AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SURMODICS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 2899 41-1356149
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification
Number)
SURMODICS, INC.
9924 WEST 74TH STREET
EDEN PRAIRIE, MINNESOTA 55344
(612) 829-2700
(Address and telephone number
of principal executive offices and principal place of business)
DALE R. OLSETH, CHIEF EXECUTIVE OFFICER
SURMODICS, INC.
9924 WEST 74TH STREET
EDEN PRAIRIE, MINNESOTA 55344
(612) 829-2700
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
DAVID R. BUSCH, ESQ. D. WILLIAM KAUFMAN, ESQ.
MELODIE R. ROSE, ESQ. MICHAEL J. KOLAR, ESQ.
Fredrikson & Byron, P.A. Oppenheimer Wolff & Donnelly
900 Second Avenue South, Suite 1100 45 South Seventh Street, Suite 3400
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 347-7000 (612) 607-7000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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,
please check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
Common Stock, $0.05 per share par
value............................... 2,300,000 shares $8.50 $19,550,000 $5,768
(1) Includes 300,000 shares purchasable by the Underwriters to cover
over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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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 DECEMBER 24, 1997
2,000,000 SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
SurModics, Inc. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $7.50 and $8.50 per share. See "Underwriting" for the factors
considered in determining the initial public offering price. The Company has
applied for quotation of the Common Stock on the Nasdaq National Market under
the symbol "SMDX."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
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 DISCOUNT 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 payable by the Company estimated at $350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares 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 offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and are
subject to the right of the Underwriters to withdraw, cancel or modify such
offer and to reject any order in whole or in part. It is expected that delivery
of the shares of Common Stock will be made on or about , 1998.
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JOHN G. KINNARD AND COMPANY, INCORPORATED
------------
The date of this Prospectus is , 1998
[LOGO]
Providing surface modification solutions
to optimize medical device
performance
[ANATOMICAL DEPICTION OF HUMAN BODY]
NEUROLOGICAL
guide catheters
infusion catheters
guidewires
hydrocephalic shunts
CARDIOVASCULAR CARDIAC RHYTHM MANAGMENT
stents pacemaker leads
guidewires electrophysiology catheters
guide catheters
angioplasty catheters
heart valves
vascular grafts
SURGICAL DEVICES
endoscopy devices
chest wound drains
UROGENITAL PERIPHERAL VASCULAR
urinary catheters vascular grafts
penile implants stents
incontinence devices catheters
ureteral stents guidewires
ORTHOPEDIC
bone repair
cartilage repair
The following are registered trademarks of the Company:
"PhotoLink-Registered Trademark-", "StabilCoat-Registered Trademark-" and
"StabilZyme-Registered Trademark-". The Company's applications for the federal
registration of its trademarks "SurModics-TM-", "StabilGuard-TM-" and
"StabilZyme Select-TM-" are pending.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
PhotoLink-Registered Trademark-
[ILLUSTRATION OF PHOTOLINK COATING PROCESS
BONDING BIOMOLECULES TO A SURFACE]
BIOMOLECULE
IMMOBILIZATION
PhotoLink is a versatile, easily applied light-activated coating technology that
can impart a variety of performance-enhancing characteristics to the surface of
medical devices.
[PHOTOGRAPH OF UNCOATED MATERIAL WITH NON-ABSORBED LIQUID
AND COATED MATERIAL WITH ABSORBED LIQUID]
WETTABILITY
[PHOTOGRAPH OF UNCOATED MATERIAL WITH BLOOD CELL ATTACHMENT
AND COATED MATERIAL WITHOUT SUCH ATTACHMENT]
HEMOCOMPATIBILITY
[MICROSCOPIC PHOTOGRAPH OF BONE
REGENERATION]
TISSUE ENGINEERING SURFACES
[ILLUSTRATION OF DRUG MOLECULES TRAPPED WITHIN A MATRIX OF POLYMERS BONDED
TO A SURFACE OF A STENT]
DRUG DELIVERY
[PHOTOGRAPH OF LIQUID BEADS ON AN UNCOATED SURFACE
AND NO LIQUID BEADS ON A COATED SURFACE]
LUBRICITY
[MICROSCOPIC PHOTOGRAPHS OF UNCOATED MATERIAL COVERED WITH BACTERIA
AND COATED MATERIAL WITH ALMOST NO BACTERIA]
INFECTION RESISTANCE
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) ASSUMES PRO FORMA CONVERSION OF ALL
OUTSTANDING SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK INTO 1,507,312 SHARES
OF COMMON STOCK TO BE EFFECTED UPON THE CLOSING OF THIS OFFERING AND (III)
REFLECTS A 4-FOR-1 STOCK SPLIT OF THE COMMON STOCK EFFECTED ON DECEMBER 22,
1997. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
THE COMPANY
SurModics, Inc. ("SurModics" or the "Company") is a leading provider of
surface modification solutions to the medical device industry. The Company's
primary focus is the commercialization of its patented PhotoLink process through
third-party licensing arrangements. PhotoLink is a versatile, easily applied,
light-activated coating technology that modifies medical device surfaces by
creating covalent bonds between those surfaces and a variety of chemical agents.
Through the PhotoLink process, these chemical agents can impart many
performance-enhancing characteristics, such as lubricity, hemocompatibility,
infection resistance and drug delivery, onto the surface of a medical device
without materially changing the dimensions or physical properties of the device.
The Company believes that medical device manufacturers who utilize the Company's
technology are able to significantly improve the performance of their products
and, in many cases, differentiate their products in a highly competitive
marketplace.
The Company focuses on providing high value-added surface modification
solutions to a variety of medical device markets and product categories.
Examples of products in the market or under development that incorporate the
PhotoLink technology include interventional cardiology catheters, vascular
stents, interventional neurology catheters, guide wires and shunts, cardiac
rhythm management devices, and urological and gynecological devices. The surface
properties created by the PhotoLink technology have greatly reduced treatment
times in catheter-based vascular procedures and have shown the potential to
enhance the long-term performance of implantable devices by improving infection
resistance and promoting host cell attachment, growth and subsequent tissue
integration. The Company believes further opportunities exist to commercialize
its PhotoLink technology for other market applications, such as biomolecule
immobilization for use in the emerging field of DNA-based diagnostics.
SurModics believes its PhotoLink technology has many advantages over other
competing surface modification technologies. First, the PhotoLink technology can
be applied to many different kinds of surfaces, which allows manufacturers a
high degree of flexibility in designing their products. Second, the PhotoLink
technology can immobilize a variety of chemical, pharmaceutical and biological
agents, thereby imparting many different performance-enhancing characteristics
to the device being coated. Third, the PhotoLink technology provides the medical
device manufacturer with the ability to combine multiple surface-enhancing
characteristics on the same device. Finally, the PhotoLink process is relatively
simple and does not subject the medical devices to harsh chemical, pressure or
temperature conditions during the coating process as is the case with some
competing technologies. PhotoLink coatings are compatible with all generally
accepted sterilization processes and the PhotoLink process does not require
expensive, specialized manufacturing equipment. In addition, SurModics' customer
service includes free proof-of-concept studies for potential applications,
coating optimization for specific licensee applications, transfer of the
technology to licensee manufacturing facilities, and assistance during the FDA
approval process for PhotoLink coated devices.
The Company has commercialized its PhotoLink technology through licensing
arrangements with medical device manufacturers which apply the PhotoLink
coatings to their own products. The Company believes this approach allows it to
focus its resources on further development of its technology and expansion of
its licensing activities, while leveraging the established manufacturing, sales
and marketing
3
capabilities of its licensees. Revenues from these arrangements include initial
license fees, minimum royalties and earned royalties based on a percentage of
licensees' product sales. The Company currently has license agreements with 32
companies covering 106 different applications, of which 58 are generating
royalty revenues for the Company. Licensees of the PhotoLink technology include
Cook Incorporated, Cordis Corporation (a Johnson & Johnson company), Medtronic
PS Medical, Pacesetter, Inc. (a St. Jude Medical, Inc. company), Perclose, Inc.,
Sulzer Carbomedics (a division of Sulzer Medica USA Inc.) and Target
Therapeutics, Inc. (a subsidiary of Boston Scientific Corporation).
In addition to licensing its PhotoLink technology, the Company also licenses
certain diagnostic technology to Abbott Laboratories for use with rapid
point-of-care diagnostic tests, such as pregnancy and strep tests. The Company
also manufactures and sells the chemical reagents used in the PhotoLink process
and stabilization products used to extend the shelf-life of immunoassay
diagnostic tests.
The Company was incorporated under the laws of the State of Minnesota in
June 1979. The Company's executive offices are located at 9924 West 74th Street,
Eden Prairie, Minnesota 55344, its telephone number is (612) 829-2700 and its
Internet address is www.surmodics.com.
THE OFFERING
Common Stock offered......................... 2,000,000 shares
Common Stock to be outstanding after this
offering................................... 6,908,180 shares (1)
Use of Proceeds.............................. The Company intends to use proceeds from this
offering for research and development, sales
and marketing and upgrades to its
manufacturing equipment, to strengthen its
patent protection and for working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... SMDX
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(1) Includes 84,000 shares of Common Stock issued pursuant to restricted stock
agreements as of the date of this Prospectus. Excludes, as of the date of
this Prospectus, 1,239,800 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $4.61 per
share. See "Management--Stock Options" and "Description of Capital Stock."
4
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND LICENSE DATA)
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Total revenues................................................ $ 4,630 $ 4,618 $ 5,956 $ 6,182 $ 7,582
Operating costs and expenses.................................. 5,391 5,703 6,411 6,597 7,545
--------- --------- --------- --------- ---------
Income (loss) from operations................................. (761) (1,085) (455) (415) 37
Other income (expense), net................................... 244 (17) 133 221 199
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ (517) $ (1,102) $ (322) $ (194) $ 236
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common and common equivalent share (pro
forma) (1).................................................. $ (.13) $ (.26) $ (.07) $ (.04) $ .04
Weighted average common and common equivalent shares
outstanding (pro forma) (1)................................. 4,085 4,304 4,789 4,851 5,393
SEPTEMBER 30,
--------------------------------------------------
1993 1994 1995 1996
----- ----- ----- -----
SELECTED LICENSE DATA:
Number of licensees.......................................................... 15 19 26 28
Number of licensed applications.............................................. 34 44 77 101
Number of licensed applications generating royalties......................... 14 20 23 45
1997
-----
SELECTED LICENSE DATA:
Number of licensees.......................................................... 32
Number of licensed applications.............................................. 106
Number of licensed applications generating royalties......................... 58
SEPTEMBER 30,
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
BALANCE SHEET DATA:
Cash, cash equivalents and investments................................................ $ 3,822 $ 18,272
Total assets.......................................................................... 6,450 20,900
Total liabilities..................................................................... 1,348 1,348
Total stockholders' equity............................................................ 5,102 19,552
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(1) See Note 2 to Financial Statements for an explanation of the determination
of weighted average common and common equivalent shares outstanding (pro
forma).
(2) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
by the Company hereby at an assumed offering price of $8.00 per share, and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THIS
PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S PLANS, ESTIMATES AND BELIEFS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
DEPENDENCE ON ROYALTY REVENUES
The principal element of the Company's strategy is to enter into licensing
arrangements with medical device companies that manufacture products
incorporating the Company's technology. For the fiscal years ended September 30,
1997 and 1996, the Company derived approximately 38.4% and 37.9% of its
revenues, respectively, from royalties. The Company does not currently
manufacture, market or sell its own medical devices nor does it intend to do so
in the foreseeable future. Thus, the Company's prospects are substantially
dependent on the receipt of royalties from licensees of its technology. The
amount and timing of such royalties are, in turn, dependent on the ability of
the Company's licensees to successfully gain regulatory approval for, market and
sell products incorporating the Company's technology. Failure of certain
licensees to gain regulatory approval or market acceptance for such products
could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company believes that its
licensees have an economic motivation to market products containing the
Company's technology, the amount and timing of resources to be devoted by them
to marketing and the ultimate commercial success of such medical devices are not
within the control of the Company. Hence, the amount and timing of royalty
payments received by the Company will fluctuate, and such fluctuations could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Under the Company's standard license agreements, licensees can abandon the
Company's technology for any reason upon prior written notice, typically
required at least 90 days before termination. Existing and potential licensees
have no obligation to deal exclusively with the Company in obtaining surface
modification technology and may pursue parallel development or licensing of
competing surface modifications, on their own or with third parties. A decision
by a licensee to abandon or terminate one or more of its products coated through
the PhotoLink process or to otherwise terminate its relationship with the
Company could materially adversely affect the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Current
Licensing Arrangements."
NEED TO EXPAND LICENSING BASE; UNCERTAINTY OF MARKET ACCEPTANCE
The Company intends to continue pursuing a strategy of licensing its
technology to a diversified base of medical device manufacturers, thereby
expanding its licensing base for the PhotoLink technology. The Company's success
will depend, in part, on its ability to attract new licensees and to enter into
agreements for additional applications with existing licensees. There can be no
assurance that the Company can successfully expand its licensing base or that
such expansion will result in increased commercialization of licensed
applications. While certain applications of SurModics' PhotoLink technology have
gained acceptance in some segments of the medical device industry, the Company
is in the early stages of adapting the technology for a broader base of medical
applications with additional performance-enhancing characteristics. The
Company's ability to expand its licensing base will depend, in part, on its
ability to develop and market new applications for its PhotoLink technology in
its target markets. However, certain of the Company's existing licenses are
exclusive with respect to certain medical devices, which could restrict the
Company's ability to license the same technology to another entity for a similar
or competitive purpose. There can be no assurance that the Company will be able
to identify, develop and adapt its PhotoLink
6
technology for new applications in a timely and cost effective manner, that new
applications will be licensed by the Company on favorable terms, that such
applications will be accepted by manufacturers in the Company's target markets,
or that products incorporating new applications will gain regulatory approval,
be commercialized or gain market acceptance. Delays in developing new or
enhancing existing PhotoLink applications or the failure of such applications or
potential licensees' products to gain market acceptance could have an adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Strategy," "Business--Research and Development" and
"Business--Government Regulation."
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
The Company operates in a highly competitive and rapidly evolving field and
new developments are expected to continue at a rapid pace. The Company's success
depends, in part, upon its ability to maintain a competitive position in the
development of technologies and products in its areas of focus. The Company's
PhotoLink technology competes with technologies developed by Biocompatibles
International plc, Carmeda (a division of Norsk Hydro USA, Inc.), Specialty
Coatings Systems, Spire Corporation and STS Biopolymers Inc., among others. In
addition, many medical device manufacturers have developed or are engaged in
efforts to develop surface modification technologies generally for use on their
own products. Competition may also result from development efforts by existing
and potential licensees who have no obligation to deal exclusively with the
Company in utilizing or developing surface modification technologies. Many of
the Company's existing and potential competitors (including medical device
manufacturers pursuing coating solutions through their own research and
development efforts) have substantially greater financial and technical
resources and production and marketing capabilities than the Company. There can
be no assurance that the Company will be able to compete effectively with such
competitors. Furthermore, there can be no assurance that new products or
technologies developed by others, or the emergence of new industry standards,
will not render the Company's products or technologies or licensees' products
incorporating the Company's technologies noncompetitive or obsolete. Any new
technologies which make the Company's PhotoLink technology less competitive or
obsolete would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Competition."
HISTORY OF LOSSES AND ACCUMULATED DEFICIT
The Company has incurred net losses in each year since inception, except for
the year ended September 30, 1997, during which the Company recorded operating
income of $37,000 and net income of $236,000. As of September 30, 1997, the
Company had an accumulated deficit of $8.2 million. Losses have resulted
principally from costs incurred in connection with the Company's research and
development activities and from general and administrative costs associated with
the Company's operations. Historically, operations have been predominately
funded with government grants and equity offerings. The Company's revenues may
fluctuate from quarter to quarter and year to year primarily as a result of
fluctuations in the recognition of initial license fees and royalty revenue. The
Company's ability to generate significant revenues and maintain profitability
will depend, in large part, on the ability of the Company to enter into
additional license agreements and on the ability of its licensees to
successfully commercialize products incorporating the Company's technologies. No
assurance can be given that the Company will generate significant revenue growth
or maintain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company's success depends, in large part, on its ability to obtain and
maintain patents, maintain trade secret protection, operate without infringing
on the proprietary rights of third parties and protect its proprietary rights
against infringement by third parties. The Company has been granted U.S. and
foreign
7
patents and has U.S. and foreign patent applications pending related to its
PhotoLink technology. There can be no assurance that any pending patent
application will be approved, that the Company will develop additional
proprietary technology that is patentable, that any patents issued to the
Company will provide the Company with competitive advantages or will not be
challenged or invalidated by any third parties or that the patents of others
will not prevent the commercialization of products incorporating the Company's
technology. Furthermore, there can be no assurance that others will not
independently develop similar technology, duplicate any of the Company's
technology or design around the Company's patents. There can also be no
assurance that the Company's trade secrets or confidentiality agreements with
potential licensees or other parties will provide meaningful protection for the
Company's unpatented proprietary information.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patent or other intellectual property rights of
third parties. There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry, and intellectual
property litigation may be used against the Company as a means of gaining a
competitive advantage. Intellectual property litigation is complex,
time-consuming and expensive, and the outcome of such litigation is difficult to
predict. If the Company were found to be infringing any third-party patent or
other intellectual property right, the Company could be required to pay
significant damages, alter its products or processes, obtain licenses from
others or cease commercialization of its products and processes. If the Company
is required to obtain any licenses, there can be no assurance that the Company
will be able to do so on commercially favorable terms, if at all. The Company's
failure to obtain any such license on commercially favorable terms could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patent litigation may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third-party
proprietary rights. If patent applications are filed in the U.S. that claim
technology also claimed by the Company, the U.S. Patent and Trademark office may
declare an interference proceeding to determine priority of invention which
could result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. An adverse outcome of any such litigation or
interference proceeding could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require the Company to cease using its technology. Any action to defend or
prosecute intellectual property would be costly and result in significant
diversion of the efforts of the Company's management and technical personnel,
regardless of outcome, and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Patents
and Proprietary Rights" and "Use of Proceeds."
DEPENDENCE ON KEY LICENSEE AND GOVERNMENT FUNDING
Abbott Laboratories ("Abbott") and certain U.S. government agencies
accounted for 21% and 16% of the Company's revenues, respectively, for fiscal
1997 and 24% and 21% of the Company's revenues, respectively, for fiscal 1996.
The revenues from Abbott primarily represent royalties received by SurModics in
connection with an exclusive license granted to Abbott of the Company's patent
rights in a particular diagnostic format. This license currently expires in
2008, subject to extension or renewals of the life of the licensed patents, but
can be terminated earlier at any time by Abbott upon 90 days' prior written
notice. However, Abbott would then have no right to use such technology in any
of its diagnostic tests. There can be no assurance that revenues from Abbott or
any customer will continue at their historical levels. Loss of one or more of
the Company's current customers, particularly Abbott, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The revenues from government agencies represent grants from such agencies
under the federal government's Small Business Innovative Research ("SBIR")
program. While the Company intends to continue to seek government grants to fund
some of its research and development efforts, there can be no assurance that the
Company will be successful in obtaining any future government grants. Although
8
government grants have represented a significant percentage of revenues in the
past, the Company believes that these revenues will decline slightly as an
absolute number and more significantly as a percentage of total revenue as the
Company continues its focus on commercializing its technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Other Products" and "Business--Research and Development."
PRODUCT LIABILITY AND INSURANCE
The development and sale of medical devices and component products involves
an inherent risk of product liability claims. Although the Company expects that
devices incorporating its technologies and products will be manufactured by
others and sold under their own labels, there can be no assurance that product
liability claims will not be filed against the Company for such devices or that
such manufacturers will not seek indemnification or other relief from the
Company for any such claims. In addition, there can be no assurance that product
liability claims will not be filed directly against the Company with respect to
its own products. The Company currently maintains product liability insurance in
amounts which management believes are appropriate. There can be no assurance,
however, that product liability insurance will continue to be available to the
Company in the future on acceptable terms, if at all, or that, if available, the
coverages will be adequate to protect the Company against any future product
liability claims. 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 or devices incorporating the Company's technology due to alleged
defects, whether such recall is instituted by a device manufacturer or 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 Company's business,
financial condition or results of operations.
DEPENDENCE UPON KEY PERSONNEL AND ABILITY TO ATTRACT QUALIFIED PERSONNEL
The Company is highly dependent upon a number of key management and
technical personnel. The Company is also dependent upon its ability to attract
and retain additional highly qualified management and technical personnel. The
Company faces intense competition for qualified personnel, many of whom could be
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel. The Company does not
maintain key person insurance on any of its employees. The loss of the services
of one or more key employees or the failure to attract and retain additional
qualified personnel would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Employees."
GOVERNMENT REGULATION
Although PhotoLink technology itself is not directly regulated by the U.S.
Food and Drug Administration ("FDA"), the medical devices incorporating this
technology are subject to FDA regulation. The burden of securing FDA approval
for these medical devices rests with the Company's licensees (the medical device
manufacturers). However, the Company has prepared Device Master Files which may
be accessed by the FDA to assist it in its review of the applications filed by
the Company's licensees. Historically, most medical devices incorporating the
PhotoLink process have been subject to the FDA's 510(k) marketing approval
process, which typically lasts about six to nine months. Supplemental or full
pre-market approval ("PMA") reviews require a significantly longer period. Thus,
significantly more time will be required to commercialize applications subjected
to PMA review. Furthermore, sales of medical devices outside the U.S. are
subject to international regulatory requirements that vary from country to
country. The time required to obtain approval for sale internationally may be
longer or shorter than that required for FDA approval. There can be no assurance
that the Company's licensees will be able to obtain regulatory approval for
devices incorporating PhotoLink technology on a timely basis, or at all.
Regulatory approvals, if granted, may include significant limitations of the
indicated uses for which the product may be
9
marketed. In addition, product approval could be withdrawn for failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing. Changes in existing regulations or adoption of new
governmental regulations or policies could prevent or delay regulatory approval
of products incorporating PhotoLink technology or subject the Company to
additional regulation. Failure or delay of licensees in obtaining FDA and other
necessary regulatory approval or clearance or the loss of previously obtained
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
Certain of the Company's activities are regulated by federal and state
agencies in addition to the FDA. For example, activities in connection with
industrial applications of PhotoLink technology and waste disposal are subject
to regulation by the U.S. Environmental Protection Agency. Some PhotoLink
reagents must be registered with the agency with basic information filed related
to toxicity during the manufacturing process as well as the toxicity of the
final product. Failure to comply with existing or future regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
HAZARDOUS MATERIALS
The Company's research activities sometimes involve the controlled use of
various hazardous materials. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
While the Company currently maintains insurance in amounts which it believes are
appropriate in light of the risk of accident, the Company could be held liable
for any damages that might result from any such event. Any such liability could
exceed the Company's insurance and available resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the offering. The initial public offering
price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which the
Common Stock of the Company will trade after this offering. Market prices for
securities of medical technology companies can be highly volatile, and the
market has experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements of
the status or results of licensing agreements, development projects or
technological innovations by the Company or its competitors, developments
concerning proprietary rights, including patents and litigation matters,
government regulation, general market conditions, as well as quarterly
fluctuations in the Company's revenues and financial results and other factors,
may have a significant impact on the market price of the Common Stock. In
particular, the realization of any of the risks described in the "Risk Factors"
set forth in this Prospectus could have a dramatic and adverse impact on such
market price. See "Underwriting."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options) in the public market following this
offering could have an adverse effect on the price of the Common Stock. Such
sales may also make it more difficult for the Company to sell equity or equity-
related securities in the future at a time and price that the Company would deem
appropriate. Upon completion of this offering, the Company will have 6,908,180
shares of Common Stock issued and outstanding. The 2,000,000 shares offered
hereby will be freely tradable following this offering, except for any shares
purchased by an "affiliate" of the Company, which will be subject to the
limitations of Rule 144 promulgated under the Securities Act of 1933, as amended
("Rule 144"). All officers and directors and
10
certain stockholders of the Company, owning an aggregate of 3,636,648 shares,
have entered into "lock-up" agreements, agreeing not to sell, transfer or
otherwise dispose of any shares of Common Stock without the consent of John G.
Kinnard and Company, Incorporated, as the representative of the several
Underwriters (the "Representative"), for a period of 180 days after the date of
this Prospectus. The Representative may waive these restrictions at any time in
its discretion. Taking such restrictions into account, in addition to the
2,000,000 shares of Common Stock offered hereby, (i) approximately 1,162,716
shares will be eligible for immediate sale on the date of this Prospectus in
accordance with Rule 144; (ii) approximately 17,428 additional shares will
become eligible for sale in the public market beginning 90 days after the date
of this Prospectus in accordance with Rule 144; and (iii) approximately
3,599,668 additional shares will be eligible for sale beginning 180 days after
the date of this Prospectus upon the expiration of the lock-up agreements,
subject, in certain cases, to volume and manner of sale limitations under Rule
144. As of the date of this Prospectus, options to purchase an aggregate of
1,239,800 shares of Common Stock are outstanding, with 915,200 of the shares
issuable upon exercise of such options subject to vesting requirements and
lock-up agreements. The remaining 324,600 shares issuable upon exercise of
outstanding options will become available for exercise and sale upon vesting and
effectiveness of Registration Statements on Form S-8, which the Company intends
to file following the expiration of the lock-up agreements referenced above.
Following the completion of this offering, the holders of an aggregate of
1,507,312 shares will also be entitled to registration rights with respect to
such shares. See "Shares Eligible for Future Sale."
ADVERSE EFFECT OF UNDESIGNATED STOCK AND ANTI-TAKEOVER PROVISIONS
The authorized capital of the Company includes 5,000,000 shares of
undesignated stock. The Company's Board of Directors has the power to issue any
or all of the shares of undesignated stock, including the authority to establish
one or more series and to fix the powers, preferences, rights and limitations of
such class or series, without seeking stockholder approval. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be created and issued
in the future. Furthermore, as a Minnesota corporation, the Company is subject
to provisions of the Minnesota Business Corporations Act ("MBCA") that could
have an anti-takeover effect on the Company. The Company may also consider
adopting additional anti-takeover measures. The authority of the Board to issue
undesignated stock and the anti-takeover provisions of the MBCA, as well as any
future anti-takeover measures adopted by the Company, may, in certain
circumstances, delay, deter or prevent takeover attempts and other changes in
control of the Company not approved by management and the Board of Directors. As
a result, the Company's stockholders may lose opportunities to dispose of their
shares at a premium over prevailing prices in the event of a change in control,
and the market price, voting and other rights of the holders of Common Stock may
also be affected. See "Description of Capital Stock."
DILUTION
Purchasers of shares in this offering will incur immediate and substantial
dilution in the pro forma net tangible book value per share of their purchased
shares. Investors may also experience additional dilution as a result of the
exercise of outstanding stock options, or the issuance by the Company of
additional equity securities. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has not declared or paid any cash dividends on its Common Stock
since its inception and does not anticipate declaring or paying any such cash
dividends in the foreseeable future. See "Dividend Policy."
11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered to the public hereby are estimated to be $14.5 million
($16.7 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $8.00 per share, and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company currently intends to use approximately $5.5 million of such
proceeds to fund improvements to existing PhotoLink applications and the
development of new technological initiatives, primarily focused on additional
PhotoLink applications, including the hiring of additional technical personnel
to support such initiatives. An additional $1.5 million of the net proceeds is
intended to be used to upgrade its technical and production equipment over the
next two years. Further, the Company plans to use approximately $2.0 million of
the net proceeds to expand its sales and marketing capabilities by hiring
additional marketing personnel, and to support market development of new
PhotoLink applications. Finally, an estimated $1.0 million will be reserved to
strengthen SurModics' patent protection in additional worldwide markets and to
seek patent protection for new technology.
The balance of the net proceeds will be used for working capital and general
corporate purposes. A portion of the net proceeds may also be used to acquire
technologies or products that complement the Company's current business. The
Company does not currently have any agreements, arrangements or understandings,
and is not involved in any negotiations, with respect to any such acquisitions,
and no portion of the net proceeds has been allocated for any specific
acquisition.
Pending their use, the net proceeds will be invested in investment grade,
interest-bearing securities.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its Common Stock
since its inception. The Company currently intends to retain any earnings for
use in the operation and expansion of its business and therefore does not
anticipate declaring or paying any cash dividends in the foreseeable future.
12
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the
capitalization of the Company, (ii) the pro forma capitalization of the Company
giving effect to the conversion of all outstanding shares of Series A
Convertible Preferred Stock into 1,507,312 shares of Common Stock and (iii) such
pro forma capitalization as adjusted to reflect the sale by the Company of the
2,000,000 shares offered hereby at an assumed price of $8.00 per share and the
anticipated receipt and application of the estimated net proceeds therefrom,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The information set forth below should
be read in conjunction with the Financial Statements and Notes thereto included
elsewhere in this Prospectus. See "Use of Proceeds."
SEPTEMBER 30, 1997(1)
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- -----------
(IN THOUSANDS)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $0.05 per share par value;
convertible into Common Stock upon the closing of an initial public
offering; 450,000 shares authorized and 376,828 shares issued and
outstanding (actual); no shares authorized, issued and outstanding
(pro forma and as adjusted)........................................... $ 19 $ -- $ --
Common Stock, $0.05 per share par value; 15,000,000 shares authorized;
3,400,868 shares issued and outstanding (actual); 4,908,180 shares
issued and outstanding (pro forma); 6,908,180 shares issued and
outstanding (as adjusted)............................................. 170 245 345
Additional paid-in capital.............................................. 13,492 13,436 27,786
Unearned compensation................................................... (259) (259) (259)
Stock purchase notes receivable......................................... (160) (160) (160)
Accumulated deficit..................................................... (8,160) (8,160) (8,160)
--------- ------------- -----------
Total stockholders' equity and capitalization......................... $ 5,102 $ 5,102 $ 19,552
--------- ------------- -----------
--------- ------------- -----------
- ------------------------
(1) Includes 126,400 shares of Common Stock issued pursuant to restricted stock
agreements. Excludes 1,204,800 shares of Common Stock issuable upon exercise
of outstanding stock options at a weighted average exercise price of $4.60
per share. See "Management--Stock Options" and "Description of Capital
Stock."
13
DILUTION
The pro forma net tangible book value of the Company's Common Stock at
September 30, 1997 was $4.8 million or $.98 per share. "Net tangible book value"
represents the tangible assets less total liabilities of the Company, and "pro
forma net tangible book value per share" was determined by dividing the net
tangible book value of the Company by the pro forma number of shares of Common
Stock outstanding on September 30, 1997. See "Capitalization." "Pro forma net
tangible book value dilution per share" represents the difference between the
initial public offering price per share and the pro forma net tangible book
value per share after this offering. Without taking into account any changes in
the Company's pro forma net tangible book value per share after September 30,
1997, other than to give effect to the sale of the 2,000,000 shares offered
hereby at an assumed initial offering price of $8.00 per share (net of
underwriting discounts and commissions and estimated offering expenses), the pro
forma net tangible book value of the Company at September 30, 1997 would have
been $19.2 million or $2.79 per share. This represents an immediate increase in
pro forma net tangible book value to the existing stockholders of $1.81 per
share and an immediate pro forma net tangible book value dilution to purchasers
of the shares of $5.21 per share, as illustrated by the following table:
Assumed initial public offering price per share............... $ 8.00
Pro forma net tangible book value per share at September 30,
1997...................................................... $ .98
Increase per share attributable to new investors............ 1.81
---------
Pro forma net tangible book value per share after this
offering.................................................... 2.79
---------
Pro forma net tangible book value dilution per share to new
investors................................................... $ 5.21
---------
---------
The following table summarizes as of September 30, 1997, on a pro forma
basis, the difference between the number of shares of Common Stock purchased
from the Company by existing stockholders and by new investors in this offering,
the total consideration paid to the Company and the average price paid per
share. The table assumes that no shares are purchased in this offering by
existing stockholders. To the extent existing stockholders purchase shares in
this offering, their percentage ownership, total consideration and average
consideration per share will be greater than is shown.
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
----------------------- -------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
Existing stockholders............................... 4,908,180 71.0% $ 13,891,861 46.5% $ 2.83
New investors....................................... 2,000,000 29.0% 16,000,000 53.5% 8.00
---------- ----- ------------- -----
Total............................................. 6,908,180 100.0% $ 29,891,861 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
- ------------------------
(1) Does not reflect any deductions for commissions or expenses paid or incurred
in connection with the issuance of such shares.
The foregoing tables and calculations, as of September 30, 1997, include
126,400 shares of Common Stock issued pursuant to restricted stock agreements,
and excludes 1,204,800 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $4.60 per
share. See "Management--Stock Options," "Description of Capital Stock" and Note
4 to the Financial Statements.
14
SELECTED FINANCIAL DATA
The statement of operations data for the years ended September 30, 1995,
1996 and 1997 and the balance sheet data at September 30, 1996 and 1997 are
derived from and are qualified by reference to, and should be read in
conjunction with the more detailed Financial Statements of the Company and the
Notes thereto, which have been audited by Arthur Andersen LLP, independent
public accountants, whose report is included elsewhere in this Prospectus, and
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which follows this section. The statement
of operations data for the years ended September 30, 1993 and 1994 and the
balance sheet data at September 30, 1993, 1994 and 1995 are derived from audited
financial statements not included in this Prospectus.
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Royalties............................................... $ 1,123 $ 1,697 $ 2,082 $ 2,340 $ 2,913
License fees............................................ 606 350 857 382 540
Product sales........................................... 573 898 1,429 1,641 2,159
Research and development................................ 2,238 1,673 1,588 1,819 1,970
--------- --------- --------- --------- ---------
Total revenues........................................ 4,630 4,618 5,956 6,182 7,582
--------- --------- --------- --------- ---------
Operating costs and expenses:
Product................................................. 415 562 1,258 1,214 1,432
Research and development................................ 3,229 3,043 2,966 3,317 3,597
Sales and marketing..................................... 588 951 1,061 912 1,098
General and administrative.............................. 1,159 1,147 1,126 1,154 1,418
--------- --------- --------- --------- ---------
Total operating costs and expenses.................... 5,391 5,703 6,411 6,597 7,545
--------- --------- --------- --------- ---------
Income (loss) from operations............................. (761) (1,085) (455) (415) 37
Other income (expense), net............................... 244 (17) 133 221 199
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ (517) $ (1,102) $ (322) $ (194) $ 236
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common and common equivalent share
(pro forma) (1)......................................... $ (.13) $ (.26) $ (.07) $ (.04) $ .04
Weighted average common and common equivalent shares
outstanding (pro forma) (1)............................. 4,085 4,304 4,789 4,851 5,393
SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and investments.................... $ 2,866 $ 4,730 $ 3,192 $ 3,845 $ 3,822
Total assets.............................................. 4,654 7,169 5,849 6,046 6,450
Total liabilities......................................... 2,041 2,580 1,192 1,306 1,348
Accumulated deficit....................................... (6,777) (7,879) (8,201) (8,395) (8,160)
Total stockholders' equity................................ 2,613 4,589 4,657 4,740 5,102
- ------------------------
(1) See Note 2 to Financial Statements for determination of weighted average
common and common equivalent shares outstanding.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
SurModics, Inc. was formed in 1979 to conduct biomedical research for
government agencies and private industry. Historically, the Company relied
heavily on revenues from research grants from U.S. government agencies to fund
its operations. Since 1990, SurModics has focused its efforts on commercializing
its technologies.
