-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GDI9Cxhn4UYNxIBPzF/oZnY2GSzFVosmC4U2mE2j+MtKY4nBBh6DEVD+EmwiV1O2 xL6uTwwRzRI/PfTk3H+kGQ== 0000891618-98-001637.txt : 19980410 0000891618-98-001637.hdr.sgml : 19980410 ACCESSION NUMBER: 0000891618-98-001637 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19980409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UROSURGE INC CENTRAL INDEX KEY: 0001058814 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-49791 FILM NUMBER: 98590918 BUSINESS ADDRESS: STREET 1: 2660 CROSSPARK ROAD CITY: CORALVILLE STATE: IA ZIP: 52241 BUSINESS PHONE: 3196268311 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ UROSURGE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3845 04-3222411 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2660 CROSSPARK ROAD CORALVILLE, IOWA 52241 (319) 626-8311 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DAVID H. MAUPIN PRESIDENT AND CHIEF EXECUTIVE OFFICER UROSURGE, INC. 2660 CROSSPARK ROAD CORALVILLE, IOWA 52241 (319) 626-8311 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: CHRISTOPHER D. MITCHELL, ESQ. ALISON S. RESSLER, ESQ. WILSON SONSINI GOODRICH & ROSATI SULLIVAN & CROMWELL PROFESSIONAL CORPORATION 444 S. FLOWER STREET, SUITE 1200 650 PAGE MILL ROAD LOS ANGELES, CALIFORNIA 90071 PALO ALTO, CALIFORNIA 94304 (213) 955-8000 (650) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE ======================================================================================================== PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- Common Stock, par value $.01................................ $40,480,000 $11,942 ========================================================================================================
(1) Estimated solely for the purpose of calculating the amount of the registration fee 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 EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 9, 1998 PROSPECTUS , 1998 SHARES LOGO UROSURGE, INC. COMMON STOCK All of the shares of Common Stock, par value $.01 (the "Common Stock"), offered hereby are being issued and sold by UroSurge, Inc. ("UroSurge" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market, under the symbol "URSG." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. 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. - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------------- Per Share................................ $ $ $ Total(3)................................. $ $ $ - --------------------------------------------------------------------------------------------------------------
(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 expenses of this offering estimated at $800,000, which will be paid by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to additional shares of Common Stock at the Price to Public less Underwriting Discounts and Commissions solely to cover over-allotments, if any. If such 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 being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of share certificates will be made in New York, New York, on or about , 1998. DONALDSON, LUFKIN & JENRETTE CIBC OPPENHEIMER SECURITIES CORPORATION 3 UroSurge(R), UroVive(TM), SANS(TM), SpiraStent(TM), FilaStent(TM), AcuTrainer(R) and UroTherm(R) are trademarks of the Company. Trade names and trademarks of other companies appearing in this Prospectus are the property of their respective holders. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes (i) the filing of the Company's Restated Certificate of Incorporation authorizing a class of undesignated Preferred Stock, to be effective upon the completion of this offering, (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock upon the completion of this offering, (iii) a - for- reverse stock split of the Company's Common Stock to be effected prior to the completion of this offering and (iv) no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." THE COMPANY UroSurge develops, manufactures and markets medical devices for the treatment and management of genito-urinary disorders. The Company is developing a broad range of proprietary products to address segments of the urology market that are currently underserved as a result of ineffective or costly therapies. The Company is initially focusing much of its efforts on addressing urinary incontinence ("UI"), which afflicts approximately 13 million people in the U.S. and accounts for approximately $15 billion in annual treatment costs. The UI market presents a significant opportunity because approximately two-thirds of UI sufferers are dissatisfied with current treatment alternatives according to a recent U.S. study by the National Association for Continence. The Company believes that its lead products, UroVive for stress UI and the Stoller Afferent Nerve Stimulation ("SANS") devices for urge UI, represent superior alternatives to existing therapies by offering minimally invasive, cost-effective, long-term solutions for patients suffering from these conditions. The Company launched these products in Europe in March 1998 and is currently conducting pivotal (late-stage) clinical trials in the U.S. Additionally, the Company is developing and marketing a number of other products to treat a variety of urological conditions. UroVive is a minimally invasive urethral bulking system for the treatment of certain types of stress UI. The UroVive procedure involves the permanent implantation of one or more hydrogel-filled microballoons around the urethra and is designed to close the bladder neck and immediately restore urinary continence. The procedure can be performed in about 20 minutes in an outpatient setting under local anesthesia. The Company believes that UroVive is a practical, safe, long-term solution and is more convenient and cost-effective than palliative approaches such as diapers and urethral plugs that do not cure the problem. The Company also believes that UroVive offers significant advantages over competing injectable urethral bulking agents that suffer from problems of absorption and migration (which can lead to the need for repeat procedures or raise safety concerns) and are not easily retrievable should urinary retention occur. UroVive also provides an advantage over invasive surgical procedures, which are costly and can result in post-surgical complications. The Company is marketing and selling UroVive in Europe under CE mark certification, and is currently conducting pivotal clinical trials of UroVive in the U.S. Results of pilot (early-stage) clinical trials indicate a 90% efficacy rate for patients with the target indication for which the Company has 18-month follow-up data. By comparison, clinical results of the only urethral bulking agent sold commercially in the U.S. indicate only a 52% probability that such patients will maintain their initial continence for one year. The Company expects to submit a pre-market approval ("PMA") application to the U.S. Food and Drug Administration ("FDA") for UroVive in mid-1999. The Company has two SANS devices, percutaneous (through the skin) and subcutaneous (below the skin), for the treatment of urge UI. Both are minimally invasive systems that modulate bladder action through stimulation of the afferent nerve fibers in the ankle area that lead to nerves located in the spinal region that control bladder function. Such stimulation has been shown to greatly reduce the likelihood that the patient will have an uncontrollable spasm of the bladder wall muscle that can cause the bladder to empty. The percutaneous SANS procedure entails approximately 30 minutes of electrical stimulation and is repeated 3 5 weekly in a physician's office. Percutaneous SANS consists of a generator that delivers electrical impulses through a small disposable needle, temporarily inserted near the ankle, and lead wire assembly. To facilitate in-home use and enhance patient convenience, the Company is developing a second generation, subcutaneous SANS device that involves the permanent implant of a small, thumbtack-shaped electronic receiver near the patient's ankle, eliminating the need for the use of a needle with each treatment. Few products exist for effectively treating urge UI and the Company believes that SANS is superior to other commercially available products due primarily to its minimally invasive nature and cost-effectiveness. Clinical studies to date on percutaneous SANS, encompassing over 1,000 treatment procedures in 90 patients with average follow-up in excess of two years, indicate an 80% efficacy rate and no complications. By comparison, clinical results of the only commercially available implantable electronic nerve stimulation device also indicate a comparable efficacy rate, but a high rate of post-treatment complications that required reoperation in approximately one-third of all cases. This competing product involves an invasive surgical implant procedure in the spinal area that is costly and requires extensive physician training. The Company is marketing and selling percutaneous SANS in Europe and is currently conducting a pivotal clinical trial in the U.S. The Company expects to submit a PMA application for acute use of percutaneous SANS by early 1999. As part of its strategy of offering a broad range of products to physicians treating genito-urinary disorders, the Company has also developed or licensed SpiraStent, FilaStent and a kidney stone grasper for use in removing kidney stones; AcuTrainer for diagnosing and managing urge UI; UroTherm for warming irrigation fluids used in various gynecological and urological procedures; demineralized bone paste for use in treating vesicoureteral reflux ("VUR") in infants and children; and a urethral pressure catheter for the diagnosis of stress UI. The Company has received FDA 510(k) clearance for U.S. marketing of SpiraStent and AcuTrainer and has submitted 510(k) clearance applications for FilaStent and UroTherm. The Company is currently marketing and selling SpiraStent, FilaStent and AcuTrainer in Europe and SpiraStent and AcuTrainer in the U.S. STRATEGY The Company's objective is to establish itself as the leader in the development and commercialization of clinically effective solutions for UI and other genito-urinary disorders treated by urologists, urogynecologists and gynecologists. The following are the key elements of the Company's strategy. Accelerate Commercialization of Existing Products. The Company has substantially developed the infrastructure, including international distributors, manufacturing capabilities and sales and marketing management, that will help accelerate the commercialization of its products. The Company is marketing and selling UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer in Europe and other international markets and is recognizing revenues from these efforts in the second quarter of 1998. The Company is also marketing and selling SpiraStent and AcuTrainer in the U.S. and intends to commence marketing of UroVive and SANS in the U.S. upon receipt of PMA approval. Become the Leader in the Treatment of UI. UI is a significant problem for a large number of adults, particularly women and the elderly, and is one of the most intractable and debilitating conditions treated by urologists and urogynecologists. The UI market offers significant potential due primarily to the inadequacy of existing treatments. The Company intends to offer improved approaches for all levels of care, ranging from diagnosis to surgery, and for all types of UI. The Company is focusing on the development of products that are highly effective and minimally invasive, as compared to many current approaches for managing UI, which are either palliative, such as diapers, or involve invasive surgical procedures. Offer a Comprehensive Product Line. Urologists, urogynecologists and gynecologists are responsible for treating most genito-urinary disorders and use a wide range of products. The Company is developing a broad line of products to address the needs of these physicians while focusing on product opportunities that represent significant improvements over currently available therapies. As part of these efforts, the Company intends to explore the applicability of its current products and technologies to additional clinical indications. The Company also continually evaluates product concepts and technologies that may present potential solutions for 4 6 unmet needs in its targeted markets and, in addition to internal development efforts, actively seeks to license or acquire rights to such potential products and technologies. Penetrate International Markets. The Company believes that there is a significant international market for its products. The Company distributes products internationally through local distributors on a country-by-country basis to access such distributors' established networks and specialized expertise regarding the health care system, including reimbursement practices, in their respective markets. The Company's current distributors cover 14 European countries, South Korea, Australia and Japan. In addition, as part of its international marketing efforts, the Company has established clinical research relationships with leading international urologists. The Company believes that its country-specific approach will accelerate sales growth, provide comprehensive geographic market coverage and enable the Company to access particular markets and customers. Build Specialized, Direct Sales Force in the U.S. According to industry sources, there are approximately 8,000 urologists and 800 urogynecologists in the U.S. The Company believes that this relatively small number of physicians to which it will market its products affords a unique opportunity to develop a cost-effective, direct sales effort. Accordingly, the Company has retained all U.S. sales and marketing rights to its products and has commenced hiring of a marketing and sales force in the U.S. To gain acceptance of its products, the Company conducts physician training and disseminates clinical and patient outcome data. In addition, the Company markets its products by raising patient awareness of its available treatments through advertising, magazine articles and other media. HISTORY UroSurge was incorporated in Delaware in August 1993. Since its inception, the Company has received, licensed or obtained an option or right to license 10 issued or allowed U.S. patents and five pending U.S. patent applications and has received three FDA investigational device exemption ("IDE") approvals for U.S. clinical trials, two FDA 510(k) clearances and CE mark certifications for two products. The Company's achievements to date are attributable to the experience of its management team and to the Company's relationships with opinion leaders at major research and treatment institutions, which include Children's Hospital and Medical Center, an affiliate of Harvard Medical School, University of Iowa, and University of California-San Francisco ("UCSF") School of Medicine. The Company is located at 2660 Crosspark Road, Coralville, Iowa 52241 and its telephone number is (319) 626-8311. THE OFFERING Common Stock offered by the Company................... shares Common Stock outstanding after this offering.......... shares(1) Use of proceeds....................................... For increased research and development, including clinical trials, expansion of sales and marketing activities, expansion of manufacturing capabilities and general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol................ URSG
- --------------- (1) Based upon shares outstanding as of March 31, 1998. Excludes (i) 968,958 shares issuable upon exercise of options outstanding at a weighted average exercise price of $0.65 per share, (ii) 300,000 shares reserved for future issuance under the Company's 1998 Employee Stock Purchase Plan, (iii) 300,000 shares reserved for future issuance under the Company's 1998 Director Option Plan and (iv) 612,000 shares reserved for future issuance under the Company's 1994 Amended and Restated Stock Plan. See "Capitalization," "Management -- Incentive Stock Plans" and "Description of Capital Stock." 5 7 SUMMARY FINANCIAL DATA
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 STATEMENTS OF OPERATIONS DATA: Net revenues............................................ $ -- $ 20,166 $ 11,707 Operating expenses: Cost of revenues...................................... -- 12,649 5,432 Research and development.............................. 848,301 1,940,795 3,594,613 Marketing and sales................................... 2,200 270,823 391,877 General and administrative............................ 466,207 771,047 1,479,722 ----------- ----------- ----------- Total operating expenses...................... 1,316,708 2,995,314 5,471,644 ----------- ----------- ----------- Loss from operations.................................... (1,316,708) (2,975,148) (5,459,937) Net loss................................................ $(1,234,159) $(2,777,052) $(5,250,634) =========== =========== =========== Pro forma net loss per share(1)......................... $ (0.84) Shares used in computing pro forma net loss per share(1).............................................. 6,281,282
AS OF DECEMBER 31, 1997 ----------------------------- ACTUAL AS ADJUSTED(2) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 3,266,386 $ Working capital(3).......................................... 3,544,983 Total assets................................................ 5,525,819 Long-term debt.............................................. 109,728 Accumulated deficit......................................... (10,012,436) Total stockholders' equity.................................. 4,474,400
- ------------------------------ (1) See Note 1 of notes to the Company's financial statements for an explanation of the method used to determine pro forma net loss per share. (2) As adjusted to reflect the sale of shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and the receipt of the net proceeds therefrom. (3) Working capital consists of current assets minus current liabilities. 6 8 RISK FACTORS This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the following risk factors as well as those discussed elsewhere in this Prospectus. The following risk factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT. Of the Company's products, only UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer are being marketed in Europe; only SpiraStent and AcuTrainer have been cleared for marketing in the U.S.; and only AcuTrainer has been approved for marketing in Japan. The products the Company is marketing in Europe may not reach the U.S. market and future products may not reach Europe, the U.S. or any other market for a number of reasons. Such reasons include the possibilities that the potential products will be found ineffective or cause harmful side effects during preclinical testing or clinical trials, fail to receive necessary regulatory approvals or clearances, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. No assurance can be given that any of the Company's development programs will be successfully completed, that clinical trials will generate anticipated results or will commence or be completed as planned, that required regulatory approvals or clearances will be obtained on a timely basis, if at all, or that any products for which approval is obtained will contain acceptable labeling or be commercially successful. If any of the foregoing do not occur as planned, the Company's business, financial condition and results of operations would be materially adversely affected. The Company's business is subject to the risks inherent in the development, licensing and acquisition of new products using new technologies and approaches. There can be no assurance that unforeseen problems will not develop with these technologies or applications, that the Company will be able to successfully address technological challenges it encounters in its research and development programs or that commercially feasible products will ultimately be developed, licensed or acquired by the Company. See "Business -- Research and Development." LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATIONS OF FUTURE LOSSES. The Company has a limited operating history upon which its prospects can be evaluated. Such prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry, which is characterized by an increasing number of participants, intense competition and a high failure rate. To date, the Company has engaged primarily in research and development efforts, and a number of the Company's key management and technical personnel have only recently joined the Company. To date, the Company has only generated minimal revenues from product sales and marketed only four of its products in Europe since March 1998. The Company has experienced net losses since its inception and, as of December 31, 1997, the Company had an accumulated deficit of $10.0 million. The development and commercialization of its products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects its net losses to continue through 1999 as it continues to expend substantial resources to build its marketing and sales organizations, continue research and development, obtain regulatory clearances or approvals and expand manufacturing capabilities. There can be no assurance that the Company will ever achieve profitability or that profitability, if achieved, will be sustained. Results of operations may fluctuate significantly from quarter to quarter and will depend upon numerous factors, including actions relating to regulatory and reimbursement matters, progress of clinical trials, discounts to distributors, introduction of alternative therapies for UI and competition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Sales and Marketing," "-- Manufacturing," "-- Competition and Technological Change" and "-- Government Regulation." LACK OF EXTENSIVE CLINICAL DATA. UroVive and percutaneous SANS are in the pivotal stages of clinical testing in the U.S., and clinical data obtained to date is insufficient to demonstrate the safety and efficacy of these products under applicable FDA regulations and regulatory guidelines. The Company completed pilot 7 9 clinical trials and received FDA approval to conduct pivotal trials for UroVive in the U.S. in December 1996. The Company obtained EC approval for UroVive in March 1998 and anticipates submitting a PMA application to the FDA in mid-1999. Percutaneous SANS received an Investigational Device Exemption ("IDE") approval in the U.S. in January 1998. There can be no assurance that UroVive or percutaneous SANS will prove to be safe and effective in clinical trials. In addition, the clinical trials may identify significant technical or other obstacles to be overcome prior to obtaining necessary regulatory or reimbursement approvals. There can be no assurance that UroVive or SANS will receive marketing approval from the FDA or that any of the Company's other products will prove to be safe and effective or will be approved or cleared by appropriate regulatory authorities or by health care payors. If UroVive, SANS and the Company's other products under development do not prove to be safe and effective in clinical trials, the Company's business, financial condition and results of operations will be materially and adversely affected. The rate of completion of the Company's clinical trials may be delayed by many factors, including slower than anticipated patient enrollment or adverse events occurring during clinical trials. Completion of preclinical and clinical activities may take several years, and the length of time for completion of the required studies is unpredictable. In addition, data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. No assurance can be given that any of the Company's clinical trials will be successfully completed on a timely basis, or at all, that additional clinical trials will be allowed by the FDA or other regulatory authorities or that such clinical trials will commence as planned. See "Business -- Products and Products Under Development." DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success will depend on its ability to obtain patent protection for its products, preserve its trade secrets, prevent third parties from infringing upon its proprietary rights, and operate without infringing upon the proprietary rights of others, both in the U.S. and internationally. There can be no assurance that the Company's pending or future patent applications will issue, or that the claims of the Company's issued or licensed patents, or any patents that may issue in the future, will provide any competitive advantages for the Company's products or that they will not be successfully challenged, narrowed, invalidated or circumvented in the future. The Company believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws and believes the protection afforded by foreign patents or any other foreign intellectual property protection, if obtained, may be more limited than that provided domestically. In addition, there can be no assurance that competitors will not seek to apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make, use, offer for sale, sell and import its products. Because patent applications in the U.S. are confidential until the patents issue, and publication of discoveries in the scientific and patent literature tends to lag behind actual discoveries, the Company cannot be certain that Company inventors or licensors were the first to conceive of inventions covered by pending patent applications or that the Company was the first to file patent applications for such inventions. The Company licenses certain technologies and may desire to or may be required to obtain additional licenses to patents or proprietary rights of others. No assurance can be given that any licenses required under any patents or proprietary rights of third parties would remain or be made available on terms acceptable to the Company, or at all. If the Company does not maintain or obtain such licenses, it could encounter delays in product introductions while it attempts to design around or otherwise avoid such patents, or it could find that the development, manufacture or sale of products requiring such licenses is foreclosed. In addition, the medical device industry has been characterized by litigation regarding patents and other intellectual property rights, and many companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. Litigation may be necessary to defend against or assert claims of patent infringement or invalidity, to enforce or defend patents issued to or licensed by the Company, to protect trade secrets or know-how owned by the Company, or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings in the U.S. Patent and Trademark Office, or opposition proceedings in a foreign patent office, may be necessary to determine the priority of inventions with respect to patent applications of the Company or its licensors. Litigation, interference or opposition proceedings could result in substantial costs to and diversion of effort by the Company, and adverse determinations in any such proceedings could prevent the Company from manufacturing, marketing or selling its products and could have a material adverse effect on the Company's business, financial condition and results of operations. 8 10 The Company also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position, which it seeks to protect, in part, by confidentiality agreements with its employees and consultants. The Company also has invention or patent assignment agreements with its employees and certain, but not all, consultants. There can be no assurance that relevant inventions will not be developed by a person not bound by an invention assignment agreement. There can be no assurance that binding agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. See "Business -- Patents and Proprietary Technology." LACK OF REGULATORY APPROVALS. The design, manufacturing, labeling, distribution and marketing of the Company's products is subject to extensive and rigorous government regulation in the U.S. and certain other countries where the process of obtaining and maintaining required regulatory clearance or approvals is lengthy, expensive and uncertain. In order for the Company to market its products in the U.S., the Company must obtain clearance or approval from the FDA. The Company is required to obtain a PMA prior to U.S. commercial sales of its two lead products, UroVive and SANS. The PMA process can take several years from the initial filing and requires the submission of extensive supporting data and clinical information. The Company has received 510(k) clearance in the U.S. for SpiraStent and AcuTrainer and marketing approval in Europe for UroVive and AcuTrainer. The Company also has submitted applications seeking clearance to market FilaStent and UroTherm through the 510(k) premarket notification process and will be required to submit PMA or 510(k) applications for additional products it is developing or may develop, license or acquire in the future. There can be no assurance that the FDA will act favorably or quickly on such PMA or 510(k) submissions, or that significant difficulties and costs will not be encountered during efforts to obtain FDA clearance or approval. Specifically, the FDA may request additional data or require additional clinical trials be conducted to obtain clearance. In addition, there can be no assurance that the FDA will not impose strict labeling, training or other requirements as a condition to 510(k) clearances or PMA approvals, any of which could limit the Company's ability to market its products. Further, if the Company wishes to modify a product after FDA clearance of a 510(k) premarket notification or approval of a PMA, including changes in indications or other modifications that could affect safety and efficacy, additional clearances or approvals will be required from the FDA. Any request by the FDA for additional data or any requirement by the FDA that the Company conduct additional clinical trials or submit to the more rigorous and lengthier PMA process could result in a significant delay in bringing such products to market and substantial additional research and other expenditures by the Company. Similarly, any labeling, training or other conditions or restrictions imposed by the FDA on the marketing of the Company's products could hinder the Company's ability to effectively market its products in the U.S. Any of the foregoing actions by the FDA could delay or prevent altogether the Company's ability to market and distribute its products and could have a material adverse effect on the Company's business, financial condition and results of operations. In order for the Company to market its products under development in Europe and certain other foreign jurisdictions, the Company and its distributors and agents must obtain required regulatory registrations or approvals and otherwise comply with extensive regulations regarding safety, efficacy and quality in those jurisdictions. Specifically, certain foreign regulatory bodies have adopted various regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. These regulations vary from country to country. There can be no assurance that the Company will be successful in maintaining ISO 9001 or CE mark certification. Failure to maintain ISO 9001 or CE mark certification or to obtain or maintain other foreign regulatory approvals could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will obtain any required regulatory registrations or approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining such regulatory registrations or approvals. Delays in obtaining any registrations or approvals required to market the Company's products, failure to receive these registrations or approvals, or future loss of previously obtained registrations or approvals could have a material adverse effect on the Company's business, financial condition and results of operations. 9 11 The Company will be required to adhere to applicable FDA Quality System Regulations ("QSR"), which incorporate the FDA's former Good Manufacturing Practice ("GMP") regulations, and similar regulations in other countries that impose testing, control and documentation requirements. Ongoing compliance with applicable QSRs and other applicable regulatory requirements will be strictly enforced in the U.S. through periodic inspections by state and federal agencies, including the FDA, and in foreign jurisdictions by comparable agencies. Failure to comply with applicable regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant premarket clearance or premarket approval for devices, withdrawal of approvals previously obtained and criminal prosecution. The restriction, suspension or revocation of regulatory approvals or any other failure to comply with regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." UNCERTAINTY OF MARKET ACCEPTANCE. The Company's products are based upon new methods of treating UI and there can be no assurance that these products will gain commercial acceptance among physicians, patients and health care payors, even if necessary international and U.S. marketing approval is obtained. The Company believes that recommendations and endorsements by physicians will be essential for market acceptance of its products and there can be no assurance that any such recommendations or endorsements will be obtained. Market acceptance of the Company's products will also be dependent upon the Company's ability to convince health care payors and providers that such products represent cost-effective alternatives to existing therapies. Such assessments of cost-effectiveness will depend in large part upon the duration of relief from UI provided by the Company's products, and a thorough analysis of long-term patient follow-up data may be necessary to assess such durability. Failure of the Company's products to achieve significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Products and Products Under Development." COMPETITION. The medical device industry in general and the market for products and treatments in the area of UI in particular are highly competitive. In Europe, the Company competes and, in the U.S., the Company will compete with other providers of products and treatments for UI. There is currently one urethral bulking agent for stress UI and one implantable nerve stimulation device for urge UI approved for commercial sale in the U.S. and other such products are in development. In addition, a number of competitors are currently marketing products, such as absorbents and pharmaceuticals, to treat UI. Some of these products are widely accepted in the health care industry and have a long history of use. Many of the Company's current and potential competitors have substantially greater financial, research, technical, manufacturing, marketing and distribution resources than the Company and have greater name recognition and lengthier operating histories in the health care industry. There can be no assurance that the Company will be able to compete effectively against these and other competitors or that the Company's products will replace any currently used devices or systems. Furthermore, there can be no assurance that the Company's competitors will not succeed in developing, either before or after the development and commercialization of the Company's products, devices and technologies that permit more efficient, less expensive and less invasive treatment of UI. It is also possible that one or more pharmaceutical or other health care companies will develop therapeutic drugs, treatments or other products that will substantially reduce the prevalence of UI or otherwise render the Company's products obsolete or irrelevant. Such competition could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition and Technological Change." LIMITED MANUFACTURING EXPERIENCE. The Company is currently scaling up its manufacturing facilities for clinical and early commercial production of its products. The Company does not have experience in manufacturing its products in commercial quantities. There can be no assurance that the Company will be able to attract, train and retain the required personnel or will be able to manufacture commercial quantities of its products in a timely manner, or at all. Manufacturers often encounter difficulties in scaling up production of their products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel. There can be no assurance that the Company's manufacturing scale-up efforts will be successful or that reliable, high-volume manufacturing can be established or 10 12 maintained at commercially reasonable costs on a timely basis, or at all. In addition, there can be no assurance that the Company will not encounter unanticipated problems and delays in connection with its contract manufacturers and suppliers. Delays associated with or difficulties encountered in establishing high-volume manufacturing, or problems encountered with contract manufacturers and suppliers, would result in disruptions of product supply. Any of the foregoing would have a material adverse affect on the Company's business, financial condition and results of operations. Medical devices, such as the Company's products, can experience performance problems in the field that require review and possible corrective action by the manufacturer. There can be no assurance that component failures, manufacturing errors or design defects that could result in an unsafe condition or injury to the patient will not occur. If any such failures or defects were deemed serious, the Company could be required to withdraw or recall products, which could result in significant costs to the Company. Any future product problems could result in market withdrawals or recalls of products, which could have a material adverse affect on the Company's business, financial condition and results of operations. Furthermore, prior to approval of a PMA application, the Company's facilities, procedures and practices, and the facilities, procedures and practices of its third-party manufacturers, will be subject to a preapproval inspection by the FDA. In addition, if the Company wishes to significantly modify its manufacturing processes or change the supplier of a critical component, additional approvals will be required from the FDA before the change can be implemented. Failure to maintain compliance with the applicable regulatory requirements of various regulatory agencies would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." DEPENDENCE UPON KEY SUPPLIERS. One of the primary components for the manufacture of UroVive, the microballoon, is purchased by the Company from a single source under a mutually exclusive supply agreement that expires in April 2000, subject to an automatic two-year extension. Other raw materials and components used in the Company's products are purchased from various suppliers. These materials have generally been readily available in the marketplace and have not been the subject of shortages. There can, however, be no assurance that the Company or its suppliers or contract manufacturers will not experience shortages of materials in the future. Delays associated with any such future shortages of materials or components, particularly as the Company scales up its manufacturing activities in support of commercial sales, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." LIMITED MARKETING AND SALES CAPABILITIES. The Company currently has limited experience in marketing and selling its products. In order to achieve commercial success for any product, UroSurge must increase its marketing and sales capabilities or enter into arrangements with third parties to market and sell its products. There can be no assurance that UroSurge will successfully develop such marketing and sales capabilities or experience. As the Company develops its own marketing and sales capabilities, it will compete with other companies that currently have experienced and well-funded marketing and sales operations. The Company markets and sells its products outside the U.S. primarily through a network of international distributors, and the Company's international sales are largely dependent on the marketing efforts of, and sales by, these distributors. Sales through distributors are subject to several risks, including the risk of financial instability of the distributors and the risk that distributors will not effectively promote the Company's products. There can be no assurance that the efforts of these third parties for the marketing and sale of the Company's products will be successful. See "Business -- Sales and Marketing." INTERNATIONAL SALES AND OPERATING RISKS. The Company's limited sales of UroVive, percutaneous SANS, SpiraStent and FilaStent have been outside the U.S., and the Company anticipates that a significant portion of its revenues for the next several years will also be derived from international sales of its products. A number of risks are inherent in international operations and transactions. International sales and operations may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs or difficulties in staffing and managing international operations. Foreign regulatory agencies often establish product standards different from those in the U.S. and any inability 11 13 to obtain foreign regulatory approvals on a timely basis could have an adverse effect on the Company's international business and its financial condition and results of operations. Additionally, the Company's business, financial condition and results of operations may be adversely affected by fluctuations in currency exchange rates as well as increases in duty rates. There can be no assurance that the Company will be able to successfully commercialize its existing or future products in any foreign market. See "Business -- Sales and Marketing." NO ASSURANCE OF ABILITY TO MANAGE GROWTH. If demand for the Company's products develops and grows, there can be no assurance that the Company will be able to develop the necessary manufacturing capability for its products; build the international sales and marketing capability for products; attract, retain and integrate the required personnel; or implement the financial and management systems necessary to meet the growing demand for its products. Failure of the Company to successfully manage its growth could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing," "-- Manufacturing," "-- Employees," "-- Facilities" and "Management." PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The development, manufacture and sale of medical products entail significant risks of product liability claims. The Company has product liability insurance subject to specified coverage limits. There can no assurance that such insurance coverage will be adequate to protect the Company from any liabilities, including any adverse judgments or settlements, it might incur in connection with the development, clinical testing, manufacture and sale of its products. In addition, product liability insurance is expensive and may in the future not be available to the Company on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company that results in an adverse judgment against or settlement by the Company in excess of any insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Product Liability." POSSIBLE FUTURE CAPITAL REQUIREMENTS. To the extent that the Company is unable to successfully commercialize its products or experiences delays in completing product testing and clinical trials or obtaining regulatory approvals and clearances, it may be required to raise additional funds through public or private financing or other arrangements. The Company believes that its existing capital resources and the net proceeds of this offering will be sufficient to satisfy its funding requirements through 1999. There can be no assurance that any required additional funding, if needed, will be available on terms attractive to the Company, or at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. The Company's success will be dependent upon, among other things, the ability of users of its products to obtain satisfactory reimbursement from health care payors for the Company's products and procedures employing such products. In the U.S. and international markets, sales of medical products are dependent, in part, on the ability of consumers of these products to obtain reimbursement for all or a portion of their cost from third-party payors, such as government and private insurance plans. Currently, third-party reimbursement is available for some existing therapies used in the treatment of UI (other than for diapers and absorbents). After such time, if ever, as FDA approval or clearance is received, third-party reimbursement for UroVive and SANS will be dependent upon decisions by the Health Care Financing Administration ("HCFA") for Medicare and Medicaid, as well as by individual health maintenance organizations, private insurers and other payors. Such reimbursement approvals will depend in part on the Company's ability to convince payors that such products represent cost-effective alternatives to existing therapies. Such assessments of cost-effectiveness will depend in large part upon the duration of the relief from UI provided by the Company's products, and a thorough analysis of long-term patient follow-up data may be necessary to assess such durability. In addition, the Company has not applied for or received either Medicare or private payor reimbursement approvals for SpiraStent or AcuTrainer, and growth in SpiraStent or AcuTrainer sales in the U.S. will be dependent upon the Company's ability to obtain such reimbursement approvals. 12 14 Reimbursement systems in international markets vary significantly by country. Many international markets have governmentally managed health care systems that govern reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as governmentally managed systems. Market acceptance of the Company's products will depend on the availability of reimbursement in international markets targeted by the Company and will require reimbursement approvals in addition to those already obtained. Regardless of the type of reimbursement system, the Company believes that physician advocacy of the Company's products will be required to obtain reimbursement. There can be no assurance that reimbursement will be available or sufficient to allow the Company to sell its products on a competitive basis, or that physicians will support reimbursement for the Company's procedures. Furthermore, the Company could be adversely affected by changes in reimbursement policies of governmental or private health care payors. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors or adverse changes in governmental and private third party payor's policies toward reimbursement for procedures employing the Company's products would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Third-Party Reimbursement." DEPENDENCE UPON KEY PERSONNEL. The Company's ability to operate successfully and manage its potential future growth depends in significant part upon the continued service of certain key scientific, technical, managerial and finance personnel and its ability to attract and retain additional highly qualified scientific, technical, managerial and finance personnel. None of these key employees has an employment contract with the Company nor are any of these employees covered by key person or similar insurance. The Company faces intense competition for qualified personnel, many of whom are often subject to competing employment offers, and there can be no assurance that the Company will be able to attract and retain such personnel. The loss of key personnel or inability to hire and retain additional qualified personnel in the future could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees." NO PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined through negotiations between the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after completion of this offering. The factors to be considered in determining the initial public offering include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Company, the historical results of operation of the Company, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering. See "Underwriting." VOLATILITY OF COMMON STOCK PRICE. The market prices for securities of medical device companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new therapeutic products by the Company or others, clinical trial results, government regulation, developments in patent or other proprietary rights, public concern as to the safety of products developed by the Company or others, future sales of substantial amounts of Common Stock by existing stockholders, comments by securities analysts and general market conditions can have an adverse effect on the market price of the Common Stock. In addition, the realization of any of the risks described in these "Risk Factors" could have a dramatic and material adverse impact on the market price of the Company's Common Stock. CONTROL BY EXISTING STOCKHOLDERS. After the completion of this offering, current stockholders, including certain executive officers and directors of the Company and their affiliates, will own approximately % of the outstanding Common Stock. As a result, these stockholders will, to the extent they act together, continue to have the ability to exert significant influence and control over matters requiring the approval of the 13 15 Company's stockholders, including the election of a majority of the Company's Board of Directors. See "Principal Stockholders." SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this offering could materially adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future. Upon completion of this offering, the Company will have shares of Common Stock outstanding, of which the shares offered hereby will be freely tradable (unless held by affiliates of the Company). As a result of lock-up agreements between certain stockholders and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), the remaining 6,956,037 shares will not become available for sale in the public market until 180 days after the date of this Prospectus, subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933, as amended (the "Securities Act"). However, DLJ may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements. See "Shares Eligible for Future Sale" and "Underwriting." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS ON PRICE OF COMMON STOCK. Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock without any vote or further action by the stockholders, eliminate the right of stockholders to act by written consent without a meeting and specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings. Certain provisions of Delaware law applicable to the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholders for a period of three years unless certain conditions are met, could also delay or make more difficult a merger, tender offer or proxy contest involving the Company. The possible issuance of Preferred Stock, the procedures required for director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of the Company. See "Description of Capital Stock -- Preferred Stock" and "-- Certain Charter and Bylaws Provisions and Delaware Anti-Takeover Statute." DILUTION. Purchasers of Common Stock in this offering will experience immediate and substantial dilution of $ per share in the net tangible book value of the Common Stock from the initial public offering price. Additional dilution is likely to occur upon the exercise of options, warrants and conversion rights granted by the Company. See "Dilution." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of per share are estimated to be million ( million if the Underwriters' over-allotment option is exercised in full) after deducting the underwriting discounts and commissions and the estimated expenses of this offering. The Company expects to use a majority of the net proceeds to fund increased research and development activities, including clinical trials, expansion of marketing and sales activities, expansion of manufacturing capabilities and capital expenditures. The Company intends to use the remaining net proceeds for working capital, general and administrative expenses and general corporate purposes. The amounts actually expended for each purpose and the timing of such expenditures may vary significantly depending upon numerous factors, including the timing of regulatory actions regarding the Company's products, the cost and timing of expansion of marketing, sales and manufacturing activities, results of clinical trials and competition. The Company may also use a portion of the net proceeds for the licensing or acquisition of technologies, businesses or products that are complementary to those of the Company. No such acquisitions are currently planned or are being negotiated, and no portion of the net proceeds has been allocated for any specific licensing or acquisition. Pending such uses, the Company intends to invest the net proceeds of this offering in short-term, interest-bearing, investment grade securities. In addition, a portion of the net proceeds may be used to repay certain amounts the Company may borrow from stockholders under a financing arrangement. Under this arrangement, which is expected to be entered into in April 1998, certain principal stockholders would provide the Company with a line of credit of up to $5.0 million in the event that the Company requires any additional funding prior to receiving the net proceeds from this offering. In exchange for this line, the Company has agreed to issue warrants to the stockholders to purchase an aggregate of 50,000 shares of Common Stock at the initial public offering price per share. The remaining terms of this credit facility are currently being negotiated by the Company and such stockholders. To date, the Company has not borrowed any amounts under this arrangement. DIVIDEND POLICY The Company has never declared or paid any dividends on its capital stock. The Company does not anticipate declaring or paying any cash dividends in the foreseeable future. 15 17 CAPITALIZATION The following table sets forth, as of December 31, 1997, (i) the actual capitalization of the Company and (ii) the as adjusted capitalization of the Company reflecting the conversion of all outstanding shares of Preferred Stock into Common Stock; the sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share) and receipt of the proceeds therefrom, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company; and the restatement of the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock to 50,000,000 shares and create a class of undesignated Preferred Stock. See "Use of Proceeds." This table should be read in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED Cash, cash equivalents and short-term investments........... $ 3,266,386 =========== ======== Long-term debt (including current maturities)............... $ 174,691 Stockholders' equity: Preferred Stock, par value $0.01 per share; 7,220,000 shares authorized, 5,834,404 shares issued and outstanding on an actual basis; 5,000,000 shares authorized, none issued and outstanding as adjusted.... 58,344 Common Stock, par value $0.01 per share; 15,000,000 shares authorized, 1,121,633 shares issued and outstanding on an actual basis; 50,000,000 shares authorized and shares issued and outstanding as adjusted(1)............................................ 11,216 Additional paid-in capital................................ 15,155,720 Deferred compensation..................................... (738,444) Accumulated deficit....................................... (10,012,436) ----------- -------- Total stockholders' equity........................ 4,474,400 ----------- -------- Total capitalization.............................. $ 4,649,091 =========== ========
- ------------------------------ (1) Based upon shares outstanding as of December 31, 1997. Excludes (i) 734,458 shares issuable upon exercise of options outstanding at a weighted average exercise price of $0.26 per share, (ii) 300,000 shares reserved for future issuance under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan"), (iii) 300,000 shares reserved for future issuance under the Company's 1998 Director Option Plan and (iv) 846,500 shares reserved for future issuance under the Company's 1994 Stock Plan. See "Management -- Incentive Stock Plans" and "Description of Capital Stock." 16 18 DILUTION The pro forma net tangible book value of the Company's Common Stock as of December 31, 1997, was $4,240,638 or $0.61 per share. Pro forma net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding after giving effect to the conversion of outstanding shares of Preferred Stock into Common Stock upon the completion of this offering. After giving effect to the sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share) and after deducting underwriting discounts and commissions and estimated offering expenses, the Company's pro forma net tangible book value as of December 31, 1997 would have been approximately $ or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors purchasing shares of Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price.................. $ Pro forma net tangible book value per share at December 31, 1997................................. $ Increase per share attributable to new investors..... Pro forma net tangible book value after this offering............................................. Dilution to new investors.............................. $
The following table summarizes, on a pro forma basis as of December 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by existing stockholders and by investors purchasing shares in this offering (assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing stockholders......... 6,956,037 $14,428,653 % $ 2.07 New investors................. --------- ----- ----------- ----- Total............... 100.0% 100.0% ========= ===== =========== =====
17 19 SELECTED FINANCIAL DATA The selected financial data presented below with respect to the Company's financial statements as of and for each of the periods ended December 31, 1993, 1994, 1995, 1996 and 1997 are derived from financial statements of the Company that have been audited by McGladrey & Pullen, LLP, independent auditors. The selected financial data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1993(1) 1994(1) 1995 1996 1997 STATEMENTS OF OPERATIONS DATA: Net revenues................ $ -- $ -- $ -- $ 20,166 $ 11,707 Operating expenses: Cost of revenues.......... -- -- -- 12,649 5,432 Research and development............ -- 238,212 848,301 1,940,795 3,594,613 Marketing and sales....... -- -- 2,200 270,823 391,877 General and administrative......... -- 549,247 466,207 771,047 1,479,722 -------- --------- ----------- ----------- ----------- Total operating expenses........ -- 787,459 1,316,708 2,995,314 5,471,644 -------- --------- ----------- ----------- ----------- Loss from operations........ -- (787,459) (1,316,708) (2,975,148) (5,459,937) Interest income............. -- 36,868 85,003 184,099 187,010 Interest expense............ -- -- (2,454) (6,386) (9,023) Income tax credits.......... -- -- -- 20,383 31,316 -------- --------- ----------- ----------- ----------- Net loss.......... $ -- $(750,591) $(1,234,159) $(2,777,052) $(5,250,634) ======== ========= =========== =========== =========== Basic and diluted net loss per share(2).............. $ -- $ (1.04) $ (1.23) $ (2.58) $ (4.72) Weighted average shares outstanding(2)............ -- 723,259 999,510 1,076,987 1,111,267 Pro forma net loss per share(2).................. $ (0.84) Shares used in computing pro forma net loss per share(2).................. 6,281,282
AS OF DECEMBER 31, -------------------------------------------------------------------- 1993(1) 1994(1) 1995 1996 1997 BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............. $ -- $ 919,039 $ 4,821,063 $ 2,113,202 $ 3,266,386 Working capital(3)........ -- 844,636 4,742,010 1,686,566 3,544,983 Total assets.............. -- 1,032,889 5,373,922 2,890,545 5,525,819 Long-term debt............ -- -- 107,314 92,870 109,728 Accumulated deficit....... -- (750,591) (1,984,750) (4,761,802) (10,012,436) Total stockholders' equity.................. -- 926,171 5,022,789 2,254,435 4,474,400
- ------------------------------ (1) The Company was incorporated August 6, 1993 and commenced operations in March 1994. (2) See Note 1 of notes to the Company's financial statements for an explanation of the method used to determine basic and diluted net loss per share, weighted average shares outstanding and pro forma net loss per share. (3) Working capital is current assets minus current liabilities. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Prospectus contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" as well as those discussed elsewhere in this Prospectus. The following discussion should be read in conjunction with the Company's financial statements and notes thereto included elsewhere in this Prospectus. OVERVIEW UroSurge develops, manufactures and markets medical devices for the treatment and management of genito-urinary disorders. The Company believes that its lead products, UroVive and SANS, represent a significant revenue opportunity in Europe and the U.S. Additionally, the Company has a number of other products approved or in development to treat a variety of urological conditions. The Company commenced marketing UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer in Europe and other international markets in March 1998 and is recognizing revenues from these efforts in the second quarter of 1998. The Company is marketing SpiraStent and AcuTrainer in the U.S. and intends to commence marketing UroVive and percutaneous SANS in the U.S. upon receipt of PMA approval. In addition, the Company has submitted 510(k) clearance applications for FilaStent and UroTherm. Since its inception, the Company has financed operations primarily through the private placement of equity securities totaling $14.4 million. The Company has incurred net losses in each year since its inception, including net losses of $5.3 million in 1997, $2.8 million in 1996 and $1.2 million in 1995. The Company's net losses have resulted primarily from expenses incurred in connection with the Company's research and development activities, including clinical and preclinical trials, development of manufacturing processes, general and administrative expenses and sales and marketing expenses. The Company expects to incur net losses through at least 1999 and may incur net losses in subsequent periods although the amount of future net losses and time required by the Company to reach profitability are highly uncertain. Although the Company only sold limited numbers of AcuTrainers in 1996 and 1997, it is recognizing revenues from the sale of UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer in Europe in the second quarter of 1998. The Company will not generate revenues from commercial sales of UroVive, percutaneous SANS and FilaStent in the U.S. unless FDA approvals are received. The Company has entered into license agreements with various parties under which the Company obtained certain intellectual property rights relating to its products. See "Business -- Patents and Proprietary Rights." The Company is obligated to pay royalties of up to 6% on sales of all of its products, except for FilaStent and UroTherm, under such license agreements. The Company currently accounts for such royalties as operating expenses. The Company is also obligated to make certain milestone payments under these license agreements, which could aggregate approximately $1.0 million. The Company intends to sell its products through a direct sales force in the U.S. and through local distributors in foreign markets with non-exclusive rights in their respective designated territories. The Company expects gross margins on U.S. sales to be higher than gross margins on international sales due to distributor discounts. The Company believes its gross margins will be primarily affected by product mix, manufacturing costs, sales channels and product pricing. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1996 Net revenues decreased to $12,000 in 1997 from $20,000 in 1996. AcuTrainer was the only product sold commercially by the Company during these periods and is expected to comprise only a small portion of the Company's future revenues. The Company's primary focus has been on the development of UroVive and SANS and, as a result, the Company did not devote significant sales efforts to AcuTrainer sales. The 19 21 Company is recognizing revenues from sales of UroVive and percutaneous SANS in Europe in the second quarter of 1998. Research and development expenses increased to $3.6 million in 1997 from $1.9 million in 1996. This increase was due primarily to increased costs of development, including materials for UroVive and SANS pivotal clinical trials and preclinical animal testing for the Company's other products. In addition, the increase in expense is associated with the Company's build-up of its research and development personnel as well as payments to consultants. The Company currently employs 17 individuals in research and development and manufacturing on a full-time basis and five individuals on a part-time basis. Research and development expenses are expected to increase as the Company continues to develop its products. Marketing and sales expenses increased to $392,000 in 1997 from $271,000 in 1996. This increase was due to the Company's build-up of its sales and marketing personnel, which currently includes six executives and two telemarketers. In addition, the Company is continuing to develop promotional materials, train physicians and attend trade shows, which also contributes to the increase in such expenses. Marketing and sales expenses are expected to increase as the Company commercializes its products and completes the hiring of a direct sales force in the U.S. General and administrative expenses increased to $1.5 million in 1997 from $771,000 in 1996. This increase was due primarily to increased personnel costs and associated costs related to obtaining product clearances and establishing administrative functions to support the Company's operations. General and administrative expenses are expected to increase as additional personnel are hired to support the Company's operations and needs as a public company, but at a lower rate than research and development and marketing and sales expenses. Interest income increased to $187,000 in 1997 from $184,000 in 1996. Interest expense increased to $9,000 in 1997 from $6,000 in 1996. With respect to certain stock options made during 1997, the Company is recognizing compensation charges of $860,000. The Company recognized $122,000 of the compensation charges in 1997, and will recognize the remainder over the related vesting period. The future compensation charges are subject to reduction for any employee who terminates employment prior to the expiration of such employee's vesting period. See Note 5 of notes to the Company's financial statements. FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1995 Net revenues were $20,000 in 1996 as a result of sales of AcuTrainers. No revenues were recorded in 1995. Research and development expenses increased to $1.9 million in 1996 from $848,000 in 1995. This increase was due to increased costs for the development of UroVive and SANS, including pilot clinical studies and preclinical animal testing, the associated costs for the hiring of research and development personnel and consultants and increased material and prototype expenses. Marketing and sales expenses increased to $271,000 in 1996 from $2,000 in 1995. This increase was due primarily to advertising costs for AcuTrainer and image brochures regarding the Company. General and administrative expenses increased to $771,000 in 1996 from $466,000 in 1995. This increase was due primarily to increased personnel and associated costs related to obtaining an IDE for UroVive and a 510(k) clearance for AcuTrainer and establishing administrative functions to support the Company's operations. Interest income increased to $184,000 in 1996 from $85,000 in 1995. This increase is due primarily to higher cash balances as a result of a $5.3 million private placement of equity securities completed in September and October 1995. 20 22 LIQUIDITY AND CAPITAL RESOURCES From inception through December 31, 1997, the Company has financed operations primarily through the private placement of equity securities totaling $14.4 million. The Company's principal source of liquidity as of December 31, 1997 consisted of cash, cash equivalents and short-term investments of $3.3 million. The Company's cash used in operating activities increased to $5.7 million in 1997 from $2.5 million in 1996, primarily resulting from an increase in the Company's net loss due to increased research and development, sales and marketing, and general and administrative expenses for preparation and support of clinical trials for UroVive and percutaneous SANS. As of December 31, 1997, the Company had approximately $110,000 in long-term debt. The Company expects to enter into a financing arrangement with certain of its principal stockholders during April 1998. Under this arrangement, such stockholders would provide the Company with a line of credit of up to $5.0 million in the event that the Company requires any additional funding prior to receiving the net proceeds of this offering. In exchange for this line, the Company has agreed to issue warrants to purchase an aggregate of 50,000 shares of Common Stock at the initial public offering price per share. The remaining terms of this credit facility are currently being negotiated by the Company and such stockholders. To date, the Company has not borrowed any amounts under this arrangement. The Company is completing improvements to a leased building to be used as a manufacturing facility. Leasehold improvements and other capital equipment purchases with an estimated cost of $500,000 are anticipated through the second quarter of 1998. The Company does not anticipate that material capital or other expenditures will be necessary in connection with computer problems associated with year 2000 concerns. The Company believes that the proceeds from this offering together with current cash balances will be sufficient to meet the Company's operating and capital requirements through 1999. The Company's liquidity and capital requirements will depend on numerous factors, including the extent to which the Company's products gain market acceptance, the timing of regulatory actions regarding the Company's products, the costs and timing of expansion of sales, marketing and manufacturing activities, obtaining and enforcing patents important to the Company's business, results of clinical trials and competition. There can be no assurance that the Company will not be required to raise additional capital, or that such capital will be available on acceptable terms, or at all. 21 23 BUSINESS OVERVIEW UroSurge develops, manufactures and markets medical devices for the treatment and management of genito-urinary disorders. The Company is developing a broad range of proprietary products to address segments of the urology market that are currently underserved as a result of ineffective or costly therapies. The Company is initially focusing much of its efforts on addressing UI, which afflicts approximately 13 million people in the U.S. and accounts for approximately $15 billion in annual treatment costs. The UI market presents a significant opportunity because approximately two-thirds of UI sufferers are dissatisfied with current treatment alternatives according to a recent U.S. study by the National Association for Continence. The Company believes that its lead products, UroVive for stress UI and SANS devices for urge UI, represent superior alternatives to existing therapies by offering minimally invasive, cost-effective, long-term solutions for patients suffering from these conditions. The Company launched these products in Europe in March 1998 and is currently conducting pivotal clinical trials in the U.S. Additionally, the Company is developing and marketing a number of other products to treat a variety of urological conditions. UroVive is a minimally invasive urethral bulking system for the treatment of certain types of stress UI. The UroVive procedure involves the permanent implantation of one or more hydrogel-filled microballoons around the urethra and is designed to close the bladder neck and immediately restore urinary continence. The procedure can be performed in about 20 minutes in an outpatient setting under local anesthesia. The Company believes that UroVive is a practical, safe, long-term solution and is more convenient and cost-effective than palliative approaches such as diapers and urethral plugs that do not cure the problem. The Company also believes that UroVive offers significant advantages over competing injectable urethral bulking agents that suffer from problems of absorption and migration (which can lead to the need for repeat procedures or raise safety concerns) and are not easily retrievable should urinary retention occur. UroVive also provides an advantage over invasive surgical procedures, which are costly and can result in post-surgical complications. The Company is marketing UroVive in Europe under CE mark certification, and is currently conducting pivotal clinical trials of UroVive in the U.S. Results of pilot clinical trials indicate a 90% efficacy rate for patients with the target indication for which the Company has 18-month follow-up data. By comparison, clinical results of the only urethral bulking agent sold commercially in the U.S. indicate only a 52% probability that such patients will maintain their initial continence for one year. The Company expects to submit a PMA application to the FDA for UroVive in mid-1999. The Company has two SANS devices, percutaneous (through the skin) and subcutaneous (below the skin), for the treatment of urge UI. Both are minimally invasive systems that modulate bladder action through stimulation of the afferent nerve fibers in the ankle area that lead to nerves located in the spinal region that control bladder function. Such stimulation has been shown to greatly reduce the likelihood that the patient will have an uncontrollable spasm of the bladder wall muscle that can cause the bladder to empty. The percutaneous SANS procedure entails approximately 30 minutes of electrical stimulation and is repeated weekly in a physician's office. Percutaneous SANS consists of a generator that delivers electrical impulses through a small disposable needle, temporarily inserted near the ankle, and lead wire assembly. To facilitate in-home use and enhance patient convenience, the Company is developing a second generation, subcutaneous SANS device that involves the permanent implant of a small, thumbtack-shaped electronic receiver near the patient's ankle, eliminating the need for the use of a needle with each treatment. Few products exist for effectively treating urge UI and the Company believes that SANS is superior to other commercially available products due primarily to its minimally invasive nature and cost-effectiveness. Clinical studies to date on percutaneous SANS, encompassing over 1,000 treatment procedures in 90 patients with average follow-up in excess of two years, indicate an 80% efficacy rate and no complications. By comparison, clinical results of the only commercially available implantable electronic nerve stimulation device also indicate a comparable efficacy rate, but a high rate of post-treatment complications that required reoperation in approximately one-third of all cases. This competing product involves an invasive surgical implant procedure in the spinal area and requires extensive physician training. The Company is marketing percutaneous SANS in Europe and is currently conducting a pivotal clinical trial in the U.S. The Company expects to submit a PMA application for acute use of percutaneous SANS by early 1999. 22 24 As part of its strategy of offering a broad range of products to physicians treating genito-urinary disorders, the Company has also developed or licensed SpiraStent, FilaStent and a kidney stone grasper for use in removing kidney stones; AcuTrainer for diagnosing and managing urge UI; UroTherm for warming irrigation fluids used in various gynecological and urological procedures; demineralized bone paste for use in treating VUR in infants and children; and a urethral pressure catheter for the diagnosis of stress UI. The Company has received FDA 510(k) clearance for U.S. marketing of SpiraStent and AcuTrainer, and has submitted 510(k) clearance applications for FilaStent and UroTherm. The Company is marketing SpiraStent, FilaStent and AcuTrainer in Europe and SpiraStent and AcuTrainer in the U.S. STRATEGY The Company's objective is to establish itself as the leader in the development and commercialization of clinically effective solutions for UI and other genito-urinary disorders treated by urologists, urogynecologists and gynecologists. The following are the key elements of the Company's strategy. Accelerate Commercialization of Existing Products. The Company has substantially developed the infrastructure, including international distributors, manufacturing capabilities and sales and marketing management, that will help accelerate the commercialization of its products. The Company is marketing UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer in Europe and other international markets and is recognizing revenues from these efforts in the second quarter of 1998. The Company is also marketing SpiraStent and AcuTrainer in the U.S. and intends to commence marketing of UroVive and SANS in the U.S. upon receipt of PMA approval. Become the Leader in the Treatment of UI. UI is a significant problem for a large number of adults, particularly women and the elderly, and is one of the most intractable and debilitating conditions treated by urologists and urogynecologists. The UI market offers significant potential due primarily to the inadequacy of existing treatments. The Company intends to offer improved approaches for all levels of care, ranging from diagnosis to surgery, and for all types of UI. The Company is focusing on the development of products that are highly effective and minimally invasive, as compared to many current approaches for managing UI, which are either palliative, such as diapers, or involve invasive open surgical procedures. Offer a Comprehensive Product Line. Urologists, urogynecologists and gynecologists are responsible for treating most genito-urinary disorders and use a wide range of products. The Company is developing a broad line of products to address the needs of these physicians while focusing on product opportunities that represent significant improvements over currently available therapies. As part of these efforts, the Company intends to explore the applicability of its current products and technologies to additional clinical indications. The Company also continually evaluates product concepts and technologies that may present potential solutions for unmet needs in its targeted markets and, in addition to internal development efforts, actively seeks to license or acquire rights to such products and technologies. Penetrate International Markets. The Company believes that there is a significant international market for its products. The Company distributes products internationally through local distributors on a country-by-country basis to access such distributors' established networks and specialized expertise regarding the health care system, including reimbursement practices, in their respective markets. The Company's current distributors cover 14 European countries, South Korea, Australia and Japan. In addition, as part of its international marketing efforts, the Company has established clinical research relationships with leading international urologists. The Company believes that its country-specific approach will accelerate sales growth, provide comprehensive geographic market coverage and enable the Company to access particular markets and customers. Build Specialized, Direct Sales Force in the U.S. According to industry sources, there are approximately 8,000 urologists and 800 urogynecologists in the U.S. The Company believes that this relatively small number of physicians to which it will market its products affords a unique opportunity to develop a cost-effective, direct sales effort. Accordingly, the Company has retained all U.S. sales and marketing rights to its products and has commenced building a sales and marketing sales force in the U.S. To gain acceptance of its products, the Company conducts physician training and disseminates clinical and patient outcome data. In addition, the 23 25 Company markets its products by raising patient awareness of its available treatments through advertising, magazine articles and other media. URINARY INCONTINENCE In the normal urinary tract, continence, or the appropriate storage of urine, is maintained by a complex interplay of anatomic structures. The primary structures responsible for controlling continence are the bladder neck and the urinary sphincter. The urinary sphincter is a muscle at the base of the bladder that surrounds the bladder neck and urethra and aids the bladder in maintaining continence. In a normal system, the bladder neck and the urinary sphincter work in a coordinated fashion to act as a valve. As the bladder fills and relaxes, the urinary sphincter contracts to prevent urination. During urination, the urethra and urinary sphincter muscle relax and open, the bladder contracts and the bladder neck opens, all in a coordinated fashion, causing the passage of urine. In normal continence, when the bladder neck opens involuntarily in response to intra-abdominal pressure, the lower portion of the urinary sphincter tightens in turn so as to maintain continence. Similarly, the urethra is also under muscular control so as to keep this tube closed during the urine storage phase. The following diagram depicts the anatomy of the urinary tract. [DIAGRAM OF URINARY TRACT] A malfunction in any part of this system can cause UI. The most common anatomic incontinence pathology is bladder neck or urethral hypermobility, which results from a lack of bladder neck support caused primarily by weak surrounding tissue. The weakening of tissue surrounding the bladder, urethra and bladder neck arises most commonly in women as a consequence of pelvic trauma cause by pregnancy and childbirth. Other causes of UI include birth defects, injuries to the pelvic region or to the spinal cord, neurological diseases and degenerative changes associated with aging. UI may cause depression, discomfort and embarrassment about appearance and odor. Patients suffering from UI may withdraw from social interaction with others, including friends and family, and sexual activity may be restricted or avoided entirely. Spouses and other intimates also may share the burden of the condition. There are three main categories of UI. Stress urinary incontinence. Stress UI refers to the involuntary loss of urine during coughing, laughing, sneezing, jogging or any other physical activity which causes a sufficient increase in intra-abdominal pressure. This condition varies in severity from those women who leak urine as a result of certain sudden movements or physical activities to those who leak urine simply upon standing up. Stress UI is caused by one of two conditions (i) urethral hypermobility, a lack of anatomic stability caused primarily by weak surrounding tissues, which results in the abnormal movement of the bladder neck and urethra in response to sufficient intra-abdominal pressure or exertion; and (ii) intrinsic sphincter deficiency, or the inability of the urinary sphincter valve muscle to function properly due to atrophy of the urinary sphincter muscle. Approximately 15% of stress UI cases are solely the result of intrinsic sphincter deficiency. Urethral hypermobility is the principal cause of the remaining 85% of stress UI cases; however, the Company believes that many of these patients have a mix of urethral hypermobility and intrinsic sphincter deficiency. 24 26 Urge urinary incontinence. Urge UI refers to the involuntary loss of urine due to an unexpected bladder contraction that is associated with a strong, uncontrollable desire to urinate, often referred to as urgency. Causes of urge UI include an overactive bladder muscle, neurologic abnormalities, such as those caused by a stroke, and urethral instability or abnormal bladder relaxation patterns. Mixed urinary incontinence. Mixed UI is a mixture of stress and urge UI. URINARY INCONTINENCE MARKET The U.S. Department of Health and Human Services reports that approximately 13 million adults suffer from UI in the U.S., although precise figures are uncertain because of underreporting due to the stigma associated with the condition. The National Association for Continence estimates that approximately 31% of adults with UI suffer from stress UI, approximately 21% of adults with UI suffer from urge UI, and approximately 30% of adults with UI suffer from mixed UI. The U.S. Department of Health and Human Services has estimated that the annual cost for treatment of UI in the U.S. exceeds $15 billion. This amount includes all costs associated with the treatment of UI, including physician fees and nursing home and long-term care costs. The Company believes that medical devices for UI, which amounted to an estimated $250 million in sales in 1997, represent a relatively small portion of the potential market due primarily to the limitations of currently available devices. UI particularly affects the elderly and women. Industry sources estimate that approximately 19% of people over 65 living in non-institutional settings and 40% of such persons living in institutional settings suffer from UI. UI is believed to be a primary reason for admission to long-term nursing care facilities. In addition to being prevalent in the elderly, UI is a major women's health concern with women accounting for approximately 85% of the estimated 13 million adults with UI in the U.S. The higher incidence of UI among women is generally attributed to pelvic trauma during pregnancy and childbirth, menopause and abdominal surgery. UI will continue to be a significant health care problem in the elderly and institutionalized populations and among adult females, and the number of individuals suffering from UI is expected to increase as the population continues to age. CURRENT TREATMENTS AND THEIR LIMITATIONS The Company views the treatment of UI at five levels of intervention: (i) diagnosis; (ii) simple self-management through the use of products and approaches that manage, but do not cure the condition, such as disposable or reusable absorbents, behavioral therapy and pelvic muscle training exercises; (iii) complex self-management through the use of products or procedures that can be performed by the patient but require a device to be manually inserted in the body, such as urethral and vaginal inserts and plugs; (iv) minimally invasive treatments that can be accomplished on an outpatient basis, such as urethral bulking agents, pharmaceuticals and Foley catheters; and (v) invasive surgery under general anesthesia that involves suspension and sling procedures, artificial sphincters and implantable nerve stimulation devices. Disposable or reusable absorbents. Many cases of stress and urge UI are managed through the use of disposable adult diapers, shields and reusable absorbent pads. These products are palliative and do not treat the causes of the patient's UI. The cost of diapers and pads over time can be substantial and is not covered by medical insurance, creating a continuous financial burden for the patient. Industry sources estimate that the annual sales of disposable diapers and pads in the U.S. constitutes a $1.0 to $2.0 billion market. In addition, this management technique requires frequent changing of diapers and pads to control odor. Diapers and pads are also uncomfortable and wearing them can be an embarrassment to the patient. Behavioral therapy and pelvic muscle training exercises. Behavioral therapy and related techniques are also used to manage UI through bladder and habit training, pelvic muscle exercises (known as Kegel exercises) and biofeedback. These techniques are primarily used in managing stress UI but can also be used by persons suffering from urge UI. These therapies and techniques first teach the patient to be aware of the group of muscles in the perineal area and to contract them in a way that builds muscle tone around the bladder neck. These treatments are time consuming, take several weeks or months before results are evident, present uncertain outcomes and require strict patient compliance. 25 27 Urethral and vaginal inserts and plugs. Urethral inserts act as expandable stoppers to block the flow of urine when inserted in the urethra. When the patient feels the need to urinate, these devices are either opened or removed to allow the patient to urinate. The insertion method and the need to periodically replace or remove these devices require a high degree of complex self-management by the patient, which limits the usefulness of these devices to a small segment of highly-motivated, extremely compliant patients. Potential adverse side effects include urinary tract infections. Vaginal inserts are used to manage stress UI by obstructing the bladder neck and urethra by applying pressure through the neighboring vaginal cavity. These devices are frequently ineffective in preventing leakage because it is difficult to fit patients properly and apply sufficient pressure to eliminate the leakage of urine without causing discomfort. Potential side effects observed with vaginal inserts include vaginal discharge and tissue erosion. Urethral bulking agents. Bulking agents are either biologically derived or synthetic materials designed to be injected or implanted in or near the bladder neck to treat stress UI by increasing tissue bulk. These bulking agents decrease the urethral opening at the sphincter and compensate for the lack of muscle tone that is needed to offset the hydrodynamic pressure of the bladder, thus preventing urine leakage under stress. Bulking procedures are gaining acceptance as a method of treating certain types of stress UI as a result of the high efficacy rates achieved in clinical trials. However, biologically-derived bulking agents currently available have experienced problems with absorption by the body and may require retreatments within six to twelve months. Synthetic bulking agents currently available have experienced problems with migration because particles may be small enough to migrate to other areas of the body such as the brain, lungs or lymphatic system. In addition, both synthetic and biologically-derived bulking materials are not encapsulated and cannot be contained after injection and therefore are not easily retrievable in the event of chronic urinary retention. Pharmaceuticals. Drug treatments can be used to manage both urge UI and stress UI, but have demonstrated a limited efficacy, particularly in managing stress UI. Drugs for the management of urge UI affect the contraction of the muscle tissue of the bladder. Drugs for the management of stress UI attempt to either affect contraction of the muscle tissue of the bladder neck or improve the quality of the mucosal lining of the bladder neck and urethra. Drugs seldom represent a long-term, effective solution and potential side effects include dryness of the eyes (resulting in blurred vision) and mouth, urinary retention, nausea, dizziness and the possibility of adverse drug interactions. Foley catheters. Foley catheters, which are typically used to assist patients unable to urinate post-surgery, may also be used to manage UI in hospitals and long-term care facilities. The Foley catheter is inserted through the urethra into the bladder. Once in place, the catheter is either clamped at the exit point from the body or connected to an external urine collection bag. Aside from the physical and emotional discomfort experienced by patients, the direct path from the exterior to the bladder provides a conduit for bacteria, and often results in bladder infections. Suspension and sling procedures. Bladder neck suspension and sling procedures involve invasive surgical intervention to elevate and stabilize the urethra and the bladder neck in order to treat stress UI. In a bladder neck suspension, the bladder neck and urethra are elevated to prevent urethral and bladder neck prolapse (descent) during exertion. In a sling procedure, either an autologous (patient tissue) or synthetic piece of material is placed under the urethral-bladder junction, pulling it forward in a way that reinforces and strengthens the sphincter. Surgeries of this nature are costly, delicate and complicated procedures in which the outcome depends on a number of factors, including the degree of severity of the patient's condition and the surgeon's experience. Artificial sphincters. Artificial sphincters are implantable, miniature, hydraulic medical devices consisting of an inflatable cuff placed around the urethra and a pump and tubing required to activate the cuff. The most common applications are for post-prostatectomy incontinence and patients with neuropathic bladders. Artificial sphincter implantation currently requires a major inpatient surgical procedure and hospitalization with associated discomfort, lengthy recovery period and high expense. Initial complications that may arise are mainly associated with post-operative infection or urethral or bladder injury during implantation. Delayed complications include mechanical problems such as pump malfunctioning, fluid leaks, tubing kinks and tissue atrophy. 26 28 Implantable Nerve Stimulation Devices. Implantable nerve stimulation devices stimulate the nerve bundle located in the spinal column that controls bladder activity in an attempt to reduce the bladder spasms that cause urge UI. The only such device currently sold commercially is derived from traditional pacemaker technology, and the implantation of the device is an open surgical procedure which is usually performed by a urologist and assisted by a neurosurgeon, if necessary. This device involves a lead that is attached to the spinal column and connected to an electrical stimulation device (which contains a battery) implanted in the abdomen. Periodically, the patient must submit to additional surgical procedures in order to change the batteries or replace the implanted device. Implantation of the device requires costly major invasive surgery including exposure of the spine. In clinical testing, the device showed efficacy in approximately 75% of patients. However, 35% of patients reported long-term pain from the device and required additional surgery to reposition the implant. THE UROSURGE SOLUTION Stress UI solution. The Company believes that UroVive is an effective method for treating stress UI and addresses the major problems associated with existing treatments. UroVive is a minimally invasive system that is initially being targeted for the treatment of stress UI caused by intrinsic sphincter deficiency. The Company may seek to expand the targeted indications for UroVive by conducting additional clinical trials and seeking additional regulatory approvals. The Company believes that the following are the principal advantages of UroVive compared to other urethral bulking agents and other approaches for treating stress UI: - No absorption. The membrane of the UroVive microballoon completely contains the hydrogel filler material, preventing loss of volume through absorption. In contrast, other injectibles such as collagen can be absorbed by the body, resulting in the potential need for retreatments within six to twelve months in order to maintain bulk in the urethral sphincter. With UroVive, long-term bulking of the urethral sphincter can be achieved in a single procedure. - No migration. UroVive does not spread along tissue planes or migrate to other parts of the body like unencapsulated bulking agents such as teflon or silicone microparticles. Migration causes difficulty in maintaining bulk in the desired area, requiring the injection of large amounts of material as well as possible retreatment. Furthermore, migration to other parts of the body may result in the occurrence of unpredictable and unintended side effects. - Ease of use and patient convenience. Placement of UroVive microballoons is a relatively easy procedure that takes approximately 20 minutes and is performed using a cystoscope, a visualization device that is commonly used in urinary tract procedures. In addition, UroVive is convenient for the patient who experiences immediate continence and who is not required to adhere to ongoing treatment regimens, which are necessary with reusable or disposable absorbents, behavioral therapy, pelvic muscle training exercises, pharmaceuticals and urethral and vaginal inserts and plugs. - Minimally invasive procedure. The UroVive procedure is minimally invasive and can be performed in an outpatient or physician office setting under local anesthesia. Unlike suspension and sling procedures and artificial sphincters that may require several days of hospitalization, patient recovery time is minimal and hospitalization is not required. - Long-term, cost-effective solution. The UroVive procedure is designed to provide immediate, long-term continence from a one-time treatment. As such, UroVive offers a cost-effective solution compared to palliative measures that do not restore continence, other urethral bulking agents that often require costly retreatments or invasive surgery. - Retrievability. In cases of chronic urinary retention, it may be necessary to retrieve the urethral bulking agent. UroVive microballoons are retrievable transurethrally through a small incision in the urethra. No practical method exists for retrieving competing urethral bulking agents, all of which are unencapsulated. 27 29 Urge UI solution. The Company believes that SANS is an effective system for treating urge UI and addresses many of the problems with existing treatments. SANS is a minimally invasive system that modulates bladder action through stimulation of the afferent nerve fibers in the ankle area that lead to nerves located in the spinal region that control bladder function. The Company believes that the following are the principal advantages of SANS compared to the only commercially available implantable electronic nerve stimulation device and other approaches for treating urge UI: - Effective and less invasive solution. SANS stimulates the same nerves and achieves equivalent efficacy with significantly reduced invasiveness and risk as compared to the only commercially available implantable electronic nerve stimulation device, which requires an invasive implantation of an electrical lead in close proximity to the spinal column along with a battery operated electronic stimulation device in the abdomen. Furthermore, clinical trials indicated that 35% of patients treated with this spinal implant device required surgical reintervention due to lead migration and other complications. - Patient comfort. Percutaneous SANS delivers electrical stimulation through a small diameter needle temporarily inserted in the ankle area and subcutaneous SANS will deliver electrical stimulation through a small receiver implanted in the ankle area. In contrast, the spinal implant system delivers electrical stimulation through an implanted device that is complex and bulky, which can result in patient discomfort. - Cost-effectiveness. The percutaneous SANS procedure is performed in periodic, short visits to the doctor's office and uses a relatively inexpensive disposable needle and lead wire assembly. By contrast, the competing spinal implant entails the implantation of a costly, self-contained electrical stimulation device in an invasive surgical procedure, requiring retreatments for battery replacement and reintervention due to complications. In addition, subcutaneous SANS should enable the Company to reduce the cost of each SANS treatment by ultimately enabling SANS treatments to be performed at home. Unlike the spinal implant, SANS will not require reoperation for battery replacement. - Ease of use. Both percutaneous and subcutaneous SANS procedures are relatively easy and will be performed in a physician office setting. The percutaneous SANS treatment can be performed in approximately 30 minutes by the urologist and implantation of the subcutaneous SANS receiver will be performed in a short, outpatient procedure under local anesthesia. - Curative approach. Other than a spinal implant, few approaches exist for treating urge UI. SANS is designed to be a curative approach for treating urge UI, unlike palliative approaches such as diapers. In addition, SANS does not present the side-effects often associated with pharmaceuticals, which also may have short-term effectiveness. 28 30 PRODUCTS AND PRODUCTS UNDER DEVELOPMENT The following table summarizes the status of the Company's products and products under development as of March 31, 1998:
PRODUCT DESCRIPTION PRIMARY INDICATION STATUS PRINCIPAL PRODUCTS UroVive Self-detachable, self- Stress UI due to Commenced marketing in sealing microballoon intrinsic sphincter Europe in March 1998. implanted into the deficiency Pivotal clinical trials urethral sphincter and in U.S. PMA expected to permanently inflated be submitted in mid- with a biocompatible 1999. hydrogel. Percutaneous SANS Needle device to Urge UI Commenced marketing in electrically stimulate Europe in March 1998. peripheral nerve fibers Pivotal clinical trials located in ankle area in U.S. PMA expected to that regulate bladder be submitted by early and pelvic floor 1999. function. Subcutaneous SANS Implantable device to Urge UI IDE to be submitted in electrically stimulate late 1998. peripheral nerve fibers located in ankle area that regulate bladder and pelvic floor function. OTHER PRODUCTS SpiraStent Spiral-shaped stent Kidney drainage (i.e. Commenced marketing in designed to facilitate urine, stones) U.S. and Europe in March urine flow and removal 1998. 510(k) clearance of kidney stones from received. the kidney and ureter. FilaStent Filament-reinforced Kidney drainage (i.e. Commenced marketing in stent designed to urine, stones) Europe in March 1998. facilitate urine flow 510(k) clearance and removal of kidney application submitted. stones from the kidney and ureter. AcuTrainer Non-invasive electric Urge UI Marketed in U.S. and device to assist Europe. patients with bladder retraining exercises. UroTherm Device to warm BPH surgical 510(k) clearance irrigation fluids. procedures application submitted. Kidney stone grasper Device to facilitate Kidney stones 510(k) clearance removal of multiple application expected to small and large kidney be submitted in late stones from the ureter. 1998. Demineralized bone paste Biologically derived VUR in infants and IDE approved in U.S. paste. children Urethral pressure catheter Hardware and disposable Intrinsic sphincter Functional prototype device for measuring deficiency diagnosis expected by late 1998. stress UI due to intrinsic sphincter deficiency.
