 six
months ended June 30, 1996 and 1997 and for the period from inception (August 1,
1994) through June 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 six months ended June 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 SIX MONTHS ENDED PERIOD FROM
DECEMBER 31, JUNE 30, INCEPTION
-------------------- -------------------- (AUGUST 1, 1994) TO
1995 1996 1996 1997 JUNE 30, 1997
--------- --------- --------- --------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expense........................ $ 353 $ 764 $ 284 $ 548 $ 1,699
General and administrative expense...................... 165 778 355 692 1,709
Net loss................................................ $ (524) $ (1,508) $ (624) $ (1,173) $ (3,314)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per share...................................... $ (0.12) $ (0.30) $ (0.13) $ (0.22)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding.................................... 4,376 5,115 4,992 5,237
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- -----------
1995 1996 1997
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 475 $ 354 $ 4,394
Working capital....................................................................... 415 88 4,321
Total assets.......................................................................... 534 623 4,892
Total liabilities..................................................................... 277 407 309
Total stockholders' equity............................................................ 257 216 4,583
</TABLE>
16
<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 June 30,
1997, the Company had an accumulated deficit of $3.6 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. The Company will also be actively pursuing ISO
9001 certification and will seek approval to apply the CE mark to ACYST to allow
for marketing and distribution in the EU. The Company believes that it will
receive authority to apply the CE mark to ACYST in 1998. 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 1999.
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
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Research and development expenses include costs associated with the
development and clinical testing of ACYST. Research and development expenses
were $548,000 in the first six months of 1997 and $284,000 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
17
<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 $692,000 in the first six months of
1997 and $355,000 for the same period in 1996. The increase was primarily due to
higher compensation expenses of $308,000, as additional personnel were hired to
meet expanded operational needs, and a $103,000 increase in non-cash charges
related to stock options granted. This increase was partially offset by an
$88,000 decrease in professional fees related to financing efforts.
Interest expense was $0 for the first six 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 $67,000 for the first six months of 1997 and $20,000 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 $1.2 million for the first six months of 1997 and $624,000 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 June 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 June 30, 1997, the Company had
used cash of $2.9 million to fund operations, $290,000 to purchase equipment,
leasehold improvements and intangible assets, and $300,000 for principal
payments to a related party for a note
18
<PAGE>
payable under an asset purchase agreement. At June 30, 1997, the Company had
cash, cash equivalents and short-term investments of $4.4 million and working
capital of $4.3 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.
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<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 October 1, 1997, 60 patients had been treated with ACYST in the
Company's clinical studies. Most of the 60 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
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<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
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.
- Overflow urinary incontinence is the incomplete emptying of the bladder
due to an obstruction or to the inability to produce sufficient bladder
contractions.
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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 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
22
<PAGE>
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 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
23
<PAGE>
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
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.
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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]
<TABLE>
<S> <C> <C>
A CYSTOSCOPE IS INSERTED THE NEEDLE TIP IS INSERTED THE INJECTION IS REPEATED AT
INTO THE URETHRA AND AN UNDER THE MUCOSAL LINING AND OTHER SITES UNTIL THE
INJECTION NEEDLE IS ADVANCED ACYST IS INJECTED. BLADDER NECK IS CLOSED.
THROUGH THE WORKING CHANNEL
OF THE CYSTOSCOPE.
</TABLE>
25
<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 October 1, 1997 indicate
that most of the 60 patients (31 treated in accordance with the U.S. IDE study
and 29 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
26
<PAGE>
pretreatment continence grades. These initial clinical studies have demonstrated
better results in women than in men.
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--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.
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
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<PAGE>
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 any
court, and, because of the complex legal and factual questions involved in
intellectual property
28
<PAGE>
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.
29
<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 many 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's facilities and processes are currently undergoing an
inspection and audit process to achieve ISO 9001 certification and authority to
affix the CE mark to the Company's products in connection with the Company's
efforts to distribute its products internationally. Certification of compliance
with ISO 9001 standards and MDD "essential requirements" would enable the
Company to affix the CE mark on its products, enabling such products to be
marketed, sold and used in EU countries, subject to limited
30
<PAGE>
safeguard powers of such countries. The Company expects to receive approval to
affix the CE mark on its products in 1998, although there can be no assurance
that it will receive ISO 9001 certification or authority to affix the CE mark to
its products 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."
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<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 is currently undergoing an
assessment of the quality system to verify compliance with ISO 9001, EN46001
standards and the essential requirements of the MDD, and expects to be ISO
certified in 1998.
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
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<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 October 1, 1997, the Company had 15
full-time employees and two part-time employees. The Company is not a party to
any collective bargaining agreements and believes that its relations with its
employees are good. See "Certain Transactions."
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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
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.
Subsequent to Mr. Lawin's resignation from Bioplasty, Inc. in 1993, Bioplasty,
Inc. filed a petition for bankruptcy, resulting from litigation regarding its
breast implant product. Mr. Lawin'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.
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
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<PAGE>
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 1993, Bioplasty, Inc. filed a petition for bankruptcy,
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.
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.
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
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<PAGE>
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
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.
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
36
<PAGE>
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 301,000 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., a wound care company whose principal stockholders 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.
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 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
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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 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 1, 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 (10 persons)(17)......... 4,685,250 78.8% 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 October 1, 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.
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<PAGE>
(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.
(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. 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 816,500 shares which may be purchased upon the exercise of options
and warrants.
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<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.
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<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
42
<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
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<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 354,600 shares will be eligible for immediate sale on the date of
this Prospectus in accordance with Rule 144; (ii) approximately 247,620
additional shares will become eligible for sale in the public market beginning
in December 1997; (iii) approximately 88,500 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 990,880 shares of Common Stock were outstanding, with 740,000 of the
shares issuable upon exercise of such options subject to vesting requirements
and lock-up agreements. The remaining 160,880 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.
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<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."
45
<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 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 shares of Common
Stock are released for sale to the public, the Representatives may change the
initial Price to Public 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.
46
<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."
47
<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.
48
<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 June 30, 1997 (unaudited).............................. F-3
Statements of Operations for the Years Ended December 31, 1995 and 1996, Six Months Ended June 30, 1996 and
1997 (unaudited) and the Period from August 1, 1994 (Date of Inception) to June 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, Six Months Ended June 30, 1997 (unaudited)................. F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, Six Months Ended June 30, 1996 and
1997 (unaudited) and Period from August 1, 1994 (Date of Inception) to June 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 ended December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
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 JUNE 30, 1997
<TABLE>
<CAPTION>
1997
1995 1996 -------------
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................ $ 474,749 $ 354,216 $ 2,882,129
Short-term investments............................................... -- -- 1,512,240
Inventories.......................................................... 13,589 126,121 170,150
Other current assets................................................. 4,260 15,018 65,523
------------ ------------ -------------
TOTAL CURRENT ASSETS............................................... 492,598 495,355 4,630,042
Equipment and Leasehold Improvements, less accumulated depreciation,
1995 $6,839; 1996 $25,620; 1997 $41,620.............................. 18,364 100,479 226,304
Intangible Assets, less accumulated amortization 1995 $7,087; 1996
$13,665; 1997 $17,765................................................ 23,484 27,369 35,393
------------ ------------ -------------
TOTAL ASSETS....................................................... $ 534,446 $ 623,203 $ 4,891,739
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 43,558 $ 131,328 $ 72,592
Accrued expenses..................................................... 33,805 276,134 236,243
------------ ------------ -------------
TOTAL CURRENT LIABILITIES.......................................... 77,363 407,462 308,835
------------ ------------ -------------
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 99,000 251,149
Deficit accumulated during the development stage..................... (902,729) (2,410,571) (3,583,447)
------------ ------------ -------------
257,083 215,741 4,582,904
------------ ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 534,446 $ 623,203 $ 4,891,739
------------ ------------ -------------
------------ ------------ -------------
</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 SIX MONTHS ENDED JUNE 30, 1996 AND
1997,
AND THE PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO JUNE 30, 1997
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
(UNAUDITED) (DATE OF
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 INCEPTION) TO
---------------------------- ---------------------------- JUNE 30, 1997
1995 1996 1996 1997 (UNAUDITED)
------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Expenses:
Research and development........ $ 353,334 $ 763,796 $ 284,247 $ 547,902 $ 1,698,536
General and administrative (Note
3)............................ 164,771 778,227 355,141 692,420 1,709,123
Interest expense to related
party (Note 2)................ 16,000 4,667 4,667 -- 24,000
------------- ------------- ------------- ------------- -----------------
534,105 1,546,690 644,055 1,240,322 3,431,659
Interest income................... 9,661 38,848 19,912 67,446 117,587
------------- ------------- ------------- ------------- -----------------
NET LOSS...................... $ (524,444) $ (1,507,842) $ (624,143) $ (1,172,876) $ (3,314,072)
------------- ------------- ------------- ------------- -----------------
------------- ------------- ------------- ------------- -----------------
Net loss per share................ $ (0.12) $ (0.30) $ (0.13) $ (0.22)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted-average number of common
and common equivalents shares
outstanding..................... 4,376,149 5,114,765 4,992,389 5,237,139
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</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 JUNE 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)............................. -- -- 152,149 -- 152,149
Net loss (unaudited)............................... -- -- -- (1,172,876) (1,172,876)
---------- ----------- ----------- ------------ ------------
Balance, June 30, 1997 (unaudited)................... 5,126,720 $ 7,915,202 $ 251,149 $ (3,583,447) $4,582,904
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</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 SIX MONTHS ENDED JUNE 30, 1996 AND
1997, AND THE PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO JUNE 30, 1997
<TABLE>
<CAPTION>
PERIOD FROM
(UNAUDITED) AUGUST 1,
YEARS ENDED SIX MONTHS ENDED JUNE 1994 (DATE OF
DECEMBER 31 30 INCEPTION) TO
---------------------- ----------------------- JUNE 30, 1997
1995 1996 1996 1997 (UNAUDITED)
--------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss............................................... $(524,444) $(1,507,842) $ (624,143) $(1,172,876) $(3,314,072)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 5,635 18,781 4,733 16,000 41,620
Amortization......................................... 5,317 6,578 3,134 4,100 17,765
Noncash expenses (Notes 3 and 5)..................... -- 49,000 49,000 152,149 251,149
Changes in assets and liabilities:
Inventories........................................ (13,589) (112,532) (71,423) (44,029) (170,150)
Other current assets............................... 14,870 (10,758) (1,526) (50,505) (65,523)
Accounts payable................................... 8,191 87,770 11,685 (58,736) 72,592
Accrued expenses................................... 21,243 242,329 176,285 (39,891) 236,243
--------- ----------- ---------- ----------- -------------
NET CASH USED IN OPERATING ACTIVITIES............ (482,777) (1,226,674) (452,255) (1,193,788) (2,930,376)
--------- ----------- ---------- ----------- -------------
Cash Flows From Investing Activities
Purchase of short-term investments..................... -- -- -- (1,512,240) (1,512,240)
Purchase of equipment.................................. (7,078) (100,896) (54,251) (141,825) (249,799)
Purchase of intangible assets.......................... (7,641) (10,463) (9,118) (12,124) (40,658)
--------- ----------- ---------- ----------- -------------
NET CASH USED IN INVESTING ACTIVITIES............ (14,719) (111,359) (63,369) (1,666,189) (1,802,697)
--------- ----------- ---------- ----------- -------------
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) 701,876 2,527,913 2,882,129
Cash and Cash Equivalents
Beginning.............................................. 352,833 474,749 474,749 354,216 --
--------- ----------- ---------- ----------- -------------
Ending................................................. $ 474,749 $ 354,216 $1,176,625 $ 2,882,129 $ 2,882,129
--------- ----------- ---------- ----------- -------------
--------- ----------- ---------- ----------- -------------
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 June 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 June 30, 1997, and for the six months ended June 30,
1996 and 1997, and the period from August 1, 1994 (date of inception), to June
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 $8,000 and $18,000 for the six months ended June
30, 1996 and 1997, and $6,000 and $26,000 in 1995 and 1996, respectively.
As of June 30, 1997, the approximate future lease commitments are as
follows:
<TABLE>
<S> <C>
1997............................................................... $ 29,000
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.
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 June 30,
1997, 126,000 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 $152,149 for the six months ended June 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
six months ended June 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
--------------------------
1995 1996 JUNE 30, 1997
----------- ------------- -------------
<S> <C> <C> <C>
Net loss, as reported.............................. $ (524,444) $ (1,507,842) $ (1,172,876)
Net loss, pro forma................................ (597,487) (1,556,650) (1,189,151)
Net loss per share, as reported.................... (0.12) (0.30) (0.22)
Net loss per share, pro forma...................... (0.14) (0.30) (0.23)
</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 six months ended June 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)................................... 131,000 4.02
Options expired (unaudited)................................... (5,000) 4.00
----------- -----
Balance, June 30, 1997 (unaudited).............................. 725,880 $ 1.81
----------- -----
----------- -----
</TABLE>
The weighted-average fair value of options granted during 1995, 1996, and
the six months ended June 30, 1997, was $0.35, $1.09, and $3.55, respectively.
The following table summarizes information about stock options outstanding
as of June 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 7.0 $ 1.01 395,880 $ 1.01
$1.67.......................... 162,000 8.5 1.67 162,000 1.67
$3.33.......................... 42,000 8.8 3.33 42,000 3.33
$4.00 - $4.40.................. 126,000 4.9 4.02 51,000 4.05
----------- ----- ----------- -----
725,880 $ 1.81 650,880 $ 1.35
----------- ----- ----------- -----
----------- ----- ----------- -----
</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 EVENTS (UNAUDITED)
STOCK OPTIONS: In July and September 1997, the Board of Directors granted
options to purchase 175,000 shares of the Company's common stock at $4.00 -
$4.40 per share which vest over a three-year period. The Company recorded
compensation expense of approximately $45,000 upon issuance of these options in
the third quarter ending September 30, 1997.
INITIAL PUBLIC OFFERING: In 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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................................... 5
Use of Proceeds................................ 13
Dividend Policy................................ 13
Capitalization................................. 14
Dilution....................................... 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 20
Management..................................... 34
Certain Transactions........................... 37
Principal Stockholders......................... 39
Description of Securities...................... 41
Shares Eligible for Future Sale................ 43
Underwriting................................... 46
Legal Matters.................................. 48
Experts........................................ 48
Available Information.......................... 48
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 199 (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
-------------
<TABLE>
<S> <C>
[DAIN BOSWORTH INCORPORATED]
ADAMS, HARKNESS & HILL, INC.
</TABLE>
, 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. 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
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>
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
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>
<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 October 9, 1997.
<TABLE>
<S> <C> <C>
ADVANCED UROSCIENCE, INC.
By /s/ DEAN A. KLEIN
-----------------------------------------
Dean A. Klein,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Timothy P.
Lawin and Dean A. Klein, and each of them, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, any registration statement filed
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and any and
all instruments or documents filed as part of or in connection with any of such
amendments or registration statements, and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his or her
substitutes, shall do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ TIMOTHY P. LAWIN
- ------------------------------ Chairman of the Board of October 9, 1997
Timothy P. Lawin Directors
President and Chief
/s/ DEAN A. KLEIN Executive Officer
- ------------------------------ (principal executive October 9, 1997
Dean A. Klein officer)
Vice President, Finance
/s/ THOMAS M. JAEGER and Chief Financial
- ------------------------------ Officer (principal October 9, 1997
Thomas M. Jaeger financial and accounting
officer)
/s/ BRUCE A. LAWIN
- ------------------------------ Director October 1, 1997
Bruce A. Lawin
/s/ MARK G. NOSBUSH
- ------------------------------ Director October 2, 1997
Mark G. Nosbush
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ PAUL E. COLOMBO
- ------------------------------ Director October 1, 1997
Paul E. Colombo
/s/ JAMES M. KNOBLACH
- ------------------------------ Director October 3, 1997
James M. Knoblach
/s/ HARRY E. WELLS, III
- ------------------------------ Director October 2, 1997
Harry E. Wells, III
/s/ JEFFREY R. TOLLEFSON
- ------------------------------ Director October 2, 1997
Jeffrey R. Tollefson
</TABLE>
<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
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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
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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
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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.
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(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
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<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.
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(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.
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(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
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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
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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
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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
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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, the Company or
you as the Representatives of the Underwriters will have the right, by
written notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company except for expenses to be borne
by the Company and the Underwriters as provided in Section 5 hereof and the
indemnity and contribution agreements in Section 7 hereof. In the
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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.
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<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.
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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
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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>
RESTATED ARTICLES OF INCORPORATION
OF
ADVANCED UROSCIENCE, INC.
ARTICLE 1 - NAME
The name of the Company shall be Advanced UroScience, Inc.
ARTICLE 2 - REGISTERED OFFICE
The location and office address of the registered office of the Company in
this state shall be 1290 Hammond Road, White Bear Lake, Minnesota 55110.
ARTICLE 3 - CAPITAL STOCK
A. AUTHORIZED SHARES. The aggregate number of shares that the Company
has authority to issue shall be Twenty Three Million (23,000,000) shares,
consisting of Twenty Million (20,000,000) shares of Common Stock, 1,500,000
shares of Series A Preferred Stock and 1,500,000 shares of Series A1 Preferred
Stock. Such shares shall have no par value, except that, solely for the purpose
of a statute or regulation imposing a tax or fee based upon capitalization of
the Company, they shall have a par value of one cent ($.01) per share.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The rights,
preferences, restrictions and other matters relating to the Series A Preferred
Stock and Series A1 Preferred Stock are as follows:
1. DIVIDEND PROVISIONS. The holders of shares Series A Preferred
Stock, Series A1 Preferred Stock, and Common Stock shall be entitled to receive
dividends, out of any assets legally available therefor, when, as and if
dividends are declared by the Board of Directors. The right to such dividends
is not cumulative and no right shall accrue to holders of such shares by reason
of the fact that dividends on such shares are not declared in any prior year,
nor shall undeclared or unpaid dividends bear or accrue interest.
2. LIQUIDATION PREFERENCE.
(a) SERIES A AND SERIES A1 PREFERRED STOCK. In the event
of any liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, a majority of holders of Series A and Series
A1 Preferred Stock (voting as a single class and on an as-converted
basis) may, within 20 days of receipt of a written notice stating the
total amount of funds to be distributed to the shareholders in the
pending liquidation and a current list of all outstanding securities
and the liquidation rights of all such securities, elect to either (i)
convert their shares of Series A and Series A1 Preferred
<PAGE>
Stock into Common Stock and participate in the distribution provided
for in subsection 2(b) below, or (ii) receive, prior and in preference
to any distribution of any of the assets of the Company to the holders
of Common Stock by reason of their ownership thereof, an amount per
share equal to the sum of (A) $4.00 for each outstanding share of
Series A Preferred Stock and Series A1 Preferred Stock (the "Original
Series A Issue Price" and the "Original Series A1 Issue Price,"
respectively), and (B) an amount equal to a return on their investment
at the rate of 30% per annum, compounded monthly and on the date of
completion of such transaction, over the period commencing on April 2,
1997 and ending on the date of completion of such transaction ("30%
Return"), provided, however, the maximum amount to which the holders of
Series A and Series A1 Preferred Stock shall be entitled to under this
subsection B.2(a)(ii)(B) shall be $.80 per share. If, upon the
occurrence of such event, the assets and funds thus distributed among
the holders of the Series A and Series A1 Preferred Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the
Company legally available for distribution shall be distributed ratably
among the holders of the Series A and Series A1 Preferred Stock.
(b) Upon the completion of any distribution required by
subparagraph (a) of this Section 2, the remaining assets of the Company
available for distribution to stockholders shall be distributed among
the holders of Common Stock (including converted Series A and Series A1
Preferred Stock) pro rata based on the relative number of shares of
Common Stock held by each.