As indicated in the table below, the Company's revenues come from four
primary sources: fees from licensing its patented technology to customers;
royalties received from licensees; the sale of photo-reactive chemical compounds
to licensees and stabilization products to the diagnostics industry; and
research and development fees generated on projects for commercial customers and
pursuant to government grants. The Company expects that revenue generated from
government grants will continue to decline slightly as an absolute number but
more significantly as a percentage of total revenue in the future. The table
below reports each revenue category as a percentage of total revenues.
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Royalties..................................................... 35.0% 37.9% 38.4%
License fees.................................................. 14.4% 6.2% 7.1%
Product sales................................................. 24.0% 26.5% 28.5%
Research and development...................................... 26.6% 29.4% 26.0%
----- ----- -----
Total....................................................... 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
As indicated above, a significant portion of the Company's revenues are
derived from license fees and royalties. Generally, the Company's license
agreements provide for a term of 15 years or the life of the Company's patents
covering the licensed applications, whichever is longer, although the agreement
may be terminated earlier upon notice. These worldwide licenses can be either
exclusive or nonexclusive for a particular device, but over 75% of the Company's
licensed applications are nonexclusive. SurModics requires the payment of a
non-refundable license fee which has historically ranged from $25,000 to
$500,000 and quarterly royalties of 2% to 6% on sales of products incorporating
SurModics' technology. The amount of license fees and royalties are based on
whether the arrangement is exclusive or nonexclusive and the perceived value of
the PhotoLink application to the device. Certain nonrefundable license and
research and development fees are recoverable by the licensees as offsets
against a percentage of future earned royalties.
The Company has attempted to diversify its revenue base by entering into
license agreements with many companies covering multiple product applications.
SurModics currently has license agreements with 32 companies covering 106
applications, of which 58 are generating royalty revenues for the Company. Most
of SurModics' agreements provide for the quarterly payment of the greater of a
minimum royalty or an "earned" royalty based on actual product sales. Many of
the licensed products incorporating SurModics' technology are still in the early
phase of their development, and the Company will not receive earned royalties on
these products until the licensees receive the necessary regulatory approvals
and commercialize these products, if at all. SurModics anticipates that the
Company's royalty revenues will continue to grow in the future as its licensees
succeed in bringing their licensed products to market.
With the exception of the most recently completed fiscal year, the Company
has reported annual losses since inception. During fiscal 1997, the Company
recorded operating income of $37,000 and net income of $236,000. The Company's
accumulated deficit was $8.2 million as of September 30, 1997.
16
Historically, most of the Company's expenses were incurred in connection
with its research and development activities. As additional products
incorporating the PhotoLink technology are commercialized by the manufacturers
of such products and consequently generate earned royalties for the Company,
management anticipates that the Company will be able to leverage its expense
base into increased profitability. The Company's licensing strategy should allow
it to grow its revenue without corresponding expense growth. However, as stated
in "Use of Proceeds," the Company does intend to further invest in sales,
marketing and technical resources in order to further penetrate its target
markets and to develop additional PhotoLink applications.
RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. The Company's revenues were $7.6 million for fiscal 1997, an
increase of $1.4 million, or 22.6%, over fiscal 1996. Between years, royalty
revenue increased 24.5%, product sales increased 31.6% and license fees
increased 41.1%. Research and development revenue increased 8.3%, with a 41.0%
increase in customer-funded research and development revenue, partially offset
by a 5.0% decrease in government-sponsored research and development revenue. In
general, these increases were due to greater customer development activity and
increased market penetration of products incorporating SurModics' technology.
PRODUCT COSTS. The Company's product costs were $1.4 million in fiscal
1997, an increase of $217,000, or 17.9%, compared to fiscal 1996. Product
margins increased to 33.7% in fiscal 1997 from 26.0% in fiscal 1996, primarily
due to manufacturing efficiencies achieved in producing reagent chemicals.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was $3.6
million in fiscal 1997, an increase of $280,000, or 8.5%, over fiscal 1996. The
change was primarily due to increased patent-related costs, additional research
studies at external laboratories and additional technical personnel.
SALES AND MARKETING EXPENSE. Sales and marketing expense was $1.1 million
in fiscal 1997, an increase of $186,000, or 20.5%, over fiscal 1996. This
increase was primarily due to additional marketing personnel and increased
customer activities, which resulted in more travel and promotional spending.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense was
$1.4 million in fiscal 1997, an increase of $263,000, or 22.8%, compared to
fiscal 1996. The increase was primarily due to incentive compensation.
OTHER INCOME (EXPENSE), NET. The Company's net other income was $198,000 in
fiscal 1997, a decrease of $23,000 or 10.2% from fiscal 1996. This decrease was
due primarily to a reduced level of interest income from investments.
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES. The Company's revenues were $6.2 million for fiscal 1996, an
increase of $227,000, or 3.8%, over fiscal 1995. Due to an overall increase in
customer activity, royalty revenue increased 12.4%, product sales increased
14.8% and research and development revenue increased 14.5%, which was comprised
of a 28.9% increase in customer-funded research and development revenue and a
9.6% increase in government-sponsored research and development revenue. License
fees declined $475,000, or 55.4%, to $383,000 in fiscal 1996 due to the timing
of finalizing new license arrangements. Fiscal 1995 included large fees
associated with two license agreements.
PRODUCT COSTS. The Company's product costs were $1.2 million for fiscal
1996, a decrease of $43,000, or 3.4%, compared to fiscal 1995. Product margins
increased to 26.0% in fiscal 1996 from 12.0% in fiscal 1995. This improvement
was primarily due to manufacturing efficiencies achieved in producing reagent
chemicals.
17
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was $3.3
million for fiscal 1996, an increase of $351,000, or 11.8%, over fiscal 1995.
The increase was primarily due to additional compensation-related expense and
research studies at external laboratories, offset by lower patent-related costs.
SALES AND MARKETING EXPENSE. Sales and marketing expense was $912,000 for
fiscal 1996, a decrease of $149,000, or 14.0%, compared to fiscal 1995. This
decrease was primarily attributable to lower compensation costs due to personnel
turnover and lower legal fees associated with the review of new license
agreements.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense was
$1.2 million for fiscal 1996, an increase of $29,000, or 2.6%, over fiscal 1995.
The increase was primarily due to higher compensation costs offset by slightly
lower general legal costs.
OTHER INCOME (EXPENSE), NET. The Company's net other income was $221,000
for fiscal 1996, an increase of $88,000, or 66.2%, compared to fiscal 1995. The
primary reason for the increase was the improved performance of the Company's
investment portfolio. Performance of the Company's investment portfolio in
fiscal 1996 included losses of $55,000 on certain investments compared to losses
of $218,000 on these same investments in fiscal 1995. The Company completely
liquidated these investments in the second quarter of fiscal 1996.
NEW ACCOUNTING PRONOUNCEMENTS
See Notes 2 and 4 of Notes to Financial Statements for a discussion of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," SFAS No. 128, "Earnings Per Share," SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
NET OPERATING LOSS CARRYFORWARDS
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, a change in equity ownership of the Company of greater than 50% within
a three-year period results in an annual limitation on the Company's ability to
utilize its net operating loss ("NOL") carryforwards which accrued during the
tax periods prior to the change in ownership. As of September 30, 1997, the
Company had an NOL carryforward of approximately $6.4 million, which expires in
varying amounts through 2011. The sale of the shares of Common Stock in this
offering will not directly result in such limitation; however, the NOL
carryforwards may become subject to such a limitation due to subsequent changes
in the equity ownership of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of approximately
$2.1 million. Historically, the Company has primarily funded its operations
through government research grants and equity offerings, the most recent of
which occurred in the third quarter of fiscal 1994. For the last three fiscal
years, the Company has generated positive cash flow from operations.
As of September 30, 1997, the Company had cash, cash equivalents and
investments totaling approximately $3.8 million. The Company's funds are
currently invested in short-term money market funds and investment grade,
interest-bearing securities with maturity dates of less than two years. As of
September 30, 1997, the Company had no debt, nor did it have any credit
agreements. The Company believes that its existing capital resources, including
the net proceeds from this offering, will be adequate to fund the Company's
operations into the foreseeable future.
18
BUSINESS
GENERAL
SurModics is a leading provider of surface modification solutions to the
medical device industry. The Company's primary focus is the commercialization of
its patented PhotoLink process through third-party licensing arrangements.
PhotoLink is a versatile, easily applied, light-activated coating technology
that modifies medical device surfaces by creating covalent bonds between those
surfaces and a variety of chemical agents. Through the PhotoLink process, these
chemical agents can impart many performance-enhancing characteristics, such as
lubricity, hemocompatibility, infection resistance and drug delivery, onto the
surface of a medical device without materially changing the dimensions or
physical properties of the device. The Company believes that medical device
manufacturers who utilize the Company's technology are able to significantly
improve the performance of their products and, in many cases, differentiate
their products in a highly competitive marketplace.
The Company focuses on providing high value-added surface modification
solutions to a variety of medical device markets and product categories.
Examples of products in the market or under development that incorporate the
PhotoLink technology include interventional cardiology catheters, vascular
stents, interventional neurology catheters, guide wires and shunts, cardiac
rhythm management devices, and urological and gynecological devices. The surface
properties created by the PhotoLink technology have greatly reduced treatment
times in catheter-based vascular procedures and have shown the potential to
enhance the long-term performance of implantable devices by improving infection
resistance and promoting host cell attachment, growth and subsequent tissue
integration. The Company believes further opportunities exist to commercialize
its PhotoLink technology for other market applications, such as biomolecule
immobilization for use in the emerging field of DNA-based diagnostics.
The Company has commercialized its PhotoLink technology through licensing
arrangements with medical device manufacturers which apply the PhotoLink
coatings to their own products. The Company believes this approach allows it to
focus its resources on further development of its technology and expansion of
its licensing activities, while leveraging the established manufacturing, sales
and marketing capabilities of its licensees. Revenues from these arrangements
include initial license fees, minimum royalties and earned royalties based on a
percentage of licensees' product sales. The Company currently has license
agreements with 32 companies covering 106 different applications, of which 58
are generating royalty revenues for the Company. In addition to licensing its
PhotoLink technology, the Company also licenses certain diagnostic technology to
Abbott Laboratories for use with rapid point-of-care diagnostic tests, such as
pregnancy and strep tests. The Company also manufactures and sells the chemical
reagents used in the PhotoLink process and stabilization products used to extend
the shelf-life of immunoassay diagnostic tests.
MARKETS AND NEED FOR SURFACE MODIFICATION
Recent trends in healthcare toward improved patient outcomes and reduced
total costs have resulted in intense competition for the development of medical
devices that demonstrate superior product performance, reduced procedure times,
improved outcomes and overall cost effectiveness. In the highly competitive
medical device industry, many medical device manufacturers may offer similar
competing products for a single medical application. As a result, product
differentiation is critical to marketing success, and medical device
manufacturers are continually seeking new methods of distinguishing their
products from those of their competitors.
Medical device manufacturers have attempted to address these competitive
pressures by developing innovative medical devices manufactured from a wide
variety of synthetic materials, including many new, expensive and exotic
materials. In an effort to further differentiate their products through improved
product performance, a growing number of medical device manufacturers are
turning to the emerging field of surface modification technology. Surface
modification technology enables device manufacturers to
19
provide medical devices with desired surface characteristics including improved
lubricity, hemocompatibility and infection resistance, as well as the ability to
deliver drugs and promote cell growth and tissue integration.
Although it is an emerging field, surface modification technology has been
used to improve medical devices in many different industry segments. The table
below identifies several of these market segments and the surface properties the
Company believes are desired by each segment.
MARKET SEGMENT SERVED DESIRED SURFACE PROPERTY AND EXAMPLES OF APPLICATIONS
- ---------------------------- -------------------------------------------------------------
Interventional cardiology LUBRICITY: catheters, guide wires
and vascular access HEMOCOMPATIBILITY: vascular stents, catheters, guide wires
THERAPEUTIC DRUG DELIVERY AND RELEASE: vascular stents,
catheters
INFECTION RESISTANCE: catheters, implantable ports
Cardiac rhythm management LUBRICITY: pacemaker and defibrillator leads,
electrophysiology devices
HEMOCOMPATIBILITY: electrophysiology devices
Cardiothoracic surgery INFECTION RESISTANCE: heart valves
HEMOCOMPATIBILITY: minimally invasive bypass devices,
vascular grafts, ventricular assist devices
CELL GROWTH AND TISSUE INTEGRATION: heart valves, vascular
grafts
Interventional neurology LUBRICITY: catheters, guide wires
and neurosurgery INFECTION RESISTANCE: catheters, shunts
Urology and gynecology LUBRICITY: urinary catheters, incontinence devices, ureteral
stents, fertility devices
INFECTION RESISTANCE: urinary catheters, incontinence
devices, ureteral stents, fertility devices, penile
implants
Orthopedics CELL GROWTH AND TISSUE INTEGRATION: bone regeneration
In addition to the above-identified market segments, the Company believes
that one of the next areas of growth for surface modification technology will be
the diagnostic test market. Diagnostic tests utilizing biomolecules, such as
DNA, can be used to screen for new drugs, to sequence unknown portions of the
human genome, or to search for signs of viruses. The Company believes
manufacturers of these diagnostic tests may benefit from surface modification
technology to provide biomolecule immobilization and wettability properties.
THE PHOTOLINK SOLUTION
PhotoLink is a versatile, easily applied, light-activated coating technology
that modifies medical device surfaces by creating covalent bonds between those
surfaces and a variety of chemical agents. The PhotoLink process can impart many
performance-enhancing characteristics, such as lubricity, hemocompatibility,
infection resistance and drug delivery, onto the surface of a wide variety of
medical devices without significantly changing the dimensions or physical
properties of the device.
20
The PhotoLink solution to surface modification involves the utilization of
proprietary, light sensitive (photochemical) reagents. These reagents can
consist of advanced polymers or active biomolecules having desired surface
characteristics and an attached light-reactive chemical compound (photogroup).
As illustrated in the following diagram, when the reagent is exposed to a direct
light source, typically ultraviolet, a photochemical reaction creates a covalent
bond between the photogroup and the surface of the medical device, thereby
imparting the desired property to the surface. A covalent bond is a very strong
chemical bond which results from the sharing of electrons between carbon
molecules of the substrate and the applied coating.
[illustration of the PhotoLink coating process in which a polymer attached
to a photogroup is bonded to a surface when exposed to ultraviolet light]
SurModics' proprietary PhotoLink reagents work on most polymer-based (E.G.,
plastic) substrates, biological substrates (latex rubber, cellulose, tissue and
natural fibers), and metal and glass substrates. Metal and glass substrates
generally require pretreating with polymers to make a carbon-molecule available
for bonding prior to the application of the PhotoLink reagents. The reagents are
easily applied to a clean material surface by dipping, spraying, roll coating,
ink jetting or brushing. SurModics continues to develop proprietary
photochemical reagents providing new product features while expanding the number
and type of substrates on which the reagents can be applied.
ADVANTAGES
The Company believes that its proprietary PhotoLink process provides its
licensees with a number of benefits.
- FLEXIBILITY. PhotoLink coatings can be applied to many different kinds of
surfaces and can immobilize a variety of chemical, pharmaceutical and
biological agents, which allows licensees to be innovative in the design
of their products without significantly changing their dimensions or
physical properties.
- VARIETY OF SURFACE PROPERTIES. The PhotoLink process can be tailored to
provide SurModics' licensees with the ability to improve the performance
of their devices by choosing the specific coating properties desired for
particular applications. The PhotoLink technology also provides the
medical device manufacturer with the ability to combine multiple
surface-enhancing characteristics on the same device.
- EASE OF USE. The PhotoLink coating process is a relatively simple process
that does not require expensive special equipment or the use of hazardous
materials and does not subject the coated products to harsh chemical,
pressure or temperature conditions. Further, PhotoLink coatings are
compatible with all the generally accepted sterilization processes, so the
surface attributes are not lost when the medical device is sterilized
prior to usage.
SURFACE PROPERTIES
SurModics' PhotoLink process has been used by manufacturers of pacemaker
leads, drug infusion catheters, laser and balloon angioplasty catheters, urinary
drainage catheters, vascular closure devices, wound drains, guide wires,
angiography catheters, ureteral stents and hydrocephalic shunts, among other
devices. The PhotoLink process can be used to provide medical device
manufacturers with the following surface properties to improve product
performance:
- LUBRICITY. Low friction or lubricious coatings reduce the force and time
required for insertion, navigation and removal of devices in vascular,
neurological and urogenital applications. Lubricity also reduces tissue
irritation and damage caused by products such as catheters, guide wires
and endoscopy devices. Based on Company and licensee testing, when
compared to uncoated surfaces, the PhotoLink process has reduced the
friction on surfaces by as much as 85% to 95%, depending on the substrate
being coated.
21
- HEMOCOMPATIBILITY. Hemocompatible coatings help reduce adverse reactions
that may be created when a device is inserted into the body and comes in
contact with blood. Heparin has been used for decades as an injectable
drug to reduce blood clotting in patients. SurModics can immobilize
heparin on the surface of blood-contacting medical devices thereby
inhibiting blood clotting on the device surface, minimizing patient risk
and enhancing the performance of the device. PhotoLink heparin coatings
have been shown in Company and licensee testing to reduce blood clotting
by greater than 90% compared to uncoated surfaces. SurModics has
immobilized several other chemical agents in addition to heparin that have
also demonstrated improved hemocompatibility.
- INFECTION RESISTANCE. Antimicrobial coatings are advantageous for most
implantable medical devices where risk of infection is a concern.
PhotoLink technology can apply passive coatings which significantly reduce
bacterial adhesion to the device or active coatings incorporating
antimicrobial agents which kill bacteria around the device. Testing by the
Company has demonstrated that the PhotoLink process reduces the adherence
of microorganisms to biomaterial surfaces by 97% to over 99% depending on
the base material of the device. In addition, when compared to uncoated
products, the PhotoLink process has been shown to increase the uptake of
antimicrobial agents applied to the device just prior to implantation and
prolong the release of these agents.
- DRUG DELIVERY. PhotoLink technology can be used to crosslink polymers and
create reservoirs to entrap drugs on the surface of medical devices. These
drugs can then be released from the surface on a controlled basis by
tailoring the polymers, by adjusting the extent of crosslinking, or by
using a barrier coating to control diffusion. For example, SurModics has
developed a PhotoLink coating that would allow a coronary stent
manufacturer to incorporate a drug onto the stent directed at reducing the
incidence of restenosis (the re-narrowing of the artery).
- WETTABILITY. PhotoLink hydrophilic coatings have been shown in tests by
the Company and its licensees to accelerate liquid flow rates on normally
hydrophobic (water repelling) materials by 75%. Rapid point-of-care
diagnostic tests, such as home monitoring or physician monitoring of
glucose levels in diabetics, are currently done by pricking a patient's
finger and carefully placing a drop of blood onto a polymer strip which is
then inserted into a blood glucose reader. The Company believes that the
time it takes for the blood to flow up the strip to provide the patient
with a readout can be dramatically reduced and the consistency can be
greatly improved with PhotoLink technology.
- CELL GROWTH, TISSUE INTEGRATION AND OTHER TISSUE ENGINEERING. Studies have
shown that attachment of extracellular matrix proteins and peptides onto
surfaces of implantable medical devices improves host cell attachment,
growth and subsequent tissue integration. PhotoLink technology has been
used to coat biomedical devices with photoreactive collagens and other
proteins upon which cells normally grow within the body. Company studies
have shown that biomedical devices (such as vascular grafts and ocular
implants) coated with such proteins, have improved attachment, growth of
cells and acceptance by surrounding tissues. In addition, the Company is
also using its PhotoLink technology to produce three-dimensional scaffolds
to promote bone regeneration.
- BIOMOLECULE IMMOBILIZATION. During a DNA gene analysis, typically hundreds
of different probes need to be placed in a pattern on a surface, called a
DNA array. These arrays can be used by the pharmaceutical industry to
screen for new drugs, by genome mappers to sequence unknown portions of
the human genome, or by diagnostic companies to search a patient sample
for disease-causing bacteria or viruses. However, DNA does not readily
adhere to most surfaces that are important for DNA assays. The Company has
demonstrated a versatile method for the immobilization of DNA on various
surfaces.
22
STRATEGY
The Company's goal is to be the leading provider of surface modification
solutions to companies in the medical device industry. To achieve this goal,
SurModics intends to implement the following key strategies:
- FURTHER PENETRATE AND EXPAND ITS LICENSING BASE. The Company intends to
continue to focus on commercializing its technology through
application-by-application licensing agreements with medical device
manufacturers. Under this strategy, SurModics intends to continue to
license its PhotoLink technology to multiple licensees within the same
market, thereby increasing SurModics' revenue potential.
- FURTHER DEVELOP APPLICATIONS FOR THE PHOTOLINK TECHNOLOGY. The PhotoLink
process is extremely flexible, which provides the Company with many
potential useful applications in the medical device industry. The Company
intends to devote research and development efforts to further enhance the
lubricious, hemocompatible and infection resistant properties of its
existing PhotoLink applications, and to further develop applications
involving controlled drug delivery and release, DNA immobilization and
cell growth and tissue integration.
- EXPAND SALES AND MARKETING RESOURCES. Because of the technical nature of
the Company's operations, SurModics' marketing strategy is to utilize a
technically sophisticated direct sales force, which works closely with
both the Company's and its customers' development staff. The Company
intends to increase its direct sales resources to increase market
awareness of the Company's technological capabilities and developments.
The Company also intends to improve its market research capabilities to
investigate new PhotoLink applications.
- SEEK JOINT DEVELOPMENT PROGRAMS. The Company intends to aggressively
pursue opportunities with medical device companies to expand its
technology, internal expertise and revenue base while reducing
developmental risks by sharing them with others. SurModics is engaged in
several such joint development programs, including one regarding
controlled drug delivery and release and another involving DNA
immobilization.
- EXPAND THE COMPANY'S PRODUCT PORTFOLIO. SurModics believes that it can
utilize its know-how and expertise in surface modified devices,
photoreactive crosslinking and bonding, and reagent chemistry to develop
additional proprietary products that SurModics can directly sell, rather
than license, to the medical marketplace. The Company may acquire
technologies and products which are closely related to or utilize its
technology, thereby allowing the Company to leverage its existing presence
in the medical marketplace.
CURRENT LICENSING ARRANGEMENTS
The Company has commercialized its PhotoLink technology through licensing
arrangements with medical device manufacturers who apply the PhotoLink coatings
to their own products. The Company believes this approach allows it to focus its
resources on further developing its technology and expanding its licensing
activities, while leveraging the established manufacturing, sales and marketing
capabilities of its licensees for the marketing of the specific medical device
utilizing the PhotoLink technology. The Company believes its licensees generally
find the licensing arrangement to be beneficial for them because it is designed
to allow manufacturers to incorporate the PhotoLink process into their own
manufacturing processes without the need to send product outside their facility,
resulting in tighter quality control and reduced investment in work-in-process
inventory.
23
SurModics currently has license agreements with 32 companies covering 106
applications. The following table identifies selected licensees of SurModics'
PhotoLink technology, some of the medical devices that incorporate SurModics'
technology and the surface characteristics sought by the licensee.
SELECTED LICENSEES SELECTED MEDICAL DEVICE(1) DESIRED SURFACE PROPERTY
- -------------------------------- ---------------------------------------- ----------------------------
Cook Incorporated Angiography catheters* Hemocompatibility
Urinary catheters* Lubricity
Guide catheters
Intravascular stents
Guide wires
Balloon dilitation catheters
Cordis Corporation Intravascular stents Hemocompatibility
(a Johnson & Johnson company) Therapeutic drug release
Medtronic PS Medical Hydrocephalic shunts* Lubricity
Central venus access catheter*
Pacesetter, Inc. Implantable pacemaker Infection resistance
(a St. Jude Medical, Inc. components* Lubricity
company) Implantable defibrillator
components
Perclose, Inc. Vascular closure device* Lubricity
Sulzer Carbomedics Sewing rings for biologically derived Hemocompatibility
(a division of Sulzer Medica and synthetic heart valves
USA, Inc.) Synthetic heart valve components
Target Therapeutics, Inc. Neurovascular infusion catheters* Lubricity
(a subsidiary of Boston Neurovascular guide wires*
Scientific Corporation) Neurovascular guide catheters*
- ------------------------
(1) The devices marked with an asterisk are currently generating earned
royalties for SurModics based on the respective licensee's sale of the
medical device incorporating SurModics' technology. The devices not marked
with an asterisk are in the development stage and may never generate earned
royalties for the Company.
The licensing process begins with the medical device manufacturer specifying
the surface characteristics it desires. Because each surface is unique, the
Company routinely conducts a feasibility study at no charge to the customer to
qualify each new potential product application by SurModics. Once the
feasibility has been proven, the customer typically funds further development by
SurModics to optimize the coating formulation to meet the customer's technical
and financial needs. A license agreement is then executed and SurModics'
technical personnel assist the licensee in incorporating the PhotoLink process
into its manufacturing facility. SurModics provides ongoing assistance in
reagent handling, capital equipment recommendations, process control and trouble
shooting. The Company also manufactures and sells the chemical reagents used in
the PhotoLink process, thus creating another source of revenue.
The term of a license agreement is generally for a period of 15 years or the
life of SurModics' patents covering the licensed application, whichever is
longer, although an agreement may be terminated for any reason upon prior
written notice, typically required at least 90 days before termination. The
worldwide license can be either exclusive or nonexclusive for a particular
medical device, but over 75% of the Company's licensed applications are
nonexclusive. SurModics requires the payment of a non-refundable
24
license fee which has historically ranged from $25,000 to $500,000 and quarterly
"earned" royalties of 2% to 6% on the sales of products incorporating SurModics'
technology. The amount of license fees and royalties are based on whether the
arrangement is exclusive or nonexclusive and the perceived value of the
PhotoLink application to the device. Certain nonrefundable license and research
and development fees are recoverable by the licensees as offsets against a
percentage of future earned royalties. Most of SurModics' agreements incorporate
a minimum royalty to be paid by the licensee while the medical devices are
developed, tested and commercialized. In certain cases, payment of these minimum
royalties may not commence until several months after the execution of an
agreement for a particular application.
OTHER PRODUCTS
STABILIZATION PRODUCTS
Although the primary focus of the Company is the development and marketing
of its PhotoLink technology, the Company also develops and markets stabilization
products for use by manufacturers of immunoassay diagnostic tests. SurModics'
StabilCoat and StabilZyme Stabilizers are designed to maintain the activity of
biological components of the immunoassays, resulting in a longer shelf-life.
These products offer SurModics' customers the benefit of product differentiation
and improvement while providing the ultimate end users the benefit of a faster
test with fewer steps and fewer errors. In fiscal 1997, SurModics generated $1.7
million of revenue from its stabilization products.
DIAGNOSTIC FORMATS
The Company also licenses a format for IN VITRO diagnostic tests developed
during the early years of the Company. This format has found broad application
in the expanding area of rapid point-of-care diagnostic testing, such as
pregnancy and strep tests, and generated $1.5 million of royalty revenue for the
Company in fiscal 1997 pursuant to the license agreement with Abbott. Although
this revenue is expected to grow in the future with the increased sales of
licensed products, limited additional SurModics-funded research and development
is being undertaken in this area.
INDUSTRIAL APPLICATIONS
While it is not the Company's primary focus, the Company occasionally
pursues industrial applications for its PhotoLink technology. The Company only
pursues those applications that are perceived to be high-value applications in a
market that is not considered to be price sensitive. To date, revenue associated
with industrial applications has been immaterial and is not expected to be
significant in the foreseeable future.
RESEARCH AND DEVELOPMENT
SurModics' research and development department supports the marketing staff
in performing feasibility studies, providing technical assistance to potential
licensees, optimizing the coating methodologies for specific licensee
applications, assisting in training licensees and integrating the Company's
technology and know-how into licensee manufacturing processes. In addition, the
research and development department works to enhance and expand the PhotoLink
technology through the development of new reagents and new applications.
As medical devices become more sophisticated and complex, the Company
believes the requirements for optimized surface properties will grow. The
Company intends to continue its development efforts to allow its PhotoLink
technology to provide additional optimized surface properties to meet these
needs. The Company's technical strategy is to target selected coating
characteristics for further development prior to licensing, in order to
facilitate and shorten the license cycle. The Company has begun to perform
research into applications for future products both on its own and in
conjunction with some of its licensees. Some of the identified research and
development opportunities include coatings designed to improve the
characteristics of long-term implants, site-specific drug release, orthopedic
repair materials and devices, long-term blood compatibility and DNA
immobilization methods. In addition to expanding the number of medical
applications that may use PhotoLink technology, the Company intends to broaden
the spectrum of
25
surfaces on which reagents can be applied, improve the coating process for
metals and glass, develop a process for coating the interior diameter of medical
devices, expand the portfolio of PhotoLink reagents, and develop additional
proprietary products in which PhotoLink reagents serve as the end product.
The technical staff of the Company consists of 46 scientists, including
seven with Ph.D. degrees, four with Masters degrees and 31 with Bachelor
degrees, with expertise in chemistry, biomedical engineering, biology,
microbiology, cell biology and biochemistry. The technical staff is organized
into five areas of specialization: hydrophilicity, microbiology,
hemocompatibility, biochemistry and tissue engineering. In addition, a chemistry
group supports the synthesis of new reagents needed by the other five groups.
SurModics intends to use a portion of the net proceeds from this offering to
hire additional technical personnel.
In fiscal 1996 and 1997, the Company's research and development expenses
were $3.3 million and $3.6 million, respectively. The Company's research and
development efforts are often funded by commercial licensees and government
agencies. Such research and development revenues during these periods were $1.8
million and $2.0 million, respectively.
Since its founding, the Company has actively participated in the federal
government's Small Business Innovative Research ("SBIR") program to fund
development efforts. Since 1979, 136 research contracts resulting in revenues of
over $23 million have been awarded to SurModics, primarily under the SBIR
program. Grant proposals are generally directed toward the commercial strategies
of the Company. The Company retains commercial rights to discoveries and
technologies resulting from the research and development efforts funded by these
grants. Where possible, licensees' products or substrates are used when
performing research under the grant; thus the results are often directly
applicable to SurModics' licensees. Grant funding has also allowed SurModics to
maintain a larger and more technologically diverse employee base than would
otherwise be possible.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that it has protected its PhotoLink technology through
a series of patents covering a variety of coating methods, reagents and
formulations, as well as particular medical device applications, based on or
employing the Company's proprietary photoreactive chemistry. The series of
patents related to the PhotoLink technology includes 12 issued and three allowed
U.S. patents and seven pending U.S. patent applications, with similar protection
being sought in 28 pending and seven issued patents in various foreign
countries. The Company generally files international patent applications in
parallel with most U.S. applications. The Company generally files in Australia,
Canada, Europe, Japan and Mexico. In addition to the series of patents regarding
PhotoLink technology, SurModics has three issued U.S. patents, with similar
protection being sought in nine pending and 13 issued patents in various foreign
countries, related to its diagnostic technology. There can be no assurance that
any of the pending patent applications will be approved.
The commercial success of the Company will depend, in part, on its ability
to protect its existing patents, to obtain patent protection for newly developed
technology, and to avoid infringing patents issued to others, of which there can
be no assurance. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or, if patents are issued to the Company, design around, circumvent or challenge
the Company's patents. There can also be no assurance that the Company's trade
secrets or confidentiality agreements with potential licensees or other parties
will provide meaningful protection for the Company's unpatented proprietary
information. Litigation, which could result in substantial costs to the Company
and substantial diversion of the efforts of its management and technical
personnel, may be necessary to protect the Company's intellectual property
rights or to determine the scope and validity of third-party proprietary rights.
The Company also relies heavily upon trade secrets and unpatented
proprietary technology. The Company seeks to maintain the confidentiality of
such information by requiring employees, consultants and other parties to sign
confidentiality agreements and by limiting access by parties outside the Company
26
to such information. There can be no assurance, however, that these measures
will prevent the unauthorized disclosure or use of this information or that
others will not be able to independently develop such information. Additionally,
there can be no assurance that any agreements regarding confidentiality and
non-disclosure will not be breached, or, in the event of any breach, that
adequate remedies would be available to the Company.
MARKETING AND SALES
The Company markets its PhotoLink process throughout the world using a
direct sales force consisting of four licensing managers who focus on specific
markets such as cardiology devices, diagnostic products and urology products.
This specialization fosters an in-depth knowledge of the issues faced by
SurModics' licensees within these markets such as technology changes,
biomaterial changes and the regulatory environment.
Because the sales cycle can take several months from feasibility
demonstration to the execution of a license agreement, the Company focuses its
sales efforts on potential licensees with established market positions rather
than those with only development stage products which may never come to market.
Generally, the PhotoLink technology is licensed to medical device manufacturers
for use on specific products. This strategy enables the Company to license the
PhotoLink technology to multiple licensees in the same market. SurModics also
targets selling new applications to existing licensees. The Company believes the
sales cycle is much faster in these situations because the licensee is already
familiar with the technology and the general terms of the license have already
been negotiated. The Company intends to use a portion of the net proceeds from
this offering to increase the size of its direct sales staff and to expand its
market research capabilities to investigate new PhotoLink applications.
As part of its marketing strategy, the Company publishes technical
literature on each surface capability of the PhotoLink technology (I.E.,
lubricity, hemocompatibility, etc.). In addition, the Company participates at
major trade shows and technical meetings, advertises in trade journals and
through its website, and conducts direct mailings to appropriate target markets.
The Company also offers ongoing customer service and technical support
throughout a licensee's relationship with SurModics. As part of this service and
support, SurModics performs initial coating feasibility studies on the
licensee's device at no charge, optimizes the licensee's application before
final release, educates and trains the licensee on the technology to
successfully transfer the process to its manufacturing facility, and assists the
licensee with FDA submissions for coated product approval.
COMPETITION
Competition in the medical device industry has resulted in an increase in
competition in the surface modification market. The Company's PhotoLink
technology competes with technologies developed by Biocompatibles International
plc, Carmeda (a division of Norsk Hydro, Inc.), Specialty Coatings Systems,
Spire Corporation and STS Biopolymers Inc., among others. In addition, many
medical device manufacturers have developed or are engaged in efforts to develop
surface modification technologies for use on their own products. Most
competitors marketing surface modification to the outside marketplace are
divisions of organizations with businesses in addition to surface modification.
Overall, the Company believes the worldwide market is very fragmented with no
competitor marketing to third parties having more than a 10% market share. Many
of the Company's existing and potential competitors (including medical device
manufacturers pursuing coating solutions through their own research and
development efforts) have substantially greater financial, technical and
marketing resources than the Company.
SurModics attempts to differentiate itself from its competition by providing
what it believes is a high value-added solution to surface modification. The
Company believes that the primary factors customers consider in choosing a
particular surface modification technology are performance, ease of
manufacturing, ability to produce multiple properties from a single process,
compliance with manufacturing regulations, customer service and pricing. The
Company believes that its PhotoLink process competes favorably with respect to
these factors, enabling it to charge a premium price. The Company believes that
the cost and
27
time required to obtain the necessary regulatory approvals significantly reduces
the likelihood of a manufacturer changing the coating process it uses once a
device has been approved for marketing.