29 31 PRINCIPAL PRODUCTS UROVIVE UroVive system. The UroVive system includes a delivery system, a microballoon and a syringe filled with biocompatible hydrogel, which will be sold in an integrated kit. The microballoons are made of cross-linked silicone polymer and are available in various sizes depending on the amount necessary to provide the muscular tension for continence. The hydrogel material is a hydrophilic, or water-absorbing polymer, which has been demonstrated to be safe when used in other devices, including contact lenses. The microballoons can be delivered periurethrally or transurethrally. In a periurethral UroVive procedure, a cystoscope is inserted through the urethra and used for visualization of the sphincter muscle while a catheter and deflated microballoon are delivered directly into the sphincter muscle using a needle and sheath. After proper needle positioning, the needle is removed, the sheath is retracted and the deflated balloon is exposed in the tissue pocket created in the sphincter muscle. Once inside the pocket, a syringe connected to the catheter containing hydrogel is used to inflate the microballoon. When the microballoon is sufficiently filled, the sheath and catheter are retracted, the microballoon is detached, seals itself and remains in place. In a transurethral UroVive procedure, a cystoscope is inserted in the urethra and a needle and sheath are advanced through the working channel of the cystoscope and inserted into the sphincter muscle, creating a small tissue pocket. The closed-end needle is removed, leaving the sheath in place. A catheter and a deflated microballoon are inserted through the lumen of the delivery sheath until the balloon is positioned in the tissue pocket. As in a periurethral procedure, when the microballoon is sufficiently filled, the microballoon is detached, seals itself and remains in place. [SERIES OF DIAGRAMS DEMONSTRATING THE UROVIVE PROCEDURE] A typical UroVive procedure will involve the placement of three balloons around the perimeter of the sphincter muscle to achieve closure. The procedure can be performed in about 20 minutes in an outpatient 30 32 setting and is designed to immediately restore the patient to normal urinary continence. A typical procedure using three or four microballoons is comparable to other urethral bulking agents. UroVive clinical trials. In February 1996, the Company initiated clinical testing of UroVive in a pilot study involving 27 women with stress UI due to intrinsic sphincter deficiency. The study was completed in February 1997. The Company's clinical investigators have been following the progress of these patients, and the Company currently has one to two year follow-up data. Results indicate a 90% efficacy rate for female patients with stress UI due to intrinsic sphincter deficiency for which the Company has 18-month follow-up data. The UroVive treatment is considered effective if the patient is either dry (continent) or achieves an improvement on a scale, known as the Stamey Scale, which is used to measure the grade and severity of UI symptoms. The Company received FDA approval to enroll up to 216 patients at up to 10 U.S. sites in a pivotal clinical trial of UroVive for the treatment of females with stress UI caused by intrinsic sphincter deficiency. This is a controlled, randomized study in which two-thirds of the patients will be randomized into the UroVive treated group and one-third will be randomized into a control group. The control group patients will be treated with a commercially available collagen urethral bulking agent. As of March 31, 1998, approximately 100 patients had been enrolled with 70 patients in the UroVive treated group and 30 patients in the control group. This clinical trial is designed to obtain data to support a PMA application for UroVive, which the Company expects to submit in mid-1999. The Company is conducting clinical trials for the treatment of other UI indications using UroVive. For example, another indication in clinical trials involves males who experience stress UI after undergoing a radical prostatectomy. The Company is currently in the pilot phase of this trial in which 10 patients will be treated. The Company plans to pursue regulatory approvals for these other indications to expand UroVive's application. SANS Percutaneous SANS. The percutaneous SANS system consists of a generator that delivers electrical impulses through a small disposable needle and lead wire assembly. In a SANS procedure, the physician temporarily inserts the needle into the proper location in the ankle area. After the lead wire and electrode are attached, the SANS device is turned on and amplitude is slowly increased until the patient's large toe starts to curl or the toe digits fan out, indicating proximity to the nerve bundle. Amplitude is then reduced slightly and the patient receives intermittent electrical pulses for approximately 30 minutes per visit. The treatment is repeated weekly in a physician office setting and after approximately 10 weeks, the physician can assess patient progress. If improvement is significant, the physician may place the patient on a regimen requiring less frequent treatments. SANS was originally developed by Dr. Marshall Stoller, a leading urologist at UCSF School of Medicine. Percutaneous SANS clinical trials. Clinical studies to date, encompassing 90 patients with average follow-up in excess of two-years, demonstrated an 80% efficacy rate in the treatment of urinary urgency, frequency and pelvic pain with no complications in over 1,000 treatment procedures. Efficacy is defined as an at least 50% improvement in one or more of a patient's urge UI symptoms. In the first quarter of 1998, the Company received FDA approval to enroll up to 60 patients at up to four sites in a nonrandomized, pivotal clinical trial. In this study, urgency and frequency will be used as benchmarks for measuring patient progress over a period of at least 10 weeks and up to one year. This clinical trial is designed to obtain data to support a PMA application for percutaneous SANS, which the Company expects to submit in early 1999. Subcutaneous SANS. To ultimately facilitate in-home use and enhance patient convenience, the Company is developing a second generation, subcutaneous SANS that involves the permanent implant of a small, thumbtack-shaped receiver near the patient's ankle, eliminating the need for the use of a needle with each treatment. The patient may then visit a physician weekly to receive the electrical stimulus or perform the treatment on himself or herself at home. Because the permanent implant is simply a receiver for a magnetic 31 33 pulse, it will not require batteries and the patient will not have to undergo subsequent implants for battery replacement. Subcutaneous SANS clinical status. The Company is currently conducting preclinical animal studies of subcutaneous SANS and, depending upon the outcome of these studies, expects to file an IDE for FDA approval to conduct pilot and pivotal clinical trials in late 1998. OTHER PRODUCTS SpiraStent and FilaStent SpiraStent and FilaStent are ureteral stents designed to facilitate urine flow and the passage of kidney stone fragments generated by lithotripsy or other procedures. Approximately 200,000 lithotripsy procedures are performed annually in the U.S. for kidney stone removal. Currently available ureteral stents are simple tubes with intermittent side holes along their length. To date, the principal purpose of ureteral stents has been to dilate the ureter to allow urine passage around the stone fragments. Stones typically do not pass through the center lumen of the stent or through the side holes, but will move along the outside wall of the stent. With conventional smooth walled stents, the natural peristaltic motion of the ureter causes stone fragments to oscillate back and forth along the outer wall of the stent, resulting in slow downward progression. SpiraStent is differentiated by its extrusion screw-like shape, which is designed to overcome the problem of slow movement by allowing stones to pass down the channel of the screw as natural peristalsis and urine flow occur. The ability of SpiraStent to provide improved expulsion of stone fragments has been demonstrated in preclinical animal trials. FilaStent is a smooth ureteral stent with an embedded high strength filament within its wall designed to facilitate post-encrustation removal of the device. In some cases, ureteral stents may be left in place for 30 days or longer, particularly when used to provide a conduit for urine passage after certain types of kidney and ureteral surgeries. As a result, stents may become encrusted and brittle, resulting in breakage during removal. With conventional stents, encrustation and breakage can lead to the need for surgical intervention to remove the fractured stent. With FilaStent, in the event of encrustation and fracture of the stent, the fragments would remain bonded to the filament and be retrieved upon removal of the stent. AcuTrainer AcuTrainer is a hand-held, battery-operated device that facilitates behavior modification by chiming or vibrating at increasing time intervals to prompt urge UI patients to urinate. Patients with urge UI often attempt to keep their bladder as empty as possible at all times to avoid accidental urination. However, the more frequently they urinate, the more frequently they get the urge to urinate. Bladder retraining, when used as a first-line treatment modality, has been shown to non-invasively improve or correct the condition in many patients. AcuTrainer circumvents the need for the patient to keep cumbersome voiding diaries and provides the clinician with an effective tool for monitoring several parameters pertaining to patient progress. After urinating, the patient presses a button which resets the internal clock of the device. When a patient has an incontinence or leak episode, they will press another button, registering this event in the device memory. The physician can choose the initial time interval, and the device automatically advances the patient to the next time interval only after a specific success rate is achieved. The physician may access AcuTrainer memory to determine patient compliance, frequency of urination, nocturia (urinating during sleep) and urge UI episodes. UroTherm The Company is developing UroTherm, a device for warming irrigation fluids used in surgical procedures to treat benign prostatic hyperplasia ("BPH"), laparoscopic surgical procedures and other types of gynecological and urological procedures. Approximately 200,000 BPH surgical procedures are performed annually in the U.S. 32 34 During a typical laparoscopic or BPH surgical procedure, urologists may use up to 30 liters of irrigation solution such as saline, which is warmed to body temperature. Studies indicate that warmed irrigation fluid for urological applications reduces infections, speeds healing and shortens hospital stays. The current practice of heating bags of fluid is to place them in an oven and replenish them from time to time as they are used. This process is inconvenient and inefficient. To address this problem, the Company is developing UroTherm, a system which will heat the solution in-line, eliminating the need to continuously heat and replenish bags. UroTherm will consist of a small heating unit that can be mounted onto an IV pole. The hardware unit will provide an actual irrigation fluid temperature readout and an advanced electronic temperature control system. The unit will consist of a plastic cartridge that is disposable and will be included as part of the TURP infusion set. As the irrigation solution flows through the disposable unit, it is warmed to body temperature. The Company has submitted a 510(k) clearance application to the FDA for UroTherm. Kidney Stone Grasper The Company is developing a kidney stone grasping device for removing multiple small and large kidney stones or stone fragments from the ureter or bladder. Current kidney stone graspers are typically either wire baskets or pincers. These devices have sharp cutting edges, which can be painful and traumatic to the patient. In addition, they typically can only grasp one stone at a time. The Company's kidney stone grasper is designed with a soft, collapsible polymeric net that can be opened in the ureter. Multiple stone fragments can be snared as the net collapses around them and can then be withdrawn through the ureteral catheter, minimizing trauma to the patient. The Company plans to submit a 510(k) clearance application for the kidney stone grasper in late 1998. Demineralized Bone Paste The Company is developing an injectable demineralized bone paste for treatment of VUR in infants and children. VUR is a condition caused by an abnormal interface between the ureter and the bladder resulting in backflow or "reflux" of urine from the bladder to the kidney when the child urinates. VUR can cause chronic urinary tract infections and necrosis of the kidney. Severe cases of VUR must be treated with invasive and expensive surgery. The Company's demineralized bone paste, which has been shown in preclinical trials encompassing two years of data to be biocompatible, nonimmunogenic, nonmigratory and nonresorbable, is injected at the junction of the bladder and uretero in a minimally invasive outpatient procedure to restore proper functioning of the child's urinary system. In January 1998, the Company received IDE approval to commence a pilot study for treatment of VUR. This study is scheduled to begin in July of 1998 and is expected to be followed by a non-randomized pivotal trial. The development of this product is being partially funded by Child Healthcare Corporation of America. The Company also intends to explore the use of the demineralized bone paste in other UI indications, including the treatment of urethral hypermobility. Urethral Pressure Catheter Urethral or sphincter pressure is an important factor in diagnosing intrinsic sphincter deficiency. Establishing whether a patient's stress UI is caused by intrinsic sphincter deficiency or another category of stress UI is important because the treatments are specific to the indicated type of UI. The current methods of testing for stress UI caused by intrinsic sphincter deficiency consist of a video urodynamic profile procedure that costs approximately $1,000 or use of a balloon catheter such as a Foley catheter that is inflated partially in the bladder and then pulled past the sphincter muscle to measure sphincter resistance. The urodynamic profile method is expensive and the latter method can be inaccurate due to inconsistencies associated with the pressure transducers in the balloon. The Company's urethral pressure catheter will consist of a catheter with a custom-designed tip. The tip has the appearance of an inverted umbrella. The umbrella is folded shut and advanced into the bladder "handle first." The umbrella tip can be opened to various degrees, thereby tailoring the circumference of the device. After the umbrella tip is opened, the catheter is retracted through the urethra. Pull force as a function of umbrella opening diameter and urethral distance are measured. A correlation between pull force and 33 35 intrinsic sphincter strength can be generated to obtain a diagnosis of intrinsic sphincter deficiency. The Company's urethral pressure catheter is designed to provide diagnostic accuracy comparable to urodynamic profiling at significantly reduced cost. The Company expects to have completed development of a functional prototype by late 1998. SALES AND MARKETING The Company is marketing UroVive, percutaneous SANS, SpiraStent, FilaStent and AcuTrainer in Europe and other international markets and is recognizing revenues from these efforts in the second quarter of 1998. The Company's current distributors cover 14 European countries, South Korea, Australia and Japan. Each distributor has non-exclusive rights in its designated territory. The Company distributes its products internationally through distributors on a country-by-country basis to access such distributors' established networks and specialized expertise regarding the healthcare system, including reimbursement practices, in their respective markets. In addition, the Company has established clinical research relationships with leading international urologists. The Company believes that its country-specific approach will accelerate sales growth, provide comprehensive geographic market coverage and enable the Company to access particular markets and customers. The Company is also marketing SpiraStent and AcuTrainer in the U.S. and intends to commence marketing of UroVive and SANS in the U.S. upon receipt of PMA approval. The Company's U.S. direct sales and marketing staff currently consists of six sales and marketing executives and two telemarketers. The Company has retained U.S. marketing rights to its products and plans to continue expanding its direct sales effort as regulatory approvals and clearances are received. Industry sources estimate that there are approximately 8,000 urologists and 800 urogynecologists in the U.S. to which the Company could market its products. The Company believes that this relatively small number of physicians can initially be served by a sales force of fewer than 20 people. See "Risk Factors -- Limited Marketing and Sales Capabilities." MANUFACTURING The Company is currently manufacturing AcuTrainer and is scaling up its manufacturing facilities for the clinical and early commercial production of its other products. The Company recently leased an additional 11,500 square foot space adjacent to the Company's headquarters in order to meet its anticipated supply requirements. Historically, the Company has relied on contract manufacturers to produce development prototypes and products for clinical trials. However, as products receive regulatory clearance, the Company intends to manufacture its own products, beginning with the assembly or manufacture of percutaneous SANS hardware and disposables, UroVive kits, SpiraStent and FilaStent kits and the preparation of demineralized bone paste. The Company is currently in the process of building out its facility which is expected to be completed in July 1998. This facility will contain a class 10,000 clean room. See "Risk Factors -- Limited Manufacturing Experience." The Company purchases raw materials and components used in its products from various suppliers. A contract supplier provides the Company with the microballoons used in the UroVive system under a mutually exclusive supply agreement executed in April 1995. The agreement expires in April 2000 subject to an automatic two-year extension if the Company does not receive the FDA's approval of the Company's PMA application for UroVive by April 1999, which approval the Company does not expect to receive by such date. In addition to UroVive balloons, certain materials and components are currently purchased by the Company from single sources. To date, these materials have generally been readily available and the Company has not experienced supply shortages. See "Risk Factors -- Dependence Upon Key Suppliers." The Company is also required to register as a medical device manufacturer with the FDA and to list its products with the FDA. Furthermore, prior to approval of a PMA application, the Company's facilities, procedures and practices, and the facilities, procedures and practices of its third-party manufacturers, will be subject to a preapproval inspection by the FDA. In addition, if the Company wishes to significantly modify its manufacturing processes or change the supplier of a critical component, additional approvals will be required from the FDA before the change can be implemented. The Company has not yet undergone an FDA QSR 34 36 inspection of its facilities, but may undergo such an inspection before or after submission of its initial PMA application. See "Risk Factors -- Government Regulation." RESEARCH AND DEVELOPMENT The Company believes that its future success will depend in large part upon its ability to enhance its existing products and to develop other new products. Accordingly, the Company intends to continue to devote significant funds and efforts to research and development. The Company currently employs 17 individuals on a full-time basis and five individuals on a part-time basis for its research and development and manufacturing efforts, including five individuals with advanced degrees. To the extent that the Company's medical advisors develop new products which the Company believes represent attractive opportunities, the Company will seek to negotiate licenses to the technology related to such products. For the years ended December 31, 1995, 1996 and 1997, the Company's research and development expenses were $0.8 million, $1.9 million and $3.6 million, respectively. PATENTS AND PROPRIETARY RIGHTS Because of the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the medical products industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, the Company's strategy regarding the protection of its proprietary rights and innovations is to seek patents on those portions of its technology that it believes are patentable and that provide a competitive advantage and to protect as trade secrets other confidential and proprietary information. The Company has received, licensed or has obtained an option or right to license 10 issued or allowed U.S. patents and has five pending U.S. patent applications. The Company or its licensors have obtained or applied for corresponding patents for certain of these U.S. patents and applications in a limited number of foreign countries. These patent rights relate to UroVive, SANS, AcuTrainer, SpiraStent, FilaStent, UroTherm, the kidney stone grasper, demineralized bone paste and the urethral pressure catheter. The issued U.S. patents have expiration dates ranging from 2009 to 2015. Patents and patent applications related to the Company's products are either held directly by the Company or licensed from others. Much of the original technology for the Company's products other than FilaStent and UroTherm is licensed from others. The Company has developed improvements to the licensed technologies related to UroVive and has filed additional patent applications to broaden the coverage of existing patents for such improvements. See "Risk Factors -- Dependence on Patents and Proprietary Technology." The Company has licensed technologies relating to UroVive, SANS, SpiraStent, AcuTrainer, the kidney stone grasper, demineralized bone paste and the urethral pressure catheter. The Company holds an exclusive worldwide right and license to the technologies underlying UroVive, subject to a royalty-free, nonexclusive license granted to the U.S. government (for patents developed with U. S. government funding) and a royalty-free, nonexclusive, irrevocable license retained by the licensor to employ the licensed technologies and processes for research purposes only. The Company has also obtained an exclusive license to all U. S. and foreign patents and patent applications related to the technology underlying SANS, as well as the right to issue sublicenses to third parties in regard to SANS-related patents. The Company has also obtained similar licenses related to technologies underlying SpiraStent and the kidney stone grasper from the same licensor for SANS. All of such licenses for SANS, SpiraStent and the kidney stone grasper are subject to the right of the licensor to use the technologies for educational and research purposes. The Company also holds an exclusive, worldwide license to and right to sublicense AcuTrainer as well as a right of first refusal to any future intellectual property or patent rights held by the AcuTrainer licensor. The Company also has exclusive, worldwide licenses to and the right to grant sublicenses to demineralized bone paste (for urological applications) and the urethral pressure catheter, subject to rights held by the U. S. government and the licensors. All of the licenses generally remain in effect for the term of the underlying patents, unless earlier 35 37 terminated by the Company, upon the Company's breach or operation of law. For a discussion of royalties payable under these licenses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and the Company's financial statements and notes thereto. To date, no claims have been brought against the Company alleging that its technology or products infringe intellectual property rights of others. However, there can be no assurance that such claims will no be brought against the Company in the future or that any such claims will not be successful. See "Risk Factors -- Dependence on Patents and Proprietary Technology." COMPETITION AND TECHNOLOGICAL CHANGE The medical device industry, including in particular the UI product industry, is highly competitive. The Company believes that primary competitive factors include the level of physician and consumer awareness and acceptance of available treatment methods, product efficacy, consistency of product quality and delivery, price, technical capability and the training of health care professionals and consumers in the use of available treatment methods. The Company's ability to compete in this industry will also be affected by its product development capabilities and innovation, its ability to obtain required regulatory clearances, its ability to protect the proprietary technology included in its products, its manufacturing and marketing capabilities and its ability to attract and retain skilled employees. C.R. Bard, Inc. sells the only urethral bulking agent currently sold commercially in the U.S. and Medtronic, Inc. sells the only commercially available implantable electronic nerve stimulation device for urge UI. Current major competitors who compete in the urethral bulking agent market include C.R. Bard, Inc., Uroplasty, Inc., Advanced UroScience, Inc., BioMatrix, Inc. and Mentor Corporation. Current major competitors who compete in the stent market include Boston Scientific Corporation, Circon Corporation and Cook Incorporated. The Company's competitors may have greater experience in developing products, conducting clinical trials, obtaining regulatory approvals, and manufacturing and marketing products than the Company. Certain of these competitors may obtain patent protection, approval or clearance by the FDA or foreign countries or product commercialization earlier than the Company, any of which could materially adversely affect the Company. Furthermore, if the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it currently has limited experience. See "Risk Factors -- Competition." Other recently developed technologies or procedures are, or may in the future be, the basis of competitive products. There can be no assurance that the Company's current competitors or other parties will not succeed in developing alternative technologies and products that are more effective, easier to use or more economical than those which have or are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive in these fields. In such event, the Company's business, financial condition and results of operations could be materially adversely affected. GOVERNMENT REGULATION United States The Company's products and its research and development activities are subject to stringent regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. The Federal Food, Drug, and Cosmetic Act (the "FDC Act"), as amended, the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the preclinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, record keeping, advertising and promotion of medical devices. In the U.S., medical devices are classified into three different classes, class I, II and III, on the basis of controls deemed necessary to reasonably ensure the safety and effectiveness of the device. Class I devices are subject to general controls (e.g., labeling, premarket notification and adherence to FDA's QSRs) and class II 36 38 devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices). Percutaneous SANS is a class II medical device that requires PMA approval prior to marketing in the U.S. UroVive, subcutaneous SANS and demineralized bone paste are class III devices that require PMA approval prior to marketing in the U.S. SpiraStent, FilaStent, AcuTrainer, UroTherm, the kidney stone grasper and the urethral pressure catheter are eligible for clearance under the 510(k) premarket notification process. Generally, before a new medical device can be marketed, marketing clearance must be obtained through a 510(k) premarket notification or approval of a PMA application. A 510(k) clearance will typically be granted by the FDA if it can be established that the device is substantially equivalent to a "predicate device," which is a legally marketed class I or II device or a class III device for which the FDA has not called for PMAs. The FDA has been requiring an increasingly rigorous demonstration of substantial equivalence and this may include a requirement to submit human clinical trial data. It generally takes four to twelve months from the date of a 510(k) submission to obtain clearance, but it may take longer. The Company made its 510(k) submission for FilaStent in March 1998 and for UroTherm in November 1996. The FDA may determine that a medical device is not substantially equivalent to a predicate device, or that additional information is needed before a substantial equivalence determination can be made. A "not substantially equivalent" determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness, or that constitute a major change in the intended use of the device, will require new 510(k) clearances. A PMA application must be submitted if a proposed device is not substantially equivalent to a legally marketed class I or class II device, or if it is a preamendment class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical trials, bench tests, and laboratory and animal studies. The PMA must also contain a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising, and any training materials. The PMA process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. The Company has not submitted a PMA application for UroVive, the SANS devices or demineralized bone paste. Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA. The FDA review of a PMA application generally takes one to three years from the date the PMA is accepted for filing, but may take significantly longer. The review time is often significantly extended by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians, may be convened to review and evaluate the application and provide a recommendation to the FDA as to whether the device should be approved. The FDA accords substantial weight to the recommendation but is not bound by it. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure compliance with applicable QSRs, which include elaborate testing, control documentation and other quality assurance procedures. The Company has not yet undergone an FDA QSR inspection and does not anticipate that it will undergo such an inspection until after filing of its initial PMA application. Separate preapproval inspections are required for each PMA application. 37 39 If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing marketing of the device for certain indications. If the FDA's evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a "complete response" letter. The FDA may determine that additional clinical trials are necessary, in which case the PMA may be delayed for one or more years while additional clinical trials are conducted and submitted in an amendment to the PMA. Modifications to a device that is the subject of an approved PMA, its intended use or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA. If human clinical trials of a device are required, either for a 510(k) submission or a PMA application, and the device presents a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) must file an investigational device exemption ("IDE") application prior to commencing human clinical trials. The Company has received an IDE for UroVive, percutaneous SANS and the demineralized bone paste and expects to file an IDE application for subcutaneous SANS. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by two or more appropriate IRBs without the need for FDA approval. Submission of an IDE does not give assurance that FDA will approve the IDE and, if it is approved, there can be no assurance that FDA will determine that the data derived from the studies support the safety and efficacy of the device or warrant the continuation of clinical trials. Sponsors of clinical trials are permitted to sell investigational devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. If clearance or approval is obtained, any device manufactured or distributed by the Company will be subject to pervasive and continuing regulation by the FDA. The Company will be subject to routine inspection by the FDA and other international regulatory authorities and will have to comply with the host of regulatory requirements that usually apply to medical devices marketed in the U.S., including labeling regulations, QSR requirements, the Medical Device Reporting ("MDR") regulation (which requires a manufacturer to report to the FDA certain types of adverse events involving its products), and the FDA's general prohibitions against promoting products for unapproved or "off-label" uses. If the FDA believes that a company is not in compliance with law, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the Company, its officers and its employees. Failure to comply with the regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, regulations regarding the manufacture and sale of the Company's products are subject to change. The Company cannot predict the effect, if any, that such changes might have on its business, financial condition and results of operations. Among the requirements for product approval is the requirement that the prospective manufacturer conform to the FDA's Quality Standard Regulation ("QSR") requirements, which incorporate the FDA's former GMP regulations. QSR addresses the design and other applicable controls, methods, facilities and quality assurance controls used in the manufacture, packaging, storing and installation of products. In complying with the QSR regulations, manufacturers must continue to expend time, money and effort in product, record keeping and quality control to assure that the product meets applicable specifications and other requirements. The FDA periodically inspects device and drug manufacturing facilities in the U.S. in 38 40 order to assure compliance with applicable QSR requirements. Failure of the Company to comply with the QSR regulations or other FDA regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The President recently signed into law the Food and Drug Administration Modernization Act of 1997. This legislation makes changes to the device provisions of the FDA Act and other provisions in the Act affecting the regulation of devices. Among other things, the changes will affect the 510(k) and PMA processes, and also will affect device standards and data requirement procedures relating to humanitarian and breakthrough devices, tracking and postmarket surveillance, accredited third-party review, and the dissemination of off-label information. The Company cannot predict how or when these changes will be implemented or what effect the change will have on the regulation of the Company's products. International In order for the Company and its distributors to market its products in Europe and other foreign countries, the Company and/or its distributors must obtain required regulatory approvals and comply with extensive regulations governing safety, quality and manufacturing processes. These regulations vary significantly from country to country and with respect to the nature of the particular medical device. The time required to obtain approval to market the Company's products may be longer or shorter than that required in the U.S., and requirements for licensing may differ from FDA requirements. In order to market the Company's products in the member countries of the European Union, the Company will be required to comply with the Medical Devices Directive ("MDD") and obtain CE mark certification. CE mark certification is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. Under the system established by the MDD, all medical devices other than active implants and in-vitro diagnostic products must qualify for CE marking by June 14, 1998. In August 1997, the Company was granted ISO 9001 certification for its Coralville, Iowa facility. The ISO 9001 designation, and certain other certifications received by UroSurge under the auspices of a notified body designated under the MDD, allows UroSurge to self-certify its products for the CE mark, other than permanent implantables such as the subcutaneous SANS, which will require a separate CE mark application through a designated notified body. In order to sell a medical device in Japan, a company must obtain regulatory approval from the Japanese Ministry of Health ("MOH"). UroSurge is currently negotiating a consulting agreement with a contract research organization to begin the registration process for UroVive. AcuTrainer is currently being sold in Japan and does not require registration with the MOH. THIRD-PARTY REIMBURSEMENT Reimbursement and health care payment systems in international markets vary significantly by country. In connection with international product introductions, the Company may be required to seek international reimbursement approvals. If required, there can be no assurance that any such approvals will be obtained in a timely manner, or at all, and failure to receive such international reimbursement approvals could have an adverse effect on market acceptance of the Company's products in the international markets in which such approvals are sought. In the U.S., health care providers, such as hospitals and physicians, that purchase medical devices such as the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of the treatment. In the U.S., third-party reimbursement is generally available for surgical procedures and minimally invasive treatments for UI but generally is unavailable for patient management products such as diapers and pads. In the U.S. and certain other countries, third-party reimbursement is currently generally available for certain bulking agents for UI. The Medicare reimbursement rate for commercially available injectable bulking agents is currently approximately $300 per two and one-half milliliter syringe. The Company believes that typically three to five syringes of such bulking agents are used during an injection procedure. However, there is 39 41 no uniform policy for such reimbursement and there is no assurance UroVive will receive the same level of reimbursement, if any. In the U.S. and certain other countries, third-party reimbursement is currently generally available for SpiraStent, FilaStent and the kidney stone retriever as they represent improvements on products that are currently being sold and reimbursed. In the U.S., reimbursement has been available from certain private payors and from Medicare for implantable nerve stimulation devices. Accordingly, the Company believes that reimbursement may become available for the Company's SANS devices following regulatory approval, subject to the Company's ability to demonstrate the cost-effectiveness and clinical utility of such products to third-party payors. The availability of third-party reimbursement for its products or competitors' products and continuing efforts to reduce the costs of health care by decreasing reimbursement rates may reduce the price received by the Company for its products or the ability of the Company's products to gain market acceptance. Reimbursement for the Company's products and procedures employing such products in the U.S. will be dependent on the Company's ability to obtain FDA clearances and approvals to market products in the U.S. and on the Company's ability to demonstrate the clinical utility and cost-effectiveness of its products through clinical trials, peer reviewed articles in medical journals and long-term follow-up data regarding the efficacy of its products. The Company intends to work with managed care organizations to explore the possibility of reimbursement for the use of its products in the U.S. Any such reimbursement is likely to be variable among third-party payors. See "Risk Factors -- Uncertainty Relating to Third-Party Reimbursement." EMPLOYEES As of March 31, 1998, the Company employed 34 persons. Of these employees, 22 are in research and development and manufacturing, nine are in sales and marketing and three are in finance and administration and other business functions. None of the Company's current employees is represented by a labor union or is the subject of a collective bargaining agreement. The Company believes that it maintains good relations with its employees. PRODUCT LIABILITY Although the Company has not been the subject of any product liability litigation to date, the medical products industry is subject to substantial litigation, and the Company, as a manufacturer of a medical products to be used in the body, faces an inherent business risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in adverse effects to a patient. The Company currently has product liability insurance with certain coverage limitations. There can be no assurance that the Company's existing insurance coverage limits are adequate to protect the Company from any liabilities which it might incur in connection with clinical trials or the commercialization of its products. There can be no assurance that liability claims will not exceed coverage limits. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. Furthermore, the Company does not expect to be able to obtain insurance covering its costs and losses as a result of any recall of its products due to alleged defects, whether such recall is instituted by the Company or required by a regulatory agency. A product liability claim, recall or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Risk Factors -- Product Liability Risk; Limited Insurance Coverage." FACILITIES The Company's principal operations are conducted in Coralville, Iowa, in an approximately 10,000 square foot facility. This facility serves as the site for the Company's corporate headquarters. In addition, the Company occupies an approximately 11,500 square foot manufacturing facility next to its corporate headquarters. The Company is in the process of building out its manufacturing facility and expects to be completed by July 1998. Both facilities are occupied under a triple-net lease which expires in 2000. The Company has the option of renewing the lease on both buildings for an additional five-year period. The 40 42 Company believes that these facilities are sufficient to meet the Company's requirements through at least the next several years. LEGAL PROCEEDINGS The Company is not currently a party to any material pending legal proceedings. 41 43 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The executive officers, key employees and directors of the Company and their ages as of March 31, 1998 are as follows:
NAME AGE POSITION David H. Maupin................ 54 President, Chief Executive Officer and Director Michael J. Magliochetti, Ph.D. ....................... 34 Senior Vice President and Chief Technical Officer Donald R. Beussink............. 43 Vice President of Sales and Marketing Randal L. Owens................ 53 Vice President of Finance and Chief Financial Officer Steven J. Preiss............... 42 Vice President of Clinical and Regulatory Affairs Dick P. Allen(1)............... 53 Director William E. Engbers(2).......... 55 Director Robert E. Curry, Ph.D.(2)...... 51 Director Joseph F. Lovett(1)............ 49 Director
- ------------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. DAVID H. MAUPIN has been President, Chief Executive Officer and a Director since joining UroSurge in February 1994. Before joining UroSurge, Mr. Maupin served as President and Chief Executive Officer of Menlo Care, Inc., a medical device company, from June 1989 to February 1994. Prior to joining Menlo Care, Inc., Mr. Maupin was President of Gambro, Inc., a Swedish dialysis company, where he was responsible for all operations in the Western Hemisphere. Mr. Maupin holds an M.A. and an M.B.A. from the University of Chicago and a B.A. from Harvard College. MICHAEL J. MAGLIOCHETTI, PH.D. has been Senior Vice President and Chief Technical Officer of the Company since February 1997. From 1994 to February 1997, Dr. Magliochetti was Vice President of Research and Development and Chief Technical Officer of the Company. From 1992 to 1994, Dr. Magliochetti was Director of Advanced Development for the Haemonetics Corporation, a medical device company. Prior to joining Haemonetics, Dr. Magliochetti held various positions with Delta Suprenant Corporation, a polymer products company, serving most recently as Director of New Product Development. Dr. Magliochetti is currently an adjunct professor in the Department of Biomedical Engineering at the University of Iowa and the Chairman of the Industry Development Committee for the National Foundation for Bladder Research. Dr. Magliochetti holds a Ph.D. in Chemical Engineering from the University of Massachusetts at Amherst, an M.B.A. from Northeastern University and a B.S. in Chemical Engineering from Northeastern University. DONALD R. BEUSSINK has been Vice President of Sales and Marketing of the Company since May 1997. From August 1995 to May 1997, Mr. Beussink was responsible for U.S., Canadian and Latin American Sales at Meadox Medicals, a subsidiary of Boston Scientific. Prior to joining Meadox Medicals, Mr. Beussink spent fifteen years in various positions, most recently as Director of Sales and Senior Marketing Manager, at Mallinckrodt Medical and Mallinckrodt Veterinary. Mr. Beussink holds an M.B.A. from Lindenwood College. RANDAL L. OWENS has been Vice President of Finance and Chief Financial Officer of the Company since February 1998. Prior to joining the Company, Mr. Owens was the president of Owens & Associates, an international management consulting firm from 1994 to 1998. From 1974 to 1993, Mr. Owens served in numerous financial management positions at NCR Corporation, a computer systems manufacturing and marketing company, including Chief Financial Officer of the Pacific Group. Mr. Owens holds a B.S.E. from the University of Pennsylvania, Wharton School of Business and an M.B.A. from the University of Michigan. STEVEN J. PREISS has been Vice President of Clinical and Regulatory Affairs of the Company since April 1997. Mr. Preiss was president of CPROS, a regulatory consulting firm, from May 1996 to April 1997. From August 1992 to May 1996, Mr. Preiss held various positions at Bio-Pharm Clinical Services, a clinical 42 44 research organization, including Vice President of Clinical Programs and Data Management. Prior to joining Bio-Pharm Clinical Services, Mr. Preiss was Clinical Programs Director at Ioptex Research, Inc., a medical device company. Mr. Preiss holds a B.S. in Chemistry from St. Lawrence University. DICK P. ALLEN joined the Company's Board of Directors in July 1994. Mr. Allen has been President of DIMA Ventures, Inc., a private investment firm since 1987. Mr. Allen was a Founder and Vice-President of Caremark, Inc., a home infusion therapy company acquired by Baxter International in 1987. He also serves on the Board of Directors of MicroTherapeutics, Inc., a publicly traded company. Mr. Allen holds an M.B.A. from Stanford University Graduate School of Business and a B.S. from Yale University. WILLIAM E. ENGBERS joined the Company's Board of Directors in September 1995. Since 1996, Mr. Engbers has been a Director of Venture Capital for Allstate Insurance Company. From 1989 to 1996 Mr. Engbers was Venture Group Manager for Allstate Insurance Co. He also serves on the Board of Directors of La Jolla Pharmaceutical Company and DM Management, each of which is publicly traded. ROBERT E. CURRY, PH.D. joined the Company's Board of Directors in September 1995. Since 1991, Dr. Curry has been a General Partner and Vice President of the Sprout Group, a venture capital management firm and affiliate of DLJ, one of the underwriters in this offering. Dr. Curry also serves on the Boards of Directors of AutoCyte, Inc., Biocircuits Corp., Diatide, Inc., Nanogen, Inc., and Photon Technology International, Inc. and several private companies. He holds an M.S. and Ph.D. in Chemistry from Purdue University and received his B.S. from the University of Illinois. JOSEPH F. LOVETT joined the Company's Board of Directors in August 1993. Since 1988, Mr. Lovett has been a General Partner of Medical Science Partners venture fund. From 1985 to 1988, Mr. Lovett was Executive Vice President of Damon Biotech, a biotechnology company. Mr. Lovett holds an M.B.A. from California State Polytechnic Institute and received his B.A. from the University of Vermont. MEDICAL ADVISORS The Company has assembled a Medical Advisory Board comprised of six individuals who are prominent in the field of urology research. Members of the Medical Advisory Board review the Company's research and development activities and are available for consultation with the Company's management and staff relating to their respective areas of expertise. Several of the members of the Medical Advisory Board meet more frequently, on an individual basis, with the Company's management and staff to discuss the Company's ongoing research and development projects. The names and background of the current members of the Medical Advisory Board are set forth below: ANTHONY M. ATALA, M.D. has been a member of the Department of Urology at Children's Hospital and Medical Center, an affiliate of Harvard Medical School, since 1990. Dr. Atala is currently the Director of the Tissue Engineering Program, is in charge of the Bladder Reconstruction Cohort and heads the Laboratory for Cellular Therapeutics in the Department of Urology. Dr. Atala is an Assistant Professor of Surgery (Urology) at Harvard Medical School. Dr. Atala is a member of the Board of Directors, the Medical Advisory Board and Chairman of the Research Scholar Program for the National Kidney Foundation of Massachusetts and Rhode Island. He is also Chairman of the Board of Directors for the National Bladder Foundation. MICHAEL MARBERGER, M.D., PH.D. has been Professor and Chairman of the Department of Urology of the Klinik Fur Urologie of the University of Vienna in Vienna, Austria since 1990. W. SCOTT MCDOUGAL, M.D. has been the Chief of Urology at Massachusetts General Hospital (Harvard Medical School) since 1991. MARTIN RESNICK, M.D. has been a Professor and Chairman of the Department of Urology of Case Western University of Cleveland, Ohio since 1981. Dr. Resnick is also affiliated with Metropolitan Hospital, the V.A. Hospital of Cleveland and Henry Ford Hospital. THOMAS STAMEY, M.D. has been a Professor at Stanford University since 1961. From 1961 to 1994, Dr. Stamey was the Chairman of the Department of Urology of Stanford University. 43 45 RICHARD WILLIAMS, M.D. has been the Chairman of the Department of Urology of the University of Iowa Hospitals and Clinics since 1984. Dr. Williams also holds the Rubin H. Flock Endowed Chair in Urology. BOARD COMPOSITION The Company currently has five directors. In accordance with the terms of the Company's Restated Certificate of Incorporation, effective upon the closing of this offering, the terms of office of the Board of Directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held at the annual meeting of stockholders to be held in 1999; Class II, whose term will expire at the annual meeting of stockholders to be held in 2000; and Class III, whose term will expire at the annual meeting of stockholders to be held in 2001. The Class I directors are Robert E. Curry, Ph.D. and Joseph F. Lovett, the Class II director is David H. Maupin and the Class III directors are Dick P. Allen and William E. Engbers. At each annual meeting of stockholders after the initial classification, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. In addition, the Company's Bylaws provide that the authorized number of directors may be changed only by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the Board of Directors may have the effect of delaying or preventing changes in control or management of the Company. Each officer is elected by and serves at the discretion of the Board of Directors. Each of the Company's officers and directors, other than its nonemployee directors, devote such time to the affairs of the Company as is necessary to discharge their duties. There are no family relationships among any of the directors, officers or key employees of the Company. BOARD COMMITTEES The Audit Committee of the Board of Directors (consisting of Dick P. Allen and Joseph F. Lovett) reviews the internal accounting procedures of the Company and consults with and reviews the services provided by the Company's independent accountants. The Compensation Committee of the Board of Directors (consisting of Robert E. Curry, Ph.D. and William E. Engbers) reviews and recommends to the Board the compensation and benefits of all executive officers of the Company and establishes and reviews general policies relating to compensation and benefits of employees of the Company. The Board does not have a nominating committee or any committee currently performing the functions of a nominating committee. DIRECTOR COMPENSATION The Company does not pay its directors for attending meetings of the Board of Directors or for serving on Committees of the Board of Directors. Directors are reimbursed for their out-of-pocket expenses incurred in attending meetings. From time to time, certain directors of the Company have received grants of options to purchase shares of the Company's Common Stock pursuant to the 1994 Stock Option Plan. After the closing of this offering, directors of the Company will be eligible to receive grants of options to purchase Common Stock pursuant to the 1998 Stock Option Plan. See "-- Incentive Stock Plans" and "Certain Transactions." EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain information for the year ended December 31, 1997 regarding the compensation of the Company's Chief Executive Officer and the other executive officers of the Company whose salary and bonus for such fiscal year were in excess of $100,000 (the "Named Executive Officers"). 44 46 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION 1997 ANNUAL ------------ COMPENSATION SECURITIES ALL OTHER --------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($) David H. Maupin................................. 203,963 -- 50,000 -- President and Chief Executive Officer Michael J. Magliochetti, Ph.D................... 176,947 -- 50,000 15,000(1) Senior Vice President and Chief Technical Officer Donald R. Beussink.............................. 74,360 -- 75,000 30,263(2) Vice President, Sales and Marketing Steven J. Preiss................................ 75,000 -- 55,000 82,974(3) Vice President, Clinical and Regulatory Affairs
- ------------------------------ (1) Dr. Magliochetti received a $60,000 Housing Assistance Loan on October 3, 1994, which was forgiven in 1995, 1996 and 1997 in the amount of $15,000 per year plus accrued interest. (2) Mr. Beussink was hired by the Company in June 1997 and received $30,263 for relocation expenses. (3) Mr. Preiss was hired by the Company in April 1997. Mr. Preiss received $36,074 for relocation expenses, and a $46,900 loan to assist with housing costs, which has been repaid in full as of March 31, 1998. Option Grants in Last Fiscal Year. The following table sets forth each grant of stock options made during the fiscal year ended December 31, 1997 to each of the Named Executive Officers: OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION UNDERLYING GRANTED TO OF BASE FOR OPTION TERM(2) OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------- NAME GRANTED(#) FISCAL 1997(%)(1) ($/SH) DATE 5%($) 10%($) David H. Maupin............... 50,000 15.9 0.20 02/04/02 2,763 6,105 Michael J. Magliochetti, Ph.D........................ 25,000 8.0 0.20 02/04/02 1,381 3,053 25,000 8.0 0.50 12/05/02 3,454 7,631 Donald R. Beussink............ 75,000 23.9 0.50 06/17/02 10,361 22,894 Steven J. Preiss.............. 35,000 11.2 0.20 04/01/02 1,934 4,274 20,000 6.4 0.50 12/05/02 2,763 6,105
- ------------------------------ (1) In 1997, the Company granted employees options to purchase an aggregate of 313,500 shares of Common Stock. (2) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), shown are the gains or "option spreads" that would exist for the respective options granted. These gains are based on the assumed rates of annual compound stock price appreciation of 5% and 10% from the date the option was granted over the full option term. These assumed annual compound rates of stock price appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of future Common Stock prices. 45 47 Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. No options were exercised by the Named Executive Officers in 1997. The following table sets forth for each of the Named Executive Officers the number and value of securities underlying unexercised options held at December 31, 1997: AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1997 AND OPTION VALUES AT DECEMBER 31, 1997
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1997(#)(1) DECEMBER 31, 1997($)(2) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE David H. Maupin................................ 38,750 88,750 Michael J. Magliochetti, Ph.D.................. 104,167 95,833 Donald R. Beussink............................. -- 75,000 Steven J. Preiss............................... -- 55,000
- ------------------------------ (1) Based upon an assumed fair market value of $ per share as of the date of this Prospectus less the exercise price per share. (2) Based upon an assumed initial public offering price of $ less the exercise price per share. INCENTIVE STOCK PLANS 1994 Stock Plan. The Company's 1994 Stock Plan, as amended and restated (the "1994 Plan") provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for the granting to employees and consultants of nonstatutory stock options and stock purchase rights ("SPRs"). The 1994 Plan, as amended and restated, was approved by the Board of Directors in April 1998 and is expected to be approved by the stockholders in May 1998. Unless terminated sooner, the 1994 Plan will terminate automatically in July 2004. A total of 1,610,000 shares of Common Stock are currently reserved for issuance pursuant to the 1994 Plan. The 1994 Plan may be administered by the Board of Directors or a committee of the Board (the "Administrator"), which Administrator shall, in the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The Administrator has the power to determine the terms of the options or SPRs granted, including, but not limited to, the exercise price, the number of shares subject to each option or SPR, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Board has the authority to amend, suspend or terminate the 1994 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1994 Plan. Options and SPRs granted under the 1994 Plan are not generally transferable by the optionee, other then by will or the laws of descent and distribution, and each option and SPR is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1994 Plan must generally be exercised within three months of the end of optionee's status as an employee or consultant of the Company, or within twelve months after such optionee's termination by death or disability, but in no event later than the expiration of the option's ten year term. In the case of SPRs, unless the Administrator determines otherwise, the restricted stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for shares repurchased pursuant to the restricted stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. The exercise price of all incentive stock options granted under the 1994 Plan must be at least equal to the fair market value of the Common Stock on the date of grant, unless adjusted by the Administrator to the fair market value on the date of such adjustment if the fair market value of the Company's Common Stock shall have declined since the date the option was granted. The exercise price of nonstatutory stock options and SPRs granted under the 1994 Plan is determined by the Administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of 46 48 Section 162(m) of the Code, the exercise price must at least be equal to the fair market value of the Common Stock on the date of grant, unless adjusted by the Administrator to the fair market value on the date of such adjustment if the fair market value of the Company's Common Stock shall have declined since the date the option was granted. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock or any parent or subsidiary, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1994 Plan may not exceed ten years. The 1994 Plan provides that in the event of a merger of the Company with or into another corporation, a sale of substantially all of the Company's assets or a like transaction involving the Company, options may be granted with a per share exercise price of less than fair market value on the date of the grant and each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted as described in the preceding sentence, the Administrator shall provide for the optionee to have the right to exercise the option or SPR as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the administrator makes an option or SPR exercisable in full in the event of a merger or sale of assets, the administrator shall notify the optionee that the option or SPR shall be fully exercisable for a period of fifteen days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. 1998 Director Option Plan. Non-employee directors are entitled to participate in the 1998 Director Option Plan (the "Director Plan"). The Director Plan was adopted by the Board of Directors in April 1998 and is expected approved by the stockholders in May 1998, but it will not become effective until its approval which shall be required within 12 months of the Board's adoption of the Director Plan. The Director Plan has a term of ten years, unless terminated sooner by the Board. A total of 300,000 shares of Common Stock have been reserved for issuance under the Director Plan. The Director Plan provides for the automatic grant of 9,000 shares of Common Stock (the "First Option") to each non-employee director on the effective date of this offering. After the First Option is granted to the non-employee director, he or she shall automatically be granted an option to purchase 9,000 shares (a "Subsequent Option") each year on the date of the annual stockholder's meeting of the Company, if on such date he or she shall have served on the Board for at least six months. Each First Option and each Subsequent Option shall have a term of 10 years and the shares subject to the option shall vest in equal monthly increments over the one year period immediately following the date of grant. The exercise price of the First Option shall be the initial price to public of the shares offered in this Offering. The exercise price of each Subsequent Option shall be 100% of the fair market value per share of the Common Stock, generally determined with reference to the closing price of the Common Stock as reported on the Nasdaq National Market on the date of grant. In the event of a merger of the Company or the sale of substantially all of the assets of the Company, each option shall become fully vested and exercisable for a period of thirty days from the date the Board notifies the optionee of the option's full exercisability, after which period the option shall terminate. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within twelve months after such director's termination by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the Director Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. 1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was approved by the Board of Directors in April 1998 and is expected to be approved by the stockholders in May 1998. The Company has reserved a total of 300,000 shares of Common Stock for issuance thereunder. No shares have been issued under the Purchase Plan to date. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), will be administered by the Board of Directors of the Company or by a committee appointed by the Board of Directors. Under the Purchase Plan, the Company will withhold a specified percentage (not to exceed 15%) of each salary payment to participating employees over certain offering periods. Any employee who is currently employed for at least 30 hours per week will be eligible to participate in the Purchase Plan. Unless the Board of Directors or its committee determines otherwise, each offering period will run for 24 months and will be divided into four consecutive purchase periods of approximately six months. The first offering period will 47 49 commence on the effective date of this Prospectus and will end on December 31, 1999. The first purchase period will commence on the effective date of this Prospectus and will end on December 31, 1998. New 24 month offering periods will commence every January 1 and July 1 thereafter. In the event of a change in control of the Company, including a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, the offering and purchase periods then in progress will be shortened unless the rights to purchase stock are assumed by the successor or acquiring company. The price at which Common Stock will be purchased under the Purchase Plan is equal to 85% of the fair market value of the Common Stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever is lower. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. The maximum number of shares that a participant may purchase on the last day of any offering period is determined by dividing the payroll deductions accumulated during the purchase period by the purchase price. However, no person may purchase shares under the Purchase Plan to the extent such person would own and/or hold outstanding options to purchase 5% or more of the total combined value or voting power of all classes of the capital stock of the Company or of any of its subsidiaries, or to the extent that such person's rights to purchase stock under all employee stock purchase plans would accrue at a rate that exceeds $25,000 worth of stock for any calendar year. The Board of Directors may amend the Purchase Plan at any time. The Purchase Plan will terminate in April 2008, unless terminated earlier in accordance with the provisions of the Purchase Plan. CHANGE OF CONTROL ARRANGEMENTS David H. Maupin and Michael J. Magliochetti, PhD. have been granted options to purchase Common Stock pursuant to option agreements that provide for acceleration of vesting of certain options so that such options shall immediately become fully exercisable in the event of certain changes of control. LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for (i) any breach of their duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions, or (iv) any transaction from which the director derived an improper personal benefit. Such limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and executive officers and may indemnify its other officers and employees and other agents to the fullest extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence on the part of indemnified parties. The Company's Bylaws also permit it to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Bylaws would permit indemnification. The Company will, prior to the completion of this offering, enter into agreements to indemnify its directors and executive officers, in addition to indemnification provided for in the Company's Bylaws. These agreements, among other things, indemnify the Company's directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company arising out of such person's services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 48 50 CERTAIN TRANSACTIONS In September and October 1995, the Company issued shares of Series B Preferred Stock to certain entities affiliated with directors of the Company and certain 5% stockholders of the Company at a purchase price of $2.00 per share. In June 1997, the Company issued shares of Series C Preferred Stock to certain entities affiliated with directors of the Company and certain 5% stockholders of the Company at a purchase price of $5.00 per share. The number of shares of Common Stock issuable upon conversion of such shares of Series B Preferred Stock and Series C Preferred Stock issued to each such entity is set forth below.