(c) (i) For purposes of this Section 2, if (A) the Company is
acquired by another entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation); or (B) a sale of all or substantially all of the assets of
the Company (unless the Company's shareholders of record as constituted
immediately prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration for
the Company's acquisition or sale or otherwise) hold at least 50% of the
voting power of the surviving or acquiring entity), and if the 30% Return
(as defined in B.2.(a)(ii)(B)) has not been realized, then upon the vote of
a majority of the Series A and Series A1 Preferred Stock, voting together
as a single class and on an as-converted basis, such event will be treated
as a liquidation, dissolution or winding up of the Company. If the 30%
Return has been realized or if the holders of a majority of the Series A
and Series A1 Preferred Stock do not elect to treat the event as a
liquidation, dissolution or winding up of the Company, provision will be
made so that such holders of the Series A and Series A1 Preferred Stock
shall thereafter be entitled to receive upon conversion of their shares of
Series A or Series A1 Preferred Stock, the number of shares of stock or
other securities or property (including cash) of the Company, or of any
successor Company resulting from any of the events specified above, that
are receivable upon such event by holders of the number of shares of Common
Stock into which such shares of Series A and Series A1 Preferred Stock
might have been converted immediately prior to such event, all subject to
adjustment as provided herein.
(ii) In any of the events specified in subparagraph
B.2.(c)(i), if the consideration received by the Company is other than
cash, its value will be deemed its fair market value. Any securities shall
be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
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<PAGE>
(1) If traded on a securities exchange or through
the Nasdaq National Market or Nasdaq SmallCap Market,
the value shall be deemed to be the average of the
closing prices of the securities on such exchange over
the thirty-day period ending three (3) days prior to
the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing
bid or sale prices (whichever is applicable) over the
thirty-day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as
mutually determined by the Company and the holders of
at least a majority of the voting power of all then
outstanding shares of Series A and Series A1 Preferred
Stock.
(B) The method of valuation of securities subject to
restrictions on free marketability (other than restrictions arising
solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market
value determined as above in subparagraph B.2.(c)(ii)(A)(l), (2) or
(3) to reflect the approximate fair market value thereof, as mutually
determined by the Company and the holders of at least a majority of
the voting power of all then outstanding shares of such Preferred
Stock.
(iii) If the requirements of this subsection 2(c) are
not complied with, the Company shall forthwith either:
(A) cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A and
Series A1 Preferred Stock will revert to and be the same as such
rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in subsection 2(c)(iv) hereof
(iv) The Company shall give each holder of record of
Series A and Series A1 Preferred Stock written notice of such impending
transaction not later than 20 days prior to the shareholders' meeting
called to approve such transaction, or 20 days prior to the closing of the
transaction, whichever is earlier, and will also notify these holders in
writing of the final approval of the transaction. The first of these
notices will describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Company will
thereafter give the holders prompt notice of any material changes. The
transaction will in no event take place sooner than 20 days after the
Company has given the first notice provided for herein or sooner than 10
days after the Company has given notice of any material changes provided
for herein; provided, however, that such periods may be
3
<PAGE>
shortened upon the written consent of the holders of at least a
majority of the Series A and Series A1 Preferred Stock, voting together
as a single class and on an as-converted basis, that are entitled to
such notice rights or similar notice rights.
3. REDEMPTION OF SERIES A AND SERIES A1 PREFERRED STOCK.
(a) If at any time after March 28, 2005 the Company receives a
written request of the holders of not less than fifty percent (50%) of the then
outstanding shares of Series A and Series A1 Preferred Stock, voting together as
a single class and on an as-converted basis, (collectively, the "Initiating
Holders"), the Company shall within thirty (30) days after the receipt of such
notice redeem the percentage of the Series A and Series A1 Preferred Stock
specified in such request (or, if less, the maximum amount it may lawfully
redeem) by paying in cash therefor the higher of (i) a sum per share equal to
the Original Series A Issue Price or Original Series A1 Issue Price, as
applicable, or (ii) the fair market value of such shares as determined by a
qualified independent appraiser mutually agreed upon by the Company and holder
of the largest number of shares of Series A and Series A1 Preferred Stock being
redeemed and paid for by the Company. If the Company and such holder are unable
to agree upon an appraiser, a qualified appraiser will be appointed by the Chief
Judge of the Fourth Judicial District of Minnesota. The aggregate amounts
payable with respect to Series A and Series A1 Preferred Stock are hereinafter
collectively referred to as the "Redemption Price." If necessary, to legally
pay the full Redemption Price on the Redemption Date (defined below), the
Company will take all reasonable actions including, but not limited to, using
its best efforts to recapitalize or sell its business or businesses. Upon
receipt of any such written request, the Company shall promptly mail written
notice of the redemption request, first class, postage prepaid, to each holder
of record of Series A and Series A1 Preferred Stock, other than the Initiating
Holders, at the address last shown on the records of the Company for such holder
or given by the holder to the Company for the purpose of notice or if no such
address appears or is given at the principal executive office of the Company.
Each such holder shall have thirty (30) days from receipt of such notice to
request in writing the redemption of such holder's Series A or Series A1
Preferred Stock on the terms contained herein and each such request shall be
deemed to have been received by the Company on the date of the request by the
Initiating Holders. Holders of Series A and Series A1 Preferred Stock may make
only one request under this Section B.3.
(b) At least twenty (20) days prior to the date fixed for any
redemption of any Series A and Series A1 Preferred Stock (the "Redemption
Date"), written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the business day next preceding
the day on which notice is given) of the Series A and Series A1 Preferred Stock
to be redeemed, at the address last shown on the records of the Company for such
holder or given by the holder to the Company for the purpose of notice or if no
such address appears or is given at the principal executive office of the
Company, noticing such holder of the redemption to be effected, specifying the
number of shares to be redeemed from such holder, the Redemption Date, the
Redemption Price, the place at which payment may be obtained, and the date on
which such holder's Conversion Rights (as defined below) as to such shares
terminate, and calling upon such holder to surrender to the Company, in the
manner and at the place designated, the certificate or certificates representing
the shares to be redeemed (the "Redemption Notice"). On or after the Redemption
Date, each holder of Series A and Series A1 Preferred Stock to be redeemed shall
surrender to the Company the certificate or certificates representing such
shares, in the manner and at the place designated in the Redemption Notice, and
thereupon the Redemption Price of such shares shall be payable to the order
4
<PAGE>
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. In the event
less than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the holders of
Series A and Series A1 Preferred Stock, as holders of such shares (except the
right to receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares which such
holders elected to have redeemed, and such shares shall not thereafter be
transferred on the books of the Company or be deemed to be outstanding for any
purpose whatsoever. If the funds of the Company legally available for
redemption of shares of Series A and Series A1 Preferred Stock on any Redemption
Date are insufficient to redeem the total number of shares of Series A and
Series A1 Preferred Stock to be redeemed on such date, those funds that are
legally available will be used to redeem shares of Series A and Series A1
Preferred Stock such that each holder of Series A and Series A1 Preferred Stock
receives the same percentage of the aggregate Series A and Series A1 Preferred
Stock Redemption Price, as applicable, as such holder would otherwise receive if
the Company could legally redeem all of the shares put for redemption on such
date. The shares of Series A and Series A1 Preferred Stock not redeemed shall
remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Company are legally
available for the redemption of shares of Series A and Series A1 Preferred
Stock, such funds will immediately be used to redeem the balance of the shares
that the Company has become obligated to redeem on any Redemption Date but that
it has not redeemed.
(d) On or prior to the Redemption Date, the Company shall
deposit the Redemption Price of all shares of Series A and Series A1 Preferred
Stock designated for redemption in the Redemption Notice, and not yet redeemed
or converted, with a bank or trust company having aggregate capital and surplus
in excess of $100,000,000 as a trust fund for the benefit of the respective
holders of the shares designated by holders of Series A and Series A1 Preferred
Stock for redemption and not yet redeemed, with irrevocable instructions and
authority to the bank or trust company to publish the notice of redemption
thereof and pay the Redemption Price for such shares to their respective holders
on or after the Redemption Date, upon receipt of notification from the Company
that such holder has surrendered its share certificate to the Company pursuant
to subsection B.3.(b) above. As of the date of such deposit, the deposit shall
constitute full payment of the shares to their holders, and from and after the
date of the deposit the shares so called for redemption shall be redeemed and
shall be deemed to be no longer outstanding, and the holders thereof shall cease
to be shareholders with respect to such shares and shall have no rights with
respect thereto except the rights to receive from the bank or trust company
payment of the Redemption Price of the shares, without interest, upon surrender
of their certificates therefor, and the right to convert such shares as provided
in Section B.4 hereof. Such instructions shall also provide that any moneys
deposited by the Company pursuant to subsection B.3(d) for the redemption of
shares thereafter converted into shares of the Company's Common Stock pursuant
to Section B.4. hereof prior to the Redemption Date shall be returned to the
Company forthwith upon such conversion. The balance of any moneys deposited by
the Company pursuant to subsection B.3(d) remaining unclaimed at the expiration
of two (2) years following the Redemption Date shall thereafter be returned to
the Company upon its request expressed in a resolution of its Board of
Directors.
5
<PAGE>
4. CONVERSION. The holders of the Series A and Series A1 Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A and Series A1
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the Company
or any transfer agent for such series of Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
the Original Series A Issue Price or Original Series A1 Issue Price, as
applicable, by the Conversion Price at the time in effect for such series. The
initial Conversion Price per share for shares of Series A Preferred Stock shall
be the Original Series A Issue Price, and the initial Conversion Price per share
for shares of Series A1 Preferred Stock shall be the Original Series A1 Issue
Price.
(b) AUTOMATIC CONVERSION UPON QUALIFIED PUBLIC OFFERING. Each
share of Series A and Series A1 Preferred Stock shall automatically be converted
into shares of Common Stock at the Conversion Price then in effect for such
series immediately upon the consummation of a "Qualified Public Offering." A
"Qualified Public Offering" is a firmly underwritten public offering of the
Company's Common Stock, pursuant to an effective registration statement under
the Securities Act of 1933, as amended, 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 public offering is consummated prior to 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.
(c) AUTOMATIC CONVERSION UPON CONSENT OF SERIES A AND SERIES A1
PREFERRED STOCK HOLDERS. Each share of Series A and Series A1 Preferred Stock
shall automatically be converted into shares of Common Stock at the Conversion
Price then in effect for such series on the date upon which the Company obtains
the consent of the holders of a majority of the then outstanding shares of
Series A and Series A1 Preferred Stock, voting as separate classes, on an
as-converted basis.
(d) MECHANICS OF CONVERSION. Before any holder of Series A or
Series A1 Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he or she shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or of any transfer agent
for the Series A or Series A1 Preferred Stock, and shall give written notice by
mail, postage prepaid, to the Company at its principal corporate office, of the
election to convert the same and shall state therein the name or names' in which
the certificate or certificates for shares of Common Stock are to be issued The
Company shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A or Series A1 Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A or Series A1
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with a Qualified Public
Offering, the conversion may, at the option of any holder tendering Series A or
Series A1 Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series A or Series A1 Preferred Stock shall not be deemed to
have
6
<PAGE>
converted such Series A or Series A1 Preferred Stock until immediately
prior to the closing of such sale of securities.
(e) CONVERSION PRICE ADJUSTMENTS OF SERIES A PREFERRED STOCK.
The Conversion Price of the Series A Preferred Stock will be subject to
adjustment from time to time as follows:
(i) If after the date upon which any shares of the Series A
Preferred Stock were first issued (the "Purchase Date"), the Company issues
or is deemed to have issued any Additional Stock (as defined below) without
consideration or for a consideration per share less than the Conversion
Price of the Series A Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, then the Conversion Price for those
shares of Series A Preferred Stock held immediately prior to each such
issuance shall forthwith be adjusted to an amount equal to the price of any
Additional Shares issued. No adjustment shall be made to the Conversion
Price of the Series A1 Preferred Stock pursuant to this subsection B.4.(e).
Except to the limited extent provided for in subsections
B.4.(e)(i)(C)(3)(5), no adjustment of such Conversion Price pursuant to
this subsection B.4.(e)(i) shall have the effect of increasing the
Conversion Price above the Conversion Price in effect immediately prior to
such adjustment.
(A) In the case of the issuance of Additional Stock
for cash, the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts, commissions
or other expenses allowed, paid or incurred by the Company for any
underwriting or otherwise in connection with the issuance and sale
thereof.
(B) In the case of the issuance of Additional Stock
for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value
thereof as determined by the Company's Board of Directors in good
faith irrespective of any accounting treatment.
(C) In the case of the issuance (whether before, on or
after the Purchase Date) of options, warrants or other rights to
purchase or subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options, warrants
or other rights to purchase or subscribe for such convertible or
exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4(e)(i):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the
satisfaction of any conditions to exercisability,
including without limitation, the passage of time, but
without taking into account potential antidilution
adjustments) of such options, warrants or other rights
to purchase or subscribe for Common Stock shall be
deemed to have been issued at the time such
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options, warrants or rights were issued and for a
consideration equal to the consideration
(determined in the manner provided in subsections
B.4.(e)(i)(A) and (B)), if any, received by the
Company upon the issuance of such options, warrants
or other rights plus the minimum exercise price
provided in such options, warrants or other rights
(without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in
exchange (assuming the satisfaction of any conditions
to convertibility or exchangeability, including,
without limitation, the passage of time, but without
taking into account potential antidilution adjustments)
for any such convertible or exchangeable securities or
upon the exercise of options, warrants or other rights
to purchase or subscribe for such convertible or
exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at
the time such securities were issued or such options,
warrants or other rights were issued for consideration
equal to the consideration, if any, received by the
Company for any such securities and related options,
warrants or other rights (excluding any cash received
on account of accrued interest or accrued dividends),
plus the minimum additional consideration, if any, to
be received by the Company (without taking into account
potential antidilution adjustments) upon the conversion
or exchange in full of such securities or the exercise
in full of any related options, warrants or other
rights (the consideration in each case to be determined
in the manner provided in subsections B.4.(e)(i)(A) and
(B)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the
consideration payable to the Company upon exercise of
such options, warrants or other rights or upon
conversion of or in exchange for such convertible or
exchangeable securities, including, but not limited to,
a change resulting from the antidilution provisions
thereof, the Conversion Price of the Series A Preferred
Stock to the extent in any way affected by or computed
using such options, warrants or other rights or
securities or options, warrants or other rights related
to such securities shall be recomputed to reflect such
change, but no further adjustment shall be made for the
actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such options,
warrants or other rights or the conversion or exchange
of such securities.
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<PAGE>
(4) Upon the expiration of any such options,
warrants or other rights, the termination of any such
rights to convert or exchange or the expiration of any
options, warrants or other rights related to such
convertible or exchangeable securities, the Conversion
Price of the Series A Preferred Stock to the extent in
any way affected by or computed using such options,
warrants, other rights or securities or options,
warrants or other rights related to such securities,
shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect)
actually issued upon the exercise of such options,
warrants or other rights, upon the conversion or
exchange of such securities or upon the exercise of the
options, warrants or other rights related to such
securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor
pursuant to subsections 4(e)(i)(C)(3) and (4) shall be
appropriately adjusted to reflect any change,
termination or expiration of the type described in
either subsection 4(e)(i)(C)(3) or (4).
(D) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection
4(e)(i)(D)) by the Company after the Purchase Date other than:
(1) Common Stock issued pursuant to a transaction
described in subsection 4(e)(ii) hereof,
(2) 1,099,880 shares of Common Stock issuable or
issued to employees, consultants or directors, directly
or pursuant to a plan arrangement or agreement approved
by the Board of Directors of the Company;
(3) Common Stock issued upon conversion of
Series A or Series A1 Preferred Stock;
(4) Up to 81,250 shares of Common Stock issued
upon exercise of the warrant issued in connection with
the Series A Preferred Stock financing;
(5) 570,000 shares of Common Stock issuable upon
exercise of the Common Stock purchase warrants
outstanding as of the date hereof.
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(6) Shares or other securities issued by the
Company with the consent of holders of a majority of
the then outstanding Series A and Series A1 Preferred
Stock.
(ii) In the event the Company should at any time or from
time to time after the Purchase Date fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock
or the Common Stock Equivalents (including the additional shares of Common
Stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend distribution, split or
subdivision if no record date is fixed), the Conversion Price of the
Series A and Series A1 Preferred Stock shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each
share of such series shall be increased in proportion to such increase of
the aggregate number of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents, with the number of
shares issuable with respect to Common Stock Equivalents determined from
time to time in the manner provided for deemed issuances in subsection
4(e)(i)(C).
(iii) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for the Series A and
Series A1 Preferred Stock shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of
such series shall be decreased in proportion to such decrease in the
outstanding shares of Common Stock as a result of such combination.
(iv) No adjustment of the Conversion Price for the Series A
Preferred Stock shall be made in an amount less than one cent per share,
provided that any adjustments which are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into
account in any subsequent adjustment or conversion made prior to three (3)
years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of three (3) years from the
date of the event giving rise to the adjustment being carried forward
(f) SPECIAL ADDITIONAL CONVERSION PRICE ADJUSTMENT IN CONNECTION
WITH A QUALIFIED PUBLIC OFFERING. In the event the Company consummates a
Qualified Public Offering in which the value of the Company prior to the
Qualified Public Offering does not reflect a 30% Return on the Series A and
Series A1 Preferred Stock (or other subsequent series of preferred stock into
which Series A or Series A1 Preferred Stock may be converted), the Conversion
Price then in effect for such shares shall, prior to the automatic conversion in
connection with the Qualified Public Offering, be reduced to a price that will
reflect a 30% Return, provided, however, the Conversion Price shall never be
reduced below 83.35% of the then current Conversion Price. Such Conversion
Price adjustment will be calculated as follows:
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n
ACP = OP [.97561]
ACP = Adjusted Conversion Price
OP = Offering Price in Qualified Public Offering
n = number of months that have past since April 1, 1997 (with
months in which more than 15 days have passed being treated as
full months).
(g) OTHER DISTRIBUTIONS. In the event the Company shall declare
a distribution payable in securities of other persons, evidences of indebtedness
issued by the Company or other persons, assets (excluding cash dividends) or
options or rights not referred to in subsection B.4(e)(ii) then, in each such
case for the purpose of this subsection 4(g), the holders of the Series A and
Series A1 Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Company into which their shares of Series A and Series A1 Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Company entitled to receive such distribution.
(h) RECAPITALIZATIONS. If at any time, or from time to time,
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A and Series A1 Preferred Stock shall thereafter be entitled to receive
upon conversion of the Series A and Series A1 Preferred Stock the number of
shares of stock or other securities or property of the Company or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 4 with
respect to the rights of the holders of the Series A and Series A1 Preferred
Stock after the recapitalization to the end that the provisions of this Section
4 (including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series A and Series A1 Preferred
Stock) shall be applicable after that event as nearly equivalent as may be
practicable.
(i) NO IMPAIRMENT. The Company will not, by amendment of these
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A and Series A1 Preferred Stock against impairment.
(j) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of
the Series A or Series A1 Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share (with
one-half being rounded upward). Such conversion shall be determined on the
basis of the total number of shares of Series A and
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Series A1 Preferred Stock the holder is at the time converting into
Common Stock and the aggregate number of shares of Common Stock
issuable upon such conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A or Series A1 Preferred Stock pursuant
to this Section 4, the Company, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of Series A and Series A1 Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Company shall, upon the written request at any time of any holder of
Series A or Series A1 Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price at the time in effect, and (C) the
number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of a share of
Series A and Series A1 Preferred Stock.
(k) NOTICES OF RECORD DATE. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Series A and
Series A1 Preferred Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(l) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A and Series A1 Preferred Stock such number of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A and Series A1 Preferred
Stock; and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Series A and Series A1 Preferred Stock, in addition to such other
remedies as shall be available to the holders of such Preferred Stock, the
Company will take such corporate action as may in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
(m) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A or Series A1
Preferred Stock shall be deemed given 3 business days after deposited in the
United States mail, postage prepaid, and addressed to each holder of record at
his address appearing on the books of the Company.
(n) SPECIAL MANDATORY CONVERSION.