Because a significant portion of the Company's revenue is dependent on the
receipt of royalties based on sales of medical devices incorporating PhotoLink
coatings, the Company is also affected by competition within the markets for
such devices. The Company believes that the intense competition within the
medical device markets creates opportunities for the Company's coating
technology as medical device manufacturers seek to differentiate their products
through new enhancements or to remain competitive with enhancements offered by
other manufacturers. Because the Company seeks to license its technology on a
non-exclusive basis, the Company may further benefit from competition within the
medical device markets by offering its PhotoLink technology to multiple
competing manufacturers of a device. However, competition in the medical device
markets could also have an adverse affect on the Company. While the Company
seeks to license its products to established manufacturers, in certain cases the
Company's licensees may compete directly with larger, dominant manufacturers
with extensive product lines and greater sales, marketing and distribution
capabilities. The Company also is unable to control other factors that may
impact commercialization of PhotoLink-coated devices, such as the marketing and
sales efforts of its licensees or competitive pricing pressures within the
particular device market. There can be no assurance that products coated with
the PhotoLink technology will be successfully commercialized by the Company's
licensees or that such licensees will otherwise be able to effectively compete.
The primary competition for SurModics' stabilization products is its
customers' internally developed formulations. The consolidation of the
diagnostic industry increases the availability of internally developed
stabilizers to the market. There are several direct competitors that have
recently emerged, of which Pierce Medical Products, Inc. and Medix, Inc. are the
two largest. The Company believes that quick market penetration is the best
strategy for addressing these threats. As in the coating market, the Company
also believes that once its stabilization products are accepted in an
FDA-approved diagnostic test, the likelihood of change is reduced because of the
cost and time required to qualify a new component. SurModics' marketing strategy
for its stabilization products is to develop a strong market presence by
offering superior product performance and technical service.
MANUFACTURING
In accordance with its licensing strategy, the Company does not perform the
actual coating of its licensees' medical devices, nor does it manufacture any of
these devices. The Company has, however, adopted a strategy of developing and
manufacturing the reagents itself, allowing it to maintain the quality of the
reagents and their proprietary nature, while providing an additional source of
revenue. PhotoLink reagents are specialty photoreactive chemicals that are
prepared using a proprietary formula in small batch processes (as contrasted
with commodity chemicals prepared by large continuous methods). Generally, all
PhotoLink reagents share a similar production process: a water soluble polymer
is synthesized in a glass reactor; reactive photochemical groups are attached to
the polymer; the solution is purified and freeze-dried, thus removing the water
and creating a solid; and the PhotoLink reagents are packaged in standard
quantities in light- and moisture-proof packaging. The reagents are sold dry,
requiring the licensee, in most cases, to simply add water or a water and
isopropyl alcohol mix before application. The Company has developed proprietary
testing and quality assurance standards for manufacturing the reagents and does
not disclose the reagent formulas or manufacturing methods. Although licensees
may purchase the requisite chemical reagents from any source, all have elected
to purchase them from the Company.
28
The Company also manufactures its stabilization products. These products are
a group of sterile-filtered liquids that generally share a three-step production
process. A standard recipe of chemicals is mixed in high purity water, these
liquids are sterile-filtered into specific container sizes under aseptic
conditions, and the resultant finished goods are packaged and labeled.
The Company maintains multiple sources of supply for the key raw materials
used to manufacture reagents and stabilization products. The Company does,
however, purchase some raw materials from single sources, but it believes that
additional sources of supply are readily available.
Although not required to follow Good Manufacturing Practice quality
procedures, SurModics does follow such procedures in part to respond to requests
of licensees to establish compliance with their criteria. The Company has not
yet sought ISO 9001 certification but may do so in the future.
GOVERNMENT REGULATION
Although PhotoLink technology itself is not directly regulated by the FDA,
the medical devices incorporating this technology are subject to FDA regulation.
The burden of demonstrating safety and efficacy of such medical devices, the
ultimate criteria applied by the FDA, rests with the Company's licensees (the
medical device manufacturers). Medical products incorporating the PhotoLink
technology may generally be marketed only after 510(k) or PMA applications have
been submitted and approved by the FDA, which process can take anywhere from six
months for a 510(k) application and to two or three years for a PMA application.
These applications are prepared by the manufacturer and contain results of
extensive laboratory toxicity, mutagenicity and clinical evaluations on animals
and humans conducted by the manufacturer.
The Company maintains confidential Device Master Files at the FDA regarding
the nature, chemical structure and biocompatibility of the PhotoLink reagents.
Although the Company's licensees do not have access to these files, the
licensees may, with the permission of the Company, reference these files in any
medical device submission to the FDA. This process allows the FDA to understand
in confidence the details of the PhotoLink technology without the Company having
to share this highly confidential information with its licensees.
Recent U.S. legislation allows device manufacturers, prior to obtaining FDA
approval to market a medical device in the U.S., to manufacture such medical
device in the U.S. and export it for sale in international markets, which could
allow SurModics to realize earned royalties sooner. However, sales of medical
devices outside the U.S. are subject to international requirements that vary
from country to country. The time required to obtain approval for sale
internationally may be longer or shorter than that required by the FDA.
EMPLOYEES
As of December 1, 1997, SurModics had 85 employees of whom 52 were engaged
in development or manufacturing positions, with the remainder in marketing,
quality or administrative positions. Of SurModics' employees, seven hold Ph.D.
degrees and nine hold Masters degrees. The Company is not a party to any
collective bargaining agreements and believes that its employee relations are
good.
Management believes that the future success of the Company will depend in
part on its ability to attract and retain qualified technical, management and
marketing personnel. Such experienced personnel are in high demand, and the
Company must compete for their services with other firms which may be able to
offer more favorable benefits.
FACILITIES
SurModics leases approximately 35,000 square feet of office/warehouse space
in Eden Prairie, Minnesota under a lease that expires at the end of 1999.
SurModics has an option to extend this lease
29
through the end of 2001. The lease commitment for fiscal 1998 is approximately
$210,000. Of the total leased space, approximately 15,000 square feet is office
space, 13,000 square feet is laboratory space and 7,000 square feet is
manufacturing space. Approximately 6,000 square feet of the manufacturing space
is a HEPA-filtered, highly controlled environment, but not certified as a "clean
room" under FDA standards. The Company believes that projected capacity of the
manufacturing area is adequate to service the needs of its licensees for the
foreseeable future.
LEGAL PROCEEDINGS
The Company is not a party to nor is any of its property subject to any
material pending legal proceedings.
30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------
Dale R. Olseth................ 67 Chairman of the Board, President and Chief
Executive Officer
Stephen C. Hathaway........... 42 Vice President and Chief Financial Officer
Patrick E. Guire, Ph.D........ 61 Senior Vice President of Research and Technology
and Director
James C. Powell............... 48 Vice President of Technical Operations
Andrew B. Summerville......... 52 Vice President of Marketing
Walter H. Diers, Jr........... 46 Vice President of Corporate Development
Marie J. Versen............... 36 Vice President of Quality Management and
Regulatory Compliance
Donald S. Fredrickson, M.D. 73 Director
(2).........................
James J. Grierson (1)(2)...... 55 Director
Kenneth H. Keller, Ph.D. 63 Director
(1)(2)......................
David A. Koch (1)(2).......... 67 Director
Kendrick B. Melrose (1)(2).... 57 Director
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
DALE R. OLSETH joined the Company in 1986 as its President, Chief Executive
Officer and a director of the Company and has served as Chairman of the Board
since 1988. Mr. Olseth also serves on the Board of Directors of The Toro Company
and Graco, Inc. He served as Chairman or President and Chief Executive Officer
of Medtronic, Inc. from 1976 to 1986. From 1971 to 1976, Mr. Olseth served as
President and Chief Executive Officer of Tonka Corporation. Mr. Olseth received
a B.B.A. degree from the University of Minnesota in 1952 and an M.B.A. degree
from Dartmouth College in 1956.
STEPHEN C. HATHAWAY joined the Company as its Vice President and Chief
Financial Officer in September 1996. Prior to joining SurModics, he served as
Director of Finance for Ceridian Employer Services, Ceridian Corporation from
1995 to 1996. Prior to that, Mr. Hathaway was Vice President-- Finance &
Operations for Wilson Learning Corporation from 1988 to 1995. He also spent ten
years with Arthur Andersen LLP. Mr. Hathaway received a B.S. degree in
accounting in 1977 from Miami University and became a Certified Public
Accountant in 1980.
PATRICK E. GUIRE, PH.D. is a co-founder of the Company and has served as
Senior Vice President of Research and Technology and a director since 1980. Dr.
Guire is responsible for the research affairs of the Company. Prior to founding
SurModics, Dr. Guire was employed by Kallestad Laboratories, Inc. as a senior
scientist from 1978 to 1979 and was a researcher at the Midwest Research
Institute, Inc. in Kansas City, Missouri from 1972 to 1978. He received a B.S.
degree in Chemistry from the University of Arkansas, Fayetteville in 1958 and a
Ph.D. in biochemistry from the University of Illinois in 1963.
JAMES C. POWELL joined the Company in 1987, and in 1992 became its Vice
President of Technical Operations. He was employed at Precision-Cosmet Company,
Inc., a manufacturer of contact and intraocular lenses, from 1978 until he
joined SurModics. Mr. Powell received a B.S. degree in wood
31
sciences from Texas A&M University in 1972 and an M.S. degree in polymer science
in 1975 from the University of Washington.
ANDREW B. SUMMERVILLE joined the Company in 1994, and in 1995 became its
Vice President of Marketing. He held various sales and marketing positions with
Graco, Inc. from 1986 until joining SurModics. Prior to that, Mr. Summerville
held similar positions with 3M Company. Mr. Summerville received a B.A. degree
in applied science and a B.S. degree in material science from Lehigh University
in 1968 and an M.B.A. degree from Dartmouth College in 1970.
WALTER H. DIERS, JR. joined the Company in 1988 and currently serves as Vice
President of Corporate Development. He served as a consultant to several small,
high technology companies from 1984 until he joined SurModics. Prior to that, he
was the Controller of the Laserdyne division of Data Card Corporation. Mr. Diers
received a B.S. degree in economics and a B.S. degree in business in 1977 and an
M.B.A. degree in finance in 1979 from the University of Minnesota.
MARIE J. VERSEN joined the Company in 1987, and in 1996 became its Vice
President of Quality Management and Regulatory Compliance. She was previously
employed at Precision-Cosmet Company, Inc. from 1983 to 1986. Ms. Versen
received a B.S. degree in chemical engineering from the University of Minnesota
in 1983.
DONALD S. FREDRICKSON, M.D. was elected a director of the Company in
February 1991. He has served as President and Chief Executive Officer of D.S.
Fredrickson Associates, Inc., an international medical research and biomedical
consulting firm since 1987. Dr. Fredrickson served as Vice President, President
and Chief Executive Officer during his tenure at the Howard Hughes Medical
Institute in Washington D.C. from 1983 to 1987. During 1982 and 1983, he served
as a scholar-in-residence at the National Academy of Sciences of the United
States of America. From 1975 to 1981, he served as the Director of the National
Institutes of Health. Dr. Fredrickson received his medical degree from the
University of Michigan.
JAMES J. GRIERSON was elected a director of the Company in 1988. He served
as Vice President of Business Development for Honeywell, Inc. from 1992 until
his retirement in 1996. He was Vice President of Finance of Honeywell from 1987
to 1992 and its Vice President and Treasurer from 1982 to 1987.
KENNETH H. KELLER, PH.D. was elected a director of the Company in 1997. He
has served as Professor of Science and Technology Policy in the Hubert H.
Humphrey Institute of Public Affairs at the University of Minnesota since 1996.
Dr. Keller was a Senior Fellow at the Council on Foreign Relations from 1989 to
1997. Dr. Keller joined the Chemical Engineering and Materials Science faculty
of the University of Minnesota in 1964, and through the years assumed increasing
administrative responsibilities, including serving as the twelfth President of
the University in 1985, a position he held until 1988, when he moved to
Princeton University as a Visiting Fellow. Dr. Keller received a B.A. degree in
liberal arts and a B.S. degree in chemical engineering from Columbia University
in 1956 and 1957, respectively, and his M.S.E. and Ph.D. degrees in 1963 and
1964, respectively, from The Johns Hopkins University.
DAVID A. KOCH was elected a director of the Company in 1988. He has served
as the Chairman of Graco, Inc. since 1985, as its Chief Executive Officer from
1962 to 1996 and as its President and Chief Executive Officer from 1962 to 1985.
Mr. Koch is also a director of ReliaStar Financial Corporation and is Chair of
the Federal Reserve Bank of Minneapolis.
KENDRICK B. MELROSE was elected a director of the Company in 1988. He has
served as Chairman of the Board and Chief Executive Officer of The Toro Company
since 1987, served as its Chief Executive Officer from 1983 to 1987 and as its
President from 1981 to 1983. Mr. Melrose is also a director of Donaldson
Company, Inc., Valspar Corporation and Jostens, Inc.
The number of directors is determined by the stockholders at their annual
meeting, subject to the right of the stockholders to change such number between
annual meetings and to the right of the Board to increase such number between
annual meetings. All directors hold office until the next annual meeting of
32
stockholders or until their successors have been duly elected and qualified.
Executive officers of the Company are appointed by and serve at the discretion
of the Board of Directors. The Board of Directors has a Compensation Committee
which provides recommendations concerning salaries and other compensation to be
paid to executive officers of the Company and administers the Company's employee
stock plans. The Board also has an Audit Committee which is responsible for
reviewing the Company's audit process.
The non-employee directors hold non-qualified options to purchase an
aggregate of 200,000 shares of Common Stock. In addition, Messrs. Grierson and
Fredrickson are reimbursed for their expenses incurred in attending meetings of
the Board of Directors. See "Principal Stockholders."
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY. The following table sets forth certain information
regarding compensation earned or awarded to the President and Chief Executive
Officer and each of the other four most highly compensated executive officers
(the "Named Executive Officers") during the Company's fiscal year ended
September 30, 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($)(1)
- -------------------------------------------------------------- ----------- ---------- --------- -------------------
Dale R. Olseth,
President and Chief Executive Officer....................... 1997 $ 109,598 $ 20,408 $ 2,100
Stephen C. Hathaway,
Vice President and Chief Financial Officer.................. 1997 $ 90,000 $ 22,493 $ 618
Patrick E. Guire, Ph.D.,
Senior Vice President of Research and Technology............ 1997 $ 86,250 $ 16,327 $ 1,680
James C. Powell,
Vice President of Technical Operations...................... 1997 $ 96,246 $ 18,463 $ 1,830
Andrew B. Summerville,
Vice President of Marketing................................. 1997 $ 89,160 $ 16,523 $ 1,675
- ------------------------
(1) Represents contributions made by the Company under its 401(k) plan.
OPTION GRANTS. The following table sets forth information regarding stock
options granted during the fiscal year ended September 30, 1997 to the Named
Executive Officers.
OPTION GRANTS
(INDIVIDUAL GRANTS)
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED(#) 1997 ($/SH) DATE
- ------------------------------------------- ------------------- ----------------------- ------------- -----------
Dale R. Olseth............................. -- -- -- --
14,000 9.2% $ 5.00 1/1/02
30,000 19.8% $ 5.00 11/18/01
30,000 19.8% $ 5.00 11/18/03
Stephen C. Hathaway........................
Patrick E. Guire, Ph.D..................... 20,000 13.2% $ 5.00 1/1/02
James C. Powell............................ -- -- -- --
Andrew B. Summerville...................... 16,000 10.6% $ 5.00 1/1/02
33
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES. The following table
sets forth certain information regarding options exercised and the number and
value of exercisable and unexercisable options to purchase shares of Common
Stock held as of the end of the Company's 1997 fiscal year by the Named
Executive Officers.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT FY-END(#) AT FY-END($)
NAME ON EXERCISE(#) REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- -------------------------------- --------------- ---------------- ----------------------- --------------------------
Dale R. Olseth.................. -- -- 112,000/128,000 $96,000/$64,000
Stephen C. Hathaway............. -- -- 8,800/65,200 $0/$0
Patrick E. Guire, Ph.D.......... -- -- 24,400/49,600 $14,400/$9,600
James C. Powell................. 14,000 $ 14,000 38,000/56,000 $7,200/$4,800
Andrew B. Summerville........... -- -- 31,600/42,400 $0/$0
- ------------------------
(1) Based on the difference between the fair market value as of September 30,
1997 ($5.00 per share as determined by the Board of Directors) and the
option exercise price.
STOCK OPTIONS
On January 27, 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Incentive Stock Option Plan (the "Plan") in order to provide
for the granting of stock purchase options to employees and officers of the
Company. The Plan permits the granting of incentive stock options meeting the
requirements of Section 422A of the Internal Revenue Code of 1986. The Company
has reserved 600,000 shares of its Common Stock for issuance upon exercise of
options granted under the Plan. As of the date of this Prospectus, the Company
has outstanding options to purchase an aggregate of 30,200 shares under the
Plan. The Company also has outstanding options, granted pursuant to the
Company's 1987 Incentive Stock Option Plan, which plan expired on January 18,
1997, to purchase an aggregate of 302,800 shares. In addition, the Company has
outstanding non-qualified options, granted outside of either of the foregoing
plans, to purchase an aggregate of 906,800 shares of Common Stock.
CERTAIN TRANSACTIONS
In August 1997, the Company adopted a plan pursuant to which an employee of
the Company could borrow amounts from the Company to fund option exercises. Any
loan made pursuant to this plan is required to provide for: a five-year term,
subject to automatic acceleration to the earlier of three months after
termination of employment or six months after the shares purchased become
eligible for sale in the public market; interest payable annually at the prime
rate in effect at the time of the loan, paid annually; principal payable at
maturity; and a pledge of the shares of Common Stock acquired with the proceeds
of the loan as security. The Board has the authority to terminate this plan at
any time and will do so upon completion of this offering. Under the terms of
this loan program, (i) Walter H. Diers, Jr., Vice President of Corporate
Development for the Company, borrowed an aggregate of $80,000 on September 19,
1997, at an interest rate of 8.5%, to exercise an option to purchase an
aggregate of 20,000 shares of Common Stock at $4.00 per share and (ii) James C.
Powell, Vice President of Technical Operations for the Company, borrowed an
aggregate of $56,000 on September 19, 1997, at an interest rate of 8.5% to
exercise an option to purchase an aggregate of 14,000 shares of Common Stock at
$4.00 per share.
34
PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 1, 1997, and as adjusted to
reflect the sale of the shares offered hereby, certain information regarding
beneficial ownership of the Company's Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each director of the Company, (iii) each of the Named Executive
Officers and (iv) all executive officers and directors of the Company as a
group.
PERCENTAGE OF OUTSTANDING SHARES
NUMBER OF SHARES
BENEFICIALLY -----------------------------------
NAME OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ -------------------- ----------------- ----------------
Dale R. Olseth (2)(3)....................................... 546,000 10.8% 7.7%
Stephen C. Hathaway (2)(4).................................. 17,600 * *
Patrick E. Guire, Ph.D. (2)(5).............................. 207,867 4.2% 3.0%
James C. Powell (2)(6)...................................... 87,600 1.8% 1.3%
Andrew B. Summerville (2)(4)................................ 34,800 * *
Donald S. Fredrickson, M.D. (2)(4).......................... 52,000 1.1% *
James J. Grierson (2)(7).................................... 75,000 1.5% 1.1%
Kenneth H. Keller, Ph.D. (2)(4)............................. 4,000 * *
David A. Koch (2)(8)........................................ 441,400 8.9% 6.4%
Kendrick B. Melrose (2)(7).................................. 142,000 2.9% 2.0%
Seven Hundred Company (9)................................... 522,000 10.6% 7.6%
All executive officers and directors 1,692,547
as a group (12 persons) (10).............................. 34.0% 24.3%
- ------------------------
* Less than one percent.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of December 1, 1997, or within 60
days of such date, are treated as outstanding when determining the percent
of the class owned by such individual and when determining the percent
owned by the group. For purposes of calculating the percent of class owned
after this offering, it was assumed that the officers, directors and
principal stockholders will not be purchasing shares in this offering.
Unless otherwise indicated, each person named or included in the group has
sole voting and investment power with respect to the shares of Common Stock
set forth opposite his name.
(2) The address of the directors and executive officers of the Company is 9924
West 74th Street, Eden Prairie, Minnesota 55344.
(3) Includes 144,000 shares purchasable upon exercise of options.
(4) Represents shares purchasable upon exercise of options.
(5) Includes 33,200 shares purchasable upon exercise of options.
(6) Includes 47,600 shares purchasable upon exercise of options.
(7) Includes 32,000 shares purchasable upon exercise of options.
(8) Includes 32,000 shares purchasable upon exercise of options and 16,000
shares held of record by an affiliate of Mr. Koch's wife.
(9) The address of the Seven Hundred Company is 5140 Norwest Center, 90 South
Seventh Street, Minneapolis, MN 55402.
(10) Includes 462,480 shares purchasable upon exercise of options.
35
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, assuming approval by the stockholders of
the amendment to the Company's Restated Articles of Incorporation, as amended,
which is discussed below, the authorized capital stock of the Company will
consist of 20,000,000 shares of capital stock, $0.05 per share par value, of
which 15,000,000 shares are Common Stock and 5,000,000 shares are undesignated.
COMMON STOCK
As of December 1, 1997, the Company had approximately 200 shareholders of
record holding 3,400,868 shares of issued and outstanding Common Stock,
including 84,000 shares issued pursuant to restricted stock agreements. The
holders of the Common Stock: (i) have equal ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all the assets
of the Company available for distribution to holders of the Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company; and (iii)
are entitled to one vote per share on all matters which stockholders may vote on
at all meetings of stockholders. All shares of Common Stock now outstanding are
fully paid and nonassessable and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
shares of Common Stock.
The holders of the Common Stock do not have cumulative voting rights.
Subject to the rights of any future series of preferred stock, the holders of
more than 50 percent of such outstanding shares voting for the election of
directors can elect all of the directors of the Company to be elected, if they
so choose. In such event, the holders of the remaining shares will not be able
to elect any of the Company's directors.
SERIES A CONVERTIBLE PREFERRED STOCK
Upon the closing of this offering, the 376,828 shares of outstanding Series
A Convertible Preferred Stock, held of record by approximately 70 shareholders,
will be converted automatically into an aggregate of 1,507,312 shares of Common
Stock. The Board of Directors has approved an amendment to the Company's
Restated Articles of Incorporation, as amended, subject to stockholder approval
at their annual meeting in January 1998, to provide that, upon completion of
this offering and the concurrent automatic conversion of outstanding shares of
Series A Convertible Preferred Stock into Common Stock, the Board shall take the
necessary steps to cancel the class of and eliminate the shares authorized as
Series A Convertible Preferred Stock.
UNDESIGNATED STOCK
Under governing Minnesota law and the Company's Restated Articles of
Incorporation, as amended, no action by the Company's stockholders is necessary,
and only action of the Board of Directors is required, to authorize the issuance
of any of the undesignated stock. The Board of Directors is empowered to
establish and to designate each class or series of the undesignated shares and
to set the terms of such shares (including terms with respect to redemption,
sinking fund, dividend, liquidation, preemptive, conversion and voting rights
and preferences). Accordingly, the Board of Directors, without stockholder
approval, may issue such undesignated shares in one or more series of preferred
stock having rights, preferences, privileges or restrictions, including voting
rights, that may be greater than the rights of holders of Common Stock.
It is not possible to state the actual effect of the issuance of any shares
of preferred stock upon the rights of holders of the Common Stock until the
Board of Directors determines the specific rights of the holders of such
preferred stock. However, the effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock, impairing the liquidation rights of the Common Stock and delaying
or preventing a change in control of the Company
36
without further action by the stockholders. The Company has no present plans to
issue any shares of preferred stock.
MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its stockholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20
percent or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a majority vote of the stockholders of the
Company prior to its consummation. In general, shares acquired in the absence of
such approval are denied voting rights and are redeemable at their then fair
market value by the Company within 30 days after the acquiring person has failed
to give a timely information statement to the Company or the date the
stockholders voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
stockholder which purchases 10 percent or more of the Company's voting shares
(an "interested stockholder") within four years following such interested
stockholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company serving before the interested stockholder's share
acquisition date.
CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
The Company's Restated Articles of Incorporation, as amended, limit the
personal liability of its directors. Specifically, directors of the Company will
not be personally liable to the Company or its stockholders for monetary damages
for any breach of their fiduciary duty as directors, except to the extent that
the elimination or limitation of liability is in contravention of the MBCA, as
amended. This provision will generally not limit liability under state or
federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business corporation
shall indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Section 5.1 of the Company's Bylaws provides that each director, officer and
employee of the Company shall be indemnified by the Company in accordance with,
and to the fullest extent permissible by, applicable law.
The Company is in the process of obtaining an insurance policy covering
director and officer liability.
37
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Company
pursuant to the foregoing provisions, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Company's Common Stock
will be Firstar Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the open market
may adversely affect the market price of the Common Stock offered hereby and the
ability of the Company to raise equity capital in the future.
Upon consummation of the offering, the Company will have outstanding an
aggregate of 6,908,180 shares of Common Stock (assuming no exercise of the
Underwriters' over-allotment option). Of the aggregate number of outstanding
shares of Common Stock, the 2,000,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless purchased by an "affiliate" of the Company, as
that term is defined by Rule 144 promulgated under the Securities Act (an
"Affiliate"), whose sales would be subject to certain volume limitations and
other restrictions described below. The remaining 4,908,180 shares of Common
Stock originally issued and sold by the Company in private transactions in
reliance upon exemptions from the Securities Act held by stockholders upon the
consummation of this offering will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act, and may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144, 144(k) or 701 or otherwise.
All officers and directors and certain stockholders of the Company, owning
an aggregate of 3,636,648 shares, have entered into "lock-up" agreements,
agreeing not to, directly or indirectly, sell, assign, transfer, encumber, offer
to sell, grant any option for the sale of, or otherwise dispose of, any shares
of Common Stock without the consent of the Representative for a period of 180
days after the date of this Prospectus. The Representative may waive these
restrictions at any time in its discretion. Taking such restrictions into
account, in addition to the 2,000,000 shares of Common Stock offered hereby, (i)
approximately 1,162,716 shares will be eligible for immediate sale on the date
of this Prospectus in accordance with Rule 144; (ii) approximately 17,428
additional shares will become eligible for sale in the public market beginning
90 days after the date of this Prospectus in accordance with Rule 144; and (iii)
approximately 3,599,668 additional shares will be eligible for sale beginning
180 days after the date of this Prospectus upon the expiration of the lock-up
agreements, subject, in the case of Affiliates, to volume and manner of sale
limitations under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owns shares last acquired
privately from the Company or an Affiliate at least one year previously is
entitled to sell, in "brokers' transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 69,000 shares immediately
after the offering); or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are generally subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who beneficially owns shares last
acquired from the Company or an Affiliate at least two years previously, is
entitled to sell such shares without complying with the manner of sale, public
38
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may therefore be sold immediately upon the
consummation of this offering.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
non-Affiliates to sell their Rule 701 shares without complying with the public
information, holding period, volume limitation or notice provisions of Rule 144
and which permits Affiliates to sell their Rule 701 shares without complying
with the Rule 144 holding period restrictions, in each case commencing 90 days
after the date of this Prospectus.
The Company intends to file, after expiration of the lockup agreements
referenced above, Registration Statements on Form S-8 under the Securities Act
to register shares of Common Stock reserved for issuance upon exercise of stock
options, thus permitting the resale of such shares by non-Affiliates in the
public market without restrictions under the Securities Act and by Affiliates
subject to volume and manner of sale limitations under Rule 144. As of the date
of this Prospectus, options to purchase 1,239,800 shares of Common Stock were
outstanding, with 915,200 of the shares issuable upon exercise of such options
subject to vesting requirements extending beyond the terms of the lock-up
agreements. The remaining 324,600 shares issuable upon exercise of such options
will become available for exercise and sale upon vesting and effectiveness of
such Registration Statements on Form S-8.
REGISTRATION RIGHTS
The Company has entered into Registration Rights Agreements with certain
holders of Series A Convertible Preferred Stock granting them participatory and
demand registration rights with respect to the shares of Common Stock issuable
to them upon conversion of their shares of Series A Convertible Preferred Stock.
The participatory or "piggyback" rights provide that if the Company determines
to register for public sale with the U.S. Securities and Exchange Commission
certain of the Company's securities, the Company will use its best efforts to
cause the Common Stock acquired upon conversion of the Series A Convertible
Preferred Stock by such stockholders to be included in the offering for the
benefit of the investors desiring to sell such shares. The piggyback
registration rights relate to certain public offerings of the Company, if any,
occurring during a three-year period beginning on the closing of this offering.
Such registration rights are subject to various limitations, including the right
of the managing underwriter of a subsequent offering to determine that marketing
factors require a limitation on the number of shares of Common Stock that can be
sold by the selling stockholders participating in the registered sales and the
requirement that the selling stockholders pay their own selling expenses
(including selling commissions and stock transfer taxes) in connection with any
exercise of these piggyback rights.
The demand registration rights provide that on a one-time basis only, during
a two and one-half year period beginning six months after the effective date of
this offering, upon the request of the holders of a majority in interest
thereof, the Company will promptly take all necessary action to register or
qualify for immediate sale, under the Securities Act and the securities laws of
such states as the holders may reasonably request, the Common Stock obtained
upon conversion. Selling stockholders will also be required to pay their own
selling expenses (including selling commissions and stock transfer taxes) in
connection with these demand rights.
39
UNDERWRITING
The Underwriters named below, for which John G. Kinnard and Company,
Incorporated is acting as representative (the "Representative"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement with
the Company to purchase from the Company the 2,000,000 shares of Common Stock
offered hereby. The number of shares that each Underwriter has agreed to
purchase is set forth opposite its name below:
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
John G. Kinnard and Company, Incorporated........................................
----------
Total........................................................................ 2,000,000
----------
----------
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the shares offered hereby, if any are purchased.
The obligation of the Underwriters to purchase the shares is several and not
joint meaning that, subject to the terms of the Underwriting Agreement, each
Underwriter is obligated to purchase only the number of shares set forth
opposite its name.
The Underwriters propose to offer the shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per share
to certain other brokers and dealers. After the initial public offering, the
Price to Public, concession and reallowance may be changed by the
Representative.
The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 300,000
shares at the Price to Public, less the Underwriting Discount and Commission
shown on the cover page of this Prospectus. The Underwriters may exercise such
option only for the purpose of covering any over-allotments in the sale of the
shares offered hereby.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriters and their controlling persons against civil
liabilities in connection with the offering, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.
In order to facilitate the offering of Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
Common Stock. Specifically, the Underwriters may over-allot Common Stock in
connection with the offering, creating a short position in Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. The Underwriters
40
may also reclaim selling concessions allowed to an underwriter or dealer for
distributing Common Stock in the offering, if the Underwriters repurchase
previously distributed Common Stock in transactions to cover their short
positions, in stabilization transactions or otherwise. Finally, the Underwriters
may bid for, and purchase, shares of Common Stock in market making transactions
and impose penalty bids. These activities may stabilize or maintain the market
price of Common Stock above the market level that may otherwise prevail. The
Underwriters are not required to engage in these activities and may end any of
these activities at any time.
Prior to this offering, there has been no public trading market for the
Common Stock. The initial public offering price of the shares has been
determined by negotiations between the Company and the Representative. Among the
factors considered in such negotiations were the prevailing market conditions,
estimates of the business potential of the Company, the results of operations of
the Company in recent periods and other factors deemed to be relevant.
The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of their
terms and conditions. The Underwriting Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Fredrikson & Byron, P.A., Minneapolis, Minnesota. Certain legal
matters for the Underwriters will be passed upon by Oppenheimer Wolff &
Donnelly, Minneapolis, Minnesota.
EXPERTS
The financial statements of SurModics, Inc. as of September 30, 1996 and
1997 and for each of the three years in the period ended September 30, 1997,
included in this Prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the sale of the shares. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
shares being offered hereby, reference is made to the Registration Statement,
including the exhibits thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement. The
Registration Statement may be inspected by anyone without charge at the
principal office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, or at one of the Commission's regional offices: 500 West Madison, Suite
1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th Floor, New
York, New York, 10048. Copies of all or any part of such material may be
obtained upon payment of the prescribed fees from the Public Reference Section
of the Commission at 450 Fifth Street, N.W. Washington, D.C. The Commission
maintains a World Wide Website at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including the Company.
Prior to this offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. After completion of this
offering, the Company intends to comply with such requirements, including
distributing to its stockholders an annual report containing audited financial
statements.
41
SURMODICS, INC.
FINANCIAL STATEMENTS
INDEX
PAGE
---------
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of September 30, 1996 and 1997 and Pro Forma as of September 30, 1997 (unaudited)........ F-3
Statements of Operations for the Years Ended September 30, 1995, 1996 and 1997............................. F-4
Statements of Stockholders' Equity for the Years Ended September 30, 1995, 1996 and 1997 and Pro Forma as
of September 30, 1997 (unaudited)........................................................................ F-5
Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and 1997............................. F-6
Notes to Financial Statements.............................................................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SurModics, Inc.:
We have audited the accompanying balance sheets of SurModics, Inc. (a
Minnesota corporation) as of September 30, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 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 SurModics, Inc. as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 14, 1997 (except for
Note 3, as to which the date
is December 22, 1997)
F-2
SURMODICS, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30
PRO FORMA
1996 1997 1997
------------- ------------- -------------
(UNAUDITED;
SEE NOTE 8)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 2,012,906 $ 491,624 $ 491,624
Short-term investments............................................. 1,831,910 1,455,976 1,455,976
Accounts receivable, net........................................... 627,819 922,466 922,466
Inventories........................................................ 260,768 264,008 264,008
Prepaids and other................................................. 61,423 74,124 74,124
------------- ------------- -------------
Total current assets........................................... 4,794,826 3,208,198 3,208,198
------------- ------------- -------------
PROPERTY AND EQUIPMENT:
Laboratory fixtures and equipment.................................. 1,901,828 2,027,940 2,027,940
Office furniture and equipment..................................... 727,563 834,222 834,222
Leasehold improvements............................................. 1,038,609 1,049,802 1,049,802
Less--Accumulated depreciation and amortization.................... (2,452,609) (2,846,954) (2,846,954)
------------- ------------- -------------
Property and equipment, net.................................... 1,215,391 1,065,010 1,065,010
LONG-TERM INVESTMENTS................................................ -- 1,874,118 1,874,118
OTHER ASSETS, net.................................................... 36,265 302,930 302,930
------------- ------------- -------------
$ 6,046,482 $ 6,450,256 $ 6,450,256
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 52,663 $ 280,467 $ 280,467
Accrued liabilities--
Compensation..................................................... 162,108 400,861 400,861
Other............................................................ 111,635 91,807 91,807
Deferred revenues.................................................. 518,786 308,143 308,143
------------- ------------- -------------
Total current liabilities...................................... 845,192 1,081,278 1,081,278
DEFERRED REVENUES AND OTHER, less current portion.................... 460,850 266,973 266,973
------------- ------------- -------------
Total liabilities.............................................. 1,306,042 1,348,251 1,348,251
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock--
$.05 par value, 450,000 shares authorized; 376,828 shares issued
and outstanding (none pro forma)............................... 18,841 18,841 --
Voting Common Stock--
$.05 par value, 15,000,000 shares authorized; 3,311,480 and
3,400,868 shares issued and outstanding (4,908,180 pro
forma)......................................................... 165,576 170,044 245,408
Additional paid-in capital......................................... 13,093,961 13,491,665 13,435,142
Unearned compensation.............................................. (142,720) (259,000) (259,000)
Stock purchase notes receivable.................................... -- (160,000) (160,000)
Accumulated deficit................................................ (8,395,218) (8,159,545) (8,159,545)
------------- ------------- -------------
Total stockholders' equity..................................... 4,740,440 5,102,005 5,102,005
------------- ------------- -------------
$ 6,046,482 $ 6,450,256 $ 6,450,256
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these balance sheets.