NUMBER OF SHARES OF COMMON STOCK ---------------------------------- SERIES B SERIES C --------------- --------------- NAME OF INVESTOR PREFERRED STOCK PREFERRED STOCK ENTITIES AFFILIATED WITH DIRECTORS Entities affiliated with Medical Science Partners II, L.P....................................................... 507,025 -- Entities affiliated with DIMA Ventures, Inc................. 8,775 9,000 Entities affiliated with Allstate Insurance Company......... 310,000 164,000 Entities affiliated with Sprout Capital VII, L.P............ 1,250,000 278,000 OTHER 5% STOCKHOLDERS Medtronic, Inc.............................................. 200,000 118,000
Pursuant to an Investor Rights Agreement, the holders of the Company's Preferred Stock agreed to vote their shares of Preferred Stock to fix the number of directors at five. Pursuant to this agreement, the board was to consist of one director designated by the holders of the Company's Series A Preferred Stock, to be designated by Medical Science Partners, L.P.; one director designated by the holders of the Company's Series B Preferred Stock, to be designated by Sprout Capital VII, L.P.; the duly elected, qualified and acting President of the Company; and two directors designated jointly by the President of the Company and all holders of the Company's Preferred Stock. Directors Robert E. Curry, Ph.D. and David H. Maupin have served as members of the board pursuant to this voting arrangement, which terminates upon completion of this offering. The Company entered into an agreement in March 1994 with David H. Maupin containing antidilution provisions which allowed Mr. Maupin to purchase additional shares of Common Stock at fair market value based upon a certain formula. In November 1995, the Company issued 42,500 shares of Common Stock at $0.20 per share under the agreement. The Company expects to enter into a financing arrangement with certain of its principal stockholders during April 1998. Under this arrangement, such stockholders would provide the Company with a line of credit of up to $5.0 million in the event that the Company requires any additional funding prior to receiving the net proceeds of this offering. In exchange for this line, the Company has agreed to issue warrants to the stockholders to purchase an aggregate of 50,000 shares of Common Stock at the initial public offering price per share. The remaining terms of this credit facility are currently being negotiated by the Company and such stockholders. To date, the Company has not borrowed any amounts under this arrangement. The Company has from time to time granted options and other compensation to its directors and executive officers. All future transactions, including any loans from the Company to its officers, directors, principal stockholders or affiliates, will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested members of the Board of Directors or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. This offering is being made pursuant to Rule 2720 of the Conduct Rules of the NASD because certain associates of DLJ own in excess of 10% of the Common Stock of the Company prior to this offering. Rule 2720 provides that, among other things, when an NASD member participates in the underwriting of equity securities of a company in which there exists a conflict of interest, the price at which such equity securities are to be distributed to the public can be no higher than that recommended by a qualified independent underwriter ("QIU") meeting certain standards. CIBC Oppenheimer Corp. will assume the responsibilities of acting as the QIU in connection with this offering. 49 51 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 31, 1998 and as adjusted to reflect the sale by the Company of the Common Stock offered hereby, by (i) each director of the Company, (ii) each Named Executive Officer, (iii) each person known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, based on information furnished by the beneficial owners of the Common Stock listed below, the Company believes that such owners have sole investment and voting power with respect to such shares, subject to community property laws, where applicable.
PERCENTAGE OF VOTING STOCK NUMBER OF BENEFICIALLY OWNED SHARES -------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OWNED(1) OFFERING OFFERING Entities affiliated with Medical Science Partners II, L.P.(2)................................................... 1,331,519 19.4% 20 Williams Street, Suite 250 Wellesley, MA 02181 Entities affiliated with Sprout Capital VII, L.P.(3)........ 1,528,000 22.0 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 Entities affiliated with Allstate Insurance Company(4)...... 974,000 14.0 3075 Sanders Road, Suite G5D Northbrook, IL 60062-2721 Medtronic, Inc.............................................. 648,000 9.3 7000 Central Avenue, N.E Minneapolis, MN 55432 Premier Medical Partner Fund................................ 400,000 5.8 12730 High Bluff Drive Suite 300 San Diego, CA 92130-2099 Dick P. Allen(5)............................................ 58,525 * Donald R. Beussink(6)....................................... 18,750 * Robert E. Curry, Ph.D.(7)................................... 1,540,000 22.1 William E. Engbers(8)....................................... 986,000 14.2 Joseph F. Lovett(9)......................................... 1,343,519 19.3 David H. Maupin(10)......................................... 392,448 5.6 Michael J. Magliochetti, Ph.D.(11).......................... 127,603 1.8 Steven J. Preiss(12)........................................ 9,479 * All directors and executive officers as a group(9 persons) (13)...................................................... 4,476,324 61.7
- ------------------------------ * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of Securities and Exchange Commission and includes voting or investment power with respect to securities. Percentage of beneficial ownership is based on 6,956,037 shares of Common Stock outstanding as of March 31, 1998 and shares of Common Stock outstanding after completion of this offering. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days after March 31, 1998 are deemed outstanding for computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person. (2) Includes 897,430 shares held by Medical Science Partners II, L.P., 330,000 shares held by Medical Science Partners, L.P., 98,583 shares held by Medical Science II Co-Investment, L.P.("MSP II"), 2,753 shares held by Eagle Constellation Fund Ltd. ("Eagle"), and 2,753 shares held by UEMCO XI Limited Partnership ("UEMCO"). MSP II, Eagle and UEMCO are limited partners of Medical 50 52 Science Partners II, L.P. Excludes 12,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998 held by Joseph F. Lovett. See Note 9. (3) Includes 1,410,582 shares held by Sprout Capital VII, L.P. and 117,418 shares held by DLJ Capital Corporation. Excludes 12,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998 held by Robert E. Curry, Ph.D. See Note 7. Sprout Capital VII, L.P. and DLJ Capital Corporation are affiliates of DLJ, one of the Underwriters in this offering. (4) Includes 602,840 shares held by Allstate Insurance Company, 283,500 shares held by Allstate Life Insurance Company, 40,500 shares held by Continental Trust Company, as Trustee for the Allstate Retirement Plan, 32,400 shares held by Continental Trust Company, as Trustee for the Agents Pension Plan, 8,200 shares held by CTC Illinois Trust Company, as Trustee for the Allstate Retirement Plan, and 6,560 shares held by CTC Illinois Trust Company, as Trustee for the Agents Pension Plan. Excludes 12,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998 held by William E. Engbers. See Note 8. (5) Includes 13,500 shares held by DIMA Ventures Inc., 1,500 shares held by the Brett Richard Allen Trust DTD 10/12/81, 1,500 shares held by the Jennifer Lee Allen Trust DTD 10/12/81, and 1,275 shares held in the Allen Investment Partnership. Also includes 40,750 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. Mr. Allen is a director of the Company and President of DIMA Ventures, Inc. Mr. Allen disclaims beneficial ownership of the shares held by Allen Investment Partnership except to the extent of his proportionate partnership interest therein. (6) Includes 18,750 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (7) Includes 1,410,582 shares held by Sprout Capital VII, L.P. and 117,418 shares held by DLJ Capital Corporation. Dr. Curry is a director of the Company and a general partner of Sprout Capital VII, L.P. Dr. Curry disclaims beneficial ownership of the shares held by such entities except to the extent of his proportionate partnership interest therein. Sprout Capital is an affiliate of DLJ, one of the underwriters in this offering. Also includes 12,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (8) Includes 602,840 shares held by Allstate Insurance Company, 283,500 shares held by Allstate Life Insurance Company, 40,500 shares held by Continental Trust Company, as Trustee for the Allstate Retirement Plan, 32,400 shares held by Continental Trust Company, as Trustee for the Agents Pension Plan, 8,200 shares held by CTC Illinois Trust Company, as Trustee for the Allstate Retirement Plan, and 6,560 shares held by CTC Illinois Trust Company, as Trustee for the Agents Pension Plan. Mr. Engbers is a director of the Company and a Director of Venture Capital at Allstate Insurance Company. Mr. Engbers disclaims beneficial ownership of the shares held by such entities except to the extent of his proportionate interest therein. Also includes 12,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (9) Includes 897,430 shares held by Medical Science Partners II, L.P., 330,000 shares held by Medical Science Partners, L.P., 98,583 shares held by MSP II, 2,753 shares held by Eagle and 2,753 shares held by UEMCO. MSP II, Eagle, and UEMCO are limited partners of Medical Science Partners II, L.P. Mr. Lovett is a director of the Company and a general partner of Medical Science Partners II, L.P., and Medical Science Partners, L.P.. Mr. Lovett disclaims beneficial ownership of the shares held by such entities except to the extent of his proportionate partnership interest therein. Also includes 12,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (10) Includes 62,448 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (11) Includes 127,603 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (12) Includes 9,479 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. (13) Includes 295,030 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1998. 51 53 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of this offering, the total number of shares of all classes of stock which the Company has authority to issue will be 50,000,000 shares of Common Stock, par value $0.01 per share and 5,000,000 shares of Preferred Stock, par value $0.01 per share. As of March 31, 1998, 1,121,633 shares of Common Stock were issued and outstanding and held by 12 stockholders and 5,834,404 shares of Preferred Stock were issued and outstanding and held by 46 stockholders. All outstanding shares of Preferred Stock will be converted into shares of Common Stock upon completion of this offering. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation or dissolution of the Company, holders of Common Stock would be entitled to share in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted the holders of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company in this offering, when issued and paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate in the future. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by law, without stockholder approval, from time to time to provide in the issuance of one or more series of Preferred Stock, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. Issuances of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of approximately 5,834,404 shares of Common Stock (assuming the conversion of all outstanding shares of Preferred Stock into Common Stock upon completion of this offering) (the "Registrable Securities") or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between the Company and the holders of Registrable Securities. The holders of at least 35% of the Registrable Securities may require, on two occasions, that the Company use its best efforts to register the Registrable Securities for public resale, provided, among other limitations, that the proposed aggregate selling price to the public is at least $2 million. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in the registration, subject to the ability of the underwriters to limit the number of shares included in the offering. The holders of at least 15% of the Registrable Securities may also require the Company, on four occasions, but not more than once during any 12-month period, to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to the Company, provided, among other limitations, that the proposed aggregate selling price (net of any underwriters' discounts or commissions) is at least $250,000. The Company will not be required to effect any registration, other than a registration on 52 54 Form S-3 or any successor form relating to secondary offerings within six months after the effective date of any other Registration Statement of the Company. All registration expenses must be borne by the Company and all selling expenses relating to Registrable Securities must be borne by the holders of the securities being registered. The holders of Registrable Securities have waived their right to have shares of Common Stock registered under the Securities Act as part of this offering and for a period of 180 days after the date of this Prospectus. CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUE Certain provisions of the Company's Restated Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock without any vote or further action by the stockholders, eliminate the right of stockholders to act by written consent without a meeting and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, the Company is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless: (i) prior to such date, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder; the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is Norwest Bank Minnesota, N.A. Its telephone number is (800) 468-9716. 53 55 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse, or the availability of such shares for sale, could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon the completion of this offering, the Company will have shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option. Of these shares, the shares sold in this offering will be freely tradable without restriction under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. As a result of lock-up agreements between certain stockholders and the Underwriters, the remaining 6,956,037 shares will not become available for sale in the public market until 180 days after the date of this Prospectus subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 of the Securities Act. Shares of Common Stock outstanding upon completion of this offering and held by existing stockholders will be "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the 1933 Act, which rules are summarized below. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year is entitled to sell in "broker's transactions" or to market makers, within any three-month period, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately shares immediately after this offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701 under the Securities Act, persons who purchase shares upon exercise of options granted prior to the effective date of this offering are entitled to sell such shares 90 days after the closing of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. Each of the Company, its executive officers and directors and certain stockholders of the Company has agreed, subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or substantially all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of the Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its stockholders has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without DLJ's prior written consent. Approximately 90 days after the date of this Prospectus, the Company intends to file a Registration Statement on Form S-8 covering shares issuable under the Company's 1994 Stock Plan (including shares subject to then outstanding options under such plans), 1998 Director Option Plan and 1998 Employee Stock Purchase Plan, thus permitting the resale of such shares in the public market without restriction under the Securities Act after expiration of the applicable lock-up agreements. 54 56 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement dated , 1998 (the "Underwriting Agreement"), the Underwriters named below, (the "Underwriters"), who are represented by DLJ and CIBC Oppenheimer Corp. (collectively, the "Representatives"), have severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite their names below.
NUMBER OF UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation......... CIBC Oppenheimer Corp....................................... --------- Total............................................. =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $ per share. After the initial offering of the Common Stock, the public offering price and other selling terms may be changed by the Representative at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Each of the Company, its executive officers and directors and certain of the stockholders of the Company has agreed, subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its stockholders has 55 57 agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without DLJ's prior written consent. The Company and each of its executive officers, directors and certain stockholders of the Company have also waived any right of first refusal that they may have with respect to the Common Stock issued pursuant to this offering. Prior to this offering, there has been no established trading market for the Common Stock. The initial public offering price for the shares of Common Stock offered hereby will be determined by negotiation among the Company and the Representatives. The factors to be considered in determining the initial public offering include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Company, the historical results of operation of the Company, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering. Other than in the U.S., no action has been taken by the Company or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisement in connection with the offer and sale of any such shares of Common Stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of the Common Stock and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation in unlawful. In connection with this offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. This offering is being made pursuant to Rule 2720 of the Conduct Rules of the NASD because certain associates of DLJ own in excess of 10% of the Common Stock of the Company prior to this offering. Rule 2720 provides that, among other things, when an NASD member participated in the underwriting of equity securities of a company in which there exists a conflict of interest, the price at which such equity securities are to be distributed to the public can be no higher than that recommended by a qualified independent underwriter meeting certain standards. CIBC Oppenheimer Corp. will assume responsibilities of acting as the QIU in connection with this offering. VALIDITY OF COMMON STOCK The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California and for the Underwriters by Sullivan & Cromwell, Los Angeles, California. Mario M. Rosati and Christopher D. Mitchell, members of Wilson Sonsini Goodrich & Rosati, are the Secretary and Assistant Secretary of the Company. Members of and investment partnerships affiliated with Wilson Sonsini Goodrich & Rosati beneficially own 3,350 shares of the Company's Common Stock. 56 58 EXPERTS The audited financial statements 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. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1, including amendments thereto, under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the securities offered hereby, reference is made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office upon the payment of prescribed fees. Such information is also available electronically by means of the Commission's web site on the Internet at http://www.sec.gov. 57 59 UROSURGE, INC. INDEX TO FINANCIAL STATEMENTS
PAGE INDEPENDENT AUDITORS' REPORT................................ F-2 FINANCIAL STATEMENTS Balance sheets............................................ F-3 Statements of operations.................................. F-4 Statements of stockholders' equity........................ F-5 Statements of cash flows.................................. F-6 Notes to financial statements............................. F-7
F-1 60 INDEPENDENT AUDITORS' REPORT To the Board of Directors UroSurge, Inc. Coralville, Iowa We have audited the accompanying balance sheets of UroSurge, Inc., a development stage company, as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1995, 1996 and 1997 and the period from August 6, 1993, date of incorporation, to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Urosurge, Inc., as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1995, 1996 and 1997 and the period from August 6, 1993, date of incorporation, to December 31, 1997 in conformity with generally accepted accounting principles. MCGLADREY & PULLEN, LLP Iowa City, Iowa April 6, 1998 F-2 61 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 ASSETS Current Assets Cash and cash equivalents................................. $2,113,202 $ 136,990 Short-term investments.................................... -- 3,129,396 Trade and other receivables............................... 18,663 140,495 Inventories............................................... 50,385 930,204 Prepaid expenses.......................................... 47,556 149,589 ---------- ----------- Total current assets............................... 2,229,806 4,486,674 ---------- ----------- Leasehold Improvements and Equipment (Note 3) Leasehold improvements.................................... 257,130 353,764 Furniture and office equipment............................ 189,944 369,731 Production equipment...................................... 63,370 285,125 ---------- ----------- 510,444 1,008,620 Less accumulated depreciation............................. 96,956 203,237 ---------- ----------- 413,488 805,383 ---------- ----------- Intangibles, primarily licenses, less accumulated amortization 1996 $57,444; 1997 $93,996 (Note 2).......... 247,251 233,762 ---------- ----------- $2,890,545 $ 5,525,819 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt (Note 3)............. $ 34,415 $ 64,963 Accounts payable.......................................... 375,001 816,263 Accrued expenses.......................................... 1,424 10,465 License fees payable (Note 2)............................. 132,400 50,000 ---------- ----------- Total current liabilities.......................... 543,240 941,691 ---------- ----------- Long-Term Debt (Note 3)..................................... 92,870 109,728 ---------- ----------- Commitments and Contingencies (Notes 2, 4, 6, and 8) Stockholders' Equity (Note 4) Preferred stock, $.01 par value; participating; convertible; authorized 7,220,000 shares; to be issued in Series: Series A, issued 1,685,000 shares, liquidation preference $1,685,000.................................. 16,850 16,850 Series B, issued 2,675,000 shares, liquidation preference $5,350,000.................................. 26,750 26,750 Series C, issued 1,474,404 shares, liquidation preference $7,372,020.................................. -- 14,744 Common stock, $.01 par value; authorized 15,000,000 shares; issued 1996 1,097,591 shares; 1997 1,121,633 shares.................................................. 10,976 11,216 Additional paid-in capital................................ 6,961,661 15,155,720 Deferred compensation (Note 5)............................ -- (738,444) (Deficit) accumulated during the development stage........ (4,761,802) (10,012,436) ---------- ----------- 2,254,435 4,474,400 ---------- ----------- $2,890,545 $ 5,525,819 ========== ===========
See Notes to Financial Statements. F-3 62 UROSURGE, INC (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND PERIOD FROM AUGUST 6, 1993, DATE OF INCORPORATION, TO DECEMBER 31, 1997
CUMULATIVE TOTALS SINCE 1995 1996 1997 INCORPORATION Net revenues........................... $ -- $ 20,166 $ 11,707 $ 31,873 ----------- ----------- ----------- ------------ Operating expenses: Cost of revenues..................... -- 12,649 5,432 18,081 Research and development............. 848,301 1,940,795 3,594,613 6,621,921 Marketing and sales.................. 2,200 270,823 391,877 664,900 General and administrative........... 466,207 771,047 1,479,722 3,266,223 ----------- ----------- ----------- ------------ Total operating expenses..... 1,316,708 2,995,314 5,471,644 10,571,125 ----------- ----------- ----------- ------------ Loss from operations......... (1,316,708) (2,975,148) (5,459,937) (10,539,252) Financial income (expense): Interest income...................... 85,003 184,099 187,010 492,980 Interest expense..................... (2,454) (6,386) (9,023) (17,863) ----------- ----------- ----------- ------------ Loss before income taxes..... (1,234,159) (2,797,435) (5,281,950) (10,064,135) Income tax credits (Note 7)............ -- 20,383 31,316 51,699 ----------- ----------- ----------- ------------ Net loss..................... $(1,234,159) (2,777,052) (5,250,634) (10,012,436) =========== =========== =========== ============ Basic and diluted loss per share....... $ (1.23) $ (2.58) $ (4.72) =========== =========== =========== Weighted average shares outstanding.... 999,510 1,076,987 1,111,267 =========== =========== =========== Pro forma basic and diluted loss per share................................ $ (.84) =========== Shares used in computing pro forma basic and diluted loss per share..... 6,281,282 ===========
See Notes to Financial Statements. F-4 63 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND PERIOD FROM AUGUST 6, 1993, DATE OF INCORPORATION, TO DECEMBER 31, 1997
SERIES A SERIES B SERIES C PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------------------- ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Balance, August 6, 1993, date of incorporation.............................. -- $ -- -- $ -- -- $ -- -- $ -- Issuance of common stock to founders: March 9, 1994 ($.01 per share)........... -- -- -- -- -- -- 660,000 6,600 October 3, 1994 ($.01 per share)......... -- -- -- -- -- -- 330,000 3,300 Issuance of preferred stock: March 11, 1994 ($1.00 per share)......... 1,675,000 16,750 -- -- -- -- -- -- November 2, 1994 ($1.00 per share)....... 10,000 100 -- -- -- -- -- -- Stock issuance costs..................... -- -- -- -- -- -- -- -- Net (loss)................................. -- -- -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- --------- ------- Balance, December 31, 1994.................. 1,685,000 16,850 -- -- -- -- 990,000 9,900 Issuance of preferred stock: September 29, 1995 ($2.00 per share) -- -- 2,550,000 25,500 -- -- -- -- October 24, 1995 ($2.00 per share) -- -- 125,000 1,250 -- -- -- -- Stock issuance costs..................... -- -- -- -- -- -- -- -- Collection of stock subscription receivable............................... -- -- -- -- -- -- -- -- Issuance of common stock under license agreement on November 7, 1995............ -- -- -- -- -- -- 63,112 631 Net (loss)................................. -- -- -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- --------- ------- Balance, December 31, 1995.................. 1,685,000 16,850 2,675,000 26,750 -- -- 1,053,112 10,531 Issuance of common stock ($.20 per share) on June 14, 1996 (Note 4)................ -- -- -- -- -- -- 42,500 425 Exercise of stock options (Note 5)......... -- -- -- -- -- -- 1,979 20 Net (loss)................................. -- -- -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- --------- ------- Balance, December 31, 1996.................. 1,685,000 16,850 2,675,000 26,750 -- -- 1,097,591 10,976 Exercise of stock options (Note 5)......... -- -- -- -- -- -- 24,042 240 Issuance of preferred stock: June 13, 1997 ($5.00 per share)' -- -- -- -- 1,464,404 14,644 -- -- August 12, 1997 ($5.00 per share) -- -- -- -- 10,000 100 -- -- Stock issuance costs..................... -- -- -- -- -- -- -- -- Deferred compensation related to grant of stock options (Note 5)................... -- -- -- -- -- -- -- -- Amortization of deferred compensation...... -- -- -- -- -- -- -- -- Net (loss)................................. -- -- -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- --------- ------- Balance, December 31, 1997.................. 1,685,000 $16,850 2,675,000 $26,750 1,474,404 $14,744 1,121,633 $11,216 ========= ======= ========= ======= ========= ======= ========= ======= (DEFICIT) ACCUMULATED ADDITIONAL DEFERRED DURING THE STOCK PAID-IN COMPENSATION DEVELOPMENT SUBSCRIPTION CAPITAL (NOTE 5) STAGE RECEIVABLE TOTAL Balance, August 6, 1993, date of incorporation.............................. $ -- $ -- $ -- $ -- $ -- Issuance of common stock to founders: March 9, 1994 ($.01 per share)........... -- -- -- -- 6,600 October 3, 1994 ($.01 per share)......... -- -- -- (3,300) -- Issuance of preferred stock: March 11, 1994 ($1.00 per share)......... 1,658,250 -- -- -- 1,675,000 November 2, 1994 ($1.00 per share)....... 9,900 -- -- -- 10,000 Stock issuance costs..................... (14,838) -- -- -- (14,838) Net (loss)................................. -- -- (750,591) -- (750,591) ----------- --------- ------------ ------- ----------- Balance, December 31, 1994.................. 1,653,312 -- (750,591) (3,300) 926,171 Issuance of preferred stock: September 29, 1995 ($2.00 per share) 5,074,500 -- -- -- 5,100,000 October 24, 1995 ($2.00 per share) 248,750 -- -- -- 250,000 Stock issuance costs..................... (23,154) -- -- -- (23,154) Collection of stock subscription receivable............................... -- -- -- 3,300 3,300 Issuance of common stock under license agreement on November 7, 1995............ -- -- -- -- 631 Net (loss)................................. -- -- (1,234,159) -- (1,234,159) ----------- --------- ------------ ------- ----------- Balance, December 31, 1995.................. 6,953,408 -- (1,984,750) -- 5,022,789 Issuance of common stock ($.20 per share) on June 14, 1996 (Note 4)................ 8,075 -- -- -- 8,500 Exercise of stock options (Note 5)......... 178 -- -- -- 198 Net (loss)................................. -- -- (2,777,052) -- (2,777,052) ----------- --------- ------------ ------- ----------- Balance, December 31, 1996.................. 6,961,661 -- (4,761,802) -- 2,254,435 Exercise of stock options (Note 5)......... 2,164 -- -- -- 2,404 Issuance of preferred stock: June 13, 1997 ($5.00 per share)' 7,307,376 -- -- -- 7,322,020 August 12, 1997 ($5.00 per share) 49,900 -- -- -- 50,000 Stock issuance costs..................... (25,866) -- -- -- (25,866) Deferred compensation related to grant of stock options (Note 5)................... 860,485 (860,485) -- -- -- Amortization of deferred compensation...... -- 122,041 -- -- 122,041 Net (loss)................................. -- -- (5,250,634) -- (5,250,634) ----------- --------- ------------ ------- ----------- Balance, December 31, 1997.................. $15,155,720 $(738,444) $(10,012,436) $ -- $ 4,474,400 =========== ========= ============ ======= ===========
See Notes to Financial Statements. F-5 64 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND PERIOD FROM AUGUST 6, 1993, DATE OF INCORPORATION, TO DECEMBER 31, 1997
CUMULATIVE TOTALS SINCE 1995 1996 1997 INCORPORATION Cash Flows from Operating Activities Net (loss)........................... $(1,234,159) $(2,777,052) $(5,250,634) $(10,012,436) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Depreciation...................... 33,570 64,462 106,281 204,879 Amortization of intangibles....... 17,271 32,824 38,489 99,260 Amortization of deferred compensation.................... -- -- 122,041 122,041 Accretion of discount on short-term investments.......... (35,561) (58,876) (31,650) (126,087) Changes in certain working capital items: Trade and other receivables..... 3,329 7,323 (121,832) (140,495) Inventories..................... -- (50,385) (879,819) (930,204) Prepaid expenses................ (93,325) 57,769 (102,033) (149,589) Accounts payable and accrued expenses..................... 108,530 211,176 450,303 826,727 ----------- ----------- ----------- ------------ Net cash (used in) operating activities................. (1,200,345) (2,512,759) (5,668,854) (10,105,904) ----------- ----------- ----------- ------------ Cash Flows from Investing Activities Purchase of short-term investments... (3,505,417) -- (6,097,746) (10,930,444) Proceeds from maturities of short-term investments............ 1,147,218 3,000,000 3,000,000 7,927,135 Payments for license agreements...... (50,000) (90,933) (107,400) (273,333) Purchase of leasehold improvements and equipment..................... (322,858) (134,297) (450,728) (911,588) Other................................ -- (4,617) -- (9,689) ----------- ----------- ----------- ------------ Net cash provided by (used in) investing activities... (2,731,057) 2,770,153 (3,655,874) (4,197,919) ----------- ----------- ----------- ------------ Cash Flows from Financing Activities Proceeds from long-term debt......... 120,000 -- 40,000 160,000 Payments on long-term debt........... (11,111) (32,829) (40,042) (83,982) Proceeds from issuance of capital stock, net of issuance costs...... 5,330,777 8,698 7,348,558 14,364,795 ----------- ----------- ----------- ------------ Net cash provided by (used in) financing activities... 5,439,666 (24,131) 7,348,516 14,440,813 ----------- ----------- ----------- ------------ Increase (decrease) in cash and cash equivalents....... $ 1,508,264 $ 233,263 $(1,976,212) $ 136,990 Cash and cash equivalents: Beginning............................ 371,675 1,879,939 2,113,202 -- ----------- ----------- ----------- ------------ Ending............................... $ 1,879,939 $ 2,113,202 $ 136,990 $ 136,990 =========== =========== =========== ============ Supplemental disclosures: Noncash financing for equipment...... $ 26,996 $ 24,230 $ 47,448 $ 51,226 Noncash financing for licenses....... -- 173,333 25,000 173,333
See Notes to Financial Statements. F-6 65 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: The Company has acquired various licenses that allow it to develop, manufacture and market devices for the diagnosis, treatment and management of urinary incontinence and other genito-urinary conditions. Risk and uncertainties: The Company is in the development stage. It needs to obtain regulatory approval from the Food and Drug Administration ("FDA") prior to selling many of its products within the United States, and foreign regulatory approval must be obtained to sell many of its products internationally. There can be no assurance that the Company's products will receive regulatory approvals and a substantial amount of time may pass before significant revenue is realized. In addition, the primary component of one of the Company's products is purchased from a single supplier under an agreement that expires in 2000, subject to an automatic two-year extension. Accounting estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies follows: Cash and cash equivalents: For purposes of reporting cash flows, the Company considers all cash accounts which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments with a maturity of three months or less, to be cash equivalents. Short-term investments: Short-term investments include certificates of deposit of $2,000,000 and held to maturity U.S. Government securities of $1,129,396 which the Company has the positive intent and ability to hold to maturity and are stated at amortized cost. The fair value of U.S. Government securities, which matured in early 1998, approximates their carrying value. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. The inventories consist primarily of purchased materials available for sale and to be used in research and development activities. Leasehold improvements and equipment: Leasehold improvements and equipment are stated at cost. Depreciation of furniture and equipment is computed primarily by accelerated methods over estimated useful lives of five to seven years. Leasehold improvements are amortized by the straight-line method over the terms of the leases, plus optional renewals. Licenses: License acquisition costs are amortized by the straight-line method over their estimated economic life which varies between five and fifteen years. These licenses are periodically reviewed for impairment based upon an assessment of future operations to ensure that they are appropriately valued. Revenue recognition: Sales of medical devices are recognized as the products are shipped. Research and development: Research and development costs are charged to expense as incurred. Deferred income taxes: Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely F-7 66 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Stock options issued to employees and directors: Compensation expense for stock issued through a stock option plan is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion 25, Accounting for Stock Issued to Employees. Under this method, compensation is measured as the difference, if any, between the fair value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over the periods of service. The estimated fair value used for the stock options granted was determined on a periodic basis by the Company's Board of Directors. Stock options issued to nonemployees: The Company uses the Black-Scholes model to determine the fair value of stock options issued to nonemployees. The fair value of options granted is amortized and expensed over the period of service. Loss per share: The FASB has issued SFAS No. 128, "Earnings Per Share," which supersedes APB Opinion No. 15. SFAS No. 128 requires the presentation of basic and diluted earnings (loss) per share by all entities that have common stock or potential common stock, such as options, warrants and convertible securities outstanding. Basic per share amounts are computed by dividing net income (loss) (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock unless the effect is to reduce the loss or increase the income per common share from continuing operations. The dilutive effect of stock options is reflected by application of the treasury stock method and the dilutive effect of convertible preferred stock is reflected by application of the if-converted method. For each of the periods basic and diluted loss per share were the same since there was no dilutive effect from stock options or convertible preferred stock. There are no issuances of stock options that are considered "nominal issuances" under the Securities and Exchange Commission's Staff Accounting Bulletin No. 98. Pro forma basic and diluted loss per share for the year ended December 31, 1997 is computed using the weighted average number of outstanding shares of common stock determined above and the assumed conversion of Series A, B and C convertible preferred stock into common stock (as of their date of original issuance), which will occur upon the completion of the initial public offering, as contemplated herein. Fair value of financial instruments: The fair value of all the financial instruments approximates their carrying value since all are liquid or have short maturities. Recent accounting pronouncements: In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998. The Company operates in one business segment. F-8 67 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2. LICENSES The Company has acquired seven licenses that allow it to develop, manufacture and market a number of products. The licenses require the payment of royalties which vary up to 6% of the revenues related to the products. One license requires additional fees totaling $75,000 contingently payable if the Company is able to meet specified regulatory milestones and receives FDA clearance for the licensed product. This license also requires additional license fees of $900,000 over five years upon receiving FDA approval. Royalty expense totaled $0, $637, $1,067 and $1,704 for the years ended December 31, 1995, 1996 and 1997 and the period from August 6, 1993, date of incorporation, to December 31, 1997. NOTE 3. PLEDGED ASSETS AND RELATED DEBT The Company has various notes payable, collateralized by equipment and leasehold improvements, totaling $174,690 as of December 31, 1997. These notes are due in various monthly and annual installments through June 2002. NOTE 4. STOCKHOLDERS' EQUITY The Company has issued three series of convertible preferred stock under investment agreements as follows: 1,685,000 shares of Series A convertible preferred stock, ($.01 par value) ("Series A") for $1.00 per share under an Investment Agreement dated March 11, 1994, 2,675,000 shares of Series B convertible preferred stock, ($.01 par value) ("Series B") for $2.00 per share under an Investment Agreement dated September 29, 1995 and 1,474,404 shares of Series C convertible preferred stock, ( $.01 par value) ("Series C") for $5.00 per share under an Investment Agreement dated June 13, 1997. Dividends: In each fiscal year of the Company, the holders of Series A, Series B and Series C (collectively, the "Preferred") shall be entitled to receive, when and if declared by the Board of Directors, dividends in preference to the holders of Common Stock ("Common") in an amount per share at least equal to the product of (i) the per share amount, if any, of the cash dividend declared, paid or set aside for the Common during such fiscal year, multiplied by (ii) the number of whole shares of Common into which each such share of Preferred is then convertible. Dividends on the Preferred shall not be cumulative. Liquidation preference: In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A, Series B and Series C shall be entitled to receive in preference to the holders of Common amounts equal to $1.00, $2.00 and $5.00 per share, respectively, plus declared and unpaid dividends. Thereafter the holders of Common shall receive the remaining assets of the Company. A consolidation or merger or sale of all or substantially all of the assets of the Company shall be deemed to be a liquidation, dissolution or winding up for purposes of the liquidation preference. Voting rights: Pursuant to an Investor Rights Agreement, the holders of the Company's Preferred Stock agreed to vote their shares of Preferred Stock to fix the number of directors at five. Pursuant to this agreement, the board was to consist of one director designated by the holders of the Company's Series A Preferred Stock, to be designated by Medical Science Partners, L.P.; one director designated by the holders of the Company's Series B Preferred Stock, to be designated by Sprout Capital VII, L.P.; the duly elected, qualified and acting President of the Company and two directors designated jointly by the President of the Company; and all holders of the Company's Preferred Stock. Directors Robert E. Curry, Ph.D. and David H. Maupin have served as members of the board pursuant to this voting arrangement, which terminates upon completion of the initial public offering. F-9 68 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Protective provisions: So long as there shall be issued and outstanding at least 67% of the total number of shares of Preferred ever issued, the Company shall not, without first obtaining the affirmative vote of not less then 67% of the then outstanding shares of Preferred (i) merge or consolidate into or with any other corporation or sell all or substantially all of the Company's assets; (ii) voluntarily or involuntarily liquidate, dissolve or wind up the Company or its business; (iii) amend, repeal or add any provision to the Company's Certificate of Incorporation if such action would alter or change any of the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Preferred, or increase or decrease the total number of authorized shares of Preferred; (iv) authorize or issue any new or existing class or series of capital stock (or any securities convertible into or exercisable for any shares of capital stock) having any preference or priority as to amounts distributable upon liquidation superior to or on parity with the Preferred; (v) reclassify any Common into shares having any preference or priority as to amounts distributable upon liquidation superior to or on parity with the Preferred; or (vi) pay or declare any dividend or distribution on any shares of its capital stock, or redeem, retire, repurchase or acquire any shares of its capital stock (except for shares repurchased in accordance with restricted stock purchase agreements with employees, consultants or directors previously approved by the Board of Directors.) Conversion: Each share of Preferred may be converted at the holder's option at any time into one share of Common, subject to adjustment as provided below. Automatic conversion: The Preferred will be automatically converted into Common at its then applicable conversion rate upon the earlier of (i) the closing of an underwritten public offering of more than $15,000,000 of Company stock for not less than $7.50 per share (a "Qualified Public Offering"), or (ii) the date on which there are issued and outstanding a number of shares of Preferred equal to less than 33% of the total number of shares of Preferred ever issued by the Company. Conversion price adjustments: The conversion price of the Series A, Series B and Series C shall be subject to adjustment (i) proportionately for stock splits, stock dividends, recapitalization, reclassifications, reorganizations, etc. and (ii) on a broad-based weighted-average basis if the Company issues additional shares of Common or Common equivalents (other than a total of 1,010,000 shares of Common under board approved stock option/stock purchase plans and certain other customary exclusions) at a purchase price less than the applicable conversion price. The conversion prices of the Series A, Series B and Series C shall initially be $1.00, $2.00 and $5.00, respectively. The holders of 67% of each of the outstanding Series A, Series B and Series C may elect to waive any price-based antidilution adjustment to the conversion price of their stock. Right of first refusal: In the event that the Company issues equity securities or securities convertible or exercisable for equity securities (other than up to 1,010,000 shares of Common issued pursuant to board approved stock option/stock purchase plans and certain other customary exclusions), each of the holders of Preferred shall be given the right to purchase a percentage of such securities, on the same basis as the other investors, equal to the percentage ownership of the Company (on a fully diluted basis) it holds prior to such issuance, with an additional right of overallotment. A holder of Preferred may apportion such holder's rights among itself and such general partners, officers and other affiliates in such proportions as it deems appropriate. These rights shall terminate upon the closing of the Company's first Qualified Public Offering. NOTE 5. EMPLOYEE BENEFIT PLANS The Company has a defined contribution 401(k) plan covering all employees fulfilling minimum age and service requirements. Employee contributions to the plan are optional. The plan does not provide for a contribution by the employer. The Company has a Stock Option Plan for certain officers, directors, employees and consultants whereby 1,010,000 shares of Common have been reserved for issuance. Options for 763,500 shares of Common have F-10 69 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) been granted as of December 31, 1997 to certain officers, directors, employees and consultants at prices equal to the estimated fair value of the stock at the date of the grant and are exercisable and vest in a range from immediately to over a four-year period. The options expire five years from the date of the grants. For certain options granted, the Company recognizes as compensation expense the excess of the deemed value for accounting purposes of the Common stock issuable upon exercise of such options over the aggregate exercise price of such options. In connection with these grants, $860,485 of deferred compensation has been recorded. This compensation expense is being amortized over the vesting period of each option. Compensation expense under the Plan totaled $122,041 for the year ended December 31, 1997. A summary of the status of the Company's Stock Option Plan is as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at date of inception............................ -- $ -- Granted................................................... 177,000 0.10 ------- Outstanding at December 31, 1994............................ 177,000 0.10 Granted................................................... 43,500 0.10 Granted................................................... 137,000 0.20 ------- Outstanding at December 31, 1995............................ 357,500 0.14 Granted................................................... 33,500 0.20 Exercised on September 20, 1996........................... (1,979) 0.10 Forfeited................................................. (3,021) 0.10 ------- Outstanding at December 31, 1996............................ 386,000 0.15 Granted................................................... 174,000 0.20 Granted................................................... 198,500 0.50 Exercised: April 26, 1997............................................ (10,000) 0.10 May 31, 1997.............................................. (625) 0.10 June 10, 1997............................................. (10,000) 0.10 October 3, 1997........................................... (2,667) 0.10 October 3, 1997........................................... (750) 0.20 ------- Outstanding at December 31, 1997............................ 734,458 0.26 =======
Other pertinent information related to the options outstanding at December 31, 1997 is as follows:
WEIGHTED AVERAGE REMAINING OPTIONS CONTRACTUAL OPTIONS EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE $0.10.................................. 192,208 1.6 157,008 0.20.................................. 343,750 3.6 114,791 0.50.................................. 198,500 4.7 3,333 ------- ------- 734,458 275,132 ======= =======
F-11 70 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Upon merger or sale of the Company, an additional 171,460 shares would become fully exercisable. As of December 31, 1997, options to purchase 246,500 shares of Common were available for future grants. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." Had the Company elected to measure compensation based on the grant date fair value of awards granted (the method described in FASB Statement No. 123), reported net loss and loss per share would have been changed to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 Pro forma net loss.................... $(1,234,345) $(2,779,311) $(5,318,835) Pro forma basic and diluted loss per share............................... $ (1.23) $ (2.58) $ (4.79)
The pro forma amounts shown above are estimated using the following assumptions for grants in 1995, 1996 and 1997: no dividends, no price volatility, risk-free interest rate of 5.84%, 6.27% and 5.71% and expected life of options of four years. Subsequent to December 31, 1998, the Company reserved an additional 600,000 shares for future issuance under the plan discussed above, adopted a 1998 director stock option plan and a 1998 employee stock purchase plan. (see Note 9) NOTE 6. LEASE COMMITMENTS The Company leases its office building under a lease agreement that expires June 30, 2000 with one five-year option to renew, whereby it pays monthly rentals of $7,003 plus property taxes, special assessments, insurance and maintenance costs. The Company signed a lease in December 1997 for an adjoining building to be used for manufacturing. This lease commences on January 1, 1998 and requires monthly rentals of $8,050 plus property taxes, special assessments, insurance and maintenance costs. The lease term is 29 months with one five year option to renew. The Company plans to exercise both renewal options. Estimated future minimum lease payments under operating leases are as follows:
YEAR ENDING DECEMBER 31: 1998............................................ $180,634 1999............................................ 180,634 2000............................................ 82,268 -------- $443,536 ========
The rent expense for the years ended December 31, 1995, 1996, 1997 and the period from August 6, 1993, date of incorporation, to December 31, 1997 was $54,414, $91,597, $91,597 and $239,153, respectively. F-12 71 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7. INCOME TAXES The composition of the income taxes (credits) are as follows:
AUGUST 6, 1993, DATE OF INCORPORATION, YEAR ENDED DECEMBER 31, TO -------------------------------- DECEMBER 31, 1995 1996 1997 1997 Current............................. $ -- $(20,383) $(31,316) $(51,699) Deferred............................ -- -- -- -- -------- -------- -------- -------- -- $(20,383) $(31,316) $(51,699) ======== ======== ======== ========
The effective income tax rate is different than the statutory federal tax rate as follows:
AUGUST 6, 1993, DATE OF INCORPORATION, YEAR ENDED DECEMBER 31, TO ----------------------------------- DECEMBER 31, 1995 1996 1997 1997 Income taxes (credits) at federal rate of 34%........................................ $(419,600) $(944,200) $(1,754,400) $(3,373,400) State income taxes (credits) net of federal benefit.................................... (74,000) (141,500) (279,500) (540,000) Federal research and development tax credits.................................... (27,300) (75,600) (229,400) (332,300) State research and development tax credits... -- (20,383) (31,316) (51,699) Nondeductible expenses....................... 900 2,400 5,500 9,600 Valuation allowance.......................... 520,000 1,158,900 2,257,800 4,236,100 --------- --------- ----------- ----------- $ -- $ (20,383) $ (31,316) $ (51,699) ========= ========= =========== ===========
Net deferred income taxes consist of the following components as of December 31, 1996 and 1997:
1996 1997 Net operating loss carryforwards............................ $ 1,818,200 $ 3,836,500 Research and development credits 102,900 332,300 Other temporary differences................................. 57,200 67,300 Less valuation allowance.................................... (1,978,300) (4,236,100) ----------- ----------- Net deferred income taxes.......................... $ -- $ -- =========== ===========
A valuation allowance totaling $4,236,100 as of December 31, 1997 was established since it is uncertain if the Company will receive future income tax benefit from loss carryovers. The amount of the carryforward is approximately $9,591,000 of which $630,000 expires in 2009, $1,178,000 expires in 2010, $2,690,000 expires in 2011 and $5,093,000 expires in 2012. The above loss carryforwards are subject to certain annual limitations resulting from issuances of equity securities and may be further limited by additional issuances. Such events could limit the eventual tax utilization of these carryforwards. NOTE 8. COMMITMENTS AND CONTINGENCIES The Company has clinical service agreements with various research institutions and medical centers who conduct clinical studies on behalf of the Company and bill the Company as services are performed. F-13 72 UROSURGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company is completing improvements to a leased building to be used as a manufacturing facility. Leasehold improvements and other capital equipment purchases with an estimated cost of $500,000 are anticipated through the second quarter of 1998. NOTE 9. SUBSEQUENT EVENTS In April 1998 the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to issue its common stock in an initial public offering. The Company plans to use the proceeds to fund ongoing and future clinical trials, research and development, marketing and sales activities, expansion of manufacturing capabilities and for working capital and general corporate purposes. In April 1998 the Company's Board of Directors approved a Restated Certificate of Incorporation which eliminates the previous class of preferred stock, authorizes a class of undesignated preferred stock and changes the number of common shares authorized to 50,000,000 shares. The Restated Articles are to be filed following the effectiveness of the initial public offering. In April 1998 the Company's Board of Directors approved a 1998 Director Option Plan and has reserved 300,000 shares of common stock for issuance under the plan. Nonemployee directors will annually be granted a nonstatutory option to purchase 9,000 shares of common stock at the fair value on the date of the grant, with the option vesting over four years. In April 1998 the Company's Board of Directors approved a 1998 Employee Stock Purchase Plan and has reserved 300,000 shares for issuance under the plan. The Company will withhold up to 15% of salary for participating employees, who may acquire common stock at 85% of fair value of the common stock on the dates specified in the plan. F-14 73 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING 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 ANY OF THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 15 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Financial Data............... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Business.............................. 22 Management............................ 42 Certain Transactions.................. 49 Principal Stockholders................ 50 Description of Capital Stock.......... 52 Shares Eligible for Future Sale....... 54 Underwriting.......................... 55 Validity of Common Stock.............. 56 Experts............................... 57 Additional Information................ 57 Index to Financial Statements......... F-1
------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== SHARES LOGO UROSURGE, INC. COMMON STOCK ------------------------ PROSPECTUS ------------------------ DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION CIBC OPPENHEIMER , 1998 ====================================================== 74 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $ 11,942 NASD filing fee............................................. 4,548 Nasdaq National Market listing fee.......................... 44,000 Printing and engraving costs................................ 150,000 Legal fees and expenses..................................... 250,000 Accounting fees and expenses................................ 150,000 Blue Sky fees and expenses.................................. 12,000 Transfer Agent and Registrar fees........................... 7,000 Miscellaneous expenses...................................... 170,510 -------- Total............................................. $800,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law allows for the indemnification of officers, directors and any corporate agents in the terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). The Registrant's Restated Certificate of Incorporation (Exhibit 3.1 hereto) and the Registrant's Bylaws (Exhibit 3.3 hereto) provides for indemnification of the Registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Registrant also intends to enter into agreements with its directors and executive officers that will require the Registrant among other things to indemnify them against certain liabilities that may arise by reason of their status or service as directors to the fullest extent not prohibited by Delaware law. The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the Underwriters, for certain liabilities, including liabilities arising under the Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since March 31, 1995, the Registrant has issued and sold the following unregistered securities: (a) Since March 31, 1995, the Registrant has granted stock options to employees, consultants and directors under its stock option plans covering an aggregate of 782,500 shares of the Registrant's Common Stock, at exercise prices ranging from $0.10 to $2.00 per share. Since March 31, 1995, the Registrant has issued 794,500 shares of Common Stock to employees, consultants and directors upon exercise of stock options. (b) In September and October 1995, Registrant sold 2,675,000 shares of Series B Preferred Stock to 18 private investors at a purchase price of $2.00 per share. (c) In June 1997, Registrant sold 1,474,404 shares of Series C Preferred Stock to 36 private investors at a purchase price of $5.00 per share. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public II-1 75 offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ----------- ----------- 1.1 Form of Underwriting Agreement. 3.1 Restated Certificate of Incorporation of the Registrant as currently in effect. 3.2 Form of Restated Certificate of Incorporation to be in effect upon completion of offering. 3.3 Bylaws of the Registrant, as currently in effect. 3.4 Bylaws of the Registrant, as proposed to be amended in connection with this offering. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation. 10.1 Form of Amended and Restated 1994 Stock Plan. 10.2 Form of 1998 Employee Stock Purchase Plan. 10.3 Form of 1998 Director Option Plan. 10.4 Three-Party Agreement dated October 31, 1994 by and between University of Iowa Research Park Corporation, Myriad Developers, L.C. and the Registrant. 10.5 Lease Agreement dated December 12, 1997 between Myriad Developers, L.C. and the Registrant. 10.6** Development and Supply Agreement dated April 19, 1995 by and between the Registrant and a contract supplier. 10.7** License Agreement dated October 14, 1993, as amended and assigned to the Registrant on February 23, 1994, with Children's Medical Center Corporation. 10.8** Exclusive License Agreement dated June 30, 1996 between The Regents of the University of California and the Registrant for Electrode Acupuncture System. 10.9 Iowa Department of Economic Development CEBA Loan Agreement dated August 21, 1997 by and between the Iowa Department of Economic Development and the Registrant. 10.10 Amendment No. 1 to Iowa Department of Economic Development CEBA Loan Agreement dated September 22, 1994. 10.11 Restated Investors Rights Agreement dated June 13, 1997. 10.12 Form of Indemnification Agreement. 10.13* Form of Note and Warrant Agreement. 11.1 Calculation of earnings per share. 23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors. 23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
II-2 76
EXHIBIT NUMBER DESCRIPTION ----------- ----------- 24.1 Power of Attorney (included in II-4). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Confidential treatment has been requested for certain portions of this exhibit. (b) FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing as specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-3 77 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Coralville, State of Iowa, on the 9th day of April, 1998. UROSURGE, INC. By: /s/ DAVID H. MAUPIN ------------------------------------ David H. Maupin, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David H. Maupin and Randal L. Owens and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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:
SIGNATURE TITLE DATE /s/ DAVID H. MAUPIN President, Chief Executive April 9, 1998 - ----------------------------------------------------- Officer and Director David H. Maupin (Principal Executive Officer) /s/ RANDAL L. OWENS Vice President of Finance April 9, 1998 - ----------------------------------------------------- and Chief Financial Officer Randal L. Owens (Principal Financial and Accounting Officer) /s/ DICK P. ALLEN Director April 9, 1998 - ----------------------------------------------------- Dick P. Allen /s/ WILLIAM E. ENGBERS Director April 9, 1998 - ----------------------------------------------------- William E. Engbers /s/ ROBERT E. CURRY, PHD. Director April 9, 1998 - ----------------------------------------------------- Robert E. Curry, PhD. /s/ JOSEPH F. LOVETT Director April 9, 1998 - ----------------------------------------------------- Joseph F. Lovett
II-4 78 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE ----------- ------------------------------------------------------------ ------------ 1.1 Form of Underwriting Agreement. 3.1 Restated Certificate of Incorporation of the Registrant as currently in effect. 3.2 Form of Restated Certificate of Incorporation to be in effect upon completion of offering. 3.3 Bylaws of the Registrant, as currently in effect. 3.4 Bylaws of the Registrant, as proposed to be amended in connection with this offering. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation. 10.1 Form of Amended and Restated 1994 Stock Plan. 10.2 Form of 1998 Employee Stock Purchase Plan. 10.3 Form of 1998 Director Option Plan. 10.4 Three-Party Agreement dated October 31, 1994 by and between University of Iowa Research Park Corporation, Myriad Developers, L.C. and the Registrant. 10.5 Lease Agreement dated December 12, 1997 between Myriad Developers, L.C. and the Registrant. 10.6** Development and Supply Agreement dated April 19, 1995 by and between the Registrant and a contract supplier. 10.7** License Agreement dated October 14, 1993, as amended and assigned to the Registrant on February 23, 1994, with Children's Medical Center Corporation. 10.8** Exclusive License Agreement dated June 30, 1996 between The Regents of the University of California and the Registrant for Electrode Acupuncture System. 10.9 Iowa Department of Economic Development CEBA Loan Agreement dated August 21, 1997 by and between the Iowa Department of Economic Development and the Registrant. 10.10 Amendment No. 1 to Iowa Department of Economic Development CEBA Loan Agreement dated September 22, 1994. 10.11 Restated Investors Rights Agreement dated June 13, 1997. 10.12 Form of Indemnification Agreement. 10.13* Form of Note and Warrant Agreement. 11.1 Calculation of earnings per share. 23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors. 23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1 Power of Attorney (included in II-4). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Confidential treatment has been requested for certain portions of this exhibit. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 __________Shares UROSURGE, INC. Common Stock UNDERWRITING AGREEMENT __________, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION CIBC OPPENHEIMER CORP. As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: UroSurge, Inc., a Delaware corporation (the "Company"), proposes to issue and sell _________shares of its Common Stock, $.01 par value per share (the "Firm Shares") to the several underwriters named in Schedule I hereto (the "Underwriters"). The Company also proposes to issue and sell to the several Underwriters not more than an additional__________ shares of its Common Stock, $.01 par value per share (the "Additional Shares") if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "Shares". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock". Section 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-1, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to -1- 2 Rule 430A under the Act, is hereinafter referred to as the "Registration Statement"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus". If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a price per Share of $______ (the "Purchase Price") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to_______. Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (I) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Company hereby agrees not to (I) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of -2- 3 any Common Stock (regardless of whether any of the transactions described in clause (I) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise), except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such period (I) the Company may grant stock options pursuant to the Company's existing stock option plan and (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. The Company also agrees not to file any registration statement with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, the Company may during such period file a registration statement on Form S-8 relating to its employee benefit plans; provided, however, that in no event shall such registration statement on Form S-8 be used for resale of shares issued upon exercise of stock options or stock purchase rights during such 180 day period and, provided further that the Company shall not, during such 180 day period, waive any provision of any stock option or stock purchase agreement that obligates the optionee or purchaser, as the case may be, to enter into a 180 day lockup agreement following the offering of the Company's Common Stock contemplated hereby without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by the stockholders of the Company listed on Schedule II hereto to the effect that such person will not, during the period commencing on the date such person signs such agreement and ending 180 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Corporation, (A) engage in any of the transactions described in the first sentence of this paragraph or (B) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. Such individuals shall also waive any right of first refusal they may have with respect to the shares of Common Stock issuable pursuant to the public offering contemplated hereby. The Company will not, in the case of stockholders of the Company that are not listed on Schedule II hereto, waive any provision of any stock option, stock purchase, registration rights or similar agreement to which such stockholder and the Company are parties which provides that stockholder(s) will enter into a 180 day lockup agreement following the offering of the Company's Common Stock contemplated hereby without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation. The Company hereby confirms its engagement of CIBC Oppenheimer ("Oppenheimer") as, and Oppenheimer hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter", within the meaning of Section (b)(15) of Rule 2720 of the National Association of Securities Dealers, Inc. with -3- 4 respect to the offering and sale of the Shares. Oppenheimer, solely in its capacity as the qualified independent underwriter and not otherwise, is referred to herein as the "QIU". [As compensation for the services of the QIU hereunder, the Company agrees to pay the QIU $10,000 on the Closing Date.] The price at which the Shares will be sold to the public will not be higher than the maximum price recommended by the QIU. Section 3. Terms of Public Offering. The Company is advised by you that the Underwriters propose (I) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. Section 4. Delivery and Payment Section. The Shares shall be represented by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request no later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Company shall deliver the Shares, with any transfer taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Company of the Purchase Price therefor by wire transfer of immediately available Federal funds immediately available in New York City. The certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be, at the office of DTC or its designated custodian (the "Designated Office"). The time and date of delivery and payment for the Firm Shares shall be 10:00 A.M., New York City time, on ________, 1998 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery for the Firm Shares are hereinafter referred to as the "Closing Date". The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 10:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery for the Option Shares are hereinafter referred to as an "Option Closing Date". The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 8 of this Agreement shall be delivered at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. -4- 5 Section 5. Agreements of the Company. The Company agrees with you: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (I) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to you one signed copy of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) Prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each -5- 6 Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To mail and make generally available to its stockholders as soon as practicable an earnings statement covering the twelve-month period ending June 30, 1999 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company as you may reasonably request. -6- 7 (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's independent auditors in connection with the registration and delivery of the Shares under the Act and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all costs of reproducing this Agreement (excluding fees and expenses of counsel to the Underwriters) and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) all expenses in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and fees and disbursements of counsel for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (v) the filing fees and disbursements of counsel for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to the listing of the Shares on the Nasdaq National Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depositary, and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. (j) To use its best efforts to list for quotation the Shares on the Nasdaq National Market and to use its best efforts to maintain the listing of the Shares on the Nasdaq National Market for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to -7- 8 the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. Section 6. Representations and Warranties of the Company. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iii) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) will comply in all material respects with the Act and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to -8- 9 be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any preliminary prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. The Company has no subsidiaries. (e) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company, except as otherwise disclosed in the Registration Statement. (f) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (h) The Company is not in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company, to which the Company is a party or by which the Company or its property is bound. (i) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (i) require any consent, -9- 10 approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company, to which the Company is a party or by which the Company or its property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, or its property or (iv) result in the suspension, termination or revocation of any Authorization (as defined below) of the Company or any other impairment of the rights of the holder of any such Authorization. (j) There are no legal or governmental proceedings pending or threatened to which the Company is or could be a party or to which any of its property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (k) The Company has not violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company. (l) The Company has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "Authorization") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. Notwithstanding the foregoing, the term "Authorizations" shall not, for purposes hereof, include U.S. Food and Drug Administration and other governmental or private medical device regulatory approvals or certifications (collectively, "Device Approvals"), and, with respect to Device Approvals, the Company represents that its current Device Approval status is as set forth in the -10- 11 Prospectus. Each such Device Approval that the Prospectus discloses that the Company has obtained ("Obtained Device Approval") and each such Authorization is valid and in full force and effect and the Company is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Obtained Device Approval or Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Obtained Device Approval or Authorization; and such Obtained Device Approval or Authorizations contain no restrictions that are burdensome to the Company; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (m) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (n) The Company owns or possesses, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("intellectual property") currently employed by it in connection with the business now operated by the Company except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operation of the Company. (o) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which it is engaged; and the Company (i) has not received notice from any insurer or agent of such insurer that substantial capital improvements or other material expenditures will have to be made in order to continue such insurance and -11- 12 (ii) has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not have a material adverse effect on the business, prospects, financial conditions or results of operation of the Company. (p) This Agreement has been duly authorized, executed and delivered by the Company. (q) McGladrey & Pullen, LLP are independent public accountants with respect to the Company as required by the Act. (r) The consolidated financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the consolidated financial position, results of operations and changes in financial position of the Company on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (s) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (t) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company, except as described in the Registration Statement, or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement, except as have been waived prior to the date of this Agreement. (u) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse -12- 13 change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company and (iii) the Company has not incurred any material liability or obligation, direct or contingent. (v) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. Section 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter who failed to deliver a Prospectus (as then amended or supplemented, provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages and liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in such Prospectus and such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity -13- 14 from the Company to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 7(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation and shall be reasonably acceptable to the Company, in the case of parties indemnified pursuant to Section 7(a), and by the Company, in the case of parties indemnified pursuant to Section 7(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of -14- 15 the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 7 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) 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 hand from the offering of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(d)(i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, 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 hand shall be deemed to be in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand 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 or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution 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 in the immediately preceding paragraph. The amount paid or payable by an -15- 16 indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 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 to contribute pursuant to this Section 7(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. Section 8. Indemnification of QIU. (a) The Company agrees to indemnify and hold harmless the QIU, its directors, its officers and each person, if any, who controls the QIU within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) related to, based upon or arising out of (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) the QIU's activities as QIU under its engagement pursuant to Section 2 hereof, except in the case of this clause (ii) insofar as any such losses, claims, damages, liabilities or judgments are found in a final judgment by a court of competent jurisdiction, not subject to further appeal, to have resulted solely from the willful misconduct or gross negligence of the QIU. (b) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) (the "QIU Indemnified Party"), the QIU Indemnified Party shall promptly notify the Company in writing and the Company shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the QIU Indemnified Party and the -16- 17 payment of all fees and expenses of such counsel, as incurred. Any QIU Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the QIU Indemnified Party unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company, (ii) the Company shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the QIU Indemnified Party or (iii) the named parties to any such action (including any impleaded parties) include both the QIU Indemnified Party and the Company, and the QIU Indemnified Party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action on behalf of the QIU Indemnified Party). In any such case, the Company shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all QIU Indemnified Parties, which firm shall be designated by the QIU, and all such fees and expenses shall be reimbursed as they are incurred. The Company shall indemnify and hold harmless the QIU Indemnified Party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the Company shall have received a request from the QIU Indemnified Party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the Company) and, prior to the date of such settlement, the Company shall have failed to comply with such reimbursement request. The Company shall not, without the prior written consent of the QIU Indemnified Party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the QIU Indemnified Party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the QIU Indemnified Party, unless such settlement, compromise or judgment (i) includes an unconditional release of the QIU Indemnified Party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the QIU Indemnified Party. (c) To the extent the indemnification provided for in this Section 8 is unavailable to a QIU Indemnified Party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then the Company, in lieu of indemnifying such QIU Indemnified Party, shall contribute to the amount paid or payable by such QIU Indemnified Party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the QIU on the other hand from the offering of the -17- 18 Shares or (ii) if the allocation provided by clause 8(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(c)(i) above but also the relative fault of the Company on the one hand and the QIU on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the QIU on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company as set forth in the table on the cover page of the Prospectus, and the fee received by the QIU pursuant to Section 2 hereof, bear to the sum of such total net proceeds and such fee. The relative fault of the Company on the one hand and the QIU on the other hand 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 or the QIU and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission and whether the QIU's activities as QIU under its engagement pursuant to Section 2 hereof involved any willful misconduct or gross negligence on the part of the QIU. The Company and the QIU agree that it would not be just and equitable if contribution pursuant to this Section 8(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by a QIU Indemnified Party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such QIU Indemnified Party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. 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. (d) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any QIU Indemnified Party at law or in equity. Section 9. Conditions of Underwriters' Obligations. Conditions of Underwriters Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: -18- 19 (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by David H. Maupin and Randal L. Owens, in their capacities as the President and Chief Executive Officer and Vice President of Finance and Chief Financial Officer of the Company, confirming the matters set forth in Sections 6(u), 9(a) and 9(b) and that the Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company and (iii) the Company shall not have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Wilson Sonsini Goodrich & Rosati, counsel for the Company, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) the Company is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of -19- 20 its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company; (iii) all the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; (iv) the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (vii) the Registration Statement has become effective under the Act, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to the best of such counsel's knowledge after due inquiry, pending before or contemplated by the Commission; (viii) the statements under the captions "Risk Factors--Lack of Regulatory Approvals", "Business--Government Regulation", "Certain Transactions", "Description of Capital Stock", "Shares Eligible for Future Sale" and "Underwriting" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (ix) the Company is not in violation of its certificate of incorporation or by-laws; (x) the execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the -20- 21 securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the certificate of incorporation or by-laws of the Company or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or property is bound, (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, or its property or (D) result in the suspension, termination or revocation of any Authorization of the Company or any other impairment of the rights of the holder of any such Authorization; (xi) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company is a party or to which any of its respective property is subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xii) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; and (xiii) to the best of such counsel's knowledge after due inquiry, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company, except as described in the Registration Statement, or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement, except as have been waived prior to the date of this Agreement. Such counsel shall state that (except for financial statements and schedules and other financial data derived therefrom as to which such counsel need express no opinion) the Registration Statement and the Prospectus comply as to form with the Act. In addition, such counsel shall also state that such counsel has participated in the preparation of the Registration Statement and the Prospectus, involving, among other things, review and discussion of the contents thereof, discussion and inquiries concerning various legal matters and the review of certain records, documents and proceedings, and participation in conferences with certain officers and other representatives of the Company, including its independent auditors, and with the Underwriters and their counsel at which the contents of the Registration Statement and the Prospectus were discussed, but without -21- 22 independent check or verification of the accuracy or completeness of such information, except as specified in such counsel's opinion. On the basis of such consideration, review and discussion, but without independent check or verification of the accuracy or completeness of such information, nothing has come to our attention which causes such counsel to believe (A) that (except for financial statements and schedules and other financial data derived therefrom included therein as to which such counsel need express no opinion) the Registration Statement and the Prospectus included therein at the time the Registration Statement became effective 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 (B) that (except for financial statements and schedules and other financial data derived therefrom included therein as to which such counsel need express no opinion) the Prospectus on the Closing Date contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The opinion of Wilson Sonsini Goodrich & Rosati described in Section 9(e) above shall be rendered to you at the request of the Company and shall so state therein. (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Lahive &Cockfield, LLP, patent counsel for the Company, to the effect that: (i) the statements under the caption "Business - Patents and Proprietary Rights" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; and (ii) such counsel is not aware that the Company lacks ownership or possession or cannot acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("intellectual property") currently employed by it in connection with the business now operated by the Company except as described in the Registration Statement and Prospectus and except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; and, to the best of such counsel's knowledge after due -22- 23 inquiry, the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. Such counsel shall also state that although they have not independently verified the statements contained in the Registration Statement and the Prospectus under the caption "Risk Factors -- Dependence on Patents and Proprietary Technology" and "Business --- Patents and Property Rights," nothing has come to their attention that leaves them to believe that, at the time the Registration Statement became effective or at the Closing Date, the Registration Statement and the Prospectus under the captions "Risk Factors ---Dependence on Patents and Propriety Technology" and "Business -- Patents and Proprietary Rights" contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The opinion of Lahive & Cockfield, LLP described in Section 9(f) above shall be rendered to you at the request of the Company and shall so state therein. (g) You shall have received on the Closing Date an opinion, dated the Closing Date, of Sullivan & Cromwell, counsel for the Underwriters, as to the matters referred to in Sections 9(e)(iv), 9(e)(v), 9(e)(viii) (but only with respect to the statements under the caption "Description of Capital Stock" and "Underwriting") and 9(e)(xvi). In giving such opinions with respect to the matters covered by Section 9(e)(xvi) counsel for the Company and counsel for the Underwriters may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (h) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from McGladrey & Pullen, LLP, independent public accountants, containing the information and statements 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. (i) The Company shall have delivered to you the agreements specified in Section 2 hereof which agreements shall be in full force and effect on the Closing Date. -23- 24 (j) The Shares shall have been duly listed for quotation on the Nasdaq National Market. (k) The Company shall not have failed on or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company on or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. Section 10. Effectiveness of Agreement and Termination. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as -24- 25 the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you and the Company for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. Section 11. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to UroSurge, Inc., 2660 Crosspark Road, Coralville, Iowa 52241, Attention: David H. Maupin, and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. -25- 26 The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, any QIU Indemnified Party, the Company, the officers or directors of the Company or any person controlling the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 9), the Company agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the several Underwriters, their directors and officers, any persons controlling any of the Underwriters and the QIU Indemnified Parties for any and all fees and expenses (including, without limitation, the fees disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 7 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the QIU Indemnified Parties, the Company's directors and the Company's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. -26- 27 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, UROSURGE, INC. By: -------------------------------- Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION CIBC OPPENHEIMER CORP. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ------------------------------- -27- 28 SCHEDULE I Underwriters Number of Firm Shares to be Purchased Donaldson, Lufkin & Jenrette Securities Corporation CIBC Oppenheimer Corp. ------------------- Total =================== SCHEDULE II Stockholders -28- EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF UROSURGE, INC. UroSurge, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: A. The name of the Corporation is UroSurge, Inc. The Corporation was originally incorporated under the same name and the original Certificate of Incorporation was filed with the Delaware Secretary of State on August 18, 1993. B. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and amends the provisions of the Certificate of Incorporation of this Corporation. C. The text of the Certificate of Incorporation is hereby amended and restated in its entirety to read as follows: FIRST. The name of the Corporation is UroSurge, Inc. SECOND. The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted by the Corporation is as follows: to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The Corporation is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock. The total number of shares of Common Stock which the Corporation has authority to issue is fifty million (50,000,000) with par value of $.01 per share. The total number of shares of Preferred Stock which the Corporation has authority to issue is 12,220,000 with a par value of $.01 per share. One million six hundred eighty-five thousand (1,685,000) shares of Preferred Stock 2 are designated as Series A Convertible Preferred Stock ("Series A Preferred Stock"), three million five hundred thirty five thousand (3,535,000) shares of Preferred Stock are designated as Series B Convertible Preferred Stock ("Series B Preferred Stock") and two million (2,000,000) shares of Preferred Stock are designated as Series C Convertible Preferred Stock ("Series C Preferred Stock"). The remaining 5,000,000 shares shall be undesignated Preferred Stock and may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the board of directors (authority to do so being hereby expressly vested in the board). The board of directors is further authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares in any such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. The authority of the board of directors with respect to each such class or series shall include, without limitation of the foregoing, the right to determine and fix: (i) the distinctive designation of such class or series and the number of shares to constitute such class or series; (ii) the rate at which dividends on the shares of such class or series shall be declared and paid, or set aside for payment, whether dividends at the rate so determined shall be cumulative or accruing, and whether the shares of such class or series shall be entitled to any participating or other dividends in addition to dividends at the rate so determined, and if so, on what terms; (iii) the right or obligation, if any, of the Corporation to redeem shares of the particular class or series of Preferred Stock and, if redeemable, the price, terms and manner of such redemption; (iv) the special and relative rights and preferences, if any, and the amount or amounts per share, which the shares of such class or series of Preferred Stock shall be entitled to receive upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (v) the terms and conditions, if any, upon which shares of such class or series shall be convertible into, or exchangeable for, shares of capital stock of any other class or series, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; -2- 3 (vi) the obligation, if any, of the Corporation to retire, redeem or purchase shares of such class or series pursuant to a sinking fund or fund of a similar nature or otherwise, and the terms and conditions of such obligation; (vii) voting rights, if any, on the issuance of additional shares of such class or series or any shares of any other class or series of Preferred Stock; (viii) limitations, if any, on the issuance of additional shares of such class or series or any shares of any other class or series of Preferred Stock; and (ix) such other preferences, powers, qualifications, special or relative rights and privileges thereof as the board of directors of the Corporation, acting in accordance with this Certificate of Incorporation, may deem advisable and are not inconsistent with law and the provisions of this Certificate of Incorporation. The corporation shall from time to time in accordance with the laws of the State of Delaware increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock. The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. COMMON STOCK. 1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock. 2. Voting. The holders of the Common Stock are entitled to one vote for each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. 3. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. B. PREFERRED STOCK. -3- 4 1. Dividends. In each fiscal year of the Corporation, the holders of shares of Preferred Stock shall be entitled to receive, before any cash dividends shall be declared and paid upon or set aside for the Common Stock in such fiscal year, when and as declared by the Board of Directors of the Corporation out of funds legally available for that purpose, dividends payable in cash in an amount per share for such fiscal year at least equal to the product of (i) the per share amount, if any, of the cash dividend declared, paid or set aside for the Common Stock during such fiscal year, multiplied by (ii) the number of whole shares of Common Stock into which each such share of Preferred Stock is then convertible. Any cash dividends payable to holders of shares of Preferred Stock shall be payable pari passu among the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and in preference and priority to any payment of any cash dividend on the Common Stock. The right to such dividends shall not be cumulative, and no right shall accrue to holders of Common Stock or Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior period. 2. Liquidation, Dissolution or Winding Up. (a) Preferred Stock Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled to receive on a pari passu basis, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Common Stock by reason of their ownership of such shares, an amount equal to $1.00, $2.00 and $5.00 per share, respectively, plus an amount equal to any declared but unpaid dividends thereon, with respect to such liquidation, dissolution or winding up. If the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) Remaining Assets. After the payment or irrevocable setting apart of all preferential amounts required to be paid to the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock upon the dissolution, liquidation or winding up of the Corporation as set forth in subsection 2(a) above, the holders of shares of Common Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders. (c) Consolidation or Merger. The merger or consolidation of the Corporation into or with another corporation, or the sale of all or substantially all the assets of the Corporation, in which transaction the Corporation's stockholders immediately prior to such transaction own immediately after such transaction less than 50% of the voting securities of the surviving corporation (or its parent), shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 2. The amount deemed distributed to the holders of Preferred Stock upon any such merger or -4- 5 consolidation shall be the cash or the value of the property, rights or securities distributed to such holders by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. (a) General. Each holder of outstanding shares of Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof), at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law or by the provisions of subsection 3(b) below, the holders of Preferred Stock shall vote together with the holders of Common Stock as a single class. (b) Board of Directors. Notwithstanding Section 3(a) above, the holders of Series A Preferred Stock shall be entitled to elect one (1) director of the Corporation, the holders of Series B Preferred Stock shall be entitled to elect one (1) director of the Corporation, and the holders of Common Stock and Preferred Stock, voting together, shall be entitled to elect all remaining directors of the Corporation. Notwithstanding any bylaw provision to the contrary, the stockholders entitled to elect a particular director shall be entitled to remove such director or to fill a vacancy in the seat formerly held by such director, all in accordance with the applicable provisions of the Delaware General Corporation Law. (c) General Protective Provisions. In addition to any other rights provided by law or by this Section 3, so long as there shall be issued and outstanding a number of shares of Preferred Stock equal to at least 67% of the total number of shares of Preferred Stock ever issued by the Corporation (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than 67% of the then outstanding shares of Preferred Stock consenting or voting (as the case may be) together as a single class: (i) Merge or consolidate into or with any other corporation or sell all or substantially all of the Corporation's assets; (ii) Voluntarily or involuntarily liquidate, dissolve or wind up the Corporation or its business; (iii) Amend or repeal any provision of, or add any provision to, the Corporation's Certificate of Incorporation or Bylaws, if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, any series of Preferred Stock, or increase or decrease the number of authorized shares of any series of Preferred Stock; -5- 6 (iv) Authorize or issue any new or existing class or classes or series of capital stock having any preference or priority as to amounts distributable upon dissolution, liquidation or winding up of the Corporation superior to or on a parity with any such preference or priority of any series of Preferred Stock, or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Corporation having any preference or priority as to amounts distributable upon dissolution, liquidation or winding up of the Corporation superior to or on a parity with any such preference or priority of any series of Preferred Stock; (v) Reclassify any Common Stock into shares having any preference or priority as to amounts distributable upon dissolution, liquidation or winding up of the Corporation superior to or on a parity with any such preference or priority of any series of Preferred Stock; or (vi) Pay or declare any dividend or distribution on any shares of its capital stock, or apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any shares of its capital stock (other than in accordance with the terms of restricted stock or similar agreements with employees or directors of, or consultants to, the Corporation previously approved by the Board of Directors). (d) Special Series C Protective Provision. In addition to any other rights provided by law or by this Section 3, so long as there are any issued and outstanding shares of Series C Preferred Stock, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than 75% of the then outstanding shares of Series C Preferred Stock consenting or voting (as the case may be) together as a separate class, amend, modify, or repeal any provision of Article Fourth, Section B, Subsection 2 (Liquidation, Dissolution or Winding Up). 4. Optional Conversion. The holders of Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of 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 Corporation or any transfer agent for the Preferred Stock. Each share of Preferred Stock shall be convertible into the number of shares of Common Stock which results from dividing the "Conversion Price" per share in effect for such series of Preferred Stock at the time of conversion into the "Conversion Value" per share of such series of Preferred Stock. The number of shares of Common Stock into which a series of Preferred Stock is convertible is hereinafter referred to as the "Conversion Rate" for such series of Preferred Stock. The Conversion Price per share of Series A Preferred Stock shall initially be $1.00, and the Conversion Value per share of Series A Preferred Stock shall be $1.00. The Conversion Price per share of Series B Preferred Stock shall initially be $2.00 and the Conversion Value per share of Series B Preferred Stock shall be $2.00. The Conversion Price per share of Series C Preferred Stock shall initially be $5.00 and the Conversion Value per share of Series C Preferred Stock shall be $5.00. The Conver sion Price of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock shall be subject to adjustment as hereinafter provided. In the event of a liquidation of the Corporation, -6- 7 the Conversion Rights shall terminate at the close of business on the first full day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. (b) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective applicable Conversion Price. (c) Mechanics of Conversion. (i) In order for a holder of Preferred Stock to convert shares of Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock, at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price. (iii) Upon any such conversion, no adjustment to the Conversion Price shall be made for any accrued and unpaid dividends, if any, on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion. (iv) All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect -7- 8 to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any declared and unpaid dividends thereon. Any shares of Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Preferred Stock accordingly. (d) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Article FOURTH, the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities (as defined below), excluding rights, options or warrants to acquire shares described in clause V of subsection 4(d)(i)(D) below; (B) "Filing Date" shall mean the date on which this Restated Certificate of Incorporation is filed with the Delaware Secretary of State. (C) "Convertible Securities" shall mean any evidence of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" with respect to the Preferred Stock shall mean all shares of Common Stock issued (or, pursuant to subsection 4(d)(iii) below deemed to be issued) by the Corporation after the Filing Date, other than: (I) all shares of Common Stock and Preferred Stock outstanding on the date of filing of this certificate with the Delaware Secretary of State; (II) all shares of Common Stock issued or issuable upon conversion of shares of Preferred Stock; (III) all shares of Common Stock issued or issuable as a dividend or distribution on Preferred Stock; (IV) all shares of Common Stock issued or issuable as a result of any stock split, combination, dividend, distribution, reclassification, exchange or substitution for which an adjustment is provided in subsections 4(e), (f), (g) or (h) below; or (V) all shares of Common Stock, outstanding from time to time, or shares of Common Stock issued or issuable upon exercise of rights, options or warrants, outstanding from time to time, granted or issued to officers, directors or employees of, or consultants to, the -8- 9 Corporation pursuant to a stock grant, stock option plan, employee stock purchase plan, restricted stock plan or other similar plan or agreement or otherwise, in each case as approved by the Board of Directors, in an amount not to exceed in the aggregate at any time 1,010,000 shares (subject to appropriate adjustment for any stock dividend, stock split, combination or other similar recapitalization affecting such shares). (ii) No Adjustment of Conversion Price. No adjustment in the number of shares of Common Stock into which any series of Preferred Stock is convertible shall be made, by adjustment in the applicable Conversion Price thereof: (a) unless the consideration per share (determined pursuant to subsection 4(d)(v) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price for such series of Preferred Stock in effect on the date of, and immediately prior to, the issuance of such Additional Share of Common Stock, or (b) if prior to such issuance, the Corporation receives written notice from the holders of at least 67% of the then outstanding shares of such series of Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance of Additional Shares of Common Stock. (iii) Issue of Securities; Deemed Issue of Additional Shares of Common Stock. If the Corporation, at any time or from time to time after the Filing Date for the applicable series of Preferred Stock, shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for such series of Preferred Stock in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which such Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue date thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or -9- 10 decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) No readjustment pursuant to clause (B) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; (D) Upon the expiration or termination of any unexercised Option, the Conversion Price shall not be readjusted but the Additional Shares of Common Stock deemed issued as the result of the original issue date of such Option shall not be deemed issued for the purposes of any subsequent adjustment of such Conversion Price; and (E) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise or conversion of any such Option or Convertible Security. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall, at any time after the Filing Date, issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 4(d)(iii), but excluding shares issued as a dividend or distribution as provided in subsection 4(f) or upon a stock split or combination as provided in subsection 4(e)), without consideration or for a consideration per share less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, for the purpose of this subsection 4(d)(iv), (i) all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. -10- 11 Notwithstanding the foregoing, the applicable Conversion Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.01, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.01 or more. (v) Determination of Consideration. For purposes of this subsection 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating the relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. -11- 12 (e) Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Filing Date effect a subdivision of the outstanding Common Stock, the Conversion Price for each series of Preferred Stock then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Filing Date combine the outstanding shares of Common Stock, the Conversion Price for each series of Preferred Stock then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Certain Dividends and Distributions. In the event the Corporation at any time, or from time to time after the Filing Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for each series of Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction: (i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution: provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (g) Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Filing Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period, under this paragraph with respect to the rights of the holders of the Preferred Stock. -12- 13 (h) Adjustment for Reclassification Exchange, or Substitution. If the Common Stock issuable upon the conversion of the Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (i) Adjustment for Merger or Reorganization, etc. In case of any consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a consolidation, merger or sale which is treated as a liquidation pursuant to subsection 2(c)), each share of Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred Stock. (j) No Impairment. The Corporation 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 Corporation, 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 Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Certificate of Incorporation in accordance with the General Corporation Law of the State of Delaware. (k) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price for the Preferred Stock pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of 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 Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price for the series of Preferred Stock held by such holder then in effect, and (iii) the -13- 14 number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of the Preferred Stock held by such holder. (l) Notice of Record Date. In the event: (i) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all substantially all of the assets of the Corporation; or (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Preferred Stock, and shall cause to be mailed to the holders of the Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least ten days prior to the record date specified in (A) below or twenty days before the date specified in (B) below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. 5. Mandatory Conversion. (a) Mandatory Conversion Time. All outstanding shares of Preferred Stock shall automatically be converted into shares of Common Stock, at the then current Conversion Price, upon the earlier (the "Mandatory Conversion Date") of (i) the closing of the sale of shares of Common Stock at a price of at least $7.50 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $15,000,000 of gross proceeds to the Corporation, or (ii) the date on which there are issued -14- 15 and outstanding a number of shares of Preferred Stock equal to less than 33% of the total number of shares of Preferred Stock ever issued by the Corporation (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares). (b) Mechanics of Conversion. All holders of record of shares of Preferred Stock will be given written notice of the Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of Preferred Stock pursuant to this Section 5. Such notice need not be given in advance of the occurrence of the Mandatory Conversion Date. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of Preferred Stock at such holder's address last shown on the records of the transfer agent for the Preferred Stock (or the records of the corporation, if it serves as its own transfer agent). Upon receipt of such notice, each holder of shares of Preferred Stock shall surrender his or its certificate or certificates for all such shares to the corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date, all rights with respect to the Preferred Stock so converted, including the rights, if any, to receive notices and vote, will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such shares of Preferred Stock have been converted, and payment of any declared or accrued but unpaid dividends thereon (all of which shall be deemed to be declared by the Board of Directors on the Mandatory Conversion Date). If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the Mandatory Conversion Date and the surrender of the certificate or certificates for Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in subsection 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) Retirement of Shares. All certificates evidencing shares of Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Date, be deemed to have been retired and cancelled and the shares of Preferred Stock presented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized Preferred Stock accordingly. FIFTH. In furtherance of and not in limitation of powers conferred by statute, it is further provided: 1. Election of directors need not be by written ballot. -15- 16 2. The Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. SIXTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. SEVENTH. Except to the extent that the General Corporation Law of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. EIGHTH. The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each 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, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another Corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. With respect to any action, suit, proceeding or investigation for which indemnity will or could be sought, the Corporation will be entitled to participate therein at its own expense and/or to assume the -16- 17 defense thereof at its own expense, with legal counsel reasonably acceptable to the person seeking indemnification. In the event that the Corporation does not assume the defense of any action, suit, proceeding or investigation for which indemnity will or could be sought, any expenses (including attorneys' fees) incurred by the person seeking indemnification in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this Article, which undertaking may be accepted without reference to the financial ability of such person to make such repayment. The Corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the Corporation. The indemnification rights provided in this Article EIGHTH (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. NINTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred upon stock holders herein are granted subject to this reservation. -17- 18 IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by David H. Maupin, its President, as of April ___, 1998. UROSURGE, INC. By:______________________________________ David H. Maupin, President -18- EX-3.2 4 FORM OF RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 RESTATED CERTIFICATE OF INCORPORATION OF UROSURGE, INC. UroSurge, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: A. The name of the Corporation is UroSurge, Inc. The Corporation was originally incorporated under the same name and the original Certificate of Incorporation was filed with the Delaware Secretary of State on August 18, 1993. B. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and amends the provisions of the Certificate of Incorporation of this Corporation. C. The text of the Certificate of Incorporation is hereby amended and restated in its entirety to read as follows: ARTICLE I The name of the Corporation is UroSurge, Inc. ARTICLE II The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted by the Corporation is as follows: to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 2 ARTICLE IV The Corporation is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock. The Corporations shall have authority to issue fifty million (50,000,000) shares of Common Stock, $.01 par value per share ("Common Stock"), and (ii) five million (5,000,000) shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). The shares of Preferred Stock shall be undesignated Preferred Stock and may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the board of directors (authority to do so being hereby expressly vested in the board). The board of directors is further authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares in any such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. The authority of the board of directors with respect to each such class or series shall include, without limitation of the foregoing, the right to determine and fix: (i) the distinctive designation of such class or series and the number of shares to constitute such class or series; (ii) the rate at which dividends on the shares of such class or series shall be declared and paid, or set aside for payment, whether dividends at the rate so determined shall be cumulative or accruing, and whether the shares of such class or series shall be entitled to any participating or other dividends in addition to dividends at the rate so determined, and if so, on what terms; (iii) the right or obligation, if any, of the Corporation to redeem shares of the particular class or series of Preferred Stock and, if redeemable, the price, terms and manner of such redemption; (iv) the special and relative rights and preferences, if any, and the amount or amounts per share, which the shares of such class or series of Preferred Stock shall be entitled to receive upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (v) the terms and conditions, if any, upon which shares of such class or series shall be convertible into, or exchangeable for, shares of capital stock of any other class or series, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (vi) the obligation, if any, of the Corporation to retire, redeem or purchase shares of such class or series pursuant to a sinking fund or fund of a similar nature or otherwise, and the terms and conditions of such obligation; -2- 3 (vii) voting rights, if any, on the issuance of additional shares of such class or series or any shares of any other class or series of Preferred Stock; (viii) limitations, if any, on the issuance of additional shares of such class or series or any shares of any other class or series of Preferred Stock; and (ix) such other preferences, powers, qualifications, special or relative rights and privileges thereof as the board of directors of the Corporation, acting in accordance with this Certificate of Incorporation, may deem advisable and are not inconsistent with law and the provisions of this Certificate of Incorporation. ARTICLE V The Corporation is to have perpetual existence. ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. ARTICLE VII The number of directors which constitute the whole Board of Directors of the Corporation shall be as specified in the Bylaws of the corporation. ARTICLE VIII Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the corporation. ARTICLE IX Holders of stock of any class or series of the Corporation shall not be entitled to cumulate their votes for the election of directors or any other matters submitted to a vote of the stockholders. ARTICLE X No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. The affirmative vote of sixty-six and two thirds percent (66 2/3%) of the then outstanding voting securities of the corporation, voting together as a single class, shall be required -3- 4 for the amendment, repeal or modification of the provisions of Article IX or X of this Amended and Restated Certificate of Incorporation or Sections 1.3, 1.5 and 2.2(b) of the corporation's Bylaws. ARTICLE XI To the fullest extent permitted by the Delaware General Corporation Law, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article XI nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article XI, shall eliminate or reduce the effect of this Article XI in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article XI, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE XII 1. The corporation shall indemnify each of the corporation's directors and officers in each and every situation where, under Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), the corporation is permitted or empowered to make such indemnification. The corporation may, in the sole discretion of the Board of Directors of the corporation, indemnify any other person who may be indemnified pursuant to Section 145 to the extent the Board of Directors deems advisable, as permitted by Section 145. The corporation shall promptly make or cause to be made any determination required to be made pursuant to Section 145. 2. No person shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is subsequently amended to further eliminate or limit the liability of a director, then a director of the corporation, in addition to the circumstances in which a director is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the amended General Corporation Law of the State of Delaware. For purposes of this Article XII, "fiduciary duty as a director" shall include any fiduciary duty arising out of serving at the corporation's request as a director of another corporation, partnership, joint venture or other enterprise, and "personal liability to the corporation or its stockholders" shall include any liability to such other corporation, partnership, joint venture, trust or other enterprise, and any liability to the corporation in its capacity as a security holder, joint venturer, partner, beneficiary, creditor or investor of or in any such other corporation, partnership, joint venture, trust or other enterprise. -4- 5 ARTICLE XIII Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation. ARTICLE XIV The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred upon stock holders herein are granted subject to this reservation. -5- 6 IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by David H. Maupin, its President, as of April ___, 1998. UROSURGE, INC. By:______________________________________ David H. Maupin, President -6- EX-3.3 5 BYLAWS OF THE REGISTRANT, AS CURRENTLY IN EFFECT 1 EXHIBIT 3.3 BY-LAWS OF UROSURGE, INC. ARTICLE 1 STOCKHOLDERS 1.1 Place of Meetings. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation. 1.2 Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors or the President and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-Laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. 1.3 Special Meetings. Special meetings of stockholders may be called at any time by the President or by the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 1.5 Voting List. The officer who has charge of the stock ledger of the corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary 2 business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. 1.6 Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. 1.7 Adjournments. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these By-Laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. 1.8 Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by written proxy executed by the stockholder or his authorized agent and delivered to the Secretary of the corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. 1.9 Action at Meeting. When a quorum is present at any meeting, the holders of shares of stock representing a majority of the votes cast on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of shares of stock of that class representing a majority of the votes cast on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-laws. When a quorum is present at any meeting, any election by stockholders shall be determined by a plurality of the votes cast on the election. 1.10 Action without Meeting. Any action required or permitted to be taken at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such -2- 3 action were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE 2 DIRECTORS 2.1 General Powers. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2.2 Number; Election and Qualification. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of the stockholders or the Board of Directors, but in no event shall be less than one. The number of directors may be decreased at any time and from time to time either by the stockholders or by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the corporation. 2.3 Enlargement of the Board. The number of directors may be increased at any time and from time to time by the stockholders or by a majority of the directors then in office. 2.4 Tenure. Each director shall hold office until the next annual meeting and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.5 Vacancies. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.6 Resignation. Any director may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. -3- 4 2.7 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. 2.8 Special Meetings. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, President, two or more directors, or by one director in the event that there is only a single director in office. 2.9 Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or telex, or delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.10 Meetings by Telephone Conference Calls. Directors or any members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. 2.11 Quorum. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.12 Action at Meeting. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-Laws. 2.13 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. -4- 5 2.14 Removal. Except as otherwise provided by the General Corporation Law of Delaware, any one or more or all of the directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except that the directors elected by the holders of a particular class or series of stock may be removed without cause only by vote of the holders of a majority of the outstanding shares of such class or series. 2.15 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-Laws for the Board of Directors. 2.16 Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. ARTICLE 3 OFFICERS 3.1 Enumeration. The officers of the corporation shall consist of a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate. 3.2 Election. The President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. -5- 6 3.3 Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person. 3.4 Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal. 3.5 Resignation and Removal. Any officer may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resigna tion or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation. 3.6 Vacancies. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. 3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of Directors may appoint a Chairman of the Board and may designate the Chairman of the Board as Chief Executive Officer. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties and possess such powers as are assigned to him by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors. 3.8 President. The President shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the corporation. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and, if he is a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated the Chairman of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. -6- 7 3.9 Vice Presidents. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. 3.10 Secretary and Assistant Secretaries. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary, (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to him by the Board of Directors or the President. In addition, the Treasurer shall perform such duties and have such powers as are incident to the-office of treasurer" including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-Laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer, (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. 3.12 Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. -7- 8 ARTICLE 4 CAPITAL STOCK 4.1 Issuance of Stock. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any unissued balance of the authorized capital stock of the corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 Certificates of Stock. Every holder of stock of the corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the By-Laws, applicable securities laws or any agreement among any number of shareholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. 4.3 Transfers. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-Laws. 4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar. -8- 9 4.5 Record Date. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or to express consent (or dissent) to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 GENERAL PROVISIONS 5.1 Fiscal Year. Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year. 5.2 Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors. 5.3 Waiver of Notice. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these By-Laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.4 Voting of Securities. Except as the directors may otherwise designate, the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of -9- 10 stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. 5.6 Certificate of Incorporation. All references in these By-Laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time. 5.7 Transactions with Interested Parties. No contract or transaction between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 5.8 Severability. Any determination that any provision of these By-Laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-Laws. 5.9 Pronouns. All pronouns used in these By-Laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. -10- 11 ARTICLE 6 AMENDMENTS 6.1 By the Board of Directors. These By-Laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 By the Stockholders. These By-Laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. -11- EX-3.4 6 BYLAWS OF REGISTRANT, AS PROPOSED TO BE AMENDED 1 EXHIBIT 3.4 BYLAWS OF UROSURGE, INC. (A DELAWARE CORPORATION) AS AMENDED AND RESTATED EFFECTIVE ___________, 1998 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 - Meetings of Stockholders.............................................................1 1.1 Place of Meetings.................................................................1 1.2 Annual Meeting....................................................................1 1.3 Special Meetings..................................................................1 1.4 Notice of Meetings................................................................2 1.5 Advance Notice of Stockholder Nominees and Stockholder Business..........................................................2 1.6 Manner of Giving Notice; Affidavit of Notice......................................3 1.7 Quorum............................................................................3 1.8 Adjournments......................................................................4 1.9 Voting............................................................................4 1.10 Stockholder Action by Written Consent Without a Meeting...........................4 1.11 Record Date for Stockholder Notice; Voting........................................5 1.12 Proxies...........................................................................5 1.13 Organization......................................................................5 1.14 List of Stockholders Entitled to Vote.............................................6 1.15 Waiver of Notice..................................................................6 ARTICLE 2 - Directors............................................................................6 2.1 General Powers....................................................................6 2.2 Number; Election and Qualification................................................6 2.3 Election and Term of Office of Directors..........................................7 2.4 Resignation and Vacancies.........................................................7 2.5 Removal of Directors..............................................................8 2.6 Place of Meetings; Meetings by Telephone. .......................................8 2.7 First Meetings....................................................................8 2.8 Regular Meetings..................................................................9 2.9 Special Meetings..................................................................9 2.10 Quorum............................................................................9 2.11 Waiver of Notice..................................................................9 2.12 Adjournment......................................................................10 2.13 Notice of Adjournment............................................................10 2.14 Board Action by Written Consent Without a Meeting................................10 2.15 Fees and Compensation of Directors...............................................10 2.16 Approval of Loans to Officers....................................................10
-i- 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE 3 - Committees..........................................................................10 3.1 Committees of Directors..........................................................10 3.2 Meetings and Action of Committees................................................11 3.3 Committee Minutes. .............................................................11 ARTICLE 4 - Officers............................................................................12 4.1 Officers.........................................................................12 4.2 Election.........................................................................12 4.3 Subordinate Officers.............................................................12 4.4 Removal and Resignation of Officers..............................................12 4.5 Vacancies........................................................................12 4.6 Chairman of the Board............................................................13 4.7 President........................................................................13 4.8 Vice Presidents..................................................................13 4.9 Secretary........................................................................13 4.10 Chief Financial Officer..........................................................14 4.11 Assistant Secretary..............................................................14 4.12 Authority and Duties of Officers.................................................14 4.13 Salaries.........................................................................14 ARTICLE 5 - Indemnification of Directors, Officers, Employees and Other Agents.................................................................15 5.1 Indemnification of Directors and Officers........................................15 5.2 Indemnification of Others........................................................16 5.3 Insurance........................................................................16 ARTICLE 6 - Records and Reports.................................................................16 6.1 Maintenance and Inspection of Records............................................16 6.2 Inspection by Directors..........................................................17 6.3 Annual Statement to Stockholders.................................................17 6.4 Representation of Shares of Other Corporations...................................17 6.5 Certification and Inspection of Bylaws...........................................17
-ii- 4 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE 7 - General Matters.....................................................................17 7.1 Record Date for Purposes Other than Notice and Voting............................17 7.2 Checks; Drafts; Evidences of Indebtedness........................................18 7.3 Corporate Contracts and Instruments; How Executed................................18 7.4 Stock Certificates; Transfer; Partly Paid Shares.................................18 7.5 Special Designation on Certificates..............................................19 7.6 Lost certificates................................................................19 7.7 Transfer Agents and Registrars...................................................19 7.8 Construction; Definitions........................................................19 ARTICLE 8 - Amendments..........................................................................20
-iii- 5 BYLAWS OF UROSURGE, INC. (A DELAWARE CORPORATION) ARTICLE 1 MEETINGS OF STOCKHOLDERS 1.1 Place of Meetings. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation. 1.2 Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held each year on a date and at a time designated by the Board of Directors or the President. In the absence of such designation, the annual meeting of stockholders shall be held on the first,Monday in May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding business day. 1.3 Special Meetings. Special meetings of stockholders may be called at any time by the President or by the Board of Directors. No other person or persons are permitted to call a special meeting. If a special meeting is called by any person or persons other than the board of directors, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 1.4 and 1.6 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 1.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 6 1.4 Notice of Meetings. All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 1.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall specify the place date and hour of meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 1.5 Advance Notice of Stockholder Nominees and Stockholder Business. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (1) nominations for the election of directors, and (2) business proposed to be brought before any stockholder meeting may be made by the board of directors or proxy committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of their intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy state ment, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; -2- 7 (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 1.6 Manner of Giving Notice; Affidavit of Notice. Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corpo ration or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 1.7 Quorum. The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise pro vided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting in accordance with Section 1.7 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. -3- 8 If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 1.8 Adjournments. Any meeting of stockholders may be adjourned to any other time and place at which a meeting of stockholders may be held under these bylaws. Unless these bylaws otherwise require, it shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 1.9 Voting. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 1.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder and stockholders shall not be entitled to cumulate their votes in the election of directors or with respect to any matter submitted to a vote of the stockholders. 1.10 Record Date for Stockholder Notice; Voting. For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. -4- 9 If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 7.1 of these bylaws. 1.12 Proxies. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. 1.13 Organization. The president, or in the absence of the president, the chairman of the board, or, in the absence of the president and the chairman of the board, one of the corporation's vice presidents, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the president, the chairman of the board, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. 1.14 List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. -5- 10 1.15 Waiver of Notice. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. ARTICLE 2 DIRECTORS 2.1 General Powers. Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 2.2 Number; Election and Qualification. (a) The board of directors shall consist of five (5) members. The number of directors may be changed by an amendment to this bylaw, duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to the certificate of incorporation. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable, provided that no decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. (b) Upon the closing of the first sale of the corporation's common stock pursuant to a firmly underwritten registered public offering (the "IPO"), the directors shall be divided into three classes, with the term of office of the first class, which class shall initially consist of two directors, to expire at the first annual meeting of stockholders held after the IPO; the term of office of the second class, which class shall initially consist of one director, to expire at the second annual meeting of stockholders held after the IPO; the term of office of the third class, which class shall initially consist of two directors, to expire at the third annual meeting of stockholders held after the IPO; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders held after such election. 2.3 Election and Term of Office of Directors. Except as provided in Section 2.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office as provided -6- 11 in Section 2.4 of these bylaws. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 2.4 Resignation and Vacancies. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office for a term expiring at the next annual meeting of the stockholders at which the term of office of the class to which such director has been elected expires. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or -7- 12 stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 2.5 Removal of Directors. Except as otherwise provided by the General Corporation Law of Delaware, any one or more or all of the directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, provided, however, that, if and so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. 2.6 Place of Meetings; Meetings by Telephone. Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such participating directors shall be deemed to be present in person at the meeting. 2.7 First Meetings. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 2.8 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. 2.9 Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, President, any Vice President, the Secretary or any two directors. -8- 13 Notice of the time and place of special meeting of directors shall be Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail, telecopy or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopy or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 2.10 Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 2.13 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of director, if any action taken is approved by at least a majority of the quorum for that meeting. 2.11 Waiver of Notice. Notice of a meeting need not be given to any director (i) who signs a waiver of notice, whether before or after the meeting, or (ii) who attends the meeting other than for the express purposed of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. All such waivers shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 2.12 Adjournment. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting of the board to another time and place. 2.13 Notice of Adjournment. Notice of the time and place of holding an adjourned meeting of the board need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 2.10 of these bylaws, to the directors who were not present at the time of the adjournment. 2.14 Board Action by Written Consent Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case -9- 14 may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board of directors. 2.15 Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 2.16 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. ARTICLE 3 COMMITTEES 3.1 Committees of Directors. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have and may exercise all the powers and authority of the board, but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 3.2 Meetings and Action of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the following provisions of Article III of these bylaws: Section 2.6 (place of meetings; meetings by telephone), Section 2.8 (regular meetings), Section 2.9 (special meetings; notice), Section 2.10 (quorum), Section 2.11 (waiver of notice), Section 2.12 (adjournment), Section 2.13 (notice of adjournment) and Section 2.14 (board action by -10- 15 written consent without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 3.3 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE 4 OFFICERS 4.1 Officers. The officers of the corporation shall consist of a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents (however denominated), one or more assistant secretaries, a treasurer and one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 4.3 of these bylaws. Any number of offices may be held by the same person. In addition to the Corporate Officers of the Company described above, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 4.2 Election of Officers. The Corporate Officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3.3 or Section 3.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment, and shall hold their respective offices for such terms as the board of directors may from time to time determine. 4.3 Subordinate Officers. The board of directors may appoint, or may empower the presi dent to appoint, such other Officers as the business of the corporation may require, each of whom shall hold office for such period, have such power and authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. -11- 16 4.4 Removal and Resignation of Officers. Subject to the rights, if any, of a Officer under any contract of employment, any Officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of a Officer chosen by the board of directors, by any Officer upon whom such power of removal may be conferred by the board of directors. Any Officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the Officer is a party. 4.5 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. 4.6 Chairman of the Board. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise such other powers and perform such other duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 4.7 President. The President shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the corporation. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and, if he is a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated the Chairman of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. 4.8 Vice Presidents. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. -12- 17 4.9 Secretary. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of the board of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolu tion of the board of directors, a share register or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 4.10 Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director for a purpose reasonably related to his position as a director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 4.11 Assistant Secretary. The assistant secretary, if any, or, if there is more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. -13- 18 4.12 Authority and Duties of Officers. In addition to the foregoing powers, authority and duties, all officers of the corporation shall respectively have such authority and powers and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors. 4.13 Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. ARTICLE 5 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 5.1 Indemnification of Directors and Officers. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 5.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the Board of Directors of the corporation. The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 5.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director of officer is not entitled to be indemnified under this Section 5.1 or otherwise. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the -14- 19 corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 5.2 Indemnification of Others. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 5.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 5.3 Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE 6 RECORDS AND REPORTS 6.1 Maintenance and Inspection of Records. The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records of its business and properties. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other -15- 20 books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 6.2 Inspection by Directors. Any director shall have the right to examine (and to make copies of) the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 6.3 Annual Statement to Stockholders. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 6.4 Representation of Shares of Other Corporations. The chairman of the board, if any, the president, any vice president, the chief financial officer, the secretary or any assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of the stock of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 6.5 Certification and Inspection of Bylaws. The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE 7 GENERAL MATTERS 7.1 Record Date for Purposes Other than Notice and Voting. For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted and which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwith- -16- 21 standing any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the applicable resolution. 7.2 Checks; Drafts; Evidences of Indebtedness. From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 7.3 Corporate Contracts and Instruments; How Executed. The board of directors, except as otherwise provided in these bylaws, may authorize and empower any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such power and authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 7.4 Stock Certificates; Transfer; Partly Paid Shares. The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a -17- 22 statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the con sideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 7.5 Special Designation on Certificates. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 7.6 Lost certificates. Except as provided in this Section 7.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 7.7 Transfer Agents and Registrars. The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company -- either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. -18- 23 7.8 Construction; Definitions. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, as used in these bylaws, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both an entity and a natural person. ARTICLE 8 AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote or by the board of directors of the corporation. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. -19- 24 CERTIFICATE OF ADOPTION OF BYLAWS OF UROSURGE, INC. The undersigned hereby certifies that he is the duly elected, qualified, and acting Assistant Secretary of UroSurge, Inc. and that the foregoing Bylaws, comprising twenty-three (20) pages, were adopted as the Bylaws of the corporation effective as of , 1998. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this day of 1998. ----------------------------------------- Christopher D. Mitchell -20- EX-10.1 7 AMENDED & RESTATED 1994 STOCK PLAN 1 EXHIBIT 10.1 UROSURGE, INC. AMENDED AND RESTATED 1994 STOCK PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees, Directors and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. (g) "Company" means UroSurge, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. 2 (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- 3 (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (q) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" means a stock option granted pursuant to the Plan. (s) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "Option Exchange Program" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (u) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (v) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (w) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (x) "Plan" means this 1994 Stock Plan, as amended and restated. (y) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (z) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (bb) "Section 16(b)" means Section 16(b) of the Exchange Act. -3- 4 (cc) "Service Provider" means an Employee, Director or Consultant. (dd) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ee) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ff) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 1,610,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. -4- 5 (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; -5- 6 (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. -6- 7 (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 300,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 300,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. -7- 8 (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or -8- 9 (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -9- 10 (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason -10- 11 (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. -11- 12 (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determinatioen granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the -12- 13 determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. -13- 14 19. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -14- 15 UROSURGE, INC. 1994 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: ________________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates. 16 Termination Period: This Option may be exercised for 30 days after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for one year after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Chief Financial Officer of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 17 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or (e) with the Administrator's consent, delivery of Optionee's promissory note (the "Note") in the form attached hereto as Exhibit C, in the amount of the aggregate Exercise Price of the Exercised Shares together with the execution and delivery by the Optionee of the Security Agreement attached hereto as Exhibit B. The Note shall bear interest at the "applicable federal rate" prescribed under the Code and its regulations at time of purchase, and shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair -3- 18 Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. -4- 19 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Delaware. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: UROSURGE, INC. ___________________________________ ____________________________________ Signature By ___________________________________ ____________________________________ Print Name Title ____________________________________ Residence Address ____________________________________ -5- 20 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. _______________________________________ Spouse of Optionee -6- 21 EXHIBIT A 1994 STOCK PLAN EXERCISE NOTICE UroSurge, Inc. 2660 Crosspark Road Coralville, Iowa 52241 Attention: Chief Financial Officer 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of UroSurge, Inc. (the "Company") under and pursuant to the 1994 Stock Plan (the "Plan") and the Stock Option Agreement dated __________, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $______, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in [Section 13] of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter 22 hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Delaware. Submitted by: Accepted by: PURCHASER: UROSURGE, INC. __________________________________ _____________________________________ Signature By __________________________________ _____________________________________ Print Name Its Address: Address: _________________________________ UroSurge, Inc. _________________________________ 2660 Crosspark Road Coralville, Iowa 52241 _____________________________________ Date Received -2- EX-10.2 8 1998 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.2 UROSURGE, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1998 Employee Stock Purchase Plan of UroSurge, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean UroSurge, Inc. and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is a full-time regular Employee of the Company for tax purposes whose customary employment with the Company is at least thirty (30) hours per week. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. 2 (i) "Exercise Date" shall mean the last day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after January 1 and July 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before December 31, 1999. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. -2- 3 (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after January 1 and July 1 of each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before December 31, 1999. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. -3- 4 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding 15% of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to -4- 5 purchase during each Purchase Period more than 30,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such -5- 6 participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 300,000 shares. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall deter mine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. -6- 7 (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. -7- 8 (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or -8- 9 accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -9- 10 EXHIBIT A UROSURGE, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _____________________________hereby elects to participate in the UroSurge, Inc. 1998 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to pur chase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 0 to 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): ____________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or 11 benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)___________________________________________________________ (First) (Middle) (Last) _______________________________ _________________________________________ Relationship _________________________________________ (Address) Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ ____________________________________ Signature of Employee ____________________________________ Spouse's Signature (If beneficiary other than spouse) -2- 12 EXHIBIT B UROSURGE, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned is a participant in the Offering Period of the UroSurge, Inc. 1998 Employee Stock Purchase Plan. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ____________________________________ ____________________________________ ____________________________________ Signature: ____________________________________ Date:_______________________________ EX-10.3 9 1998 DIRECTOR OPTION PLAN 1 Exhibit 10.3 UROSURGE, INC. 1998 DIRECTOR OPTION PLAN 1. Purposes of the Plan. The purposes of this 1998 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the common stock of the Company. (d) "Company" means UroSurge, Inc., a Delaware corporation. (e) "Director" means a member of the Board. (f) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock for the last market 2 trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (i) "Inside Director" means a Director who is an Employee. (j) "Option" means a stock option granted pursuant to the Plan. (k) "Optioned Stock" means the Common Stock subject to an Option. (l) "Optionee" means a Director who holds an Option. (m) "Outside Director" means a Director who is not an Employee. (n) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (o) "Plan" means this 1998 Director Option Plan. (p) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 300,000 Shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. (a) Procedure for Grants. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- 3 (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 9,000 Shares (the "First Option") on the effective date of the Company's initial public offering ("IPO") of Common Stock registered with the Securities and Exchange Commission. (iii) Commencing in 1999, each Outside Director shall be automatically granted an Option to purchase 9,000 Shares (the "Annual Option") on the date of the annual stockholders' meeting of each year provided he or she is then an Outside Director and if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (iv) Notwithstanding the provisions of subsection (ii) or (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the initial price to public of the Shares offered in the IPO as set forth in the final prospectus included within the registration statement on Form S-1 filed with the Securities and Exchange Commission. (D) subject to Section 10 hereof, the First Option shall become exercisable as to one-twelfth (1/12) of the Shares subject to the First Option at the end of each full month commencing upon the last date of the month in which the First Option is granted, provided that the Optionee continues to serve as a Director on such dates. (vi) The terms of each Annual Option granted hereunder shall be as follows: (A) the term of the Annual Option shall be ten (10) years. (B) the Annual Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Annual Option. -3- 4 (D) subject to Section 10 hereof, the Annual Option shall become exercisable as to one-twelfth (1/12) of the Shares subject to the Annual Option at the end of each full month after the date of grant commencing upon the last date of the month in which the Option is granted, provided that the Optionee continues to serve as a Director on such dates. (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to -4- 5 exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Continuous Status as a Director. Subject to Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. In the event Optionee's status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such ter mination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. -5- 6 9. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate. 11. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. -6- 7 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated there under, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules. -7- EX-10.4 10 THREE-PARTY AGREEMENT DATED OCTOBER 31, 1994 1 EXHIBIT 10.4 THREE-PARTY AGREEMENT THIS AGREEMENT, is made and executed as of the 31st day of October 1994, by and between UNIVERSITY OF IOWA RESEARCH PARK CORPORATION, an Iowa corporation, hereinafter referred to as "RESEARCH," MYRIAD DEVELOPERS, L.C., an Iowa limited liability company, hereinafter referred to as "MYRIAD," and UROSURGE, INC., a Delaware corporation, hereinafter referred to as "UROSURGE" WITNESSETH: WHEREAS, Research has leased property from the Iowa State Board of Regents for the development of a research park in Coralville, Iowa, which consists of certain real estate located at the University's Oakdale Campus, and WHEREAS, Research has entered into a certain Land Lease dated October 31, 1994, whereunder Research is the Lessor and Myriad is the Lessee with respect to a portion of Lot 4, on the Oakdale Research Park Subdivision Final Plat, and WHEREAS, Myriad has entered into a certain Lease Agreement dated October 31, 1994, whereunder Myriad is the Landlord and Urosurge is the Tenant with respect to a portion of said Lot 4 the real estate which is the subject of the lease between Research and Myriad, and WHEREAS, the parties have agreed to enter into a certain agreement which provides for the respective rights of the parties upon default by Myriad under its Land Lease with Research. IT IS, THEREFORE, AGREED BY AND BETWEEN THE PARTIES FOR GOOD AND VALUABLE CONSIDERATION: 1. That Research acknowledges that it has reviewed the Lease Agreement dated October 31, 1994, whereunder Myriad is the Landlord and Urosurge is the Tenant, and Research hereby consents to the terms and conditions thereof and hereby consents to the subleasing of the property by Myriad to Urosurge. 2. That in the event of any default by Myriad under its Land Lease with Research, Research hereby agrees to give written notice thereof to Urosurge and allow Urosurge to cure any of said defaults on behalf of Myriad, within the terms provided therefor under the Land Lease. Any cost incurred by Urosurge in curing Myriad's said defaults may be offset by Urosurge against its obligations under the Lease Agreement with Myriad. 3. That any and all notices, requests, or communications given hereunder shall be in writing and shall be delivered or mailed by first class registered or certified mail, postage prepaid, with return receipt requested, directed to the party at the following addresses: 2 -2- TO: University of Iowa Research Park Corporation Oakdale Campus University of Iowa Iowa City, Iowa 52242 Attention Director TO: Myriad Developers, L.C. 1400 Highway 13 S.E. Cedar Rapids, Iowa 52406-2517 Attention Dennis L. Murdock and Patrick Murphy TO: Urosurge, Inc. 5. That this Agreement and the terms and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, and assignees, where permitted by this Agreement. 6. That this instrument constitutes the full and complete agreement of the parties with respect to the subject matter hereof. All modifications, amendments, or changes shall be in writing, to be effective, and shall be executed by all parties. IN WITNESS WHEREOF, the parties have executed this Agreement on the day, month, and year first above-written. UNIVERSITY OF IOWA RESEARCH MYRIAD DEVELOPERS, L.C. PARK CORPORATION By [SIG] By /s/ PATRICK H. MURPHY ----------------------------- ----------------------------- Patrick H. Murphy, Manager RESEARCH MYRIAD UROSURGE, INC. By /s/ DAVID H. MAUPIN ----------------------------- David H. Maupin UROSURGE 3 LEASE AGREEMENT This Lease Agreement is made this 31st day of October 1994, between MYRIAD DEVELOPERS, L.C., an Iowa limited liability company, (the "LANDLORD") and UROSURGE, INC., a Delaware corporation, (the "TENANT"). Schedule NAME OF TENANT: Urosurge, Inc. LOCATION OF BUILDING: Oakdale Campus Coralville, Iowa LEGAL DESCRIPTION: Lot 4, Oakdale Research Park TENANT'S USE OF BUILDING: Laboratory, offices and production RENTABLE SQUARE FEET: 10,004 ANNUAL BASE RENT: $84,033.60 MONTHLY RENT: $7,002.80 RATE PER SQUARE FOOT PER YEAR: $8.40 subject to adjustment TERM OF LEASE: Five years with one five-year option to renew. COMMENCEMENT DATE: Completion of construction. TOTAL RENTABLE SQUARE FOOTAGE: 10,004 PROPORTIONATE SHARE OF TAXES: 100% TAXES/BASE YEAR: Not applicable, Tenant pays all taxes. REQUIRED DEPOSIT: None PARKING: _____spaces surrounding the Building. TERMINATION DATE OF LEASE: 5 years from commencement date. LANDLORD -- MYRIAD DEVELOPERS, L.C. an Iowa limited liability company By Patrick H. Murphy ------------------------------------ Manager ------------------------------------, Agent TENANT -- UROSURGE, INC. By David H. Maupin ------------------------------------ ------------------------------------ 4 -2- 1. LEASING AGREEMENT. Landlord hereby leases to Tenant, and Tenant hereby leases the Building, from the Landlord for a term commencing on the completion of construction of Landlord and Tenant's improvements as evidenced by the issuance of a certificate of occupancy, and terminating five years from the commencement date, unless sooner terminated or renewed according to the terms hereof. The Building shall be occupied and used by the Tenant only for the uses described herein. 2. USE OF BUILDING. The Building shall be occupied and used by the Tenant only for those purposes and uses allowable hereunder. The Tenant's use, and this Lease, are subject to the terms and conditions of a certain Land Lease entered into on the 31st day of October 1994, by and between IOWA RESEARCH PARK CORPORATION, as "Lessor" and MYRIAD, DEVELOPMENT, L.C., as "Lessee," a copy of which is attached hereto, however, Tenant is not obligated to pay any sums thereunder. The Tenant acknowledges that it has reviewed all provisions contained therein, including those provisions applicable to the use of the Building. The Tenant hereby acknowledges that the building will be used for the following purposes: laboratory, administrative offices for research and development, and light prototype manufacturing. Any changes in said use shall be subject to and in compliance with the provisions hereof. 3. RENT. Tenant shall pay to Landlord at Landlord's office in the City of Cedar Rapids, Iowa or to such other person or at such other place as directed from time to time by notice to the Tenant from Landlord the annual base rent as set forth in the Schedule in equal monthly installments as set forth in the Schedule. Each monthly installment shall be payable in advance promptly on the first day of each calendar month during the term of this Lease and shall bear interest at the rate of 10 percent (10%) per annum from and after the 10th day of the month if not then paid until the date when paid. If the term should commence or terminate on a day other than the first day of the month, then the rent for the first and last month shall be prorated for such fractional month. All rent payable by Tenant hereunder shall be net to Landlord. All expenses and obligations of every kind and nature whatsoever relating to the building, which may arise or become due during the term of this Lease including, but not limited to, taxes, utilities, insurance, and maintenance shall be paid by the Tenant and Tenant shall indemnify and hold the Landlord harmless from said expenses. This Lease is a net, net, net Lease and Landlord shall have no expenses associated with the Building. 4. ADDITIONAL RENT AND TAXES. In addition to the base rent provided for above and on the Schedule, the Tenant shall pay, as additional rent, all of the real estate taxes prorated from the commencement date and all special assessments due and payable during the lease term, and all prorated taxes. and special assessments becoming payable after the termination of the Lease for periods during the term of the Lease, which amounts shall be paid monthly with the base rent. The Landlord shall notify the Tenant of any increases in taxes during the term of this Lease. All other sums required to be paid by Tenant hereunder shall be deemed additional rent. 5 -3- 5. Utilities. Landlord will furnish nonducted heating ventilation and air conditioning, telephone, electric service and plumbing as described in paragraph 19 hereof. Tenant will pay for all utility costs and charges during the lease term. 6. Services. Tenant shall keep the leased Building clean, neat, and shall provide its own janitor and cleaning services. Tenant will keep the windows clean inside and out and keep the inner walls painted or washed to maintain a neat appearance. 7. Parking. The Tenant for itself and its invitees and guests shall have use of the space surrounding the Building which has been constructed by the Landlord for parking purposes, subject to parking rights granted to tenants and their invitees of other buildings within Lot 4, Oakdale Research Park. The Tenant shall have the exclusive use of 6 parking spaces requested by Tenant. 8. Recording. Except for recording of a memorandum of this Lease which may be accomplished only if approved by Landlord, nothing contained shall empower Tenant to do any act which can, shall or may encumber the interest or title of Landlord or its assignee in and to the ground or building. 9. Mortgage by Landlord. From time to time either before or after the execution of this Lease and before the termination of the term thereof, Landlord may execute a mortgage or trust deed in the nature of a mortgage of Landlord's interest in the building. IN SUCH EVENT: A. If requested by the mortgagee or trustee, Tenant will subordinate its interest in this Lease to said mortgage or trust deed and will execute such subordination agreement or agreements as may be reasonably required by said mortgagee or trustee, provided, however, that so long as Tenant shall not be in default under this Lease, its right of possession and enjoyment of the Building shall be and remain undisturbed and unaffected by said mortgage or trust deed or by any foreclosure proceedings thereunder, and any subordination agreement executed pursuant to this paragraph shall contain language specifically so providing. B. Should such mortgage be foreclosed, the liability of the mortgagee, trustee or purchaser at such foreclosure sale or the liability of a subsequent owner designated as Landlord under this Lease, shall exist only so long as such trustee, mortgagee, purchaser or owner is the owner of the subject real estate and such liability shall not continue or survive after further transfer of ownership. 6 -4- C. Landlord agrees promptly to notify Tenant of the placing of any mortgage or trust deed against the leasehold estate of which the Building forms a part and Tenant agrees in the event of any act or omission by Landlord which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant shall not exercise any such right (i) until it has notified in writing the holder of any mortgage which at the time shall be a lien on the Building, if the name and address of such holder shall previously have been furnished by written notice to Tenant, of such act or omission, and (ii) until a reasonable period, not exceeding thirty (30) days, for commencing the remedying of such act or omission shall have lapsed following the giving of such notice, and (iii) such holder, with reasonable diligence shall not have so commenced and continued to remedy such act or omission or to cause the same to be remedied. During the period between the giving of such notice and the remedying of such act or omission, the rental herein recited shall be abated and apportioned to the extent that any part of the Building shall be untenantable. D. If such mortgage be foreclosed, upon request of the mortgagee or trustee, Tenant will attorn to the purchaser at any foreclosure sale thereunder and will execute such instruments as may be necessary or appropriate to evidence such attornment. Likewise Tenant will attorn to the leasehold mortgagee in the event said leasehold mortgagee should ever become the owner of the leasehold estate covered by its mortgage or should become the owner of any new lease in replacement or substitution of such leasehold estate. 10. Certain Rights Reserved to the Landlord. The Landlord preserves the following rights: A. Occupancy. During the last one hundred twenty (120) days of the term of this Lease, if during or prior to that time the Tenant vacates the Building, to decorate, remodel, repair, alter or otherwise prepare the Building for reoccupancy. B. Pass keys. To have pass keys to the Building for access to the Building in the event of 7 -5- emergencies requiring Landlord's action to prevent or limit damages to the Building. C. Access for Inspections. To have access for the purpose of inspecting the condition of the Building, at convenient times and with reasonable advance notice provided to Tenant. D. Show Building. To show the Building to prospective tenants or brokers during the last 120 days of the term of this Lease as extended, and to prospective purchasers at all reasonable times provided prior notice is given to Tenant in each case and the Tenant's use and occupancy of the Building shall not be materially inconvenienced by any such action of the Landlord. E. Heavy Equipment. To approve the weight, size and location of safes or heavy equipment of articles which articles may be moved, in, about, or out of the Building only at such times and in such manner as Landlord shall approve and, in all events, however, at Tenant's sole risk and responsibility. The Landlord may enter the Building and may exercise any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of the Tenant's use or possession and without being liable in any manner to the Tenant. 11. Liability Claims. Tenant waives all claims it may have against Landlord, its agents or Employees or damage to person or property sustained by Tenant or any occupant or other person resulting from any cause, except if caused by the negligence of the Landlord, its agents or employees. Tenant shall carry fire and extended coverage insurance insuring the full replacement value of the building and the Tenant improvements in the Building and its interest in its furniture, equipment, and supplies, and Tenant shall waive any rights of action against Landlord for loss or damage covered by such insurance, and the policies shall permit such waiver. Tenant will secure and maintain general liability insurance naming the Tenant and Landlord as insureds from financially responsible insurance companies. If Tenant occupies space in which there is exterior plate glass, then Tenant shall be responsible for the damage, breakage or repair of such plate glass. If any damage to the Building results from any act or neglect of the Tenant, the Landlord may at the Landlord's option, without any obligation to do so, repair such damage, 8 -6- and the Tenant shall thereupon pay to the Landlord the total cost of such repairs and damages to the Building. The parties agree that Tenant shall maintain public liability insurance, pursuant to the terms of this paragraph, with minimum limits of $2,000,000 and shall furnish the certificate to Landlord showing said insurance is in full force and effect. 12. Conditions of Building. During the term of this Lease, Tenant shall maintain at its sole cost the building and all components thereof in good condition and repair, with its failing to do so constituting a default hereunder. In the event Tenant fails to maintain the Building as required hereunder, Landlord may restore the Building to such condition, and the Tenant shall pay the cost thereof. At the termination of this Lease, Tenant shall return the Building to the Landlord in good condition and repair, and, if the Tenant is not in default hereunder, the Tenant may remove any removable fixtures other than light fixtures and other like equipment installed by Tenant if, and only if, such removals are done in a good and workmanlike manner and if the Building and all surfaces are restored to conditions reasonably acceptable to the Landlord. 13. Alterations. After construction of the Building by Landlord and completion of fixtures and interior improvements by Tenant, Tenant shall not make alterations in or additions to the Building unless Tenant has obtained Landlord's written permission to do so, and subject to Tenant's not being in default hereunder and subject to furnishing Landlord with acceptable plans and specifications, the names and addresses of contractors, copies of contracts, necessary permits and indemnifications as requested by the Landlord and lien waivers as to any and all claims, costs, liabilities, and expenses which may arise in connection with said alterations or additions. As a further condition to Landlord's consent to said alterations or additions, Tenant shall advise all subcontractors, suppliers, materialmen, and laborers that they shall not have the right to file a Mechanic's Lien against the Building and property owned by the Landlord. Whether the Tenant furnished the Landlord the foregoing or not, the Tenant hereby agrees to hold the Landlord harmless from any and all liabilities of every kind and description which may arise out of or be conducted in any way with said alterations or additions. Before commencing any work in connection with alterations or additions, the Tenant, if requested by Landlord, shall furnish the Landlord with certificates of insurance from all contractors performing labor or furnishing materials insuring the Landlord against any and all liabilities which may arise out of or be connected in any way with said additions or alterations. The Tenant shall pay the cost of all such alterations and additions and also the cost of decorating the Building occasioned by such alterations and additions. Upon completing any alterations or additions, the Tenant, if requested by Landlord, shall furnish the Landlord with contractors' affidavits and full and final waiver of lien and receipted bills 9 -7- covering all labor and material expended and used. All alterations and additions shall comply with all insurance requirements and with all relevant laws, ordinances, or regulations of municipalities, counties, state, or departments and agencies thereof. All alterations and additions shall be constructed in a good and workmanlike manner and only good grades of materials shall be used. All additions, excepting removable fixtures other than light fixtures, shall become the Landlord's property and shall remain upon the Building at the termination of this Lease by lapse of time or otherwise without compensation or allowance or credit to the Tenant. If the Tenant does not remove the Tenant's fixed furniture, equipment, machinery, fixtures, and all other items of personal property of every kind and description from the Building prior to the end of the term, however ended, which the Tenant does not have the right to remove if it is in default hereunder, then Tenant shall conclusively presumed to have conveyed the same to the Landlord under this Lease as a bill of sale without further payment or credit by Landlord to the Tenant. All structural changes made by Tenant shall be restored to their original condition at the Tenant's expense if Landlord so requests. Tenant's violation of any of the terms and conditions of this numbered paragraph 13 shall constitute a default hereunder. 14. Rules and Regulations. The Tenant shall abide by all reasonable rules and regulations adopted by Landlord pertaining to the operation and management of the building. If any rules and regulations are contrary to the terms of this Lease, the terms of the Lease shall govern. 15. Fire and Casualty. If the Building or any part thereof shall be damaged or partially destroyed by fire or other casualty, the Tenant shall promptly notify the Landlord, and, at the Tenant's sole cost and expense, and whether or not the insurance proceeds are sufficient, restore, repair, replace, or rebuild the Building. Said restoration shall be at least equal in quality and class to the original construction, shall be of a design approved in writing by the Landlord, shall be performed pursuant to plans and specifications approved by the Landlord and in accordance with all provisions applicable to said work and all other provisions of this Lease. The restoration shall be commenced within ninety (90) days from the date of damage or partial destruction, provided, however, the Landlord may grant such extensions of time for the adjustment of insurance and the preparation of plans and specifications as reasonably may be required. The architect or engineer in charge of such work shall be selected by the Tenant and approved in writing by the Landlord. The Tenant shall diligently complete the restoration. The Landlord agrees to oversee and supervise all construction required under this paragraph 15; without altering or modifying the Tenant's responsibilities hereunder. No partial destruction or damage to the Building or any part thereof shall permit the Tenant to surrender this Lease or relieve the Tenant from its obligations to pay rent or from any other obligations hereunder. The Tenant waives any rights now or in the future conferred 10 -8- upon it by statute or otherwise to quit or surrender this Lease or to any rebate, refund, suspension, diminution, abatement, or reduction of rent on account of any partial destruction or damage to the Building. If the Building is totally destroyed by fire or by any other casualty, the Tenant shall promptly notify the Landlord, and, at the Tenant's sole discretion, restore, replace, repair or rebuild the Building in accordance with the provisions of this paragraph, or terminate this Lease. In the event the Tenant elects to terminate this Lease, the Tenant shall, at the Tenant's sole expense, restore the building site to its condition as of the date hereof, prior to construction, to the satisfaction of Landlord. 16. Holding Over. If the Tenant retains possession of the Building or any part thereof, by lapse of time or otherwise, after the termination of this Lease, the Tenant shall pay the Landlord rent at double the rate payable for the year immediately preceding said holdover computed on per month basis, for the time the Tenant thus remains in possession. The provisions of this paragraph do not waive the Landlord's rights of re-entry or any other right hereunder. Any retention of the Building after the termination of this lease or any extension thereof shall be considered as a month-to-month holdover unless otherwise agreed to in writing by both parties. 17. Landlord's Remedies. All rights and remedies of the Landlord herein enumerated shall be cumulative, and this Lease shall not exclude any other right or remedy allowed herein or by law. If any provision hereof shall be held invalid or unenforceable, the remaining provisions hereof shall continue valid, enforceable and applicable. A. If the Tenant defaults in the payment of base rent, additional rent, or with regard to the payment of any other sums due hereunder and if said default is not remedied within ten (10) days after written demand is made by Landlord, then in any such event, Landlord may, if the Landlord so elects but not otherwise, either forthwith terminate this Lease and the Tenant's right to possession of the Building, or, without terminating this Lease, forthwith terminate the Tenant's right to possession of the Building and the Landlord may exercise any and all remedies available to it under Iowa law, including but not limited to, the foreclosure of its Landlord's lien against all tangible personal property excepting property that is confidential or otherwise proprietary in nature such as patents, copyrights, trade secrets, software programs, data and the like of the Tenant maintained within the Building. 11 -9- B. If the Tenant defaults in the prompt and full performance of any other provision of this Lease; and if such default is not remedied or prompt and full performance is not accomplished by Tenant or Tenant has not promptly instituted and is not vigorously pursuing such remedies as are necessary to rectify such default within thirty days after written demand is made by Landlord, or if the Tenant abandons the Building, then and in any such event, the Landlord may, if the Landlord so elects but not otherwise, forthwith terminate this Lease and the Tenant's right to the Building or without terminating this Lease, forthwith terminate the Tenant's right to possession of the Building and exercise any and all other remedies available to the Landlord under Iowa law, including but not limited to the foreclosure of its Landlord's lien as limited above. C. Upon any termination of this Lease, whether by lapse of time or otherwise, or upon termination of the Tenant's right to possession without termination of the Lease, the Tenant shall immediately surrender possession and vacate the Building and deliver possession thereof to the Landlord, and the Tenant hereby grants to the Landlord full and free license to enter the Building with or without process of law, and to repossess and remove any and all property therefrom using such force as may be necessary, without being deemed guilty of trespass, eviction, or forcible entry or detainer, and without relinquishing the Landlord's right to rent or any other right given to the Landlord hereunder or by operation of law. D. Any and all property which may be removed from the Building by the Landlord pursuant to the authority of the Lease or of law, to which the Tenant is or may be entitled may be handled, removed and stored by the Landlord at the risk, cost and expense of the Tenant, provided, however, that Landlord shall use reasonable care and caution to prevent any damage or loss to such property in removing and storing such property. The Tenant shall pay to the Landlord, upon demand, any and all reasonable expenses incurred in such removal and all reasonable storage charges against 12 -10- such property as long as the same shall be in the Landlord's possession or under the Landlord's control. Any such property of the Tenant not removed from the Building or retaken from storage by the Tenant within 60 days after the end of the term, however, terminated, or any extension thereof, shall be conclusively deemed to have been forever abandoned by the Tenant. E. If Tenant is adjudicated to be bankrupt or is found insolvent in any court of record, or if a receiver or trustee for the benefit of Tenant's creditors is appointed, Landlord at its sole option may terminate this Lease without notice and shall be entitled to damages as provided by law or the terms hereof, provided, however, that such adjudication, finding or appointment is not set aside within 30 days or an appeal therefrom shall not be prosecuted within said 30 days and said appeal is either pending or is concluded with the determination that Tenant is not bankrupt or insolvent. F. If Tenant should default under the terms of this Lease, Landlord shall be entitled to all reasonable costs, charges, expenses, and attorneys' fees incurred by Landlord in connection therewith. G. Tenant hereby pledges and assigns to Landlord subject to purchase money security interests and prior perfected security interests all of the furniture, fixtures, goods, and tangible personal property of Tenant except that property excepted in paragraph 17A above, which shall or may be brought or put on the Building as security for the payment of the rent herein reserved and Tenant agrees that said lien hereby created by operation of law may be enforced by foreclosure or otherwise at the election of the Landlord. Tenant agrees to execute any and all financing statements, security agreements and other forms necessary to perfect this lien. H. Tenant hereby waives and renounces any and all exemption rights it may have now, or hereafter, under or by virtue of the constitution and laws of the state in which the Building is located or of any other state 13 -11- or of the United States, as against the payment of said rental or any portion hereof, or any other obligation or damages that may accrue under the terms of this Agreement. I. it is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do. waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever, arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of said Building, or any claim of injury or damage, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Landlord commences any summary proceeding for nonpayment of rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding. J. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of Building, by reason of the violation by Tenant of any of the covenants and conditions of this Lease, or otherwise. 18. Basic Finish. The Landlord agrees to provide Tenant a "shell Building" which will include the following basic interior finish: A. Concrete floor. B. Exterior walls with finish concrete masonry unit face. C. Exterior windows and doors with glazing but no interior trim. D. Warehouse level ambient light (approximately 10 foot candles). E. Two 200 amp 3 phase panels at approximately the center of the west wall of the Building. F. Plumbing services will be stubbed into that same location (sewer and water). 14 -12- G. The heating, venting, and air conditioning units will be in place with some main runs but no secondary runs or defusers. H. Exterior landscaping and parking will be in place. I. Sprinklers in place for open space. Landlord, at its sole cost, shall provide the above and such other improvements as are shown by the plans and specifications prepared by John Rice R.A. dated August 29, 1994 and by this reference made a part hereof. All interior improvements shall be completed by the Tenant consistent with floor plans, specifications, and descriptions of materials provided by the Tenant to the Landlord, and to be approved by the Landlord. The Landlord agrees to advance the costs of the Tenant's improvements in an amount not to exceed $60,000.00, and the Tenant agrees to repay said $60,000.00 at the rate of $12,000.00 per year without interest until all sums are paid in full. The parties agree to execute all necessary notes, security agreements, and financing statements to provide the Landlord with security for the repayment of said sum. The Landlord and Tenant agree to complete its respective improvements in a timely fashion. The Landlord shall commence construction on or about November 2, 1994. The Tenant shall provide Landlord with plans and specifications for Tenant improvements to be approved by Landlord which improvements shall be substantially completed within 90 days from the date Landlord releases the Building to Tenant for construction of Tenant improvements. 19. Option to Renew. The Tenant shall have one option to renew the term of this Lease for one five-year term, which term shall commence immediately upon the expiration of the original term of this Lease. Said extension shall be upon the same terms and conditions contained herein, except for the rental rate described in this paragraph. In the event the Tenant desires to exercise its option to renew this lease, the Tenant shall notify the Landlord, in writing, not less than 120 days prior to the expiration of the term hereof. During the option period, the rent payable shall equal the rent described above, ($84,033.60 annually), adjusted by the change in the Bureau of Labor Statistics Consumer Price Index, U.S. City Average. All Urban Consumers (C.P.I.-U) for the month immediately preceding the end of the initial lease term from the index (expressed as a percentage or otherwise) for the month of October 1994. If publication of that index is terminated, a substantially equivalent successor thereto shall be used to determine the adjustment in rent during the option period. 15 -13- 20. Environmental Matters. Tenant shall comply with all applicable environmental rules, regulations, and laws and the Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, and losses (including reasonable attorneys' fees), arising out of a breach of or violation of any applicable environmental laws. The Tenant shall not cause any hazardous material, as described by state or federal law, to be used, generated, stored, or disposed of on, about, or under or transported to or from the building, without first receiving the landlord's written consent, which consent may be withheld for any reason and revoked at any time. The Tenant acknowledges that the Landlord shall have no liability with respect to violations of the provisions of this paragraph. 21. Subletting and Assignment. For purposes of this paragraph, any transfer of stock, change in equity ownership within the Tenant or any change of the Tenant's capital structure shall constitute an assignment or subletting, with the exception of changes resulting from public offerings and other changes where less than 49% of the Tenant's equity ownership has been transferred. With the exception stated above, the Tenant shall not assign or sublet this Lease or any part of the Building without the prior written consent of the Landlord, which consent shall not be unreasonably withheld under the following conditions: A. The assignee is at least as creditworthy, based upon financial statements submitted to the Landlord, as the Tenant. B. The assignee shall agree to abide by all the terms and conditions of this Lease. C. There shall be no defaults under the terms of this Lease at that time. Any assignment or subletting by the Tenant contrary to the terms hereof shall have the effect of accelerating all sums due hereunder during the remaining term of this Agreement, and shall constitute a default hereunder, thereby entitling Landlord to pursue any and all remedies available to it. No assignment or sublease shall relieve the Tenant of its obligations hereunder. 22. Notices. All notice to be given by one party to the other party under this Lease shall be given in written form and mailed or delivered to the following: A. To the Landlord, 1400 Highway 13 S.E., Cedar Rapids, Iowa 52406-2577, or to such other person at such other address designated by Notice sent to Tenant and after commencement of the term of the address to which rent is payable. 16 -14- B. To the Tenant at the place set forth in the Schedule until Tenant takes possession of the Building, and thereafter at the Building or at such other address designated by notice to the Landlord. Mailed notices shall be sent by United States mail, Certified or Registered, postage prepaid. Such notice shall be deemed to have been given upon depositing in the United States mail. 23. Quiet Possession. So long as Tenant shall observe and perform the covenants and agreements binding on it hereunder, Tenant shall at all times during the term herein granted peacefully and quietly have and enjoy the possession of the Building without any encumbrance or hindrance by, from or through the Landlord, its successors or assigns. 24. Miscellaneous. A. Each provision hereof shall extend to and shall, as the case may require, bind and inure to the benefit of the Landlord and the Tenant and their respective heirs, legal representatives and successors, and assigns. B. All amounts owed to the Landlord hereunder, for which the date of payment is not expressly fixed herein, shall be paid within thirty (30) days from the date the Landlord renders statements of account therefore and shall bear interest at the rate of ten (10%) per annum thereafter until paid. C. Tenant shall deliver to Landlord or to its mortgagee, auditors, or prospective purchaser when requested by Landlord, a certificate to the effect that Landlord is not in default therein, or stating specifically any exceptions thereto. Failure to give such a certificate within two (2) weeks after written request shall be conclusive evidence that the Lease is in full force and effect and Landlord is not in default and Tenant shall be estopped from asserting any defaults known to Tenant at that time. D. In the event that all or a substantial portion of the Building is taken by eminent domain so that the Building cannot be reasonably used by Tenant for the purposes for which it is demised, then at the option of either party the Lease may be terminated, effective as of the date of the taking. In this event, the 17 -15- entire award shall be paid to and retained by Landlord excepting however, that Tenant may receive therefrom any portion paid on account of its moving expenses. MYRIAD DEVELOPERS, L.C. UROSURGE, INC., an Iowa limited liability company an corporation ---------------- BY /s/ Patrick H. Murphy BY ------------------------------ ------------------------------ LANDLORD TENANT EX-10.5 11 LEASE AGREEMENT DATED DECEMBER 12, 1997 1 Exhibit 10.5 LEASE AGREEMENT This Lease Agreement is made this 12th day of December 1997, between MYRIAD DEVELOPERS, L.C., an Iowa limited liability company, (the "LANDLORD") and UROSURGE, INC., A Delaware corporation, (the "TENANT") Schedule NAME OF TENANT: UroSurge, Inc. LOCATION OF BUILDING: Oakdale Campus (Building 2) Coralville, Iowa LEGAL DESCRIPTION: A portion of Lot 4, Oakdale Research Park See attached. DESCRIPTION OF LEASED 11,500 square feet located in the PREMISES: center and east end of the Building. TENANT'S USE OF PREMISES: office space RENTABLE SQUARE FEET: 11,500 ANNUAL BASE RENT: $96,600.00 MONTHLY RENT: $8,050 RATE PER SQUARE FOOT PER YEAR: $8.40, plus additional rent, subject to adjustment TERM OF LEASE: 29 months with one five-year option to renew. COMMENCEMENT DATE: January 1, 1998 TOTAL RENTABLE SQUARE FOOTAGE IN BUILDING: 14,904 PROPORTIONATE SHARE OF TAXES, INSURANCE, MAINTENANCE AND OTHER EXPENSES: As set by Landlord. REQUIRED DEPOSIT: None PARKING: 33 spaces surrounding the Building. TERMINATION DATE OF LEASE: 29 months from commencement date subject to option.
LANDLORD -- MYRIAD DEVELOPERS, L.C. an Iowa limited liability company By /s/ PATRICK H. MURPHY ------------------------------------ MANAGER , AGENT ----------------------------- TENANT -- UROSURGE, INC. A Delaware corporation By [SIG] ------------------------------------ PRES. & C.E.O. ------------------------------------ 2 -2- 1. LEASING AGREEMENT AND TERM. Landlord hereby leases to Tenant, and Tenant hereby leases the Premises, from the Landlord for a term commencing January 1, 1998, and terminating June 1, 2000 unless sooner terminated or renewed according to the terms hereof. The Premises shall be occupied and used by the Tenant only for the uses described herein. 2. USE OF PREMISES. The Premises shall be occupied and used by the Tenant only for those purposes and uses allowable hereunder. The Tenant's use, and this Lease, are subject to the terms and conditions of a certain Land Lease entered into on the 31st day of October 1994, by and between IOWA RESEARCH PARK CORPORATION, as "Lessor" and MYRIAD DEVELOPERS, L.C., as "Lessee," a copy of which is attached hereto. The Tenant represents that it has reviewed all provisions contained therein, including those provisions applicable to the use of the Building and Tenant covenants it shall comply with the terms and conditions thereof applicable to Tenant. The Tenant hereby represents that the Premises will be used for the following purposes: laboratory; business and administrative; offices for research, development, marketing, and sales activities; and light manufacturing. Any changes in said use shall be subject to and in compliance with the provisions hereof. 3. RENT. Tenant shall pay to Landlord at Landlord's office in the City of Cedar Rapids, Iowa or to such other person or at such other place as directed from time to time by notice to the Tenant from Landlord the annual base rent as set forth in the Schedule in equal monthly installments as set forth in the Schedule. Each monthly installment shall be payable in advance promptly on the first day of each calendar month during the term of this Lease and shall bear interest at the rate of 10 percent (10%) per annum from and after the l0th day of the month if not then paid until the date when paid. If the term should commence or terminate on a day other than the first day of the month, then the rent for the first and last month shall be prorated for such fractional month. All rent payable by Tenant hereunder shall be net to Landlord. All expenses and obligations of every kind and nature whatsoever relating to the Building, which may arise or become due during the term of this Lease including, but not limited to, taxes, utilities, insurance, and maintenance shall be paid by the Tenant and Tenant shall indemnify and hold the Landlord harmless from said expenses. This Lease is a net Lease and Landlord shall have no expenses associated with the Building. 4. ADDITIONAL RENT. In addition to the base rent provided for above and on the schedule, the Tenant shall pay, as additional rent, the following: A. Taxes and Special Assessments. The Tenant shall pay, as additional rent, its proportionate share of the real estate taxes accruing from the commencement date and all special assessments due and payable during the Lease term, and a prorated share of all taxes and special assessments becoming payable after the termination of the Lease for 3 -3- periods during the term of the Lease, which amounts shall be paid monthly with the base rent. The Landlord shall notify the Tenant of any increases in taxes during the term of this Lease. All other sums required to be paid by tenant hereunder shall be deemed additional rent. Tenant's proportionate share shall be rentable square feet (11,SOO square feet) divided by total rentable square footage in the building (14,904 square feet) times the actual taxes for building number two and taxes for the associated parking. B. Insurance. The Tenant shall pay and reimburse the Landlord, upon request by the Landlord, its proportionate share of the cost of insurance procured and maintained by the Landlord hereunder as per section 11 of the Agreement based on the square footage of the Leased Premises compared to the total square footage of the Building. All sums requested hereunder by the Landlord shall be paid by the Tenant within 15 days thereof, or the Landlord has the right to require the Tenant to pay one-twelfth of the cost of all insurance monthly with the base rent. Tenant's proportionate share shall be rentable square feet (11,500 square feet) divided by total rentable square footage in the building (14,904 square feet) times the cost of insurance procured and maintained by the Landlord as described above. C. Maintenance. The Tenant shall pay its proportionate share of all the costs of maintaining, repairing, operating and replacing all improvements to the real estate on which the rental premises is located including, but not limited to, parking lot, lighting, exterior maintenance of the Building, hallways, entryways, heating, cooling, and ventilating systems, any and all facilities and services provided to the Building (except where the Tenant is responsible for all such costs hereunder), snow removal, care of lawn and landscaping, and utilities. The Tenant shall pay to the Landlord, upon demand, monthly with all other sums due hereunder, Tenant's proportionate share of all such maintenance costs incurred by Landlord. Tenant's proportionate share shall be rentable square feet (11,500 square feet) divided by total rentable square footage in the Myriad Technology Plaza (currently 24,908 square feet), located on lot 4 of the Oakdale Research Park, times maintenance costs for the complex; excluding replacement of HVAC and EDPM roof for the complex 4 -4- buildings. Tenant shall also contribute a proportionate share to reserve for replacement EDPM roof and HVAC. Tenants annual share to reserve replacement EDPM roof and HVAC shall be $3,570 to be paid monthly with all other sums due hereunder. 5. Utilities. Landlord will furnish nonducted heating, ventilation and air conditioning, telephone, electric service and plumbing as described in paragraph 19 hereof. Tenant will pay for all utility costs and charges during the lease term with respect to the Premises upon demand by the Landlord. The Premises shall be separately metered and the Tenant shall pay all such utility charges directly to the provider. 6. Services. Tenant shall keep the Premises clean, neat, and shall provide its own janitor and cleaning services. Tenant will keep the windows clean inside and keep the inner walls painted or washed to maintain a neat appearance. 7. Parking. The Tenant for itself and its invitees and guests shall have use of the space surrounding the Building which has been constructed by the Landlord for parking purposes, subject to parking rights granted to other tenants and their invitees. The Tenant shall have the exclusive use of 33 parking spaces requested by Tenant. 8. Recording. Except for recording of a memorandum of this Lease which may be accomplished only if approved by Landlord, nothing contained shall empower Tenant to do any act which can, shall or may encumber the interest or title of Landlord or its assignee in and to the ground or Building. 9. Mortgage by Landlord. From time to time either before or after the execution of this Lease and before the termination of the term thereof, Landlord may execute a mortgage or trust deed in the nature of a mortgage of Landlord's interest in the Building. IN SUCH EVENT: A. If requested by the mortgagee or trustee, Tenant will subordinate its interest in this Lease to said mortgage or trust deed and will execute such subordination agreement or agreements as may he reasonably required by said mortgagee or trustee, provided, however, that so long as Tenant shall not be in default under this Lease, its right of possession and enjoyment of the Premises shall be and remain undisturbed and unaffected by said mortgage or trust deed or by any foreclosure proceedings thereunder, and any subordination agreement executed pursuant to this paragraph shall contain language specifically so providing. B. Should such mortgage be foreclosed, the liability of the mortgagee, trustee or purchaser at such 5 -5- foreclosure sale or the liability of a subsequent owner designated as Landlord under this Lease, shall exist only so long as such trustee, mortgagee, purchaser or owner is the owner of the subject real estate and such liability shall not continue or survive after further transfer of ownership. C. Landlord agrees promptly to notify Tenant of the placing of any mortgage or trust deed against the leasehold estate of which the Building forms a part and Tenant agrees in the event of any act or omission by Landlord which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant shall not exercise any such right (i) until it has notified in writing the holder of any mortgage which at the time shall be a lien on the Building, if the name and address of such holder shall previously have been furnished by written notice to Tenant, of such act or omission, and (ii) until a reasonable period, not exceeding thirty (30) days, for commencing the remedying of such act or omission shall have lapsed following the giving of such notice, and (iii) such holder, with reasonable diligence shall not have so commenced and continued to remedy such act or omission or to cause the same to be remedied. During the period between the giving of such notice and the remedying of such act or omission, the rental herein recited shall be abated and apportioned to the extent that any part of the Building shall be untenantable. D. If such mortgage be foreclosed, upon request of the mortgagee or trustee, Tenant will attorn to the purchaser at any foreclosure sale thereunder and will execute such instruments as may be necessary or appropriate to evidence such attornment. Likewise Tenant will attorn to the leasehold mortgagee in the event said leasehold mortgagee should ever become the owner of the leasehold estate covered by its mortgage or should become the owner of any new lease in replacement or substitution of such leasehold estate. 10. Certain Rights Reserved to the Landlord. The Landlord preserves the following rights: A. Occupancy. During the last one hundred twenty (120) days of the term of this Lease, if during or prior to that time the Tenant vacates the Premises, 6 -6- to decorate, remodel, repair, alter or otherwise prepare the Premises for reoccupancy. B. Pass keys. To have pass keys to the Premises for access to the Premises in the event of emergencies requiring Landlord's action to prevent or limit damages to the Building. C. Access for Inspections. To have access for the purpose of inspecting the condition of the Premises, at convenient times and with reasonable advance notice provided to Tenant. D. Show Building. To show the Premises to prospective tenants or brokers during the last 120 days of the term of this Lease as extended, and to prospective purchasers at all reasonable times provided prior notice is given to Tenant in each case and the Tenant's use and occupancy of the Premises shall not be materially inconvenienced by any such action of the Landlord. E. Heavy Equipment. To approve the weight, size and location of safes or heavy equipment of articles which articles may be moved, in, about, or out of the Premises only at such times and in such manner as Landlord shall approve and, in all events, however, at Tenant's sole risk and responsibility. The Landlord may enter the Premises and may exercise any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of the Tenant's use or possession and without being liable in any manner to the Tenant. 11. Liability Claims. Tenant waives all claims it may have against Landlord, its agents or Employees for damage to person or property sustained by Tenant or any occupant or other person resulting from any cause, except if caused by the negligence of the Landlord, its agents or employees. Landlord shall carry fire and extended coverage insurance insuring the full replacement value of the Premises provided by the Landlord, and Tenant shall waive any rights of action against Landlord for loss or damage covered by such insurance, and the policies shall permit such waiver. Tenant shall reimburse the Landlord for the proportionate share of cost of said insurance and all other insurance the Landlord deems necessary, as provided in paragraph 4 above. Tenant shall carry fire and extended coverage insurance insuring the full replacement value of Tenant improvements in the Building and its interest in furniture, and supplies, and Tenant shall waive any rights of action against Landlord for loss or damage covered by such insurance, and the policies shall permit such waiver. 7 -7- Tenant will secure and maintain general liability insurance naming the Tenant and Landlord as insureds from financially responsible insurance companies. If Tenant occupies space in which there is exterior plate glass, then Tenant shall be responsible for the damage, breakage or repair of such plate glass. If any damage to the Building results from any act or neglect of the Tenant, the Landlord may at the Landlord's option, without any obligation to do so, repair such damage, and the Tenant shall thereupon pay to the Landlord the total cost of such repairs and damages to the Building. The parties agree that Tenant shall maintain public liability insurance, pursuant to the terms of this paragraph, with minimum limits of $1,000,000 aggregate and shall furnish the certificate to Landlord showing said insurance is in full force and effect. 12. Conditions of Building. During the term of this Lease, Tenant shall maintain, at its sole cost, in good condition and repair, the Premises, all leasehold improvements contained therein and all components including, but not limited to utilities, heating, ventilating, and cooling systems, electrical and plumbing, and plate glass for which the Tenant is responsible hereunder. In the event the Tenant fails to maintain the Premises as required by this paragraph, then the Landlord may restore the Premises in such condition, and the Tenant shall pay the costs thereof. Failure of the Tenant to fulfill its obligations of this paragraph, shall constitute a default hereunder. At the termination of the lease, the Tenant shall return the Premises to the Landlord in good condition and repair with reasonable wear and tear excepted, and, if the Tenant does not default hereunder, the Tenant may remove any removable fixtures other than light fixtures and other like equipment installed by the Tenant if, and only if, such removals are done and good and workmanlike manner and if the Premises and all surfaces are restored to conditions reasonably acceptable to the Landlord. 13. Alterations. After construction of the Building by Landlord and completion of fixtures and interior improvements by Tenant, Tenant shall not make alterations in or additions to the Building unless Tenant has obtained Landlord's written permission to do so, and subject to Tenant's not being in default hereunder and subject to furnishing Landlord with acceptable plans and specifications, the names and addresses of contractors, copies of contracts, necessary permits and indemnifications as requested by the Landlord and lien waivers as to any and all claims, costs, liabilities, and expenses which may arise in connection with said alterations or additions. As a further condition to Landlord's consent to said alterations or additions, Tenant shall advise all subcontractors, suppliers, materialmen, and laborers that they shall not have the right to file a Mechanic's Lien against the Building and property owned by the Landlord. Whether the Tenant furnished the Landlord the foregoing or not, the Tenant hereby agrees to hold the Landlord harmless from any and all liabilities of every kind and description which may arise out of or be conducted in any way with said alterations or additions. Before commencing any work in connection 8 -8- with alterations or additions, the Tenant, if requested by Landlord, shall furnish the Landlord with certificates of insurance from all contractors performing labor or furnishing materials insuring the Landlord against any and all liabilities which may arise out of or be connected in any way with said additions or alterations. The Tenant shall pay the cost of all such alterations and additions and also the cost of decorating the Premises occasioned by such alterations and additions. Upon completing any alterations or additions, the Tenant, if requested by Landlord, shall furnish the Landlord with contractors' affidavits and full and final waiver of lien and receipted bills covering all labor and material expended and used. All alterations and additions shall comply with all insurance requirements and with all relevant laws, ordinances, or regulations of municipalities, counties, state, and other governmental units or departments and agencies thereof. All alterations and additions shall be constructed in a good and workmanlike manner and only good grades of materials shall be used. All additions, excepting removable fixtures other than light fixtures, shall become the Landlord's property and shall remain upon the Premises at the termination of this Lease by lapse of time or otherwise without compensation or allowance or credit to the Tenant. If the Tenant does not remove the Tenant's fixed furniture, equipment, machinery, fixtures, and all other items of personal property of every kind and description from the Premises prior to the end of the term, however ended, which the Tenant does not have the right to remove if it is in default hereunder, then Tenant shall conclusively presumed to have conveyed the same to the Landlord under this Lease as a bill of sale without further payment or credit by Landlord to the Tenant. All structural changes made by Tenant shall be restored to their original condition at the Tenant's expense if Landlord so requests. Tenant's violation of any of the terms and conditions of this numbered paragraph 13 shall constitute a default hereunder. 14. Rules and Regulations. The Tenant shall abide by all reasonable rules and regulations adopted by Landlord pertaining to the operation and management of the Building. if any rules and regulations are contrary to the terms of this Lease, the terms of the Lease shall govern. 15. Damage or Destruction. A. Damage or Destruction of Premises Provided by the Landlord. If the Premises or any part thereof shall be damaged or partially destroyed by fire or any other casualty, the Tenant shall promptly notify the Landlord, and the Landlord will repair or rebuild the Premises, except as hereinafter provided. The restoration shall commence within ninety (90) days from the date of damage or partial destruction, provided, however, the Landlord may be granted such extensions of time for the adjustment 9 -9- of insurance and the preparation of plans and specifications as reasonably may be required. No partial destruction or damage to the Premises or any part thereof shall permit the Tenant to surrender this Lease or relieve the Tenant from its obligations to pay rent or from any other obligations hereunder. The Tenant waives any rights now or in the future conferred upon it by statute or otherwise to quit or surrender this Lease or to any rebate, refund, suspension, diminution, abatement, or reduction of rent on account of any partial destruction or damage to the Building. If the Premises is totally destroyed by fire or any other casualty, Tenant may elect to terminate this lease and promptly notify the Landlord, in writing, within thirty (30) days after the date of damage or destruction, and this Lease shall thereupon terminate. In the event the Tenant does not elect to terminate this Lease in case of total destruction, then the Landlord shall repair or rebuild the Premises, using any and all insurance proceeds therefor. The Tenant hereby acknowledges that any and all insurance proceeds payable upon damage or destruction to the Premises, shall be payable to the Landlord and the Landlord may apply and use said proceeds as it deems appropriate, in its sole discretion. B. Damage or Destruction of Tenant Interior Improvements. If the Tenant-provided interior improvements thereof shall be damaged or partially destroyed by fire or other casualty, the Tenant shall notify the Landlord, and, at the Tenant's sole cost and expense, and whether or not the insurance proceeds are sufficient, restore, repair, replace, or rebuild such Tenant-provided interior improvements. Said restoration shall be at least equal in quality and class to the original construction, shall be of a design approved in writing by the Landlord, shall be performed pursuant to plans and specifications approved by the Landlord and in accordance with all procedures applicable to said work and all other provisions of this Lease. The restoration shall be commenced within ninety (90) days from the date of damage or partial destruction; however, the Landlord may grant such extensions of time for the adjustment of 10 -10- insurance and the preparation of plans and specifications as reasonably may be required. if the Premises as provided by the Landlord shall be totally destroyed, and the Tenant has not terminated this lease as provided in section 15A, then construction shall commence as soon as practicable after said damage or destruction. The architect or engineer in charge of restoration of Tenant provided interior improvements shall be selected by the Tenant and approved in writing by the Landlord. The Tenant shall diligently complete the restoration. No partial destruction or damage to the Tenant-provided interior improvements shall permit the Tenant to surrender this Lease or relieve the Tenant from its obligations to pay rent or from any other obligations hereunder. The Tenant waives any rights now or in the future conferred upon it by stature or otherwise to quit or surrender this Lease or to any rebate, refund, suspension, diminution, abatement, or reduction of rent on account of any partial destruction or damage to the Tenant provided interior improvements. 16. Holding Over. If the Tenant retains possession of the Premises or any part thereof, by lapse of time or otherwise, after the termination of this Lease, the Tenant shall pay the Landlord rent at double the rate payable for the year immediately preceding said holdover computed on per month basis, for the time the Tenant thus remains in possession. The provisions of this paragraph do not waive the Landlord's rights of re-entry or any other right hereunder. Any retention of the Premises after the termination of this lease or any extension thereof shall be considered as a month-to-month holdover unless otherwise agreed to in writing by both parties. 17. Landlord's Remedies. All rights and remedies of the Landlord herein enumerated shall be cumulative, and this Lease shall not exclude any other right or remedy allowed herein or by law. If any provision hereof shall be held invalid or unenforceable, the remaining provisions hereof shall continue valid, enforceable and applicable. A. If the Tenant defaults in the payment of base rent, additional rent, or with regard to the payment of any other sums due hereunder and if said default is not remedied within ten (10) days after written demand is made by Landlord, then in any such event, Landlord may, if the Landlord so elects but not otherwise, either forthwith terminate this Lease and the Tenant's right to possession of the Premises, or, without terminating this Lease, forthwith terminate the Tenant's right to 11 -11- possession of the Premises and the Landlord may exercise any and all remedies available to it under Iowa law, including but not limited to, the foreclosure of its Landlord's lien against all tangible personal property excepting property that is confidential or otherwise proprietary in nature such as patents, copyrights, trade secrets, software programs, data, and the like of the Tenant maintained within the Building. B. If the Tenant defaults in the prompt and full performance of any other provision of this Lease; and if such default is not remedied or prompt and full performance is not accomplished by Tenant or Tenant has not promptly instituted and is not vigorously pursuing such remedies as are necessary to rectify such default within thirty days after written demand is made by Landlord, or if the Tenant abandons the Premises, then and in any such event, the Landlord may, if the Landlord so elects but not otherwise, forthwith terminate this Lease and the Tenant's right to the Premises or without terminating this Lease, forthwith terminate the Tenant's right to possession of the Premises and exercise any and all other remedies available to the Landlord under Iowa law, including but not limited to the foreclosure of its Landlord's lien as limited above. C. Upon any termination of this Lease, whether by lapse of time or otherwise, or upon termination of the Tenant's right to possession without termination of the Lease, the Tenant shall immediately surrender possession and vacate the Premises and deliver possession thereof to the Landlord, and the Tenant hereby grants to the Landlord full and free license to enter the Premises with or without process of law, and to repossess and remove any and all property therefrom using such force as may be necessary, without being deemed guilty of trespass, eviction, or forcible entry or detainer, and without relinquishing the Landlord's right to rent or any other right given to the Landlord hereunder or by operation of law. D. Any and all property which may be removed from the Premises by the Landlord pursuant to the authority of the Lease or of law, to which the Tenant is or may be entitled may be handled, removed and stored by the Landlord at the risk, cost and expense of the Tenant, provided, however, that Landlord shall use reasonable care and caution to prevent any, 12 -12- damage or loss to such property in removing and storing such property. The Tenant shall pay to the Landlord, upon demand, any and all reasonable expenses incurred in such removal and all reasonable storage charges against such property as long as the same shall be in the Landlord's possession or under the Landlord's control. Any such property of the tenant not removed from the Premises or retaken from storage by the Tenant within 60 days after the end of the term, however, terminated, or any extension thereof, shall be conclusively deemed to have been forever abandoned by the Tenant. E. If Tenant is adjudicated to be bankrupt or is found insolvent in any court of record, or if a receiver or trustee for the benefit of Tenant's creditors is appointed, Landlord at its sole option may terminate this Lease without notice and shall be entitled to damages as provided by law or the terms hereof, provided, however, that such adjudication, finding or appointment is not set aside within 30 days or an appeal therefrom shall not be prosecuted within said 30 days and said appeal is either pending or is concluded with the determination that Tenant is not bankrupt or insolvent. F. If Tenant should default under the terms of this Lease, Landlord shall be entitled to all reasonable costs, charges, expenses, and attorneys' fees incurred by Landlord in connection therewith. 18. Tenant's Remedies Upon Default. If the Landlord is in default in performing any of the terms or provisions of this Lease and the Landlord fails to cure such default within thirty (30) days after receipt of written notice from the Tenant stating with particularity the nature and extent of the default (provided the nature of the default is of a character as to require more than 30 days to cure, the Landlord shall have an additional reasonable period of time to cure such default if the Landlord has commenced to cure such default within 30 days as is diligently pursuing the remedies or steps necessary to cure or correct such default), the Tenant shall have the following rights and remedies, which distinct and separate: A. The Tenant may cure the default, and the Landlord shall reimburse the Tenant, upon demand, for all the Tenant's direct costs; D. The Tenant shall have the right to exercise any and all rights and remedies available to it under applicable laws. 13 -13- 19. Basic Finish. The Landlord agrees to provide Tenant "shell" Premises which will include the following basic interior finish: A. Concrete floor. B. Exterior walls with finish concrete masonry unit face. C. Exterior windows and doors with glazing but no interior trim. D. Warehouse level ambient light (approximately 10 foot candles). E. A 200 amp 3 phase panel at approximately the center of the north wall of the Building with the Tenant, at its own expense, extending electrical service to the Leased Premises. P. Plumbing services will be stubbed to the north wall of the Building with the Tenant, at its own expense, extending plumbing services to the Leased Premises. G. The heating, venting, and air conditioning units will be in place with some main runs but no secondary runs or defusers. H. Exterior landscaping and parking will be in place. Landlord, at its sole cost, shall provide the above and such other improvements as are shown by the plans and specifications prepared by John Rice, R.A. dated August 29, 1994, and by this reference made a part hereof. All interior improvements shall be completed by the Tenant consistent with floor plans, specifications, and descriptions of materials provided by the Tenant to the Landlord, and to be approved by the Landlord. The Tenant shall provide Landlord with plans and specifications for Tenant improvements to be approved by Landlord which improvements shall be substantially completed within 90 days from the date Landlord releases the Premises to Tenant for construction of Tenant improvements. The Landlord agrees to advance the costs of the Tenant's improvements in an amount not to exceed $40,000.00 and the Tenant agrees to repay said $40,000.00 as per the attached amortization schedule with three percent interest per annum (amortization table attached) until all sums are paid in full. The parties agree to execute all necessary notes, security agreements, and financing statements to provide the Landlord with security agreements, and financing statements to provide the Landlord with security for the repayment of said sum. 14 -14- 20. Option to Renew. The Tenant shall have one option to renew the term of this lease for one five-year term, which term shall commence immediately upon the expiration of the original term of this Lease. Said extension shall be upon the same terms and conditions contained herein, except for the rental rate described in this paragraph. In the event the Tenant desires to exercise its option to renew this lease, the Tenant shall notify the Landlord, in writing, not less than 120 days prior to the expiration of the term hereof. During the option period the rent payable shall equal the rent described above, $96,600.00 annually, adjusted by the change in the Bureau of Labor Statistics Consumer Price Index, U.S. City Average, All Urban Consumers (C.P.I.U.) for the month immediately preceding the end of the initial lease term from the index (expressed as a percentage or otherwise) for the month of October 1994. If publication of that index is terminated, a substantially equivalent successor thereto shall be used to determine the adjustment in rent during the option period. 21. Environmental Matters. Tenant shall comply with all applicable environmental rules, regulations, and laws and the Tenant shall indemnify, defend and hold Landlord and the Iowa Research Park Corporation harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, and losses (including reasonable attorneys' fees), arising out of a breach of or violation of any applicable environmental laws. The Tenant shall not cause any hazardous material, as described by state or federal law, to be used, generated, stored, or disposed of on, about, or under or transported to or from the Building, without first receiving the landlord's written consent, which consent may be withheld for any reason and revoked at any time. The Tenant acknowledges that the Landlord shall have no liability with respect to violations of the provisions of this paragraph. 22. Subletting and Assignment. For purposes of this paragraph, any transfer of stock, change in equity ownership within the Tenant or any change of the Tenant's capital structure shall constitute an assignment or subletting, with the exception of changes resulting from public offerings and other changes where less than 49% of the Tenant's equity ownership has been transferred. With the exception stated above, the Tenant shall not assign or sublet this Lease or any part of the Building without the prior written consent of the Landlord, which consent shall not be unreasonably withheld under the following conditions: A. The assignee is at least as creditworthy, based upon financial statements submitted to the Landlord, as the Tenant. B. The assignee shall agree to abide by all the terms and conditions of this Lease. C. There shall be no defaults under the terms of this Lease at that time. 15 -15- Any assignment or subletting by the Tenant contrary to the terms hereof shall have the effect of accelerating all sums due hereunder during the remaining term of this Agreement, and shall constitute a default hereunder, thereby entitling Landlord to pursue any and all remedies available to it. No assignment or sublease shall relieve the Tenant of its obligations hereunder. 23. Notices. All notice to be given by one party to the other party under this Lease shall be given in written form and mailed or delivered to the following: A. To the Landlord, 1400 Highway 13 S.E., Cedar Rapids, Iowa 52403-9803, or to such other person at such other address designated by Notice sent to Tenant and after commencement of the term of the address to which rent is payable. B. To the Tenant at the place set forth in the Schedule until Tenant takes possession of the Building, and thereafter at the Building or at such other address designated by notice to the Landlord. Mailed notices shall be sent by United States mail, Certified or Registered, postage prepaid. Such notice shall be deemed to have been given upon depositing in the United States mail. 24. Quiet Possession. So long as Tenant shall observe and perform the covenants and agreements binding on it hereunder, Tenant shall at all times during the term herein granted peacefully and quietly have and enjoy the possession of the Premises without any encumbrance or hindrance by, from or through the Landlord, its successors or assigns. 25. Miscellaneous. A. Each provision hereof shall extend to and shall, as the case may require, bind and inure to the benefit of the Landlord and the Tenant and their respective heirs, legal representatives and successors, and assigns. B. All amounts owed to the Landlord hereunder, for which the date of payment is not expressly fixed herein, shall be paid within thirty (30) days from the date the Landlord renders statements of account therefore and shall bear interest at the rate of ten (10%) per annum thereafter until paid. C. Tenant shall deliver to Landlord or to its mortgagee, auditors, or prospective purchaser when requested by Landlord, a certificate to the effect that Landlord is not in default therein, or stating specifically any exceptions thereto. Failure to 16 -16- give such a certificate within two (2) weeks after written request shall be conclusive evidence that the Lease is in full force and effect and Landlord is not in default and Tenant shall be estopped from asserting any defaults known to Tenant at that time. D. In the event that all or a substantial portion of the Premises is taken by eminent domain so that the Premises cannot be reasonably used by Tenant for the purposes for which it is demised, then at the option of either party the Lease may be terminated, effective as of the date of the taking. In this event, the entire award shall be paid to and retained by Landlord excepting however, that Tenant may receive therefrom any portion paid on account of its moving expenses. MYRIAD DEVELOPERS, L.C. UROSURGE, INC. an Iowa limited liability company a corporation By /s/ PATRICK H. MURPHY By [SIG] ------------------------------- --------------------------------- LANDLORD TENANT 17 AMORTIZATION TABLE Principal: $40,000.00 Payment $ 1,486.00 Term: 28 Monthly Rate: 0.23% Annual Rate: 3.00% Tot. Interest $ 1,461.32 Start Date: 02/01/98 Tot. Payments $40,000.00