(i) At any time following the Purchase Date, if (A) the
holders of shares of Series A Preferred Stock are entitled to exercise the
right of first offer (the "Right of First Offer") set forth in Section 4 of
the Investors' Rights Agreement between the Company and the purchasers of
Series A Preferred Stock, by and between the Company and certain
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<PAGE>
investors, as amended from time to time (the "Rights Agreement"), with
respect to an equity financing of the Company (the "Equity Financing"),
(B) the Equity Financing would result in a Conversion Price adjustment
to the Series A Preferred Stock as provided in subsection 4(e)(i)
herein, (C) the Company has complied with its notice obligations, or
such obligations have been waived, under the Right of First Offer with
respect to such Equity Financing and the Company thereafter proceeds to
consummate the Equity Financing, and (D) such holder (a
"NonParticipating Holder") does not by exercise of such holder's Right
of First Offer acquire his, her or its pro rata share offered in such
Equity Financing (a "Mandatory Offering"), then all of such
Non-Participating Holder's shares of Series A Preferred Stock shall
automatically and without further action on the part of such holder be
converted effective upon, subject to, and concurrently with, the
consummation of the Mandatory Offering (the "Mandatory Offering Date")
into an equivalent number of shares of Series A1 Preferred Stock;
PROVIDED, however, that no such conversion shall occur in connection
with a particular Equity Financing if, pursuant to the written request
of the Company, such holder agrees in writing to waive his, her or its
Right of First Offer with respect to all or part of such Equity
Financing. Upon conversion pursuant to this subsection 4(n)(i), the
shares of Series A Preferred Stock so converted shall be canceled and
not subject to reissuance.
(ii) The holder of any shares of Series A Preferred Stock
converted pursuant to this subsection 4(n) shall deliver to the Company
during regular business hours at the office of any transfer agent of the
Company for the Series A Preferred Stock or at such other place as may be
designated by the Company, the certificate or certificates for the shares
so converted, duly endorsed or assigned in blank or to the Company. As
promptly as practicable thereafter, the Company shall issue and deliver to
such holder, at the place designated by such holder, a certificate or
certificates for the number of full shares of Series A1 Preferred Stock to
be issued and such holder shall be deemed to have become a shareholder of
record of Series A1 Preferred Stock immediately prior to the close of
business on the Mandatory Offering Date.
(iii) In the event that any shares of Series A1
Preferred Stock are issued, concurrently with such issuance, the Company
shall use its best efforts to take all such action as may be required,
including amending its Articles of Incorporation, (A) to cancel all
authorized shares of Series A1 Preferred Stock that remain unissued after
any issuance of such series, (B) to create and reserve for issuance upon
conversion pursuant to this subsection 4(n) of any Series A Preferred Stock
a new series of Preferred Stock equal in number to the number of shares of
Series A1 Preferred Stock so canceled and designated Series A2 Preferred
Stock with the designations, powers, preferences and rights and the
qualifications, limitations and restrictions identical to those then
applicable to the Series A1, except that the Conversion Price for such
shares of Series A2 Preferred Stock shall be the Series A Conversion Price
in effect immediately prior to such issuance, and (C) to amend the
provisions of this subsection 4(n) to provide that any subsequent
conversion pursuant to this subsection 4(n) will be into shares of
Series A2 Preferred Stock. The Company shall take the same actions with
respect to the Series A2 Preferred Stock and each subsequently authorized
series of Preferred Stock upon initial issuance of shares of the last such
series to be authorized. The right to receive any dividend declared but
unpaid at the time of conversion on any shares of Preferred Stock converted
pursuant to the provisions of this subsection 4(n) shall accrue to the
benefit of the new shares of Preferred Stock issued upon conversion
thereof. All references in these Articles
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<PAGE>
of Incorporation to Series A1 Preferred Stock shall include Series A2
and all subsequent series of preferred stock created pursuant to this
B.4.(n)(iii).
5. VOTING RIGHTS.
(a) The holder of each share of Series A and Series A1 Preferred
Stock shall have the right to one vote for each share of Common Stock into which
such Series A and Series A1 Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any shareholders'
meeting in accordance with the bylaws of the Company, and shall be entitled to
vote, together with holders of Common Stock, with respect to any question upon
which holders of Common Stock have the right to vote. Fractional votes shall
not, however, be permitted and any fractional voting rights available on an
as-converted basis (after aggregating all shares into which shares of Series A
and Series A1 Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
(b) No shareholder shall have the right to cumulate votes for
the election of directors.
6. PROTECTIVE PROVISIONS.
(a) So long as any shares of Series A and Series A1 Preferred
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by law and which will not be
unreasonably withheld) of at least a majority of the then outstanding shares of
Series A and Series A1 Preferred Stock, voting together as a single class and on
an as-converted basis:
(i) create any new class or series of stock or any other
securities convertible into equity securities of the Company or reclassify
any junior security into a security (A) having a preference over, or being
on a parity with, the Series A or Series A1 Preferred Stock with respect to
voting, dividends or upon liquidation, or (B) having rights similar to any
of the rights of the Series A or Series A1 Preferred Stock under this
Section 6;
(ii) alter or change the rights, preferences or privileges
of any class or series of stock so as to affect adversely the Series A or
Series A1 Preferred Stock;
(iii) increase the total number of authorized shares of
Series A or Series A1 Preferred Stock;
(iv) pay dividends on any class or series of the Company's
capital stock (other than dividends payable in Common Stock of the Company
or securities convertible into Common Stock of the Company);
(v) repurchase any of the Company's capital stock, except
pursuant to the redemption provisions hereof, or
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<PAGE>
(vi) issue any shares of the Company's capital stock,
options, warrants, or other stock rights, except as related to an employee
stock option plan or other similar arrangement authorized by the vote of
the Company's Board of Directors, or in connection with a Qualified Public
Offering.
(b) So long as any shares of Series A and Series A1 Preferred
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by law and which consent will
not be unreasonably withheld) of at least a majority of the then outstanding
shares of Series A and Series A1 Preferred Stock, voting together as a single
class and on an as-converted basis, unless upon completion of the transaction
contemplated such holders will realize a 30% Return on their investment:
(i) liquidate, dissolve, recapitalize or reorganize the
Company;
(ii) sell, convey, or otherwise dispose of all or
substantially all of the Company's property; or
(iii) issue any shares of the Company's capital stock,
options, warrants, or other stock rights in connection with a Qualified
Public Offering.
(c) If the Company is unable to obtain the consent of the
holders of a majority of the Series A and Series A1 Preferred Stock to conduct
one of the transactions listed in B.6.(b) the Company may nevertheless
consummate such a transaction if the Company and/or its other shareholders shall
at the closing of such transaction pay to each of the holders of Series A and
Series A1 Preferred Stock an amount equal to the difference between the amount
such holder would receive upon consummation of such transaction and the amount
that would equal a 30% Return on such holder's investment as of the closing date
of the transaction.
7. NO PREEMPTIVE RIGHTS. The holders of Series A and Series A1
Preferred Stock shall not have any preemptive rights pursuant to Minnesota
Statutes Section 302A.413. The Company may, however, grant preemptive rights by
agreement.
8. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares
of Series A or Series A1 Preferred Stock shall be converted pursuant to Section
4 hereof, the shares so converted shall be canceled and shall not be issuable by
the Company and these Articles of Incorporation shall be appropriately amended
to effect the corresponding reduction in the Company's authorized capital stock.
9. WAIVERS. Holders of a majority of the outstanding Series A and
Series A1 Preferred Stock may waive the Company's compliance with any provision
set forth herein.
ARTICLE 4 - RIGHTS OF SHAREHOLDERS
A. NO PREEMPTIVE RIGHTS. No shareholder of the Company shall have any
preemptive right to subscribe for, purchase or acquire any shares of stock of
any class or series of the corporation now or hereafter authorized or issued by
the Company.
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B. NO CUMULATIVE VOTING RIGHTS. No shareholder shall have the right to
cumulate votes for the election of directors or for any other purpose.
ARTICLE 5 - WRITTEN ACTION BY DIRECTORS
Any action required or permitted to be taken at a Board meeting may be
taken by written action signed by all of the directors or, in cases where the
action need not be approved by the shareholders, by written action signed by the
number of directors that would be required to take the same action at a meeting
of the Board at which all directors were present.
ARTICLE 6 - LIMITATION OF DIRECTOR LIABILITY
A director shall not be personally liable to the Company or to its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except to the extent that elimination or limitation of liability is
not permitted under Section 302A.251, the Minnesota Business Corporation Act, as
the same exists or may hereafter be amended. Any repeal or modification of the
provisions of this Article shall not adversely affect any right or protection of
a director of the Company existing at the time of such repeal or modification.
ARTICLE 7 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION
Where approval of shareholders is required by law, the affirmative vote of
the holders of at least a majority of the voting power of all shares entitled to
vote shall be required to authorize the Company (i) to merge into or with one or
more other corporations, (ii) to exchange its shares for shares of one or more
other corporations, (iii) to sell, lease, transfer or otherwise dispose of all
or substantially all of its property and assets, including its good will, or
(iv) to commence voluntary dissolution.
ARTICLE 8 - AMENDMENT OF ARTICLES OF INCORPORATION
Any provision contained in these Articles of Incorporation may be amended,
altered, changed or repealed by the affirmative vote of the holders of at least
a majority of the voting power of the shares present and entitled to vote at a
duly held meeting or such greater percentage as may be otherwise prescribed by
the laws of the State of Minnesota.
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
ADVANCED UROSCIENCE, INC.
(AS AMENDED THROUGH JULY 31, 1996)
a corporation duly organized under Minnesota Statutes, Chapter 302A, as amended.
OFFICES
BYLAW 1. PLACE. The registered office of the corporation shall be at
such location as set forth in the Articles of Incorporation or any such
subsequent filings made with the Secretary of State. The principal executive
office in Minnesota shall be at such location as may be determined by the Board
of Directors. Other offices may be maintained by the corporation at any other
place or places which the Board may designate.
BYLAW 2. MAINTENANCE OF RECORDS. The original books and records of the
corporation shall be maintained at the principal executive office of the
corporation where they shall be available for examination by the shareholders on
such terms and conditions as the Board may from time to time impose.
SHAREHOLDERS' MEETINGS
BYLAW 3. PLACE. All meetings of the shareholders shall be held at such
place as the Board may designate provided that any meeting called at the demand
of one or more shareholders shall be held in the county where the principal
executive office is located.
BYLAW 4. REGULAR MEETINGS. Regular meetings of the shareholders may be
called from time to time by the Board and any meeting so called shall be held on
such date and at such time as the Board may determine. The action to be taken
at a regular meeting shall include the election of directors and any other
business appropriate for action by the shareholders.
BYLAW 5. SPECIAL MEETINGS. Special meetings of the shareholders may be
called for any purpose by the President or Treasurer, or by the Board of
Directors or any two members thereof, and shall be called by the Board of
Directors at the demand in writing of a shareholder or shareholders owning 10
percent or more of the voting stock of the corporation, as provided by Minnesota
Statutes, Section 302A.433, Subd. 2, as amended. Business transacted at any
special meeting shall be confined to purposes stated in the notice of the
meeting, unless all of the shareholders are present at the meeting and consent
to consideration of other business.
BYLAW 6. NOTICE. Written notice of shareholder meetings shall be given
to each shareholder entitled to vote thereat by mailing such notice, postage
prepaid, to each shareholder's last known address. The notice shall be given at
least 10 days, and not more than 60 days, before the meetings. The notice of a
regular meeting shall set forth the time and place of the meeting and the items
of business to be transacted at the meeting. The notice of a special meeting
shall set forth the time and place of the meeting and shall also state the
purpose or purposes of the meeting. Notice may be waived by a shareholder
before, at or
<PAGE>
after a meeting, orally, in writing, or by attendance at the meeting.
BYLAW 7. WRITTEN ACTIONS. Any action which may be taken at a meeting of
the shareholders may be taken without a meeting if authorized by a writing
signed by all of the shareholders who would be entitled to vote on such action.
Such action is effective when it is signed by all of the shareholders, unless a
different effective time is provided in the written action.
BYLAW 8. QUORUM: ADJOURNMENT. The presence at any meeting, in person or
by proxy, of the holders of a majority of the voting power of the shares
entitled to vote shall constitute a quorum for the transaction of business. If
a quorum is present when a duly called or held meeting is convened, the
shareholders present may continue to transact business until adjournment, even
though the withdrawal of a number of shareholders originally present leaves less
than the proportion or number otherwise required for a quorum. In the absence
of a quorum, those present may adjourn the meeting from day to day or time to
time without notice other than announcement at the meeting. At an adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally noticed.
BYLAW 9. VOTING: RECORD DATE. At each meeting of the shareholders, each
shareholder entitled to vote thereat may vote in person or by proxy duly
appointed by a written instrument signed by such shareholder. Shares owned by
two or more shareholders may be voted by any one of them unless the corporation
receives written notice from any one of them denying the authority of any other
person or persons to vote those shares. Unless otherwise provided in the terms
of the shares, each shareholder shall have one vote for each share standing in
his or her name on the books of the corporation, or on the books of any transfer
agent appointed by the corporation, on the record date established by the Board,
which date shall be not more than 60 days before the meeting. If no record date
has been established, the record date shall be the close of business on the
third business day preceding the date of the meeting as originally noticed.
Upon the demand of any shareholder, the vote for directors, or the vote upon any
question before the meeting, shall be by ballot. All elections shall be had and
all questions shall be decided by a majority vote, except as otherwise
specifically provided for by statute or by the Articles of Incorporation.
BYLAW 10. SHAREHOLDER MANAGEMENT. The shareholders of the corporation's
voting stock may, by unanimous affirmative vote, take any action required or
permitted to be taken by the Board of Directors. Such actions are deemed to be
approved by the Board of Directors, if such approval is required.
BOARD OF DIRECTORS
BYLAW 11. AUTHORITY. The business and affairs of the corporation shall be
managed by the Board of Directors, subject to the provisions of Bylaw 10. The
Board shall have all powers necessary and appropriate to manage the business of
the corporation, including the power to set the compensation of its members.
BYLAW 12. NUMBER, ELECTION AND TERM. The number of directors which shall
constitute the whole Board shall not be less than one. Within the limits above
specified, the number of directors shall be determined by resolution of the
Board of Directors or by the shareholders at the regular meeting of shareholders
or at a special meeting called for that purpose. The terms of office of
directors shall be classified by dividing them into three
<PAGE>
classes, with each class being as nearly equal in number as possible. The terms
of office of the directors initially classified as Class A shall expire at the
regular meeting of shareholders held in 1997; the terms of those classified as
Class B shall expire at the regular meeting of shareholders held in 1998; and
the terms of those classified as Class C shall expire at the regular meeting of
shareholders held in 1999. At each regular meeting of shareholders after such
initial classification, directors of the class the term of which is expiring
shall be elected to hold office until the third succeeding regular meeting of
shareholders.
BYLAW 13. MEETINGS. Meetings of a Board may be called by the President or
by any director at any time. In the absence of designation by the Board,
meetings of the Board shall be held at the principal executive office of the
corporation.
BYLAW 14. NOTICE. The notice of a Board meeting shall state the time and
place of the meeting, and if the meeting is to be held by means of electronic
communication, the arrangements to be made in that regard. Notice shall be
given to each director personally or by mail, telefax, or telegraph sent at
least 10 days prior to the meeting. The notice need not specify the purpose or
purposes of the meeting. Notice may be waived by a director before, at or after
a meeting, orally, in writing, or by attendance and participation at the
meeting.
BYLAW 15. WRITTEN ACTIONS. Any action which might be taken at a meeting
of the Board may be taken without a meeting if authorized by a writing signed by
all directors unless the action need not be approved by the shareholders, in
which case the writing must be signed by the number of directors that would be
required to take the same action at a meeting of the Board at which all
directors were present. A written action is effective when signed by the
required number of directors, unless a different effective time is provided in
the written action.
BYLAW 16. TELEPHONE MEETINGS. The directors of the corporation may
participate in a meeting of the Board by means of conference telephone or
similar communications equipment which allows all persons participating in the
meeting to hear each other, and participation in a meeting pursuant to this
Bylaw shall constitute presence in person at such meeting.
BYLAW 17. QUORUM. At all meetings of the Board, a majority of the
directors shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
any meeting at which there is a quorum when the meeting is convened shall be the
act of the Board. If there is only one director, that director shall constitute
a quorum. In the absence of a quorum, those present may adjourn the meeting
from day to day or time to time without notice other than announcement at the
meeting.
BYLAW 18. ABSENT DIRECTORS. A director may give advance written consent
or opposition to a proposal to be acted on at a Board meeting. If the director
is not present at the meeting, consent or opposition to a proposal does not
constitute presence for purposes of determining the existence of a quorum, but
consent or opposition shall be counted as a vote in favor of or against the
proposal and shall be entered in the minutes or other record of action at the
meeting, if the proposal acted on at the meeting is substantially the same or
has substantially the same effect as the proposal to which the director has
consented or objected.
BYLAW 19. ORDER OF BUSINESS: RECORD OF PROCEEDINGS. The directors shall
determine the order of the business of their meetings. If a Secretary of the
corporation has been elected and is in attendance at a meeting, the Secretary
shall keep a record of all proceedings at the meeting; otherwise a Secretary PRO
TEM, chosen by the directors, shall so act.
<PAGE>
BYLAW 20. VACANCY. A vacancy in the Board of Directors resulting from the
death, resignation, removal or disqualification of a director shall be filled by
a majority vote of the remaining members of the Board, although less than a
quorum, and a vacancy resulting from a newly created directorship shall be
filled by the affirmative vote of a majority of the directors serving at the
time of the increase. A director so elected shall serve until a successor is
elected by the shareholders at their next regular meeting or at a special
meeting duly called for that purpose, or until such director's earlier death,
resignation, removal or disqualification.
BYLAW 21. COMMITTEES. The Board may establish such committees composed
of one or more natural persons, who need not be directors, having the authority
of the Board in the management of the business of the corporation to the extent
provided in the resolution establishing the committee. Committees so
established are subject at all times to the direction and control of the Board.
These Bylaws apply to such committees and members of such committees to the same
extent as they apply to the Board and the directors.
STOCK
BYLAW 22. ISSUANCE OF SHARES. The Board is authorized to issue shares of
the corporation, in the full amount authorized by the Articles of Incorporation,
in such amounts and at such times as may be determined by the Board and as may
be permitted by law.
BYLAW 23. TRANSFER OF SHARES. Subject to any applicable restrictions,
shares of stock in the corporation shall be transferred upon demand accompanied
by a tender of stock certificates to be transferred, duly endorsed, together
with any transfer taxes due thereon.
BYLAW 24. CERTIFICATE OF SHARES. The certificates of shares of the
corporation shall be fully printed, lithographed, or steel engraved in form and
shall be registered in the books of the corporation as they are issued. They
shall exhibit the holder's name, number of shares, any other information
required by law, and shall be signed by at least one officer of the corporation.
If a transfer agent has been appointed for the corporation's stock, the
signature of such officer may be by facsimile.
BYLAW 25. LOST CERTIFICATES. Any shareholder claiming a certificate of
shares to be lost, stolen or destroyed shall make an affidavit or affirmation of
that fact in such form as the Board may require, and shall, if the Board so
requires, give the corporation (and its transfer agent, if a transfer agent be
appointed) his or her personal indemnification or a bond of indemnity in an
amount and form and with one or more sureties satisfactory to the Board,
whereupon a new certificate may be issued for the same number of shares as the
one alleged to have been lost, stolen or destroyed.
OFFICERS
BYLAW 26. APPOINTMENT OF OFFICERS. The Board shall appoint a President,
who shall be the chief executive officer, and a Treasurer, who shall be the
chief financial officer. The Board may also appoint such other officers and
agents as it shall deem necessary from time to time, who shall exercise such
powers and perform such duties as stated in these Bylaws and/or as shall be
prescribed from time to time by the Board. The same person may hold more than
one office.
BYLAW 27. TERMS OF OFFICE. The officers of the corporation shall hold
office for an
<PAGE>
indefinite term until their successors are appointed and have qualified, or
until their earlier death, resignation, removal or disqualification. Any
officer may be removed by the Board at any time, with or without cause.