F-3
SURMODICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30
1995 1996 1997
------------ ------------ ------------
REVENUES:
Royalties............................................................. $ 2,082,176 $ 2,340,187 $ 2,913,119
License fees.......................................................... 857,500 382,500 540,000
Product sales......................................................... 1,428,951 1,641,226 2,158,572
Research and development.............................................. 1,587,607 1,818,739 1,970,174
------------ ------------ ------------
Total revenues...................................................... 5,956,234 6,182,652 7,581,865
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Product............................................................... 1,258,327 1,214,526 1,431,675
Research and development.............................................. 2,966,489 3,316,767 3,597,061
Sales and marketing................................................... 1,060,728 911,622 1,098,316
General and administrative............................................ 1,125,494 1,154,412 1,417,524
------------ ------------ ------------
Total operating costs and expenses.................................. 6,411,038 6,597,327 7,544,576
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS........................................... (454,804) (414,675) 37,289
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Investment income and other, net...................................... 350,465 275,849 198,384
Loss on investments................................................... (217,840) (54,901) --
------------ ------------ ------------
Other income (expense), net......................................... 132,625 220,948 198,384
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ (322,179) $ (193,727) $ 235,673
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (PRO FORMA)
(Note 2).............................................................. $ (.07) $ (.04) $ .04
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (PRO
FORMA) (Note 2)....................................................... 4,788,963 4,851,123 5,393,031
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-4
SURMODICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
CONVERTIBLE VOTING NONVOTING COMMON
PREFERRED STOCK COMMON STOCK STOCK ADDITIONAL
-------------------- -------------------- -------------------- PAID-IN UNEARNED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- --------- --------- --------- --------- --------- ---------- -------------
BALANCE, September 30, 1994........ 376,828 $ 18,841 3,158,380 $ 157,920 26,232 $ 1,312 $12,688,813 $(151,680)
Common stock options exercised... -- -- 36,040 1,800 -- -- 90,860 --
Restricted stock granted......... -- -- 24,000 1,200 -- -- 118,800 (120,000)
Amortization of unearned
compensation................... -- -- -- -- -- -- -- 50,560
Net realized loss on
investments.................... -- -- -- -- -- -- -- --
Unrealized gain on investments... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------- -------------
BALANCE, September 30, 1995........ 376,828 18,841 3,218,420 160,920 26,232 1,312 12,898,473 (221,120)
Common stock options exercised... -- -- 71,628 3,584 -- -- 214,448 --
Conversion of nonvoting common
stock to voting common stock... -- -- 26,232 1,312 (26,232) (1,312) -- --
Restricted stock canceled........ -- -- (4,800) (240) -- -- (18,960) 3,840
Amortization of unearned
compensation................... -- -- -- -- -- -- -- 74,560
Unrealized loss on investments... -- -- -- -- -- -- -- --
Realized loss on investments..... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------- -------------
BALANCE, September 30, 1996........ 376,828 18,841 3,311,480 165,576 -- -- 13,093,961 (142,720)
Common stock options exercised... -- -- 45,388 2,268 -- -- 179,904 --
Restricted stock granted......... -- -- 44,000 2,200 -- -- 217,800 (220,000)
Amortization of unearned
compensation................... -- -- -- -- -- -- -- 103,720
Net income....................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------- -------------
BALANCE, September 30, 1997........ 376,828 18,841 3,400,868 170,044 -- -- 13,491,665 (259,000)
Effects of conversion of Series A
Convertible Preferred Stock to
common stock (Note 8)
(unaudited).................... (376,828) (18,841) 1,507,312 75,364 -- -- (56,523) --
--------- --------- --------- --------- --------- --------- ---------- -------------
BALANCE, pro forma, September 30,
1997 (unaudited)................. -- $ -- 4,908,180 $ 245,408 -- $ -- $13,435,142 $(259,000)
--------- --------- --------- --------- --------- --------- ---------- -------------
--------- --------- --------- --------- --------- --------- ---------- -------------
STOCK
PURCHASE UNREALIZED TOTAL
NOTES INVESTMENT ACCUMULATED STOCKHOLDERS'
RECEIVABLE LOSS DEFICIT EQUITY
----------- ----------- ------------ ------------
BALANCE, September 30, 1994........ $ -- $(246,390) $(7,879,312) $4,589,504
Common stock options exercised... -- -- -- 92,660
Restricted stock granted......... -- -- -- --
Amortization of unearned
compensation................... -- -- -- 50,560
Net realized loss on
investments.................... -- 217,840 -- 217,840
Unrealized gain on investments... -- 28,550 -- 28,550
Net loss......................... -- -- (322,179) (322,179)
----------- ----------- ------------ ------------
BALANCE, September 30, 1995........ -- -- (8,201,491) 4,656,935
Common stock options exercised... -- -- -- 218,032
Conversion of nonvoting common
stock to voting common stock... -- -- -- --
Restricted stock canceled........ -- -- -- (15,360)
Amortization of unearned
compensation................... -- -- -- 74,560
Unrealized loss on investments... -- (54,901) -- (54,901)
Realized loss on investments..... -- 54,901 -- 54,901
Net loss......................... -- -- (193,727) (193,727)
----------- ----------- ------------ ------------
BALANCE, September 30, 1996........ -- -- (8,395,218) 4,740,440
Common stock options exercised... (160,000) -- -- 22,172
Restricted stock granted......... -- -- -- --
Amortization of unearned
compensation................... -- -- -- 103,720
Net income....................... -- -- 235,673 235,673
----------- ----------- ------------ ------------
BALANCE, September 30, 1997........ (160,000) -- (8,159,545) 5,102,005
Effects of conversion of Series A
Convertible Preferred Stock to
common stock (Note 8)
(unaudited).................... -- -- -- --
----------- ----------- ------------ ------------
BALANCE, pro forma, September 30,
1997 (unaudited)................. $(160,000) $ -- $(8,159,545) $5,102,005
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-5
SURMODICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30
1995 1996 1997
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss).................................................. $ (322,179) $ (193,727) $ 235,673
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation and amortization.................................... 449,746 427,274 460,039
Realized loss on investments..................................... 217,840 54,901 --
Amortization of unearned compensation, net....................... 50,560 59,200 103,720
Change in deferred rent.......................................... 8,812 2,174 (11,104)
Change in assets and liabilities:
Accounts receivable............................................ (29,250) (67,849) (294,647)
Inventories.................................................... (100,318) (3,945) (3,240)
Accounts payable and accrued liabilities....................... 113,170 (9,962) 446,729
Deferred revenue............................................... (311,968) 138,268 (393,416)
Prepaids and other............................................. 2,230 (33,303) (12,701)
------------- ------------- -------------
Net cash provided by operating activities.................... 78,643 373,031 531,053
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net........................... (190,323) (201,580) (298,388)
Purchases of short-term investments................................ (933,428) (1,497,290) (2,049,066)
Sales of short-term investments.................................... -- 2,659,520 2,425,000
Purchases of long-term investments................................. (334,620) -- (1,874,118)
Issuance of stock purchase notes receivable........................ -- -- (160,000)
Other.............................................................. (15,000) -- (277,935)
------------- ------------- -------------
Net cash provided by (used in) investing activities.......... (1,473,371) 960,650 (2,234,507)
------------- ------------- -------------
FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs.................... 92,660 218,032 182,172
Borrowings (repayments) under line of credit, net.................. (1,151,263) -- --
Repayment of long-term debt and capital lease obligations.......... (46,206) (16,917) --
------------- ------------- -------------
Net cash provided by (used in) financing activities.......... (1,104,809) 201,115 182,172
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents......... (2,499,537) 1,534,796 (1,521,282)
CASH AND CASH EQUIVALENTS:
Beginning of year.................................................. 2,977,647 478,110 2,012,906
------------- ------------- -------------
End of year........................................................ $ 478,110 $ 2,012,906 $ 491,624
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid...................................................... $ 13,462 $ 2,254 $ 1,700
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-6
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
1. DESCRIPTION:
SurModics, Inc. (the Company) (formerly BSI Corporation) develops,
manufactures and markets innovative surface modifications for medical,
industrial and diagnostic products. The Company also produces and markets a line
of proprietary biomolecule stabilization products. Its revenues are derived from
the following: the licensing of its surface modification and diagnostic
technologies to major manufacturers, resulting in both license fees and ongoing
royalty streams; the sale of reagents and diagnostic products; and contracts
with the United States government and private industry to conduct biomedical
research.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of money market instruments
with original maturities of three months or less and are stated at cost which
approximates fair value.
INVESTMENTS
Short-term and long-term investments consist of corporate debt securities
and are classified as available-for-sale as of September 30, 1996 and 1997.
Investments classified as available-for-sale are reported at fair value with
unrealized gains and losses excluded from operations and reported as a separate
component of stockholders' equity, except for other-than-temporary impairments,
which are reported as a charge to current operations and result in a new cost
basis for the investment. As of September 30, 1996 and 1997, the investments'
amortized cost approximated fair value.
INVENTORIES
Inventories are stated at the lower of cost or market using the specific
identification method and include direct labor, materials and overhead.
Inventories consisted of the following as of September 30:
1996 1997
---------- ----------
Raw materials......................................................... $ 85,197 $ 67,099
Finished products..................................................... 175,571 196,909
---------- ----------
Total............................................................. $ 260,768 $ 264,008
---------- ----------
---------- ----------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over five years, the estimated useful lives of the assets.
Amortization of leasehold improvements is recorded on a straight-line basis over
the estimated useful lives of the assets or the lease term, whichever is
shorter.
OTHER ASSETS
Other assets consist principally of patents, which are amortized over seven
to twelve years. Accumulated amortization is $12,000 and $23,000 as of September
30, 1996 and 1997, respectively.
F-7
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Royalties are recognized as third-party licensees report sales of the
product or as minimum royalties become due. Initial nonrefundable license fees
are recognized as revenue upon execution of the license agreement. Certain
nonrefundable license and research and development fees are recoverable by the
licensees as offsets against a percentage of future earned royalties. Revenues
on product sales are recognized as products are shipped and for research and
development as performance progresses under the applicable government contract
or commercial development agreement.
Cash received prior to performance is recorded as deferred revenues in the
accompanying balance sheets. Deferred revenues also include advance payments
from a third-party licensee to the Company. The advance payments are being
applied as a reduction of amounts otherwise due for earned royalties up to
$75,000 per quarter and are expected to be fully absorbed during fiscal 1998.
As of September 30, 1997, the Company had approximately $2.3 million of
signed government contracts on which work is yet to be performed and revenue has
yet to be earned.
MAJOR CUSTOMERS
Revenues from customers which exceed 10% of total revenues are as follows
for the years ended September 30:
1995 1996 1997
--------- --------- ---------
Government agencies.................................................... 20% 21% 16%
Commercial:
Company A............................................................ 23% 24% 21%
Company B............................................................ 12% -- --
Accounts receivable from these customers were as follows as of September 30:
1996 1997
--------- ---------
Government agencies..................................................... $ 59,000 $ 78,000
Commercial:
Company A............................................................. 73,000 5,000
INCOME TAXES
The Company utilizes the liability method to account for income taxes, and
deferred taxes are based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of the enacted tax laws.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (PRO FORMA)
Net income (loss) per common and common equivalent share (pro forma) was
computed by dividing net income (loss) by the weighted average common and common
stock equivalent shares outstanding (pro forma). Weighted average common and
common stock equivalent shares outstanding includes common shares outstanding,
the conversion of Series A Convertible Preferred Stock into common stock, common
F-8
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
stock equivalents and common stock equivalents issued within the 12-month period
prior to the proposed initial public offering at a price less than the proposed
public offering price using the treasury stock method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which changes the way companies calculate their earnings per share
(EPS). SFAS No. 128 replaces primary EPS with basic EPS. Basic EPS is computed
by dividing reported earnings by weighted average shares outstanding, excluding
potentially dilutive securities. Fully diluted EPS, termed diluted EPS under
SFAS No. 128, is also to be disclosed. The Company is required to adopt SFAS No.
128 in fiscal 1998, at which time all prior year EPS are to be restated in
accordance with SFAS No. 128. If the Company had adopted the pronouncement
during fiscal 1997, the effect of this accounting change on reported EPS data
would have been as follows for the years ended September 30:
1995 1996 1997
--------- --------- ---------
Primary EPS as reported............................................... $ (.07) $ (.04) $ .04
Effect of SFAS No. 128................................................ -- -- .01
--------- --------- ---------
Basic EPS as restated................................................. $ (.07) $ (.04) $ .05
--------- --------- ---------
--------- --------- ---------
Diluted EPS of the Company under SFAS No. 128 would be the same as primary
EPS as reported.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in financial statements. The Company will adopt the
provisions of SFAS No. 130 in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes a new model for
segment reporting, called the "management approach" and requires certain
disclosures for each segment. The management approach is based on the way the
chief operating decision maker organizes segments within a company for making
operating decisions and assessing performance. The Company will be required to
adopt the provisions of SFAS No. 131 in fiscal 1999.
F-9
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
3. STOCKHOLDERS' EQUITY:
AUTHORIZED SHARES
The authorized capital stock of the Company consists of 20,450,000 shares of
capital stock, $0.05 per share par value, of which 15,000,000 shares are common
stock, 450,000 shares are Series A Convertible Preferred Stock and 5,000,000
shares are undesignated.
STOCK SPLIT
On December 22, 1997, the Company's board of directors approved a 4-for-1
stock split of all the Company's outstanding common stock. All share and per
share data have been restated for all periods presented to reflect the common
stock split.
PREFERRED STOCK RIGHTS
The Series A Convertible Preferred Stock has certain preferential
liquidation, conversion and dividend rights as follows:
a. In the event of liquidation of the Company, the holders of these shares are
entitled to receive $13.50 per share unless a greater amount would be
distributed or paid with respect to each common share assuming the
conversion of all outstanding preferred shares.
b. Each preferred share is convertible, at the option of the holder, at any
time into four shares of voting common stock, subject to adjustment, with
automatic conversion upon the closing of a registered public offering
meeting certain minimum parameters.
c. Holders of preferred stock are entitled to receive dividends if, as and when
declared by the board of directors.
RESTRICTED STOCK AWARDS
The Company has entered into restricted stock agreements with certain key
employees, covering the issuance of voting common stock (the Restricted Stock).
The Restricted Stock will be released to the key employees if they are employed
by the Company at the end of a five-year waiting period. Unearned compensation
has been recognized for the estimated fair value of the applicable common
shares, reflected as a reduction of stockholders' equity, and is being charged
to operations over the five-year waiting period.
Transactions in restricted stock are as follows:
SHARES
---------
Outstanding at September 30, 1994.................................................. 63,200
Granted.......................................................................... 24,000
---------
Outstanding at September 30, 1995.................................................. 87,200
Canceled......................................................................... (4,800)
---------
Outstanding at September 30, 1996.................................................. 82,400
Granted.......................................................................... 44,000
---------
Outstanding at September 30, 1997.................................................. 126,400
---------
---------
F-10
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
3. STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK PURCHASE NOTES RECEIVABLE
The Company established a loan program during fiscal 1997 to assist
employees in purchasing shares of the Company's stock. The loans are
collateralized by the employees' purchased shares and require annual interest
payments at a rate equal to prime at the date of issuance, with principal and
any unpaid interest due at the earlier of five years after the date of issuance,
three months after termination of employment, or six months after the Company's
common stock becomes available to the public. Employees may borrow up to 100% of
the option price for the shares purchased or up to 100% of their previous
investment in the Company's stock.
4. STOCK-BASED COMPENSATION PLANS:
Upon adoption of the Company's 1997 Incentive Stock Option Plan (the Plan),
which replaced the 1987 Incentive Stock Option Plan, 600,000 shares of voting
common stock were reserved for issuance to employees and officers. The Plan
requires that the option price per share cannot be less than 100% of the fair
market value of the common stock (as determined by the board of directors) on
the date of the grant of the option or 110% with respect to optionees who own
more than 10% of the total combined voting power of all classes of stock.
Options expire in five years or upon termination of employment and are
exercisable at a rate of 20% per year from the date of grant.
Nonqualified options have been granted to outside directors, employees and
officers. The options have been granted at fair market value, as determined by
the board of directors at the date of grant. Options expire in five to ten years
and are exercisable at a rate of 20% per year from the date of grant or 20% per
year commencing two years after the date of grant.
Information regarding stock options under all plans is summarized as
follows:
1995 1996 1997
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
Outstanding, beginning of period........... 856,000 $ 3.81 1,396,280 $ 4.35 1,163,600 $ 4.52
Granted.................................. 592,400 5.00 5,400 5.00 157,400 5.00
Exercised................................ (36,040) 2.57 (71,628) 3.04 (45,388) 4.01
Canceled................................. (16,080) 3.55 (166,452) 3.78 (70,812) 4.51
---------- ----- ---------- ----- ---------- -----
Outstanding, end of period................. 1,396,280 $ 4.35 1,163,600 $ 4.52 1,204,800 $ 4.60
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Exercisable, end of period................. 448,880 $ 3.84 436,760 $ 4.26 589,320 $ 4.42
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Weighted average fair value of options
granted.................................. $ 3.23 $ 3.30
---------- ----------
---------- ----------
The options outstanding at September 30, 1997 have exercise prices ranging
between $2.50 and $5.00, with a weighted average exercise price of $4.60 and a
weighted average remaining contractual life of 3.25 years.
F-11
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
4. STOCK-BASED COMPENSATION PLANS: (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively: risk-free interest
rates of 6.43% and 6.24%; expected lives of 5 and 5.57 years; and expected
volatility of 73% for both years.
The Company accounts for the options under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for the options
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) would have been the following pro
forma amounts for the years ended September 30:
1996 1997
----------- ----------
Net income (loss):
As reported........................................................ $ (193,727) $ 235,673
Pro forma.......................................................... (194,890) 155,541
Net income (loss) per common share:
As reported........................................................ (.04) .04
Pro forma.......................................................... (.04) .03
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma information
may not be representative of that to be expected in future periods.
5. INCOME TAXES:
Deferred income taxes consisted of the following as of September 30:
1996 1997
------------- -------------
Deferred tax assets............................................. $ 3,025,000 $ 2,850,000
Less--Valuation allowance....................................... (3,025,000) (2,850,000)
------------- -------------
Net deferred tax assets....................................... $ -- $ --
------------- -------------
------------- -------------
These deferred tax assets result from differences in the recognition of
transactions for income tax and financial reporting purposes. The principal
temporary differences relate to certain financial reserves not deductible for
tax purposes until paid, a capital loss carryforward and net operating loss
carryforwards.
The Company's net operating loss carryforwards of approximately $6.4 million
at September 30, 1997 expire in varying amounts through 2011. Certain
restrictions under the Tax Reform Act of 1986, caused by the change in ownership
resulting from sales of common and convertible preferred stocks, may limit
annual utilization of the net operating loss carryforwards. The Company also has
$519,000 of capital loss carryforwards at September 30, 1997, which expire in
2001. A valuation allowance for the full amount of the deferred tax asset has
been established due to the uncertainty of realization.
During fiscal 1997, the Company utilized $64,000 of net operating loss
carryforwards to offset the 1997 income tax liability.
F-12
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
6. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases its office and laboratory space under an operating lease
that expires in fiscal 2000. The lease provides for base monthly payments, which
increase annually, and additional amounts to cover the Company's share of common
area expenses and property taxes. The Company is responsible for maintenance,
insurance and other normal operating costs. Rental expense for the base monthly
payments and additional costs was approximately $280,000, $290,000 and $290,000
for the years ended September 30, 1995, 1996 and 1997, respectively.
As of September 30, 1997, future commitments under the operating lease are
as follows:
1998.............................................................. $ 210,000
1999.............................................................. 216,000
2000.............................................................. 54,000
---------
$ 480,000
---------
---------
GOVERNMENT CONTRACTS
Under provisions contained in the government research contracts,
representatives of the government agencies have the right to access and review
the Company's underlying records of contract costs. The government retains the
right to reject expenses considered unallowable under the terms of the contract.
The Defense Contract Audit Agency has reviewed the contracts through 1989. In
the opinion of management, future amounts due, if any, with respect to open
contract years will not have a material impact on the financial position or
results of operations of the Company.
7. DEFINED CONTRIBUTION PLAN:
The Company has a profit-sharing/401(k) retirement and savings plan for the
benefit of qualified employees. Under the plan, qualified employees may elect to
defer up to 15% of their compensation, subject to a maximum limit determined by
the Internal Revenue Service. The Company, at the discretion of the board of
directors, may elect to make an additional contribution. Contributions of
approximately $67,000, $78,000 and $86,000 have been charged to operations for
the years ended September 30, 1995, 1996 and 1997, respectively.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS:
INITIAL PUBLIC OFFERING
The Company has filed a Registration Statement with the Securities and
Exchange Commission for the sale of up to 2,000,000 shares (excluding the
Underwriters' over-allotment option to purchase an additional 300,000 shares) of
common stock (the Offering). The Company intends to use the net proceeds from
the Offering (estimated to be approximately $14.5 million) for research and
development, sales and marketing and upgrades to its manufacturing equipment, to
strengthen its patent protection and for working capital and general corporate
purposes.
F-13
SURMODICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS:
(CONTINUED)
PRO FORMA BALANCE SHEET AND STATEMENT OF STOCKHOLDERS' EQUITY AS OF
SEPTEMBER 30, 1997
As discussed in Note 3, each share of the Series A Convertible Preferred
Stock will be automatically converted into four shares of voting common stock
upon the closing of the Offering and, subject to stockholder approval, the
authorized shares of Series A Convertible Preferred Stock will be eliminated and
this class of stock canceled. The Company's pro forma balance sheet and pro
forma statement of stockholders' equity as of September 30, 1997 give effect to
the conversion.
F-14
[PHOTOGRAPH OF THE MIXING OF THE REAGENTS]
PhotoLink is a simple, light-activated coating technology. Reagent is dissolved
into solution applied to the device, and the device is exposed to a light
source. The PhotoLink process is quick, uses cost-effective equipment, and is
easily incorporated into existing manufacturing operations.
[PHOTOGRAPH OF DIPPING THE
DEVICE INTO THE REAGENT]
[PHOTOGRAPH OF PREPARING THE COATED
DEVICE FOR EXPOSURE TO DIRECT LIGHT]
[PHOTOGRAPH OF A COATED
CATHETER]
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT 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 OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
---------
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 12
Dividend Policy................................ 12
Capitalization................................. 13
Dilution....................................... 14
Selected Financial Data........................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
Business....................................... 19
Management..................................... 31
Principal Stockholders......................... 35
Description of Capital Stock................... 36
Shares Eligible for Future Sale................ 38
Underwriting................................... 40
Legal Matters.................................. 41
Experts........................................ 41
Available Information.......................... 41
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 OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
J OHN G. KINNARD AND COMPANY,
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company involving service as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3,
requires payment by the Company, upon written request, of reasonable expenses in
advance of final disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested majority of the Board
of Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
stockholders, or by a court.
Provisions regarding indemnification of officers and directors of the
Company are contained in Section 5.1 of the Bylaws (Exhibit 3.2 to this
Registration Statement). The Company is in the process of obtaining a director
and officer liability policy.
Under Section 6 of the Underwriting Agreement, filed as Exhibit 1.1 hereto,
the Underwriters agree to indemnify, under certain conditions, the Company, its
directors, certain of its officers and persons who control the Company within
the meaning of the Securities Act against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC registration fee, NASD fee and Nasdaq listing fee, are
estimated.
SEC Registration Fee.............................................. $ 5,768
NASD Fee.......................................................... 2,455
Nasdaq National Market Listing Fee................................ 35,000
Legal Fees........................................................ 100,000
Accountants' Fees and Expenses.................................... 70,000
Printing Expenses................................................. 50,000
Blue Sky Fees and Expenses........................................ 3,000
Transfer Agent Fees and Expenses.................................. 5,000
Miscellaneous..................................................... 78,777
---------
Total........................................................... $ 350,000
---------
---------
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the securities listed
below pursuant to exemptions from registration under the Securities Act. The
information below is presented on a post stock split basis.
1. On January 6, 1995, the Company issued an aggregate of 18,000 shares
of Common Stock to three directors at a price of $2.50 per share upon
exercisable of non-qualified stock options.
2. On January 22, 1995, the Company issued 6,000 shares of Common Stock
to an executive officer at a price of $2.50 per share upon exercise of an
incentive stock option.
3. On March 13, 1995, the Company issued 1,120 shares of Common Stock
to an employee at a price of $3.64 per share upon exercise of an incentive
stock option.
4. On March 20, 1995, the Company issued 600 shares of Common Stock to
an employee at a price of $2.50 per share upon exercise of an incentive
stock option.
5. On May 31, 1995, the Company issued an aggregate of 9,200 shares of
Common Stock to eight employees, including one executive officer, at a price
of $2.50 per share upon exercise of incentive stock options.
6. On September 18, 1995, the Company issued an aggregate of 24,000
shares of Common Stock to six employees pursuant to restricted stock
agreement at a price of $5.00 per share.
7. On October 31, 1995, the Company issued an aggregate of 1,120 shares
of Common Stock to an employee at a price of $3.64 per share upon exercise
of non-qualified stock options.
8. On October 31, 1995, the Company issued 3,200 shares and 1,400
shares of Common Stock to an employee at prices of $3.53 and 3.73 per share,
respectively, upon exercise of incentive stock options.
9. On February 4, 1996, the Company issued an aggregate of 16,400
shares of Common Stock to eight employees at a price of $2.50 per share upon
exercise of incentive stock options.
10. On February 4, 1996, the Company issued an aggregate of 12,000
shares of Common Stock to three directors at a price of $2.50 per share upon
exercise of non-qualified stock options.
11. On June 21, 1996, the Company issued 88 shares of Common Stock to an
employee at a price of $5.00 per share upon exercise of an incentive stock
option.
12. On September 18, 1996, the Company issued an aggregate of 38,540
shares of Common Stock to 26 employees, including two executive officers, at
a price of $3.38 per share upon exercise of incentive stock options.
13. On January 1, 1997, the Company issued 44,000 shares of Common Stock
pursuant to restricted stock agreements to 14 employees at a price of $5.00
per share.
14. On April 29, 1997, the Company issued 600 shares of Common Stock to
an employee at a price of $5.00 per share upon exercise of an incentive
stock option.
15. On April 29, 1997, the Company issued 400 shares of Common Stock to
an employee at a price of $4.00 per share upon exercise of an incentive
stock option.
16. On May 5, 1997, the Company issued 20 shares of Common Stock to an
employee at a price of $5.00 per share upon exercise of an incentive stock
option.
17. On September 21, 1997, the Company issued 44,368 shares of Common
Stock to 14 employees, including two executive officers, at a price of $4.00
per share upon exercise of stock options.
II-2
The sales of securities above were made in reliance upon Section 4(2) of the
Securities Act, which provide exemptions for transactions not involving a public
offering. The purchasers of securities described above acquired them for their
own account and not with a view to any distribution thereof to the public. The
certificates evidencing the securities bear legends stating that the shares are
not to be offered, sold or transferred other than pursuant to an effective
registration statement under the Securities Act, or an exemption from such
registration requirements. No underwriting commissions or discounts were paid
with respect to the sales of unregistered securities described above.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation, as amended
3.2 Restated Bylaws
4.1 Restated Articles of Incorporation, as amended (filed as Exhibit 3.1)
4.2 Restated Bylaws (filed as Exhibit 3.2)
4.3 Specimen Stock Certificate (to be filed by amendment)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.
10.1 Lease Agreement, dated November 18, 1991, relating to manufacturing and office space located at 9924
West 74th Street, Eden Prairie, Minnesota
10.2 Company's 1987 Incentive Stock Option Plan, including specimen of Incentive Stock Option Agreement
10.3 Company's 1997 Incentive Stock Option Plan, including specimen of Incentive Stock Option Agreement
10.4 Form of Restricted Stock Agreement
10.5 Form of Non-qualified Stock Option Agreement
10.6 Form of License Agreement
10.7* License Agreement with Abbott Laboratories dated November 20, 1990, as amended
10.8 Form of Promissory Note from Walter H. Diers, Jr. and James C. Powell
11 Statement re computation of pro forma per share earnings
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page of the Registration Statement)
27 Financial Data Schedule
- ------------------------
* Portions of this document have been deleted and a confidentiality request
regarding such portions has been filed with the SEC.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
II-3
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on December 23,
1997.
SURMODICS, INC.
By: /s/ DALE R. OLSETH
-----------------------------------------
Dale R. Olseth
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Dale R.
Olseth and Stephen C. Hathaway, and each of them, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, any registration statement filed
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and any and
all instruments or documents filed as part of or in connection with any of such
amendments or registration statements, and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his or her
substitutes, shall do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
President, Chief Executive
/s/ DALE R. OLSETH Officer and Chairman of the
------------------------------------------- Board of Directors (principal December 23, 1997
Dale R. Olseth executive officer)
Vice President and Chief
/s/ STEPHEN C. HATHAWAY Financial Officer (principal
------------------------------------------- financial and accounting December 23, 1997
Stephen C. Hathaway officer)
/s/ PATRICK E. GUIRE
------------------------------------------- Senior Vice President of Research December 23, 1997
Patrick E. Guire and Technology and Director
/s/ DONALD S. FREDRICKSON
------------------------------------------- Director December 23, 1997
Donald S. Fredrickson
II-5
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
/s/ JAMES J. GRIERSON
------------------------------------------- Director December 23, 1997
James J. Grierson
/s/ DAVID A. KOCH
------------------------------------------- Director December 23, 1997
David A. Koch
/s/ KENDRICK B. MELROSE
------------------------------------------- Director December 23, 1997
Kendrick B. Melrose
/s/ KENNETH H. KELLER
------------------------------------------- Director December 23, 1997
Kenneth H. Keller
II-6
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SURMODICS, INC.
EXHIBIT INDEX TO FORM SB-2
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation, as amended
3.2 Restated Bylaws
4.1 Restated Articles of Incorporation, as amended (filed as Exhibit 3.1)
4.2 Restated Bylaws (filed as Exhibit 3.2)
4.3 Specimen Stock Certificate (to be filed by amendment)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.
10.1 Lease Agreement, dated November 18, 1991, relating to manufacturing and office space
located at 9924 West 74th Street, Eden Prairie, Minnesota
10.2 Company's Incentive 1987 Stock Option Plan, including specimen of Incentive Stock Option
Agreement
10.3 Company's Incentive 1997 Stock Option Plan, including specimen of Incentive Stock Option
Agreement
10.4 Form of Restricted Stock Agreement
10.5 Form of Non-qualified Stock Option Agreement
10.6 Form of License Agreement
10.7* License Agreement with Abbott Laboratories dated November 20, 1990, as amended
10.8 Form of Promissory Note from Walter H. Diers Jr. and James C. Powell
11 Statement re computation of pro forma per share earnings
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page of the Registration Statement)
27 Financial Data Schedule
- ------------------------
* Portions of this document have been deleted and a confidentiality request
regarding such portions has been filed with the SEC.
DRAFT 12/23/97
2,000,000 SHARES
SURMODICS, INC.
COMMON STOCK
$0.05 PAR VALUE
UNDERWRITING AGREEMENT
_________________, 1998
John G. Kinnard and Company, Incorporated
As Representative of the Several Underwriters
c/o John G. Kinnard and Company, Incorporated
920 Second Avenue South
Minneapolis, MN 55402
Ladies and Gentlemen:
SurModics, Inc., a Minnesota corporation (the "Company"), hereby confirms
its agreement to issue and sell to the underwriters named in Schedule A attached
hereto (the "Underwriters"), for which you are acting as the representative (the
"Representative"), an aggregate of 2,000,000 shares (the "Firm Shares") of
authorized common stock, $0.05 par value, of the Company (the "Common Stock").
The Company also hereby confirms its agreement to issue and sell to the
Underwriters an aggregate of up to 300,000 additional shares of Common Stock
upon the request of the Representative solely for the purpose of covering
overallotments (the "Option Shares"). The Firm Shares and the Option Shares are
collectively referred to as the "Shares."
The Company hereby confirms the arrangements with respect to the purchase
of the Shares severally by each of the Underwriters. The Company has been
advised and hereby acknowledges that John G. Kinnard and Company, Incorporated
has been duly authorized to act as the representative of the Underwriters. As
used in this Agreement, the term "Underwriter" refers to any individual member
of the underwriting syndicate and includes any party substituted for an
Underwriter under Section 9 hereof.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to and agrees with each of the several
Underwriters as follows:
-1-
(a) A registration statement on Form SB-2 (Registration No.
___________) with respect to the Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") promulgated thereunder and
has been filed with the Commission under the Act. If the Company has elected to
rely upon Rule 462(b) under the Act to increase the size of the offering
registered under the Act, the Company will prepare and file with the Commission
a registration statement with respect to such increase pursuant to Rule 462(b).
Copies of the registration statement as amended to date have been delivered by
the Company to the Representative. Such registration statement, including a
registration statement (if any) filed pursuant to Rule 462(b) under the Act and
the information (if any) deemed to be part thereof pursuant to Rules 430A and
434(d) under the Act, and all prospectuses included as a part thereof, all
financial statements included in such registration statement, and all schedules
and exhibits thereto, as amended at the time when the registration statement
shall become effective, are herein referred to as the "Registration Statement,"
and the term "Prospectus" as used herein shall mean the final prospectus
included as a part of the Registration Statement on file with the Commission
when it becomes effective (except that if a prospectus is filed by the Company
pursuant to Rules 424(b) and 430A under the Act, the term "Prospectus" as used
herein shall mean the prospectus so filed pursuant to Rules 424(b) and 430A
(including any term sheet meeting the requirements of Rule 434 under the Act
provided by the Company for use with a prospectus subject to completion within
the meaning of Rule 434 in order to meet the requirements of Section 10(a) of
the Act)). The term "Preliminary Prospectus" as used herein means any
prospectus used prior to the Effective Date (as defined in Section 5(a) hereof)
and included as a part of the Registration Statement, prior to the time it
becomes or became effective under the Act and any prospectus subject to
completion as described in Rules 430A or 434 under the Act. Copies of the
Registration Statement, including all exhibits and schedules thereto, any
amendments thereto and all Preliminary Prospectuses have been delivered to you.
(b) The Registration Statement has been declared effective, and at
all times subsequent thereto up to each closing date, the Registration Statement
and Prospectus and all amendments thereof and supplements thereto, will comply
in all material respects with the provisions of the Act and the Rules and
Regulations. Neither the Commission nor any state securities division has
issued any order (i) preventing or suspending the use of any Preliminary
Prospectus, (ii) issuing a stop order with respect to the offering of the Shares
or (iii) requiring the recirculation of a Preliminary Prospectus. The
Registration Statement (as amended, if the Company shall have filed with the
Commission any post effective amendments thereto) does not and 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, in
light of the circumstances under which they were made, not misleading. Each
Preliminary Prospectus, at the time of filing thereof, the Registration
Statement as of the date declared effective and at all times subsequent thereto
up to each closing date, and the Prospectus (as amended or supplemented, if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) conformed and conforms in all material respects to the requirements of
the Act and the
-2-
Rules and Regulations and did not, does not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties in this Subsection 1(b) shall
apply to statements in, or omissions from, the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto) which are based upon
and conform to information furnished to the Company by the Underwriters in
writing specifically for use in the preparation of the Registration Statement or
the Prospectus or any such amendment or supplement. There is no contract or
other document of the Company of a character required by the Act or the Rules
and Regulations to be described in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement that has not been
described or filed as required.