PAYMENT PRINCIPAL EXTRA PRINCIPAL PMT# DATE INTEREST PORTION PRINCIPAL BALANCE ---- ---------- -------- --------- --------- --------- 1 02/01/98 101.92 1,383.08 38,616.92 2 03/01/98 88.87 1,396.13 37,220.79 3 04/01/98 94.84 1,390.16 35,830.63 4 05/01/98 88.35 1,396.65 34,433.98 5 06/01/98 87.74 1,397.26 33,036.72 6 07/01/98 81.46 1,403.54 31,633.18 7 08/01/98 80.60 1,404.40 30,228.78 8 09/01/98 77.02 1,407.98 28,820.80 9 10/01/98 71.06 1,413.94 27,406.86 10 11/01/98 69.83 1,415.17 25,991.69 11 12/01/98 64.09 1,420.91 24,570.78 12 01/01/99 62.61 1,422.39 23,148.39 13 02/01/99 58.98 1,426.02 21,722.37 14 03/01/99 51.78 1,433.22 20,289.15 15 04/01/99 51.70 1,433.30 18,855.85 16 05/01/99 46.49 1,438.51 17,417.34 17 06/01/99 44.38 1,440.62 15,976.72 18 07/01/99 39.39 1,445.61 14,531.11 19 08/01/99 37.02 1,447.98 13,083.13 20 09/01/99 33.34 1,451.66 11,631.47 21 10/01/99 28.68 1,456.32 10,175.15 22 11/01/99 25.93 1,459.07 8,716.08 23 12/01/99 21.49 1,463.51 7,252.57 24 01/01/2000 18.48 1,466.52 5,786.05 25 02/01/2000 14.74 1,470.26 4,315.79 26 03/01/2000 9.93 1,475.07 2,840.72 27 04/01/2000 7.24 1,477.76 1,362.96 28 05/01/2000 3.36 1,362.96 0.00
EX-10.6 12 DEVELOPMENT AND SUPPLY AGREEMENT DATED 4/19/1995 1 EXHIBIT 10.6 DEVELOPMENT AND SUPPLY AGREEMENT This DEVELOPMENT AND SUPPLY AGREEMENT ("Agreement") effective as of April 19, 1995 (the "Effective Date") by and between Urosurge Inc., a Delaware corporation, with offices at Technology Innovation Center, Suite 104, University of Iowa, Iowa City, Iowa 52242-5000, ("Urosurge"), and Interventional Therapeutics Corporation, a California corporation, with offices at 48668 Milmont Drive, Fremont, California, 94538 ("ITC"). BACKGROUND A. Urosurge and ITC desire that ITC perform development work on behalf of Urosurge with respect to Products (as defined herein), on the terms and conditions set forth herein. B. ITC desires to manufacture and sell Products (as defined herein) exclusively for and to Urosurge, and Urosurge is willing to purchase its requirements Products from ITC in the United States, on the terms, and conditions herein. C. Urosurge and ITC have entered into a Regulatory Affairs and Indemnity Agreement of even date herewith (the "Regulatory Affairs Agreement"). NOW, THEREFORE, Urosurge and ITC agree as follows: 1. DEFINITIONS The following terms shall have the following meanings herein: 1.1 "FDA" shall mean the U.S. Food and Drug Administration. 1.2 "GMP" shall mean Good Manufacturing Practices as established by FDA regulations. 1.3 "Intellectual Property Rights" shall mean all current and future worldwide patents and other patent rights, copyrights, trade secrets, and all other intellectual property rights, including without limitation all applications and registrations with respect thereto. 1.4 "Products" shall mean the products to be developed by ITC as set forth in Exhibit A and supplied to Urosurge hereunder. 1.5 "Specifications" shall mean the technical and other specifications for the Products as set forth on Exhibit A. 2 1.6 "Technology" shall mean all tangible and intangible results created in the performance of any Product development, including the Products and all Intellectual Property Rights embodied in the Products. 2. PRODUCT DEVELOPMENT AND PROTOTYPES 2.1 Development. If Urosurge requests modifications to the Product, ITC agrees to develop the modified Products in accordance with specifications, schedules and acceptance procedures to be mutually agreed upon. ITC shall not subcontract any aspect of such development work without Urosurge's prior written consent. ITC shall be responsible for all costs associated with such development work related to the Product described in Exhibit A. If Urosurge requests extensive revisions to the specifications on Exhibit A or requests future product development the parties shall negotiate in good faith the terms on which such development work shall be conducted. 2.2 Supply of Prototypes. ITC shall deliver a prototype Product to Urosurge. Following the acceptance by Urosurge of the prototype, ITC shall provide Urosurge with 300 Products suitable for use in clinical trials at the prices indicated in Exhibit B. 2.3 Ownership. (a) Each party shall retain ownership of all Intellectual Property Rights owned by it as of the Effective Date. ITC shall own all right, title, and interest in the Technology. (b) ITC agrees, during the term of this Agreement, not to use any equipment and tooling purchased by it to enable the manufacture of Products for any purpose other than to fulfill its supply obligations to Urosurge hereunder. 3. PRODUCT MANUFACTURE AND SALE 3.1 Purchase and Sale. Subject to the terms and conditions of this Agreement, ITC agrees to manufacture and sell to Urosurge all Products ordered by Urosurge during the term of this Agreement. Unless otherwise agreed by the parties, ITC shall sell the Products exclusively to Urosurge. 3.2 Exclusive Supplier. During the term of this Agreement, ITC shall be the exclusive supplier of Products to Urosurge for sale in the U.S. ITC shall be the exclusive supplier outside the U.S., as soon as practicable, provided ITC demonstrates to Urosurge that the Product is available outside the U.S. and that the Product is free from U.S. FDA limitations on distribution. Urosurge shall be solely responsible for regulatory clearances deemed necessary by -2- 3 individual foreign countries or regulatory bodies. ITC shall use its best efforts to provide technical information and physical test date as requested by Urosurge in support of such efforts. ITC shall ensure that U.S. and foreign manufacturing facilities conform to European Community (EC) and ISO standards requirements when necessary. Notwithstanding the foregoing, if ITC is unable to supply Urosurge's requirements for Products, Urosurge shall have the right to purchase the Products or any components from any other source without obligation to ITC. In that event, ITC shall license the other source to manufacture the Products at a reasonable customary royalty rate. 3.3 Orders. Urosurge may initiate purchases under this Agreement by telephone contact, telex, fax or by submitting written purchase orders to ITC at the address above. Any purchase order initiated by telephone, fax or telex order must be confirmed within ten (10) working days by a written purchase order. All purchase orders shall contain: (a) purchase order number and date; (b) Product model number; (c) specification number and revision level; (d) part number and revision level; (e) quantity of Product(s) to be purchased; (f) shipping instructions; (g) specified delivery date; (h) destination and billing address (if different from address listed above); (i) the net unit price for the Product(s); and (j) an authorized signature. 3.4 Acceptance. Purchase orders shall be binding when accepted by ITC. ITC shall acknowledge each purchase order in writing within ten (10) business days of receipt. Within such ten (10) day period, ITC may only reject an order which does not conform with the terms and conditions of this Agreement. Notice of rejection must be sent to Urosurge by telex or fax, followed by registered letter. If an order is neither confirmed nor rejected by ITC within ten (10) business days of receipt, it shall be deemed to have been accepted. 3.5 Delivery Date. Unless otherwise agreed in writing by the parties, ITC shall deliver Products no later than five (5) days after the date specified in an accepted purchase order, provided ITC receives such purchase order at least ninety (90) days prior to the specified delivery date. If ITC receives a purchase order less than ninety (90) days before the specified delivery date, ITC shall use reasonable commercial efforts to deliver such Products on the specified delivery date. 3.6 Shipping. All Products subject to this Agreement shall be suitably packed for shipment in containers adequate to insure safe arrival of the goods at Urosurge's designated delivery destination, marked for shipment to the address specified in Urosurge's purchase order or such other address as Urosurge may specify in writing, and delivered to a carrier or forwarding agent chosen by Urosurge. ITC shall mark all containers with necessary lifting, handling and shipping information, purchase order numbers, and date of shipment. An itemized packing list must accompany each shipment. Urosurge will reimburse ITC for all transportation, shipping and insurance expenses. In the event that Urosurge requests special packaging or -3- 4 finishing for any order, Urosurge shall pay the incremental cost for such special packaging or finishing; provided, however, ITC agrees to pack any special documentation regarding the Products requested by Urosurge, at no additional charge. Shipment will be F.O.B., ITC's plant, Fremont, California. All shipping papers and/or invoices shall include the purchase order number and serial numbers of Products shipped. 3.7 Terms and Conditions. This Agreement contains the exclusive terms and conditions which shall apply to all purchases of Products by Urosurge. In ordering and delivering Products, Urosurge and ITC may use their standard forms but nothing in such forms shall amend or modify the terms of this Agreement. In case of conflict between such forms and this Agreement, the terms of this Agreement shall control. 4. CANCELLATION AND RESCHEDULING 4.1 Changes. Urosurge may cancel or reschedule for up to thirty (30) days a purchase order previously accepted by ITC, provided Urosurge provides ITC notice at least sixty (60) days prior to the specified delivery date. ITC will use reasonable commercial efforts to meet all rescheduled delivery dates. Cancellation or rescheduling requests made by Urosurge less than sixty (60) days prior to the specified delivery date may be accepted or rejected at ITC's discretion. 4.2 Delayed Delivery. ITC shall promptly notify Urosurge if any circumstance arises which could result in delivery of a Product after the specified delivery date in an accepted purchase order. If Urosurge has not received Products for which ITC accepted a purchase order more than twenty (20) days following the specified delivery date, Urosurge shall be entitled to cancel such order, in whole or part, without any obligation or liability to ITC. 5. PRICING 5.1 Product Prices. Except as otherwise provided in this Section 51, the price for Products subject to this Agreement shall be those listed on attached Exhibit B. All prices are in United States dollars. The prices as set forth on said Exhibit shall remain in effect and fixed during the term of this Agreement. If during the term of this Agreement reduced prices are put into effect by ITC, such reduced prices shall apply to released but unshipped Products and all subsequent release orders issued hereunder. ITC warrants that the prices charged Urosurge hereunder are not in excess of the lowest prices charged by ITC to other purchasers of the similar Products in like quantities and under similar circumstances. 5.2 Taxes. All prices described herein are exclusive of federal, state and local excise, sales, use and similar taxes. Urosurge shall be liable for and shall pay all applicable -4- 5 taxes invoiced by ITC, unless Urosurge provides ITC with a properly executed tax exemption certificate prior to delivery. 6. PAYMENT 6.1 Payment. ITC shall issue Urosurge individual invoices for each Product shipment. Each such invoice shall separately list the price of each Product, taxes, transportation, shipping and insurance charges, and any special packaging or finishing charges. Urosurge shall pay each invoice within thirty (30) days of the date of such invoice or the delivery date, whichever is later. Payment of an invoice shall not constitute implied acceptance of Products. 6.2 Payment Method. Urosurge shall make payment to ITC for Products by check or by wire transfer to an account specified by ITC. 6.3 Overdue Payments. Payments more than thirty (30) days overdue will be subject to a service charge of one percent (1%) per month or the maximum amount allowed by law, whichever is less. 7. FORECASTS On a quarterly basis thereafter Urosurge shall provide ITC with a forecast of Urosurge's anticipated quarterly requirements of Products for the following twelve (12) month period commencing on the date of such forecast. It is understood that such forecast is not binding but Urosurge shall use all reasonable efforts to make each forecast as accurate as possible, particularly as it pertains to the six (6) months immediately following the date of such forecast. 8. PRODUCT QUALITY 8.1 Quality Assurance. ITC agrees to assure the quality level of Products through the use of a formal quality assurance program reasonably acceptable to Urosurge. Such program shall require ITC to prepare and maintain written records sufficient to enable Urosurge to trace the history of each Product. Pursuant to such program, ITC shall place serial numbers on all Products to enable the identification and tracing of Products. During the term of the Agreement, Urosurge shall have the right to audit such quality assurance program, at its expense, during regular business hours. 8.2 Inspection. ITC shall conduct a final inspection and quality control test on each Product prior to shipment to verify that such Products meet and conform with the Specifications. -5- 6 Each shipment of Products shall be accompanied by a quality assurance analytical data sheet (the "Q.A. Data Sheet"). 8.3 Presence at Facility. During the first six (6) months during which each Product is commercially manufactured for Urosurge and thereafter upon reasonable written notice to ITC, Urosurge shall have the right to have its representatives visit, from time to time, the facility at which such Product is being manufactured, to verify ITC's compliance with the warranties in Section 10 below. 8.4 Inspection and Acceptance. Urosurge shall have the right and ITC shall cooperate to the fullest extent practicable in giving Urosurge an opportunity to inspect the Products at all times and places including during the period of manufacture. However, no inspection or test made prior to final inspection and acceptance at Urosurge's facility shall relieve ITC of responsibility for defects or other failure to supply conforming Products. Final inspection and acceptance shall be at Urosurge's facility, and shall be performed within a reasonable time after receipt of the Products. 8.5 Latent Defects. It is understood that Products may have defects ("defects" meaning that such Products fail to conform to the applicable Specifications or otherwise fail to conform to the warranties given by ITC herein) which would not be discoverable upon reasonable physical inspection or testing (the "Latent Defects"). As soon as either Urosurge or ITC becomes aware of a Latent Defect in any Product it shall immediately notify the other party and, at Urosurge's election, such Products shall be deemed non-conforming to the Specifications and rejected as of the date of such notice. 9. PRODUCT CHANGES 9.1 Design Modifications. ITC shall have the right to make design modifications to the Products to the extent such modifications do not affect the form, fit, function, safety, reliability, or performance of a Product; provided, however, that ITC shall notify Urosurge of any such modifications that materially affect the form, fit, function, safety, reliability, or performance of the Products. Within twenty (20) days after receiving any such notice from ITC, Urosurge may disapprove of such design modifications. If Urosurge fails to provide ITC with notice during such twenty (20) day period, Urosurge shall be deemed to approve such modifications. 9.2 Requested Modifications. Urosurge may request changes in the design or operation of the Products relating to improvements, or the reliability or serviceability of the Products. The parties shall discuss such modifications in good faith; provided, however, it is understood that ITC shall have no obligation to make such modifications to the Products. -6- 7 9.3 Mandatory Modifications. ITC shall make any changes to Products required to comply with official requirements (including governmental regulation or industrial standards). With respect to products changed to comply with such requirements that have been ordered but not yet delivered, an appropriate adjustment of the delivery date shall be agreed by the parties. 9.4 Validation Units. In the event ITC proposes any change which affecting form, fit, function, safety, reliability or performance of a Product, ITC, at its expense, shall ship Urosurge ten (10) validation units incorporating all such changes. Within ninety (90) days after receipt of such validation unit, Urosurge shall notify ITC whether it approves or disapproves the proposed changes. Failure by Urosurge to advise ITC that it disapproves a proposed change within such ninety (90) days shall constitute Urosurge approval of such proposed changes; provided, however, ITC shall not make the proposed changes until the end of such ninety (90) day period or until Urosurge provides notice of its approval of such changes, whichever occurs earlier. 10. PRODUCT WARRANTY 10.1 Express Warranty. ITC hereby warrants to Urosurge that: (a) on the date of shipment, all Products sold by ITC to Urosurge hereunder are new, will comply with the Specifications for such Products and any further specifications, standards and/or criteria agreed upon by the parties, conform fully with the Q.A. Data Sheet provided for the particular Product according to Section 8.2 hereof, and do not contain Latent Defects; (b) Products purchased hereunder shall be free from defects in material and workmanship for a period of twelve (12) months from the date of shipment to Urosurge; (c) all of the Products sold hereunder shall have been manufactured, packaged and stored and shipped in conformance with all applicable current Good Manufacturing Practices which are in force or hereinafter adopted by the FDA or any successor agency thereto; (d) title to all Products sold hereunder shall pass to Urosurge as provided herein free and clear of any security interest, lien, or other encumbrance; (e) ITC shall meet Urosurge's required shipment and/or delivery schedule(s); and -7- 8 (f) the Products sold hereunder shall have been manufactured, packaged and stored in facilities which are approved by the FDA at the time of such manufacture, packaging and storage, to the extent such approval is required by law. 10.2 Effect of Warranty. (a) If any Products purchased hereunder do not meet the warranties specified herein or otherwise applicable, Urosurge may, at its option (i) require ITC to replace or correct at no cost to Urosurge any defective or nonconforming Products, (ii) return any nonconforming Products to ITC at ITC's expense and recover from ITC the full market price thereof or (iii) replace or correct the defective or nonconforming Products itself and charge ITC with the cost of such correction. In the event that ITC fails to meet Urosurge's shipment and/or delivery schedules Urosurge may, at its option, (i) procure equivalent or similar replacement Products in a commercially reasonable manner from an alternate source, charging ITC for the price differential, if any, or (ii) if an alternate source is not available, recover from ITC all financial losses of any nature resulting therefrom. The foregoing remedies are in addition to all other remedies at law or in equity or under this Agreement and shall not be deemed to be exclusive thereof. All warranties and remedies for breach thereof available to Urosurge under this Agreement shall also be available to Urosurge's customers. (b) No inspection or acceptance, approval or acquiescence by Urosurge with respect to ITC's Products shall relieve ITC from any portion of its warranty obligation, nor shall waiver by Urosurge of any specification requirement for one or more items constitute a waiver of such requirements for remaining items unless expressly agreed by Urosurge in writing. 10.3 Exclusions. The express warranties set forth in Section 10.1 above shall not apply to defects to a Product which result from normal wear and tear or improper, unqualified or unauthorized repair of Products. 10.4 Disclaimer. EXCEPT FOR THE ABOVE EXPRESS WARRANTIES, ITC MAKES NO WARRANTIES WITH RESPECT TO THE PRODUCTS, EXPRESS, IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF THIS AGREEMENT, AND ITC SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 10.5 Warranty Procedures. Subject to Section 10.2 above, Urosurge may send Products with defects covered by the foregoing warranties to ITC's repair center at an address specified by ITC from time to time. Urosurge shall request authorization from ITC prior to the return of each defective Product for replacement by ITC. Upon such request, ITC shall provide Urosurge with a Material Return Authorization (MRA) tracer number to be prominently -8- 9 displayed on the shipping container for the defective Product. Once ITC authorizes the return of any defective Product, Urosurge shall ship such Product to the repair facility, freight prepaid, in its original shipping container or in a container of equivalent protective constitution. If such defective Product is received by ITC during the applicable warranty period, ITC shall, and shall ship the replaced Product to Urosurge, freight prepaid. 11. CONFIDENTIALITY 11.1 Confidential Information. Pursuant to this Agreement, each party may disclose to the other certain proprietary technical or business information or materials ("Confidential Information"). Each party agrees that it will not use any Confidential Information received from the other except for the purposes of this Agreement and agrees not to disclose any such Confidential Information to third parties, and to maintain and follow reasonable procedures to prevent unauthorized disclosure or use of the Confidential Information and to prevent it from falling into the public domain or the possession of unauthorized persons. Each party agrees to disclose to its employees only such Confidential Information as is necessary to each employee's responsibilities in performing the acts allowed by this Agreement. Each party shall immediately advise the disclosing party of any disclosure, loss or use. of Confidential Information in violation of this Agreement. Each party agrees that for a period of five (5) years after the termination of this Agreement it will hold the Confidential Information disclosed to it hereunder in strict confidence and not disclose to any third party any such Confidential Information except as expressly agreed upon in writing. 11.2 Exclusions. Confidential Information shall not include information: (a) that becomes lawfully known or available to the receiving party from a source other than the disclosing party without breach of this Agreement; (b) that was already known to the receiving party, as shown by written records, before its disclosure by the disclosing party; (c) developed independently by the receiving party without the use or consideration of or reference to the Confidential Information; (d) that is within, or later falls within, the public domain without breach of this Agreement; (e) publicly disclosed with the written approval of the disclosing party; or -9- 10 (f) disclosed pursuant to the requirement or demand of a lawful governmental or judicial authority, but only to the extent required by operation of law, regulation or court order. 12. REPRESENTATIONS AND WARRANTIES 12.1 Urosurge. Urosurge represents and warrants on a continuing basis that: (i) it has the right to enter this Agreement, is a corporation duly organized, validly existing, and in good standing under the laws of Delaware, (ii) has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder, (iii) has by all necessary corporate action duly and validly authorized the execution and delivery of this Agreement and the performance of its obligations hereunder, and (iv) has not and will not during the term of this Agreement enter into any agreement which conflicts with or which will result in any breach of, or constitute a default under, any note, security agreement, commitment, contract or other agreement, instrument or undertaking to which Urosurge is a party. 12.2 ITC. ITC represents and warrants on a continuing basis that: (i) ITC has the right to enter this Agreement, is a corporation duly organized, validly existing and in good standing under the laws of the State of California, (ii) has the power and authority, to execute and deliver this Agreement and to perform its obligations hereunder, (iii) it has by all necessary corporate action duly and validly authorized the execution and delivery of this Agreement and the performance of its obligations hereunder, and (iv) it has not and will not during the term of this Agreement enter into any agreement which conflicts with or which will result in any breach of, or constitute a default under, any note, security agreement, commitment, contract or other agreement, instrument or undertaking to which ITC is a party. 12.3 Effect of Representations and Warranties. It is understood that if the representations and warranties under this Section 12 are not true and accurate at any time during the term of the Agreement and the nonbreaching party (i.e., ITC or Urosurge, as the case may be) incurs any liabilities, costs or other expenses as a result of such falsity, the breaching party shall indemnify and hold harmless the other party and its affiliates for any such liabilities, costs or expenses incurred, in accordance with Section 6 of the Regulatory Affairs Agreement. 13. TERM AND TERMINATION 13.1 Term. This Agreement shall commence on the Effective Date and shall have a term of five (5) years unless terminated earlier as provided herein; provided, however, if Urosurge does not receive FDA approval for the sale of the Product within four (4) years of the Effective Date of the Agreement, the Agreement shall automatically be extended for one additional two (2) year period. -10- 11 13.2 Termination for Cause. Either party may, without penalty, terminate this Agreement or cancel any purchase order or portion thereof effective upon written notice to the other party in the event of one of the following events: (a) The other party materially breaches this Agreement or the Regulatory Affairs Agreement, including, without limitation, by failing to deliver conforming Products on the requested delivery dates set forth on Urosurge's purchase orders, and such breach remains uncured for thirty (30) days following written notice of breach by the nonbreaching party, unless such breach is incurable in which event termination shall be immediate upon receipt of written notice; (b) Any cause as set forth in Section 15.6 delays the other party's performance for more than sixty (60) days; or (c) A petition for relief under any bankruptcy statute is filed by or against the other party, or the other party makes an assignment for the benefit of creditors, or a receiver is appointed for all or a substantial part of the other party's assets, and such petition, assignment or appointment is not dismissed or vacated within sixty (60) days. 13.3 Effect of Termination or Expiration. (a) In the event of a termination or expiration of this Agreement the provisions of this Agreement shall continue to apply to all purchase orders accepted by ITC prior to the effective date of such termination or expiration. Termination or expiration of this Agreement shall not relieve or release either party from making payments which obligation has accrued prior to such termination. (b) In the event of the default by ITC, Urosurge may take any reasonable steps which Urosurge deems appropriate and which are authorized by law or this Agreement to obtain the benefit of its bargain pursuant to this Agreement in addition to or in lieu of the termination procedure set forth in this Paragraph. 13.4 Survival. Sections 10, 11, 12, 13, 14 and 15 shall survive the termination of this Agreement for any reason. 14. DISPUTE RESOLUTION If a dispute arises between the parties relating to the interpretation or performances of this Agreement or the grounds for the termination thereof, representatives of the parties with decision-making authority shall meet to attempt in good faith to negotiate a resolution of the -11- 12 dispute prior to pursuing other available remedies. If within thirty (30) days after such meeting the parties have not succeeded in negotiating a resolution of the dispute, such dispute shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association ("AAA"), by one (1) arbitrator in Iowa City, Iowa. Such arbitrator shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrator will be instructed to prepare and deliver a written, reasoned opinion stating his decision within thirty (30) days of the completion of the arbitration. Such arbitration shall be concluded within nine (9) months following the filing of the initial request for arbitration. The parties shall bear the costs of arbitration equally and shall bear their own expenses, including professional fees. The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. 15. MISCELLANEOUS 15.1 Governing Law . This Agreement shall be governed by the laws of Iowa, without reference to principles of conflicts of laws. 15.2 Compliance with Laws. ITC shall perform this Agreement in compliance with all applicable federal, state and local laws, rules and regulations. ITC shall indemnify Urosurge and its customers for loss or damage sustained because of ITC's noncompliance with any such law, rule or regulation. ITC shall furnish to Urosurge any information requested or required by Urosurge during the term of this Agreement or any extensions hereof to enable Urosurge to comply with the requirements of any U.S. or foreign federal, state and/or government agency. 15.3 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES OF THE OTHER PARTY ARISING OUT OF THIS AGREEMENT, UNDER ANY THEORY OF LIABILITY. 15.4 Urosurge Trademarks. Urosurge, in its sole discretion, may select the trademarks, trade names and trade dresses to be used in connection with each Product and all such trademarks, trade names and trade dresses shall be and become the exclusive property of Urosurge. ITC shall not adopt any trademark, trade name or trade dress that may be confusingly similar therewith. ITC shall acquire no interest or rights in and to any trademarks, trade names and trade dresses selected or used by Urosurge. Urosurge shall have the right to remove any ITC trademarks incorporated in marked on, or fixed to the Products. -12- 13 15.5 No Conflicting Obligations. ITC agrees not, to engage in any work or services on its behalf or for any other party which would conflict with its obligations under this Agreement. 15.6 Force Majeure. Neither party shall be held responsible for any delay or failure in performance hereunder caused by strikes, embargoes, unexpected government requirements, civil or military authorities, acts of God, or by the public enemy or other causes reasonably beyond such party's control and without such party's fault or negligence. 15.7 Independent Contractors. ITC shall perform its obligations hereunder as an independent contractor and shall be solely responsible for its own financial obligations. Nothing contained herein shall be construed to imply a joint venture or principal and agent relationship between the parties, and neither party shall have any right, power or authority to create any obligation, express or implied, on behalf of the other in connection with the performance hereunder. ITC will not act as an agent of Urosurge and ITC's employees shall not be deemed to be employees of Urosurge for the purpose of any employee benefit program, tax withholding, FICA taxes, unemployment benefits or otherwise. 15.8 Confidentiality of Agreement. Except as required by law, ITC shall not disclose the contents or any term of this Agreement to any person or entity without the prior written consent of Urosurge. 15.9 Further Assurances. At any time or from time to time on and after the date of this Agreement, ITC shall at the request of Urosurge (i) deliver to Urosurge such records, data or other documents consistent with the provisions of this Agreement, and (ii) execute, and deliver or cause to be delivered, all such assignments, consents, documents or further instruments of transfer or license, and (iii) take or cause to be taken all such other actions, as Urosurge may reasonably deem necessary or desirable in order for Urosurge to obtain the full benefits of this Agreement and the transactions contemplated hereby. 15.10 Notices. All notices or reports permitted or required under this Agreement shall be in writing and shall be delivered in person, mailed by first class mail, postage prepaid, (registered or certified), or sent by telecopy, to the party to receive the notice at the address set forth at the beginning of this Agreement or such other address as either party may specify in writing. All such notices shall be effective upon receipt. 15.11 No Use of Names. Neither party will use the name of the other in its advertising or promotional materials without the prior written consent of such other party. -13- 14 15.12 Assignment. ITC shall not assign this Agreement or any rights hereunder without the prior written consent of Urosurge. Urosurge may assign this Agreement without restrictions. 15.13 Severability. If any provision(s) of this Agreement shall be held invalid, illegal or unenforceable by a court of competent jurisdiction, this Agreement shall continue in full force and effect without said provision. 15.14 Modification; Waiver. This Agreement may not be altered, amended or modified in any way except by a writing signed by both parties. The failure of a party to enforce any provision of the Agreement shall not be construed to be a waiver of the right of such party to thereafter enforce that provision or any other provision or right. 15.15 Entire Agreement and Indemnity. This Agreement, the exhibits hereto and the Regulatory Affairs Agreement represent and constitute the entire agreement between the parties and supersede all prior agreements and understandings with respect to the matters covered by this Agreement. This Agreement may only be amended in writing signed by both parties. UROSURGE INTERVENTIONAL THERAPEUTICS CORPORATION By: /s/ DAVID MAUPIN By: /s/ BILL DORMANDY ---------------------------- ---------------------------- Print Name: DAVID MAUPIN Print Name: BILL DORMANDY -------------------- -------------------- Title: PRES/CEO Tide: PRESIDENDT ------------------------- -------------------------- -14- 15 EXHIBIT A SPECIFICATIONS [TO BE DETERMINED BY MUTUAL AGREEMENT] -15- 16 EXHIBIT B Product Prices The following prices apply based on the cumulative number of units ordered annually:
No. of Units Price per Unit ------------ -------------- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
[*] Confidential treatment requested. 17 REGULATORY AFFAIRS AND INDEMNITY AGREEMENT This REGULATORY AFFAIRS AND INDEMNITY AGREEMENT ("Agreement") is effective as of August 30, 1995 (the "Effective Date") by and between Urosurge Inc., a Delaware corporation, with offices at 2660 Crosspark Road, Coralville, Iowa 52241, ("Urosurge"), and Interventional Therapeutics Corporation, a California corporation, with offices at 48668 Milmont Drive, Fremont, California, 94538 ("ITC"). BACKGROUND A. Urosurge and ITC have entered into an agreement under which ITC will manufacture and sell products to Urosurge ('Products") on the terms and conditions of a Development and Supply Agreement of even date herewith (the "Supply Agreement"). B. Urosurge and ITC wish to set forth their respective obligations regarding regulatory affairs associated with the Supply Agreement. NOW, THEREFORE, Urosurge and ITC agree as follows: 1. General Obligations. Each party agrees to conduct its activities pursuant to the Supply Agreement in accordance with state and federal regulatory laws as applied to clinical trial protocols, device commercialization and the protection of patient health, welfare and safety. 2. Notification. Each party agrees to notify the other party in a timely manner of (A) (i) any adverse event, technical or clinical which may involve a Product and (ii) any FDA communications or inquiries pertaining to adverse events or adverse actions by FDA, pertaining to a Product. Urosurge agrees to monitor the use of the Products in accordance with state and federal regulatory laws, and in a manner to ensure adequate and timely data collection in order to identify, quantify and correct any anticipated or unanticipated adverse events. In the event Urosurge determines a recall is necessary, ITC will cooperate fully with Urosurge in effecting the recall. 3. Progress Reports. Urosurge agrees to provide timely copies of United States Food and Drug Administration ("FDA") progress reports concerning clinical trial protocols involving the Products to ITC at the time such reports are submitted to the FDA. Urosurge shall provide ITC with any regulatory filings made with respect to the Products. 4. FDA Inquiries. Each party agrees to notify the other in the event of any FDA inspection, notification or communication which may involve the Products. ITC agrees to cooperate with Urosurge in responding to. FDA queries regarding the Products. 18 9.5 Severability. If any provision(s) of this Agreement shall be held invalid, illegal or unenforceable by a court of competent jurisdiction, this Agreement shall continue in full force and effect without said provision. 9.6 Modification, Waiver. This Agreement may not be altered, amended or modified in any way except by a writing signed by both parties. The failure of a party to enforce any provision of the Agreement shall not be construed to be a waiver of the right of such party to thereafter enforce that provision or any other provision or right. 9.7 Entire Agreement. This Agreement and the Supply Agreement represent and constitute the entire agreement between the parties with respect to the subject matter thereof and supersede all prior agreements and understandings with respect to the matters covered by this Agreement. This Agreement may only be amended in writing signed by both parties. Urosurge, Inc. Interventional Therapeutics Corporation /s/ DAVID MAUPIN /s/ JULIE D. BELL - ------------------------------- ------------------------------- BY: BY: Julie D. Bell VP, Regulatory Affairs & Risk Pres/CEO Management - ------------------------------- ------------------------------- TITLE: TITLE: 9/12/95 August 30, 1995 - ------------------------------- ------------------------------- DATE DATE: 4 EX-10.7 13 LICENSE AGREEMENT 1 Exhibit 10.7 LICENSE AGREEMENT TABLE OF CONTENTS PREAMBLE ARTICLES: I DEFINITIONS II GRANT III DUE DILIGENCE IV ROYALTIES V REPORTS AND RECORDS VI PATENT PROSECUTION VII INFRINGEMENT VIII PRODUCT LIABILITY IX EXPORT CONTROLS X NON-USE OF NAMES XI ASSIGNMENTS XII ARBITRATION XIII TERMINATION XIV PAYMENTS, NOTICES AND OTHER COMMUNICATIONS XV MISCELLANEOUS PROVISIONS This Agreement is made and entered into this 14th day of October, 1993 (the effective Date), by and between CHILDREN'S MEDICAL CENTER CORPORATION, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts and having its principal office at 300 Longwood Avenue, Boston, Massachusetts, 02115, U.S.A. (hereinafter referred to as CMCC), and Medical Science Partners a partnership duly organized under the laws of the Commonwealth of Massachusetts and having its principal office at 68 Harvard Street, Brookline, MA 02146 (hereinafter referred to as LICENSEE). 2 WITNESSETH WHEREAS, CMCC is the owner of certain "Patent Rights" (as later defined herein) relating to CMCC Case No. 263 Treatment of Vesico-ureteral Reflux by Drs. Anthony Atala and James Mandell and has the right to grant licenses under said Patent Rights, (subject only to a royalty-free, nonexclusive license heretofore granted to the United States Government); WHEREAS, CMCC desires to have the Patent Rights utilized in the public interest and is willing to grant a license thereunder; WHEREAS, LICENSEE has represented to CMCC, to induce CMCC to enter into this Agreement, that LICENSEE is capable of the development, production, manufacture, marketing and sale of products similar to the "Licensed Product(s)" (as later defined herein) and/or the use of the "Licensed Process(es)" (as later defined herein) and that it shall commit itself to a thorough, vigorous and diligent program of exploiting the Patent Rights so that public utilization shall result therefrom; and WHEREAS, LICENSEE desires to obtain a license under the Patent Rights upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein, the parties hereto agree as follows: - 2 - 3 ARTICLE I -- DEFINITIONS For the purpose of this Agreement, the following words and phrases shall have the following meanings: 1.1 "LICENSEE" shall mean Medical Science Partners , any Subsidiary or joint venture of Medical Science Partners , or any entity formed by Medical Science Partners. 1.2 "Subsidiary" shall mean any corporation, company or other entity more than fifty percent (50%) of whose voting stock is owned or controlled directly or indirectly by LICENSEE. 1.3 "Patent Rights" shall mean all of the following CMCC intellectual property: a. The United States and foreign patents and/or patent applications listed in Appendix A; b. United States and foreign patents issued from the applications listed in Appendix A and from divisionals and continuations of these applications; c. Claims of U.S. and foreign continuation-in-part applications, and of the resulting patents, which are directed to subject matter specifically described in the U.S. and foreign applications listed in Appendix A; d. Claims of all later filed foreign patent applications, and of the resulting patents, which are directed to subject matter specifically described in the United States patent and/or patent applications described in (a) , (b) , or (c) above; e. Any reissues of United States patents described in (a), (b), (c), or (d) above. 1.4 A "Licensed Product" shall mean any product or part thereof which: a. Is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Patent Rights in the country in which any Licensed Product is made, used, or sold; b. Is manufactured by using a process which is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Patent Rights in the country in which any Licensed Process is used or in which the Licensed Product is used or sold. 1.5 A "Licensed Process" shall mean any process which is covered in whole or in part by an issued, unexpired - 3 - 4 claim or a pending claim contained in the Patent Rights. 1.6 "Net Sales Price" shall mean LICENSEE's billings for Licensed Products produced hereunder less the sum of the following: a. Discounts allowed in amounts customary in the trade; b. Sales, tariff duties and/or use taxes directly imposed and with reference to particular sales; c. Outbound transportation prepaid or allowed; and d. Amounts allowed or credited on returns. No deductions shall be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by LICENSEE and on its payroll, or for cost of collections. Licensed Products shall be considered "sold" when bills or invoices are collected. 1.7 "Field of Use" shall mean the use of the detachable balloon catheter for the treatment of vesico-ureteral reflux, urinary incontinence, and contraceptives. ARTICLE II -- GRANT 2.1 CMCC hereby grants to LICENSEE the exclusive worldwide right and license to make, have made, use, lease and sell the Licensed Products, and to practice the Licensed Processes for the Field of Use to the end of the term for which the Patent Rights are granted unless sooner terminated according to the terms hereof; provided however, CMCC shall retain a royalty-free, nonexclusive, irrevocable license to practice the Patent Rights for research purposes only. 2.2 LICENSEE agrees that Licensed Products leased or sold in the United States shall be manufactured substantially in the United States. 2.3 In order to establish exclusivity for LICENSEE, CMCC hereby agrees that it shall not grant any other license to make, have made, use, lease and/or sell Licensed Products or to utilize Licensed Processes for the Field of Use during the period of time in which this Agreement is in effect. 2.4 LICENSEE shall have the right to enter into sublicense agreements sublicensing any or all of the rights, privileges, and licenses granted hereunder. - 4 - 5 2.5 LICENSEE shall have the right to enter into sublicensing agreements for the rights, privileges, and licenses granted hereunder. LICENSEE agrees that any sublicense agreement to which it shall be a party and which shall relate to the rights, privileges or licenses granted hereunder, shall contain a statement setting forth the date (if any) upon which LICENSEE's exclusive rights, privileges and licenses hereunder shall terminate. LICENSEE agrees to provide to CMCC notice of any and all sublicenses granted under this Agreement, which notice shall include a copy of the sublicense agreement and the sublicensee's address. CMCC agrees that if LICENSEE has provided notice to CMCC that LICENSEE has granted a sublicense, then in the event CMCC terminates this Agreement for any reason as provided hereunder, CMCC shall, no less than thirty (30) days prior to the effective date of termination of this Agreement, give such sublicensee written notice of said termination at the address specified by LICENSEE in LICENSEE's notice to CMCC of the sublicense. CMCC hereby agrees that, at the request of the sublicensee as set forth below, provided the sublicensee is not in breach under its sublicense, CMCC shall grant to such sublicensee license rights and terms equivalent to the sublicense rights and terms which the sublicense shall have granted to said sublicensee; provided that the sublicensee shall remain a sublicensee under this Agreement for a period of at least sixty (60) days following receipt of notice from CMCC. Such right shall be exercisable upon written notice from the sublicensee to CMCC during said sixty (60) day period wherein the sublicensee: (i) reaffirms the terms and conditions of its sublicense and the terms and conditions of this Agreement appearing in Articles II, V, VII, VIII, IX, X, XI, XII, XIII, XIV and XV (hereafter referred to collectively as the "Pertinent Terms"); (ii) agrees to abide by all of the terms and conditions of its sublicense agreement and the requirements of the Pertinent Terms of this Agreement; provided that in the event of any inconsistency or other conflict between the sublicense and the Pertinent Terms of this Agreement, the Pertinent Terms of this Agreement shall control and to discharge directly to CMCC (aa) all obligations of sublicensee which sublicensee is obligated under the sublicense agreement to discharge; and (bb) the obligations of LICENSEE arising after the date of the new agreement between CMCC and the sublicencee which LICENSEE would have been obligated to discharge under the Pertinent Terms of this Agreement if this Agreement had not been terminated and (iii) acknowledges that CMCC - 5 - 6 shall have no obligations to the sublicensee other than its obligations set forth in this Agreement with regard to LICENSEE. 2.6 All sublicenses granted by LICENSEE hereunder shall include a requirement that the sublicensee use its good faith and diligent efforts to bring the subject matter of the sublicense into commercial use as quickly as is reasonably possible. In addition, LICENSEE agrees that any sublicense granted by it shall provide that the obligations to CMCC of Articles II, V, VII, VIII, IX, X, XII, XIII, and XV of this Agreement shall be binding upon the sublicensee as if it were a party to this Agreement. LICENSEE further agrees to attach copies of these Articles to sublicense agreements. 2.7 LICENSEE agrees to forward to CMCC a copy of any and all fully executed sublicense agreements, and further agrees to forward to CMCC annually a copy of such reports received by LICENSEE from its sublicensees during the preceding twelve (12) month period under the sublicenses as shall be pertinent to a royalty accounting under said sublicense agreements. 2.8 LICENSEE shall not receive from sublicensees anything of value in lieu of cash payments based upon payment obligations of any sublicense under this Agreement, without the express prior written permission of CMCC. 2.9 The license granted hereunder shall not be construed to confer any rights upon LICENSEE by implication, estoppel or otherwise as to any technology not specifically set forth in Appendix A hereof. ARTICLE III -- DUE DILIGENCE 3.1 LICENSEE shall use reasonable efforts to bring one or more Licensed Products or Licensed Processes to market through a thorough, vigorous and diligent program for exploitation of the Patent Rights. In connection with such reasonable efforts LICENSEE agrees to satisfy the following due diligence milestones: a. Commence human clinical trials by [*] if LICENSEE determines that a 510K should be filed for the licensed products or by [*] if [*] Confidential treatment requested. -6- 7 LICENSEE determines that a PMA should be filed for the Licensed Products. b. If LICENSEE determines that a 510K should be filed with the FDA then LICENSEE shall file the 510K by October 1997 or if LICENSEE determines that a PMA should be filed for the Licensed Products such PMA shall be filed by October 1998. LICENSOR'S sole remedy for LICENSEE'S failure to use its reasonable efforts under this Section 3.1 shall be termination of this Agreement or conversion of the license to a non-exclusive license. ARTICLE IV -- ROYALTIES 4.1 For the rights, privileges and license granted hereunder, LICENSEE shall pay to CMCC in the manner hereinafter provided to the end of the term of the Patent Rights or until this Agreement shall be terminated as hereinafter provided: a. A license issue fee of [*] which said license issue fee shall be deemed earned and due: (i) [*] immediately upon the execution of this Agreement (ii) [*] one year from the effective signing date of this Agreement (iii) [*] two years from the effective signing date. b. A royalty based on the Net Sales Price of the Licensed Products or Licensed Processes, leased or sold by LICENSEE or a joint venture in which LICENSEE is involved, which said royalty shall be [*] while patent applications are still pending, and [*] as soon as at least one patent in the Patent Rights has been issued in the country where the royalty obligation is accruing, whether or not other patent applications are still pending in that country. If no patent issues in a specified country, royalty shall be [*] in that country only. C. Where sublicenses have been granted, LICENSEE shall pay to CMCC [*] of any and all sublicensing fees, signing fees, milestone payments and royalties received from sublicensees, provided that CMCC shall receive royalties not less than [*] of the Net Sales Price of the Licensed Products, or Licensed Processes, leased or sold by LICENSEE's sublicensees. - 7 - [*] Confidential treatment requested. 8 d. In the event that LICENSEE participates in the formation of a company to commercialize the Patent Rights, LICENSEE shall cause such company to issue to CMCC common stock of such company such that CMCC's percentage ownership interest therein (on a fully diluted basis) shall not be less than [*] until such time as [*] has been invested in such company (CMCC to enjoy no anti-dilution protection thereafter). 4.2 No multiple royalties shall be payable because any Licensed Product, its manufacture, use, lease or sale are or shall be covered by more than one Patent Rights Patent Application or Patent Rights Patent licensed under this Agreement. 4.3 Royalty payments shall be paid in United States dollars in Boston, Massachusetts, or at such other place as CMCC may reasonably designate consistent with the laws and regulations controlling in any foreign country. If any currency conversion shall be required in connection with the payment of royalties hereunder, such conversion shall be made by using the exchange rate prevailing at the Bank of Boston on the last business day of the calendar quarterly reporting period to which such royalty payments relate. ARTICLE V -- REPORTS AND RECORDS 5.1 LICENSEE shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to CMCC hereunder. Said books of account shall be kept at LICENSEE's principal place of business or the principal place of business of the appropriate Division of LICENSEE to which this Agreement relates. Said books and the supporting data shall be open at all reasonable times for five (5) years following the end of the calendar year to which they pertain, to the inspection of CMCC or its agents for the purpose of verifying LICENSEE's royalty statement or compliance in other respects with this Agreement. 5.2 LICENSEE, within thirty (30) days after March 31, June 30, September 30 and December 31, of each year, shall deliver to CMCC true and accurate reports, giving such particulars of the business conducted by - 8 - [*] Confidential treatment requested. 9 (i) LICENSEE and (ii) and within forty-five (45) days of such dates its sublicensees during the preceding three-month period under this Agreement as shall be pertinent to a royalty accounting hereunder. These shall include at least the following: a. Number of Licensed Products manufactured and sold. b. Total collections for Licensed Products sold. c. Accounting for all Licensed Products sold. d. Deductions applicable as provided in Paragraph 1.6 e. Total royalties due. f. Names and addresses of all sublicensees of LICENSEE. g. Licensed Products manufactured and sold to the United States Government. (No royalty obligations shall arise due to use by, for or on behalf of the United States Government in view of the royalty-free, nonexclusive license heretofore granted to the United States Government.) 5.3 With each such report submitted, LICENSEE shall pay to CMCC the royalties due and payable under this Agreement. If no royalties shall be due, LICENSEE shall so report. 5.4 On or before the ninetieth (90th) day following the close of LICENSEE's fiscal year, LICENSEE shall allow an independent certified public accountant to review LICENSEE's financial statements, for the preceding fiscal year including, at a minimum, a Balance Sheet and an Operating Statement. In addition, until LICENSEE brings one or more Licensed Products or Licensed Processes to market, CMCC shall have the right to send a representative, reasonably acceptable to LICENSEE, to observe board meetings of the LICENSEE entity attempting to bring Licensed Products or Licensed Processes to market. 5.5 The royalty payments set forth in this Agreement shall, if overdue, bear interest until payment at a per annum rate of [*] above the prime rate in effect at the Bank of Boston on the due date. The payment of such interest shall not foreclose CMCC from exercising any other rights it may have as a consequence of the lateness of any payment. - 9 - [*] Confidential treatment requested. 10 ARTICLE VI -- PATENT PROSECUTION 6.1 The prosecution, filing and maintenance of all Patent Rights Patents and Applications shall be the primary responsibility of LICENSEE once the license has been executed; provided, however, CMCC shall have reasonable opportunities to advise LICENSEE and shall cooperate with LICENSEE in such prosecution, filing and maintenance. 6.2 Payment of all fees and costs relating to the filing, prosecution, and maintenance of the Patent Rights shall be the responsibility of LICENSEE, whether such fees and costs were incurred before or after the date of this Agreement. ARTICLE VII -- INFRINGEMENT 7.1 LICENSEE shall inform CMCC promptly in writing of any alleged infringement of the Patent Rights by a third party and of any available evidence thereof. 7.2 During the term of this Agreement, LICENSEE shall have the right, but shall not be obligated, to prosecute at its own expense any such infringements of the Patent Rights and, in furtherance of such right, CMCC hereby agrees that LICENSEE may join CMCC as a party plaintiff in any such suit, without expense to LICENSEE. The total cost of any such infringement action commenced or defended solely by LICENSEE shall be borne by LICENSEE and LICENSEE shall keep any recovery or damages for past infringement derived therefrom. 7.3 If within six (6) months after having been notified of any alleged infringement, LICENSEE shall have been unsuccessful in persuading the alleged infringer to desist and shall not have brought and shall not be diligently prosecuting an infringement action, or if LICENSEE shall notify CMCC at any time prior thereto of its intention not to bring suit against any alleged infringer, then, and in those events only, CMCC shall have the right, but shall not be obligated, to prosecute at its own expense any infringement of the Patent Rights. No settlement, consent judgment of other voluntary final disposition of the suit may be entered into without the consent of the party not bringing the suit, which consent shall not unreasonably be withheld. - 10 - 11 7.4 In the event that LICENSEE shall undertake the enforcement and/or defense of the Patent Rights by litigation, LICENSEE may withhold up to fifty percent (50%) of the royalties otherwise thereafter due CMCC hereunder and apply the same toward reimbursement of its expenses, including reasonable attorneys, fees, in connection therewith. Any recovery of damages by LICENSEE for any such suit shall be applied first in satisfaction of any unreimbursed expenses and legal fees of LICENSEE relating to the suit, next toward reimbursement of CMCC for any royalties past due or withheld and applied pursuant to this Article VII, and to royalties due to CMCC for infringing sales as if sales had been made by LICENSEE. The balance remaining from any such recovery shall belong to LICENSEE. 7.5 In the event that a declaratory judgment action alleging invalidity or non-infringement of any of the Patent Rights shall be brought against LICENSEE, CMCC, at its option, shall have the right, within thirty (30) days after commencement of such action, to intervene and take over the sole defense of the action at its own expense. 7.6 In any infringement suit as either party may institute to enforce the Patent Rights pursuant to this Agreement, the other party hereto shall, at the request and the expense of the party initiating such suit, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples, specimens, and the like. 7.7 LICENSEE, during the period of this Agreement, shall have the sole right in accordance with the terms and conditions herein to sublicense any alleged infringer for the Field of Use for future use of the Patent Rights. ARTICLE VIII -- INDEMNIFICATION, PRODUCT LIABILITY AND INSURANCE 8.1. Indemnification (a) LICENSEE shall indemnify, defend and hold harmless CMCC and its trustees, officers, medical and professional staff, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss or expense (including - 11 - 12 reasonable attorney's fees and expenses of litigation) incurred by or imposed upon the Indemnitees or any one of them in connection with any claims, suits, actions, demands or judgments arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning, any product, process or service made, used or sold pursuant to any right or license granted under this Agreement. (b) LICENSEE's indemnification under (a) above shall not apply to any liability, damage, loss or expense to the extent that it is directly attributable to the negligent activities, reckless misconduct or intentional misconduct of the Indemnitees. (c) LICENSEE agrees, at its own expense, to provide attorneys reasonably acceptable to CMCC to defend against any actions brought or filed against any party indemnified hereunder with respect to the subject of indemnity contained herein, whether or not such actions are rightfully brought. (d) This Section 8.1 shall survive expiration or termination of this Agreement. 8.2. Insurance. (a) Beginning at the time as any such product, process or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by LICENSEE or by a sublicensee, affiliate or agent of LICENSEE, LICENSEE shall, at its sole cost and expense, procure and maintain comprehensive general liability insurance in amounts not less than [*] per incident and [*] annual aggregate and naming the Indemnitees as additional insureds. Such comprehensive general liability insurance shall provide (i) product liability coverage and (ii) broad form contractual liability coverage for LICENSEE's indemnification under Section 8.1 of this Agreement. If LICENSEE elects to self-insure all or part of the limits described above (including deductibles or retentions which are in excess of [*] annual aggregate) such self-insurance program must be acceptable to the CMCC and the Risk Management Foundation of the Harvard Medical Institutions, Inc. The minimum amount of insurance coverage required under this Section 8.2 shall not be construed to create a limit of LICENSEE's liability with respect to its indemnification under Section 8.1 of this Agreement. (b) LICENSEE shall provide CMCC with written evidence of such insurance upon request of CMCC. LICENSEE shall - 12 - [*] Confidential treatment requested. 13 provide CMCC with written notice at lease fifteen (15) days prior to the cancellation, non-renewal or material change in such insurance; if LICENSEE does not obtain replacement insurance providing comparable coverage within such fifteen (15) day period, CMCC shall have the right to terminate this Agreement effective at the end of such fifteen (15) day period without notice of any additional waiting periods. (c) LICENSEE shall maintain such comprehensive general liability insurance during (i) the period that any such product, process or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by LICENSEE or by a sublicensee, affiliate or agent of LICENSEE and (ii) a reasonable period after the period referred to in (c) (i) above which in no event shall be less than fifteen (15) years. (d) This ARTICLE 8.2 shall survive expiration or termination of this Agreement. ARTICLE IX -- EXPORT CONTROLS It is understood that CMCC is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities (including the Arms Export Control Act, as amended and the Export Administration Act of 1979), and that its obligations hereunder are contingent on compliance with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require a license from the cognizant agency of the United States Government and/or written assurances by LICENSEE that LICENSEE shall not export data or commodities to certain foreign countries without prior approval of such agency. CMCC neither represents that a license shall not be required nor that, if required, it shall be issued. ARTICLE X -- NON-USE OF NAMES LICENSEE shall not use the names of the Children's Medical Center corporation nor of any of its employees, nor any adaptation thereof, in any advertising, promotional or sales literature without prior written consent obtained from CMCC in each case except that LICENSEE may state that it is licensed by CMCC under one or more of the patents and/or applications comprising the Patent Rights, and LICENSEE may comply with disclosure requirements of all applicable laws - 13 - 14 relating to its business, including United States and state security laws. ARTICLE XI -- ASSIGNMENT This Agreement is not assignable by LICENSEE without the express written consent of CMCC which shall not be unreasonably withheld; provided, however, that LICENSEE shall have the right to assign this Agreement to a Subsidiary without the consent of CMCC. ARTICLE XII -- ARBITRATION 12.1 Any and all claims, disputes or controversies arising under, out of, or in connection with this Agreement, which have not been resolved by good faith negotiations between the parties, shall be resolved by final and binding arbitration in Boston, Massachusetts, under patent arbitration rules of the American Arbitration Association then obtaining. The arbitrators shall have no power to add to, subtract from or modify any of the terms or conditions of this Agreement. Any award rendered in such arbitration may be enforced by either party in either the courts of the Commonwealth of Massachusetts or in the United States District Court for the District of Massachusetts, to whose jurisdiction for such purposes CMCC and LICENSEE each hereby irrevocably consents and submits. 12.2 Notwithstanding the foregoing, nothing in this Article shall be construed to waive any rights or timely performance of any obligations existing under this Agreement. ARTICLE XIII -- TERMINATION 13.1 If LICENSEE shall cease to carry on its business, this Agreement shall terminate upon notice by CMCC. 13.2 Should LICENSEE fail to pay CMCC royalties due and payable hereunder, CMCC shall have the right to terminate this Agreement on thirty (30) days' notice, unless LICENSEE shall pay CMCC within the thirty (30) day period, all such royalties and interest due and payable. Upon the expiration of the thirty (30) day period, if LICENSEE shall not have paid all such royalties and interest due and - 14 - 15 payable, the rights, privileges and license granted hereunder shall terminate. 13.3 Upon any material breach or default of this Agreement by LICENSEE, other than those occurrences set out in Paragraphs 13.1 and 13.2 hereinabove, which shall always take precedence in that order over any material breach or default referred to in this Paragraph 13.3, CMCC shall have the right to terminate this Agreement and the rights, privileges and license granted hereunder by ninety (90) days' notice to LICENSEE. Such termination shall become effective unless LICENSEE shall have cured any such breach or default prior to the expiration of the ninety (90) day period. 13.4 LICENSEE shall have the right to terminate this Agreement at any time on six (6) months' notice to CMCC, and upon payment of all amounts due CMCC through the effective date of termination, in no case prior to the end of the first year of full funding. 13.5 Upon termination of this Agreement for any reason, nothing herein shall be construed to release either party from any obligation that matured prior to the effective date of such termination. LICENSEE and any sublicensee thereof may, however, after the effective date of such termination, sell all Licensed Products, and complete Licensed Products in the process of manufacture at the time of such termination and sell the same, provided that LICENSEE shall pay to CMCC the royalties thereon as required by Article IV of this Agreement and shall submit the reports required by Article V hereof on the sales of Licensed Products. ARTICLE XIV -- PAYMENTS, NOTICES, AND OTHER COMMUNICATIONS Any payment, notice or other communication pursuant to this Agreement shall be sufficiently made or given on the date of the mailing if sent to such party by certified first class mail, postage prepaid, addressed to it at its address below or as it shall designate by written notice given to the other party: - 15 - 16 In the case of CMCC: Technology Transfer Manager Office of Research Administration The Children's Hospital 300 Longwood Avenue Boston, MA 02115 In the case of LICENSEE: Joseph F. Lovett General Partner Medial Science Partners 68 Harvard Street Brookline, MA 02146 ARTICLE XV -- MISCELLANEOUS PROVISIONS 15.1 This Agreement shall be construed, governed, interpreted and applied in accordance with the laws of the Commonwealth of Massachusetts, U.S.A., except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent was granted. 15.2 The parties hereto acknowledge that this Agreement sets forth the entire Agreement and understanding of the parties hereto as to the subject matter hereof, and shall not be subject to any change or modification except by the execution of a written instrument subscribed to by the parties hereto. 15.3 The provisions of this Agreement are severable, and in the event that any provisions of this Agreement shall be determined to be invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof. 15.4 LICENSEE agrees to mark the Licensed Products sold in the United States with all applicable United States patent numbers. All Licensed Products shipped to or sold in other countries shall be marked in such a manner as to conform with the patent laws and practice of the country of manufacture or sale. 15.5 The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar - 16 - 17 subsequent failure to perform any such term or condition by the other party. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals and duly executed this Agreement the day and year set forth below. CHILDREN'S MEDICAL CENTER CORPORATION By [SIG] ------------------------------------- Name William New ------------------------------------- Title Director, Research Administrator ------------------------------------- Date 10/25/93 ------------------------------------- LICENSEE By /s/ Joseph F. Lovett ------------------------------------- Name Joseph F. Lovett ------------------------------------- Title General Partner ------------------------------------- Date 10/25/93 ------------------------------------- - 17 - 18 APPENDIX A Children's Medical Center Corporation Case #263 U.S. Patent Application Serial #07/782,058 filed 10/24/91 PCT US/92/09037 filed 10/23/92 CIP 08/054,375 filed 4/28/93 By: Drs. Anthony Atala and James Mandell - 18 - 19 [MEDICAL SCIENCE PARTNERS, L.P. LETTERHEAD] Children's Medical Center Corporation 300 Longwood Avenue Boston, MA 02115 February 23, 1994 UroSurge, Inc. c/o Medical Science Partners, L.P. 68 Harvard Street Brookline, MA 02146 Medical Science Partners, L.P. 68 Harvard Street Brookline, MA 02146 Gentlemen: Children's Medical Center Corporation ("CMCC"), UroSurge, Inc. ("UroSurge") and Medical Science Partners, L.P. ("MSP") hereby agree as to the following with respect to the License Agreement dated as of October 14, 1993 between the CMCC and MSP (the "License Agreement"): 1. UroSurge, an entity formed by MSP (as described in the License Agreement), shall be the sole licensee under the License Agreement and shall be bound by and subject to the terms of the License Agreement; 2. CMCC consents to the assignment of the License Agreement by MSP to UroSurge; and 3. MSP shall have no further rights or obligations under the License Agreement. If you are in agreement with the above paragraphs, please indicate such agreement by signing in the spaces below. CHILDREN'S MEDICAL CENTER CORPORATION By: [SIG] --------------------------------- Title: Director, Research Administration --------------------------------- 20 Agreed and Acknowledged this ___ day of February, 1994 UROSURGE, INC. By: [SIG] --------------------------------- Title: Treasurer ------------------------------ MEDICAL SCIENCE PARTNERS, L.P. By: Medical Science Ventures, L.P. its General Partner By: [SIG] --------------------------------- Title: ------------------------------ EX-10.8 14 EXCLUSIVE LICENSE AGREEMENT 1 EXHIBIT 10.8 EXCLUSIVE LICENSE AGREEMENT BETWEEN THE REGENTS OF THE UNIVERSITY OF CALIFORNIA AND UROSURGE, INC. FOR ELECTRODE ACUPUNCTURE SYSTEM U.C. CASE NO. 88-064 2 TABLE OF CONTENTS 1. DEFINITIONS...............................................................2 2. GRANT.....................................................................4 3. LICENSE ISSUE FEE.........................................................6 4. ROYALTIES.................................................................7 5. DUE DILIGENCE............................................................10 6. PROGRESS AND ROYALTY REPORTS.............................................12 7. BOOKS AND RECORDS........................................................13 8. LIFE OF THE AGREEMENT....................................................14 9. TERMINATION BY THE REGENTS...............................................15 10. TERMINATION BY LICENSEE.................................................15 11. DISPOSITION OF PATENT PRODUCTS ON HAND UPON TERMINATION.................16 12. USE OF NAMES AND TRADEMARKS.............................................16 13. LIMITED WARRANTY........................................................17 14. PATENT PROSECUTION AND MAINTENANCE......................................18 15. PATENT MARKING..........................................................20 16. PATENT INFRINGEMENT.....................................................20 17. INDEMNIFICATION.........................................................22 18. NOTICES.................................................................23 19. ASSIGNABILITY...........................................................24 20. LATE PAYMENTS...........................................................25 21. WAIVER..................................................................25 22. FAILURE TO PERFORM......................................................25 23. GOVERNING LAWS..........................................................25 24. GOVERNMENT APPROVAL OR REGISTRATION.....................................26 25. EXPORT CONTROL LAWS.....................................................26 26. FORCE MAJEURE...........................................................26 27. CONFIDENTIALITY.........................................................27 28. MISCELLANEOUS...........................................................28