BYLAW 28. SALARIES. The salaries of the officers of the corporation shall
be determined by the Board, or the Board may authorize the President to
determine such salaries.
BYLAW 29. PRESIDENT. In addition to such other powers or duties as the
Board may prescribe, the President shall have responsibility for the general
active management of the business of the corporation. Unless a Chairman of the
Board has been appointed and is present, the President shall preside at all
meetings of the Board of Directors and of the shareholders. Unless some other
person is specifically authorized by the Board, the President shall sign all
stock certificates, bonds, deeds, mortgages, instruments, contracts and
agreements on behalf of the corporation. The President shall have such other
powers as may be granted by Minnesota law to the chief executive officer.
BYLAW 30. CHAIRMAN. In addition to such other powers or duties as the
Board may prescribed, the Chairman shall preside at all meetings of the
directors and shareholders.
BYLAW 31. CHIEF FINANCIAL OFFICER. In addition to such other powers or
duties as the President or the Board may prescribe, the Chief Financial Officer
shall keep accurate financial records for the corporation and shall be
responsible for the safekeeping, deposit and disbursal of all moneys, securities
and other valuables that may come into the possession of the corporation. The
Chief Financial Officer shall have such other powers as may be granted by
Minnesota law to the chief financial officer.
BYLAW 32. VICE PRESIDENT. If the Board shall appoint a Vice President,
the Vice President shall, in the absence or disability of the President, perform
the duties and exercise the powers of the President, and shall perform such
other duties as the Board may prescribe.
BYLAW 33. SECRETARY. If the Board shall appoint a Secretary, the
Secretary shall attend all meetings of the Board of Directors and of the
shareholders and record all votes and the minutes of all proceedings in a book
kept for that purpose. The Secretary shall also give, or cause to be given,
notice of all meetings of the shareholders and the Board of Directors, and shall
perform such other duties as may be prescribed by the Board.
BYLAW 34. VACANCY. If the office of any officer becomes vacant, the
directors then in office, although less than a quorum may choose a successor,
who shall hold office for the unexpired term in respect of which such vacancy
occurred.
MISCELLANEOUS
BYLAW 35. NO SEAL. The corporation shall not have a corporate seal.
BYLAW 36. AMENDMENTS TO BYLAWS. These Bylaws, or any one or more of them,
may be amended or repealed by the Board of Directors, provided that the Board
shall not adopt, amend or repeal any Bylaw fixing a quorum for meetings of
shareholders, prescribing procedures for removing directors or filling vacancies
on the Board, or fixing the qualifications, classifications, term of office, or
number (except to increase the number) of directors. Such authority in the
directors is subject to the powers of the shareholders to adopt, amend or repeal
such Bylaws as provided in Minnesota Statutes, Section 302A.181, Subd. 3,
<PAGE>
as amended.
BYLAW 37. INDEMNIFICATION. Pursuant to the provisions of Minnesota
Statutes, Section 302A.521, as amended, the corporation shall indemnify its
officers, directors, committee members, employees, and agents in the manner and
to the full extent that the corporation has power to provide indemnification
under such statute, provided that a determination is made in each case, in the
manner required by such statute, that the person seeking indemnification is
eligible therefor. The corporation may purchase and maintain insurance on
behalf of its officers, directors, committee members, employees, and agents
against any liability asserted against such persons in their official
capacities, regardless of whether or not the corporation is required to provide
indemnification under this section with respect to such liabilities.
BYLAW 38. SHAREHOLDERS' AGREEMENT. Any of the provisions contained herein
may be modified pursuant to an agreement among the shareholders adopted in the
manner required by Minnesota Statutes, Section 302A.457, as amended.
<PAGE>
CERTIFICATE OF AMENDMENT TO BYLAWS
The undersigned, DEAN A. KLEIN, hereby certifies that he is the duly
elected, qualified and acting Chief Executive Officer of Advanced UroScience,
Inc.; that pursuant to resolution duly adopted at the Annual Meeting of the
Shareholders of said corporation held on July 11, 1997, Bylaw 12 and Bylaw 13
of the Bylaws of the corporation were amended to read as set forth:
"Bylaw 12. NUMBER, ELECTION AND TERM. The number of directors
which shall constitute the whole Board shall not be less than one nor
more than eight. Within the limits above specified, the number of
directors shall be determined by resolution of the Board of Directors or
by the shareholders at the regular meeting of shareholders or at a
special meeting called for that purpose. The terms of office of directors
shall be classified by dividing them into three classes, with each class
being as nearly equal in number as possible. The terms of office of the
directors initially classified as Class A shall expire at the regular
meeting of shareholders held in 1997; the terms of those classified as
Class B shall expire at the regular meeting of shareholders held in 1998;
and the terms of those classified as Class C shall expire at the regular
meeting of shareholders held in 1999. At each regular meeting of
shareholders after such initial classification, directors of the class
and term which is expiring shall be elected to hold office until the
third succeeding regular meeting of shareholders."
"Bylaw 13. MEETING. Meetings of the Board may be called by the
President or by any two directors at any time. In the absence of
designation by the Board, meetings of the Board shall be held at the
principal executive office of the corporation."
IN WITNESS WHEREOF, the undersigned has executed this Certificate for
placement in the corporate minute book this 11th day of June, 1997.
/s/ Dean A. Klein
--------------------------------------
Dean A. Klein, Chief Executive Officer
<PAGE>
COMMON SHARES COMMON SHARES
NUMBER NUMBER
[LOGO] [LOGO] [LOGO]
ADVANCED UROSCIENCE, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 00756X 10 3
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
- ------------------------ -----------------------
- ------------------------ ADVANCED UROSCIENCE, INC. -----------------------
- ------------------------ -----------------------
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR
BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS
CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT-REGISTRAR.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS.
DATED:
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED
NORWEST BANK, MINNESOTA, N.A.
MINNEAPOLIS MINNESOTA TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The corporation will furnish to any shareholder, upon request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class or series authorized to be
issued, so far as they have been determined, and the authority of the
board to determine the relative rights and preferences of subsequent
classes or series.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- _____________Custodian______________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Transfers to Minors
survivorship and not as Act______ ________________________
tenants in common (State)
UNIF TRF MIN ACT-- _____________Custodian (until age___)
(Cust)
_____________under Uniform Transfers
to Minors Act_______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED_______ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
___________________________________________________________________ SHARES
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT ____________________________________________
ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED CORPORATION
WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED: _______________________________________________
NOTICE _______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED
By _____________________________________
<PAGE>
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
October 9, 1997
Advanced UroScience, Inc.
1290 Hammond Road
St. Paul, Minnesota 55110
RE: REGISTRATION STATEMENT ON FORM SB-2 - EXHIBIT 5.1
Gentlemen/Ladies:
We have acted as counsel for Advanced UroScience, Inc. (the "Company") in
connection with the Company's filing of a Registration Statement on Form SB-2
(the "Registration Statement") relating to the registration under the Securities
Act of 1933 (the "Act") of 2,875,000 shares of Common Stock, including 375,000
shares subject to an over-allotment option (the "Shares").
In connection with rendering this opinion, we have reviewed the following:
1. The Company's Articles of Incorporation;
2. The Company's Bylaws; and
3. Certain corporate resolutions, including resolutions of the Company's
Board of Directors pertaining to the issuance by the Company of the
Shares covered by the Registration Statement.
Based upon the foregoing and upon representations and information provided
by the Company, we hereby advise you that in our opinion:
1. The Company's Articles of Incorporation validly authorize the issuance
of the Shares registered pursuant to the Registration Statement.
2. Upon the delivery and payment therefor in accordance with the terms of
the Registration Statement and the Underwriting Agreement described in
the Registration Statement, the Shares to be issued and sold by the
Company will be validly issued, fully paid and nonassessable.
<PAGE>
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" included in the Registration Statement and the related Prospectus.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By /s/ Melodie R. Rose
Melodie R. Rose
<PAGE>
Exhibit 10.1
ADVANCED UROSCIENCE, INC.
1996 STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Affiliates" shall mean a Parent or Subsidiary of the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Committee" shall mean a Committee of two or more directors who shall
be appointed by and serve at the pleasure of the Board. In the event the
Company's securities are registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, each of the members of the
Committee shall be a "disinterested" person within the meaning of Rule
16b-3, or any successor provision, as then in effect, of the General Rules
and Regulations under the Securities Exchange Act of 1934 as amended. As
of the effective date of the Plan, a "disinterested" person under Rule
16b-3 generally means a person who, among other things, has not been, at
any time within one year prior to his or her appointment to the Committee
(or, if shorter, during the period beginning with the initial registration
of the Company's equity securities under Section 12 of the Securities
Exchange Act of 1934, as amended, and ending with the director's
appointment to the Committee) and who will not be, while serving on such
Committee, granted or awarded options under the Plan, or under any other
plan of the Company or any of its Affiliates entitling participants to
acquire stock, stock options, stock appreciation rights or similar rights
that have an exercise or conversion privilege or a value derived from
equity securities issued by the Company or its Affiliate, except to the
extent permitted by Rule 16b-3, or any successor provision.
(d) "Common Stock" shall mean common stock of the Company.
(e) The "Company" shall mean Advanced UroScience, Inc., a Minnesota
corporation.
(f) "Director" shall mean a member of the Board of Directors.
(g) "Fair Market Value" of the Common Stock as of any applicable date
shall mean: (i) if such stock is reported in the national market system or
is listed upon an established exchange or exchanges, the reported closing
price of such stock in such national market system or on such stock
exchange or exchanges on the date the option is granted or, if no sale of
such stock shall have occurred on that date, on the next preceding day on
which there was a sale of stock; (ii) if such stock is not so reported in
the national market system or listed upon an exchange, the average of the
closing "bid" and "asked" prices quoted by a recognized specialist in the
Common Stock of the Company on the date the option is granted, or if there
are no quoted "bid" and "asked" prices on such date, on the next preceding
date for which there are such quotes; or (iii) if such stock is not
publicly traded as of the date the option is granted, the per share value
as determined by the Board, or the Committee, in its sole discretion by
applying principles of valuation with respect to all such options.
(h) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(i) "Option Agreement" shall mean a written stock option agreement
evidencing an option
<PAGE>
granted under the Plan.
(j) "Option Stock" shall mean Common Stock (subject to adjustment as
described in Section 13) reserved for options pursuant to this Plan.
(k) "Parent" shall mean any corporation which owns, directly or indirectly
in an unbroken chain, fifty percent (50%) or more of the total voting power
of the Company's outstanding stock.
(l) The "Plan" means the Advanced UroScience, Inc. 1996 Stock Option Plan,
as amended hereafter from time to time, including the form of Option
Agreements as they may be modified by the Board from time to time.
(m) A "Subsidiary" shall mean any corporation of which fifty percent (50%)
or more of the total voting power of outstanding stock is owned, directly
or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and its
Subsidiaries by facilitating the employment and retention of competent personnel
and by furnishing incentive to officers, directors, employees, consultants and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, and through the granting of "non- qualified stock options" pursuant
to Sections 10 and 11 of this Plan. Adoption of this Plan shall be and is
expressly subject to the condition of approval by the shareholders of the
Company within twelve (12) months after the adoption of the Plan by the Board.
In no event shall any stock options be exercisable prior to the date this Plan
is approved by the shareholders of the Company. If shareholder approval of this
Plan is not obtained within twelve (12) months after the adoption of the Plan by
the Board, any stock options previously granted shall be revoked.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective upon its adoption by the Board, subject to
approval by the shareholders of the Company as required in Section 2.
-2-
<PAGE>
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Committee if one is in existence or
if not, by the Board. The Board or the Committee, as the case may be, shall
have all of the powers vested in it under the provisions of the Plan, including
but not limited to exclusive authority (where applicable and within the
limitations described herein) to determine, in its sole discretion, whether an
incentive stock option or nonqualified stock option shall be granted, the
individuals to whom, and the time or times at which, options shall be granted,
the number of shares subject to each option and the option price and terms and
conditions of each option. The Board, or the Committee, shall have full power
and authority to administer and interpret the Plan, to make and amend rules,
regulations and guidelines for administering the Plan, to prescribe the form and
conditions of the respective stock option agreements (which may vary from
optionee to optionee) evidencing each option and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's, or the Committee's, interpretation of the Plan, and all actions taken
and determinations made by the Board or the Committee pursuant to the power
vested in it hereunder, shall be conclusive and binding on all parties
concerned. No member of the Board or the Committee shall be liable for any
action taken or determination made in good faith in connection with the
administration of the Plan.
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board or the Committee, as the case may be, shall from time to time, at
its discretion and without approval of the shareholders, designate those
employees, directors, officers, consultants, and advisors of the Company or of
any Subsidiary to whom nonqualified stock options shall be granted under this
Plan; provided, however, that consultants or advisors shall not be eligible to
receive stock options hereunder unless such consultant or advisor renders bona
fide services to the Company or Subsidiary and such services are not in
connection with the offer or sale of securities in a capital raising
transaction; provided, further, that a Director, other than a Director who is
also an employee of the Company, shall only be eligible to receive nonqualified
stock options pursuant to Section 11. The Board or the Committee, as the case
may be, shall, from time to time, at its discretion and without approval of the
shareholders, designate those employees of the Company or any Subsidiary to whom
incentive stock options shall be granted under this Plan. The Board or the
Committee may grant additional incentive stock options or nonqualified stock
options under this Plan to some or all participants then holding options or may
grant options solely or partially to new participants. In designating
participants, the Board or the Committee shall also determine the number of
shares to be optioned to each such participant. The Board may from time to time
designate individuals as being ineligible to participate in the Plan.
-3-
<PAGE>
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. Five Hundred Thousand (500,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to
time during a period of ten (10) years from the effective date as defined in the
Plan. Nonqualified stock options may be granted pursuant to the Plan from time
to time after the effective date of the Plan and until the Plan is discontinued
or terminated by the Board.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, certified check, Common Stock of the Company valued at such
stock's then Fair Market Value, or such other form of payment as may be
authorized by the Board or the Committee. The Board or the Committee may, in
its sole discretion, limit the forms of payment available to the optionee and
may exercise such discretion any time prior to the termination of the option
granted to the optionee or upon any exercise of the option by the optionee.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to the Plan shall be evidenced
by an Option Agreement. The Option Agreement shall be in such form as may be
approved from time to time by the Board or Committee and may vary from optionee
to optionee; provided, however, that each inactive stock option granted under
this Plan and each related Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To the
extent required to qualify the option as an incentive stock option under
Section 422 of the Internal Revenue Code, or any successor provision, the
option price per share shall not be less than one hundred percent (100%) of
the Fair Market Value of the Common Stock per share on the date the Board
or the Committee, as the case may be, grants the option; provided, however,
that if an optionee owns
-4-
<PAGE>
stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of its Parent or any
Subsidiary, the option price per share of an incentive stock option granted
to such optionee shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Common Stock per share on the date of the
grant of the option. The Board or the Committee, as the case may be, shall
have full authority and discretion in establishing the option price and
shall be fully protected in so doing.
(b) TERM AND EXERCISABILITY OF INCENTIVE STOCK OPTION. The term during
which any incentive stock option granted under the Plan may be exercised
shall be established in each case by the Board or the Committee, as the
case may be. To the extent required to qualify the option as an incentive
stock option under Section 422 of the Internal Revenue Code, or any
successor provision, in no event shall any incentive stock option be
exercisable during a term of more than ten (10) years after the date on
which it is granted; provided, however, that if an optionee owns stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of its Parent or any Subsidiary,
the incentive stock option granted to such optionee shall be exercisable
during a term of not more than five (5) years after the date on which it is
granted. The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which the
option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the event
it is not exercised in full immediately shall be specified in the Option
Agreement. The Board or the Committee, as the case may be, may accelerate
the exercise date of any incentive stock option granted hereunder which is
not immediately exercisable as of the date of grant.
(c) OTHER PROVISIONS. The Option Agreement authorized under this Section
9 shall contain such other provisions as the Board or the Committee, as the
case may be, shall deem advisable. Any such Option Agreement shall contain
such limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered an "incentive
stock option" as defined in Section 422 of the Internal Revenue Code or to
conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to the Plan shall be
evidenced by an Option Agreement. The Option Agreement shall be in such form as
may be approved from time to time by the Board or the Committee and may vary
from optionee to optionee; provided, however, that each nonqualified option
granted under this Section 10 and each related Option Agreement shall comply
with and be subject to the following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Board or the Committee, as the case may
be, the option price per share shall be one hundred percent (100%) of the
Fair Market Value of the Common Stock per share on the date the Board or
the Committee grants the option.
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(b) TERM AND EXERCISABILITY OF NONQUALIFIED STOCK OPTION. The term during
which any nonqualified stock option granted under the Plan may be exercised
shall be established in each case by the Board or the Committee, as the
case may be. The Option Agreement shall state when the nonqualified stock
option becomes exercisable and shall also state the maximum term during
which the option may be exercised. In the event a nonqualified stock
option is exercisable immediately, the manner of exercise of the option in
the event it is not exercised in full immediately shall be specified in the
stock option agreement. The Board or the Committee, as the case may be,
may accelerate the exercise date of any nonqualified stock option granted
hereunder which is not immediately exercisable as of the date of grant.
(c) WITHHOLDING. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the optionee all legally required
amounts necessary to satisfy any and all federal, state and local
withholding and employment-related taxes attributable to the optionee's
exercise of a nonqualified stock option. In the event the optionee is
required under the Option Agreement to pay the Company, or make
arrangements satisfactory to the Company respecting payment of, such
federal, state and local withholding and employment-related taxes, the
Board or the Committee, as the case may be, may, in its discretion and
pursuant to such rules as it may adopt, permit the optionee to satisfy such
obligation, in whole or in part, by electing to have the Company withhold
shares of Common Stock otherwise issuable to the optionee as a result of
the option's exercise equal to the amount required to be withheld for tax
purposes. Any stock elected to be withheld shall be valued at its Fair
Market Value, as of the date the amount of tax to be withheld is determined
under applicable tax law. The optionee's election to have shares withheld
for this purpose shall be made on or before the date the option is
exercised or, if later, the date that the amount of tax to be withheld is
determined under applicable tax law. Such election shall also comply with
such rules as may be adopted by the Board or the Committee to assure
compliance with Rule 16b-3, or any successor provision, as then in effect,
of the General Rules and Regulations under the Securities Exchange Act of
1934, if applicable.
(d) OTHER PROVISIONS. The Option Agreement authorized under this Section
10 shall contain such other provisions as the Board, or the Committee, as
the case may be, shall deem advisable.
SECTION 11
as Amended June 11, 1997
STOCK OPTIONS FOR DIRECTORS
(a) GRANT OF STOCK OPTIONS. All grants of stock options to Directors
under this Section 11 shall be evidenced by an Option Agreement. The
Option Agreement shall be in such form as may be approved from time to time
by the Board or Committee and may vary from optionee to optionee; provided,
however, that each non employee Director shall receive a nonqualified stock
option and each Director who is also an employee of the Company shall
receive an incentive stock option, and these stock options shall be
automatic and nondiscretionary and shall be made strictly in accordance
with the following provisions:
(1) AUTOMATIC GRANTS. No person shall have any discretion to select
the Directors that shall be eligible for stock options pursuant to
this Section 11 or to determine the number of shares of Common Stock
to be subject to such options, the option price per share or the date
of grant.
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<PAGE>
(2) ANNUAL GRANTS. Each Director shall, on each anniversary date of
such Director's most recent election to the Board, be granted a stock
option to purchase Six Thousand (6,000) shares of Common Stock so long
as such Director continues to serve on the Board.
(b) OPTION PRICE. The option price per share for all nonqualified stock
options granted pursuant to Section 11(a) above shall be one hundred
percent (100%) of the Fair Market Value of a share of Common Stock on the
date the nonqualified stock option is granted. The option price for all
incentive stock options granted pursuant to Section 11(a) above shall be as
stated in Section 9 of this Plan.