(c) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Minnesota, with
full corporate power and authority, to own, lease and operate its properties and
conduct its business as described in the Registration Statement and Prospectus.
The Company is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction in which the ownership or lease of its properties,
or the conduct of its business, requires such qualification and in which the
failure to be qualified or in good standing would have a material adverse effect
on the condition (financial or otherwise), results of operations, shareholders'
equity, business, property or prospects of the Company.
(d) The Company has no subsidiaries, is not affiliated with or
owns any stock or other equity interest, or any other company or business
entity.
(e) The Company has all necessary material authorizations,
licenses, approvals, consents, permits, certificates and orders of and from all
state, federal, foreign and other governmental or regulatory authorities to own
its properties and to conduct its business as described in the Registration
Statement and Prospectus, is conducting its business in substantial compliance
with all applicable laws, rules and regulations of the jurisdictions in which it
is conducting business, and has received no notice of nor has it knowledge of
any basis for any proceeding or action for the revocation or suspension of any
such authorizations, licenses, approvals, consents, permits, certificates or
orders.
(f) The Company is not in violation of or in default under
[AMENDED AND RESTATED] (i) its Articles of Incorporation or Bylaws, (ii) or in
default in the performance or observance of any material obligation, agreement,
covenant or condition contained in any bond, debenture, note or other evidence
of indebtedness or in any contract, license, indenture, bond mortgage, loan
agreement, joint venture or partnership agreement, lease, agreement or
instrument to which the Company is a party or by which the Company or any of its
properties are bound, (iii) any law, order, rule, regulation, writ, injunction
or decree of any government, governmental instrumentality or court, domestic or
foreign, which violation or default would have a material adverse effect on the
condition (financial or otherwise), results of operations, shareholders'
-3-
equity, business, property or prospects of the Company or the ability of the
Company to consummate the transactions contemplated hereby.
(g) The Company has full requisite power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and will be a valid and binding agreement on the part
of the Company, enforceable in accordance with its terms, if and when this
Agreement shall have become effective in accordance with Section 8, except as
enforceability may be limited by the application of bankruptcy, insolvency,
moratorium or similar laws affecting the rights of creditors generally and by
judicial limitations on the right of specific performance and other equitable
remedies, and except as the enforceability of the indemnification or
contribution provisions hereof may be affected by applicable federal or state
securities laws. The performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of or constitute a material default
under (i) any bond, debenture, note or other evidence of indebtedness, or any
contract, license, indenture, mortgage, loan agreement, joint venture or
partnership agreement, lease, agreement or other instrument to which the Company
is a party or by which the property of the Company is bound, (ii) the Company's
[AMENDED AND RESTATED] Articles of Incorporation or Bylaws, or (iii) any statute
or any order, rule or regulation of any court, governmental agency or body
having jurisdiction over the Company. No consent, approval, authorization or
order of any court, governmental agency or body is required for the consummation
by the Company of the transactions on its part herein contemplated, except such
as may be required under the Act or under state or other securities laws.
(h) There are no actions, suits or proceedings pending before any
court or governmental agency, authority or body to which the Company is a party
or of which the business or property of the Company is the subject which (i)
might result in any material adverse change in the condition (financial or
otherwise), shareholders' equity, results of operations, business or prospects
of the Company, (ii) materially and adversely affect its properties or assets,
or (iii) prevent consummation of the transactions contemplated by this
Agreement. To the best of the Company's knowledge, no such actions, suits or
proceedings are threatened.
(i) The Company has the duly authorized and outstanding
capitalization set forth under the caption "Capitalization" in the Prospectus.
The outstanding shares of capital stock of the Company have been duly authorized
and validly issued, fully paid and nonassessable. The Shares conform in
substance to all documents relating thereto contained in the Registration
Statement and Prospectus. The Shares to be sold by the Company hereunder have
been duly authorized and, when issued and delivered pursuant to this Agreement,
will be validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus. No statutory preemptive rights
or similar rights to subscribe for or purchase shares of capital stock of any
security holders of the Company exist with respect to the issuance and sale of
the Shares by the Company. Except as described in the Prospectus, the Company
has no agreement with any security holder which gives such security holder the
right to require the Company to register under the Act any securities of any
nature owned or held by such person in connection with the transactions
contemplated by this Agreement. Except as described in the
-4-
Prospectus, there are no outstanding options, warrants, agreements, contracts or
other rights to purchase or acquire from the Company any shares of its capital
stock. Except as described in the Prospectus, there are no agreements among the
Company's executive officers and directors and any other persons with respect to
the voting or transfer of the Company's capital stock or with respect to other
aspects of the Company's affairs. Upon payment for and delivery of the Shares
to be sold by the Company pursuant to this Agreement, the Underwriters will
acquire good and marketable title to such Shares, free and clear of all liens,
encumbrances or claims created by actions of the Company. The certificates
evidencing the Shares will comply as to form with all applicable provisions of
the laws of the State of Minnesota.
(j) The financial statements of the Company, together with the
related notes, included in the Registration Statement and Prospectus (the
"Financial Statements") fairly and accurately present the financial position,
the results of operations and changes in stockholder's equity and cash flows of
the Company at the dates and for the respective periods to which such Financial
Statements apply. The Financial Statements have been prepared in accordance
with generally accepted accounting principles, consistently applied throughout
the periods involved, and all adjustments necessary for a fair presentation of
results for such periods have been made, except as otherwise stated therein; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein. No other financial statements or
schedules are required to be included in the Registration Statement. The
summary and selected consolidated financial data included in the Registration
Statement present fairly the information shown therein on the basis stated in
the Registration Statement and have been compiled on a basis consistent with the
financial statements presented therein.
(k) Arthur Andersen, LLP, which has expressed its opinion with
respect to the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and the rules and regulations thereunder.
(l) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, (i) there has not been any material
adverse change, or any development, event or occurrence in the business of the
Company that, taken together with other developments, events and occurrences
with respect to such business, would have or would reasonably be expected to
have a material adverse effect on the condition (financial or otherwise) of the
Company or the management, shareholders' equity, results of operations,
business, property or prospects of the Company, whether or not occurring in the
ordinary course of business, (ii) there has not been any transaction not in the
ordinary course of business entered into by the Company which is material to the
Company, other than transactions described or contemplated in the Registration
Statement, (iii) the Company has not incurred any material liabilities or
obligations, which are not in the ordinary course of business or which could
result in a material reduction in the future earnings of the Company, (iv) the
Company has not sustained any material loss or interference with its business or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance, (v) there has not been any change in the capital stock
of the Company (other than upon the exercise of options described in the
Registration Statement) or any material increase in the short-term or long-term
debt (including capitalized lease obligations) of the Company, (vi) there has
not been any declaration
-5-
or payment of any dividends or any distributions of any kind with respect to the
capital stock of the Company, other than any dividends or distributions
described or contemplated in the Registration Statement, or (vii) there has not
been any issuance of warrants, options, convertible securities or other rights
to purchase or acquire capital stock of the Company.
(m) The Company has filed all necessary federal, state, local and
foreign income and franchise tax returns and paid all taxes shown as due
thereon. The Company has no knowledge of any tax deficiency which either has
been or might be asserted against it which would materially and adversely affect
the Company's business or properties.
(n) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations and
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(o) The Company has good and marketable title to all of the
property, real and personal, described in the Registration Statement or
Prospectus as being owned by the Company, free and clear of all liens,
encumbrances, equities, charges or claims, except as do not materially interfere
with the uses made and to be made by the Company of such property or as
disclosed in the Financial Statements. The Company has valid and binding leases
to the real and personal property described in the Registration Statement or
Prospectus as being under lease to the Company, except as to those leases which
are not material to the Company or the lack of enforceability of which would not
materially interfere with the use made and to be made by the Company of such
leased property.
(p) There has been no unlawful storage, treatment or disposal of
waste by the Company at any of the facilities owned or leased thereby, except
for such violations which would not have a material adverse effect on the
condition, (financial or otherwise) or the shareholders' equity, results of
operation, business, properties or prospects of the Company. There has been no
material spill, discharge, leak, emission, ejection, escape, dumping or release
of any kind onto the properties owned or leased by the Company, or into the
environment surrounding those properties, of any toxic or hazardous substances,
as defined under any federal, state or local regulations, laws or statutes,
except for those releases either permissible under such regulations, laws or
statutes or otherwise allowable under applicable permits or which would not have
a material adverse effect on the condition (financial or otherwise) or the
shareholders' equity, results of operation, business, properties or prospects of
the Company.
(q) Each employee benefit plan (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
("Employee Benefit Plan"), and each bonus, retirement, pension, profit sharing,
stock bonus, thrift, stock option, stock purchase, incentive, severance,
deferred or other compensation or welfare benefit plan, program,
-6-
agreement or arrangement of, or applicable to employees or former employees of,
the Company or with respect to which the Company could have any liability
("Benefit Plans"), was or has been established, maintained and operated in all
material respects in compliance with all applicable federal, state, and local
statutes, orders, governmental rules and regulations, including, but not limited
to, ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). No
Benefit Plan is or was subject to Title IV of ERISA or Section 302 of ERISA or
Section 412 of the Code. The Company does not, either directly or indirectly as
a member of a controlled group within the meaning of Sections 414(b), (c), (m)
and (o) of the Code ("Controlled Group"), have any material liability that
remains unsatisfied or arising under Section 502 of ERISA, Subchapter D of
Chapter 1 of Subtitle A of the Code or under Chapter 43 of Subtitle D of the
Code. No action, suit, grievance, arbitration or other matter of litigation or
claim with respect to any Benefit Plan (other than routine claims for benefits
made in the ordinary course of plan administration for which plan administrative
procedures have not been exhausted) is pending or, to the Company's knowledge,
threatened or imminent against or with respect to any Benefit Plan, any member
of a Controlled Group that includes the Company, or any fiduciary within the
meaning of Section 3(21) of ERISA with respect to a Benefit Plan which, if
determined adversely to the Company, would have a material adverse effect on the
Company. Neither the Company nor any member of a Controlled Group that includes
the Company, has any knowledge of any facts that could give rise to any action,
suit, grievance, arbitration or any other manner of litigation or claim with
respect to any Benefit Plan.
(r) No labor disturbance or dispute by the employees or
consultants or contractors of the Company exists or, to the Company's knowledge,
is threatened which could reasonably be expected to have a material adverse
effect on the conduct of the business or the financial condition (financial or
otherwise), results of operations, properties or prospects of the Company.
(s) Except as disclosed in the Prospectus:
(i) The Company owns or possesses the full rights to use or
is licensed to use all patents, patent applications, inventions,
copyrights, trademarks, service marks, applications for registration
of trademarks and service marks, trade secrets, know-how and other
intellectual property proprietary information or know-how reasonably
necessary for the conduct of its present or intended business as
described in the Prospectus ("Proprietary Rights"); there are no
pending legal, governmental or administrative proceedings relating to
the Proprietary Rights to which the Company is a party or of which any
property of the Company is subject; and no such proceedings are, to
the best of the Company's knowledge, threatened or contemplated
against the Company by any governmental agency or authority or by
others;
(ii) The Company has not received any notice of conflict or
claim with asserted intellectual property rights of any third parties;
-7-
(iii) To the best of the Company's knowledge, the Company
does not infringe upon the rights or claimed rights of any person
under or, with respect to, any of the Proprietary Rights referred to
in Section 1(s)(i) above; except as disclosed in the Prospectus, the
Company is not obligated nor is it under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to any owner
of, licensor of, or other claimant to, any Proprietary Rights, with
respect to the use thereof or in connection with the conduct of its
business or otherwise; and to the best of the Company's knowledge, the
Company is not using any confidential information or trade secrets of
any other party in the conduct of its business;
(iv) The Company has not entered into any consent,
indemnification, forbearance to sue or settlement agreement with
respect to the Proprietary Rights other than in the ordinary course of
business;
(v) To the best of the Company's knowledge, the Proprietary
Rights are valid and enforceable and no registration relating thereto
has lapsed, expired or been abandoned or canceled or is the subject of
cancellation or other adversarial proceedings, and all applications
therefor are pending and are in good standing;
(vi) The Company has complied in all material respects with
its respective contractual obligations relating to the protection of
any Proprietary Rights used pursuant to licenses; and
(vii) The Company owns and/or has the unrestricted right to
use all trade secrets, including know-how, customer lists, inventions,
designs, processes, computer programs and any other technical data or
information necessary to the development, manufacture, operation and
sale of all products sold or proposed to be sold by it, free and clear
of any rights, liens and claims of others.
(t) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts reasonably adequate for its business
and, to the best of its knowledge, consistent with coverage comparable to the
insurance maintained by similar companies or businesses.
(u) The Company has not sold any securities in violation of
Section 5 of the Act.
(v) The conditions for use of a registration statement on Form
SB-2 for the distribution of the Shares have been satisfied with respect to the
Company.
(w) The Company intends to apply the proceeds from the sale of the
Shares by it to the purposes and substantially in the manner set forth in the
Prospectus.
-8-
(x) No person is entitled, directly or indirectly, to compensation
from the Company or the Underwriters for services as a finder in connection with
the transactions contemplated by this Agreement.
(y) All material transactions between the Company and its
stockholders who beneficially own more than 5% of any class of the Company's
voting securities have been accurately disclosed in the Prospectus, and the
terms of each such transaction are fair to the Company and no less favorable to
the Company than the terms that could have been obtained from unrelated parties.
(z) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares other than any Preliminary Prospectus or the Prospectus or other
materials permitted by the Act to be distributed by the Company.
(aa) The Company has not taken and will not take, directly or
indirectly, any action designed to, or which has constituted, or which might
reasonably be expected to cause or result in, stabilization or manipulation of
the price of the Common Stock.
(bb) The Company's application for listing on the Nasdaq National
Market ("Nasdaq") has been approved, and, on the date the Registration Statement
became effective, the Company's Registration Statement on Form 8-A or other
applicable form under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), became effective.
(cc) To the Company's knowledge, none of the Company's officers,
directors or security holders has any affiliations with the National Association
of Securities Dealers, Inc., except as set forth in the Registration Statement
or as otherwise disclosed in writing to the Representative.
(dd) The Company has obtained a written agreement, enforceable by
the Representative, from each officer and director of the Company and
shareholder who holds __% or more of the outstanding Common Stock of the Company
that for 180 days following the Effective Date, such person will not, without
the Representative's prior written consent, sell, transfer or otherwise dispose
of, or agree to sell, transfer or otherwise dispose of, other than by gift to
donees who agree to be bound by the same restriction or by will or the laws of
descent, any of his or her Common Stock, or any options, warrants or rights to
purchase Common Stock or any shares of Common Stock received upon exercise of
any options, warrants or rights to purchase Common Stock, which are beneficially
held by such persons during such 180 day period.
(ee) The Company is not, and upon completion of the sale of the
Shares contemplated hereby will not be, required to register as an "investment
company" under the Investment Company Act of 1940, as amended.
(ff) The Company has complied and will comply with all provisions
of Florida Statutes Section 517.075 (Chapter 92-198, Laws of Florida). Neither
the Company, nor any
-9-
affiliate thereof, does business with the government of Cuba or with any person
of affiliate located in Cuba.
(gg) Other than as contemplated by this Agreement, the Company has
not incurred any liability for any finder's fee, broker's fee or other agent's
commission in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby.
(hh) Any certificate signed by any officer of the Company and
delivered to the Representative or counsel to the Underwriters shall be deemed
to be a representation and warranty of the Company to each Underwriter as to the
matters covered thereby.
2. PURCHASE, SALE, DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties, and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each of the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase from the Company the
Firm Shares, at a purchase price equal to ____% of the per Share price to public
of $_____ (the "Offering Price"), the respective amount of Firm Shares set
forth opposite such Underwriter's name in Schedule A hereto. The Underwriters
will collectively purchase all of the Firm Shares if any are purchased.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters to purchase an aggregate of up to
300,000 Option Shares at the same purchase price as the Firm Shares for use
solely in covering any overallotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the Effective Date (as
defined in Section 5(a) hereof) upon notice (confirmed in writing) by the
Representative to the Company setting forth the aggregate number of Option
Shares as to which the Underwriters are exercising the option and the date on
which certificates for such Option Shares are to be delivered. Option Shares
shall be purchased severally for the account of each Underwriter in proportion
to the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A hereto. The option granted hereby may be canceled by the
Representative upon notice to the Company as to the Option Shares for which the
option is unexercised at the time of expiration of the 30 day period.
(c) The Company will deliver the Firm Shares to the Representative
at the offices of Oppenheimer Wolff & Donnelly, Plaza VII, 45 South Seventh
Street, Suite 3400, Minneapolis, MN 55402, unless some other place is agreed
upon, at 10:00 a.m., Minneapolis time, against payment of the purchase price at
the same place, on the third full business day after trading of the Shares has
commenced, or, if the offering commences after 4:30 p.m., on the fourth full
business day after commencement of the offering, or such earlier time as may be
agreed upon between the Representative and the Company, such time and place
being herein referred to as the "First Closing Date."
-10-
(d) The Company will deliver the Option Shares being purchased by
the Underwriters to the Representative at the above-referenced offices of
Oppenheimer Wolff & Donnelly set forth in Section 2(c) above, unless some other
place is agreed, at 10:00 a.m., Minneapolis time, against payment of the
purchase price at such place, on the date determined by the Representative and
of which the Company has received notice as provided in Section 2(b), which
shall not be earlier than two nor later than five full business days after the
exercise of the option as set forth in Section 2(b), or at such other time not
later than ten full business days thereafter as may be agreed upon by the
Representative and the Company, such time and date being herein referred to as
the "Second Closing Date."
(e) Certificates for the Shares to be delivered will be registered
in such names and issued in such denominations as the Underwriters shall request
two business days prior to the First Closing Date or the Second Closing Date, as
the case may be. The certificates will be made available to the Underwriters in
definitive form for the purpose of inspection and packaging at least twenty-four
(24) hours prior to the respective closing dates.
(f) Payment for the Shares shall be made by wire transfer to a
designated account of the Company for the Shares to be sold by it or by
certified or official bank check or checks in Clearing House funds, payable to
the order of the Company for the Shares to be sold by it.
3. UNDERWRITERS' OFFERING TO THE PUBLIC.
(a) The Underwriters will make a public offering of the Shares
directly to the public (which may include selected dealers who are members in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD") or foreign dealers not eligible for membership in the NASD but who have
agreed to abide by the interpretation of the NASD Board of Governor's with
respect to free-riding and withholding) as soon as the Underwriters deem
practicable after the Registration Statement becomes effective at the Offering
Price, subject to the terms and conditions of this Agreement and in accordance
with the Prospectus. Concessions from the Offering Price may be allowed
selected dealers who are members of the NASD as the Underwriters determine and
the Underwriters will furnish the Company with such information about the
distribution arrangements as may be necessary for inclusion in the Registration
Statement. It is understood that the Offering Price and such concessions may
vary after the public offering. The Underwriters shall offer and sell the
Shares only in jurisdictions in which the offering of Shares has been duly
registered or qualified, or is exempt from registration or qualification, and
shall take reasonable measures to effect compliance with applicable state and
local securities laws.
(b) It is understood that the Representative, individually and not
as a Representative, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for the Shares to be purchased by such
Underwriter or Underwriters. No such payment by the Representative shall
relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.
-11-
4. COVENANTS OF THE COMPANY.
The Company hereby covenants and agrees with each of the several
Underwriters as follows:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Company will prepare and file a Prospectus (or term sheet within the meaning
of Rule 434 under the Act) containing the information omitted therefrom pursuant
to Rule 430A under the Act with the Commission within the time period required
by, and otherwise in accordance with the provisions of, Rules 424(b), 430A and
434, if applicable, under the Act; if the Company has elected to rely upon Rule
462(b) under the Act to increase the size of the offering registered under the
Act, the Company will prepare and file a registration statement with respect to
such increase with the Commission within the time period required by, and
otherwise in accordance with the provisions of, Rule 462(b) under the Act; the
Company will prepare and file with the Commission, promptly upon the request of
the Representative, any amendments or supplements to the Registration Statement
or Prospectus (including any term sheet within the meaning of Rule 434 under the
Act) that, in the opinion of the Representative, may be necessary or advisable
in connection with distribution of the Securities by Underwriters; and the
Company will not file any amendment or supplement to the Registration Statement
or Prospectus (including any term sheet within the meaning of Rule 434 under the
Act) to which the Representative shall reasonably object by notice to the
Company after having been furnished with a copy a reasonable time prior to the
filing.
(b) The Company will advise the Representatives promptly of (i)
any request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus, (iii) the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or (iv)
the institution or threatening of any proceedings for that purpose, and the
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus or suspending such
qualification and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will promptly prepare and file at its own expense
with the Commission any amendments of, or supplements to, the Registration
Statement and the Prospectus which may be necessary in connection with the
distribution of the Shares by the Underwriters. During the period when a
Prospectus relating to the Shares is required to be delivered under the Act, the
Company will promptly file any amendments of, or supplements to, the
Registration Statement and the Prospectus which may be necessary to correct any
untrue statement of a material fact or any omission to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company will not file any amendment
of, or supplement to, the Registration Statement or Prospectus, after the
Effective Date, which shall not previously have been submitted to the
Representative and its counsel a reasonable time prior to such proposed filing
or to which the Representative shall have reasonably objected. In case any
Underwriter is required to deliver a
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prospectus in connection with sales of any Shares at any time nine months or
more after the effective date of the Registration Statement, upon the request of
the Representative but at the expense of such Underwriter, the Company will
prepare and deliver to such Underwriter as many copies as the Representative may
request of an amended or supplemented Prospectus complying with Section 10(a)(3)
of the Act.
(d) The Company will endeavor to qualify the Shares for sale under
the securities laws of such jurisdictions as the Representative may reasonably
designate and the Company will file such consents to service of process or other
documents necessary or appropriate in order to effect such qualification or
registration. In each jurisdiction in which the Shares shall have been
qualified or registered as above provided, the Company will continue such
qualifications or registrations in effect for so long as may be required for
purposes of the distribution of the Shares and make and file such statements and
reports in each year as are or may be reasonably required by the laws of such
jurisdiction to permit secondary trading of the same; provided, however, that in
no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to the service of process in suits, other than those arising out of
the offering or sale of the Shares.
(e) The Company will furnish to the Representative, as soon as
available, copies of the Registration Statement and all amendments (two of which
will be signed and which shall include all exhibits), each Preliminary
Prospectus, if any, the Prospectus and any amendments or supplements to such
documents including any prospectus prepared to permit compliance with Section
10(a)(3) of the Act, all in such quantities as the Representative may from time
to time reasonably request. The Company specifically authorizes the
Underwriters and all dealers to whom any of the Shares may be sold by the
Underwriters to use and distribute copies of such Preliminary Prospectuses and
Prospectuses in connection with the sale of the Shares as and to the extent
permitted by the federal and applicable state and local securities laws.
(f) The Company will make generally available to its security
holders an earnings statement, in a form complying with requirements of Section
11(a) of the Act and Rule 158 thereunder, as soon as practicable and in any
event not later than 45 days after the end of its fiscal quarter in which occurs
the first anniversary date of the Effective Date, meeting the requirements of
Section 11(a) of the Act covering a period of at least 12 consecutive months
beginning after the Effective Date, and will advise you in writing when such
statement has been so made available.
(g) The Company will, for such period up to five years from the
First Closing Date, deliver to the Representatives copies of its annual report
and copies of all other documents, and information furnished by the Company to
its security holders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or the
Exchange Act, or any state securities commission by the Company. The Company
will deliver to the Representatives similar reports with respect to significant
subsidiaries, if any, as that term is defined in the rules and regulations under
the Act, which are not consolidated in the Company's financial statements.
-13-
(h) The Company will not, without the prior written consent of the
Representative, offer, sell or otherwise dispose of any capital stock of the
Company or warrants, options, convertible securities or other rights to assign
any shares of capital stock (other than pursuant to employee stock options, the
conversion of convertible securities outstanding on the date of this Agreement,
or currently outstanding options and warrants) for a period of 180 days after
the Effective Date.
(i) The Company shall be responsible for and pay all costs and
expenses incident to the performance of its obligations under this Agreement
including, without limiting the generality of the foregoing, (i) all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits),
Preliminary Prospectuses, if any, the Prospectus and any amendments thereof or
supplements to any of the foregoing; (ii) the issuance and delivery of the
Shares, including taxes, if any; (iii) the cost of all certificates representing
the Shares; (iv) the fees and expenses of the Transfer Agent for the Shares; (v)
the fees and disbursements of counsel for the Company; (vi) all fees and other
charges of the independent public accountants of the Company; (vii) the cost of
furnishing and delivering to the Underwriters and dealers participating in the
offering copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectuses, the Prospectus and any amendments of, or supplements
to, any of the foregoing; (viii) the NASD filing fee; (ix) all fees and expenses
of counsel for the Representative incurred in qualifying the Shares for sale
under the laws of such jurisdictions designated by the Representative (including
filing fees).
(j) The Company will not take, and will use its best efforts to
cause each of its officers and directors not to take, directly or indirectly,
any action designed to or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares and will not effect any sales of
any security of the Company which are required to be disclosed in response to
Item 701 of Regulation S-X of the Commission which have not been so disclosed in
the Registration Statement.
(k) Upon completion of this offering, the Company will use its
best efforts to maintain the listing of its Common Stock on the National
Association of Securities Dealers Automated Quotation System (Nasdaq) National
Market or any other national securities exchange.
(l) The Company will apply the net proceeds from the sale of the
Shares substantially in the manner set forth in the Prospectus.
(m) During the period ending 270 days from the Effective Date, the
Company agrees that it will issue press releases, make public statements and
respond to inquiries of the press and securities analysts only after conferring
with its counsel and with the Representative.
(n) Prior to or as of either closing date, the Company shall have
performed each condition to closing required to be performed by the Company
pursuant to Section 5 hereof.
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5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS.
The respective obligations of the Underwriters to purchase and pay for the
Shares as provided herein shall be subject to the accuracy of the
representations and warranties of the Company, in the case of the Firm Shares as
of the date hereof and the First Closing Date (as if made on and as of the First
Closing Date), and in the case of the Option Shares, as of the date hereof and
the Second Closing Date (as if made on and as of the Second Closing Date), to
the performance by the Company of its obligations hereunder, and to the
satisfaction of the following additional conditions on or before the First
Closing Date in the case of the Firm Shares and on or before the Second Closing
Date in the case of the Option Shares:
(a) The Registration Statement has been declared effective as of
_________.m Minneapolis time on ____________, 1998 (the "Effective Date"). All
filings required by Rules 424, 430A and 434 under the Act shall have been timely
made. No stop order suspending the effectiveness thereof shall have been issued
and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or the Representative, threatened by the Commission or
any state securities commission or similar regulatory body. Any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Underwriters and their legal counsel.
(b) The Representative shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, contains any untrue statement of a fact which is material or omits to
state a fact which is material and is required to be stated therein or is
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this Section 5(b) shall not apply to statements in, or omissions from, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto, which are based upon and conform to written information furnished to
the Company by any of the Underwriters specifically for use in the preparation
of the Registration Statement or the Prospectus, or any such amendment or
supplement.
(c) Subsequent to the Effective Date, and except as contemplated
or referred to in the Prospectus, the Company shall not have incurred any direct
or contingent liabilities or obligations material to the Company, or entered
into any material transactions, except liabilities, obligations or transactions
in the ordinary course of business, or declared or paid any dividends or made
any distribution of any kind with respect to its capital stock; and there shall
not have been any change in the capital stock (other than a change in the number
of outstanding shares of Common Stock due to the exercise of options or warrants
described in the Registration Statement and the Prospectus), or any change in
the short-term debt or long-term debt (including capitalized lease obligations)
of the Company, or any issuance of options, warrants, convertible securities or
other rights to purchase the capital stock of the Company or any change or any
development involving a prospective change in or affecting the general affairs,
management, financial position, shareholders' equity or results of operations of
the Company, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in the judgment of the Representatives
-15-
makes it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered.
(d) The Representative shall have received the opinion of
Fredrikson & Byron, P.A., counsel for the Company, dated the First Closing Date
or the Second Closing Date, as the case may be, addressed to the Underwriters
covering certain corporate matters to the effect that:
(i) The Company as been duly incorporated and is validly
existing in good standing under the laws of the State of Minnesota;
has the corporate power to own, lease and operate its properties and
conduct its businesses as described in the Prospectus; and is duly
qualified to do business as a foreign corporation in good standing in
all jurisdictions where the ownership or leasing of its properties or
the conduct of its business requires such qualification and in which
the failure to be so qualified or in good standing would have a
material adverse effect on condition (financial or otherwise),
shareholders' equity, results of operations, business, properties or
prospects of the Company.
(ii) The Company has the number of authorized and
outstanding shares of capital stock of the Company as set forth under
the caption "Capitalization" of the Prospectus, and all issued and
outstanding capital stock of the Company has been duly authorized and
is validly issued, fully paid and nonassessable. There are no
statutory preemptive rights, or to the best knowledge of such counsel,
no similar subscription or purchase rights of securities holders of
the Company with respect to issuance or sale of the Shares by the
Company pursuant to this Agreement, and no rights to require
registration of shares of Common Stock or other securities of the
Company because of the filing of the Registration Statement exist.
The Shares conform as to matters of law in all material respects to
the description of such made in the Prospectus, and such description
accurately sets forth the material legal provisions thereof required
to be set forth in the Prospectus.
(iii) The Shares have been duly authorized and, upon delivery
to the Underwriters against payment therefor, will be validly issued,
fully paid and nonassessable.
(iv) The certificates evidencing the Shares comply as to
form with the applicable provisions of the laws of the State of
Minnesota.
(v) The Registration Statement has become effective under
the Act and, to the knowledge of such counsel, no stop orders
suspending the effectiveness of the Registration Statement have been
issued and no proceedings for that purpose have been instituted or are
pending or, to the knowledge of such counsel, contemplated under the
Act.
(vi) To such counsel's knowledge, there are not material
legal or
-16-
governmental proceedings, pending or threatened, before any court or
administrative body or regulatory agency, to which the Company or its
affiliates is a party or to which any of the properties of the Company
or its affiliates are subject that are required to be disclosed in the
Registration Statement or Prospectus that are not so described, or
statutes, regulations, or legal or governmental proceedings that are
required to be described in the Registration Statement or Prospectus
that are not so described.
(vii) To such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required to
be disclosed in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement or required to be
incorporated by reference into the Prospectus which are not disclosed
or filed or incorporated by reference, as required.
(viii) No authorization, approval or consent of any
governmental authority or agency is necessary in connection with the
issuance and sale of the Shares as contemplated under this Agreement,
except such as may be required under the Act or under state or other
securities laws in connection with the purchase and distribution of
the Shares by the Underwriters.
(ix) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and supporting financial and statistical data
and information included or incorporated therein, as to which such
counsel need express no opinion) conform in all material respects with
the requirements of the Act and the Rules and Regulations, and the
conditions for use of a registration statement on Form SB-2 for the
distribution of the Shares have been satisfied with respect to the
Company.
(x) The statements (i) in the Prospectus under the caption
"Risk Factors -- Government Regulation," "-- Hazardous Materials,"
"--Anti-Takeover Laws," "-- Potential Adverse Market Impact of Shares
Eligible for Future Sale," "Business -- Current Licensing
Arrangements," "-- Government Regulation," "-- Facilities," "-- Legal
Proceeding," "Management - Stock Option Plan," "Description of Capital
Stock," "Shares Eligible for Future Sale" and (ii) in the Registration
Statement in Item 14 insofar as such statements constitute a summary
of statutes, legal and governmental proceeding contracts and other
documents, are accurate summaries and fairly present the information
called for with respect to such matters.
(xi) Such counsel does not know of any contracts,
agreements, documents or instruments required to be filed as exhibits
to the Registration Statement or described in the Registration
Statement or the Prospectus which are not so filed or described as
required, and does not know of any amendment to the Registration
Statement required to be filed that has not been filed; and insofar as
-17-
any statements in the Registration Statement or the Prospectus
constitute summaries of any contract, agreement, document or
instrument to which the Company is a party, such statements are
accurate summaries and fairly present the information called for with
respect to such matters.
(xii) To such counsel's knowledge, there are no defects in
title or leasehold interests, or any liens, encumbrances, equities,
charges or claims, not disclosed in the Registration Statement or
Prospectus which would materially affect the present occupancy or use
of any of the real or personal property owned or leased by the
Company.
(xiii) The Company has the corporate power and authorization
to enter this Agreement and to authorize, issue and sell the Shares as
contemplated hereby. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of
creditors generally and judicial limitations on the right of specific
performance and other equitable remedies and except as the
enforceability of indemnification or contribution provisions hereof
may be limited by action of a court interpreting or applying federal
or state securities laws or equitable principles.
(xiv) The performance of this Agreement and the consummation
of the transactions described herein will not result in a violation of
or default under, the Company's [AMENDED AND RESTATED] Articles of
Incorporation, Bylaws or other governing documents. To the best of
such counsel's knowledge, (a) the Company is not in violation of, or
in default under, its [AMENDED AND RESTATED] Articles of
Incorporation, Bylaws or other governing documents; and (b) the
performance of this Agreement and the consummation of the transactions
described herein will not result in a material violation of, or a
material default under, the terms or provisions of (A) any bond,
debenture, note, or other evidence of indebtedness or any contract,
license, indenture, mortgage, loan agreement, joint venture or
partnership agreement, lease, agreement or instrument to which the
Company is a party or by which the Company or any of its properties is
bound, or (B) any law, order, rule, regulation, writ, injunction, or
decree known to such counsel of any government, governmental agency or
court having jurisdiction over the Company or any of its properties.
(xv) To such counsel's knowledge, sales of unregistered
securities by the Company prior to the Effective Date were exempt from
registration requirements of the Act and are not required to be
integrated, under Rule 502(a) of Regulation D of the Act, with the
public offering contemplated hereby.
-18-
(xvi) The Company is not, and immediately upon completion of
the sale of the Shares contemplated hereby will not be required to
register as an "investment company" under the Investment Company Act
of 1940, as amended.
(xvii) To the best of such counsel's knowledge, the Company is
not engaged in any negotiations regarding any form of business
combination with an other entity.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper, upon
certificates of public officials and of the officers of the Company, and
opinions of other legal counsel to the Company, provided that copies of all such
certificates and opinions are attached to the opinion.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot guarantee
the accuracy, completeness or fairness of any of the statements contained in the
Registration Statement or Prospectus, in connection with such counsel's
representation, investigation and due inquiry of the Company in the preparation
of the Registration Statement and Prospectus, such counsel has no reason to
believe that, (i) as of its Effective Date, the Registration Statement or any
further amendment thereto (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion) made by the
Company prior to the First Closing Date or the Second Closing Date, as the case
may be, 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 (ii), as of its date, the Prospectus or any further
amendment or supplement thereto (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion) made by the
Company prior to the First Closing Date or the Second Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or (iii), as of the First
Closing Date or the Second Closing Date, as the case may be, either the
Registration Statement or the Prospectus or any further amendment or supplement
thereto (other than the financial statements and related schedules therein, as
to which such counsel need express no opinion) made by the Company prior to the
First Closing Date or the Second Closing Date, as the case may be, contains an
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances in which they were
made, not misleading.