3 June 24 1996 EXCLUSIVE LICENSE AGREEMENT FOR ELECTRODE ACUPUNCTURE SYSTEM This license agreement ("Agreement") is effective this 30 day of June, 1996, by and between The Regents of the University of California ("The Regents"), a California corporation, having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 and UroSurge, Inc. ("Licensee"), a Delaware corporation, having a principal place of business at 2660 Crosspark Road, Coralville, Iowa 52241. Recitals Whereas, certain inventions, characterized as "Electrode Acupuncture System" ("Invention"), useful for the control of incontinence, were made at the University of California, San Francisco ("UCSF") by Dr. Gleason, et al. and are claimed in Patent Rights defined below; Whereas, the Licensee is a "small entity" as defined in 37 CFR Section 1.9 and a "small-business concern" defined in 15 U.S.C. Section 632; Whereas, both parties recognize that royalties due under this Agreement will be paid on pending patent applications and issued patents; Whereas, Licensee requested certain rights from The Regents to commercialize the Invention; and 1 4 Whereas, The Regents responded to the request of Licensee by granting the following rights to Licensee so that the products and other benefits derived from the Invention can be enjoyed by the general public. oo 0 oo - - The parties agree as follows: 1 Definitions As used in this Agreement, the following terms will have the meaning set forth below: 1.1. "Patent Rights" means all U.S. patents and patent applications and foreign patents and patent applications assigned to The Regents 14.3 including any reissues, extensions, substitutions, continuations, divisions, and continuation-in-part applications (only to the extent, however, that claims in the continuation-in-part applications are entitled to the priority filing date of the parent patent application) based on and including any subject matter claimed in or covered by the following: 1.1.1. U.S. Patent Number 5,094,242, entitled "Implantable Nerve Stimulation Device," issued on March 10, 1992 by Dr. Gleason, et al. and assigned to The Regents; and 1.1.2. U.S. Patent Number 5,211,175, entitled "Method for Implanting Electro-Acupuncture Needle," issued on May 18, 1993 by Dr. Gleason, et al. and assigned to The Regents 1.2. "Patent Products" means: 1.2.1. any kit, composition of matter, material, or product; 1.2.2. any kit, composition of matter, material, or product to be used in a manner requiring the performance of the Patent Method; or 1.2.3. any kit, composition of matter, material, or product produced by the Patent Method; 2 5 to the extent that the manufacture, use, or sale of such kit, composition of matter, material, or product, in a particular country, would be covered by or infringe, but for the license granted to Licensee pursuant to this Agreement, an unexpired claim of a patent or pending claim of a patent application were it issued as a claim in a patent under Patent Rights in that country in which such patent has issued or application is pending. 1.3. "Patent Method" means any process or method covered by the claims of a patent application or patent within Patent Rights or the use or practice of which would constitute in a particular country, but for the license granted to Licensee pursuant to this Agreement, an infringement of an unexpired claim of a patent or pending claim of a patent application were it issued as a claim in a patent within Patent Rights in that country in which the Patent Method is used or practiced. 1.4. "Net Sales" means the gross invoice prices from the sale of Patent Products by Licensee, an Affiliate, a Joint Venture, or a Sublicensee to independent third parties for cash or other forms of consideration in accordance with generally accepted accounting principles limited to the following deductions (if not already deducted from the gross invoice price and at rates customary within the industry): (a) allowances (actually paid and limited to rejections, returns, and prompt payment and volume discounts granted to customers of Patent Products, whether in cash or Patent Products in lieu of cash); (b) freight, transport packing, insurance charges associated with transportation; and (c) taxes, tariff, or import/export duties based on sales when included in gross sales, but not value-added taxes or taxes assessed on income derived from such sales. Where Licensee distributes Patent Products for end use to itself, an Affiliate, a Joint Venture, or a Sublicensee, then such distribution will be considered a sale at list price normally charged to independent third parties, and The Regents will be entitled to collect fees and royalties on such sale at the rate set forth in Article 4. (Royalties). 3 6 1.5. "Affiliate(s)" of Licensee means any entity which, directly or indirectly, controls Licensee, is controlled by Licensee, or is under common control with Licensee ("control" for these purposes being defined as the actual, present capacity to elect a majority of the directors of such affiliate, or if not, the capacity to elect the members that control fifty percent (50%) of the outstanding stock or other voting rights entitled to elect directors) provided, however, that in any country where the local law will not permit foreign equity participation of a majority, then an "Affiliate" will include any company in which Licensee will own or control, directly or indirectly, the maximum percentage of such outstanding stock or voting rights permitted by local law. Each reference to Licensee herein will be meant to include its Affiliates. 1.6. "Joint Venture" means any separate entity established pursuant to an agreement between a third party and Licensee to constitute a vehicle for a joint venture, in which the separate entity manufactures, uses, purchases, sells, or acquires Patent Products from Licensee. Each reference to Licensee herein will be meant to include its Joint Venture. 1.7. "Sublicensee" means any non-Affiliate third party that is granted by Licensee the right to make, have made, use, or sell any Patent Products, or use the Patent Method. 2. Grant 2.1. Subject to the limitations set forth in this Agreement, The Regents hereby grants to Licensee exclusive licenses under Patent Rights to make, have made, use, sell, offer for sale, and import Patent Products and to practice the Patent Method. 2.2. The manufacture of Patent Products and the practice of the Patent Method will be subject to applicable government importation laws and regulations of a particular country on Patent Products made outside the particular country in which such Patent Products are used or sold. 4 7 2.3. The Regents also grants to Licensee the right to issue sublicenses to third parties to make, have made, use, sell, offer for sale, and import Patent Products and to practice Patent Method, provided Licensee retains current exclusive rights thereto, under this Agreement. To the extent applicable, such sublicenses will include all of the rights of and obligations due to The Regents, including the payment of royalties, fees, and other consideration as specified in Subparagraph 4.1.2 herein that are contained in this Agreement. 2.4. The right to enter into a royalty-free license for Patent Rights with any third parties is expressly prohibited. Licensee will use its diligent efforts in reaching favorable royalty rates and license issue fees from Sublicensees. 2.5. Licensee will notify The Regents of each sublicense granted hereunder and provide The Regents with a copy of each sublicense. The copy of each sublicense will be treated as Proprietary Information pursuant to Article 27 (Confidentiality) herein. Licensee will collect and pay all fees and royalties due The Regents as set forth in Paragraph 4.1.2 herein (and guarantee all such payments due from Sublicensees). Licensee will require Sublicensees to provide it with progress and royalty reports in accordance with the provisions herein, and Licensee will collect and deliver to The Regents all such reports due from Sublicensees. 2.6. Upon termination of this Agreement for any reason, all sublicenses that are granted by Licensee in accordance with this Agreement will remain subject to the terms of such sublicenses in effect and will be assigned to and assumed by The Regents, except that The Regents will not be bound by any duties and obligations contained in the sublicenses that extend beyond the duties and obligations assumed by The Regents in this Agreement and shall have no right to receive any payment from such sublicensees except the amounts due under this Agreement for the activities of such sublicensees. 5 8 2.7. Nothing in this Agreement will be deemed to limit the right of The Regents to publish any and all technical data resulting from any research performed by The Regents relating to the Invention and to make and use the Invention, Patent Products, Patent Method, and associated technology owned by The Regents solely for educational and research purposes. 3. License Issue Fee 3.1. As partial consideration for all the rights and licenses granted to Licensee, Licensee will pay to The Regents a license issue fee of [*] in three installments according to the following schedule: 3.1.1. [*] to be sent by Licensee to The Regents within thirty days following the execution of this Agreement by Licensee; and 3.1.2. [*] to be sent by Licensee to The Regents on or before December 30,1996; and 3.1.3. [*] to be sent by Optionee to The Regents on or before June 30, 1997, 3.2. Licensee will also pay to The Regents a license maintenance fee of [*] beginning on the one-year anniversary date of the effective date of this Agreement and continuing annually thereafter on each anniversary date of the effective date of this Agreement. The license maintenance fee will not be due and payable on any anniversary date of the effective date of this Agreement if on such date Licensee is commercially selling Patent Products and paying an earned royalty to The Regents on the Net Sales of such Patent Products. 3.3. The fee set forth in Paragraphs 3.1 and 3.2 above are non-refundable, noncreditable, and not an advance against royalties. 6 [*] Confidential treatment requested. 9 4. Royalties 4.1. As further consideration for all the rights and licenses granted to Licensee, Licensee will also pay to The Regents an earned royalty according to the following: 4.1.1. a royalty rate of [*] based on the Net Sales of Patent Products sold by Licensee; and 4.1.2. an amount equal to [*] of all consideration, fees, and royalties received by Licensee from its Sublicensees with respect to Patent Products and Patent Methods. Not withstanding the above, The Regents will not be entitled to any portion of any amounts received by Licensee from Sublicensee with respect to: (i) the purchase of equity in Licensee at or below [*] of the fair market value of such equity, (ii) debt financing, (iii) research funding, and (iv) reimbursement of patent filing, prosecution, and maintenance expenses. The Regents will be entitled to receive [*] of any amounts received by Licensee from Sublicense with respect to the purchase of equity in Licensee in an amount above [*] of the fair market value of such equity. Any consideration received by Licensee from its Sublicensees will be converted into a U.S. dollar cash equivalent for purposes of computing the royalties due The Regents under this Subparagraph. 4.1.3. For the avoidance of doubt, it is understood and agreed that in the event that Licensee assigns its rights under this Agreement in connection with the sale or transfer of all or substantially all of the assets of Licensee relating to the subject matter of this Agreement pursuant to Section 19.1 herein, The Regents shall not be entitled to any portion of any consideration received by Licensee in connection with such sale or transfer. 4.2. Paragraphs 1.1, 1.2, and 1.3 define Patent Rights, Patent Products, and Patent Method so that royalties will be payable on Patent Products and Patent Method covered by both pending patent applications and issued patents. Earned royalties will accrue in each country for the duration of Patent Rights in that country and will be payable to The Regents when Patent Products are invoiced, or if not invoiced, when delivered to a third party or to itself, an Affiliate, or Sublicensee in the case where such delivery of the 7 [*] Confidential treatment requested. 10 Patent Products to Licensee, an Affiliate, or Sublicensee is intended for end use for purposes other than clinical trials. 4.3. In the event that no patent issues in a particular country under Patent Rights within five (5) years (except for Japan which shall be eight (8) years) from the effective date recited on page one of this Agreement, then earned royalties and minimum annual royalties (set forth in Paragraphs 4.1.1 and 4.1.2 above due The Regents in connection with the sale of Patent Products in such country shall be suspended from that date. At the time a patent under Patent Rights does issue in a particular country, Licensee's obligations to pay earned royalties (in accordance with Paragraphs 4.1.1 and 4.1.2 on Patent Products) shall resume with respect to sales of Patent Products after such date only in connection with the Patent Products that would, but for the licenses granted herein, infringe a valid claim of such issued, unexpired patent in such country, and payment of such royalties and minimum annual royalties shall continue for the life of this Agreement, subject to the provisions of Paragraphs 4.1.1, 4.10, and 8.2. 4.4. No more than one royalty payment will be due to The Regents with respect to a sale of a particular Patent Products. No multiple royalties will be payable whether or not any Patent Products, or their manufacture, use, or sale is covered by more than one claim within the Patent Rights. 4.5. Royalties from Licensee and the payment of fees, royalties, and other consideration by Licensee from its Sublicensees accruing to The Regents will be paid to The Regents quarterly on or before the following dates of each calendar year: February 28 for the calendar quarter ending December 31 May 31 for the calendar quarter ending March 31 August 31 for the calendar quarter ending June 30 November 30 for the calendar quarter ending September 30 8 11 Each such payment will be for royalties from Licensees and the payment of fees, royalties and other consideration from Sublicensees which accrued up to the most recently completed calendar quarter of Licensee or its Sublicensees. 4.6. Beginning in the year 1998, or in the year of first commercial sale, whichever is earlier, Licensee will pay to The Regents a minimum annual royalty in the amounts and at the times set forth below: 1998 - [*] 1999 - [*] 2000 - [*]
Licensee will pay a minimum annual royalty of $50,000 in each succeeding calendar year after the year 2000 for the life of this Agreement. This minimum annual royalty will be paid to The Regents by February 28 of each year and will be credited against the earned royalty due and owing for the calendar year in which the minimum payment was made. 4.7. All monies due The Regents will be payable in United States funds collectible at par in San Francisco, California. When Patent Products are sold for monies other than United States dollars, the earned royalties will first be determined in the foreign currency of the country in which such Patent Products were sold and then converted into equivalent United States funds. The exchange rate will be that rate quoted in the Wall Street Journal on the last business day of the calendar quarter. 4.8. Earned royalties on sales of Patent Products occurring in any country outside the United States will not be reduced by any taxes, fees, or other charges imposed by the government of such country except those taxes, fees, and charges allowed under the provisions of Paragraph 1.4 (Net Sales). Licensee will also be responsible for all bank transfer charges. 4.9. Notwithstanding the provisions of Article 26. (Force Majeure), if at any time legal restrictions prevent prompt remittance of part or all royalties owed to The Regents by 9 [*] Confidential treatment requested. 12 Licensee with respect to any country where Patent Products are sold or distributed, Licensee will convert the amount owed to The Regents into United States funds and will pay The Regents directly from another source of funds for the amount impounded. 4.10. In the event that any patent or any claim thereof included within the Patent Rights is held invalid in a final decision by a court of competent jurisdiction and last resort and from which no appeal has or can be taken, all obligation to pay royalties based on such patent or claim or any claim patentably indistinct therefrom will cease as of the date of such final decision. Licensee will not, however, be relieved from paying any royalties that accrued before such decision or that are based on another patent or claim that has not expired or that is not involved in such decision. 5. Due Diligence 5.1. Licensee, upon execution of this Agreement, will diligently proceed with the development, manufacture, and sale of Patent Products and will earnestly and diligently market Patent Products after execution of this Agreement and in quantities sufficient to meet the market demands therefor. 5.2. Licensee will be entitled to exercise prudent and reasonable business judgment in the manner in which it meets its due diligence obligations hereunder. In no case, however, will Licensee be relieved of its obligations to meet the due diligence provisions of this Article 5. (Due Diligence). 5.3. Licensee will obtain all necessary governmental approvals in each country in which Patent Products are manufactured, used, and sold. 5.4. If Licensee is unable to perform the following: 10 13 5.4.1. submit to the United States Food and Drug Administration ("FDA") an application for a 510(k) to market Patent Products in the United States on or before [*]; and 5.4.2. introduce Patent Products to the market in the United States on or before [*]; or 5.4.3. file an IDE for Patent Products by [*]; and 5.4.4. enter phase II/III clinical trials for Patent Products in the United States on or before [*]; and 5.4.5. submit to the United States Food and Drug Administration ("FDA") an application for a Pre-Market Approval (PMA) to market Patent Products in the United States on or before [*]; and 5.4.6. introduce Patent Products to the market in the United States within six (6) months after receiving marketing approval from the United States FDA for such Patent Products and reasonably fill the market demand for a Patent Products following commencement of marketing at any time during the exclusive period of this Agreement; then The Regents will have the right and option to either terminate this Agreement or reduce the exclusive licenses granted to Licensee to non-exclusive licenses in accordance with Paragraph 5.5 hereof. The exercise of this right and option by The Regents supersedes the rights granted in Article 2. (Grant). 5.5. To exercise either the right to terminate this Agreement or reduce the exclusive licenses granted to Licensee to non-exclusive licenses for lack of diligence required in this Article 5. (Due Diligence), The Regents will give Licensee written notice of the deficiency. Licensee thereafter has 60 days to cure the deficiency. Licensee will have the right to present written tangible evidence that it has made good faith efforts to diligently meet and cure any milestone; and The Regents will take into consideration the evidence provided by Licensee. However, if The Regents has not received written tangible evidence satisfactory to The Regents that the deficiency has been cured by the end of the 60-day period or if The Regents is not satisfied with the evidence provided to 11 [*] Confidential treatment requested. 14 Licensee that it has made good-faith efforts to meet and cure a missed milestone, then The Regents may, at its option, terminate this Agreement or reduce the exclusive licenses granted to Licensee to non-exclusive licenses by giving written notice to Licensee. These notices will be subject to Article 18. (Notices). 6. Progress and Royalty Reports 6.1. Beginning August 31, 1996 and semi-annually thereafter, Licensee will submit to The Regents a progress report covering activities by Licensee related to the development and testing of all Patent Products and obtaining governmental approvals necessary for marketing. These progress reports will be provided to The Regents to cover the progress of the research and development of the Patent Products until their first commercial sale in the United States. 6.2. The progress reports submitted under Paragraph 6.1 will include, but not be limited to, the following topics so that The Regents may be able to determine the progress of the development of Patent Products and may also be able to determine whether or not Licensee has met its diligence obligations set forth in Article 5. (Due Diligence) above: - summary of work completed key scientific discoveries summary of - work in progress current schedule of events or milestones - anticipated market introduction date of Patent Products, - activities of Sublicensees, if any. 6.3. Licensee will also report to The Regents in its immediately subsequent progress and royalty report the date of first commercial sale of Patent Products in each country. After the first commercial sale of Patent Products, Licensee will provide The Regents with quarterly royalty reports to The Regents on or before each February 28, May 31, 12 15 August 31, and November 30 of each year. Each such royalty report will cover the most recently completed calendar quarter of Licensee (October through December, January through March, April through June, and July through September) and will show: 6.3.1. the gross sales and Net Sales of Patent Products sold by Licensee and reported to Licensee as sold by its Sublicensees during the most recently completed calendar quarter; 6.3.2. the number of Patent Products sold or distributed by Licensee and reported to Licensee as sold or distributed by its Sublicensees; 6.3.3. the royalties from Licensee, and the payment of fees, royalties and other consideration from Sublicensees in U.S. dollars, payable hereunder with respect to Net Sales; and 6.3.4. the exchange rates used, if any. 6.4. If no sales of Patent Products have been made during any reporting period after the first commercial sale of Patent Products, then a statement to this effect is required. 7. Books and Records 7.1. Licensee will keep books and records accurately showing all Patent Products manufactured, used, and/or sold under the terms of this Agreement. Such books and records will be preserved for at least four years after the date of the royalty payment to which they pertain and will be open to inspection by an independent certified accountant retained by The Regents at reasonable times and during normal business hours to determine the accuracy of the books and records and to determine compliance by Licensee with the terms of this Agreement. Such independent certified public accountant will be bound to hold all information in confidence except as necessary to communicate to The Regents any non-compliance of Licensee with respect to this Agreement. 13 16 7.2. The fees and expenses of The Regents accountant performing such an examination will be borne by The Regents. If an error in royalties of more than five percent (5%) of the total royalties due for any year is discovered, then the fees and expenses of such accountant will be borne by Licensee. 8. Life of the Agreement 8.1. Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement will be in force from the effective date recited on page one and will remain in effect for the life of the last-to-expire patent licensed under this Agreement, or until the last patent application licensed under this Agreement is abandoned. 8.2. Any termination of this Agreement will not affect the rights and obligations set forth in the following Articles: Article 7 Books and Records Article 11 Disposition of Patent Products on Hand Upon Termination Article 12 Use of Names and Trademarks Article 13 Limited Warranty Paragraph 14.6 Patent Prosecution and Maintenance Article 17 Indemnification Article 22 Failure to Perform Article 27 Confidentiality 8.3. Termination of this Agreement for any reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, or preclude 14 17 either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. 9. Termination by The Regents 9.1. If Licensee should violate or fail to perform any material term or covenant of this Agreement, then The Regents may give written notice of such default ("Notice of Default") to Licensee. If Licensee should fail to repair such default within 60 days after the date of such notice takes effect, The Regents will have the right to terminate this Agreement and the licenses herein by a second written notice ("Notice of Termination") to Licensee. If a Notice of Termination is sent to Licensee, this Agreement will automatically terminate on the date such notice takes effect. Such termination will not relieve Licensee of its obligation to pay any royalty or license fees owing at the time of such termination and will not impair any accrued right of The Regents. These notices will be subject to Article 18. (Notices). 10. Termination by Licensee 10.1. Licensee will have the right at any time to terminate this Agreement in whole or as to any portion of Patent Rights by giving notice in writing to The Regents. Such Notice of Termination will be subject to Article 18. (Notices) and termination of this Agreement will be effective 60 days after the effective date thereof. 10.2. Any termination pursuant to the above paragraph will not relieve Licensee of any obligation or liability accrued hereunder prior to such termination or rescind anything done by Licensee or any payments made to The Regents hereunder prior to the time such termination becomes effective, and such termination will not affect in any manner any rights of The Regents arising under this Agreement prior to such termination. 15 18 11. Disposition of Patent Products on Hand Upon Termination 11.1. Upon termination of this Agreement, Licensee will have the privilege of disposing all previously made or partially made Patent Products, but no more, within a period of 120 days, provided, however, that the sale of such Patent Products will be subject to the terms of this Agreement including, but not limited to the payment of royalties based on the Net Sales of Patent Products sold by Licensee and the payment of fees, royalties, or other consideration by Sublicensee at the rates and at the times provided herein and the rendering of reports in connection therewith. 12. Use of Names and Trademarks 12.1. Nothing contained in this Agreement will be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto by the other (including contraction, abbreviation or simulation of any of the foregoing). Unless required by law, the use by Licensee of the name "The Regents of the University of California" or the name of any campus of the University of California for use in advertising, publicity, or other promotional activities is expressly prohibited. 12.2. It is understood that The Regents will be free to release to the inventors and senior administrative officials employed by The Regents the terms of this Agreement upon their request. If such release is made, The Regents will request that such terms will be kept in confidence in accordance with the provisions of Article 27. (Confidentiality) and not be disclosed to others. It is further understood that should a third party inquire whether a license to Patent Rights is available, The Regents may disclose the existence of this Agreement and the extent of the grant in Article 2. (Grant) to such third party, but will not disclose the name of Licensee, except where The 16 19 Regents is required to release such information under either the California Public Records Act or other applicable law. 13. Limited Warranty 13.1. The Regents warrants to Licensee that it has the lawful right to grant this license. 13.2. THE REGENTS MAKES NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY EXPRESS OR IMPLIED WITH RESPECT TO THE LICENSES GRANTED UNDER THIS AGREEMENT AND THE ASSOCIATED INVENTION, PATENT PRODUCTS, PATENT METHOD, AND PATENT RIGHTS. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE INVENTION, PATENT PRODUCTS, PATENT METHOD, AND PATENT RIGHTS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 13.3. IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTION, PATENT PRODUCTS, PATENT METHOD AND PATENT RIGHTS. 13.4. Nothing in this Agreement will be construed as: 13.4.1. a warranty or representation by The Regents as to the validity, enforceability, or scope of any Patent Rights; or 13.4.2. a warranty or representation that anything made, used, sold, or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; or 13.4.3. an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 16. (Patent Infringement); or 17 20 13.4.4. conferring by implication, estoppel, or otherwise any license or rights under any patents of The Regents other than Patent Rights as defined herein, regardless of whether such patents are dominant or subordinate to Patent Rights; or 13.4.5. an obligation to furnish any know-how not provided in Patent Rights. 14. Patent Prosecution and Maintenance 14.1. The Regents will diligently prosecute and maintain the United States and foreign patent applications and patents comprising Patent Rights using counsel of its choice that is reasonably acceptable to Licensee, provided, however, that if Licensee rejects The Regents' choice of new counsel three times consequently (i.e. three different new attorneys), then The Regents will be free, in its sole discretion, to choose an attorney of its choice. The Regents will promptly instruct its outside counsel to provide Licensee with copies of all documents received from every patent office, so that Licensee may be currently and promptly informed and apprised of the continuing prosecution, and The Regents will instruct its outside counsel to provide Licensee with copies of proposed drafts of all documents to be filed with any patent office so that Licensee may comment upon such documentation sufficiently in advance of any initial deadline for filing a response, provided, however, that if Licensee has not commented upon such documentation prior to the initial deadline for filing a response with the relevant government patent office or The Regents must act to preserve Patent Rights, The Regents will be free to respond appropriately without consideration of comments by Licensee, if any. Both parties hereto will keep this documentation in confidence in accordance with the provisions of Article 27. (Confidentiality) herein. Counsel for The Regents will take instructions only from The Regents. 14.2. The Regents will use all reasonable efforts to amend any patent application to include claims requested by Licensee and required to protect the Patent Products contemplated to be sold or Patent Method to be practiced under this Agreement. 18 21 14.3. The Regents will, at the request of Licensee, file, prosecute, and maintain patent applications and patents covered by Patent Rights in foreign countries if available. The Regents will have the right to file patent applications at its own expense in any country Licensee has not included in its list of desired countries, and such applications and resultant patents, if any, will not be included in the licenses granted under this Agreement. 14.4. All past, present and future costs of preparing, filing, prosecuting and maintaining all United States and foreign patent applications and all costs and fees relating to the preparation and filing of patents covered by Patent Rights in Paragraph 1.1 will be borne by Licensee. This includes patent preparation and prosecution costs for the Invention incurred by The Regents prior to the execution of this Agreement. Such costs will be due upon execution of this Agreement and will be payable at the time that the license issue fee is payable. The costs of all interferences and oppositions will be considered prosecution expenses and also will be borne by Licensee. Licensee will reimburse The Regents for all costs and charges within 30 days following receipt of an itemized invoice from The Regents for same. 14.5. The obligation of Licensee to underwrite and to pay patent preparation, filing, prosecution, maintenance, and related costs will continue for costs incurred until three months after receipt by either party of a Notice of Termination. Licensee will reimburse The Regents for all patent costs incurred during the term of the Agreement and for three months thereafter whether or not invoices for such costs are received during the three-month period after receipt of a Notice of Termination. Licensee may with respect to any particular patent application or patent terminate its obligations with the patent application or patent in any or all designated countries upon three months written notice to The Regents. The Regents may continue prosecution and/or maintenance of such application(s) or patent(s) at its sole discretion and expense, provided, however, that Licensee will have no further right or licenses thereunder. 19 22 14.6. Licensee will notify The Regents of any change of its status as a small entity (as defined by the United States Patent and Trademark Office) and of the first sublicense granted to an entity that does not qualify as a small entity as defined therein. 15. Patent Marking 15.1. Licensee will mark all Patent Products made, used, or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws. 16. Patent Infringement 16.1. In the event that Licensee or the licensing associate employed by The Regents who is responsible for administering this Agreement or Resident Counsel of the Office of Technology Transfer learn of the substantial infringement of any patent licensed under this Agreement, and to the extent it is contractually able to, such party will call the attention of the other party thereto in writing and will provide The Regents with reasonable evidence of such infringement. Both parties to this Agreement acknowledge that during the period and in a jurisdiction where Licensee has exclusive rights under this Agreement, neither will notify a third party of the infringement of any of Patent Rights without first obtaining consent of the other party, which consent will not be unreasonably withheld. Both parties will use their best efforts in cooperation with each other to terminate such infringement without litigation. 16.2. Licensee may request that The Regents take legal action against the infringement of Patent Rights. Such request must be made in writing and must include reasonable evidence of such infringement and damages to Licensee. If the infringing activity has not been abated within 90 days following the effective date of such request, The Regents will have the right to elect to: 20 23 16.2.1. commence suit on its own account; or 16.2.2. refuse to participate in such suit and The Regents will give notice of its election in writing to Licensee by the end of the 100th day after receiving notice of such request from Licensee. Licensee may thereafter bring suit for patent infringement if and only if The Regents elects not to commence suit and if the infringement occurred during the period and in a jurisdiction where Licensee had exclusive rights under this Agreement. However, in the event Licensee elects to bring suit in accordance with this paragraph, The Regents may thereafter join such suit at its own expense. 16.3. Such legal action as is decided upon will be at the expense of the party on account of whom suit is brought and all recoveries recovered thereby will belong to such party, provided, however, that legal action brought jointly by The Regents and Licensee and participated in by both will be at the joint expense of the parties and all recoveries will be allocated in the following order: a) to each party reimbursement in equal amounts of the attorney's costs, fees, and other related expenses to the extent each party paid for such costs, fees, and expenses until all such costs, fees, and expenses are consumed for each party; and b) any remaining amount to be divided among the parties in the following manner: 1) [*] for Licensee and [*] for The Regents of any recoveries based on lost profits or other theories; and 2) [*] for Licensee and [*] for The Regents of any recoveries based on statutory enhanced damages. 16.4. Each party will cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party on account of whom suit is brought. Such litigation will be controlled by the party bringing the suit, except that The Regents may be represented by counsel of its choice in any suit brought by Licensee. 21 [*] Confidential treatment requested. 24 17. Indemnification 17.1. Licensee will(and require its Sublicensees to)indemnify, hold harmless, and defend The Regents, its officers, employees, and agents; the sponsors' of the research that led to the Invention; the inventors of any invention covered by patents or patent applications in Patent Rights (including the Patent Products and Patent Method contemplated thereunder) and their employers against any and all claims, suits, losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification will include, but will not be limited to, any product liability. 17.2. Licensee, at its sole cost and expense, will insure its activities in connection with the work under this Agreement and obtain, keep in force, and maintain insurance as follows: (or an equivalent program of self insurance) Comprehensive or Commercial Form General Liability Insurance (contractual liability included) with limits as follows: (a) Each Occurrence...........................................[*] (b) Products/Completed Operations Aggregate...................[*] (c) Personal and Advertising Injury...........................[*] (d) General Aggregate (commercial form only)..................[*] As of and following the date of commencement of any clinical trial, Licensee shall increase insurance coverage under Paragraph 17.2 from [*] to [*] for each occurrence and an aggregate of [*]. As of and following the date of commencement of and sales of Patent Products, Licensee shall increase insurance coverage from [*] to an aggregate of [*] and maintain [*] for each occurrence. Specifically with regard to product liability insurance, Licensee shall not be required to insure its activities until commencement of any clinical trail or any sales of Patent Product(s) for human use, at which time Licensee shall increase insurance coverage under this Paragraph 17.2 in the case of the commencement of 22 [*] Confidential treatment requested. 25 any clinical trial to an aggregate of $2,000,000, and in the case of the commencement of any sales of Patent Products to an aggregate of $5,000,000. It should be expressly understood, however, that the coverages and limits referred to under the above will not in any way limit the liability of Licensee. Licensee will furnish The Regents with certificates of insurance evidencing compliance with all requirements. Such certificates will: (a) Provide for 30 day advance written notice to The Regents of any modification; (b) Indicate that The Regents has been endorsed as an additional Insured under the coverages referred to under the above; and (c) Include a provision that the coverages will be primary and will not participate with nor will be excess over any valid and collectable insurance or program of self-insurance carried or maintained by The Regents. 17.3. The Regents will promptly notify Licensee in writing of any claim or suit brought against The Regents in respect of which The Regents intends to invoke the provisions of this Article 17. (Indemnification). Licensee will keep The Regents informed on a current basis of its defense of any claims pursuant to this Article 17. (Indemnification). 17.4. Licensee will have the right to control the defense and settlement of any such claim or suit except Licensee shall not enter into any settlement which (i) makes any admission of wrongdoing on the part of The Regents; or (ii) admits that any Patent Rights of The Regents are invalid, unenforceable, or not infringed, without prior written consent of The Regents. 18. Notices 18.1. Any notice or payment required to be given to either party will be deemed to have been properly given and to be effective (a) on the date of delivery if delivered in 23 26 person or (b) five days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to another address as it may designate by written notice given to the other party. In the case of Licensee: UROSURGE, INC. 2660 Crosspark Road Coralville, Iowa 52241 Tel: (319) 626-8311 Fax: (319) 626-8312 Attention: President In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA 1320 Harbor Bay Parkway, Suite 150 Alameda, California 94502 Tel: (510) 748-6600 Fax: (510) 748-6639 Attention: Executive Director; Office of Technology Transfer Referring to: U.C. Case No. 88-064 19. Assignability 19.1. This Agreement is binding upon and will inure to the benefit of The Regents, its successors and assigns, but will be personal to Licensee and assignable by Licensee only with the written consent of The Regents which consent will not be unreasonably withheld, provided, however, that Licensee may assign this Agreement in connection with the sale or transfer of substantially all the assets of Licensee relating to the subject matter of this Agreement, without the consent of The Regents. 24 27 20. Late Payments 20.1. In the event royalty payments or fees or patent prosecution costs are not received by The Regents when due, Licensee will pay to The Regents interest charges at a rate of ten percent (10%) simple interest per annum. Such interest will be calculated from the date payment was due until actually received by The Regents. Acceptance by The Regents of any late payment interest from Licensee under this Paragraph 20 will in no way affect the provision of Article 21. (Waiver) herein. 21. Waiver 21.1. It is agreed that no waiver by either party hereto of any breach or default of any of the covenants or agreements herein set forth will be deemed a waiver as to any subsequent and/or similar breach or default. 22. Failure to Perform 22.1. In the event of a failure of performance due under the terms of this Agreement and if it becomes necessary for either party to undertake legal action against the other on account thereof, then the prevailing party will be entitled to reasonable attorney's fees in addition to costs and necessary disbursements. 23. Governing Laws 23.1. THIS AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, excluding any choice of law rules that would direct the application of the laws of another jurisdiction, but the scope and validity of any patent or patent application will be governed by the applicable laws of the country of such patent or patent application. 25 28 24. Government Approval or Registration 24.1. If this Agreement or any associated transaction is required by the law of any nation to be either approved or registered with any governmental agency, Licensee will assume all legal obligations to do so. Licensee will notify The Regents if it becomes aware that this Agreement is subject to a United States or foreign government reporting or approval requirement. Licensee will make all necessary filings and pay all costs including fees, penalties, and all other out-of-pocket costs associated with such reporting or approval process. 25. Export Control Laws 25.1. Licensee will observe all applicable United States and foreign laws with respect to the transfer of Patent Products and related technical data to foreign countries, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. 26. Force MaJeure 26.1. The parties to this Agreement will be excused from any performance required hereunder if such performance is rendered impossible or unfeasible due to any acts of God, catastrophes, or other major events beyond their reasonable control, including, without limitation, war, riot, and insurrection; laws, proclamations, edicts, ordinances, or regulations; strikes, lock-outs, or other serious labor disputes; and floods, fires, explosions, or other natural disasters. However, any party to this Agreement will have the right to terminate this Agreement upon 30 days' prior written notice if either party is unable to fulfill its obligations under this Agreement due to any of the causes mentioned above and such inability continues for a period of one year. Notices will be subject to Article 18. (Notices). When such events have abated, the parties' respective obligations hereunder will resume. 26 29 27. Confidentiality 27.1. Licensee and The Regents respectively will treat and maintain the proprietary business, patent prosecution, software, engineering drawings, process and technical information, and other proprietary information ("Proprietary Information") of the other party in confidence using at least the same degree of care as that party uses to protect its own proprietary information of a like nature for a period from the date of disclosure until five years after the date of termination of this Agreement. 27.2. All Proprietary Information will be labeled or marked confidential or as otherwise similarly appropriate by the disclosing party, or if the Proprietary Information is orally disclosed, it will be reduced to writing or some other physically tangible form, marked and labeled as set forth above by the disclosing party, and delivered to the receiving party within 30 days after the oral disclosure as a record of the disclosure and the confidential nature thereof. Notwithstanding the foregoing, Licensee and The Regents may use and disclose Proprietary Information to their employees, agents, consultants, contractors, and, in the case of Licensee, its Sublicensees, provided that any such parties are bound by a like duty of confidentiality. 27.3. Nothing contained herein will in any way restrict or impair the right of Licensee or The Regents to use, disclose, or otherwise deal with any Proprietary Information: 27.3.1. that recipient can demonstrate by written records was previously known to it; 27.3.2. that is now, or becomes in the future, public knowledge other than through acts or omissions of recipient; 27.3.3. that is lawfully obtained without restrictions by recipient from sources independent of the disclosing party; 27.3.4. that is required to be disclosed to a governmental entity or agency in connection with seeking any governmental or regulatory approval, or 27 30 pursuant to the lawful requirement or request of a governmental entity or agency; 27.3.5. that is furnished to a third party by the recipient with similar confidentiality restrictions imposed on such third party, as evidenced in writing; or 27.3.6. that The Regents is required to disclose pursuant to the California Public Records Act or other applicable law. 27.4. Upon termination of this Agreement, Licensee and The Regents will destroy or return to the disclosing party Proprietary Information received from the other in its possession within 15 days following the effective date of termination. Licensee and The Regents will provide each other within 30 days following termination with a written notice that Proprietary Information has been returned or destroyed. Each party may, however, retain one copy of Proprietary Information for archival purposes in nonworking files. 28. Miscellaneous 28.1. The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 28.2. This Agreement will not be binding upon the parties until it has been signed below on behalf of each party, in which event, it will be effective as of the date recited on page one. 28.3. No amendment or modification hereof will be valid or binding upon the parties unless made in writing and signed on behalf of each party. 28.4. This Agreement embodies the entire understanding of the parties and will supersede all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. 28 31 28.5. In case any of the provisions contained in this Agreement are held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability will not affect any other provisions hereof, but this Agreement will be construed as if such invalid or illegal or unenforceable provisions had never been contained herein. The Regents and Licensee execute this Agreement in duplicate originals by their respective, authorized officers on the date indicated. UroSurge, Inc. The Regents of the University of California: By /s/ DAVID MAUPIN By /s/ TERENCE A. FEUERBORN --------------------------------- ---------------------------------- (Signature) (Signature) Name /s/ DAVID MAUPIN Name Terence A. Feuerborn ------------------------------- Title PRESIDENT & CEO Title Executive Director ------------------------------ Research Administration and Technology Transfer Date 6/28/96 Date 6/24/96 ------------------------------ ------------------------------- 29 EX-10.9 15 CEBA LOAN AGREEMENT DATED AUGUST 21, 1997 1 Promissory Note EXHIBIT 10.9 CEBA 98-CEBA-03 PAGE 1 IOWA DEPARTMENT OF ECONOMIC DEVELOPMENT CEBA LOAN AGREEMENT CEBA LOAN NUMBER: 98-CEBA-03 AWARD DATE: AUGUST 21, 1997 KIND OF AWARD: Loan/Forgivable Loan AWARD AMOUNT: $70,000 THIS COMMUNITY ECONOMIC BETTERMENT ACCOUNT ("CEBA") AGREEMENT is made by and among the IOWA DEPARTMENT OF ECONOMIC DEVELOPMENT, 200 East Grand Avenue, Des Moines, Iowa 50309 ("Department" or "IDED"), City of Coralville, City Hall, 1512 Coralville, Iowa 52241 ("Community"), and Urosurge, Inc. 2660 Crosspark Road, Coralville, Iowa 52241 ("Business"). The Department desires to make a loan to the Community for the benefit of the Business and the Community desires to accept this loan, all upon the terms and conditions set forth in this Agreement. The Community desires to make a loan to the Business and the Business desires to accept this loan, all upon the terms and conditions set forth in this Agreement. THEREFORE, in consideration of the mutual promises contained in this Agreement and other good and valuable consideration, it is agreed as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall apply: 1.1 AGREEMENT EXPIRATION DATE. "Agreement Expiration Date" means the date the Agreement ceases to be in force and effect. The Agreement expires upon the occurrence of one of the following: a) the Loan is repaid in full or required part, including accrued interest, court costs and any penalties; b) the Agreement is terminated by the Department due to any default under Article X; c) no disbursement of CEBA funds has occurred within the twenty four months immediately following the Award Date; or d) if the Agreement includes only a Forgivable Loan, at the end of the three (3) year period beginning with the Project Completion Date during which the Job Attainment Obligation has been fulfilled and notice of same has been provided by IDED. 1.2 AWARD DATE. "Award Date" means the date on which the Economic Development Board approved the IDED CEBA participation. 1.3 COMMUNITY BASE JOBS. "Community Base Jobs" means the number of Full-time Equivalent (FTE) Jobs the Department determines are in place in the Community at the time of application for CEBA funds and which will remain in the Community whether or not CEBA funds are awarded. Said jobs must be maintained for a minimum of thirteen (13) weeks beyond the Project Completion Date. If the Agreement includes a Forgivable Loan, said jobs must again be in place at the third (3rd) year anniversary of the Project Completion Date. 1.4 CREATED JOBS. "Created Jobs" means the number of new Full-time Equivalent (FTE) Jobs the Business will add to the Community which meet the Project Wage Obligation over and above the number of Community Base Jobs and/or Retained Jobs. Said jobs must be maintained for a minimum of thirteen (13) weeks beyond the Project Completion Date. If the Agreement includes a Forgivable Loan, said jobs must again be in place at the third (3rd) year anniversary date of the Project Completion Date. 2 Promissory Note CEBA 98-CEBA-03 PAGE 2 1.5 FORGIVABLE LOAN. "Forgivable Loan" means a loan for which repayment is eliminated in part or entirely if the Community and Business satisfy the terms of this Agreement, including the Job Attainment and Wage Obligations stated in Article VII. 1.6 FULL-TIME EQUIVALENT (FTE) JOB. "Full-time Equivalent (FTE) Job" means the equivalent of employment of one (1) person for eight (8) hours per day for a five (5) day forty (40) hour workweek for fifty two (52) weeks per year. 1.7 JOB ATTAINMENT OBLIGATION. "Job Attainment Obligation" means the aggregate total number of Community Base Jobs, Retained Jobs, Created Jobs and State Employment Level pledged by the Community and Business. 1.8 LOAN. "Loan" means either a conventional loan or a Forgivable Loan, or both, the terms of which are or may be set forth in this Loan Agreement. 1.9 LOAN AGREEMENT or AGREEMENT. "Loan Agreement" or "Agreement" means this Agreement, the Project budget and all of the notes, leases, assignments, mortgages, and similar documents referred to in the Agreement and all other instruments or documents executed by the Business or Community or otherwise required in connection with the Agreement, including but not limited to the following: a. Attachment A, Project Budget. b. Attachment B1, Promissory Note of the Business. c. Attachment B2, Promissory Note of the Community. d. Attachment C, CEBA Application for Assistance e. List of positions and associated hourly rate of pay to be created and/or retained as a result of this project. Those positions paying equal to or greater than the project Wage Threshold must be highlighted. 1.10 PROJECT. "Project" means the detailed description of the work, services, job attainment requirements and other obligations to be performed or accomplished by the Community and Business as described in this Agreement and the CEBA application approved by the Department. 1.11 PROJECT COMPLETION DATE. "Project Completion Date" means September 30, 1999 and is the date by which the Project tasks shall have been fully accomplished including fulfillment of the Job Attainment Obligation. 1.12 PROJECT WAGE OBLIGATION. The "Project Wage Obligation" is at least 85% of the County Average wage as compiled from data from the Department of Employment Services. The "Project Wage Obligation" for this project is a starting wage of at least $8.09/hour. 1.13 RETAINED JOBS. "Retained Jobs" means the number of Full-time Equivalent (FTE) Jobs the Department determines are in place in the Community at the time of application for CEBA assistance and which the Business and Community agree will be retained due to receipt of the CEBA funds. Said jobs must be maintained for a minimum of thirteen(13)weeks beyond the Project Completion Date. If the Agreement includes a Forgivable Loan, said jobs must again be in place at the third (3rd) year anniversary of the Project Completion Date. 3 Promissory Note CEBA 98-CEBA-03 PAGE 3 ARTICLE II FUNDING 2.1 FUNDING SOURCE. The source of funding for the Loan is an appropriation by the State legislature for the CEBA Program. With respect to the closing of the Loan, processing of post-closing documents and administration of the Loan until paid in full, the Business and Community shall comply with the requirements, conditions and rules of the Department and any other public or private entity having authority over the funds or the Loan. 2.2 RECEIPT OF FUNDS. All payments under this Agreement are subject to receipt by the Department of sufficient State funds for the CEBA program. Any termination, reduction or delay of CEBA funds to the Department shall, at the option of the Department, result in the termination, reduction or delay of CEBA funds to the Community and the Business. 2.3 PRIOR COSTS. No expenditures made prior to the Award Date may be included as Project costs for the purposes of this Agreement. 2.4 DISBURSEMENT OF LESS THAN THE TOTAL AWARD AMOUNT. If the total award amount has not been disbursed within one hundred twenty (120) days of the Project Completion Date, then the Department shall be under no obligation for further disbursement. And, the Community and Business shall be obligated to the extent of Loan proceeds received. ARTICLE III TERMS OF LOAN 3.1 LOAN. The Department agrees to make a LOAN in the amount of $35.000 with interest at Zero (0%) percent for Five (5) years and a FORGIVABLE LOAN in the amount of $35,000 with interest at Six (6%) percent for Five (5) years to the Community on behalf of the Business to assist in the financing of the Project. Interest begins accruing at the date of disbursement of funds. 3.2 PROMISSORY NOTES. The obligation to repay the Loan shall be evidenced by Promissory Notes executed by the Business and the Community. 3.3 OTHER TERMS. 1) UCC-1 security filing covering: Machinery and Equipment owned by the Business with a value of at least $70,000. 3.4 PREPAYMENT. The outstanding principal and accrued interest of this Loan, or any part thereof that is not forgiven, may be prepaid in part or in full at any time without penalty. 3.5 ACCELERATION UPON DEFAULT. If there is a failure to pay any installment of principal and interest when due, or only a portion is paid, or in the event of any other default under this Loan, the Department may declare the entire unpaid principal and all accrued interest immediately due and payable. 3.6 FORGIVABLE LOAN AMORTIZATION. If the award includes a Forgivable Loan, the Department will, in its sole discretion, determine if the Business has satisfied the terms of this Agreement, including fulfillment of the Job Attainment and Wage Obligation by the Project Completion Date. If the Department determines that the Business has satisfied said terms and has continued to satisfy said terms for thirteen (13) weeks past the Project Completion Date, then principal and interest which would otherwise have accrued for the time period beginning with the Award Date and ending with the Project 4 Promissory Note CEBA 98-CEBA-03 PAGE 4 Completion Date shall be waived and, barring default, no payments on the Forgivable Loan shall be due until the third (3rd) year anniversary of the Project Completion Date. If the Department determines that the Business has satisfied said terms, including fulfillment of the Job Attainment Obligation, at the third (3rd) year anniversary of the Project Completion Date, then repayment of the Forgivable Loan shall be permanently waived. ARTICLE IV CONDITIONS TO DISBURSEMENT OF FUNDS Unless and until the following conditions have been satisfied, the Department shall be under no obligation to disburse to the Community or Business any amounts under the Loan Agreement: 4.1 AUTHORITY. The Business shall have submitted the following documents to the Department: a. Certificate of Good Standing of the corporation. b. Certified copy of the corporation's Articles of Incorporation. c. Certificate of Incumbency naming the current officers and directors of the corporation. d. Resolution of the Board of Directors authorizing the corporation's execution and delivery of this Loan Agreement and the Note and borrowing hereunder, and such other papers as the Department may reasonably request; and specifying the officer(s) authorized to execute the Loan Agreement and bind the corporation. 4.2 PROJECT SCHEDULE. The Community and the Business shall have submitted a completed Project schedule on the form provided by the Department and received the Department's approval of the Project schedule. 4.3 CONSULTATION WITH EMPLOYMENT SERVICES. The Business shall have provided documentation to the Department that it has consulted with the area Department of Employment Services (DES) Workforce Center office to discuss employment services available. In addition, the Business must provide to DES agencies a list of positions to be created including job descriptions and qualifications. 4.4 LOAN AGREEMENT EXECUTED. The Loan Agreement shall have been properly executed and, where required, acknowledged. 4.5 PROJECT FINANCIAL COMMITMENTS. The Business and Community shall have submitted a letter from each of the following committing to the specified financial involvement in the Project and received the Department's approval of the letters of commitment including rate and terms:
Source Type Amount ------ ---- ------ City of Coralville Grant/leasehold improvements $70,000 Urosurge Equity $7,012,000
Each letter shall include the amount, terms and conditions of the financial commitment, as well as any applicable schedules. 4.6 RECORDING. The Business and Community shall have properly recorded in the appropriate office of the Recorder of Deeds and/or the Secretary of State any mortgage, security agreement, financing statement or similar document required by the Department under the Loan Agreement, with all recording 5 Promissory Note CEBA 98-CEBA-03 PAGE 5 charges paid. 4.7 SOLID AND HAZARDOUS WASTE REDUCTION PLAN. A Business which generates solid or hazardous waste shall have submitted the following information concerning the project site: a. A copy of the completed audit and management plan if the Business has conducted an in-house or an external audit and a corresponding management plan within the last three years; or b. If the Business has not conducted an in-house or external audit and corresponding management plan within the last three years, a copy of a letter from the Iowa Department of Natural Resources or the Iowa Waste Reduction Center indicating they have met with the Business and an external audit has been initiated, or, a copy of the outline of the Business' proposed in-house audit and a description of how and when the audit will be performed. Furthermore, the Business shall submit a copy of the completed in-house or external audit within 30 days of its completion or receipt, which time period shall not exceed 90 days from the disbursement date of the financial assistance. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUSINESS To induce the Department to make the Loan referred to in this Agreement, the Business represents, covenants and warrants that: 5.1 AUTHORITY. The Business is a corporation duly organized and validly existing under the laws of the state of incorporation and is in good standing, and has complied with all applicable laws of the State of Iowa. The Business is duly authorized and empowered to execute and deliver the Loan Agreement. All action on the Business' part, such as appropriate resolution of its Board of Directors for the execution and delivery of the Loan Agreement, has been effectively taken. 5.2 FINANCIAL INFORMATION. All financial statements and related materials concerning the Business and the Project provided to the Department are true and correct in all material respects and completely and accurately represent the subject matter thereof as of the effective date of the statements and related materials, and no material adverse change has occurred since that date. 5.3 APPLICATION. The contents of the application the Business submitted to the Department for CEBA funding is a complete and accurate representation of the Business and the Project as of the date of submission and there has been no material adverse change in the organization, operation, business prospects, fixed properties or key personnel of the Business since the date the Business submitted its CEBA application to the Department. 5.4 CLAIMS AND PROCEEDINGS. There are no actions, lawsuits or proceedings pending or, to the knowledge of the Business, threatened against the Business affecting in any manner whatsoever their rights to execute the Loan or the ability of the Community or Business to make the payments required under the Loan, or to otherwise comply with the obligations of the Business contained under the Loan. There are no actions, lawsuits or proceedings at law or in equity, or before any governmental or administrative authority pending or, to the knowledge of the Business, threatened against or affecting the Business or any property or collateral pledged as security for the Loan. 5.5 PRIOR AGREEMENTS. The Community and the Business separately or jointly have not entered into any verbal or written contracts, agreements or arrangements of any kind which are inconsistent with the Loan Agreement. 6 Promissory Note CEBA 98-CEBA-03 PAGE 6 5.6 EFFECTIVE DATE. The covenants, warranties and representations of this Article are made as of the date of this Agreement and shall be deemed to be renewed and restated by the Business at the time of each advance or request for disbursement of funds. ARTICLE VI COVENANTS OF BUSINESS 6.1 AFFIRMATIVE COVENANTS. Until payment in full or required part, or forgiveness of the Loan, the Business covenants with the Community and IDED that: (a) PROJECT WORK AND SERVICES. The Business shall complete the work and services detailed in its CEBA application by the Project Completion Date. (b) JOB ATTAINMENT OBLIGATION. By the Project Completion Date and as the Agreement may require for additional time periods thereafter,, the Business shall have fulfilled its Job Attainment Obligation described in Article VII of this Agreement. (c) BUSINESS RETENTION. The Business shall have and maintain in the Community (and State, if required) the Business premises and operations at least through the Agreement Expiration Date. (d) RECORDS AND ACCOUNTS. The Business shall maintain job data information, books, records, documents and other evidence pertaining to all costs and expenses incurred and revenues received under this Loan Agreement concerning the project, in sufficient detail to reflect all costs, direct and indirect, of labor, materials, equipment, supplies, services and other costs and expenses of whatever nature, for which payment is claimed under this Loan Agreement. The Business shall retain all records for a period of three (3) years from the Agreement Expiration Date. (e) ACCESS TO RECORDS/INSPECTIONS. The Business shall, without prior notice and at any time (during normal business hours), permit the Community and its representatives and the Department, its representatives or the State Auditor to examine, audit and/or copy (i) any plans and work details pertaining to the Project, (ii) all of the Business' books, records and accounts, and (iii) all other documentation or materials related to this Loan; the Business shall provide proper facilities for making such examination and/or inspection. (f) USE OF LOAN FUNDS. The Business shall expend funds received under the Loan only for the purposes and activities described in its CEBA Application and approved by the Department. (g) DOCUMENTATION. The Business shall deliver to the Community and/or IDED, upon request, (i) copies of all contracts or agreements relating to the Project, (ii) invoices, receipts, statements or vouchers relating to the Project, (iii) a list of all unpaid bills for labor and materials in connection with the Project, (iv) budgets and revisions showing estimated Project costs and funds required at any given time to complete and pay for the Project, and (v) current and year-to-date operating statements, including but not limited to a Profit and Loss and Balance Sheet, not older than sixty (60) days from the date of request. (h) NOTICE OF PROCEEDINGS. The Business shall promptly notify the Community and IDED of the initiation of any claims, lawsuits, bankruptcy proceedings or other proceedings brought against the Business which would adversely impact the project, including, but not limited to, any proceedings to assert or enforce liens against collateral securing the Loan. 7 Promissory Note CEBA 98-CEBA-03 PAGE 7 (i) REPORTS. The Business shall prepare, sign and submit the following reports to the Community throughout the Project period: Report Due Date Project Schedule Prior to the first draw of CEBA Loan proceeds Semi-Annual Progress May 10th and November 10th for the period Report ending April 30th and October 31st respectively Quarterly "Employees May 10th and November 10th for the previous Contribution and calendar quarter Payroll Report" Semi-Annual Payroll May 10th and November 10th for the payroll Register with created and/or period ending April 30th and October 31st retained jobs paying at least respectively $8.09 /hr. highlighted. Status of CEBA Funds Report To request funds Annual Report Within 90 days after the Business' fiscal year end Final "Employees Within 30 days after the Project Completion Contribution and Payroll Date Report" with created and/or retained jobs paying at least $8.09/hr highlighted. Final Expenditure Summary Within 30 days of Project Completion Date Solid and Hazardous Waste Within 30 days of completion which shall not Plan exceed 90 days from the date of fund disbursement Annual Solid and Hazardous March 31 of each calendar year Waste Progress Report Payroll Register and "Employer's Within 120 days of Project Completion Date Contribution Payroll Register" 90 days past the Project Completion Date with created and/ or retained jobs highlighted If the Agreement includes a Forgivable Loan, the Business shall prepare, sign and submit the following reports to the Community during the time period beginning with the Project completion Date and ending with the Agreement Expiration Date: Report Due Date ------ -------- "Employees Contribution and Within 30 days after Project Completion Date Payroll Report" anniversary 8 Promissory Note CEBA 98-CEBA-03 PAGE 8 Business Payroll Register Within 30 days after Project Completion Date (for the pay period ending anniversary closest to the Project Completion Date anniversary) with created and/or retained jobs paying at least $8.09/hr highlighted (j) NOTICE OF BUSINESS CHANGES. The Business shall provide prompt advance notice to the Community and the Department of any proposed change in the Business ownership, structure or control which would materially affect the Project. (k) NOTICE OF MEETINGS. The Business shall notify the Community and the Department at least ten (10) working days in advance of all Board of Directors and Stockholders meetings at which the subject matter of this Loan Agreement or Project is proposed to be discussed. The Business shall provide the Department with copies of the agenda and minutes of such meetings and expressly agrees that a representative of the Department has a right to attend any and all such meetings for the purposes of the discussion of the Project and the Loan. (l) MAINTENANCE OF PROJECT PROPERTY AND INSURANCE. The Business shall maintain the Project property in good repair and condition, ordinary wear and tear excepted, and shall not suffer or commit waste or damage upon the Project property. At the Department's request, the Business shall pay for and maintain insurance against loss or damage by fire, tornado, and other hazards, casualties, and contingencies and all risks from time to time included under "extended coverage" policies. This insurance shall be in an amount not less than the full insurable value of the Project property. The Business shall name the Community and Department as a mortgagee and/or an additional loss payee as appropriate and submit copies of the policies to the Department. (m) INDEMNIFICATION. The Business shall indemnify and hold harmless the Department, its officers and employees, from and against any and all losses, except those losses incurred by the Department resulting from willful misconduct or negligence on its or their part. The Business shall indemnify and hold harmless the Community, its officers and employees from and against any and all losses, except those losses incurred by the Community resulting from willful misconduct or negligence on its or their part, which losses shall include losses of the Community incurred in indemnifying and holding harmless the Department. (n) PROJECT FEES. The Business shall promptly pay all appraisal, survey, recording, title, license, permit and other fees and expenses incurred incident to the Loan. (o) INTEREST AND SURPLUS PROCEEDS. The Business shall return all unexpended Loan proceeds and interest accrued on Loan proceeds to the Community within thirty (30) days after the Project Completion Date. (p) (PROJECTS WITH CEBA AWARDS GREATER THAN $500,000). Business shall provide at least 80% of the cost of standard medical and dental insurance for FTE employees. 6.2 NEGATIVE COVENANTS. So long as the Business is indebted to IDED and/or Community, the Business shall not, without prior written disclosure to the Community and IDED and prior written consent of IDED (unless IDED prior approval is expressly waived below), directly or indirectly: 9 Promissory Note CEBA 98-CEBA-03 PAGE 9 (a) BUSINESS' INTEREST. Assign, waive or transfer any of Business' rights, powers, duties or obligations under this Loan Agreement. (b) PROPERTY/COLLATERAL. Sell, transfer, convey, assign, encumber or otherwise dispose of any of the real property or other collateral securing the Loan. (c) RESTRICTIONS. Place or permit any restrictions, covenants or any similar limitations on the real property and/or other collateral securing the Loan. (d) REMOVAL OF COLLATERAL. Remove from the Project site or the State all or any part of the collateral securing the Loan. (e) RELOCATION OR ABANDONMENT. Relocate its operations, physical facilities or jobs (including Created, Retained and Community Base Jobs) assisted with the Loan proceeds outside the Community or abandon its operations or facilities or a substantial portion thereof within the Community during the Loan term. (f) BUSINESS OWNERSHIP. Materially change the ownership structure or control of the business affecting the Project, including but not limited to, entering into any merger or consolidation with any person, firm or corporation or permitting substantial distribution, liquidation or other disposal of business assets directly associated with the Project. Changes in the business ownership, structure or control which do not materially affect the Project shall require forty-five (45) days prior written notice of the Community and Department, but not written consent of, the Department. The materiality of the change and whether or not the change affects the Project shall be determined by the Department. (g) BUSINESS OPERATION. Materially change the nature of the business being conducted, or proposed to be conducted, as described in the Business application for CEBA funding. ARTICLE VII JOB ATTAINMENT AND WAGE OBLIGATION 7.1 COMMUNITY EMPLOYMENT LEVEL. On the Project Completion Date, the Business shall have in the Community a total of 50 FTE Jobs as set forth below: Project Employment Attainment Obligation Wage Obligation Community Base Jobs 22 NA Retained Jobs NA NA Created Jobs *28 at least $ 8.09 /hr ----------- ------------------- Total 50 @$8.09/hr. * Created positions must have a minimum starting wage of at least $8.09 per hour and must average at least $11.80 per hour. 7.2 STATE EMPLOYMENT LEVEL. On the Project Completion Date, the Business shall have a minimum employment level in the State of Iowa, exclusive of its Community employment level, of at least Not Applicable FTE Jobs. This State minimum employment level shall also be maintained through the thirteenth (13th) week after the Project Completion Date, and, if the CEBA participation includes a Forgivable Loan, the State employment level shall again be attained at the third (3rd) year anniversary of the Project Completion Date. 10 Promissory Note CEBA 98-CEBA-03 PAGE 10 7.3 CALCULATION OF JOB ATTAINMENT OBLIGATION. The Department has the final authority to assess whether the Business has met its Job Attainment and Wage Obligation at the Project Completion Date. The Department shall determine the number of Community Base, Retained and Created FTE Jobs maintained, retained and created by the Business. The Community and the Department reserve the right to monitor and measure at any time during the Agreement term the number of FTE jobs maintained and/or retained and/or created by the Business. ARTICLE VIII COVENANTS OF THE COMMUNITY 8.1 AFFIRMATIVE COVENANTS. Until payment in full or required part, or forgiveness of the Loan, the Community covenants with IDED that: (a) PROJECT WORK AND SERVICES. The Community shall perform work and services detailed in the CEBA application by the Project Completion Date. (b) REPORTS REVIEW. The Community shall review and sign the reports prepared by the Business as required under the Loan Agreement and forward them to the Department. The reports shall be submitted by the Community by the 15th of the month of receipt, and for the final reports, within sixty (60) days after the Project Completion Date or Agreement Expiration Date period, whichever is applicable. (c) RECORDS. The Community shall maintain books, records and documents in sufficient detail to demonstrate compliance with the Loan Agreement and shall maintain these materials for a period of three (3) years beyond the Agreement Expiration Date. (d) FILING. The Community shall file in a proper and timely manner any and all Security Instruments required in connection with the Loan, naming the Department as co-security holder as required in Article 9.1 and promptly providing the Department with date-stamped copies of said Security Instruments. The Community shall, at the Department's request, obtain and provide to the Department lien searches or attorney's title opinions. (e) INDEMNIFICATION. The Community shall indemnify and hold harmless the Department, its officers and employees from and against any and all losses, including any loss due to the failure of the Community to file any and all Security Instruments in a proper and timely manner. (f) REQUESTS FOR LOAN FUNDS. The Community shall review the Business' requests for Loan funds to ensure that the requests are in compliance with the Department's requisition procedures and shall execute and forward the requests to the Department for processing. (g) REPAYMENTS. The Community shall promptly forward to the Department all Loan repayments received from the Business. (h) UNUSED LOAN PROCEEDS. The Community shall return all unused Loan proceeds, including interest accrued on Loan proceeds, to the Department within thirty (30) days after the Project Completion Date. (i) NOTICE OF MEETINGS. The Community shall notify the Department at least ten (10) days in advance of all public or closed meetings at which the subject matter of this Loan and/or the Project is proposed to be discussed. The Community shall provide the Department with copies of the agenda and minutes of such meetings and expressly agrees that a representative of the Department has the right to attend any such meetings for the purposes of the discussion of the Project and/or the Loan. 11 Promissory Note CEBA 98-CEBA-03 PAGE 11 (j) NOTICE TO DEPARTMENT. In the event the Community becomes aware of any material alteration in the Project, initiation of any investigation or proceeding involving the Project or Loan, change in the Business' ownership, structure or operation, or any other similar occurrence, the Community shall promptly notify the Department. (k) RESPONSIBILITY UPON DEFAULT. If the Business fails to perform under the terms of the Loan Agreement and the Department declares the Business in default, the Community shall be primarily responsible for recovery of Loan proceeds, as well as penalties, interest, costs and foreclosure on collateral. The Department may also initiate an action to recover such proceeds, or may intervene in any action commenced by the Community. 