(c) DURATION AND EXERCISE OF OPTIONS.
(1) DURATION OF OPTIONS. Except as otherwise provided in this Plan,
the period during which any nonqualified stock option and
incentive stock option granted to Directors under this Section 11
may be exercised shall be ten (10) years and five (5) years,
respectively, after the date that the option is granted.
(2) EXERCISABILITY OF STOCK OPTIONS.
a. In no event shall any stock options granted to Directors be
exercisable prior to the date that the Plan is approved by
the shareholders of the Company. If shareholder approval of
the Plan is not obtained within twelve (12) months following
its adoption by the Board, any nonqualified stock options
previously granted to Directors shall be revoked.
b. All stock options granted to Directors pursuant to this
Section 11 shall be immediately exercisable subject only to
the provisions of Section 11(c)(2)(a).
(d) PAYMENT OF OPTION PRICE. Upon the exercise of any stock option
granted to a Director pursuant to this Section 11, the purchase price for
such shares of Common Stock subject to such option shall be paid in cash or
certified check, by the transfer from the Director to the Company of
previously acquired shares of Common Stock, or any combination thereof.
Any Common Stock so transferred shall be valued at its fair market value.
For purposes of this Section 11(d), "previously acquired shares of Common
Stock" shall include shares of Common Stock that are already owned by the
Director at the time of exercise.
(e) COMPLIANCE WITH RULE 16b-3. All nonqualified stock options granted to
Directors must comply with the applicable provisions of Rule 16b-3, or its
successor, of the General Rules and Regulations of the Securities Exchange
Act of 1934, as amended.
(f) TERMINATION OF STATUS AS A DIRECTOR. In the event that a Director's
membership on the Board terminates, the following provisions shall apply:
(1) If the Director's membership on the Board terminates for any
reason other than the Director's death, the Director shall be
entitled to exercise any stock option granted to such Director
pursuant to this Section 11 which were exercisable at
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<PAGE>
the time of such termination until the earlier of (i) the close
of business on the 30th day after such termination, and (ii) the
expiration of the option as provided in Section 11(c)(1) above.
To the extent that the Director does not exercise such option
within the period specified in this Section 11(f)(1), all rights
of the Director under such option shall be forfeited.
(2) If the Director dies while a member of the Board, any stock
option granted to such Director may be exercised by the
Director's estate or any person who acquired the right to
exercise any nonqualified stock option granted to such Director
pursuant to this Section 11 by bequest or inheritance until the
earlier of the expiration of the option as provided in
Section 11(c)(1) above or the close of business one hundred
eighty (180) days after the date of the Director's death.
SECTION 12
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part, by
the optionee other than by will or by the laws of descent and distribution and,
during the optionee's lifetime, the incentive stock option may be exercised only
by the optionee. If the optionee shall attempt any transfer of any incentive
stock option granted under the Plan during the optionee's lifetime, such
transfer shall be void and the incentive stock option, to the extent not fully
exercised, shall terminate.
The Board or the Committee, as the case may be, may, in its sole
discretion, permit the transfer of a nonqualifed stock option to members of the
optionee's immediate family, to a trust for the benefit of such family members
or to a partnership in which such family members are the only partners. The
extent to which a nonqualified stock option is transferable shall be set forth
in the Option Agreement evidencing such nonqualified stock option.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the Option Agreement, in the event of the sale
by the Company of substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger, consolidation,
exchange, reorganization, reclassification, extraordinary dividend, divestiture
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<PAGE>
(including a spin-off) or liquidation of the Company (collectively referred to
as a "transaction"), the Board may, in connection with the Board's adoption of
the plan for such transaction, provide for one or more of the following: (i)
the equitable acceleration of the exercisability of any outstanding options
hereunder; (ii) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the Board (which
date shall give optionees a reasonable period of time in which to exercise the
options prior to the effectiveness of such transaction) and (iii) the
continuance of the Plan with respect to the exercise of options which were
outstanding as of the date of adoption by the Board of such plan for such
transaction and provide to optionees holding such options the right to exercise
their respective options as to an equivalent number of shares of stock of the
corporation succeeding the Company by reason of such transaction. The grant of
an option pursuant to the Plan shall not limit in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure or to merge, exchange or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business or assets.
SECTION 14.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to the optionee, the Board or the Committee may require
the optionee to (a) represent that the shares of Option Stock are being acquired
for investment and not resale and to make such other representations as the
Board, or the Committee, as the case may be, shall deem necessary or appropriate
to qualify the issuance of the shares as exempt from the Securities Act of 1933
and any other applicable securities laws, and (b) represent that the optionee
shall not dispose of the shares of Option Stock in violation of the Securities
Act of 1933 or any other applicable securities laws. The Company reserves the
right to place a legend on any stock certificate issued upon exercise of an
option granted pursuant to the Plan to assure compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An optionee (or the optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
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<PAGE>
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the optionee without
the consent of the optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to optionees under the Plan, unless such revision or amendment is approved by
the shareholders of the Company. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code. In no event shall the Board or the Committee, either directly or
indirectly, amend the provisions of Section 11 relating to nonqualified stock
options that are granted to Directors more frequently than once every six (6)
months, unless such amendment is required to comply with changes in the Employee
Retirement Income Security Act of 1974, as amended, and the regulations
thereunder, or with the Internal Revenue Code of 1986, and the regulations
thereunder.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the optionee
in its employ for any period.
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<PAGE>
FORM OF NONQUALIFIED STOCK OPTION AGREEMENT
AVANCED UROSCIENCE, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this ______ day of ______________,
19___, by and between Advanced UroScience, Inc., a Minnesota corporation (the
"Company"), and ____________________________________________, ("the Optionee");
W I T N E S S E T H:
WHEREAS, the Optionee on the date hereof is a ______________ of the
Company; and
WHEREAS, the Company's 1996 Stock Option Plan (the "Plan") provides for the
grant of a nonqualified stock option to the Optionee to purchase shares of the
Company's Common Stock; and
WHEREAS, as of the effective date of this Agreement the fair market value
of the Company's Common Stock is $______ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee on the
date set forth above (the "Date of Grant"), the right and option (the "Option")
to purchase all or portions of an aggregate of ________________________________
(________) shares of Common Stock at a per share price of $________ on the terms
and conditions set forth herein, and subject to adjustment pursuant to Section
13 of the Plan. This Option is a nonqualified stock option and will not be
treated as an incentive stock option, as defined under Section 422, or any
successor provision, of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate on ____________________________, 20____, unless terminated earlier
under the provisions of Paragraphs 4(f) or 4(g) below. This Option shall be
immediately and fully exercisable on the Date of Grant, and the Optionee may
exercise this Option under the terms and conditions of this Agreement until the
termination of the Option as provided herein. If the Optionee does not purchase
upon an exercise of this Option the full number of shares which Optionee is then
entitled to purchase, the Optionee may purchase upon any subsequent exercise
prior to this Option's termination such previously unpurchased shares in
addition to those the Optionee is otherwise entitled to purchase.
b. During the lifetime of the Optionee, the accrued Option shall be
exercisable only by the Optionee or by the Optionee's guardian or other legal
representative, and shall not be assignable or transferable by the Optionee, in
whole or in part, other than by will or by the laws of descent and distribution.
3. MANNER OF EXERCISE.
a. The Option may be exercised only by the Optionee (or other proper
party in the event of death or incapacity), subject to the conditions of the
Plan and subject to such other administrative rules as the Board of Directors
may deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full
<PAGE>
of the option price for all shares designated in the notice. The exercise of
the Option shall be deemed effective upon receipt of such notice by the Company
and upon payment that complies with the terms of the Plan and this Agreement.
b. Payment of the option price by Optionee shall be in the form of
cash, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its fair market value as provided in the Plan. As
soon as practicable after the effective exercise of all or any part of the
Option, the Optionee shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership. All requisite original issue or transfer documentary stamp taxes
shall be paid by the Company. For purposes of this Agreement, "previously
acquired shares of Common Stock" shall include shares of Common Stock that are
already owned by the Optionee at the time of exercise.
4. MISCELLANEOUS.
a. RIGHTS AS SHAREHOLDER. This Agreement shall not confer on the
Optionee any right with respect to the continuance of any relationship with the
Company or any of its Subsidiaries, nor will it interfere in any way with the
right of the Company to terminate any such relationship. The Optionee shall
have no rights as a shareholder with respect to shares subject to this Option
until such shares have been issued to the Optionee upon exercise of this Option.
No adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 13 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of
this Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws. The
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for the Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in the Optionee's rights
with respect to any unexercised portion of the Option (I.E., the Optionee shall
have such "anti-dilution" rights under the Option with respect to such events,
but shall not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the term
of this Option reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES. In order to provide the Company with the
opportunity to claim the benefit of any income tax deduction which may be
available to it upon the exercise of this
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<PAGE>
Option and to permit the Company to comply with all applicable federal or state
income tax laws or regulations, the Company may take such action as it deems
appropriate to insure that, if necessary, all applicable federal or state
payroll, income or other taxes are withheld from any amounts payable by the
Company to the Optionee. If the Company is unable to withhold such federal and
state taxes, for whatever reason, the Optionee hereby agrees to pay to the
Company an amount equal to the amount the Company would otherwise be required to
withhold under federal or state law.
f. TERMINATION OF DIRECTORSHIP (OTHER THAN DEATH) OR DISABILITY. If
the Optionee ceases to be a director of the Company for any reason other than
because of death, this Option shall completely terminate on the earlier of (i)
the close of business on the 30th day after such termination of directorship and
(ii) the expiration date of this Option stated in Paragraph 2 above. If the
Optionee does not exercise the Option within the time period specified in this
Paragraph 4(f), all rights of the Optionee under this Option shall be forfeited.
g. DEATH. If the Optionee dies while serving as a nonemployee
director of the Company, this Option may be exercised by the Optionee, the
Optionee's estate or any person who acquired the right to exercise this Option
by bequest or inheritance, as the case may be, until the earlier of (i) the
close of business one hundred eighty (180) days after the date of the Optionee's
death and (ii) the expiration date of this Option stated in Paragraph 2 above.
If the Option is not exercised within the time specified in this Paragraph 4(g),
all rights of the Optionee under this Option shall be forfeited.
h. 1996 STOCK OPTION PLAN. The Option evidenced by this Agreement
is granted pursuant to the Plan, a copy of which Plan has been made available to
the Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
i. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 2(b) above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ADVANCED UROSCIENCE, INC.
By:
---------------------------
Its:
----------------------
------------------------------
Optionee
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<PAGE>
FORM OF INCENTIVE STOCK OPTION AGREEMENT
ADVANCED UROSCIENCE, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this ____ day of ____________, 19____,
by and between Advanced UroScience, Inc., a Minnesota corporation (the
"Company"), and ____________________________________________ ("the Optionee");
W I T N E S S E T H:
WHEREAS, the Optionee on the date hereof is a key employee or officer of
the Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to the
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1996 Stock Option Plan (the "Plan"); and
WHEREAS, the Company's Board of Directors or Stock Option Committee has
authorized the grant of this incentive stock option to the Optionee;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee on the
date set forth above (the "Date of Grant"), the right and option (the "Option")
to purchase all or portions of an aggregate of ____________________________
__________________ (________________) shares of Common Stock at a per share
price of $________ on the terms and conditions set forth herein, and subject to
adjustment pursuant to Section 13 of the Plan. This Option is intended to be an
incentive stock option within the meaning of Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate at the close of business on ______________, 20__, unless terminated
earlier under the provisions of Paragraphs 4(f) or 4(g) below. This Option
shall be exercisable as follows:
Number of Shares When Exercisable
---------------- ----------------
If the Optionee does not purchase in any option year the full number of shares
which the Optionee is entitled to purchase that year, the Optionee may purchase
in any subsequent option year such previously unpurchased shares in addition to
those the Optionee is otherwise entitled to purchase. If this option has been
granted prior to approval of the Plan by the Company's shareholders, this option
shall not be exercisable until such approval is obtained.
b. During the lifetime of the Optionee, the accrued Option shall be
exercisable
<PAGE>
only by the Optionee or by the Optionee's guardian or other legal
representative, and shall not be assignable or transferable by the Optionee, in
whole or in part, other than by will or by the laws of descent and distribution.
3. MANNER OF EXERCISE.
a. The Option may be exercised only by the Optionee (or other proper
party in the event of death or incapacity), subject to the conditions of the
Plan and subject to such other administrative rules as the Board of Directors
may deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement.
b. Payment of the option price by the Optionee shall be in the form
of cash, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof; provided, however, that the Board or any
Committee appointed by the Board to administer the Plan may, in its sole
discretion, limit the form of payment to cash or certified check and may
exercise its discretion any time prior to the termination of this Option or upon
any exercise of this Option by the Optionee. Any stock so tendered as part of
such payment shall be valued at its fair market value as provided in the Plan.
As soon as practicable after the effective exercise of all or any part of the
Option, the Optionee shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership. All requisite original issue or transfer documentary stamp taxes
shall be paid by the Company. For purposes of this Agreement, "previously
acquired shares of Common Stock" shall include shares of Common Stock that are
already owned by the Optionee at the time of exercise.
4. MISCELLANEOUS.
a. EMPLOYMENT; RIGHTS AS SHAREHOLDER. This Agreement shall not
confer on the Optionee any right with respect to continuance of employment by
the Company or any of its Subsidiaries, nor will it interfere in any way with
the right of the Company to terminate such employment. The Optionee shall have
no rights as a shareholder with respect to shares subject to this Option until
such shares have been issued to the Optionee upon exercise of this Option. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 13 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of
this Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws. The
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradeable under applicable state and
federal securities laws, for the Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the
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Company (through sale, merger, consolidation, exchange, reorganization,
divestiture (including a spin-off, liquidation, recapitalization, stock split,
stock dividend or otherwise) shall result in an adjustment, reduction or
enlargement, as appropriate, in the Optionee's rights with respect to any
unexercised portion of the Option (I.E., the Optionee shall have such "anti-
dilution" rights under the Option with respect to such events, but shall not
have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the term
of this Option reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION. In the event of
a disqualifying disposition of the shares acquired through the exercise of this
Option, the Optionee hereby agrees to inform the Company of such disposition.
Upon notice of a disqualifying disposition, the Company may take such action as
it deems appropriate to insure that, if necessary to provide the Company with
the opportunity to claim the benefit of any income tax deduction which may be
available to it upon such disqualifying disposition and to comply with all
applicable federal or state income tax laws or regulations, all applicable
federal and state payroll, income or other taxes are withheld from any amounts
payable by the Company to the Optionee. If the Company is unable to withhold
such federal and state taxes, for whatever reason, the Optionee hereby agrees to
pay to the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law. The Optionee may, subject to
the approval and discretion of the Board of Directors or such other
administrative rules it may deem advisable, elect to have all or a portion of
such tax withholding obligations satisfied by delivering shares of the Company's
Common Stock having a fair market value equal to such obligations.
f. TERMINATION OF EMPLOYMENT OTHER THAN BY DEATH OR DISABILITY OR
FOR CAUSE. If the Optionee ceases to be an employee of the Company or any
Subsidiary for any reason (including, without limitation, termination of
employment as a result of the reorganization, sale or liquidation by the Company
or the Subsidiary which employs the Optionee where the Optionee does not
thereafter continue as an employee of the Company or another Subsidiary), other
than because of death, disability or discharge for cause, this Option shall
completely terminate on the earlier of (i) the close of business on the one-
month anniversary date of such termination of employment, and (ii) the
expiration date of this Option stated in Paragraph 2 above. In such period
following such termination of employment, this Option shall be exercisable only
to the extent it had not previously been exercised. If the Optionee does not
exercise the Option within the time specified in this Paragraph 4(f), all rights
of the Optionee under this Option shall be forfeited.
g. DISABILITY. If the Optionee ceases to be an employee of the
Company or any Subsidiary due to disability (as such term is defined in Section
22(e)(3), or any successor provision, of the Code), this Option shall completely
terminate on the earlier of (i) the close of business on the twelve-month
anniversary date of such termination of employment, and (ii) the expiration date
of this Option stated in Paragraph 2 above. In such period following such
termination of employment, this Option shall be exercisable only to the extent
it had not previously been exercised. If the Optionee does not exercise the
Option within the time specified in this Paragraph 4(g), all rights of the
Optionee under this Option shall be forfeited.
h. DEATH. If the Optionee dies (i) while in the employ of the
Company or any Subsidiary; (ii) within the three-month period after the
termination of employment in the case of Paragraph 4(f) above; or (iii) within
the twelve-month period after the termination of employment in the case of
Paragraph 4(g) above, this Option shall terminate on the earlier of (i) the
close of business on the twelve-month anniversary date of the Optionee's death
and (ii) the expiration date of this Option stated in Paragraph 2 above. In
such period following the Optionee's death, this Option may be exercised only by
the person or persons to whom the Optionee's rights under this Option shall have
passed by the Optionee's will or by the laws of descent and distribution and
only to the extent the
-3-
<PAGE>
Option was exercisable on the date of death but had not previously been
exercised.
i. 1996 STOCK OPTION PLAN. The Option evidenced by this Agreement
is granted pursuant to the Plan, a copy of which Plan has been made available to
the Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
j. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 2(b) above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ADVANCED UROSCIENCE, INC.
By:
---------------------------
Its:
----------------------
------------------------------
Optionee
-4-
<PAGE>
ADVANCED UROSCIENCE, INC.
STOCK OPTION AGREEMENT
PARTIES:
---------------
---------------
--------------- ("Optionee")
Advanced UroScience, Inc.
1290 Hammond Road
St. Paul, MN 55110 ("Corporation")
EFFECTIVE DATE:
----------------------
AGREEMENT
SECTION 1. OPTION GRANT.
Subject to the additional terms and conditions herein and in order to
provide ongoing performance incentives to certain key employees, directors and
executives, the Corporation grants to Optionee the option to purchase up to
______ shares of common stock of the Corporation at an exercise price of $____
per share. This option may be exercised in whole or in part at any time and
from time to time through ____________, subject to earlier expiration in the
event Optionee: (a) dies; (b) voluntarily terminates his employment or
directorship; or (c) is discharged by the Corporation following Optionee's
conviction of any felony, or any gross misdemeanor which relates to the
Corporation's business, and/or following Optionee's refusal to perform his
employment duties, which refusal shall remain uncured for at least 30 days
following written notice by the Corporation. Upon Optionee's death, this option
will expire within 180 days of Optionee's death, but in no event later than
___________. Upon Optionee's voluntary termination of employment, or his
discharge by the Corporation for any of the reasons identified above, this
option will expire 30 days from the effective date of such termination or
discharge.
All rights under this option are personal to Optionee, and may not be sold,
assigned, pledged, hypothecated or otherwise transferred in any manner, and
shall not be subject to any voluntary or involuntary sale under execution,
attachment or any similar process. This option and all rights and privileges
conferred hereby will immediately become null and void upon any such transfer by
Optionee or under applicable law.
<PAGE>
SECTION 2. MANNER OF EXERCISE.
This option may be exercised prior to expiration by delivery of a written
exercise notice signed by Optionee (or upon Optionee's death, by his legal
representative), together with full payment for all shares to be exercised. At
its option, the Corporation may require Optionee to deliver an acceptable
opinion of counsel that the shares to be issued upon exercise of the option need
not be registered under the Securities Act of 1933 or any other applicable
securities laws. Optionee shall also make arrangements satisfactory to the
corporation to satisfy all applicable withholding requirements that may arise in
connection with exercise of this option and/or the disposition of any shares
issuable upon such exercise.
SECTION 3. TRANSFER RESTRICTIONS.
The Corporation reserves the right, in its sole discretion and judgment, to
impose restrictions upon the sale, pledge or other transfer of shares issuable
upon exercise of this option if, in its judgment, such restrictions are
necessary or desirable in order to achieve compliance with the provisions of the
Securities Act of 1933, the securities laws of any state, or any other law.
Each share certificate issued upon exercise of this option shall bear an
appropriate restrictive legend, unless the Corporation, in its sole judgment,
feels that such legend is not required.