(e) The Representative shall have received on the First Closing
Date or the Second Closing Date, as the case may be, the opinion of Fredrikson &
Byron, P.A., intellectual property counsel for the Company, dated the First
Closing Date or the Second Closing Date, as the case may be, addressed to the
Underwriters, covering matters relating to the patents and other intellectual
property owned or licensed by the Company as set forth in Schedule D.
(f) The Representative shall have received from Oppenheimer Wolff
& Donnelly, its counsel, such opinion or opinions as the Representative may
reasonably require, dated the First Closing Date or the Second Closing Date, as
the case may be, with respect to the
-19-
sufficiency of corporate proceedings and other legal matters relating to this
Agreement and the transactions contemplated hereby, and other related matters as
the Representative may reasonably request; and the Company and its counsel shall
have furnished to said counsel such documents as they may have reasonably
requested for the purpose of enabling them to pass upon such matters. In
connection with such opinion, as to matters of fact relevant to conclusions of
law, such counsel may rely, to the extent that they deem proper, upon
representations or certificates of public officials and of responsible officers
of the Company.
(g) The Representative and the Company shall have received
letters, dated the date hereof and the First Closing Date and the Second Closing
Date, as the case may be, from Arthur Andersen LLP, to the effect that they are
independent public accountants with respect to the Company within the meaning of
the Act and the related rules and regulations, stating that in their opinion the
financial statements and schedules examined by them an included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related rules and
regulations, and containing such other statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Representative shall have received from the Company a
certificate, dated as of each Closing Date, of the Chief Executive Officer and
the Chief Financial Officer of the Company to the effect that as of the First
Closing Date and the Second Closing Date:
(i) The representations and warranties of the Company in
this Agreement are true and correct as if made on and as of each
Closing Date. The Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at, or prior to, each such Closing Date.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceeding for that
purpose has been instituted or is pending or to the best knowledge of
such officers contemplated under the Act.
(iii) Neither the Registration Statement nor the Prospectus
nor any amendment thereof or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, and, since the Effective Date, there has occurred no event
required to be set forth in an amended or supplemented prospectus
which has not been so set forth; provided, however, that such
certificate does not require any representation concerning statements
in, or omissions from, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto, which are based upon and
conform to written information furnished to the Company by any of the
Underwriters specifically for use in the preparation of the
Registration Statement or the Prospectus or any such amendment or
supplement.
-20-
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
and except as contemplated or referred to in the Prospectus, the
Company has not incurred any direct or contingent liabilities or
obligations material to the Company, or entered into any material
transactions, except liabilities, obligations or transactions in the
ordinary course of business, or declared or paid any dividend or made
any distribution of any kin with respect to its capital stock, and
there has not been any change in the capital stock (other than a
change in the number of outstanding shares of Common Stock due to the
exercise of options or warrants described in the Registration
Statement and the Prospectus) and there has not been any material
adverse change in the capital stock, short-term debt, or long-term
debt (including capitalized lease obligations) of the Company, or any
material adverse change or any development involving a prospective
material adverse change (whether or not arising in the ordinary course
of business) in or affecting the general affairs, condition (financial
or otherwise), business, key personnel, property, prospects,
shareholders' equity or results of operations of the Company.
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
the Company has not sustained any material loss of, or damage to, its
properties, whether or not insured.
(vi) Except as is otherwise expressly stated in the
Registration Statement and Prospectus there are no material actions,
suits or proceedings pending before any court or governmental agency,
authority or body, or, to the best of such officer's knowledge,
threatened, to which the Company is a party or of which the business
or property of the Company is the subject.
(i) The Representative shall have received, dated as of each
Closing Date, from the Secretary of the Company a certificate of incumbency
certifying the names, titles and signatures of the officers authorized to
execute the resolutions of the Board of Directors of the Company authorizing and
approving the execution, delivery and performance of this Agreement, a copy of
such resolutions to be attached to such certificate, certifying such resolutions
and certifying that the [AMENDED AND RESTATED] Articles of Incorporation and the
Bylaws of the Company have been validly adopted and have not been amended or
modified, except as described in the Prospectus.
(j) The Representative shall have received a written agreement,
enforceable by the Representative, from each of officer and director of the
Company and each shareholder who holds _____ % or more of the outstanding Common
Stock of Company, that for 180 days following the Effective Date, such person
will not, without the Representative's prior written consent, sell, transfer or
otherwise dispose of, or agree to sell, transfer or otherwise dispose of, other
than by gift to donees who agree to be bound by the same restriction or by will
or the laws of descent, any of his or her Common Stock, or any options, warrants
or rights to purchase Common Stock or any shares of Common Stock received upon
exercise of any options, warrants
-21-
or rights to purchase Common Stock, all of which are beneficially held by such
persons during the 180 day period.
(k) The Company's Common Stock shall have been approved for
listing on the Nasdaq National Market.
(l) The Company shall have furnished to the Underwriters, dated as
of the date of each Closing Date, such further certificates and documents as the
Underwriters shall have reasonably required.
(m) All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to the Representative and their legal counsel. All statements
contained in any certificate, letter or other document delivered pursuant hereto
by, or on behalf of, the Company shall be deemed to constitute representations
and warranties of the Company.
(n) The Representative may waive in writing the performance of any
one or more of the conditions specified in this Section 5 or extend the time for
their performance.
(o) If any of the conditions specified in this Section 5 shall not
have been fulfilled when and as required by this Agreement to be fulfilled, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, each closing date by the Representative. Any such
cancellation shall be without liability of the Underwriters to the Company or to
any other party, and shall not relieve the Company of its obligations under
Section 4(h) hereof. Notice of such cancellation shall be given to the Company
at the address specified in Section 11 hereof in writing, or by facsimile or
telephone and confirmed in writing.
6. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless each
Underwriter, each officer and director thereof, and each person, if any, who
controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
each such person may become subject, under the Act, the Exchange Act, the common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof), arise out of, or are based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, any Preliminary Prospectus or the Prospectus including
any amendment thereof, or (ii) the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus or Prospectus including any
amendment thereof a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; or (iii) any untrue statement or alleged untrue statement
of a material fact contained in any application or other statement executed by
the Company or based upon written information furnished by the Company filed in
any jurisdiction in order to quality the Shares under, or exempt the Shares or
the sale thereof from qualification under, the securities laws of such
jurisdiction, or the omission or alleged omission to state in such application
or statement a
-22-
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and the Company will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or controlling person (subject to the limitation set forth in
Section 6(c) hereof, in connection with investigating or defending against 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 alleged untrue statement, omission or alleged
omission, made in reliance upon and in conformity with information furnished to
the Company by, or on behalf of, any Underwriter in writing specifically for use
in the preparation of the Registration Statement or any such post effective
amendment thereof, any such Preliminary Prospectus or the Prospectus or any such
amendment thereof or supplement thereto; and provided further, that the
foregoing indemnity agreement is subject to the condition that, insofar as it
relates to any untrue statement, alleged untrue statement, omission or alleged
omission made in any Preliminary Prospectus but eliminated, remedied or
corrected in the Prospectus (or any amendment or supplement thereto) such
indemnity agreement shall not inure to the benefit of any Underwriter (or to the
benefit of any person who controls such Underwriter), if the person asserting
any loss, claim, damage or liability as a result of such untrue statement or
omission purchased the Shares from such Underwriter and was not sent or given a
copy of the Prospectus with, or prior to, the written confirmation of the sale
of such Shares to such person by such Underwriter unless such failure to deliver
the Prospectus (as amended or supplemented) was the result of noncompliance by
the Company with Section 4(c). This indemnity agreement is in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter severally, but not jointly, agrees to
indemnify and hold harmless the Company, each of the Company's directors, each
of the Company's officers who has signed the Registration Statement and each
person who controls the Company within the meaning of the Act against any
losses, claims, damages or liabilities to which the Company or any such
director, officer, or controlling person may become subject, under the Act, the
Exchange Act, the common law, or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of, or are
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, any Preliminary Prospectus or
Prospectus, including any amendment thereof, (ii) the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus or
Prospectus including any amendment thereof a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other statement executed by the Company or by any Underwriter and
filed in any jurisdiction in order to qualify the Shares under, or exempt the
Shares or the sale thereof from qualification under, the securities laws of such
jurisdiction, or the omission or alleged omission to state in such application
or statement a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; in each of the above cases to the extent, but only the
extent, that such untrue statement, alleged untrue statement, omission or
alleged omission, was made in reliance upon and in conformity with information
furnished to the Company by, or on behalf of, any
-23-
Underwriter in writing specifically for use in the preparation of the
Registration Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof or
supplement thereto, or in any application or other statement executed by the
Company or by any Underwriter and filed in any jurisdiction; and each
Underwriter will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer or controlling person in connection
with investigating or defending against any such loss, claim, damage, liability
or action as such expenses are incurred. This indemnity agreement is in
addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action or proceeding (including
any governmental investigation), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
6, notify in writing the indemnifying party of the commencement thereof. The
failure to so notify the indemnifying party will not relieve such party from any
liability under this Section 6 as to the particular item for which
indemnification is then being sought, unless such failure so to notify
prejudices the indemnifying party's ability to defend such action. In case any
such action is brought against any indemnified party and the indemnified party
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel who shall be reasonably satisfactory to such
indemnified party; and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that if, in the reasonable judgment
of the indemnified party, it is advisable for such parties and controlling
persons to be represented by separate counsel, any indemnified party shall have
the right to employ separate counsel to represent it and all other parties and
their controlling persons who may be subject to liability arising out of any
claim in respect of which indemnity may be sought by the Underwriters against
the Company or by the Company against the Underwriters hereunder, in which event
the fees and expenses of such separate counsel shall be borne by the
indemnifying party; provided, however, if the indemnified party shall have
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, or the indemnified and indemnifying parties
may have conflicting interests which would make it inappropriate for the same
counsel to represent both of them, the indemnified party shall have the right to
select separate counsel to assume such defense and to otherwise participate in
the defense of such action on behalf of such indemnified party and all other
parties and their controlling persons. Any such indemnifying party shall not be
liable to any such indemnified party on account of any settlement of any claim
or action effected without the consent of such indemnifying party.
7. CONTRIBUTION.
(a) If the indemnification provided for in Section 6 is
unavailable or insufficient to hold harmless any indemnified party in respect of
any losses, claims, damages or
-24-
liabilities referred to therein, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Shares. In the event that the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute in such proportion as is appropriate to
reflect not only the relative benefits referred to above but also the relative
fault of the Company and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The Company and the
Underwriters agree that contribution determined by per capita allocation (even
if the Underwriters were considered a single person) would not be equitable.
The respective relative benefits received by the Company on the one hand, and
the Underwriters, on the other, shall be deemed to be in the same proportion (a)
in the case of the Company, as the total price paid to the Company for the
Shares by the Underwriters (net of underwriting discount received but before
deducting expenses) bears to the aggregate Offering Price of the Shares, and (b)
in the case of the Underwriters, as the aggregate underwriting discount received
by them bears to the aggregate Offering Price of the Shares, in each case as
reflected in the Prospectus. The relative fault of the Company and the
Underwriters 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 by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto. The Underwriters' obligation to contribute
pursuant to this Section 7 is several and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of the Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person who controls an
Underwriter within the meaning of the Act or the Exchange Act shall have the
same rights to contribution as such Underwriter, each person who controls the
Company within the meaning of the Act or the Exchange Act shall have the same
rights to contribution as the Company and each officer of the Company who shall
have signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company.
(b) Promptly after receipt by a party to this Agreement of notice
of the commencement of any action, suit, or proceeding, such person will, if a
claim for contribution in respect thereof is to be made against another party
(the "Contributing Party"), notify the Contributing Party of the commencement
thereof, but the failure to so notify the Contributing Party will not relieve
the Contributing Party from any liability which it may have to any party
-25-
other than under this Section 7, unless such failure to so notify prejudices the
Contributing Party's ability to defend such action. Any notice given pursuant to
Section 6 hereof shall be deemed to be like notice hereunder. In case any such
action, suit or proceeding is brought against any party, and such person
notifies a Contributing Party of the commencement thereof, the Contributing
Party will be entitled to participate therein with the notifying party and any
other Contributing Party similarly notified.
(c) The obligations of the Company under this Section 7 shall be
in addition to any liability which the Company may otherwise have, and the
obligations of the Underwriter under this Section 7 shall be in addition to any
liability which the Underwriters may otherwise have.
8. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at the later of (i) the
day upon which this Agreement shall have been executed and delivered by the
parties hereto, or (ii) (ii) at 10:00 a.m. Minneapolis time, on the first full
business day following the Effective Date, or at such earlier time after the
Effective Date as the Representative in its discretion shall first release the
Shares for offering to the public. For purposes of this Section 8, the Shares
shall be deemed to have been released to the public upon release by the
Representative of the publication of a newspaper advertisement relating to the
Shares or upon release of a telegram or a letter offering the Shares for sale to
securities dealers, whichever shall first occur.
(b) The Representative shall have the right to terminate this
Agreement by giving notice to the Company as hereinafter specified at any time
prior to the First Closing Date, and the option referred to in Section 2(b), if
exercised, may be canceled at any time by the Representative by giving such
notice to the Company at any time prior to the Second Closing Date, if (i) the
Company shall have failed, refused or been unable, at or prior to the First
Closing Date, to perform any material agreement on its part to be performed
hereunder; (ii) any other condition of the Underwriters' obligations hereunder
is not fulfilled; (iii) trading in securities generally on the New York Stock
Exchange, American Stock Exchange or the Nasdaq Stock Market shall have been
suspended, or minimum or maximum prices for trading shall have been required or
established by the Commission or by any such exchange or the Nasdaq Stock
Market; (iv) a banking moratorium shall have been declared by federal, New York
or Minnesota authorities; (v) there shall have been such a material adverse
change in general economic, monetary, political or financial conditions, or the
effect of international conditions on the financial markets in the United States
shall be such as, in the judgment of the Representative, makes it impracticable
or inadvisable to proceed with the completion of the sale of and payment for the
Shares; (vi) there shall have been the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority, which in the judgment of the
Representative materially and adversely affects or will materially and adversely
affect the business or operations of the Company; or (vii) there shall be an
outbreak of major hostilities (or an escalation thereof) in which the United
States is involved or a formal declaration of war by the United States of
America shall have occurred or any other substantial national or international
calamity or any other event or
-26-
occurrence of a similar character shall have occurred since the execution of
this Agreement that, in the judgment of the Representative, makes it
impracticable or inadvisable to proceed with the completion of the sale of and
payment for the Shares. Any such termination shall be without liability of any
party to any other party, except as provided in Sections 6 and 7 hereof;
provided, however, that the Company shall remain obligated to pay costs and
expenses to the extent provided in Section 4(i) hereof.
(c) If the Representative elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section 8,
it shall notify the Company promptly by telecopy or telephone, confirmed by
letter sent to the address specified in Section 11 hereof. If the Company shall
elect to prevent this Agreement from becoming effective, it shall notify the
Representative promptly by telecopy or telephone, confirmed by letter sent to
the address specified in Section 11 hereof.
(d) If the Company shall fail at the First Closing Date to sell
and deliver the number of Shares which it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any
Underwriter. No action taken pursuant to this Section 8(d) shall relieve the
Company from liability, if any, in respect of such default.
9. DEFAULT OF UNDERWRITER.
If on the First Closing Date or the Second Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representative of the Underwriters, shall use your best efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from the Company such amounts as may be agreed upon, and upon the
terms set fort herein, of the Firm Shares or Option Shares, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as Representative, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (i) if the aggregate number of Shares with respect to which
such default shall occur does no exceed 10% of the Firm Shares or Option Shares,
as the case may be, covered hereby the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder, to
purchase the Firm Shares or Option Shares, as the case may be, which such
defaulting Underwriter or Underwriters failed to purchase or (ii) if the
aggregate number of shares of Firm Shares or Option Shares, as the case may be,
with respect to which such default shall occur exceeds 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the Company or you as the
Representative of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except for expenses to be borne by the Company and the
Underwriters as provided in Section 4(i) hereof and the indemnity and
contribution agreements in Sections 6 and 7 hereof. In
-27-
the event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the First Closing Date or Second Closing Date, as the case may be,
may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes, not including
a reduction in the number of Firm Shares, in the Registration Statement or in
the Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting Underwriter.
Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. SURVIVAL.
The respective indemnity and contribution agreements of the Company and the
Underwriters contained in Sections 6 and 7, respectively, the representations
and warranties of the Company set forth in Section 1 hereof and the covenants of
the Company set forth in Section 4 hereof shall remain operative and in full
force and effect, regardless of any investigation made by, or on behalf of, the
Underwriters, the Company, any of its officers and directors or any controlling
person referred to in Sections 6 and 7 and shall survive the delivery of and
payment for the Shares. The aforesaid indemnity and contribution agreements
shall also survive any termination or cancellation of this Agreement. Any
successor of any party or of any such controlling person, or any legal
representative of such controlling person, as the case may be, shall be entitled
to the benefit of the respective indemnity and contribution agreements.
11. NOTICES.
All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to the Representative or
any of the Underwriters, shall be mailed, delivered, or telecopied and
confirmed, to John G. Kinnard and Company, Incorporated, 920 Second Avenue
South, Minneapolis, Minnesota 55402, Attention: Jerry S. Johnson, with a copy to
D. William Kaufman, Esq., Oppenheimer Wolff & Donnelly, Plaza VII, 45 South
Seventh Street, Suite 3400, Minneapolis, Minnesota 55402; or, if sent to the
Company, shall be mailed, delivered, or telegraphed, and confirmed, to
SurModics, Inc., 9924 West 74th Street, Eden Prairie, Minnesota 55344,
Attention: Dale R. Olseth, with a copy to David R. Busch, Esq., Fredrikson &
Byron, P.A., 900 Second Avenue South, Suite 1100, Minneapolis, Minnesota 55401.
12. INFORMATION FURNISHED BY THE UNDERWRITER.
The statements relating to the stabilization activities of the Underwriters
and the statements in paragraphs ___ and ___ under the caption "Underwriting" in
any Preliminary Prospectus and in the Prospectus constitute the information
furnished by, or on behalf of, the Underwriters in writing specifically for use
with reference to the Underwriters referred to in Section 1(b) and Section 6
hereof.
-28-
13. PARTIES.
This Agreement shall inure to the benefit of and be binding upon each of
the Underwriters and the Company, their respective successors and assigns and
the officers, directors and controlling persons referred to in Sections 6 and 7.
Nothing expressed in this Agreement is intended or shall be construed to give
any person or corporation, other than the parties hereto, their respective
successors and assigns and the controlling persons, officers and directors
referred to in Sections 6 and 7 any legal or equitable right, remedy or claim
under, or in respect of, this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors, assigns and such controlling
persons, officers and directors, and for the benefit of no other person or
corporation. No purchaser of any Shares from the Underwriters shall be
construed to be a successor or assign merely by reason of such purchase.
14. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the laws
of the State of Minnesota, without regard to conflict of law provisions.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed counterpart of this Agreement,
whereupon it will become a binding agreement between the Company and each of the
several Underwriters in accordance with its terms.
Very truly yours,
SURMODICS, INC.
By
---------------------------------
Its
----------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted by us
for itself and as Representative of the
several Underwriters referred to in the
foregoing Agreement as of the date
first above written.
JOHN G. KINNARD
AND COMPANY, INCORPORATED
By
---------------------------------
Its
--------------------------------
-29-
SCHEDULE A
NAME OF UNDERWRITER NUMBER OF FIRM SHARES
John G. Kinnard and Company, Incorporated
Total 2,000,000
-30-
SCHEDULE B
LIST OF PATENTS
-31-
SCHEDULE C
LIST OF PATENT APPLICATIONS
-32-
SCHEDULE D
FORM OF OPINION OF PATENT COUNSEL
-33-
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BSI CORPORATION
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendment of Section 1.1 of Article 1 of the Articles of Incorporation
of BSI Corporation was adopted on June 4, 1997, by the shareholders of the
corporation:
Section 1.1 of Article 1 is amended in its entirety to read as follows:
"1.1 The name of the corporation shall be SurModics, Inc."
The undersigned swears that the foregoing is true and accurate and that the
undersigned has the authority to sign this document on behalf of the
corporation.
Dated: June 4, 1997.
/s/ David R. Busch
--------------------------------------------------
David R. Busch, Its Corporate Secretary
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BSI CORPORATION (f/k/a BIO-METRIC SYSTEMS, INC.)
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendment of Section 3.1 of Article 3 of the Articles of Incorporation
of BSI Corporation (f/k/a Bio-Metric Systems, Inc.) was adopted on January 27,
1997, by the shareholders of the corporation:
Section 3.1 of Article 3 is amended in its entirety to read as follows:
"3.1 AUTHORIZED SHARES. The aggregate number of shares which
the corporation shall have the authority to issue shall be 20,450,000,
15.0 million of which shall be designated Voting Common Stock, $.05
Par Value; 5.0 million of which shall be undesignated shares and
450,000 of which shall be designated Series A Convertible Preferred
Stock, $.05 Par Value (hereinafter referred to as the "Preferred
Stock"). (The Voting Common Stock, any shares issued from the
undesignated shares, and the Preferred Stock are hereinafter referred
to collectively as the "Capital Stock".) The Board of Directors of
the corporation is authorized to establish from the undesignated
shares, by resolution adopted and filed in the manner provided by law,
one or more classes or series of shares, to designate each such class
or series (which may include but is not limited to designation as
additional common shares), and to fix the relative rights and
preferences of each such class or series."
The undersigned swears that the foregoing is true and accurate and that the
undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 29, 1997.
/s/ David R. Busch
---------------------------------------------
David R. Busch, Its Corporate Secretary
2
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BIO-METRIC SYSTEMS, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendments of Section 1.1 of Article 1 and Section 2.1 of Article 2 of
the Articles of Incorporation of Bio-Metric Systems, Inc. were adopted on
January 17, 1994, by the shareholders of the corporation:
"ARTICLE 1 - NAME
1.1) The name of the corporation shall be BSI Corporation.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 9924 West
74th Street, Eden Prairie, Minnesota 55344."
The undersigned swears that the foregoing is true and accurate and that the
undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 17, 1994.
/s/ David R. Busch
--------------------------------------------------
David R. Busch, Its Corporate Secretary
3
RESTATED ARTICLES OF INCORPORATION
OF
BIO-METRIC SYSTEMS, INC.
We, the undersigned, DALE R. OLSETH and DAVID R. BUSCH, the
Chairman/President/Chief Executive officer and Secretary, respectively, of Bio-
Metric Systems, Inc., a Minnesota corporation, do hereby certify that at a
special meeting of the shareholders of Bio-Metric Systems, Inc. held on April
10, 1989, notice of such meeting having been mailed to each shareholder entitled
to vote thereon at least ten (10) days prior to such meeting, the shareholders,
by at least a majority of the voting power of the shares of Voting Common Stock,
present in person or by proxy, adopted resolutions to restate the Articles of
Incorporation of Bio-Metric Systems, Inc. as set forth below.
ARTICLE 1 - NAME
1.1) The name of the corporation shall be BIO-METRIC SYSTEMS, INC.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 9942 West 74th
Street, Eden Prairie, Minnesota 55344.
ARTICLE 3 - CAPITAL STOCK
3.1) AUTHORIZED SHARES; ESTABLISHMENT OF CLASSES AND SERIES. The
aggregate number of shares which the corporation shall have the authority to
issue shall be 5,500,000 shares, 5,000,000 of which shall be designated Voting
Common Stock, $.05 par value; 50,000 of which shall be designated Nonvoting
Common Stock, $.05 par value; and 450,000 of which shall be designated Series A
Convertible Preferred Stock, $.05 par value, (hereinafter referred to as the
"Preferred Stock"). The Common Stock and Preferred Stock are hereinafter
referred to collectively as the "Capital Stock".
3.2) ISSUANCE OF SHARES. The Board of Directors of the corporation is
authorized from time to time to accept subscriptions for, issue, sell and
deliver shares of Capital Stock of the corporation to such persons, at such
times and upon such terms and conditions as the Board shall determine, valuing
all nonmonetary consideration and establishing a price in money or other
consideration, or a minimum price, or a general formula or method by which the
price will be determined.
3.3) ISSUANCE OF RIGHTS TO PURCHASE SHARES. The Board of Directors is
further authorized from time to time to grant and issue rights to subscribe for,
purchase, exchange securities for, or convert securities into, shares of Capital
Stock, and to fix the terms, provisions and conditions of such rights, including
the exchange or conversion basis or the price at which such shares may be
purchased or subscribed for.
4
3.4) ISSUANCE OF SHARES TO HOLDERS OF ANOTHER CLASS OR SERIES. The Board
is further authorized to issue shares of one class or series of Capital Stock to
holders of that class or series of Capital Stock or to holders of another class
or series of Capital Stock to effect share dividends or splits.
ARTICLE 4 - RIGHTS AND PRIVILEGES OF
SHARES AND OF SHAREHOLDERS
The rights, preferences, privileges and restrictions granted to or imposed
upon the Capital Stock or the holders thereof are set forth below.
4.1) VOTING PRIVILEGES. Each holder of Voting Common Stock shall have one
vote on all matters submitted to the shareholders for each share of Voting
Common Stock standing in the name of such holder on the books of the
corporation. Each holder of Preferred Stock shall have one vote on all matters
submitted to the shareholders for each share of Voting Common Stock which such
holder of Preferred Stock would be entitled to receive upon the conversion of
his Preferred Stock as provided in subsection 4.5(c). In addition, each holder
of Preferred Stock shall have the special voting rights which are described in
subsection 4.5(b). Except as may be required by the Minnesota Business
Corporation Act, the holders of Nonvoting Common Stock shall have no voting
rights with respect to any matter submitted to a vote of the shareholders of the
corporation.
4.2) PREEMPTIVE RIGHTS. No holder of shares of any class or series of
Capital Stock shall be entitled as such, as a matter of right, to subscribe for
or purchase additional shares of that class or series or any other class or
series of Capital Stock of the corporation now or hereafter authorized or
issued.
4.3) NO CUMULATIVE VOTING. There shall be no cumulative voting by the
shareholders of the corporation.
4.4) DISTRIBUTIONS. Except as provided in subsection 4.5(a) on the
liquidation, dissolution or winding up of the corporation, shares of Capital
Stock shall share ratably in any dividends or distributions of the corporation,
whether paid in cash, property or stock.
4.5) SERIES A CONVERTIBLE PREFERRED STOCK.
(a) LIQUIDATION PREFERENCE. In the event of the liquidation,
dissolution or winding up of the corporation, whether voluntary or
involuntary, the holders of the Preferred Stock shall be entitled to
receive out of assets of the corporation, an amount equal to $13.50
(hereinafter referred to as the "Liquidation Preference") for each
outstanding share of Preferred Stock before any payment shall be made or
any assets distributed to the holders of Voting Common Stock or Nonvoting
Common Stock or any other class of stock of this corporation ranking junior
to the Preferred Stock upon liquidation or dissolution of the corporation.
If, upon any liquidation, dissolution, or
5
winding up of the corporation, the assets of the corporation are
insufficient to pay the Liquidation Preference for each outstanding share
of Preferred Stock, the holders of Preferred Stock shall share pro rata in
any such distribution in proportion to the full amounts to which they would
otherwise be entitled. If, upon any liquidation, dissolution or winding up
of the corporation, the holders of Preferred Stock would be entitled to
receive in excess of the Liquidation Preference for each outstanding share
of Preferred Stock in any such distribution if all such shares of Preferred
Stock had been converted to shares of Voting Common Stock pursuant to
subsection 4.5(c), instead of receiving the Liquidation Preference, each
holder of Preferred Stock shall receive an amount equal to the distribution
such holder would receive if all his outstanding shares of Preferred Stock
had been converted to shares of Voting Common Stock pursuant to subsection
4.5(c) on the day preceding the date of such liquidation, dissolution or
winding up. The Liquidation Preference shall be appropriately adjusted to
reflect stock splits and reverse stock splits of the Preferred Stock or
dividends or distributions payable in shares of Preferred Stock.
Nothing hereinabove set forth shall affect in any way the right or
obligation of each holder of shares of Preferred Stock to convert such
shares into shares of Voting Common Stock, at any time and from time to
time, in accordance with subsection 4.5(c) below.
(b) SPECIAL VOTING RIGHTS. Without the affirmative vote of the
holders (acting together as a class) of at least a majority of the
Preferred Stock at the time outstanding given in person or by proxy at any
annual meeting, or at such special meeting called for that purpose, or, if
permitted by law, in writing without a meeting, the corporation shall not:
(1) authorize or issue any shares of stock having priority
over the Preferred Stock as to the payment of dividends or the
payment or distribution of assets upon the liquidation or
dissolution, voluntary or involuntary, of the corporation; or
(2) amend the Articles of Incorporation of the corporation so
as to alter this Article 4 in any respect.
(c) CONVERSION RIGHTS; MANDATORY CONVERSION.
(1) At the option of the holder thereof, each share of
Preferred Stock shall be convertible, at the offices of the
corporation (or at such other office or offices, if any, as the Board
of Directors may designate), into one (1) share of Voting Common
Stock of the corporation, subject to adjustment as provided in
subsection 4.5(c)(2) below. In order to convert shares of Preferred
Stock into shares of Voting Common Stock, the holder thereof, shall
surrender at the principal executive offices of the corporation the
certificate or certificates therefor, duly endorsed to the
corporation or in blank, and give written notice to the corporation
at such office that such holder elects to convert a specified portion
or all of such shares of Preferred Stock into shares of Voting Common
Stock. Shares
6
of Preferred Stock shall be deemed to have been converted on the day
of surrender of the certificate representing such shares for
conversion in accordance with the foregoing provisions (the
"Conversion Date"), and the person entitled to receive the shares of
Voting Common Stock of the corporation issuable upon such conversion
shall be treated for all purposes as the record holder of such shares
of Voting Common Stock at that time. As promptly as practicable on
or after the Conversion Date, the corporation shall issue and mail or
deliver or cause to be issued and mailed or delivered to such holder
a certificate or certificates for the number of shares of Voting
Common Stock issuable upon conversion and a certificate or
certificates for the balance of the Preferred Stock surrendered, if
any, not so converted into shares of Voting Common Stock.
(2) The number of shares of Voting Common Stock issuable in
exchange for shares of Preferred Stock upon the exercise of these
conversion rights (the "Conversion Ratio"), which shall initially be
one share of Voting Common Stock for one share of Preferred Stock,
shall be subject to adjustment from time to time as hereinafter
provided:
(i) In case the corporation shall at any time
subdivide or split its outstanding Common Stock into a greater
number of shares, the Conversion Ratio in effect immediately
prior to such subdivision or split shall be proportionately
increased; and, conversely, in case the outstanding Common
Stock of the corporation shall be combined into a smaller
number of shares the Conversion Ratio in effect immediately
prior to such combination shall be proportionately reduced.
(ii) If any capital reorganization or reclassification
of the Capital Stock of the corporation or consolidation or
merger of the corporation with another corporation or the sale
of all or substantially all of its assets to another
corporation shall be affected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or
assets with respect to or in exchange for Common Stock, then,
as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holders of Preferred Stock shall
thereafter have the right to receive, in lieu of the Voting
Common Stock of the corporation immediately theretofore
receivable upon the conversion of any such Preferred Stock,
such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of
outstanding shares of Voting Common Stock equal to the number
of shares of Voting Common Stock immediately theretofore
receivable upon the conversion of such Preferred Stock had such
reorganization, reclassification, consolidation, merger or sale
not taken place; and, in any such case, appropriate provision
shall be made with respect to the rights and interests of the
holders of the Preferred Stock to the end that the provisions
hereof (including without limitation provisions
7
for adjustments of the Conversion Ratio and of the number of
shares receivable upon the conversion of such Preferred Stock)
shall thereafter be applicable as nearly as may be, in relation
to any shares of stock, securities or assets hereafter
receivable upon the conversion of such Preferred Stock. The
corporation shall not effect any such consolidation, merger or
sale, unless prior to the consummation thereof the surviving
corporation (if other than the corporation), the corporation
resulting from such consolidation or the corporation purchasing
such assets shall ASSUME by written instrument executed and ma
i led to the registered holders of the Preferred Stock at the
last address of such holders appearing on the books of the
corporation, the obligation to deliver to such holders such
shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to
receive.
(iii) If and whenever the corporation shall issue or
sell any Common Stock for a consideration per share less than
the Liquidation Preference (except for the issuance or sale of
up to 50,000 shares of Nonvoting Common Stock pursuant to the
corporation's 1984 Stock Option Plan, up to 200,000 shares of
Voting Common Stock pursuant to the corporation's 1987 Stock
Option Plan and up to 50,000 shares of Voting Common Stock to
Simplot Development Corporation (hereinafter referred to as the
"Excluded Stock Issuances")) or shall issue any options,
warrants or other rights for the purchase of shares of Common
Stock at a consideration per share of less than the Liquidation
Preference, forthwith upon such issuance or sale of such
shares, options, warrants or other rights for purchase, the
Conversion Ratio in effect immediately prior to such issuance
or sale for the Preferred Stock shall be adjusted so that each
share of Preferred Stock shall thereafter be convertible into
that number of shares of Voting Common Stock as is equal to the
number determined by multiplying the Conversion Ratio by a
fraction, the numerator of which shall be the amount determined
by multiplying (aa) the number of shares of Common Stock
outstanding immediately after such issuance or sale plus the
number of shares of Common Stock issuable upon the exercise of
any purchase rights thus issued, by (bb) the Liquidation
Preference, and the denominator of which shall be an amount
equal to the sum of (aa) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale
multiplied by the Liquidation Preference, and (bb) the total
consideration payable to the corporation upon such issuance or
sale of such shares and such purchase rights and upon the
exercise of such purchase rights. If any options or purchase
rights taken into account in any such adjustment of the
Conversion Ratio subsequently expire without exercise, the
Conversion Ratio shall be recomputed by deleting such options
or purchase rights. For purposes of this subsection 4.5(c)(2),
the number of shares of Voting Common Stock or Nonvoting Common
Stock which may be issued as Excluded Stock Issuances shall be
appropriately adjusted to
8
reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes.
(iv) The anti-dilution provisions of this subsection
4.5(c)(2) may be waived by the affirmative vote of the holders
(acting together as a class) of at least a majority of the then
outstanding shares of Preferred Stock,
(3) Upon receipt of a written notice to the corporation from
a holder of shares of Preferred Stock delivered to the corporation's
principal executive offices requesting a computation of the then
current Conversion Ratio, the corporation shall promptly give written
notice by first-class mail, postage prepaid, addressed to the holder
of the Preferred Stock making such request at the address of such
holder as shown on the books of the corporation which notice shall
state the then current Conversion Ratio, setting forth in reasonable
detail the method of calculation and the facts upon which such
calculation is based.