8.2 NEGATIVE COVENANTS. So long as the Business is indebted to IDED and loan payments are in arrears or past due, the Community shall not, without written consent of IDED, accept any loan repayments and/or settlements on community funds considered local effort in this agreement: (a) ASSIGNMENT. Assign its rights and responsibilities under this Loan Agreement. (b) ALTER FINANCIAL COMMITMENTS. Alter, accelerate or otherwise change the terms of the Community's financial commitment to the Business as set forth in Article 4.5. (c) ADMINISTRATION. Discontinue administration or loan servicing activities under the Loan Agreement. ARTICLE IX SECURITY 9.1 SECURITY INSTRUMENTS. The Business shall execute in joint favor of the Community and the Department all security agreements, financing statements, mortgages, personal and/or corporate guarantees (hereafter, "Security Instruments") as required by the Department. The following Security Instruments shall be executed by the Business: 1) UCC-1 security filing covering: Machinery and Equipment owned by the Business with a value of at least $70,000. 9.2 FINANCING STATEMENT. If the Department requires the filing of a financing statement, the Community shall provide the Department with a copy of the date-stamped financing statement and a certified lien search which reflects the recordation of the security interests of the Department and the Community and all other lienholder of record. The Community shall ensure that the financing statement(s) include language approved by the Department to secure its interests. 9.3 MORTGAGE. If the Department requires the filing of a mortgage, the Community shall provide the Department with a copy of the date-stamped, recorded mortgage and an attorney's Opinion of Title reflecting the interests of the Community and the Department. 9.4 COMMUNITY LIABILITY. (a) The Community shall be solely responsible for the proper and timely filing of all Security Instruments executed by the Business pursuant to this Article. (b) The Community's liability under this Loan Agreement is limited to those amounts which the Community recovers from the Business in unused Loan proceeds, enforcement of judgments against the Business and through its good faith enforcement of the Security Instruments executed by the 12 Promissory Note CEBA 98-CEBA-03 PAGE 12 Business under this Article. Notwithstanding this limited financial liability, the Community shall indemnify and hold harmless the Department, its officers and employees from and against any and all losses which are the result of the Community's failure to file, or improper or untimely filing, of any Security Instrument executed by the Business pursuant to this Article. Nothing in this paragraph shall limit the recovery of principal and interest by the Department in the event of Community's fraud, negligence, or gross mismanagement in the application for, or use of, sums loaned under the Loan Agreement. 9.5 COST VARIATION. In the event that the total Project cost is less than the amount specified in this Agreement, the CEBA participation shall be reduced at the same ratio as CEBA funds are to the total Project cost, and any disbursed excess above the reduced CEBA participation amount shall be returned immediately to IDED with interest at the rate of six percent (6%) per annum from the date of disbursement by IDED. ARTICLE X DEFAULT AND REMEDIES 10.1 EVENTS OF DEFAULT. The following shall constitute Events of Default under this Loan Agreement: (a) MATERIAL MISREPRESENTATION. If at any time any representation, warranty or statement made or furnished to the Department by, or on behalf of, the Business or Community in connection with this Loan Agreement or to induce the Department to make a loan to the Community and/or Business shall be determined by the Department to be incorrect, false, misleading or erroneous in any material respect when made or furnished and shall not have been remedied to the Department's satisfaction within thirty (30) days after written notice by the Department is given to the Business or Community. (b) NON-PAYMENT. If the Business fails to make a payment when due under the terms of this Loan Agreement within thirty (30) days following written notice of such overdue payment is given to the Business by the Department. (c) NONCOMPLIANCE. If there is a failure by the Business or Community to comply with any of the covenants, terms or conditions contained in this Agreement or Security Instruments executed pursuant to this Agreement. (d) PROJECT COMPLETION DATE. If the Project, in the sole judgment of the Department, is not completed on or before the Project Completion Date. (e) JOB ATTAINMENT OBLIGATION. If the Business, in the exclusive judgment of the Department, fails to meet its Job Attainment and Wage Obligation. (f) BUSINESS CHANGES. If there is a material change in the Business ownership, structure or control which occurs without the prior written disclosure to and if required, written permission of the Department. (g) RELOCATION OR ABANDONMENT. If there is a relocation or abandonment of the Business or jobs created or retained under the Project. (h) MISSPENDING. If the Business or Community expends Loan proceeds for purposes not described in the CEBA application or authorized by the Department. (i) INSOLVENCY OR BANKRUPTCY. If the Business becomes insolvent or bankrupt, or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of 13 Promissory Note CEBA 98-CEBA-03 PAGE 13 creditors, or the Business applies for or consents to the appointment of a trustee or receiver for the Business or for the major part of its property; or if a trustee or receiver is appointed for the Business or for all or a substantial part of the assets of the Business and the order of such appointment is not discharged, vacated or stayed within sixty (60) days after such appointment; or if bankruptcy, reorganization, arrangement, insolvency, or liquidation proceedings or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors, are instituted by or against the Business and, if instituted against the Business, is consented to, or, if contested by the Business is not dismissed by the adverse parties or by an order, decree or judgment within sixty (60) days after such institution. (j) INSURANCE. If loss, theft, damage or destruction of any substantial portion of the property of the Business occurs for which there is either no insurance coverage or for which, in the opinion of the Department, there is insufficient insurance coverage. (k) INSECURITY. The Department shall deem itself insecure in good faith and reasonably believes, after consideration of all the facts and circumstances then existing, that the prospect of payment and satisfaction of the obligations under this Agreement, or the performance of or observance of the covenants in this Agreement, or the value of its collateral is or will be materially impaired. 10.2 NOTICE OF DEFAULT. The Department shall issue a written notice of default providing therein a thirty (30) day period in which the Business shall have an opportunity to cure, provided that cure is possible and feasible. 10.3 REMEDIES UPON DEFAULT. If the default remains unremedied, IDED shall have the right, in addition to any rights and remedies available to it under any of the Security Instruments, to do one or more of the following: (a) exercise any remedy provided by law; (b) declare the unpaid principal plus interest then accrued on the Note due and payable immediately without presentment, demand, protest, notice of protest, notice of intention to accelerate or other notice of any kind, all of which are expressly waived by the Business. 10.4 FAILURE TO MEET JOB ATTAINMENT OBLIGATION. If the Business is determined by the Department to be in default of the Loan Agreement due to meeting less than one hundred percent (100%) of its Job Attainment and Wage Obligation, the Department may require full Loan repayment as described in section 10.2 above or, at its discretion, the Department may permit repayment of Loan proceeds using the following criteria: (a) FORGIVABLE LOANS. If the CEBA award is a Forgivable Loan, interest buy-down or interest subsidy, the Department may require repayment of Loan proceeds as follows: A five-year $35,000 forgivable loan. There will be no principal or interest payments or accruals for years one and two. At the project completion date, if the Business has fulfilled at least 50% of its job creation/retention (if applicable) and wage obligation, $1,250 will be forgiven for each new FTE job created/retained (if applicable) and maintained for at least ninety days past the project completion date. Any balance (shortfall) will be amortized over the remaining three years of the contract period (beginning at the project completion date) at six (6%) percent interest per annum with equal annual payments. And, interest will be charged at six (6%) percent per annum from the date of the first CEBA disbursement on the shortfall amount with that amount accrued as of the project completion date being due and payable immediately. And, further, the Department will at the end of the agreement expiration date determine the number of full-time equivalent jobs, and, if that number is less than the job attainment obligation in 7.1 and 7.2 of this agreement, the Business will reimburse funds to the Department on the cost-per-job basis set out above. If the Business has failed to fulfill at least 50% of its job creation/retention (if applicable) and wage obligation, 100% of the CEBA award will be repaid as the shortfall amount under the above-described terms and conditions. 14 Promissory Note CEBA 98-CEBA-03 PAGE 14 (b) CONVENTIONAL LOANS. If the Business received a Loan at a rate that is below the annual interest rate for non-compliance as set periodically by the IDED Board, the remaining principal amount of the Loan may be prorated between the percentage of FTE Jobs created/retained (if applicable) at the Project Wage Threshold and the percentage of the shortfall. The shortfall principal portion may be amortized over the remaining term of the Loan, beginning at the Project Completion Date, at an annual interest rate as determined periodically by the IDED Board. Interest will be charged beginning from the date Loan proceeds were disbursed to the Community on behalf of the Business; interest accrued from this date will be due immediately. The pro rata portion of the Loan associated with the percentage of FTE Jobs created will be amortized at the original rate and term. ARTICLE XI DISBURSEMENT PROCEDURES 1.11 REQUEST FOR REIMBURSEMENT. All disbursements of proceeds shall be subject to receipt by the Department of requests for disbursement submitted by the Community. Requests for disbursement shall be in form and content acceptable to the Department. ARTICLE XII GENERAL TERMS AND PROVISIONS 12.1 BINDING EFFECT. This Loan Agreement shall be binding upon and shall inure to the benefit of the Department, Community and Business and their respective heirs, successors, legal representatives and assigns. The obligations, covenants, warranties, acknowledgments, waivers, agreements, terms, provisions and conditions of this Loan Agreement shall be jointly and severally enforceable against the parties to this Loan Agreement. 12.2 COMPLIANCE WITH LAWS AND REGULATIONS. The Community and Business shall comply with all applicable State and federal laws, rules (including the administrative rules adopted by the Department for the CEBA Program - 261 Iowa Administrative Code, chapter 22), ordinances, regulations and orders. 12.3 TERMINATION FOR CONVENIENCE. In addition to termination due to an Event of Default or nonappropriation of CEBA funds, this Loan Agreement may be terminated in whole, or in part, when the Department, Community and the Business agree that the continuation of the Project would not produce beneficial results commensurate with the future disbursement of Loan funds. The Department, Community and Business shall agree upon the termination conditions. The Community and Business shall not incur new obligations after the effective date of the termination and shall cancel as many outstanding obligations as is reasonably possible. The Department will allow full credit to the Community or the Business for the Department share of the noncancellable obligations allowable under the Loan Agreement and properly incurred by the Community or Business prior to termination. 12.4 PROCEDURE UPON TERMINATION. If the Loan Agreement is terminated for convenience, an Event of Default or nonappropriation of CEBA funds, disbursements shall be allowed for costs up to the date of termination determined by the Department to be in compliance with this Loan Agreement. The Community and the Business shall return to the Department all unencumbered Loan proceeds within one (1) week of receipt of Notice of Termination. Any costs previously paid by the Department which are subsequently determined to be unallowable through audit, monitoring or closeout procedures shall be returned to the Department within thirty (30) days of the disallowance. 12.5 SURVIVAL OF AGREEMENT. If any portion of this Loan Agreement is held to be invalid or unenforceable, the remainder shall be valid and enforceable. The provisions of this Loan Agreement shall survive the execution of all instruments herein mentioned and shall continue in full force until the Loan is 15 Promissory Note CEBA 98-CEBA-03 PAGE 15 paid in full. 12.6 GOVERNING LAW. This Loan Agreement and all Security Instruments shall be interpreted in accordance with the law of the State of Iowa, and any action relating to the Loan Agreement shall only be commenced in the Iowa District Court for Polk County or the United States District Court for the Southern District of Iowa. 12.7 MODIFICATION. Neither this Loan Agreement nor any provision of the Security Instruments executed in connection with this Loan Agreement may be changed, waived, discharged or terminated orally, but only by a written document signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 12.8 NOTICES. Whenever this Loan Agreement requires or permits any notice or written request by one party to another, it shall be in writing, enclosed in an envelope, addressed to the party to be notified at the address heretofore stated (or at such other address as may have been designated by written notice), properly stamped, sealed and deposited in the United State Mail. Any such notice given hereunder shall be deemed delivered upon the earlier of actual receipt or two (2) business days after posting. The Department may rely on the addresses of the Business and Community set forth heretofore, as modified from time to time, as being the addresses of the Community and Business. 12.9 INVESTMENT OF LOAN FUNDS. Temporarily idle Loan proceeds held by the Community or Business may be invested provided such investments shall be in accordance with State law, shall be controlled by the Community or Business, and any interest accrued shall be credited to and expended on the Project prior to the expenditure of other Loan proceeds. All Loan proceeds remaining, including accrued interest, after all allowable Project costs have been paid or obligated shall be returned to the Department within thirty (30) days after the Project Completion Date. 12.10 RESOLUTION OF DISAGREEMENT. In the event of any disagreement between the parties to this Loan Agreement relating to the technical competence of the work and services being performed and its conformity to the requirements of this Loan Agreement, the Department shall resolve the disagreement. The decision of the Department shall be binding on the Community and the Business. 12.11 WAIVERS. No waiver by the Department of any default hereunder shall operate as a waiver of any other default or of the same default on any future occasion. No delay on the part of the Department in exercising any right or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right or remedy by the Department shall preclude future exercise thereof or the exercise of any other right or remedy. 12.12 LIMITATION. It is agreed between the Community and the Business that the Department shall not, under any circumstances, be obligated financially under this Loan Agreement except to disburse funds according to the terms of the Agreement. 12.13 ENFORCEMENT EXPENSES. The Business shall pay upon demand any and all reasonable fees and expenses of the Community and/or the Department, including the fees and expenses of their attorneys, experts and agents, in connection with the exercise or enforcement of any of the rights of the Department and/or Community under the Loan Agreement. 12.14 HEADINGS. The headings in this Loan Agreement are intended solely for convenience of reference and shall be given no effect in the construction and interpretation of this Loan Agreement. 12.15 FINAL AUTHORITY. The Department shall have the final authority to assess whether the Business has met its Job Attainment Obligation and whether the Community and Business have otherwise complied with the terms of this Agreement. 16 Promissory Note CEBA 98-CEBA-03 PAGE 16 12.16 INTEGRATION. This Loan Agreement contains the entire understanding between the Community, Business and the Department and any representations that may have been made before or after the signing of this Loan Agreement, which are not contained herein, are nonbinding, void and of no effect. None of the parties have relied on any such prior representation in entering into this Loan Agreement. 12.17 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Loan Agreement effective as of the Award Date first stated. COMMUNITY: Attorney for Coralville Mayor Approved as to form and content. BY:_____________________________ BY:_____________________________________ (City Attorney) James Fausett, Mayor IOWA DEPARTMENT OF ECONOMIC DEVELOPMENT: BY:_____________________________ BY:_____________________________________ Michael E. Miller, Chief David J. Lyons, Director Bureau of Business Finance BUSINESS: Urosurge, Inc. BY:_________________________________ David H. Maupin, President 17 Promissory Note CEBA 98-CEBA-03 PAGE 17 ATTACHMENT B1- PROMISSORY NOTE- BUSINESS IOWA DEPARTMENT OF ECONOMIC DEVELOPMENT CEBA PROGRAM PROMISSORY NOTE Loan Number 98-CEBA-03 Des Moines, Iowa -------------------------- (City and State) $70,000 August 21, 1997 -------------------------- (Date) FOR VALUE RECEIVED, the undersigned (hereafter called the "Maker") promises to pay to the order of the City of Coralville (hereafter called the "Payee"), at its office at City Hall, or upon notice to the Maker, at such other place as may be designated from time to time by the holder, the principal sum of Seventy Thousand ($70,000) dollars, to be paid as follows: A $35,000 LOAN AT ZERO (0%) PERCENT INTEREST TO BE PAID AS FOLLOWS: 59 monthly payments of $583.33 and 1 final payment of $583.53 beginning on the 15th day of the third month from the date CEBA funds are disbursed. Final payment may vary depending upon dates payments are received. Such payments shall be applied first on interest then due and the remainder on principal. AND; A $35,000 FORGIVABLE LOAN AT SIX (6%) PERCENT INTEREST TO BE PAID AS FOLLOWS: A five-year $35,000 forgivable loan. There will be no principal or interest payments or accruals for years one and two. At the project completion date, if the Business has fulfilled at least 50% of its job creation/retention (if applicable) obligation, $1,250 will be forgiven for each new FTE job created/retained (if applicable) and maintained for at least ninety days past the project completion date. Any balance (shortfall) will be amortized over the remaining three years of the contract period (beginning at the project completion date) at six (6%) percent interest per annum with equal annual payments. And, interest will be charged at six (6%) percent per annum from the date of the first CEBA disbursement on the shortfall amount with that amount accrued as of the project completion date being due and payable immediately. And, further, the Department will at the end of the agreement expiration date determine the number of full-time equivalent jobs, and, if that number is less than the number at the project completion date, the Business will reimburse funds to the Department on the cost-per-job basis set out above. If the Business has failed to fulfill at least 50% of its job creation/retention (if applicable) obligation, 100% of the CEBA award will be repaid as the shortfall amount under the above-described terms and conditions. 1. PAYMENTS. All payments under the Note shall be applied in this order: (1) to interest, and (2) to principal. 2. LOAN AGREEMENT; ACCELERATION UPON DEFAULT. This Note is issued by Maker to evidence an obligation to repay a loan according to the terms of Loan Agreement # 98-CEBA-03 of 18 Promissory Note CEBA 98-CEBA-03 PAGE 18 August 21, 1997 between the Payee and Maker and, at the election of the holder without notice to the Maker, shall become immediately due and payable in the event any payment is not made when due or upon the occurrence of any event of default under the terms of the Loan Agreement. 3. REDUCED AMOUNT. In the event the Maker fails to requisition and spend the full face amount of the Note as set out above, then the amount of each installment payment shall be reduced accordingly in equal amounts. 4. SECURITY. Payment of this Note is secured by a UCC-1 LIEN ON MACHINERY & EQUIPMENT and the holder is entitled to the benefits of the security therein described. In case of a decline in the market value of the collateral, or any part thereof, the Payee may demand that additional collateral of quality and value satisfactory to holder be delivered, pledged and transferred to holder. 5. WAIVER. No delay or omission on the part of the holder in exercising any right under this Note shall operate as a waiver of that right or of any other right under this Note. A waiver on any one occasion shall not be construed as a bar to or waiver of any right and/or remedy on any future occasion. 6. WAIVER OF PROTEST. Each maker, surety, indorser and guarantor of this Note, expressly waives presentment, protest, demand, notice of dishonor or default, and notice of any kind with respect to this Note. 7. COSTS OF COLLECTION. The Maker will pay an demand all costs of collection, maintenance of collateral, legal expenses, and attorneys' fees incurred or paid by the holder in collecting and/or enforcing this Note on default. 8. MEANING OF TERMS. As used in this Note, "holder" shall mean the Payee or other indorsee of this Note, who is in possession of it, or the bearer hereof, if this Note is at the time payable to the bearer. The word "Maker" shall mean each of the undersigned. If this Note is signed by more than one person, it shall be the joint and several liabilities of such persons. 9. MISCELLANEOUS. The captions of paragraphs in this Promissory Note are for the convenience of reference only, shall not define or limit the provisions hereof and shall not have any legal or other significance whatsoever. ADDRESS: BY: /s/ DAVID H. MAUPIN Urosurge. Inc. ------------------------------------- 2660 Crosspark Road David H. Maupin, President Coralville, Iowa 52241 ATTEST: _________________________________ (Signature of Secretary) 19 Promissory Note CEBA 98-CEBA-03 PAGE 19 ATTACHMENT B2 PROMISSORY NOTE- COMMUNITY IOWA DEPARTMENT OF ECONOMIC DEVELOPMENT CEBA PROGRAM PROMISSORY NOTE Loan Number 98-CEBA-03 Des Moines, Iowa -------------------------- (City and State) $70,000 August 21, 1997 -------------------------- (Date) FOR VALUE RECEIVED, the undersigned (hereafter called the "Maker") promises to pay to the order of the State of Iowa, Department of Economic Development (hereafter called the "Payee"), at its office at 200 East Grand Avenue, Des Moines, Iowa 50309, or upon notice to the Maker, at such other place as may be designated from time to time by the holder. the principal sum of Seventy Thousand ($70,000) dollars, to be paid as follows: A $35,000 LOAN AT ZERO(0%) PERCENT INTEREST TO BE PAID AS FOLLOWS: 59 monthly payments of $583.33 and 1 final Payment of $583.53 beginning on the last day of the third month from the date CEBA funds are disbursed. Final payment may vary depending upon dates payments are received. Such payments shall be applied first on interest then due and the remainder on principal. AND; A $35,000 FORGIVABLE LOAN AT SIX (6%) PERCENT INTEREST TO BE PAID AS FOLLOWS: A five-year $35,000 forgivable loan. There will be no principal or interest payments or accruals for years one and two. At the project completion date, if the Business has fulfilled at least 50% of its job creation/retention (if applicable) obligation, $1,250 will be forgiven for each new FTE job created/retained (if applicable) and maintained for at least ninety days past the project completion date. Any balance (shortfall) will be amortized over the remaining three years of the contract period (beginning at the project completion date) at six (6%) percent interest per annum with equal annual payments. And, interest will be charged at six (6%) percent per annum from the date of the first CEBA disbursement on the shortfall amount with that amount accrued as of the project completion date being due and payable immediately, And, further, the Department will at the end of the agreement expiration date determine the number of full-time equivalent jobs, and, if that number is less than the number at the project completion date, the Business will reimburse funds to the Department on the cost-per-job basis set out above. If the Business has failed to fulfill at least 50% of its job creation/retention (if applicable) obligation, 100% of the CEBA award will be repaid as the shortfall amount under the above-described terms and conditions. 1. PAYMENTS. All payments under the Note shall be applied in this order, (1) to interest, and (2) to principal. 2. LOAN AGREEMENT; ACCELERATION UPON DEFAULT. This Note is issued by Maker to evidence an obligation to repay a loan according to the terms of Loan Agreement # 98-CEBA-03 of August 21, 1997 between the Payee and Maker and, at the election of the holder without notice to 20 Promissory Note CEBA 98-CEBA-03 PAGE 20 the Maker, shall become immediately due and payable in the event any payment is not made when due or upon the occurrence of any event of default under the terms of the Loan Agreement. 3. LIMITATION. Maker's liability for the repayment of this Note is limited to those amounts Maker collects through its good faith enforcement of security interest which Maker represents that it has obtained or will obtain as required by the above-referenced Loan Agreement Upon exhaustion of its rights in the collateral granted by such security interest, the Maker will have no liability for any deficiency owing Payee under this Note. Nothing in this paragraph shall limit the recovery of principal and interest by Payee in the event of Maker's fraud, negligence, or gross mismanagement in the application for, or use of, sums loaned under the above-referenced Loan Agreement. 4. REDUCED AMOUNT. In the event the Maker fails to requisition and spend the full face amount of the Note as set out above, then the amount of each installment payment shall be reduced accordingly in equal amounts. 5. SECURITY. Payment of this Note is secured by a UCC-1 LIEN ON MACHINERY & EQUIPMENT and the holder is entitled to the benefits of the security therein described. In case of a decline in the market value of the collateral, or any part thereof, the Payee may demand that additional collateral of quality and value satisfactory to holder be delivered, pledged and transferred to holder. 6. WAIVER. No delay or omission on the part of the holder in exercising any right under this Note shall operate as a waiver of that right or of any other right under this Note. A waiver on any one occasion shall not be construed as a bar to or waiver of any right and/or remedy on any future occasion. 7. WAIVER OF PROTEST. Each maker, surety, indorser and guarantor of this Note, expressly waives presentment, protest, demand, notice of dishonor or default, and notice of any kind with respect to this Note. 8. COSTS OF COLLECTION. The Maker will pay on demand all costs of collection, maintenance of collateral, legal expenses, and attorneys' fees incurred or paid by the holder in collecting and/or enforcing this Note on default. 9. MEANING OF TERMS. As used in this Note, "holder" shall mean the Payee or other indorsee of this Note, who is in possession of it, or the bearer hereof, if this Note is at the time payable to the bearer. The word "Maker" shall mean each of the undersigned. If this Note is signed by more than one person, it shall be the joint and several liabilities of such persons. 10. MISCELLANEOUS. The captions of paragraphs in this Promissory Note are for the convenience of reference only, shall not define or limit the provisions hereof and shall not have any legal or other significance whatsoever. ADDRESS: COMMUNITY: City of Coralville City Hall BY:______________________________________ Coralville, Iowa 52241 James Fausett, Mayor ATTEST:__________________________________ (Signature of City Clerk) EX-10.10 16 AMENDMENT #1 TO CEBA LOAN AGREEMENT DATED 9/22/94 1 Exhibit 10.10 Agreement Amendment Number: (1) Agreement Number: 95-17 Issuing Agency: Agreement Title: Department of Economic Development Community Economic Betterment Account Community: Business: City of Coralville Urosurge, Inc. Amendment Effective Date: Project Completion/Job Attainment Date: March 19, 1997 September 30, 1997 Final loan Repayment Date: January 31, 2000 WHEREAS, the Department of Economic Development (hereafter referred to as the Department), approved CEBA Agreement Number 95-17 with the City of Coralville (hereafter referred to as the Community) and Urosurge, Inc. (hereafter referred to as the Business) on September 22, 1994 for the expenditure of Community Economic Betterment funds, and WHEREAS, the Community and Business are now desirous of amending said agreement and have requested to change the Project Completion Date. THEREFORE, said Agreement by and between the Department, the Community and the Business is hereby amended as follows: Amend Article 1.3 Community Base Jobs to read: 1.3 COMMUNITY BASE JOBS. "Community Base Jobs" means the number of Full-time Equivalent (FTE) Jobs the Department determines are in place in the Community at the time of application for CEBA funds and which will remain in the Community whether or not CEBA funds are awarded. Said jobs must be maintained for a minimum of thirteen (13) weeks beyond the Project Completion Date. If the Agreement includes a Forgivable Loan, said jobs must again be in place at the second (2nd) year anniversary of the Project Completion Date. Amend Article 1.4 Created Jobs to read: 1.4 CREATED JOBS. "Created Jobs" means the number of new Full-time Equivalent (FTE) Jobs the Business will add to the Community which meet the Project Wage Obligation over and above the number of Community Base Jobs and/or Retained Jobs. Said jobs must be maintained for a minimum of thirteen (13) weeks beyond the Project Completion Date. If the Agreement includes a Forgivable Loan, said jobs must again be in place at the second (2nd) year anniversary date of the Project Completion Date. Amend Article l.11 Project Completion Date to read: 1.11 PROJECT COMPLETION DATE. "Project Completion Date" means September 30, 1997 and is the date by which the Project tasks shall have been fully accomplished including fulfillment of the Job Attainment Obligation. Amend Article 1.13 Retained Jobs to read: 1.13 RETAINED JOBS. "Retained Jobs" means the number of Full-Time Equivalent (FTE) jobs the Department determines are in place in the Community at the time of 2 CEBA #95-17 Amendment #1 Page 2 application for CEBA assistance and which the Business and Community agree will be retained due to the receipt of the CEBA funds. Said jobs must be maintained for a minimum of thirteen (13) weeks beyond the Project Completion Date. If the Agreement includes a Forgivable Loan, said jobs must again in place at the second (2nd) year anniversary of the Project completion Date. Amend Article 7.2 State Employment Level to read: 7.2 STATE EMPLOYMENT LEVEL. Not Applicable Amend Article 10.4(a)i to read: i. Not Applicable Amend Article 10.4(a)ii to read: ii. Not Applicable Amend Article 10.4(a)iii to read: iii. Not Applicable IN WITNESS THEREOF, the parties hereto have executed this Amendment on the day and year last specified below: Community: Issuing Agency: City of Coralville Department of Economic Development By: /s/ JIM L. FAUSETT By: --------------------------------- ---------------------------------- Mayor David J. Lyons, Director Date: 4-30-97 Date: ------------------------------- -------------------------------- By: ---------------------------------- Michael E. Miller, Bureau Chief Date: -------------------------------- Business: Urosurge, Inc. By: /s/ DIANE GALLAGHER ------------------------------- Diane Gallagher, Manager Date: 5/2/97 ------------------------------ EX-10.11 17 RESTATED INVESTORS RIGHTS AGREEMENT 1 EXHIBIT 10.11 UROSURGE, INC. RESTATED INVESTORS RIGHTS AGREEMENT This Restated Investors Rights Agreement is made as of June 13, 1997 by and between UroSurge, Inc. a Delaware corporation (the "Company"), those entities and persons listed on Exhibit A attached hereto (individually an "Investor" and collectively the "Investors"), and those entities and persons listed on Exhibit B attached hereto (individually a "Management Stockholder" and collectively the "Management Stockholders"). WHEREAS, the Company intends to enter into a Series C Preferred Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement") with certain of the Investors, and in this connection, the Company and the Investors wish to amend and restate the Restated Investors Rights Agreement dated as of October 16, 1995 (the "Prior Agreement") to read as set forth herein. 1. Inspection Rights. The Company shall permit each Investor, or any authorized representative thereof, to visit and inspect the properties of the Company, including its corporate and financial records, and to discuss its business and finances with officers of the Company, during normal business hours following reasonable notice and as often as may be reasonably requested. All rights granted to Investors under this Section 1 shall terminate upon the closing of the sale of shares of Common Stock in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, which results in the automatic conversion of all outstanding Preferred Stock into Common Stock in accordance with the Company's Certificate of Incorporation (a "Qualified Public Offering"). 2. Financial Statements and Other Information. 2.1 Delivery to Investors. The Company will deliver to each Investor: (a) within 90 days after the end of each fiscal year of the Company, an audited balance sheet of the Company as at the end of such year and audited statements of income and of cash flows of the Company for such year, certified by certified public accountants of established national reputation selected by the Company, and prepared in accordance with generally accepted accounting principles; and (b) within 45 days after the end of each fiscal quarter of the Company, an unaudited balance sheet of the Company as at the end of such quarter, and unaudited statements of income and of cash flow of the Company for such fiscal quarter and for the current fiscal year to the end of such fiscal quarter. 2.2 Delivery to Major Investors. The Company will deliver to each Major Investor (as defined in Section 2.4 below): 2 (a) as soon as available, but in any event within 60 days after commencement of each new fiscal year, a business plan and projected financial statements for such fiscal year; and (b) with reasonable promptness, such other notices, information and data with respect to the Company as the Company delivers to the holders of its Common Stock, and such other information and data as such Major Investor may from time to time reasonably request. 2.3 Consolidated Basis. The foregoing financial statements shall be prepared on a consolidated basis if the Company then has any subsidiaries. 2.4 Definition of Major Investor. For purposes of this Agreement, the term "Major Investor" shall mean an Investor holding not less than one hundred thousand (100,000) shares of Preferred Stock, so long as such Investor continues to own not less than one hundred thousand (100,000) shares of Preferred Stock. For purposes of determining the number of shares held by an Investor, (i) the foregoing number shall be adjusted for any stock splits, stock dividends, recapitalizations or similar events, (ii) shares of Preferred Stock shall include shares which have been converted into Common Stock so long as such Common Stock is held by such Investor, and (iii) with respect to Investors that are corporations or partnerships, shares of Preferred Stock shall include shares distributed to and held by their respective shareholders and partners. 2.5 Termination of Rights. The obligations of the Company under this Section 2 shall terminate upon the closing of a Qualified Public Offering. 3. Right of First Refusal. 3.1 Grant of Right of First Refusal. The Company hereby grants to each Investor a right of first refusal to purchase all or part of its or his pro rata share of any New Securities (as defined below) which the Company may, from time to time, propose to sell and issue following the date of this Agreement, subject to the terms and conditions set forth below. An Investor's pro rata share, for purposes of this Section 3, shall equal a fraction, the numerator of which is the number of shares of Common Stock then held by such Investor or issuable upon conversion or exercise of any shares of Preferred Stock or other convertible securities, options, rights or warrants then held by such Investor, and the denominator of which is the total number of shares of Common Stock then outstanding plus the number of shares of Common Stock issuable upon conversion or exercise of then outstanding Preferred Stock or other convertible securities, options, rights or warrants. 3.2 Definition of New Securities. "New Securities" shall mean any capital stock of the Company whether now authorized or not, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever which are, or may become, convertible into capital stock; provided, however, that the term "New Securities" does not include (i) the shares of Series C Preferred Stock issued or issuable pursuant to the terms of the Stock Purchase Agreement; (ii) the shares of Common Stock issued or issuable upon conversion of shares of Preferred Stock; (iii) securities offered to the public pursuant to a Registration Statement (as defined in Section 4.1); (iv) securities issued for 3 the acquisition of another corporation by the Company by merger, purchase of substantially all the assets of such corporation or another reorganization resulting in the ownership by the Company of not less than a majority of the voting power of such corporation; (v) not more than 1,010,000 shares of Common Stock (such number being subject to adjustment for any stock dividend, stock split, subdivision, combination or other recapitalization of the Common Stock of the Company) issued to directors or employees of or consultants to the Company pursuant to a stock option plan, employee stock purchase plan, restricted stock plan or other employee stock plan or agreement or otherwise (and, in the case of rights, options or warrants, the Common Stock issuable upon exercise thereof); or (vi) securities issued as a result of any stock split, stock dividend or reclassification of Common Stock, distributable on a pro rata basis to all holders of Common Stock. 3.3 Procedure. In the event the Company intends to issue New Securities, it shall give each Investor written notice of such intention, describing the type of New Securities to be issued, the price thereof and the general terms upon which the Company proposes to effect such issuance. Each Investor shall have 20 days from the date of any such notice to agree to purchase all or part of its or his pro rata share of such New Securities for the price and upon the general terms and conditions specified in the Company's notice by giving written notice to the Company stating the quantity of New Securities to be so purchased. Each Investor shall have a right of overallotment such that if any Investor fails to exercise his or its right hereunder to purchase his or its total pro rata portion of New Securities, the other Investors may purchase such portion on a pro rata basis, by giving written notice to the Company within five days from the date that the Company provides written notice to the other Investors of the amount of New Securities with respect to which such nonpurchasing Investor has failed to exercise its or his right hereunder. 3.4 Failure to Exercise Right of First Refusal. In the event any Investor or Investors fail to exercise the foregoing right of first refusal with respect to any New Securities within such 20-day period (or the additional five-day period provided for overallotments), the Company may within 120 days thereafter sell any or all of such New Securities not agreed to be purchased by the Investors, at a price and upon general terms no more favorable to the purchasers thereof than specified in the notice given to each Investor pursuant to Section 3.3 above. In the event the Company has not sold such New Securities within such 120-day period, the Company shall not thereafter issue or sell any New Securities without first offering such New Securities to the Investors in the manner provided above. 3.5 Definition of Investor. For purposes of this Section 3, "Investor" shall include the general partners, officers or other affiliates of an Investor, and an Investor may apportion its pro rata share among itself and such general partners, officers and other affiliates in such proportions as it deems appropriate. 3.6 Termination of Rights. All rights granted to Investors under this Section 3 shall terminate on the closing of a Qualified Public Offering. 4 4. Registration Rights. 4.1 Certain Definitions. As used in this Section 4 and elsewhere in this Agreement, the following terms shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. "Preferred Stock" shall mean (i) the shares of Series A Preferred Stock issued pursuant to the Series A Convertible Preferred Stock Purchase Agreement dated as of March 11, 1994, as amended (the "Series A Agreement"), (ii) the shares of Series B Preferred Stock issued pursuant to the Series B Preferred Stock Purchase Agreement dated as of September 29, 1995, as amended (the "Series B Agreement"), and (iii) the shares of Series C Preferred Stock issued pursuant to the Stock Purchase Agreement. "Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of securities of the Company (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). "Registration Expenses" means the expenses described in Section 4.5. "Registrable Shares" means (i) the shares of the Company's Common Stock issued or issuable upon conversion of shares of Preferred Stock, and (ii) any other shares of Common Stock of the Company issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares upon any sale of such shares pursuant to a Registration Statement or Rule 144 under the Securities Act or any sale in any manner to a person or entity which, by virtue of Section 5 of this Agreement, is not entitled to the rights provided by this Section 4. Wherever reference is made in this Agreement to a request or consent of holders of a certain percentage of Registrable Shares, the determination of such percentage shall include shares of Common Stock issuable upon conversion of shares of Preferred Stock or Preferred Stock previously issued even if such conversion has not been effected. "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 5 4.2 Required Registrations. (a) At any time after the earlier of December 31, 1998 or the closing of the Company's first underwritten public offering of shares of Common Stock pursuant to a Registration Statement, an Investor or Investors holding in the aggregate at least 35% of the Registrable Shares may request, in writing, that the Company effect the registration on Form S-1 or Form S-2 (or any successor form) of Registrable Shares owned by such Investor or Investors having an aggregate offering price of at least $2,000,000 (based on the then current market price or fair value). If the holders initiating the registration intend to distribute the Registrable Shares by means of an underwriting, they shall so advise the Company in their request. In the event such registration is underwritten, the right of other Investors to participate shall be conditioned on such Investors' participation in such underwriting. Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all Investors. Such Investors shall have the right, by giving written notice to the Company within 30 days after the Company provides its notice, to elect to have included in such registration such of their Registrable Shares as such Investors may request in such notice of election, subject to the approval of the underwriter managing the offering as provided below. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration, on Form S-1 or Form S-2 (or any successor form), of all Registrable Shares which the Company has been requested to so register. Notwithstanding any other provision of this Section 4.2, if the managing underwriter advises the holders of Registrable Shares initiating the registration in writing that marketing factors require a limitation of the number of shares to be underwritten, then the holders of Registrable Shares initiating the registration shall so advise all holders of Registrable Shares which would otherwise be included in the underwriting and the number of Registrable Shares that may be included in the underwriting shall be allocated among all such holders of Registrable Shares, including the holders of Registrable Shares initiating the registration, in proportion (as nearly as practicable) to the amount of Registrable Shares of the Company owned by each such holder. If the managing underwriter does not limit the number of Registrable Shares to be underwritten, the Company or other holders of securities of the Company who have registration rights similar to those set forth in Section 4.2 hereof may include Common Stock for their respective accounts in such registration if the managing underwriter states that such inclusion would not adversely affect the offering of Registrable Shares for any reason and if the number of Registrable Shares which would otherwise have been included in such registration and underwriting will not thereby be limited or reduced. (b) At any time after the Company becomes eligible to file a Registration Statement on Form S-3 (or any successor form relating to secondary offerings), an Investor or Investors holding in the aggregate at least 15% of the Registrable Shares may request in writing that the Company effect the registration on Form S-3 (or such successor form), of Registrable Shares having an aggregate offering price of at least $250,000 (based on the then current public market price). Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all Investors. Such Investors shall have the right, by giving written notice to the Company within 30 days after the Company provides its notice, to elect to have included in such registration such of their Registrable Shares as such Investors may request in such notice of election. Thereupon, the Company 6 shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-3, or such successor form, of all Registrable Shares which the Company has been requested to register. (c) The Company shall not be required to effect more than two registrations pursuant to paragraph (a) above or more than four registrations pursuant to paragraph (b) above. In addition, the Company shall not be required to effect any registration (other than on Form S-3 or any successor form relating to secondary offerings) within six months after the effective date of any other Registration Statement of the Company. (d) If at the time of any request to register Registrable Shares pursuant to this Section 4.2, the Company is engaged or has fixed plans to engage within 30 days of the time of the request in a registered public offering as to which the Investors may include Registrable Shares pursuant to Section 4.3 or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of six months from the effective date of such offering or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once in any two year period. 4.3 Incidental Registration. (a) Whenever the Company proposes to file a Registration Statement (other than pursuant to Section 4.2) at any time and from time to time, it will, prior to such filing, give written notice to all Investors of its intention to do so and, upon the written request of an Investor or Investors given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Investor or Investors to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of such Investor or Investors; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to this Section 4.3 without obligation to any Investor. (b) In connection with any offering under this Section 4.3 involving an underwriting, the Company shall not be required to include any Registrable Shares in such underwriting unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the underwriters, jeopardize the success of the offering by the Company. If in the opinion of the managing underwriter the registration of all, or part of, the Registrable Shares which the holders have requested to be included would materially and adversely affect such public offering, then the Company shall be required to include in the underwriting only that number of Registrable Shares which the managing underwriter believes may be sold without causing such adverse effect; provided, however, that in no event shall the amount of Registrable Shares included in the registration be reduced below twenty-five percent (25%) of the total amount of securities included in such registration, unless such offering is the 7 initial underwritten public offering of the Company's securities, in which event any or all of the Registrable Shares requested to be included in the registration may be excluded. If the number of Registrable Shares to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of shares of Common Stock entitled to include shares of Common Stock in such registration shall participate in the underwriting pro rata based upon their total ownership of shares of Common Stock of the Company. If any holder would thus be entitled to include more shares than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata based upon their total ownership of Registrable Shares. 4.4 Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to use its best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) file with the Commission a Registration Statement with respect to such Registrable Shares and use its best efforts to cause that Registration Statement to become and remain effective; (b) as expeditiously as possible prepare and file with the Commission any amendments and supplements to the Registration Statement and the prospectus included in the Registration Statement as may be necessary to keep the Registration Statement effective for a period of not less than 120 days from the effective date; (c) as expeditiously as possible furnish to each selling Investor such reasonable numbers of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as the selling Investor may reasonably request in order to facilitate the public sale or other disposition of the Registrable Shares owned by the selling Investor; and (d) as expeditiously as possible use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities or Blue Sky laws of such states as the selling Investors shall reasonably request, and do any and all other acts and things that may be necessary or desirable to enable the selling Investors to consummate the public sale or other disposition in such states of the Registrable Shares owned by the selling Investor; provided, however, that the Company shall not be required in connection with this paragraph (d) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction. If the Company has delivered preliminary or final prospectuses to the selling Investors and after having done so the prospectus is amended to comply with the requirements of the Securities Act, the Company shall promptly notify the selling Investors and, if requested, the selling Investors shall immediately cease making offers of Registrable Shares and return all prospectuses to the Company. The 8 Company shall promptly provide the selling Investors with revised prospectuses and, following receipt of the revised prospectuses, the selling Investors shall be free to resume making offers of the Registrable Shares. 4.5 Allocation of Expenses. The Company will pay all Registration Expenses of all registrations under this Agreement; provided, however, that if a registration is withdrawn at the request of the Investors requesting such registration (other than as a result of information concerning the business or financial condition of the Company which is made known to the Investors after the date on which such registration was requested) and if the requesting Investors elect not to have such registration counted as a registration requested under Section 4.2, the requesting Investors shall pay the Registration Expenses of such registration pro rata in accordance with the number of their Registrable Shares included in such registration. For purposes of this Section, the term "Registration Expenses" shall mean all expenses incurred by the Company in complying with this Agreement including, without limitation, all registration and filing fees, exchange listing fees, printing expenses, fees and disbursements of counsel for the Company and the fees and expenses of one counsel selected by the selling Investors to represent the selling Investors, state Blue Sky fees and expenses, and the expense of any special audits incident to or required by any such registration, but excluding underwriting discounts, selling commissions and the fees and expenses of selling Investors' own counsel (other than the counsel selected to represent all selling Investors). 4.6 Indemnification. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the seller of such Registrable Shares, each underwriter of such Registrable Shares, and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act, the Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to such Registration Statement, or arise out of or are based upon the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Company will reimburse such seller, underwriter and each such controlling person for any legal or any other expenses reasonably incurred by such seller, underwriter or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission made in such Registration Statement, preliminary prospectus or prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by or on behalf of such seller, underwriter or controlling person specifically for use in the preparation thereof. 9 In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, each seller of Registrable Shares, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and officers and each underwriter (if any) and each person, if any, who controls the Company or any such underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities, joint or several, to which the Company, such directors and officers, underwriter or controlling person may become subject under the Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or arise out of or are based upon any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if the statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such seller, specifically for use in connection with the preparation of such Registration Statement, prospectus, amendment or supplement; provided, however, that the obligations of such Stockholders hereunder shall be limited to an amount equal to the proceeds to each Stockholder of Registrable Shares sold as contemplated herein. Each party entitled to indemnification under this Section 4.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided, that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld); and, provided, further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the Indemnifying Party is adversely affected by such failure. The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall pay such expense if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such proceeding. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation, and no Indemnified Party shall consent to entry of any judgment or settle such claim or litigation without the prior written consent of the Indemnifying Party. 4.7 Indemnification with Respect to Underwritten Offering. In the event that Registrable Shares are sold pursuant to a Registration Statement in an underwritten offering pursuant to Section 4.2(a), the Company agrees to enter into an underwriting agreement containing customary representations and warranties with respect to the business and operations of an issuer of the securities 10 being registered and customary covenants and agreements to be performed by such issuer, including without limitation customary provisions with respect to indemnification by the Company of the underwriters of such offering. 4.8 Information by Holder. Each holder of Registrable Shares included in any registration shall furnish to the Company such information regarding such holder and the distribution proposed by such holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 4.9 "Stand-Off" Agreement. Each Investor, if requested by the Company and an underwriter of Common Stock or other securities of the Company, shall agree not to sell or otherwise transfer or dispose of any Registrable Shares or other securities of the Company held by such Stockholder for a specified period of time (not to exceed 180 days) following the effective date of a Registration Statement; provided, that: (a) such agreement shall only apply to the first such Registration Statement covering Common Stock of the Company to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the Registrable Shares or other securities subject to the foregoing restriction until the end of the stand-off period. 4.10 Limitations on Subsequent Registration Rights. The Company shall not, without the prior written consent of Investors holding at least a majority of the Registrable Shares, enter into any agreement (other than this Agreement) with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to include securities of the Company in any registration filed under Sections 4.2 or 4.3 that would reduce the number of Registrable Shares includable by the Investors under this Agreement. 4.11 Rule 144 Requirements. After the earliest of (i) the closing of the sale of securities of the Company pursuant to a Registration Statement, (ii) the registration by the Company of a class of securities under Section 12 of the Exchange Act, or (iii) the issuance by the Company of an offering circular pursuant to Regulation A under the Securities Act, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and 11 (c) furnish to any holder of Registrable Shares upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days following the closing of the first sale of securities by the Company pursuant to a Registration Statement), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as such holder may reasonably request to avail itself of any similar rule or regulation of the Commission allowing it to sell any such securities without registration. 5. Transfers of Certain Rights. 5.1 In General. The rights granted to each Investor pursuant to the terms of Sections 2, 3 and 4 of this Agreement may be transferred by such Investor to another Investor, to any affiliate of such Investor or to any person or entity acquiring at least 50,000 Registrable Shares (such number being subject to adjustment for any stock dividend, stock split, subdivision, combination or other recapitalization of the Common Stock of the Company); provided, however, that the Company is given written notice by the transferee at the time of such transfer stating the name and address of the transferee and identifying the securities with respect to which such rights are being assigned; and provided further, however, that the Company receives the written instrument provided in Section 5.2 below. 5.2 Transferees. Any transferee to whom rights hereunder are transferred shall, as a condition to such transfer, deliver to the Company a written instrument by which such transferee agrees to be bound by the obligations imposed upon Investors under this Agreement to the same extent as if such transferee were a party hereto. 5.3 Subsequent Transferees. A transferee to whom rights are transferred pursuant to this Section 5 may not again transfer such rights to any other person or entity, other than as provided in Section 5.1 or 5.2 above. 5.4 Partners and Stockholders. Notwithstanding anything to the contrary herein, any Investor which is a partnership or corporation may transfer rights granted to such Investor hereunder to any partner or stockholder thereof who delivers to the Company a written instrument in accordance with Section 5.2 above and containing the representation that the transfer is exempt from registration under the Securities Act. In the event of such transfer, such partner or stockholder shall be deemed a Investor for purposes of this Section 5 and may again transfer such rights to any other person or entity which acquires Registrable Shares from such partner or stockholder, in accordance with, and subject to, the provisions of this Section 5. 6. Confidentiality. Each Investor agrees that he or it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information which such Investor may obtain from the Company pursuant to financial statements, reports and other materials submitted by the Company to such Investor pursuant to this Agreement, or pursuant to visitation or inspection rights granted hereunder, unless such information is known, or until such information becomes known, to the 12 public. Notwithstanding the foregoing, an Investor that is a partnership may disclose summary financial and operating information to its limited partners if required by its partnership agreement. 7. Voting Covenants. 7.1 Voting of Shares. (a) In any and all elections of directors of the Company (whether at a meeting or by written consent in lieu of a meeting), each Investor and Management Stockholder (collectively the "Stockholders") shall vote or cause to be voted all Shares (as defined in Section 7.2 below) owned by him or it, or over which he or it has voting control, and otherwise use his or its respective best efforts, so as to fix the number of directors of the Company at five and to elect (i) one member designated by the holders of the Company's Series A Preferred Stock (which designee shall be designated by Medical Science Partners, L.P. ("MSP"), and who shall initially be Andre L. Lamotte); (ii) one member designated by the holders of the Company's Series B Preferred Stock (which designee shall be designated by Sprout Capital VII, L.P. ("Sprout"), and who shall initially be Robert Curry); (iii) the then duly elected, qualified and acting President of the Company (currently David H. Maupin); and (iv) two members designated jointly by the President of the Company and all holders of the Company's Preferred Stock, by action of the President and the holders of a majority of the Shares held by such holders. (b) The Company shall provide the Stockholders with 20 days' prior written notice of any intended mailing of a notice to stockholders for a meeting at which directors are to be elected. The Stockholders shall give written notice to all other parties to this Agreement, no later than 10 days prior to such mailing, of the persons designated by the Stockholders pursuant to Section 7.1(a) as nominees for election as directors. If the Stockholders shall fail to give notice to the Company as provided above, it shall be deemed that the designees of the Stockholders, then serving as directors shall be their designees for reelection. (c) The Management Stockholders shall not vote to remove any director designated by the holders of the Company's Preferred Stock, except for bad faith or willful misconduct. 7.2 Shares. "Shares" shall mean and include any and all shares of Common Stock and/or shares of capital stock of the Company, by whatever name called, which carry voting rights (including voting rights which arise by reason of default) and shall include any shares now owned or subsequently acquired by a Stockholder, however acquired, including without limitation stock splits and stock dividends. 7.3 Amendment, Waiver and Termination. This Section 7 may only be modified, waived or amended in writing signed by MSP, Sprout and the holders of a majority of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, each voting as a separate class. This Section 7 shall terminate in its entirety upon the closing of a Qualified Public Offering. 13 7.4 No Revocation. The voting agreements contained herein are coupled with an interest and may not be revoked, except by written consent of all of the Stockholders. 7.5 Indemnification. In the event that any director elected pursuant to this Section 7 shall be made or threatened to be made a party to any action, suit or proceeding with respect to which he may be entitled to indemnification by the Company pursuant to its Certificate of Incorporation or Bylaws, or otherwise, he shall be entitled to be represented in such action, suit or proceeding by counsel of his choice and the reasonable expenses of such representation shall be reimbursed by the Company to the extent provided in or authorized by said Certificate of Incorporation or Bylaws. Each Stockholder agrees not to take any action to amend any provisions of the Certificate of Incorporation or the Bylaws of the Company relating to indemnification of directors, as presently in effect, without the prior written consent of all of the Stockholders. 7.6 Restrictive Legend. All certificates representing Shares owned or hereafter acquired by the Stockholders or any transferee of the Stockholders bound by this Agreement shall have affixed thereto a legend substantially in the following form: THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VOTING AGREEMENTS AS SET FORTH IN AN INVESTORS RIGHTS AGREEMENT BY AND AMONG THE REGISTERED OWNER OF THIS CERTIFICATE, THE COMPANY AND CERTAIN OTHER STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE SECRETARY OF THE COMPANY. 7.7 Transfers of Rights. Any transferee to whom Shares are transferred by a Stockholder, whether voluntarily or by operation of law, shall be bound by the voting obligations imposed upon the transferor under this Agreement, and shall be entitled to the rights granted to the transferor under this Agreement, to the same extent as if such transferee were a Stockholder hereunder. 8. Waivers and Amendments. 8.1 Waivers. Certain Investors, as the holders of a majority of the Registerable Shares (as defined in the Prior Agreement), hereby waive on behalf of all Investors any right of first refusal which the Investors may have under the Prior Agreement or otherwise to purchase any of the shares of the Company's Series C Preferred Stock pursuant to the Stock Purchase Agreement. 8.2 Termination of Prior Agreement. The Company and the Investors and Management Stockholders hereby terminate the Prior Agreement in its entirety and replace such agreement with the provisions of this Restated Investors Rights Agreement. For purposes of Section 7 of the Prior Agreement, MSP, Sprout and the holders of a majority of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock, each voting as a separate class, hereby consent and agree to such termination. It is understood and acknowledged that termination of the Prior 14 Agreement shall not affect in any way the termination of Sections 7, 8 (except for subsection 8.2), 9 and 10 of the Series A Agreement pursuant to subsection 8.2 of the Prior Agreement, nor shall it affect the termination of the Voting Agreement (as defined in the Prior Agreement) pursuant to subsection 8.3 of the Prior Agreement, all of which shall be and remain terminated unless expressly agreed otherwise in writing by the Company and the Investors hereunder. 9. General Provisions. 9.1 Governing Law. All questions concerning the construction, validity and interpretation of this Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. 9.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 9.3 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 9.4 Severability. In case any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided, however, that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 9.5 Specific Performance. In addition to any and all other remedies that may be available at law in the event of any breach of this Agreement, the Company and each Stockholder shall be entitled to specific performance of the agreements and obligations of the Company and the Stockholders hereunder and to such other injunctive or other equitable relief as may be granted by a court of competent jurisdiction. 9.6 Amendment and Waiver. With the written consent of the Company and the holders of more than 50% of the Registrable Shares, the obligations of the Company and the rights of the Stockholders under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its board of directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or 15 eliminating any of the provisions of this Agreement; provided, however, that no such waiver or supplemental agreement shall reduce the aforesaid percentage of Registrable Shares, the holders of which are required to consent to any waiver or supplemental agreement without the consent of the holders of all of the Registrable Shares; and provided, further, that such provisions shall not apply to the amendment or waiver of any provision of Section 7, the amendment or waiver of which shall be governed by Section 7.3. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by a signed statement in writing. Any amendment, waiver or supplementary agreement effected in accordance with this paragraph shall be binding upon each holder of any Registrable Shares then outstanding, each future holder of all such Registrable Shares and the Company. 9.7 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to the Company or the Stockholders (or any of their permitted assigns) upon any breach, default or noncompliance under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. Any waiver, permit, consent, or approval of any kind or character on the Company's or the Stockholders' part of any breach, default or noncompliance under this Agreement or any waiver on the Company's or the Stockholders' part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing, and that all remedies, either under this Agreement, by law, or otherwise afforded to the Company or the Stockholders, shall be cumulative and not alternative. 9.8 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or upon deposit with a reputable same-day or overnight delivery service, or with the United States Post Office, by first class mail, postage prepaid, addressed: (a) if to the Investors, at the Investors' address as set forth on Exhibit A, or at such other address as the Investors shall have furnished to the Company in writing, or (b) if to the Management Stockholders, at the Management Stockholders' address as set forth on Exhibit B, or at such other address as the Management Stockholders shall have furnished to the Company in writing, or (c) if to the Company, at the address of the Company's principal place of business. Notices provided in accordance with this Section 9.8 shall be deemed delivered upon personal delivery or two business days after deposit in the mail. 9.9 Titles and Subtitles. The titles of the sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 9.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 9.11 New Investors. Notwithstanding anything to the contrary herein, if new Investors purchase shares of Series C Preferred Stock pursuant to Section 2.3 of the Stock Purchase Agreement, 16 then each such new Investor shall become a party to this Agreement as an "Investor" hereunder, without the need for any consent, approval or signature of any Investor or other party hereunder when such new Investor has both: (a) purchased shares of Series C Preferred Stock and (b) executed one or more counterpart signature pages to this Agreement as an "Investor," with the Company's consent. 17 The foregoing Restated Investors Rights Agreement is executed as of the date first above written. UROSURGE, INC. By:________________________________ David Maupin, President EX-10.12 18 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.12 UROSURGE, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of April ____, 1998, by and between UroSurge, Inc., a Delaware corporation (the "Company"), and _______________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement and to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. (a) "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of 2 securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) References to the "Company" shall include, in addition to UroSurge, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which UroSurge, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (d) "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. -2- 3 (e) "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), actually and reasonably incurred, of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. (g) "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (h) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (i) "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. (j) "Section" refers to a section of this Agreement unless otherwise indicated. (k) "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. -3- 4 2. Indemnification. (a) Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. (b) Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid in indemnifying Indemnitee; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. (c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. (d) Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by -4- 5 Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other Indemnitees. (e) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. (a) Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefor by the Company, the Company shall make Expense Advances to Indemnitee. (b) Form of Undertaking. Any written undertaking by the Indemnitee to repay any Expense Advances hereunder shall be unsecured and no interest shall be charged thereon. (c) Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. (a) Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than forty-five (45) business days after -5- 6 such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than twenty (20) business days after such written demand by Indemnitee is presented to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement or applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such -6- 7 notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently employed by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. (b) Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. -7- 8 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses resulting from acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law; provided, however, that notwithstanding any limitation set forth in this Section10(a) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has engaged in acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law. (b) Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of -8- 9 the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be. (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Exchange Act, or any similar successor statute; provided, however, that notwithstanding any limitation set forth in this Section 10(d) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has violated said statute. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is -9- 10 ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. -10- 11 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. UROSURGE, INC. By:________________________________________ Name: David H. Maupin Title: President and Chief Executive Officer Address: UroSurge, Inc. 2660 Crosspark Road Coralville, Iowa 52241 -11- 12 AGREED TO AND ACCEPTED INDEMNITEE: _________________________________________ (signature) _________________________________________ Address: -12- EX-11.1 19 CALCULATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Shares of common stock, beginning....................... 990,000 1,053,112 1,097,591 =========== =========== =========== Shares of common stock, ending.......................... 1,053,112 1,097,591 1,121,633 =========== =========== =========== Computation of weighted average number of basic and diluted shares: Common shares outstanding at the beginning of the year............................................... 990,000 1,053,112 1,097,591 Weighted average number of net shares issued.......... 9,510 23,875 133,676 ----------- ----------- ----------- WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC)... 999,510 1,076,987 1,111,267 Weighted average of potential dilutive shares for: Stock options granted, computed using the treasury stock method..................................... -- -- -- Convertible preferred stock, computed using the "if converted" method................................ -- -- -- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES (DILUTED)... 999,510 1,076,987 1,111,267 =========== =========== Weighted average of additional shares deemed outstanding from the conversion of preferred stock.............................................. 5,170,015 ----------- TOTAL PRO FORMA AVERAGE SHARES OUTSTANDING.... 6,281,282 =========== Net loss................................................ $(1,234,159) $(2,777,052) $(5,250,634) =========== =========== =========== Basic and diluted loss per share........................ $ (1.23) $ (2.58) $ (4.72) =========== =========== =========== Pro forma basic and diluted loss per share.............. $ (0.84) ===========
EX-23.1 20 CONSENT OF MCGLADREY & PULLEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS To The Board of Directors UroSurge, Inc. Coralville, Iowa We hereby consent to the use in this Registration Statement on Form S-1 of our report, dated April 6, 1998, relating to the financial statements of UroSurge, Inc., and to the reference to our Firm under the captions "Selected Financial Data" and "Experts" in the Prospectus. /s/ MCGLADREY & PULLEN, LLP Iowa City, Iowa April 9, 1998 EX-27.1 21 FINANCIAL DATA SCHEDULE
5 1 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 136,990 3,129,396 140,495 0 930,204 4,486,674 1,008,620 203,237 5,525,819 941,691 109,728 0 58,344 11,216 4,404,840 5,525,819 11,707 11,707 5,432 5,471,644 0 0 9,023 (5,281,950) (31,316) (5,250,634) 0 0 0 (5,250,634) (4.72) (4.72)
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