SECTION 4. INVESTMENT INTENT.
Except as may be permitted in the event Optionee's shares are registered,
Optionee represents and agrees that the shares to be acquired upon exercise of
this option will be acquired for investment only, and not with a view to the
resale or other distribution thereof. In the event (a) that registration of the
sale of shares to be issued upon exercise of this option is not required under
the Securities Act of 1933, or (b) an exemption is available which requires an
investment or other representation, the Optionee shall represent and agree at
the time of exercise that the shares being acquired on exercise of this option
for investment only, and not with a view to the resale or distribution thereof,
and shall make such other representations as are deemed necessary or appropriate
by the Corporation and its counsel.
SECTION 5. LEGAL RIGHTS.
Any determination by the Corporation and its counsel in connection with any
of the matters set forth in this Stock Option Agreement shall be conclusive and
binding upon the Optionee and all other parties. Neither the Optionee nor any
legal representative thereof shall have any rights as a shareholder with respect
to any shares subject to this option unless and until such shares have been
issued as provided herein.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed on its behalf by the undersigned duly authorized officer, and the
Optionee has personally executed this Agreement, all dated and to be effective
as of the date hereof.
CORPORATION: OPTIONEE:
ADVANCED UROSCIENCE, INC.
BY:
------------------------- -------------------------
Timothy P. Lawin
Chairman of the Board
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE CONPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED.
ADVANCED UROSCIENCE, INCORPORATED
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
COMPANY: Advanced UroScience, Incorporated, a Minnesota corporation (the
"Company"), and any corporation that shall succeed to the obligations
of the Company under this Warrant.
NUMBER OF SHARES: _____________
CLASS OF STOCK: Common Stock
EXERCISE PRICE: $_____ per share
EXPIRATION DATE: ______________
DATE OF GRANT: ______________
THIS CERTIFIES THAT, for value received, ______________________________, is
entitled to purchase the above number (as adjusted pursuant to Section 6 hereof)
of fully paid and nonassessable shares of the Common Stock of the Company at the
Exercise Price above (as adjusted pursuant to Section 6 hereof), subject to the
provisions and upon the terms and conditions set forth herein.
1. DEFINITIONS.
As used herein, the following terms, unless the context otherwise requires,
shall have the following meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations thereunder, as shall be
in effect at the time.
(b) "Common Stock" shall mean shares of the presently authorized common
stock of the Company and any stock into which such Common Stock may hereafter be
exchanged.
(c) "Holder" shall mean any person who shall at the time be the holder of
this Warrant.
<PAGE>
(d) "Shares" shall mean the shares of the Class of Stock (as defined on
Page 1 of this Warrant) that the Holder is entitled to purchase upon exercise of
this Warrant, as adjusted pursuant to Section 6 hereof.
(e) "Warrant Price" shall mean the Exercise Price at which this Warrant
may be exercised, as adjusted pursuant to Section 6 hereof.
2. NUMBER OF SHARES.
Holder is entitled to purchase __________ shares of the Company's Common
Stock, subject to the terms and conditions of this Warrant.
3. TERM.
The purchase right represented by this Warrant is exercisable, in whole or
in part, at any time on or before the Expiration Date.
4. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT.
Subject to Section 3 hereof, the purchase right represented by this Warrant
may be exercised by the Holder, in whole or in part, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Appendix A duly
executed) at the principal office of the Company and by the payment to the
Company, by certified check made payable to the Company drawn on a United States
bank and for United States funds, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased.
In the event of any exercise of the purchase right represented by this Section
4, certificates for the Shares so purchased shall be delivered to the Holder
within thirty (30) days of receipt of such payment and, unless this Warrant has
been fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this warrant shall not then have been
exercised shall also be issued to the Holder within such thirty (30) day period.
5. EXERCISE PRICE.
The Warrant Price at which this Warrant may be exercised shall be the
Exercise Price, as adjusted from time to time pursuant to Section 6 hereof.
6. ADJUSTMENT OF NUMBER AND KIND OF SHARES AND ADJUSTMENT OF WARRANT
PRICE.
6.1 CERTAIN DEFINITIONS. As used in this Section 6 the following terms
shall have the following respective meanings:
(a) OPTIONS: rights, options or warrants to subscribe for, purchase
or otherwise acquire either shares of Common Stock or Convertible Securities.
<PAGE>
(b) CONVERTIBLE SECURITIES: any evidences of indebtedness, shares of
stock or other securities directly or indirectly convertible into or
exchangeable for Common Stock.
6.2 ADJUSTMENTS. The number and kind of securities purchasable upon the
exercise of this Warrant and the Warrant Price shall be subject to adjustment
from tune to time upon the occurrence of certain events, as follows:
(a) RECLASSIFICATION, REORGANIZATION, CONSOLIDATION OR MERGER. In
the case of any reclassification of the Common Stock, or any reorganization,
consolidation or merger of the Company with or into another corporation (other
than a merger or reorganization with respect to which the Company is the
continuing corporation and which does not result in any reclassification of the
Common Stock), the Company, or such successor corporation , as the case may be,
shall execute a new warrant, providing that the Holder shall have the right to
exercise such new warrant and upon such exercise to receive, in lieu of each
share of the Class of Stock theretofore issuable upon exercise of this Warrant,
the number and kind of securities receivable upon such reclassification,
reorganization, consolidation or merger by a holder of shares of the same Class
of Stock of the Company for each share of the Class of Stock. The aggregate
warrant price of the new warrant shall be the aggregate Warrant Price in effect
immediately prior to the reclassification, reorganization, consolidation or
merger. Such new warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
6 including, without limitation, adjustments to the Warrant Price and to the
number of shares issuable upon exercise of this Warrant. The provisions of this
subsection (a) shall similarly apply to successive reclassifications,
reorganizations, consolidations or mergers.
(b) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at
any time while this Warrant remains outstanding and unexpired shall split,
subdivide or combine the Class of Stock for which this Warrant is then
exercisable, the Warrant rice s all be proportionately decreased in the case of
a split or subdivision or proportionately increased in the case of a
combination. Any adjustment under this subsection (b) shall become effective
when the split, subdivision or combination becomes effective.
(c) STOCK DIVIDENDS. If the Company at any time while this Warrant
remains outstanding and unexpired shall pay a dividend with respect to the Class
of Stock for which this Warrant is then exercisable, payable in shares of that
Class of Stock, Options or Convertible Securities, the Warrant Price shall be
adjusted, from and after the date of determination of the shareholders entitled
to receive such dividend or distributions, to that price determined by
multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total number
of shares of that Class of Stock outstanding immediately prior to such dividend
or distribution, and (ii) the denominator of which shall be the total number of
shares of the same Class of Stock outstanding immediately after such dividend or
distribution (including shares of that Class of Stock issuable upon exercise,
conversion or exchange of any Options or Convertible securities issued as such
dividend or distribution). If the Options or Convertible Securities issued as
such dividend or distribution by their terms provide, with the passage of time
or otherwise, for any decrease in the consideration
<PAGE>
payable to the Company, or any increase in the number of shares issuable upon
exercise, conversion or exchange thereof (by change of rate or otherwise), the
Warrant Price shall, upon any such decrease or increase becoming effective, be
reduced to reflect such decrease or increase as if such decrease or increase
became effective immediately prior to the issuance of the Options or Convertible
Securities as the dividend or distribution. Any adjustment under this
subsection (c) shall become effective on the record date.
(d) EXERCISE PRICE REDUCTION. In the event the Company issues any
shares of Common Stock for cash for a per share purchase price which is less
than the Exercise Price then in effect, the Exercise Price shall be reduced from
time to time to equal the per share purchase price for such transaction(s).
6.3 ADJUSTMENT OF NUMBER of Shares. Upon each adjustment in the Warrant
Price pursuant to this Section 6, the number of Shares issuable upon exercise of
this Warrant shall be adjusted to the product obtained by multiplying the number
of Shares issuable immediately prior to such adjustment in the Warrant Price by
a fraction (i) the numerator of which shall be the Warrant Price immediately
prior to such adjustment, and (ii) the denominator of which shall be the Warrant
Price immediately after such adjustment.
6.4 NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 6 and in the taking of all such actions as may be necessary or
appropriate in order to protect against impairment of the rights of the holder
of this Warrant to adjustments in the Warrant Price.
7. NOTICE OF ADJUSTMENTS.
Whenever the Warrant Price shall be adjusted pursuant to Section 6 hereof,
the Company shall issue a certificate signed by an authorized executive officer
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment. the method by which such adjustment was calculated and
the Warrant Price after giving effect to such adjustment, and shall cause a copy
of such certificate to be mailed (by first class mail, postage prepaid) to the
Holder.
8. RIGHT TO CONVERT WARRANT INTO STOCK.
8.1 RIGHT TO CONVERT. In addition to the rights granted under Section 4
of this Warrant, the Holder shall have the right to require the Company to
convert this Warrant (the "Conversion Right") into shares of the Class of Stock
for which the Warrant is then exercisable, as provided in this Section 8. Upon
exercise of the Conversion Right, the Company shall deliver to the Holder
(without payment by the Holder of any Warrant Price) that number of shares of
stock equal to the quotient obtained by dividing (x) the value of this Warrant
at the time the
<PAGE>
conversion Right is exercised (determined by subtracting the aggregate Warrant
Price immediately prior to the exercise of the Conversion Right from the
aggregate fair market value of the Shares issuable upon exercise of this Warrant
immediately prior to the exercise of the Conversion Right, as determined
pursuant to Section 8.4 below) by (y) the fair market value (as determined
pursuant to Section 8.4 below) of one share of that Class of Stock immediately
prior to the exercise of the Conversion Right.
8.2 METHOD OF EXERCISE. The Conversion Right may be exercised at any time
by the Holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the Holder thereby
intends to exercise the Conversion Right. Certificates of the shares of stock
issuable upon exercise of the Conversion Right shall be delivered to the Holder
within thirty (30) days following the Company's receipt of this Warrant together
with the aforesaid written statement.
8.3 AUTOMATIC CONVERSION PRIOR TO EXPIRATION. To the extent this Warrant
is not previously exercised, and if the fair market value of one share of Common
Stock is greater than the Warrant Price per share, this Warrant shall be deemed
automatically exercised in accordance with Section 8.1 hereof (even if not
surrendered) immediately before its expiration. To the extent this Warrant or
any portion thereof is deemed automatically exercised pursuant to this Section
8.3, the Company agrees to notify Holder within a reasonable period of time of
the number of shares of the Class of Stock, if any, Holder is to receive by
reason of such automatic exercise. The Company shall issue to the Holder
certificates for the Shares issued upon such automatic conversion in accordance
with Section 8.2 above, although the Company may condition receipt of the
certificate upon surrender of the Warrant to the company.
8.4 VALUATION OF STOCK. For purposes of this Section 8, the fair market
value of one share of the Class of Stock issuable upon exercise of this Warrant
shall mean:
(a) The product of (i) the average of the closing price or, if no
closing price is reported, the closing bid and asked prices of the Common Stock,
quoted in the Over-The-Counter Market Summary, or the closing price quoted on
any exchange on which the Common Stock is listed, whichever is applicable, as
published in the Western Edition of The Wall Street Journal for the ten (10)
trading days prior to the date of determination of fair market value, and (ii)
the number of shares of Common Stock into which each share of the Class of Stock
is then convertible, if applicable;
(b) If the Common Stock is not traded Over-The-Counter or on an
exchange, the fair market value of the Class of Stock per share shall be as
determined in good faith by the Company's Board of Directors; provided, however,
that if the Holder in good faith disputes in writing the fair market value
determined by the Board of Directors within thirty (30) days of being informed
of such fair market value, the fair market value shall be determined by an
independent appraiser, appointed in good faith by the Company's Board of
Directors and whose reasonable expenses shall be borne equally by the Company
and the Holder.
<PAGE>
9. COMPLIANCE WITH ACT; TRANSFERABILITY OF WARRANT; DISPOSITION OF
SHARES.
9.1 LEGENDS. The Shares issued upon exercise of this Warrant shall be
imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
Nothing in this Warrant shall obligate the Company to effect registration
under federal or state securities law for any Shares issued upon exercise of the
Warrant.
9.2 TRANSFERABILITY AND NON-NEGOTIABILITY OF WARRANT AND SHARES. This
Warrant and the Shares issued upon exercise thereof may not be transferred or
assigned in whole or in part without compliance with applicable federal and
state securities laws by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters and legal opinions
reasonably satisfactory to the Company, if reasonably requested by the Company).
Subject to the provisions of this Section 9.2, title to this Warrant may be
transferred in the same manner as a negotiable instrument transferable by
endorsement and delivery.
10. MISCELLANEOUS.
10.1 HOLDER TREATED AS OWNER - The Holder shall be treated by the Company
and all other persons dealing with this Warrant as the absolute owner of the
Warrant for any purpose and as the person entitled to exercise the rights
represented by this Warrant, until the Warrant is transferred on the Company's
books.
10.2 NOTICES - Any notice or communication to be given pursuant to this
Warrant shall be in writing and shall be delivered in person or by certified
mail, return receipt requested, in the United States mail, postage prepaid.
Notices to the Company shall be addressed to the Company's principal office.
Notices to the Holder shall be addressed to the Holder's address as reflected in
the records of the Company. Notices shall be effective upon delivery in person,
or, if mailed, at midnight on the third (3rd) business day after mailing.
10.3 NO STOCKHOLDER RIGHTS - This Warrant shall not entitle the Holder to
any voting rights or other rights as a stockholder of the Company.
10.4 GOVERNING LAW; VENUE - This Warrant shall be governed by and construed
in accordance with the laws of the State of Minnesota as applied to contracts
entered into between residents of the State of Minnesota to be wholly performed
within the State of Minnesota. Venue
<PAGE>
for any suit brought with respect to this Agreement shall be solely in Ramsey
County, Minnesota, where the Company's principal place of business is located.
10.5 HEADINGS; INTERPRETATION - The section headings used herein are for
convenience of reference only and are not intended to define, limit, or describe
the scope or intent of any provision of this Warrant. All pronouns used in the
Warrant shall be deemed to include masculine, feminine and neuter forms.
10.6 SUCCESSORS - The covenants, agreements, and provisions of this Warrant
shall bind the parties hereto and their respective successors and permitted
assigns.
10.7 SEVERABILITY - In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
10.8 REPRESENTATIONS OF THE HOLDER - By accepting delivery of this Warrant,
the Holder hereby reconfirms its prior representations to the Company that this
Warrant is being acquired for investment for its own account and not with a view
to, or for resale in connection with, any distribution or public offering
thereof. The Holder further understands that this Warrant has not been
registered under the Securities Act of 1933, as amended, or any state securities
law by reason of it being issued in a transaction exempt from the registration
requirements. The Holder further reconfirms its prior representations that it
is qualified as an "accredited investor" for purposes of Regulation D
promulgated under the Securities Act of 1933. The Holder acknowledges that the
Company has afforded it the opportunity to make such investigation of the
Company as the Holder has deemed appropriate. The Holder further reconfirms its
prior representations that it has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
investment.
ADVANCED UROSCIENCE, INCORPORATED
By:
-----------------------------
Timothy Lawin, Its Chairman
<PAGE>
APPENDIX A
NOTICE OF EXERCISE
TO: Advanced UroScience, Incorporated
1. The undersigned hereby elects to purchase ___________ shares of the
Common Stock of Advanced UroScience, Incorporated, pursuant to terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full (as authorized by Section 4 thereof), together with all
applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
the Common Stock in the name of the undersigned or in such other name as is
specified below.
3. The undersigned represents it is acquiring the shares of Common Stock
solely for its own account and not as a nominee for any other party, and for
investment purposes only, not with a view toward the resale or distribution
thereof.
---------------------------------
(Name)
---------------------------------
(Address)
---------------------------------
---------------------------------
---------------------------------
(Taxpayer Identification Number)
------------------------------
[PRINT NAME OF HOLDER]
By:
---------------------------
Title:
------------------------
Date:
-------------------------
<PAGE>
LEASE AGREEMENT
This LEASE AGREEMENT (hereinafter called "LEASE") made as of the
1st day of August, 1997, by and between: Lawin Enterprises, LLC, a Minnesota
Corporation (hereinafter called "Landlord"), and Advanced UroScience, Inc.
(hereinafter called "Tenant").
WITNESSETH
IN CONSIDERATION OF THE TERMS AND CONDITIONS IN THIS LEASE; the parties hereto
mutually agree and covenant as follows:
DATA SHEET
(1) PREMISES: The area set forth on Exhibit "A" hereto, and described
thereon, located in the Lawin Enterprises Building, in the Township of White
Bear Lake, State of Minnesota, Ramsey County, with a street address and suite
number of 1290 Hammond Road, Suite 100, St. Paul, Minnesota 55110.
(2) TERM: Five (5) years, commencing on August 1, 1997, (hereinafter
referred to as the Commencement Date) and terminating on August 1, 2002,
(hereinafter referred to as the Termination Date).
(3) DELIVERY DATE: August 1, 1997.
(4) PERMITTED USE: The Premises shall be used by the Tenant solely for:
Office, Manufacturing and Distribution uses.
(5) TENANT NAME: Tenant shall operate and do business in the Premises and
all signs and advertising shall be under the trade name: Advanced UroScience,
Inc. Any signage displayed by Tenant shall be subject to prior approval of
Landlord, which shall not be unreasonably withheld.
(6) ANNUAL RENT: Tenant shall pay annual rent during the term of this
Lease as specified on Exhibit "B" Annual Rent. Payment of rent will be made in
equal monthly installments as provided in Article 3.
Tenant shall be responsible for all utilities charges related to the Premises.
(7) SECURITY DEPOSIT: Not applicable.
Each reference in this Lease to any of the data contained in this Data
Sheet shall be construed to incorporate the data stated under that title.
<PAGE>
ARTICLE 1
DEMISED PREMISES
Landlord does hereby demise and lease to Tenant the premises shown on
Exhibit "A", hereto attached and described thereon and made a part hereof.
ARTICLE 2
TERM
TO HAVE AND HOLD for a Term beginning at the Commencement Date as set forth
on the Data Sheet of this Lease Agreement and continuing until the Termination
Date as set forth on said Data Sheet.
ARTICLE 3
RENTS, UTILITIES AND INTEREST
Tenant covenants and agrees to pay Landlord, without set-off, deduction or
demand, at the address set out in the heading of this Lease, or at such other
place as Landlord may designate in writing to Tenant, rental at the following
rates and times:
(a) Annual Rent: Tenant shall pay annually during the Term of this Lease
the sum specified on Exhibit "B" Annual Rent, which sum shall be payable in
equal monthly installments, on or before the first day of each month, in
advance.
(b) Other Charges; Utilities: Tenant shall pay utilities (including
heat, air-conditioning, gas, water, sewer and electricity) permitted to be
imposed against Tenant under any Article of this Lease concurrently with the
next succeeding monthly installment of Annual Rent following notice of the same,
unless a different time for such payment is specified in this Lease.
(c) Interest: Any amount due from Tenant to Landlord under this Lease
which is not paid when due shall bear interest at the highest legal rate from
the date due until paid; provided, however, the payment of such interest shall
not excuse or cure the default upon which such interest accrued. No interest
shall begin to accrue until ten (10) days after written notice by Landlord to
Tenant, and then only if Tenant has failed to pay such rent.
ARTICLE 4
CONSTRUCTION, IMPROVEMENTS
(a) Parking Facilities
<PAGE>
Landlord shall provide reasonable parking space for Tenant's needs. Tenant
shall have use of twenty-five (25) parking spaces during Tenant's normal
business hours.
(b) Improvements
Tenant shall have the right to make leasehold improvements consistent with
its business. All improvements must be approved by the Landlord, which shall
not be reasonably withheld.
ARTICLE 5
DAMAGES
The Tenant shall have no claim whatsoever for damages against Landlord for
any delay in the date on which the premises shall be ready for occupancy for
Tenant.