(4) In case any time:
(i) the corporation shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other
than regular cash dividends) to the holders of its Common
Stock; or
(ii) the corporation shall offer for subscription pro
rata to the holders of its Common Stock any additional shares
of stock of any class or other rights; or
(iii) there shall be any capital reorganization,
reclassification of the Capital Stock of the corporation or
consolidation or merger of the corporation with or sale of all
or substantially all of its assets to another corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the corporation;
then in any one or more of said cases the corporation shall give
written notice, by first-class mail, postage prepaid, addressed to
the holders of the Preferred Stock at the addresses of such holders
as shown on the books of this corporation, of the date on which (aa)
the books of the corporation shall close or a record shall be taken
for such dividend, distribution or subscription rights or (bb) such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place, as the case
may be. Such notice shall also specify the date as of which the
holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights or shall be entitled to exchange
their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation
9
or winding up, as the case may be. Such written notice shall be
given at least 20 days prior to the action in question and not less
than 20 days prior to the record date or the date on which this
corporation's transfer books are closed in respect thereto.
(5) As used in this subsection 4.5(c), the term Common Stock
shall mean and include the corporation's presently authorized Voting
Common Stock and Nonvoting Common Stock and shall also include any
capital stock of any class of the corporation hereafter authorized
which shall have the right to vote on all matters submitted to the
shareholders of the corporation and shall not be limited to a fixed
sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of
the corporation; provided that the shares receivable pursuant to
conversion of the Preferred Stock shall include shares designated as
Voting Common Stock of the corporation as of the date of issuance of
such Preferred Stock or, in the case of any reclassification of the
outstanding shares thereof, the stock, securities or assets provided
for in subsection 4.5(c)(2)(ii) above.
(6) The number of shares of Voting Common Stock issuable upon
conversion of shares of Preferred Stock shall be computed to the
nearest one hundredth of a full share; however, no fractional shares
of Voting Common Stock shall be issued upon conversion. The
corporation shall pay a cash adjustment in respect of any fraction of
a share in an amount-equal to the same fraction of the market price
per share of Voting Common Stock as of the close of business on the
day of conversion. "Market price" shall mean the average of the high
and low prices of the Voting Common Stock sales on all exchanges on
which the Voting Common Stock may at the time be listed or as
reported by the National Association of Securities Dealers, Inc.
Automated Quotation System National Market System ("NASDAQ-NMS"), or,
if there shall have been no sales on any such exchange or as reported
by NASDAQ-NMS on any such day, the average of the bid and asked
prices at the end of such day, or, if the Voting Common Stock shall
not be so listed or transactions so reported, the average of the bid
and asked prices at the end of the day in the over-the-counter
market, in each case averaged over a period of 20 consecutive
business days prior to the date as of which I, market price" is being
determined. If at any time the Voting Common Stock is not listed on
any exchange, reported by NASDAQ-NMS or quote in the over-the-counter
market, the "market price" shall be deemed to be the higher of (a)
the book value thereof as determined by any firm of independent
public accountants of recognized standing selected by the Board of
Directors of the Corporation as of the last day of any month ending
within 60 days preceding the date as of which the determination is to
be made, or (b) the fair value thereof determined in good faith by
the Board of Directors of the Corporation as of a date which is
within 15 days of the date as of which the determination is to be
made.
10
(7) Notwithstanding the foregoing right to convert at the
option of the holder, each share of Preferred Stock shall
automatically be converted into the appropriate number of shares of
Voting Common Stock of the corporation in the manner and upon the
terms set forth herein, without any act by the corporation or the
holders of Preferred Stock, concurrently with the closing of:
(i) the sale by the corporation of shares of Voting
Common Stock in a public offering which was registered under
the Securities Act of 1933, as amended, was underwritten by an
investment banking firm on a firm commitment basis and results
in the Voting Common Stock being of the corporation being
quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") or listed on the New York
Stock Exchange, American Stock Exchange or other national stock
exchange; or
(ii) a merger of the corporation with or the
acquisition of the corporation by another entity in which the
surviving entity is a corporation with a class of securities
which are quoted on NASDAQ or listed on the New York Stock
Exchange, the American Stock Exchange or other national stock
exchange.
ARTICLE 5 - MERGER, EXCHANGE,
SALE OF ASSETS AND DISSOLUTION
5.1) Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its goodwill, or (iv) to commence voluntary dissolution.
ARTICLE 6 - AMENDMENT OF ARTICLES OF INCORPORATION
6.1) Subject to the special voting rights of the holders of Preferred
Stock set forth in subsection 4.5(b), any provision contained in these Articles
of Incorporation may be amended, altered, changed or repealed by the affirmative
vote of the holders of at least majority of the voting power of the shares
present and entitled to vote at a duly held meeting or such greater percentage
as may be otherwise prescribed by the laws of the State of Minnesota.
11
ARTICLE 7 - INCORPORATORS
7.1) The name and mailing address of the original incorporator was as
follows:
Stephen A. A. Goddard
1645 Hennepin Avenue South
Suite 212
Minneapolis, Minnesota 55403
ARTICLE 8 - DIRECTOR LIABILITY
8.1) LIMITATION ON DIRECTOR LIABILITY. To the fullest extent permitted by
the Minnesota Business Corporation Act, as the same exists or may hereafter be
amended, a director of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director.
IN WITNESS WHEREOF, we have hereunto set our hands this 10th day of
April, 1989.
/s/ Dale R. Olseth
---------------------------------------------
Dale R. Olseth, Chairman, President,
and Chief Executive Officer
/s/ David R. Busch
---------------------------------------------
David R. Busch, Secretary
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 10th day of
April, 1989, by Dale R. Olseth and David R. Busch, Chairman/President/Chief
Executive Officer and Secretary, respectively, of Bio-Metric Systems, Inc., a
Minnesota corporation, on behalf of the corporation.
/s/ Walter H. Diers
-----------------------------------
Notary Public
12
RESTATED BYLAWS
OF
BIO-METRIC SYSTEMS, INC.
ARTICLE 1.
OFFICES
1.1) OFFICES. The principal office of the corporation shall be 6316
Barrie Road, Edina, Minnesota, and the corporation may have offices at such
other places within or without the State of Minnesota as the Board of Directors
shall from time to time determine or the business of the corporation requires.
ARTICLE 2.
MEETING OF SHAREHOLDERS
2.1) ANNUAL MEETING. The annual meeting of the shareholders of the
corporation entitled to vote shall be held at the principal office of the
corporation or at such other place, within or without the State of Minnesota, as
is designated by the Board of Directors, or by written consent of all the
shareholders entitled to vote thereat, at such time on such day of each year as
shall be determined by the Board of Directors or by the President. At the
annual meeting, the shareholders, voting as provided in the Articles of
Incorporation, shall elect directors and shall transact such other business as
shall properly come before the meeting.
2.2) SPECIAL MEETINGS. Special meetings of the shareholders entitled to
vote shall be called by the Secretary at anytime upon request of the Chairman of
the Board, the President or the Board of Directors (acting upon majority vote),
or upon request by shareholders holding ten percent (10%) or more of the voting
power of the shareholders.
2.3) NOTICE OF MEETINGS. There shall be mailed to each shareholder
entitled to vote, at his address as shown by the books of the corporation, a
notice setting out the place, date and hour of the annual meeting or any special
meeting, which notice shall be mailed at least five (5) days prior to the date
of the meeting; provided, that (i) notice of a meeting at which an agreement of
merger or consolidation is to be considered shall be mailed to all shareholders
of record, whether or not entitled to vote, at least two (2) weeks prior
thereto, (ii) notice of a meeting at which a proposal to dispose of all, or
substantially all, of the property and assets of the corporation is to be
considered shall be mailed to all shareholders of record, whether or not
entitled to vote, at least ten (10) days prior thereto, and (iii) notice of a
meeting at which a proposal to dissolve the corporation or to amend the Articles
of Incorporation is to be considered shall be mailed to all shareholders of
record, whether or not entitled to vote, at least ten (10) days prior thereto.
Notice of any special meeting shall state the purpose or purposes of the
proposed meeting, and the business transacted at all special meetings shall be
confined to purposes stated in the notice.
-1-
Attendance at a meeting by any shareholder, without objection in writing by him,
shall constitute his waiver of notice of the meeting.
2.4) QUORUM AND ADJOURNED MEETING. The holders of a majority of all
shares outstanding and entitled to vote, represented either in person or by
proxy, shall constitute a quorum for the transaction of business at any annual
or special meeting of the shareholders. In case a quorum is not present at any
meeting, those present shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until the requisite
number of voting shares shall be represented. At such adjourned meetings at
which the required amount of voting shares shall be represented, any business
may be transacted which might have been transacted at the original meeting.
2.5) VOTING. At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy duly
appointed by an instrument in writing subscribed by such shareholder. Each
shareholder shall have one (1) vote for each share having voting power standing
in his name on the books of the corporation except as may be otherwise required
to provide for cumulative voting (if not denied by the Articles). Upon the
demand of any shareholder, the vote for directors or the vote upon any question
before the meeting shall be by ballot. All elections shall be determined and
all questions decided by a majority vote of the number of shares entitled to
vote and represented at any meeting at which there is a quorum except in such
cases as shall otherwise be required by statute, the Articles of Incorporation
or these Bylaws. Except as may otherwise be required to conform to cumulative
voting procedures, directors shall be elected by a plurality of the votes cast
by holders of shares entitled to vote thereon.
2.6) RECORD DATE. The Board of Directors may fix a time, not exceeding
sixty (60) days preceding the date of any meeting of shareholders, as a record
date for the determination of the shareholders entitled to notice of and to vote
at such meeting, notwithstanding any transfer of any shares on the books of the
corporation after any record date so fixed. The Board of Directors may close
the books of the corporation against transfer of shares during the whole or any
part of such period. In the absence of action by the Board, only shareholders
of record twenty (20) days prior to a meeting may vote at such meeting.
2.7) ORDER OF BUSINESS. The suggested order of business at the annual
meeting and, to the extent appropriate, at all other meetings of the
shareholders shall, unless modified by the presiding chairman be:
(a) Call of roll
(b) Proof of due notice of meeting or waiver of notice
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Annual reports of officers and committees
(f) Election of directors
(g) Unfinished business
(h) New business
-2-
(i) Adjournment.
ARTICLE 3.
DIRECTORS
3.1) GENERAL POWERS. The property, affairs and business of the
corporation shall be managed by a Board of Directors.
3.2) NUMBER, TERM AND QUALIFICATIONS. At each annual meeting the
shareholders shall determine the number of directors, which shall not be less
than the minimum required by law; provided, that between annual meetings the
authorized number of directors may be increased by the shareholders or by the
Board of Directors or decreased by the shareholders. Each director at each
annual meeting of shareholders shall be elected for a term of one (1) year and
shall hold office until his successor is elected and qualified, or until his
resignation or removal as provided by statute.
3.3) VACANCIES. Vacancies on the Board of Directors shall be filled by
the remaining members of the Board, though less than a quorum; provided that
newly created directorships resulting from an increase in the authorized number
of directors shall be filled by two-thirds (2/3) of the directors serving at the
time of such increase. Persons so elected shall be directors until their
successors are elected by the shareholders, who may make such election at their
next annual meeting or at any special meeting duly called for that purpose.
3.4) QUORUM AND VOTING. A majority of the whole Board of Directors shall
constitute a quorum for the transaction of business except that when a vacancy
or vacancies exist, a majority of the remaining directors (provided such
majority consists of not less than two directors) shall constitute a quorum.
Except as otherwise provided in the Articles of Incorporation or these Bylaws,
the acts of a majority of the directors present at a meeting at which a quorum
is present be the acts of the Board of Directors.
3.5) FIRST MEETING. As soon as practicable after each annual election of
directors, the Board of Directors shall meet for the purpose of organization,
electing or appointing officers of the corporation, and transaction of other
business, at the place where the shareholders' meeting is held or at the place
where regular meetings of the Board of Directors are held. No notice of such
meeting need be given. Such first meeting may be held at any other time and
place specified in a notice given as hereinafter provided for special meetings
or in a waiver of notice signed by all the directors.
3.6) REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held from time to time at such time and place as may from time to time be
fixed by resolution adopted by a majority of the entire Board of Directors. No
notice need be given of any regular meeting.
-3-
3.7) SPECIAL MEETINGS. Special meetings of the Board of Directors may be
held at such time and place as may be designated in the notice or the waiver of
notice of the meeting. Special meetings of the Board of Directors may be called
by the Chairman of the Board, the President or by any two (2) directors. Unless
notice shall be waived by all directors, notice, of such special meeting
(including a statement of the purposes thereof) shall be given to each director
at least twenty-four (24) hours in advance of the meeting if oral or two (2)
days in advance of the meeting if by mail, telegraph or other written
communication; provided, however, that meetings may be held without waiver of
notice from or giving notice to any director while he is in the armed forces of
the United States or outside the continental limits of the United States.
Attendance at a meeting by any director, without objection in writing by him,
shall constitute a waiver of notice of such meeting.
3.8) COMPENSATION. Directors who are not salaried officers of the
corporation shall receive such fixed sum per meeting attended or such fixed
annual sum as shall be determined from time to time by resolution of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving this corporation in any other capacity and receiving
proper compensation therefor.
3.9) EXECUTIVE COMMITTEE. The Board of Directors may, by unanimous
affirmative action of the entire Board, designate two or more of its number to
constitute an Executive Committee, which, to the extent determined by unanimous
affirmative action of the entire Board, shall have and exercise authority of the
Board in the management of the business of the corporation. Any such Executive
Committee shall act only in the interval between meetings of the Board and shall
be subject at all times to the control and direction of the Board.
3.10) ORDER OF BUSINESS. The suggested order of business at any meeting
of the Board of Directors shall, to the extent appropriate and unless modified
by the presiding chairman, be:
(a) Roll call
(b) Proof of due notice of meeting or waiver of notice, or
unanimous presence and declaration by president
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Reports of officers and committee
(f) Election of officers
(g) Unfinished business
(h) New business
(i) Adjournment.
ARTICLE 4.
OFFICERS
4.1) NUMBER AND DESIGNATION. The Board of Directors shall elect a
President, a Secretary and a Treasurer, and may elect or appoint a Chairman of
the Board, one or more Vice
-4-
Presidents, and such other officers and agents as it may from time to time
determine. Any two of the offices except those of President and Vice President
may be held by one person.
4.2) ELECTION, TERM OF OFFICE AND QUALIFICATIONS. At each annual meeting
of the Board of Directors, the Board shall elect the officers provided for in
Section 4.1 and such officers shall hold office until the next annual meeting of
the Board or until their successors are elected or appointed and qualify;
provided, however, that any officer may be removed with or without case by the
affirmative vote of a majority of the entire Board of Directors (without
prejudice, however, to any contract rights of such officer).
4.3) RESIGNATIONS. Any officer may resign at any time by giving written
notice to the Board of Directors or to the Chairman, President or Secretary.
The resignation shall take effect at the time specified in the notice and,
unless otherwise specified therein, acceptance of the resignation shall not be
necessary to make it effective.
4.4) VACANCIES IN OFFICE. If there be a vacancy in any office of the
corporation, by reason of death, resignation, removal or otherwise, such vacancy
shall be filled for the unexpired term by the Board of Directors at any regular
or special meeting.
4.5) CHAIRMAN OF THE BOARD. The Board of Directors may, in its
discretion elect one of its number as Chairman of the Board. The Chairman shall
preside at all meetings of the shareholders and of the Board and shall exercise
general supervision and direction over the more significant matters of policy
affecting the affairs of the corporation, including particularly its financial
and fiscal affairs. The Chairman of the Board may call a meeting of the Board
whenever he deems it advisable.
4.6) PRESIDENT. The President shall have general active management of
the business of the corporation. In the absence of the Chairman of the Board,
he shall preside at all meetings of the shareholders and Board of Directors. He
shall be the chief executive officer of the corporation and shall see that all
orders and resolutions are carried into effect. He shall be ex-officio a member
of all standing committees and shall perform all duties usually incident to the
office of President and such other duties as may from time to time be assigned
to him by the Board.
4.7) VICE PRESIDENT. Each Vice President shall have such powers and
shall perform such duties as may be specified in these Bylaws or prescribed by
the Board of Directors. In the event of absence or disability of the President,
the Board of Directors may designate a Vice President or Vice Presidents to
succeed to the powers and duties of the President.
4.8) SECRETARY. The Secretary shall be secretary and shall attend all
meetings of the shareholders and Board of Directors. He shall act as clerk
thereof and shall record all the proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He may, with the Chairman of the Board, President or Vice President,
sign all certificates representing shares of the corporation and shall perform
the
-5-
duties usually incident to his office and such other duties as may be prescribed
by the Board of Directors from time to time.
4.9) TREASURER. The Treasurer shall keep accurate accounts of all monies
of the corporation received or disbursed, and shall deposit all monies, drafts
and checks in the name of and to the credit of the corporation in such banks and
depositories as the Board of Directors shall designate from time to time . He
shall have power to endorse for deposit the funds of the corporation as
authorized by the Board of Directors. He shall render to the Chairman of the
Board, President and the Board of Directors, whenever required, an account of
all of his transactions as Treasurer and statements of the financial condition
of the corporation, and shall perform the duties usually incident to his officer
and such other duties as may be prescribed by the Board of Directors from time
to time.
4.10) OTHER OFFICERS. The Board of Directors may appoint one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other
officers, agents and employees as the Board may deem advisable. Each officer,
agent or employee so appointed shall hold office at the pleasure of the Board
and shall perform such duties as may be assigned to him by the Board, Chairman
of the Board or President.
ARTICLE 5.
INDEMNIFICATION
5.1) INDEMNIFICATION OF DIRECTORS AND OFFICERS. To the full extent
permitted by Minnesota Statutes, Section 301.095, as amended from time to time,
or by other provisions of law, 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, wherever brought, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the corporation or by reason of the fact that such person 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 at the request of the corporation, shall be indemnified by the
corporation against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually reasonably incurred by such person in
connection with such action, suit or proceeding; provided, however, that the
indemnification with respect to a person who is or was service as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall apply only to the extent such person is not
indemnified by such other corporation, partnership, joint venture, trust or
other enterprise. The indemnification provided by this section shall continue
as to a person who has ceased to be a director or officer of the corporation and
shall inure the benefit of the heirs, executors and administrators of such
person.
5.2) INDEMNIFICATION OF EMPLOYEES AND AGENTS. Each person who is not
eligible for indemnification pursuant to Section 5.1 above and who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, wherever brought, whether civil, criminal,
administrative or investigative, by reason of the fact that such
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person is or was an employee or agent of the corporation or by reason of the
fact that such person 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, may be indemnified by the corporation by
action of the Board of Directors to the extent permitted and in accordance with
the procedures described by Minnesota Statutes, Chapter 30.1, as amended from
time to time, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such person in
connection with such action, suit or proceeding; provided, however, that the
indemnification with respect to a person who is or was serving as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall apply only to the extent such person is not
indemnified by such other corporation, partnership, joint venture, trust or
other enterprise. The indemnification provided by this section shall continue
as to a person who has ceased to be an employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
5.3) NONEXCLUSIVITY. The foregoing right of indemnification in the case
of a director or officer and permissive indemnification in the case of an agent
or employee shall not be exclusive of other rights to which a director, officer,
employee or agent may be entitled as a matter of law.
5.4) INSURANCE. To the full extent permitted by Minnesota Statutes,
Section 301.095, as amended from time to time, or by other provisions of law,
the corporation may purchase and maintain insurance on behalf of any indemnified
party against any liability asserted against such person and incurred by such
person in such capacity.
ARTICLE 6.
SHARES AND THEIR TRANSFER
6.1) CERTIFICATES OF STOCK. Every owner of stock of the corporation
shall be entitled to a certificate, in such form as the Board of Directors may
prescribe, certifying the number of shares of stock of the corporation owned by
him. The certificates for such stock shall be numbered (separately for each
class) in the order in which they shall be issued and shall be signed in the
name of the corporation by the Chairman of the Board, President or a Vice
President, and by the Secretary, Assistant Secretary, Treasurer, Assistant
Treasurer, or any other proper officer of the corporation thereunto authorized
by the Board of Directors. Signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the corporation. Certificates on which a facsimile
signature of a former officer appears may be issued with the same effect as if
he were such officer on the date of issue.
6.2) STOCK RECORD. As used in these Bylaws, the term "shareholder" shall
mean, the person, firm or corporation in whose name outstanding shares of
capital stock of the corporation a re currently registered on the stock record
books of the corporation. A record shall be kept of the name of the person,
firm or corporation owning the stock represented by such certificates
respectively, the respective dates of cancellation. Every certificate
surrendered to the corporation for exchange or transfer shall be cancelled and
no new certificate or certificates shall be issued in
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exchange for any existing certificate until such existing certificate shall have
been so cancelled (except as provided for in Section 6.4 of this Article 6).
6.3) TRANSFER OF SHARES. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate
(or his legal representative or duly authorized attorney-in-fact) and upon
surrender for cancellation of the certificate or certificates for such shares.
The shareholder in whose name shares of stock stand on the books of the
corporation shall be deemed the owner thereof for all purposes as regards the
corporation ;provided, that when any transfer of shares shall be made as
collateral security and not absolutely, such fact, if known to the Secretary of
the corporation or the transfer agent, shall be so expressed in the entry of
transfer.
6.4) LOST CERTIFICATES. Any shareholder claiming a certificate of stock
to be lost or destroyed shall make an affidavit or affirmation of that fact in
such form as the Board of Directors may require, and shall, if the directors so
require, give the corporation a bond of indemnity in form and with one or more
sureties satisfactory to the Board of at least double the value, as determined
by the Board, of the stock represented by such certificate in order to indemnify
the corporation against any claim that may be made against it on account of the
alleged loss or destruction of such certificate, whereupon a new certificate may
be issued in the same tenor and for the same number of shares as the one alleged
to have been destroyed or lost.
6.5) TREASURY STOCK. Treasury stock shall be held by the corporation
subject to disposal by the Board of Directors in accordance with the Articles
and these Bylaws, and shall not have voting rights nor participate in dividends.
6.6) INSPECTION OF BOOKS BY SHAREHOLDERS. Shareholders shall be
permitted to inspect the books of the corporation for a proper purpose at all
reasonable times.
ARTICLE 7
GENERAL PROVISIONS
7.1) DIVIDENDS. Subject to the provisions of the Articles of
Incorporation and of these Bylaws, the Board of Directors may declare dividends
from the net earnings or net assets of the corporation available for dividends
whenever and in such amounts as , in its opinion, the condition of the affairs
of the corporation shall render it advisable.
7.2) SURPLUS AND RESERVES. Subject to the provisions of the Articles of
Incorporation and of these Bylaws, the Board of Directors in its discretion may
use and apply any of the net earnings or net assets of the corporation available
for such purpose to purchase or acquire any of the shares of the capital stock
of the corporation in accordance with law, or any of its bonds, debentures,
notes, scrip or other securities or evidences of indebtedness, or from time to
time may set aside from its net assets or net earnings such sums as it, in its
absolute discretion may think proper as a reserve fund to meet contingencies,
for the purpose of maintaining or increasing
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the property or business of the corporation, or for any other purpose it may
think conducive to the best interests of the corporation.
7.3) FISCAL YEAR. The fiscal year of the corporation shall be
established by the Board of Directors.
7.4) SEAL. The corporation shall have such corporate seal or no
corporate seal as the Board of Directors shall from time to time determine.
7.5) SECURITIES OF OTHER CORPORATIONS.
(a) VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise
ordered by the Board of Directors, the President shall have full power and
authority on behalf of the corporation (i) to attend and to vote at any meeting
of security holders of any other companies in which the corporation may hold
securities; (ii) to execute any proxy for such meeting on behalf of the
corporation and (iii) to execute a written action in lieu of a meeting of such
other company on behalf of this corporation. At such meeting, by such proxy or
by such writing in lieu of meeting, the President shall possess and may exercise
any and all rights and powers incident to the ownership of such securities that
the corporation might have possessed and exercised if it had been present. The
Board of Directors may, from time to time, confer like powers upon any other
person or persons.
(b) PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered
by the Board of Directors, the President shall have full power and authority on
behalf of the corporation to purchase, sell, transfer or encumber any and all
securities of any other company owned by the corporation and may execute and
deliver such documents as may be necessary to effectuate such purchase, sale,
transfer or encumbrance. The Board of Directors may, from time to time, confer
like powers upon any other person or persons.
ARTICLE 8.
MEETINGS
8.1) WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by these Bylaws, the Articles of Incorporation or any of the laws of the
State of Minnesota, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before, at or after the time stated therein,
shall be deemed equivalent to the actual required notice.
8.2) PARTICIPATION BY CONFERENCE TELEPHONE. Members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of the Board of Directors or of such committee by means of conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear and communicate with each other, and participation in a
meeting pursuant to this Section shall constitute presence in person at such
meeting. The place of the meeting shall be deemed to be the place of
origination of the conference telephone call or similar communication technique.
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8.3) AUTHORIZATION WITHOUT MEETING. Any action of the shareholders, the
Board of Directors, or any lawfully constituted Executive Committee of the
corporation which may be taken at a meeting thereof, may be taken without a
meeting if authorized by a writing signed by all of the holders of shares who
would be entitled to notice of a meeting for such purpose, by all of the
directors, or by all of the members of such Executive Committee, as the case may
be.
ARTICLE 9
AMENDMENTS AND BYLAWS
9.1) AMENDMENTS. These Bylaws may be altered, amended, added to or
repealed by the affirmative vote of a majority of the members of the Board of
Directors at any regular meeting of the Board or at any special meeting of the
Board called for that purpose, subject to the power of the shareholders to
change or repeal such Bylaws and subject to any other limitations on such
authority of the Board provided by the Minnesota Business Corporation Act.
The undersigned, PATRICK E. GUIRE, Secretary of BIOMETRIC SYSTEMS, INC.,
hereby certifies that the foregoing Restated Bylaws were duly adopted as the
Bylaws of the Corporation by its shareholders and Board of Directors on
September 19, 1980.
/s/ Patrick A. Guire
----------------------------------------
Secretary
Attest:
/s/ John W. Roseveor
- -----------------------------------
President
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Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
December 24, 1997
SurModics, Inc.
9924 West 74th Street
Eden Prairie, Minnesota 55344
RE: REGISTRATION STATEMENT ON FORM SB-2 - EXHIBIT 5.1
Gentlemen/Ladies:
We have acted as counsel for SurModics, Inc. (the "Company") in connection
with the Company's filing of a Registration Statement on Form SB-2 (the
"Registration Statement") relating to the registration under the Securities Act
of 1933 (the "Act") of 2,300,000 shares of Common Stock, including 300,000
shares subject to an over-allotment option (the "Shares").
In connection with rendering this opinion, we have reviewed the following:
1. The Company's Articles of Incorporation;
2. The Company's Bylaws; and
3. Certain corporate resolutions, including resolutions of the Company's
Board of Directors pertaining to the issuance by the Company of the
Shares covered by the Registration Statement.
Based upon the foregoing and upon representations and information provided
by the Company, we hereby advise you that in our opinion:
1. The Company's Articles of Incorporation validly authorize the issuance
of the Shares registered pursuant to the Registration Statement.
2. Upon the delivery and payment therefor in accordance with the terms of
the Registration Statement and the Underwriting Agreement described in
the Registration Statement, the Shares to be issued and sold by the
Company will be validly issued, fully paid and nonassessable.
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" included in the Registration Statement and the related Prospectus.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By /s/ Melodie R. Rose
Melodie R. Rose
OFFICE/WAREHOUSE LEASE
THIS INDENTURE of lease, dated this 18th day of November, 1991, by and
between Prairieview Jack, Ltd., AmberJack, Ltd., its General Partner, Welsh
Companies, Inc., its Manager hereinafter referred to as "Lessor", and Bio-Metric
Systems, Inc. (a Minnesota Corporation) hereinafter referred to as "Lessee".
DEFINITIONS:
"Premises" - That certain real property located in the City of Eden Prairie,
County of Hennepin and State of Minnesota and legally described on Exhibit "A"
attached hereto and made a part hereof, including all buildings and site
improvements located thereon.
"Building" - That certain office/warehouse building containing approximately
63,905 square feet located upon the Premises and commonly described as
Prairieview Business Center.
"Demised Premises" - That certain portion of the Building located at 9922, 9924,
9928, 9932, 9942 West 74th St. (see Article 42 of Addendum) and designated as
Bays 8, 11, 12, 13, 14, 15 (see Article 42 of Addendum), consisting of
approximately 26,115 square feet (10,074 square feet of office space and 16,041
square feet of warehouse space), as measured from the outside walls of the
Demised Premises to the center of the partition wall, as shown on the floor plan
attached hereto as Exhibit "B" and made a part hereof. The Demised Premises
include a non-exclusive easement for access to common areas, as hereinafter
defined, and all licenses and easements appurtenant to the Demised Premises.
"Common Areas" - The term "common area" means the entire areas to be used for
the non-exclusive use by Lessee and other lessees in the Building, including,
but not limited to, corridors, lavatories, driveways, truck docks, parking lots
and landscaped areas. Subject to reasonable rules and regulations to the
promulgated by Lessor, the common areas are hereby made available to Lessee and
its employees, agents, customers, and invitees for reasonable use in common with
other lessees, their employees, agents, customers and invitees.
WITNESSETH:
TERM:
1. For and in consideration of the rents, additional rents, terms, provisions
and covenants herein contained, Lessor hereby lets, leases and demises to Lessee
the Demised Premises for the term of 60 months commencing on the first day of
January, 1992 (sometimes called "the Commencement Date") and expiring the last
day of December, 1996 (sometimes called "Expiration Date"), unless sooner
terminated as hereinafter provided.
BASE RENT:
2. Lessor reserves and Lessee shall pay Lessor, a total rental of Seven
Hundred Thirteen Thousand Three Hundred Thirty and 46/100 Dollars ($713,330.46),
payable in advance, in equal monthly installments of SEE ARTICLE 43 OF
ADDENDUM Dollars ($ARTICLE 43), commencing on the
Commencement Date and continuing on the first day of each and every month
thereafter for the next succeeding months during the balance of the term
(sometimes called "Base Rent"). In the event the Commencement Date falls on a
date other than the first of a month the rental for that month shall be prorated
and adjusted accordingly.
ADDITIONAL RENT:
3. Lessee shall pay to Lessor throughout the term of this Lease the following:
a. Lessee shall pay a sum equal to Forty & 87/100 (See Article 44 of
Addendum) percent (40.87%) of the Real Estate taxes. The term "Real Estate
Taxes" shall mean all real estate taxes, all assessments and any taxes in lieu
thereof which may be levied upon or assessed against the Premises of which the
Demised Premises are a part. Lessee, in addition to all other payments to
Lessor by Lessee required hereunder shall pay to Lessor, in each year during the
term of this Lease and any extension or renewal thereof, Lessee's proportionate
share of such real estate taxes and assessments paid in the first instance by
Lessor.
Any tax year commencing during any lease year shall be deemed to correspond
to such lease year. In the event the taxing authorities include in such real
estate taxes and assessments the value of any improvements made by Lessee, or of
machinery, equipment, fixtures, inventory or other personal property or assets
of Lessee, then Lessee shall pay all the taxes attributable to such items in
addition to its proportionate share of said aforementioned real estate taxes and
assessments. A photostatic copy of the tax statement submitted by Lessor to
Lessee shall be sufficient evidence of the amount of taxes and assessments
assessed or levied against the Premises of which the Demised Premises are a
part, as well as the items taxed.
b. A sum equal to Forty & 87/100 (See Article 44 of Addendum) percent
(40.87%) of the annual aggregate operating expenses incurred by Lessor in the
operation, maintenance and repair of the Premises. The term "Operating
Expenses" shall include by not be limited to maintenance, repair, replacement
and care of all common area lighting, common area plumbing and roofs, parking
and landscaped areas, signs, snow removal, non-structural repair and maintenance
of the exterior of the Building, insurance premiums, management fee, wages and
fringe benefits of personnel employed for such work, costs of equipment
purchased and used for such purposes, and the cost or portion thereof properly
allocable to the Premises (amortized over such reasonable period as lessor shall
determine together with the interest at the rate of 13% per annum on the
unamortized balance) of any capital improvements made to the Building by Lessor
after the Base Year which result in a reduction of Operating Expenses or made to
the Building by Lessor after the date of this Lease that are required under any
governmental law or regulation that was not applicable to the Building at the
time it was constructed.
c. In no event shall the total adjusted monthly rent be less than Fifteen
Thousand Two Hundred Twenty-Eight & 00/100 Dollars ($15,228), per month during
the term of this Lease.
The payment of the sums set forth in this Article 3 shall be in addition to
the Base Rent payable pursuant to Article 2 of this Lease. All sums due
hereunder shall be due and payable
2
within thirty (30) days of delivery of written certification by Lessor setting
forth the computation of the amount due from Lessee. In the event the lease
term shall begin or expire at any time during the calendar year, the Lessee
shall be responsible for his prorata share of Additional Rent under subdivisions
a. and b. during the Lease and/or occupancy time.
Prior to commencement of this Lease, and prior to the commencement of each
calendar year thereafter commencing during the term of this Lease or any renewal
or extension thereof, Lessor may estimate for each calendar year (i) the total
amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii)
Lessee's share of Real Estate Taxes for such calendar year; (iv) Lessee's share
of Operating Expenses for such calendar year; and (v) the computation of the
annual and monthly rental payable during such calendar year as a result of
increases or decreases in Lessee's share of Real Estate Taxes, and Operating
Expenses. Said estimates will be in writing and will be delivered or mailed to
Lessee at the Premises.
The amount of Lessee's share of Real Estate Taxes, and Operating Expenses
for each calendar year, so estimated, shall be payable as Additional Rent, in
equal monthly installments, in advance, on the first day of each month during
such calendar year at the option of Lessor. In the event that such estimate is
delivered to Lessee before the first day of January of such calendar year, said
amount, so estimated, shall be payable as additional rent in equal monthly
installments, in advance, on the first day of each month during such calendar
year. In the event that such estimate is delivered to Lessee after the first
day of January of such calendar year, said amount, so estimated, shall be
payable as additional rent in equal monthly installments, in advance, on the
first day of each month over the balance of such calendar year, with the number
of installments being equal to the number of full calendar months remaining in
such calendar year.
Upon completion of each calendar year during the term of this Lease or any
renewal or extension thereof, Lessor shall cause its accountants to determine
the actual amount of the Real Estate Taxes, and Operating Expenses payable in
such calendar year and Lessee's share thereof and deliver a written
certification of the amounts thereof to Lessee. If Lessee has underpaid its
share of Real Estate Taxes, or Operating Expenses for such calendar year, Lessee
shall pay the balance of its share of same within ten (10) days after the
receipt of such statement. If Lessee has overpaid its share of Real Estate
Taxes, or Operating Expenses for such calendar year, Lessor shall either (i)
refund such excess, or (ii) credit such excess against the most current monthly
installment or installments due Lessor for its estimate of Lessee's share of
Real Estate Taxes, and Operating Expenses for the next following calendar year.
A pro rata adjustment shall be made for a calendar year occurring during the
term of this Lease or any renewal or extension thereof based upon the number of
days of the term of the Lease during said calendar year as compared to three
hundred sixty-five (365) days and all additional sums payable by Lessee or
credits due Lessee as a result of the provisions of this Article 3 shall be
adjusted accordingly.