ARTICLE 6
CONDITION OF PREMISES
(a) Tenant's taking of possession of the premises shall be conclusive
evidence of Tenant's acceptance thereof in good order and satisfactory
condition, unless Tenant gives Landlord notice of any problems or defects in
writing, within sixty (60) days after August 1, 1997.
(b) Landlord represents, warrants, and covenants that the premises and the
building are of good quality, comply with applicable laws and regulations, and
that all structural features and functional systems are in good condition.
ARTICLE 7
COMMON AREAS
(a) Landlord hereby grants to Tenant, its employees, agents, customers and
invitees, the non-exclusive right for and during the term of this Lease and any
renewal thereof to use the parking area, lunch room, and other common areas from
time to time constituted, such use to be common with Landlord and all tenants of
Landlord from time to time, its and their employees, agents, customers and
invitees, except when the same are being repaired.
(b) Landlord agrees to manage, operate and maintain during the term of
this Lease and any renewal thereof, all parking areas, roads, sidewalks,
landscaping, draining and the exterior of the building. The manner in which
such areas and facilities shall be maintained and the expenditures therefore
shall be at the sole discretion of Landlord. However, Landlord will maintain
such area in a first class manner. Tenant shall be responsible to pay its pro
rata share of all Common Area expenses. Tenant will be billed, on a monthly
basis, an estimated
<PAGE>
Common Area expense and at the end of each year will receive a final bill or
refund for Common Area expense(s).
ARTICLE 8
TAXES
Tenant shall pay it's pro rata share of taxes and assessments against the
land, building or improvements to the building that are levied or assessed by
any lawful authority during each calendar year during the Term of this Lease.
ARTICLE 9
LANDLORD WARRANTIES AND LEASE SUBORDINATION
Landlord hereby warrants, so long as Tenant shall perform each and every
covenant to be performed by Tenant hereunder, Tenant shall have peaceful and
quiet use and possession of the Premises without hindrance on the part of the
Landlord or others, and Landlord shall warrant and defend Tenant in such
peaceful and quiet use and possession.
Landlord reserves the right to subordinate or sell this Lease at all times
to any other party the lien of any mortgage, or mortgages, trust deed or trust
deeds now or hereafter placed upon the premises, and Tenant covenants and agrees
to execute and deliver, upon demand, such reasonable further instruments
subordinating this Lease to the lien of any such mortgage, mortgages, trust deed
or trust deeds as shall be reasonably desired by Landlord, or any mortgagees or
proposed mortgagees or trustees under trust deeds. Landlord shall pay Tenant's
reasonable fees for legal review each time such subordination is requested.
Landlord shall furnish Tenant evidence that Tenant shall have the right to
remain in possession of the Premises under the terms of this Lease and Tenant's
quiet enjoyment of the Premises shall not be adversely affected, not
withstanding any default in any such mortgage, mortgages, trust deed or trust
deeds, or after foreclosure thereof, so long as tenant is not in default under
any of the covenants, conditions, and agreements contained in this lease.
Not withstanding anything herein contained to the contrary, Tenant's
obligations herein shall not be terminated or mitigated in any way by reason of
the foreclosure of any mortgage of the Landlord or its successor in title.
ARTICLE 10
REPAIR AND MAINTENANCE OF PREMISES
Except for any structural matters, roof and exterior walls, Tenant shall,
at Tenant's expense at all times keep the demised premises and appurtenances
thereto in good order, condition, and repair, clean and sanitary and safe,
including the replacement or maintenance of heating, ventilation, air
conditioning, electricals, plumbing, interior equipment, interior fixtures, and
all broken glass
<PAGE>
(with glass of the same size and quality) and shall repair and replace all
doors, windows, frames and related items in a manner satisfactory to Landlord.
ARTICLE 11
DAMAGE TO PREMISES
In case the premises are damaged by fire, explosion or other casualty or
occurrence to the extent of twenty-five percent (25%) or less of the insurable
value of the premises, the damage shall promptly be repaired by Landlord at
Landlord's expense in no event longer than 90 days after the casualty event. In
the event the premises shall be damaged to the extent of more than twenty-five
(25%) of the insurable value, or the building of which the premises are a part
is damaged to the extent of twenty-five (25%) or more of the insurable value,
Landlord may elect either to repair or rebuild the premises or the building or
to terminate this Lease upon giving notice of such election in writing to Tenant
within thirty (30) days after the happening of the event causing the damage.
Tenant shall have the same right to elect termination of this Lease. If the
casualty or the repairing or rebuilding shall render the premises untenantable
in whole or in part, a proportionate abatement of the minimum annual rent shall
be allowed from the date when the damage occurred until the date when the
premises are again made tenantable, or until the effective date of termination
as herein provided, said abatement to be computed on the basis of the relation
which the square foot area of the space rendered untenantable bears to the
aggregate square footage of area of the premises. Landlord shall take
reasonable steps to promptly repair all damage. Tenant may elect to terminate
this Lease if repairs are not completed within ninety (90) days after the
casualty event.
ARTICLE 12
TRADE FIXTURES
All trade fixtures owned by Tenant and installed in the Premises shall
remain the property of Tenant and shall be removable from time to time and also
at the expiration of the Term, provided Tenant shall not, at such time, be in
default under any covenant or agreement contained herein; and provided further
that Tenant repair any damage to the Premises caused by the removal of said
fixtures.
ARTICLE 13
LIENS
Tenant agrees to promptly pay for any work done or material furnished in or
about the premises and will not permit or suffer any lien to be attached to the
premises and shall promptly cause any such lien or any claim therefore to be
released; provided however, that in the event Tenant contests any such claim,
Tenant agrees to indemnify and secure Landlord to Landlord's satisfaction.
<PAGE>
Tenant shall have no authority or power, express or implied, to create or cause
any lien, charge or encumbrance of any kind against the Premises.
ARTICLE 14
LAWS, ORDINANCES AND GENERAL CONDITIONS
Tenant agrees to promptly comply with all laws, ordinances, orders and
regulations affecting its business and the premises and the cleanliness, safety,
operation and use thereof. Tenant also agrees to comply with the
recommendations of any insurance company, inspection bureau or similar agency
with respect to the premises.
Tenant agrees not to: (a) permit any unlawful or immoral practice to be
carried on or committed on the premises; (b) make any use or allow the
premises to be used in any manner or for any purpose that might invalidate or
increase the rate of insurance thereof: (c) keep or use or permit to be kept
or used on said demised premises any inflammable fluids or explosives without
the written permission of the Landlord first obtained; (d) use the premises for
any purpose whatsoever which might create a nuisance or injure the reputation of
the leased premises or of the premises; (e) deface or injure the building
premises; (f) overload the floors; or (g) commit or suffer any waste. Tenant
agrees to pay as additional rent any increase in cost of insurance on the
building or premises to Landlord or the owner of same as a result of any
unauthorized use of the premises by Tenant, but such payment shall not
constitute in any manner a waiver by Landlord of its right to enforce all of the
covenants and provisions of this Lease.
Tenant agrees not to install any electrical equipment that overloads lines
in the premises. In connection with the installation or use of the electrical
equipment Tenant shall at Tenant's own expense make from time to time whatever
changes are necessary to comply with the requirements of the insurance
underwriters, governmental authorities, or of insurance inspectors designated by
Landlord. Tenant agrees not to use any electrical equipment that contains a
heating element unless same is connected and operated in compliance with the
underwriters' specifications.
Landlord reserves the right at any time to change the name of the building
in which the leased premises are located and to change the address or
designation of the leased premises.
ARTICLE 15
INSURANCE
(a) Tenant agrees to carry during the term hereof public liability
insurance for the premises written by a company satisfactory to Landlord
providing coverage in the minimum amount of Two Hundred Thousand Dollars
($200,000.00) against liability for injury to or death of any one person and Two
<PAGE>
Hundred Thousand Dollars ($200,000.00) against liability arising out of any one
accident or occurrence, and also Two Hundred Thousand Dollars ($200,000.00)
against liability arising out of any property damage; Tenant shall also provide
property insurance upon the demised premises in an amount not less than Two
Hundred Thousand Dollars ($200,000.00); said insurance shall include Landlord,
its agents, beneficiaries and employees as additional insured parties and shall
provide that Landlord shall be given a minimum of ten (10) days notice by the
insurance company prior to cancellation, termination or change of such
insurance. Upon request by Landlord, Tenant shall provide Landlord with copies
of the policies or certificates evidencing that such insurance is in full force
and effect and stating the terms thereof.
ARTICLE 16
INDEMNIFICATION
Except for matters related to Landlord's negligence or defects in the
building, Tenant agrees to indemnify, defend and hold harmless Landlord, its
agents, beneficiaries and employees, from and against all claims, liabilities,
losses, damages and expenses for injury to or death of any person or loss of or
damage to property in or upon Premises and including the person and property of
Tenant, its employees, agents, invitees, licenses or others, it being understood
and agreed that all property kept, stored or maintained in or upon the premises,
shall be at the risk of Tenant.
If any damages to the Premises or other property of Landlord results from
any act or neglect of Tenant, its agents or employees, Landlord may at its
option repair such damages, and Tenant shall promptly on demand reimburse
Landlord for the cost thereof to the extent costs are not covered by insurance.
The provisions of this Article shall not be deemed to exempt Landlord from
liability for negligence of Landlord, its agents, servants or employees.
ARTICLE 17
CONDEMNATION
If the premises or any substantial part thereof shall be taken under
eminent domain proceedings, either party may at its option terminate this Lease
as of the date when possession is taken. All damages awarded for such taking
shall belong to and be the property of Landlord.
The Tenant shall have no claim against the Landlord by reason of such
taking or termination but Tenant may pursue an award for its own loss from the
taking authority.
<PAGE>
ARTICLE 18
ASSIGNMENT AND SUBLETTING
Tenant shall not sublet the premises in whole or in part and shall not
sell, assign, mortgage, pledge or in any manner transfer this Lease or any
interest therein without first obtaining, in writing, the consent of Landlord,
which shall not be unreasonably withheld.
ARTICLE 19
ACCESS TO PREMISES
Tenant agrees that Landlord, its agents, employees or servants or any
person authorized by Landlord may enter the premises at any reasonable time
during business hours for the purpose of inspecting the condition of the same
and to make such repairs, additions, improvements, changes or alterations to the
premises or the building of which they are a part as Landlord may elect to make,
and exhibit the same to prospective purchasers of the building in which the
premises are contained so long as Tenant is given reasonable advance notice of
such entry, Tenant's quiet enjoyment of the premises and normal conduct of its
business are not interrupted, and confidentiality and security of Tenant's
business are protected.
ARTICLE 20
COST, EXPENSES, ATTORNEY'S FEES
In case Landlord shall, without fault on its part, be made a party to any
litigation commenced by or against Tenant, the Tenant shall pay all costs,
expenses and reasonable attorneys' fees incurred or paid by Landlord in
connection with such litigation; Tenant shall also pay all costs, expenses and
reasonable attorneys' fees that may be incurred or paid by Landlord in enforcing
the covenants and agreements of this Lease.
ARTICLE 21
DEFAULT OF TENANTS
It is agreed that (i) if Tenant vacates or abandons the premises or permits
the same to remain vacant or unoccupied for a period of sixty (60) days, and no
business is conducted or material is stored or rent is paid; or (ii) if the rent
or any part thereof shall be unpaid for five (5) days after written notice
thereof to Tenant, or (iii) if default shall be made in the prompt and full
performance of any covenant, condition or agreement of this Lease to be kept
more than sixty (60) days) after written notice to Tenant, specifying such
default or breach of performance, or (iv) if any proceedings shall be commenced
to declare Tenant bankrupt or insolvent or to obtain relief under any chapter or
provision of any bankruptcy or debtor relief law or act to reduce or modify
Tenant's debts or obligations or to delay or to extend the payment thereof, or
if any assignment of
<PAGE>
Tenant's property be made for benefit of creditors, or if a receiver or trustee
be appointed for Tenant or Tenant's property or business, then Landlord may
treat the occurrence of any one or more of the foregoing events as a breach of
this Lease and thereupon at its option without further notice or demand of any
kind to Tenant or any other person, may have, in addition to all other legal or
equitable remedies, the following described remedies:
(a) Landlord may elect to terminate this Lease and the term created hereby
in which event Landlord forthwith may repossess the Premises and Tenant shall
pay at once to Landlord as liquidated damages a sum of money equal to the lesser
of (i) the Annual Rent plus Tenant's share of real estate taxes and Common Area
expenses provided in this Lease to be paid by Tenant to Landlord for the
remaining months of the Lease term, or (ii) the amount of Annual Rent and
Tenant's share of real estate taxes and Common Area expenses provided in this
Lease to be paid by Tenant to Landlord for the next 18 months following the date
of Landlord's termination.
(b) Landlord may elect to terminate Tenant's right of possession without
termination of this Lease in which event Tenant agrees to surrender possession
and vacate the Premises immediately and deliver possession thereof to Landlord.
Upon and after entry into possession without terminating the Lease, Landlord
shall be obligated to relet all or any part of the Premises for such rent and
upon such terms and to such persons, firm or corporation and for such period or
periods as are reasonable to mitigate Tenant damages. If the consideration
collected by Landlord upon any such reletting for Tenant's account is not
sufficient to pay the rental reserved in this Lease, Tenant agrees to pay to
Landlord the deficiency upon demand.
If Landlord fails to perform any obligations in connection with this Lease
and such default is not cured within ninety (90) days after notice from Tenant
to Landlord and Tenant is forced to vacate the premises, then Tenant at its
option may elect to do any or all of the following:
(c) terminate this lease and have no further liability to Landlord, if
such termination is prior to August 1, 2002; or
(d) remedy or attempt to remedy such default by any appropriate
action and collect reimbursement from Landlord, only by court action and not by
offset against the rent, for all costs of Tenant incurred in connection with
such default, including Tenant's attorney's fees whether or not action is
formally undertaken.
<PAGE>
ARTICLE 22
SURRENDER OF PREMISES
Tenant, upon expiration or termination of this Lease, either by lapse of
time or otherwise, agrees peaceably to surrender to Landlord the premises,
including the alterations, additions, improvements, changes and fixtures other
than Tenant's movable trade fixtures, in broom-clean condition and in good
repair, except for acts of God and ordinary use and wear and damage by fire;
provided, however, that Tenant's alterations, additions and improvements to the
Premises shall be removed at Tenant's expense upon written request by Landlord.
ARTICLE 23
UNPERFORMED COVENANTS OF TENANT
In the event Tenant shall fail to comply with and perform any of the
covenants, conditions or agreements herein contained on Tenant's part to be
performed after notice and the opportunity to cure as provided in this Lease,
Landlord shall have the right (but not be obligated) to perform any such
covenants, conditions or agreements, and Tenant agrees to pay to the Landlord on
demand, as additional rent hereunder, a sum equal to the amount reasonably
expended by Landlord in the performance of such covenants, conditions or
agreements.
ARTICLE 24
MISCELLANEOUS
(a) Notices: Notices and demands required or permitted to be given
hereunder may be given by personal delivery to either party or any officer or
other representative of the party to be notified, or may be sent by certified
mail addressed, postage prepaid, if to Landlord, to it at the address at which
the last rental payment was made or required to be made, and if to Tenant,
addressed to Tenant at the premises, or such other address as was last specified
respectively in writing by one party to the other. Notices and demands shall be
deemed to have been given when mailed or if made by personal delivery, then upon
such delivery.
(b) Remedies: All rights and remedies of Landlord and Tenant herein
created or otherwise existing at law are cumulative and the exercise of one or
more rights or remedies shall not be taken to exclude or waive the right to the
exercise of any other. All such rights and remedies may be exercised and
enforced concurrently and whenever and as often as Landlord and Tenant,
respectively, deem desirable.
(c) Successors and Assigns: All covenants, promises, conditions,
representations and agreements herein contained shall be binding upon, apply and
insure to the parties hereto and their respective heirs, executors,
administrators, successors and permitted assigns.
<PAGE>
(d) Liability: If two or more individuals, corporations, partnerships, or
other business associations (or any combination of two or more thereof) shall
sign this Lease as Tenant, the liability of each such individual, corporation,
partnership, or other business association to pay Rent and perform all other
obligations hereunder shall be deemed to be joint and several. In like manner,
if the Tenant named in this Lease shall be a partnership or other business
association, the members of which are by virtue of statute or general law,
subject to personal liability, the liability of each such member shall be deemed
to be joint and several. Only Tenant's corporate signature shall be required on
this Lease.
(e) Representations: It is understood and agreed by Tenant that Landlord
and Landlord's agents have made no representations or promises with respect to
the premises or the making or entry into this Lease except as in this Lease
expressly set forth and that no claim or liability, or cause for termination
shall be asserted by Tenant against Landlord for, and landlord shall not be
liable by reason of breach of any representations or promises not expressly
stated in this Lease.
(f) Waiver: The failure of Landlord to insist upon strict performance by
Tenant of any of the covenants, conditions and Agreements of this Lease shall
not be deemed a waiver of any of Landlord's rights or remedies and shall not be
deemed a waiver of any subsequent breach or default by Tenant in any of the
covenants, conditions and agreements of this Lease.
(g) Hold Over: Tenant shall pay to Landlord, as liquidated damages, the
same amount of rent specified in Exhibit "B", as a month-to-month Tenant for
the time Tenant retains possession of the premises or any part thereof after
termination of the Lease by lapse of time or otherwise; or, if and only if
Landlord serves written notice upon Tenant of Landlord's election thereof, such
holding over shall constitute renewal of this Lease for one (1) year.
Landlord's acceptance of any rent after holding over begins does not renew this
Lease. This provision does not waive Landlord's rights to re-entry or any other
right hereunder.
(h) Interpretation: The time of the performance of all the covenants,
conditions and agreements of this Lease is of the essence of this Agreement.
Nothing herein shall be construed so as to constitute a joint venture or
partnership between Landlord and Tenant. The captions of the several articles,
contained herein are for convenience only and do not define, limit, describe or
construe the contents of such articles. No amendments or modifications of or
supplements to this Lease, shall be effective unless in writing and executed by
Landlord and Tenant. If any provision of this Lease is held to be invalid, such
invalid provision shall be deemed to be severable from and shall not effect the
validity of the remainder of this Lease.
<PAGE>
(i) Bankruptcy: The bankruptcy of Landlord (whether voluntary or
involuntary) shall not affect the rights of Tenant in and to the Premises
pursuant to this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this Lease
as of the day and year above written.
LANDLORD:
LAWIN ENTERPRISES, LLC
By /s/ Timothy Lawin
-----------------------
TENANT:
ADVANCED UROSCIENCE, INC.
By /s/ Thomas Jaeger
-----------------------
<PAGE>
EXHIBIT A
DESCRIPTION OF PREMISES
(See attached)
<PAGE>
EXHIBIT B
ANNUAL RENT
Area Cost per Sq. Ft. Square Feet Total
----------------------------------------------------------------
Office $4.30 sq. ft. 5,250 $22,575.00
Warehouse $4.30 sq. ft. 300 $ 1,290.00
Production $5.40 sq. ft. 1,800 $ 9,720.00
Common Area $7.00 sq. ft. 300 $ 2,100.00
----- ----------
TOTAL 7,650 $35,685.00
Pro Rata Share of Real Estate Taxes (approximately 14%)
(estimated at $2.50 sq. ft. for 1998)
Pro Rata Share of Common Area Maintenance Expense (approximately 14%)
(estimated at $1.00 sq. ft. for 1997)
Each Company/Tenant in the building will be responsible for the cleaning,
repairs and maintenance services of its entire rented space.
Rent will increase according to schedule below:
Year 2 2.5%
Year 3 3.0%
Year 4 3.5%
Year 5 4.0%
<PAGE>
EXHIBIT A-1
DIAGRAM OF FLOOR PLAN
<PAGE>
EXHIBIT A-2
DIAGRAM OF FLOOR PLAN
<PAGE>
AGREEMENT OF INDEMNIFICATION OF DIRECTORS
INDEMNITY AGREEMENT, made and executed this 25th day of April, 1997, by and
between Advanced UroScience, Inc., a Minnesota corporation (the "Company"), and
NAME ("Indemnitee");
BACKGROUND
The Company is aware that, in order to induce highly competent persons to
serve the Company as Directors or in other capacities, the Company must provide
such persons with adequate protection through insurance and indemnification
against inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the Company. The difficulty of obtaining
adequate directors' and officers' liability insurance in the current market has
increased the difficulty of attracting and retaining such persons. The Board of
Directors of the Company has determined that (1) it is essential to the best
interests of the Company's stockholders that the Company act to assure such
persons that there will be increased certainty of such protection in the future,
and that (2) it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will continue to serve the Company free
from undue concern that they will not be so indemnified. The Indemnitee is
willing to serve, continue to serve, and take on additional service for or on
behalf of the Company on the condition that he be so indemnified;
NOW THEREFORE, in consideration of the premises and the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Indemnitee do hereby agree as follows:
1. SERVICE BY THE INDEMNITEE. The Indemnitee will serve as a Director or
officer of the Company faithfully and will discharge his duties and
responsibilities to the best of his ability so long as he is duly elected or
qualified in accordance with the provisions of the Articles of Incorporation and
Bylaws of the Company and the Minnesota Business Corporation Act or until his
earlier death, resignation or removal. The Indemnitee may at any time and for
any reason resign from such position (subject to any other contractual
obligation or other obligation imposed by operation of law), in which event the
Company shall have no obligation under this Agreement to continue the Indemnitee
in any such position. Nothing in this Agreement shall confer upon the
Indemnitee the right to continue.
2. INDEMNIFICATION. The Company shall indemnify the Indemnitee to the
fullest extent permitted by the Minnesota Business Corporation Act or other
applicable law, as in effect from time to time. Without diminishing the scope
of the indemnification provided by this Section, the rights of indemnification
of the Indemnitee provided hereunder shall
Page 1
<PAGE>
include, but shall not be limited to, those rights hereinafter set forth, except
that no indemnification shall be paid to the Indemnitee:
(a) on account of any suit in which judgment is rendered against the
Indemnitee for disgorgement of profits made from the purchase or sale by
the Indemnitee of securities of the Company pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934, as amended, or
similar provisions of any federal, state or local statutory law;
(b) on account of conduct of the Indemnitee which is finally adjudged
by a court of competent jurisdiction to have been knowingly fraudulent or
to constitute willful misconduct;
(c) in any circumstance where such indemnification is expressly
prohibited by applicable law;
(d) with respect to liability for which payment is actually made to
the Indemnitee under a valid and collectible insurance policy or under a
valid and enforceable indemnity clause, bylaw or agreement (other than this
Agreement), except in respect of any liability in excess of payment under
such insurance, clause, bylaw or agreement;
(e) if a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful (and, in this
respect, both the Company and the Indemnitee have been advised that it is
the position of the Securities and Exchange Commission that indemnification
for liabilities arising under the federal securities laws is against public
policy and is, therefore, unenforceable, and that claims for
indemnification should be submitted to the appropriate court for
adjudication); or
(f) in connection with any proceeding (or part thereof) initiated by
the Indemnitee, or any proceeding by the Indemnitee against the Company or
its directors, officers, employees or other Indemnitees, unless (i) such
indemnification is expressly required to be made by law, (ii) the
proceeding was authorized by the Board of Directors of the Company, (iii)
such indemnification is provided by the Company in its sole discretion,
pursuant to the powers vested in the Company under applicable law, or (iv)
except as provided in Sections 10 and 13 hereof.
3. ACTIONS OR PROCEEDINGS OTHER THAN AN ACTION BY OR IN THE RIGHT OF THE
COMPANY. The Indemnitee shall be entitled to the indemnification rights
provided in this Section if he is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative in nature, other than an action by or
in the right of the Company, by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent or fiduciary of any
other entity, including, but not limited to, another corporation, partnership,
joint venture or trust, or by reason of any act or omission by him in any such
capacity. Pursuant to this Section, the Indemnitee shall be indemnified against
all expenses (including attorneys' fees), costs,
Page 2
<PAGE>
judgments, penalties, fines and amounts paid in settlement which were actually
and reasonably incurred by him in connection with such action, suit or
proceeding (including, but not limited to, the investigation, defense or appeal
thereof), if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, if he had no reasonable cause to believe his
conduct was unlawful.
4. ACTIONS BY OR IN THE RIGHT OF THE COMPANY. The Indemnitee shall be
entitled to the indemnification rights provided in this Section if he is a
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding brought by or in the
right of the Company to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee or agent or fiduciary of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, agent or fiduciary of another entity, including, but not
limited to, another corporation, partnership, joint venture or trust, or by
reason of any act or omission by him in any such capacity. Pursuant to this
Section, the Indemnitee shall be indemnified against all expenses (including
attorneys' fees), costs and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding (including,
but not limited to, the investigation, defense or appeal thereof), if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
be the best interests of the Company; provided, however, that no such
indemnification shall be made in respect of any claim, issue, or matter as to
which applicable law expressly prohibits such indemnification by reason of any
adjudication of liability of the Indemnitee to the Company, unless and only to
the extent that a court of the Fourth Judicial District of Minnesota or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the Indemnitee is fairly and reasonably entitled to indemnify for
such expenses and costs which such court shall deem proper.
5. INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding the other provisions of this Agreement, to the extent that the
Indemnitee has served on behalf of the Company as a witness or other participant
in any claim, action or proceeding, or has been successful, on the merits or
otherwise, in defense of any action, suit or proceeding referred to in Sections
3 and 4 hereof, or in defense of any claim, issue or matter therein, including,
but not limited to, the dismissal of any action without prejudice, he shall be
indemnified against all costs, charges and expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
6. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses (including attorneys' fees), costs, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the investigation, defense, appeal or settlement of such suit, action,
investigation or proceeding described in Section 3 or 4
Page 3
<PAGE>
hereof, but is not entitled to indemnification for the total amount thereof, the
Company shall nevertheless indemnify the Indemnitee for the portion of such
expenses (including reasonable attorneys' fees), costs, judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by him to
which the Indemnitee is entitled. Without limiting the generality of the
foregoing, if the action suit, and so forth, is brought against the Indemnitee
in his capacity as a director, officer, or employee and a shareholder, the
presumption shall be that recovery is sought by reason of the Indemnitee's
status as a director, officer of employee.
7. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Upon written request
by the Indemnitee for indemnification pursuant to Section 3 or 4 hereof, the
entitlement of the Indemnitee to indemnification pursuant to the terms of this
Agreement shall be determined by the following person or persons, who shall be
empowered to make such determination: (a) the Board of Directors of the Company,
by a majority vote of a quorum consisting of Disinterested Directors (as
hereinafter defined); or (b) if such a quorum is not obtainable or, even if
obtainable, if the Board of Directors, by the majority vote of Disinterested
Directors, so directs, by Independent Counsel (as hereinafter defined) in a
written opinion to the Board of Directors, a copy of which shall be delivered to
the Indemnitee. Such Independent Counsel shall be selected by the Board of
Directors and approved by the Indemnitee. Upon failure of the Board to so
select, or upon failure of the Indemnitee to so approve such Independent
Counsel, such Independent Counsel shall be selected by the Chief Judge of the
District Court of the Fourth Judicial District of Minnesota or such other person
as the Chief Judge shall designate to make such selection. Such determination
of entitlement to indemnification shall be made not later than 45 days after
receipt by the Company of a written request for indemnification. Such request
shall include documentation or information which is necessary for such
determination and which is reasonably available to the Indemnitee. Any costs or
expenses (including attorneys' fees) incurred by the Indemnitee in connection
with his request for indemnification hereunder shall be borne by the Company.
The Company hereby indemnifies and agrees to hold the Indemnitee harmless
therefrom irrespective of the outcome of the determination of the Indemnitee's
entitlement to indemnification. If the person making such determination shall
determine that the Indemnitee is entitled to indemnification as part (but not
all) of the application for indemnification, such person shall reasonably
prorate such partial indemnification among such claims, issues or matters.
8. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. The Secretary of the
Company shall, promptly upon receipt of the Indemnitee's request for
indemnification, advise in writing the Board of Directors, or such other person
or persons as are empowered to make the determination pursuant to Section 7,
that the Indemnitee has made such request for determination. Upon making such
request for indemnification, the Indemnitee shall be presumed to be entitled to
indemnification hereunder and the Company shall have the burden of proof in the
making of any determination contrary to such presumption. If the person or
persons so empowered to make such determination shall have failed to make the
Page 4
<PAGE>
requested indemnification within 45 days after receipt by the Company of such
request, the requisited determination of entitlement to indemnification shall be
deemed to have been made and the Indemnitee shall be absolutely entitled to such
indemnification, absent actual and material fraud in the request for
indemnification. The termination of any action, suit, investigation or
proceeding described in Section 3 or 4 hereof by judgment, order, settlement or
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself: (a) create a presumption that the Indemnitee did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, that the Indemnitee had reasonable cause to believe that his conduct
was unlawful; or (b) otherwise adversely affect the rights of the Indemnitee to
indemnification, except as may be provided herein.
9. ADVANCEMENT OF EXPENSES AND COSTS. All reasonable expenses and costs
actually incurred by the Indemnitee (including attorneys' fees, retainers and
advances of disbursements required of the Indemnitee) shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding,
if so requested by the Indemnitee, within 20 days after the receipt by the
Company of a statement or statements from the Indemnitee requesting such advance
or advances. The Indemnitee may submit such statements from time to time. The
Indemnitee's entitlement to such expenses shall include those incurred in
connection with any proceeding by the Indemnitee seeking an adjudication or
award in arbitration pursuant to this Agreement. Such statement or statements
shall reasonably evidence the expenses and costs incurred by him in connection
therewith and shall include or be accompanied by an undertaking by or on behalf
of the Indemnitee to repay such amount if it is ultimately determined that the
Indemnitee is not entitled to be indemnified against such expenses and costs by
the Company pursuant to this Agreement or otherwise.
10. REMEDIES OF THE INDEMNITEE IN CASES OF DETERMINATION NOT TO INDEMNIFY
OR TO ADVANCE EXPENSES. In the event that a determination is made that the
Indemnitee is not entitled to indemnification hereunder or if payment has not
been timely made following a determination of entitlement to indemnification
pursuant to Sections 7 and 8, or if expenses are not advanced pursuant to
Section 9, the Indemnitee shall be entitled to a final adjudication in an
appropriate court of the State of Minnesota or any other court of competent
jurisdiction of his entitlement to such indemnification or advance.
Alternatively, the Indemnitee may, at his option, seek an award in arbitration
to be conducted by a single arbitrator pursuant to the rules of the American
Arbitration Association, such award to be made within 60 days following the
filing of the demand for arbitration. The Company shall not oppose the
Indemnitee's right to seek any such adjudication or award in arbitration or any
other claim. Such judicial proceeding or arbitration shall be made DE NOVO and
the Indemnitee shall not be prejudiced by reason of a determination (if so made)
that he is not entitled to indemnification. If a determination is made or
deemed to have been made pursuant to the terms of Section 7 or Section 8 hereof
that the Indemnitee is entitled to indemnification, the Company shall be bound
by such determination and shall be precluded from asserting that such
determination has not been made or that the procedure by which
Page 5
<PAGE>
such determination was made is not valid, binding and enforceable. The Company
further agrees to stipulate in any such court or before any such arbitrator that
the Company is bound by all the provisions of this Agreement and is precluded
from making any assertions to the contrary. If the court or arbitrator shall
determine that the Indemnitee is entitled to any indemnification hereunder, the
Company shall pay all reasonable expenses (including attorneys' fees) and costs
actually incurred by the Indemnitee in connection with such adjudication or
award in arbitration (including, but not limited to, any appellate proceedings).
11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
Indemnitee of notice of the commencement of any action, suit or proceeding, the
Indemnitee will, if a claim in respect thereof is to be made against the Company
under this Agreement, notify the Company in writing of the commencement thereof,
but the omission to so notify the Company will not relieve the Company from any
liability that it may have to the Indemnitee otherwise than under this
Agreement. Notwithstanding any other provision of this Agreement, with respect
to any such action, suit or proceeding as to which the Indemnitee gives notice
to the Company of the commencement thereof:
(a) The Company will be entitled to participate therein at its own
expense; and
(b) Except as otherwise provided in this Section 11(b), to the extent
that it may wish, the Company, jointly with any other indemnifying party
similarly notified, shall be entitled to assume the defense thereof, with
counsel satisfactory to the Indemnitee. After notice from the Company to
the Indemnitee of its election to so assume the defense thereof, the
Company shall not be liable to the Indemnitee under this Agreement for any
legal or other expenses subsequently incurred by the Indemnitee in
connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. The Indemnitee shall have
the right to employ his own counsel in such action, suit or proceeding, but
the fees and expenses of such counsel incurred after notice from the
Company of its assumption of the defense thereof shall be at the expense of
the Indemnitee unless (i) the employment of counsel by the Indemnitee has
been authorized by the Company, (ii) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the Indemnitee in the conduct of the defense of such action, or (iii) the
Company shall not in fact have employed counsel to assume the defense of
the action, in each of which cases the fees and expenses of counsel shall
be at the expense of the Company. The Company shall not be entitled to
assume the defense of any action, suit or proceeding brought by or on
behalf of the Company or as to which the Indemnitee shall have reached the
conclusion provided for in clause (ii) above.
(c) The Company shall not be liable to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any
action or claim in any
Page 6
<PAGE>
manner that would impose any penalty or limitation on the Indemnitee
without the Indemnitee's written consent. Neither the Company nor the
Indemnitee will unreasonably withhold their consent to any proposed
settlement.
12. OTHER RIGHTS TO INDEMNIFICATION. The indemnification and advancement
of expenses (including attorneys' fees) and costs provided by this Agreement
shall not be deemed exclusive of any other rights to which the Indemnitee may
now or in the future be entitled under any provision of the Bylaws of the
Company, any provision of the Articles of Incorporation of the Company, any vote
of stockholders or Disinterested Directors, any provision of law or otherwise.
13. ATTORNEYS' FEES AND OTHER EXPENSES TO ENFORCE AGREEMENT. In the event
that the Indemnitee is subject to or intervenes in any proceeding in which the
validity or enforceability of this Agreement is at issue or seeks an
adjudication or award in arbitration to enforce his rights under, or to recover
damages for breach of, this Agreement, the Indemnitee, if he prevails in whole
or in part in such action, shall be entitled to recover from the Company and
shall be indemnified by the Company against any actual expenses for attorneys'
fees and disbursements reasonably incurred by him.
14. DURATION OF AGREEMENT. This Agreement shall continue until and
terminate upon the later of: (a) ten years after the Indemnitee has ceased to
occupy any of the positions or have any relationship described in Sections 3 and
4 of this Agreement, and (b) the final termination of all pending or threatened
actions, suits, proceedings or investigations to which the Indemnitee may be
subject by reason of the fact that he is or was a director, officer, employee,
agent or fiduciary of the Company or is or was serving at the request of the
Company as a director, officer, employee, agent or fiduciary of any other
entity, including, but not limited to, another corporation, partnership, joint
venture or trust, or by reason of any act or omission by him in any such
capacity. The indemnification provided under this Agreement shall continue as
to the Indemnitee even though he may have ceased to be a director or officer of
the Company. This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of the Indemnitee and his
spouse, successors, assigns, heirs, devisees, executors, administrators or other
legal representatives.
15. SEVERABILITY. If any provision or provisions of this Agreement shall
be held invalid, illegal or unenforceable for any reason whatsoever, (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including, but not limited to, all portions of any Sections of this
Agreement containing any such provision held to be invalid, illegal, or
unenforceable) shall not in any way be affected or impaired thereby, and (b) to
the fullest extent possible, the provisions of this Agreement (including, but
not limited to, all portions of any paragraph of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall
Page 7
<PAGE>
be construed so as to give effect to the intent manifest by the provision held
invalid, illegal or unenforceable.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability is sought shall
be required to be produced to evidence the existence of this Agreement.
17. CAPTIONS. The captions and headings used in this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
18. DEFINITIONS. For purposes of this Agreement:
"DISINTERESTED DIRECTOR" shall mean a Director of the Company who is not or
was not a party to the action, suit, investigation or proceeding in respect of
which indemnification is being sought by the Indemnitee.
"INDEPENDENT COUNSEL" shall mean a law firm or a member of a law firm that
neither is presently nor in the past five years has been retained to represent:
(i) the Company or the Indemnitee in any matter material to either such party,
or (ii) any other party to the action, suit, investigation or proceeding giving
rise to a claim for indemnification hereunder. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or the Indemnitee in an
action to determine the Indemnitee's right to indemnification under this
Agreement.
19. MODIFICATION AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
20. NOTICES. All notices, requests, demands or other communications
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand with receipt acknowledged by the party to whom said notice or
other communication shall have been directed or if (ii) mailed by certified or
registered mail, return receipt requested, with postage prepaid, on the date
shown on the return receipt:
(a) If to the Indemnitee to:
Page 8
<PAGE>
(b) If to the Company, to: Advanced UroScience
1290 Hammond Road
St. Paul, Minnesota 55110
or to such other address as may be furnished to the Indemnitee by the Company or
to the Company by the Indemnitee, as the case may be.
21. GOVERNING LAW. The parties hereto agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota, applied without giving effect to any conflicts-of-law
principles.
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
Page 9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
ADVANCED UROSCIENCE, INC.
By
----------------------------------
Its
---------------------------------
INDEMNITEE:
By
----------------------------------
Its
---------------------------------
Page 10
<PAGE>
EXHIBIT 11
ADVANCED UROSCIENCE, INC.
COMPUTATION OF NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
Year Ended Year Ended Six Months Ended June 30,
-------------------------
December 31, December 31, 1996 1997
1995 1996 (Unaudited) (Unaudited)
--------------------------------------------------
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 40,630 420,626 298,250 -
Common equivalent shares
attributed to stock
options and warrants
granted (A) 110,419 110,419 110,419 110,419
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 4,376,149 5,114,765 4,992,389 5,237,139
--------------------------------------------------
--------------------------------------------------
Net loss ($524,444) ($1,507,842) ($624,143) ($1,172,876)
--------------------------------------------------
------------------------------------------------
Net loss per common and
common equivalent share ($0.12) ($0.30) ($0.13) ($0.22)
------------------------------------------------
------------------------------------------------
(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 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 issued during
the twelve-month period preceding the date of the initial filing of the
Registration Statement has been included in the calculation of common stock
as if it was outstanding for all periods presented.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT 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.
Minneapolis, Minnesota
October 9, 1997
<PAGE>
CONSENT OF NAWROCKI, ROONEY & SIVERTSON, P.A.
We hereby consent to the use of our name in this Registration Statement
on Form SB-2 under the headings "Risk Factors -- Dependence on Patents and
Proprietary Rights" and "Business -- Patents and Proprietary Rights" and to
the references to our firm's opinion under such headings.
NAWROCKI, ROONEY & SIVERTSON, P.A.
By /s/ Lawrence M. Nawrocki
---------------------------
Lawrence M. Nawrocki
Minneapolis, Minnesota
October 9, 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 354,216 2,882,129
<SECURITIES> 0 1,512,240
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 126,121 170,150
<CURRENT-ASSETS> 495,355 4,630,042
<PP&E> 126,099 267,924
<DEPRECIATION> 25,620 41,620
<TOTAL-ASSETS> 623,203 4,891,739
<CURRENT-LIABILITIES> 407,462 308,835
<BONDS> 0 0
0 0
0 0
<COMMON> 2,527,312 7,915,202
<OTHER-SE> (2,311,571) (3,332,298)
<TOTAL-LIABILITY-AND-EQUITY> 623,203 4,891,739
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,542,023 1,240,322
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,667 0
<INCOME-PRETAX> (1,507,842) (1,172,876)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,507,842) (1,172,876)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,507,842) (1,172,876)
<EPS-PRIMARY> (.30) (.22)
<EPS-DILUTED> 0 0
</TABLE>