COVENANT TO PAY RENT:
4. The covenants of Lessee to pay the Base Rent and the Additional Rent are
each independent of any other covenant, condition, provision or agreement
contained in this Lease. All rents are payable to Lessor at Welsh Companies,
Inc., 11200 West 78th Street, Eden Prairie, MN 55344, or as may be designated by
Lessor
3
UTILITIES:
5. Lessor shall provide mains and conduits to supply water, gas, electricity
and sanitary sewage to the Premises. Lessee shall pay, when due, all charges
for sewer usage or rental, garbage, disposal, refuse removal, water,
electricity, gas, fuel oil, L.P. gas, telephone and/or other utility services or
energy source furnished to the Demised Premises during the term of this Lease,
or any renewal or extension thereof. In Lessor elects to furnish any of the
foregoing utility services or other services furnished or caused to be furnished
to Lessee, then the rate charged by Lessor shall not exceed the rate Lessee
would be required to pay to a utility company or service company furnishing any
of the foregoing utilities or services. The charges thereof shall be deemed
additional rent in accordance with Article 3.
CARE AND REPAIR OF DEMISED PREMISES:
6. Lessee shall, at all times throughout the term of this Lease, including
renewals and extension, and at its sole expense, keep and maintain the Demised
Premises in a clean, safe, sanitary and first class condition and in compliance
with all applicable laws, codes, ordinances, rules and regulations. Lessee's
obligations hereunder shall include but not be limited to the maintenance,
repair and replacement, if necessary, of heating, air conditioning fixtures,
equipment, and systems, all lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Lessee shall be equal in quality and
class to the original work. The Lessee shall keep and maintain all portions of
the Demised Premises and the sidewalk and areas adjoining the same in a clean
and orderly condition, free of accumulation of dirt, rubbish, snow and ice.
If Lessee fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given Lessee, in
accordance with Article 33 of this Lease, Lessor may make such repairs without
liability to Lessee for any loss or damage that may accrue to Lessee's
merchandise, fixtures or other property or to Lessee's business by reason
thereof, and upon completion thereof, Lessee shall pay to Lessor all costs plus
15% for overhead incurred by Lessor in making such repairs upon presentation to
Lessee of bill therefor.
Lessor shall repair, at its expense, the structural portions of the
Building, provided however where structural repairs are required to be made by
reason of the acts of Lessee, the costs thereof shall be borne by Lessee and
payable by Lessee to Lessor upon demand.
The Lessor shall be responsible for all outside maintenance of the Demised
Premises, including grounds and parking areas. All such maintenance which is
the responsibility of the Lessor shall be provided as reasonably necessary to
the comfortable use and occupancy of Demised Premises during business hours,
except Saturdays, Sundays and holidays, upon the condition that the Lessor shall
not be liable for damages for failure to do so due to causes beyond its control.
4
SIGNS:
7. Any sign, lettering, picture, notice or advertisement installed on or in
any part of the Premises and visible from the exterior of the Building, or
visible from the exterior of the Demised Premises, shall be approved and
installed by Lessor at Lessee's expense. In the event of a violation of the
foregoing by Lessee, Lessor may remove the same without any liability and may
charge the expense incurred by such removal to Lessee.
ALTERATIONS, INSTALLATION, FIXTURES:
8. Except as hereinafter provided, Lessee shall not make any alteration,
additions, or improvements in or to the Demised Premises or add, disturb or in
any way change any plumbing or wiring therein without the prior written consent
of the Lessor. In the event alterations are required by any governmental agency
by reason of the use and occupancy of the Demised Premises by Lessee, Lessee
shall make such alterations at its own cost and expense after first obtaining
Lessor's approval of plans and specifications therefor and furnishing such
indemnification as Lessor may reasonably require against liens, costs, damages
and expenses arising out of such alterations. Alterations or additions by
Lessee must be built in compliance with all laws, ordinances and governmental
regulations affecting the Premises and Lessee shall warrant to Lessor that all
such alterations, additions, or improvements shall be in strict compliance with
all relevant laws, ordinances, governmental regulations, and insurance
requirements. Construction of such alterations or additions shall commence only
upon Lessee obtaining and exhibiting to Lessor the requisite approvals, licenses
and permits and indemnification against liens. All alterations, installations,
physical additions or improvements to the Demised Premises made by Lessee shall
at once become the property of Lessor and shall be surrendered to Lessor upon
the termination of this Lease; provided, however, this clause shall not apply to
movable equipment or furniture owned by Lessee which may be removed by Lessee at
the end of the term of this Lease if Lessee is not then in default.
POSSESSION:
9. Except as hereinafter provided Lessor shall deliver possession of the
Demised Premises to Lessee in the condition required by this Lease on or before
the Commencement Date, but delivery of possession prior to or later than such
Commencement Date shall not affect the expiration date of this Lease. The
rentals herein reserved shall commence on the date when possession of the
Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee
prior to the beginning of the term shall in all respects be the same as that of
a Lessee under this Lease. Lessor shall have no responsibility or liability for
loss or damage to fixtures, facilities or equipment installed or left on the
Demised Premises. If Demised Premises are not ready for occupancy by
Commencement Date and possession is later than Commencement Date, rent shall
begin on date of possession.
SECURITY AND DAMAGE DEPOSIT:
10. Lessee contemporaneously with the execution of this Lease, has transferred
from Lease dated May 24, 1982, to the Lessor the sum of Two Thousand Seven
Hundred and 00/100 Dollars
5
($2,700.00), receipt of which is acknowledged hereby by Lessor, which deposit is
to be held by Lessor, without liability for interest, as a security and damage
deposit for the faithful performance by Lessee during the term hereof or any
extension hereof. Prior to the time when Lessee shall be entitled to return of
this security deposit, Lessor may commingle such deposit with Lessor's own funds
and to use such security deposit for such purpose as Lessor may determine. In
the event of the failure of Lessee to keep and perform any of the terms,
covenants and conditions of this Lease to be kept and performed by Lessee during
the term hereof or any extension hereof, then Lessor, either with or without
terminating this Lease, may (but shall not be required to) apply such portion of
said deposit as may be necessary to compensate or repay Lessor for all losses or
damages sustained or to be sustained by Lessor due to such breach on the part of
Lessee, including, but not limited to overdue and unpaid rent, any other sum
payable by Lessee to Lessor pursuant to the provisions of this Lease, damages or
deficiencies in the reletting of Demised Premises, and reasonable attorney's
fees incurred by Lessor. Should the entire deposit or any portion thereof, be
appropriated and applied by Lessor, in accordance with the provisions of this
paragraph, Lessee upon written demand by Lessor, shall remit forthwith to Lessor
a sufficient amount of cash to restore said security deposit to the original sum
deposited, and Lessee's failure to do so within five (5) days after receipt of
such demand shall constitute a breach of this Lease. Said security deposit
shall be returned to Lessee, less any depletion thereof as the result of the
provisions of this paragraph, at the end of the term of this Lease or any
renewal thereof, or upon the earlier termination of this Lease. Lessee shall
have no right to anticipate return of said deposit by withholding any amount
required to be paid pursuant to the provision of this Lease or otherwise.
In the event Lessor shall sell the Premises, or shall otherwise convey or
dispose of its interest in this Lease, Lessor may assign said security deposit
or any balance thereof to Lessor's assignee, whereupon Lessor shall be released
from all liability for the return or repayment of such security deposit and
Lessee shall look solely to the said assignee for the return and repayment of
said security deposit. Said security deposit shall not be assigned or
encumbered by Lessee without such consent of Lessor, and any assignment or
encumbrance without such consent shall not bind Lessor. In the event of any
rightful and permitted assignment of this Lease by Lessee, said security deposit
shall be deemed to be held by Lessor as a deposit made by the assignee, and
Lessor shall have no further liability with respect to the return of said
security deposit to the Lessee.
USE:
11. The Demised Premises shall be used and occupied by Lessee solely for the
purposes of general offices, laboratory, library, coating production, warehouse
so long as such use is in compliance with all applicable laws, ordinances and
governmental regulations affecting the Building and Premises. The Demised
Premises shall not be used in such manner that, in accordance with any
requirement of law or of any public authority, Lessor shall be obliged on
account of the purpose of manner of said use to make any addition or alteration
to or in the Building. The Demised Premises shall not be used in any manner
which will increase the rates required to be paid for public liability or for
fire and extended coverage insurance covering the Premises. Lessee shall occupy
the Demised Premises conduct its business and control its agents, employees,
invitees and visitors in such a way as is lawful, and reputable and will not
permit or
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create any nuisance, noise, odor, or otherwise interfere with, annoy or disturb
any other lessee in the Building in its normal business operations or Lessor in
its management of the Building. Lessee's use of the Demised Premises shall
conform to all the Lessor's rules and regulations relating to the use of the
Premises. Outside storage on the Premises of any type of equipment, property or
materials owned or used on the Premise by Lessee or its customers and suppliers
shall not be permitted.
ACCESS TO DEMISED PREMISES:
12. The Lessee agrees to permit the Lessor and the authorized representatives
of the Lessor to enter the Demised Premises at all times during usual business
hours for the purpose of inspecting the same and making any necessary repairs to
the Demised Premises and performing any work therein that may be necessary to
comply with any laws, ordinances, rules, regulations or requirements of any
public authority or of the Board of Fire Underwriters or any similar body or
that the Lessor may deem necessary to prevent waste or deterioration in
connection with the Demised Premises. Nothing herein shall imply any duty upon
the part of the Lessor to do any such work which, under any provision of this
Lease, the Lessee may be required to perform and the performance thereof by the
Lessor shall not constitute a waiver of the Lessee's default in failing to
perform the same. The Lessor may, during the progress of any work in the
Demised Premises, keep and store upon the Demised Premises all necessary
materials, tools and equipment. The Lessor shall not in any event be liable for
inconvenience, annoyance, disturbance, loss of business, or other damage of the
Lessee by reason of making repairs or the performance or any work in the Demised
Premises, or on account of bringing materials, supplies and equipment into or
through the Demised Premises during the course thereof and the obligations of
the Lessee under this Lease shall not thereby be affected in any manner
whatsoever." Lessor reserves the right to enter upon the Demised Premises at
any time in the event of an emergency and at reasonable hours to exhibit the
Demised Premises to prospective purchasers or others; and to exhibit the Demised
Premises to prospective Lessees and to the display "For Rent" or similar signs
on windows or doors in the Demised Premises during the last One Hundred Twenty
(120) days of the term of this Lease, all without hindrance or molestation by
Lessee.
EMINENT DOMAIN:
13. In the event of any eminent domain or condemnation proceeding or private
sale in lieu thereof in respect to the Premises during the term hereof, the
following provisions shall apply:
a. If the whole of the Premises shall be acquired or condemned by eminent
domain for any public or quasipublic use or purpose, then the term of this Lease
shall cease and terminate as of the date possession shall be taken in such
proceeding and all rentals shall be paid up to that date.
b. If any part constituting less than the whole of the Premises shall be
acquired or condemned as aforesaid, and in the event that such partial taking or
condemnation shall materially affect the Demised Premises so as to render the
Demised Premises unsuitable for the business of the Lessee, in the reasonable
opinion of Lessor, then the term of this Lease shall cease and terminate as of
the date possession shall be taken by the condemning authority and rent shall be
paid to the date of such termination.
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In the event of a partial taking or condemnation of the Premises which
shall not materially affect the Demised Premises so as to render the Demised
Premises unsuitable for the business of the Lessee, in the reasonable opinion of
the Lessor, this Lease shall continue in full force and effect but with a
proportionate abatement of the Base Rent and Additional Rent based on the
portion, if any, of the Demised Premises taken. Lessor reserves the right, at
its option, to restore the Building and the Demised Premises to substantially
the same condition as they were prior to such condemnation. In such event,
Lessor shall give written notice to Lessee within thirty (30) days following the
date possession shall be taken by the condemning authority, of Lessor's
intention to restore. Upon Lessor's notice of election to restore, Lessor shall
commence restoration and shall restore the Building and the Demised Premises
with reasonable promptness, subject to delays beyond Lessor's control and delays
in the making of condemnation or sale proceeds adjustments by Lessor; and Lessee
shall have no right to terminate this Lease except as herein provided. Upon
completion of such restoration, the rent shall be adjusted based upon the
portion, if any, of the Demised Premises restored.
c. In the event of any condemnation or taking as aforesaid, whether whole
or partial, the Lessee shall not be entitled to any part of the award paid for
such condemnation and Lessor is to receive the full amount of such award, the
Lessee hereby expressly waiving any right to claim to any part thereof.
d. Although all damages in the event of any condemnation shall belong to
the Lessor whether such damages are awarded as compensation for diminution in
value of the leasehold or to the fee of the Demised Premises. Lessee shall have
the right to claim and recover from the condemning authority, but not from
Lessor, such compensation as may be separately awarded or recoverable by Lessee
in Lessee's own right on account of any and all damage to Lessee's business by
reason of the condemnation and for or on account of any cost or loss to which
Lessee might be put in removing Lessee's merchandise, furniture, fixtures,
leasehold improvements and equipment. However, Lessee shall have no claim
against Lessor or make any claim with the condemning authority for the loss of
its leasehold estate, any unexpired term or loss of any possible renewal or
extension of said lease or loss of any possible value of said lease, any
unexpired term, renewal or extension of said Lease.
DAMAGE OR DESTRUCTION:
14. In the event of any damage or destruction to the Premises by fire or other
cause during the term hereof, the following provisions shall apply:
a. If the Building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by Lessor, will equal or
exceed thirty percent (30%) of the replacement value of the Building (exclusive
of foundations) just prior to the occurrence of the damage, then Lessor may, no
later than the sixtieth (60th) day following the damage, give Lessee written
notice of Lessor's election to terminate this Lease.
b. If the cost of restoration as estimated by Lessor will equal or exceed
fifty percent (50%) of said replacement value of the Building and if the Demised
Premises are not suitable as a
8
result of said damage for the purposes for which they are demised hereunder, in
the reasonable opinion of Lessee, then Lessee may, no later than the sixtieth
(60th) day following the damage, give Lessor a written notice of election to
terminate this Lease.
c. If the cost of restoration as estimated by Lessor shall amount to less
than thirty percent (30%) of said replacement value of the Building, or if,
despite the cost, Lessor does not elect to terminate this Lease, Lessor shall
restore the Building and the Demised Premises with reasonable promptness,
subject to delays beyond Lessor's control and delays in the making of insurance
adjustments by Lessor; and Lessee shall have no right to terminate this Lease
except as herein provided. Lessor shall not be responsible for restoring or
repairing leasehold improvements of the Lessee.
d. In the event of either of the elections to terminate, this Lease shall
be deemed to terminate on the date of the receipt of the notice of election and
all rentals shall be paid up to that date. Lessee shall have no claim against
Lessor for the value of any unexpired term of this Lease.
e. In any case where damage to the Building shall materially affect the
Demised Premises so as to render them unsuitable in whole or in part for the
purposes for which they are demised hereunder, then, unless such destruction
was wholly or partially caused by the negligence or breach of the terms of this
Lease by Lessee, its employees, contractors or licensees, a portion of the rent
based upon the amount of the extent to which the Demised Premises are rendered
unsuitable shall be abated until repaired or restored. If the destruction or
damage was wholly or partially caused by negligence or breach of the terms of
this Lease by Lessee as aforesaid and if Lessor shall elect to rebuild, the
rent shall not abate and the Lessee shall remain liable for the same.
CASUALTY INSURANCE:
15. a. Lessor shall at all times during the term of this Lease, at its
expense, maintain a policy or policies of insurance with premiums paid in
advance issued by an insurance company licensed to do business in the State
of Minnesota insuring the Building against loss or damage by fire, explosion
or other insurable hazards and contingencies for the full replacement value,
provided that Lessor shall not be obligated to insure any furniture, equipment,
machinery, goods or supplies not covered by this Lease which Lessee may bring
upon the Demised Premises or any additional improvements which Lessee may
construct or install on the Demised Premises.
b. Lessee shall not carry any stock of goods or do anything in or about
the Demised Premises which will in any way impair or invalidate the obligation
of the insurer under any policy of insurance required by this Lease.
c. Lessor hereby waives and releases all claims, liabilities and causes
of action against Lessee and its agents, servants and employees for loss or
damage to, or destruction of, the Premises or any portion thereof, including
the buildings and other improvements situated thereon, resulting from fire,
explosion and other perils included in standard extended coverage insurance,
whether caused by the negligence of any of said persons or otherwise.
Likewise, Lessee hereby waives and releases all claims, liabilities and causes
of action against Lessor and its agents, servants and employees for loss or
9
damage to, or destruction of, any of the improvements, fixtures, equipment,
supplies, merchandise and other property whether that of Lessee or of others
in, upon or about the Premises resulting from fire, explosion or the other
perils included in standard extended coverage insurance, whether caused by
the negligence of any of said persons or otherwise. The waiver shall remain
in force whether or not the Lessee's insurer shall consent thereto.
d. In the event that the use of the Demised Premises by Lessee increases
the premium rate for insurance carried by Lessor on the improvements of which
the Demised Premises are a part, Lessee shall pay Lessor, upon demand, the
amount of such premium increase. If Lessee installs any electrical equipment
that overloads the power lines to the building or its wiring, Lessee shall, at
its own expense, make whatever changes are necessary to comply with the
requirements of the insurance underwriter, insurance rating bureau and
governmental authorities having jurisdiction.
PUBLIC LIABILITY INSURANCE
16. Lessee shall during the term hereof keep in full force and effect at its
expense a policy or policies of public liability insurance with respect to the
Demised Premises and the business of Lessee, on terms with companies approved
in writing by Lessor, in which both Lessee and Lessor shall be covered by being
named as insured parties under reasonable limits of liability not less than:
$500,000 for injury/death to any one person; $1,000,000 for injury/death to
more than one person, and $500,000 with respect to damage to property. Such
policy or policies shall provide that ten (10) days written notice must be
given to Lessor prior to cancellation thereof. Lessee shall furnish evidence
satisfactory to Lessor at the time this Lease is executed that such coverage
is in full force and effect.
DEFAULT OF LESSEE:
17. a. In the event of any failure of Lessee to pay any rental due hereunder
within ten (10) days after the same shall be due, or any failure to perform any
other of the terms, conditions or covenants of this Lease to be observed or
performed by Lessee for more than thirty (30) days after written notice of such
failure shall have been given to Lessee, or if Lessee or an agent of Lessee
shall falsify any report required to be furnished to Lessor pursuant to the
terms of this Lease, or if Lessee or any guarantor of this Lease shall become
bankrupt or insolvent, or file any debtor proceedings or any person shall take
or have against Lessee or any guarantor of this Lease in any court pursuant to
any statute either of the United States or of any state a petition in
bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of all or a portion of Lessee's or any such guarantor's
property, or if Lessee or any such guarantor makes an assignment for the
benefit of creditors, or petitions for or enters into an arrangement, or if
Lessee shall abandon the Demised Premises or suffer this Lease to be taken
under any writ of execution, then in any such event Lessee shall be in default
hereunder, and Lessor, in addition to other rights of remedies it may have,
shall have the immediate right of re-entry and may remove all persons and
property from the Demised Premises and such property may be removed and stored
in a public warehouse or elsewhere at the cost of, and for the account of
10
Lessee, all without service of notice or resort to legal process and without
being guilty of trespass, or becoming liable for any loss or damage which may
be occasioned thereby.
b. Should Lessor elect to re-enter the Demised Premises, as herein
provided, or should it take possession of the Demised Premises pursuant to
legal proceedings or pursuant to any notice provided for by law, it may either
terminate this Lease or it may from time to time, without terminating this
Lease, make such alterations and repairs as may be necessary in order to relet
the Demised Premises, and relet the Demised Premises or any part thereof such
term or terms (which may be for a term extending beyond the term of this Lease)
and at such rental or rentals and upon such other terms and conditions as Lessor
in its sole discretion may deem advisable. Upon each such subletting all
rentals received by the Lessor from such reletting shall be applied first to
the payment of any indebtedness other than rent due hereunder from Lessee to
Lessor; second, to the payment of any costs and expenses of such reletting,
including brokerage fees and attorney's fees and costs of such alterations
and repairs; third, to the payment of the rent due and upon payment of future
rent as the same may become due and payable hereunder. If such rentals
received from such reletting during any month be less than that to be paid
during that month by Lessee hereunder, Lessee, upon demand, shall pay any
such deficiency to Lessor. No such re-entry or taking possession of the
Demised Premises by Lessor shall be construed as an election on its part to
terminate this Lease unless a written notice of such intention be given to
Lessee or unless the termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any such reletting without termination, Lessor
may at any time after such re-entry and reletting elect to terminate this
Lease for any such breach, in addition to any other remedies it may have, it
may recover from Lessee all damages it may incur by reason of such breach,
including the cost of recovering the Demised Premises, reasonable attorney's
fees, and including the worth at the time of such termination of the excess,
if any, of the amount of rent and charges equivalent to rent reserved in this
Lease for the remainder of the stated term over the then reasonable rental
value of the Demised Premises for the remainder of the stated term, all of
which amounts shall be immediately due and payable from Lessee to Lessor.
c. Lessor may, at its option, instead of exercising any other rights or
remedies available to it in this Lease or otherwise by law, statute or equity,
spend such money as is reasonably necessary to cure any default of Lessee
herein and the amount so spent, and costs incurred, including attorney's
fees in curing such default, shall be paid by Lessee, as additional rent,
upon demand.
d. In the event suit shall be brought for recovery of possession of the
Demised Premises, for the recovery of rent or any other amount due under the
provisions of this Lease, or because of the breach of any other covenant herein
contained on the part of Lessee to be kept or performed, and a breach shall be
established, Lessee shall pay to Lessor all expenses incurred therefor,
including a reasonable attorney's fee, together with interest on all such
expenses at the rate of Eighteen and 00/100 percent (18%) per annum from the
date of such breach of the covenants of this Lease.
e. Lessee hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Lessee being
11
evicted or dispossessed for any cause, or in the event of Lessor obtaining
possession of the Demised Premises, by reason of the violation by Lessee of
any of the covenants or conditions of this Lease, or otherwise. Lessee also
waives any demand for possession of the Demised Premises, and any demand for
payment of rent and any notice of intent to re-enter the Demised Premises, or
of intent to terminate this Lease, other than the notices above provided in
this Article, and waives any and every other notice or demand prescribed by
any applicable statutes or laws.
f. No remedy herein or elsewhere in this Lease or otherwise by law,
statute or equity, conferred upon or reserved to Lessor or Lessee shall be
exclusive of any other remedy, but shall be cumulative, and may be exercised
from time to time and as often as the occasion may arise.
COVENANTS TO HOLD HARMLESS:
18. Unless the liability for damage or loss is caused by the negligence of
Lessor, its agents or employees, Lessee shall hold harmless Lessor from any
liability for damages to any person or property in or upon the Demised Premises
and the Premises, including the person and the property of Lessee and its
employees and all persons in the Building at its or their invitation or
sufferance, and from all damages resulting from Lessee's failure to perform the
covenants of this Lease. All property kept, maintained or stored on the Demised
Premises shall be so kept, maintained or stored at the sole risk of Lessee.
Lessee agrees to pay all sums of money in respect of any labor, service,
materials, supplies or equipment furnished or alleged to have been furnished to
Lessee in or about the Premises, and not furnished on order of Lessor, which may
be secured by any Mechanic's Materialmen's or other lien to be discharged at the
time performance of any obligation secured thereby matures, provided that Lessee
may contest such lien, but if such lien is reduced to final judgment and if such
judgment or process thereon is not stayed, or if stayed and said stay expires,
then and in each such event, Lessee shall forthwith pay and discharge said
judgment. Lessor shall have the right to post and maintain on the Demised
Premises, notices of non-responsibility under the laws of the State of
Minnesota.
NON-LIABILITY:
19. Subject to the terms and conditions of Article 14 hereof, Lessor shall not
be liable for damage to any property of Lessee or of others located on the
Premises, nor for the loss of or damage to any property of Lessee or of others
by theft or otherwise. Lessor shall not be liable for any injury or damage to
persons or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or snow or leaks from any part of the Premises or from
the pipes, appliances, or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any other cause of whatsoever
nature. Lessor shall not be liable for any such damage caused by other Lessees
or persons in the Premises, occupants of adjacent property, of the buildings, or
the public or caused by operations in construction of any private, public or
quasi-public work. Lessor shall not be liable for any latent defect in the
Demised Premises. All property of Lessee kept or stored on the Demised Premises
shall be so kept or stored at the risk of Lessee only and Lessee shall hold
Lessor harmless from any claims arising out of damage to the same, including
subrogation claims by Lessee's insurance carrier.
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SUBORDINATION:
20. This Lease shall be subordinated to any mortgages that may now exist or
that may hereafter be placed upon the Demised Premises and to any and all
advances made thereunder, and to the interest upon the indebtedness evidenced by
such mortgages, and to all renewals, replacements and extensions thereof. In
the event of execution by Lessor after the date of this Lease of any such
mortgage, renewal, replacement or extension, Lessee agrees to execute a
subordination agreement with the holder thereof which agreement shall provide
that:
a. Such holder shall not disturb the possession and other rights of
Lessee under this Lease so long as Lessee is not in default hereunder,
b. In the event of acquisition of title to the Demised Premises by such
holder, such holder shall accept the Lessee as Lessee of the Demised Premises
under the terms and conditions of this Lease and shall perform all the
obligations of Lessor hereunder, and
c. The Lessee shall recognize such holder as Lessor hereunder. Lessee
shall, upon receipt of a request from Lessor therefor, execute and deliver to
Lessor or to any proposed holder of a mortgage or trust deed or to any proposed
purchaser of the Premises, a certificate in recordable form, certifying that
this Lease is in full force and effect, and that there are no offsets against
rent nor defenses to Lessee's performance under this Lease, or setting forth any
such offsets or defenses claimed by Lessee, as the case may be.
ASSIGNMENT OR SUBLETTING:
21. Lessee agrees to use and occupy the Demised Premises throughout the entire
term hereof for the purpose of purposes herein specified and for no other
purposes, in the manner and to substantially the extent now intended, and not to
transfer or assign this Lease or sublet said Demised Premises, or any part
thereof, whether by voluntary act, operation of law, or otherwise, without
obtaining the prior consent of Lessor in each instance. Lessee shall seek such
consent of Lessor by a written request therefor, setting forth such information
as Lessor may deem necessary. Lessor agrees not to withhold consent
unreasonably. Consent by Lessor to any assignment of this Lease or to any
subletting of the Demised Premises shall not be a waiver of Lessor's rights
under this Article as to any subsequent assignment or subletting. Lessor's
rights to assign this Lease are and shall remain unqualified. No such
assignment or subleasing shall relieve the Lessee from any of Lessee's
obligations in this Lease contained, nor shall any assignment or sublease or
other transfer of this Lease be effective unless the assignee, sublessee or
transferee shall at the time of such assignment, sublease or transfer, assume in
writing for the benefit of Lessor, its successors or assigns, all of the terms,
covenants and conditions of this Lease thereafter to be performed by Lessee and
shall agree in writing to be bound thereby. Should Lessee sublease in
accordance with the terms of this Lease, fifty percent (50%) of any increase in
rental received by Lessee over the per square foot rental rate which is being
paid by Lessee shall be forwarded to and retained by Lessor, which increase
shall be in addition to the Base Rent and Additional Rent due Lessor under this
Lease.
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ATTORNMENT:
22. In the event of a sale or assignment of Lessor's interest, in the Premises,
or the Building in which the Demised Premises are located, or this Lease, or if
the Premises come into custody or possession of a mortgagee or any other party
whether because of a mortgage foreclosure, or otherwise, Lessee shall attorn to
such assignee or other party and recognize such party as Lessor hereunder;
provided, however, Lessee's peaceable possession will not be disturbed so long
as Lessee faithfully performs its obligations under this Lease. Lessee shall
execute, on demand, any attornment agreement required by any such party to be
executed, containing such provisions and such other provisions as such party may
require.
NOVATION IN THE EVENT OF SALE:
23. In the event of the sale of the Demised Premises, Lessor shall be and
hereby is relieved of all the covenants and obligations created hereby accruing
from and after the date of sale, and such sale shall result automatically in the
purchaser assuming and agreeing to carry out all the covenants and obligations
of Lessor herein. Notwithstanding the foregoing provisions of this Article,
Lessor, in the event of a sale of the Demised Premises, shall cause to be
included in this agreement of sale and purchase a covenant whereby the purchaser
of the Demised Premises assumes and agrees to carry out all of the covenants and
obligations of Lessor herein.
The Lessor agrees at any time and from time to time upon not less than ten
(10) days prior written request by the Lessor to execute, acknowledge and
deliver to the Lessor a statement in writing certifying that this Lease is
unmodified and in full force and effect as modified and stating the
modifications, and the dates to which the basic rent and other charges have been
paid in advance, if any, it being intended that any such statement delivered
pursuant to this paragraph may be relied upon by any prospective purchaser of
the fee or mortgagee or assignee of any mortgage upon the fee of the Demised
Premises.
SUCCESSORS AND ASSIGNS:
24. The terms, covenants and conditions hereof shall be binding upon and inure
to the successors and assigns of the parties hereto.
REMOVAL OF FIXTURES:
25. Notwithstanding anything contained in Article 8, 29 or elsewhere in this
Lease, if Lessor requests then Lessee will promptly remove at the sole cost and
expense of Lessee all fixtures, equipment and alterations made by Lessee
simultaneously with vacating the Demised Premises and Lessee will promptly
restore said Demised Premises to the condition that existed immediately prior to
said fixtures, equipment and alterations having been made all at the sole cost
and expense of Lessee.
QUIET ENJOYMENT:
26. Lessor warrants that it has full right to execute and to perform this Lease
and to grant the estate demised, and that Lessee, upon payment of the rents and
other amounts due and the
14
performance of all the terms, conditions, covenants and agreements on Lessee's
part to be observed and performed under this Lease, may peaceably and quietly
enjoy the Demised Premises for the business uses permitted hereunder, subject,
nevertheless, to the terms and conditions of this Lease.
RECORDING:
27. Lessee shall not record this Lease without the written consent of Lessor.
However, upon the request of either party hereto, the other party shall join in
the execution of the Memorandum lease for the purposes of recordation. Said
Memorandum lease shall describe the parties, the Demised Premises and the term
of the Lease and shall incorporate this Lease by reference. This Article 27
shall not be construed to limit Lessor's right to file this Lease under Article
22 of this Lease.
OVERDUE PAYMENTS:
28. All monies due under this Lease from Lessee to Lessor shall be due on
demand, unless otherwise specified and if not paid when due, shall result in the
imposition of a service charge for such late payment in the amount of Eighteen
percent (18%) of the amount due.
SURRENDER:
29. On the Expiration Date or upon the termination hereof upon a day other than
the Expiration Date, Lessee shall peaceably surrender the Demise Premises
broom-clean in good order, condition and repair, reasonable wear and tear only
excepted. On or before the Expiration Date or upon termination of this Lease on
a day other than the Expiration Date, Lessee shall, at its expense, remove all
trade fixtures, personal property and equipment and signs from the Demised
Premises and any property not removed shall be deemed to have been abandoned.
Any damage caused in the removal of such items shall be repaired by Lessee and
at its expense. All alterations, additions, improvements and fixtures (other
than trade fixtures) which shall have been made or installed by Lessor or Lessee
upon the Demised Premises and all floor covering so installed shall remain upon
and be surrendered with the Demised Premises as a part thereof, without
disturbance, molestation or injury, and without charge, at the expiration or
termination of this Lease. If the Demised Premises are not surrendered on the
Expiration Date or the date of termination, Lessee shall indemnify Lessor
against loss or liability, claims, without limitation, made by any succeeding
Lessee founded on such delay. Lessee shall promptly surrender all keys for the
Demised Premises to Lessor at the place than fixed for payment of rent and shall
inform Lessor of combinations of any locks and safes on the Demised Premises.
HOLDING OVER:
30. In the event of a holding over by Lessee after expiration or termination of
this Lease without the consent in writing of Lessor, Lessee shall be deemed a
lessee at sufferance and shall pay rent for such occupancy at the rate of twice
the last-current aggregate Base and Additional Rent, prorated for the entire
holdover period, plus all attorneys' fees and expenses incurred by Lessor in
enforcing its rights hereunder, plus any other damages occasioned by such
holding over.
15
Except as otherwise agreed, any holding over with the written consent of Lessor
shall constitute Lessee with a month-to-month lessee.
ABANDONMENT:
31. In the event Lessee shall remove its fixtures, equipment or machinery or
shall vacate the Demised Premises or any part thereof prior to the Expiration
Date of this Lease, or shall discontinue or suspend the operation of its
business conducted on the Demised Premises for a period of more than thirty
(30) consecutive days (except during any time when the Demised Premises may be
rendered intenantable by reason of fire or other casualty),then in any such
event Lessee shall be deemed to have abandoned the Demised Premises and Lessee
shall be in default under the terms of this Lease.
CONSENTS BY LESSOR:
32. Whenever provision is made under this Lease for Lessee securing the consent
or approval by Lessor, such consent or approval shall only be in writing.
NOTICES:
33. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent by registered or certified return
receipt mail to Lessee at Bio-Metrics Systems, Inc., 9932 West 74th Street,
Eden Prairie, MN 55344 and to Lessor at the address then fixed for the payment
of rent as provided in Article 4 of this Lease, and either party may by like
written notice at any time designate a different address to which notices
shall subsequently be sent or rent to be paid.
RULES AND REGULATIONS:
34. Lessee shall observe and comply with reasonable rules and regulations as
Lessor may prescribe, on written notice to Lessee for the safety, care and
cleanliness of the Building.
INTENT OF PARTIES:
35. Except as otherwise provided herein, the Lessee covenants and agrees that
if it shall any time fail to pay any such cost or expense, or fail to take out,
pay for, maintain or deliver any of the insurance policies above required, or
fail to make any other payment or perform any other act on its part to be made
or performed as in this Lease provided, then the Lessor may, but shall not be
obligated so to do, and without notice to or demand upon the Lessee and without
waiving or releasing the Lessee from any obligations of the Lessee in this Lease
contained, pay any such cost or expense, effect any such insurance coverage and
pay premiums therefore, and may make any other payment or perform any other act
on the part of the Lessee to be made and performed as in this Lease provided, in
such manner and to such extent as the Lessor may deemed desirable, and in
exercising any such right, to also pay all necessary and incidental costs and
expenses, employ counsel and incur and pay reasonable attorneys' fees. All sums
so paid by Lessor and all necessary and incidental costs and expenses in
connection with the performance of any such act
16
by the Lessor, together with interest thereon at the rate of eighteen percent
(18%) per annum from the date of making of such expenditure, by Lessor, shall be
deemed additional rent hereunder, and shall be payable to Lessor on demand.
Lessee covenants to pay any such sum or sums with interest as aforesaid and the
Lessor shall have the same rights and remedies in the event of the non-payment
thereof by Lessee as in the case of default by Lessee in the payment of the Base
Rent payable under this Lease.
GENERAL:
36. The Lease does not create the relationship of principal and agent or of
partnership or of joint venture or of any association between Lessor and Lessee,
the sole relationship between the parties hereto being that of Lessor and
Lessee.
No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect any default other
than the default specified in the express waiver and that only for the time and
to the extent therein stated. One or more waivers by Lessor shall not then be
construed as a waiver of subsequent breach of the same covenant, term or
condition. The consent to or approval by Lessor of any act by Lessee requiring
Lessor's consent or approval shall not waive or render unnecessary Lessor's
consent to or approval of any subsequent similar act by Lessee shall be
construed to be both a covenant and a condition. No action required or
permitted to be taken by or on behalf of Lessor under the terms or provisions of
this Lease shall be deemed to constitute an eviction or disturbance of Lessee's
possession of the Demised Premises. All preliminary negotiations are merged
into and incorporated in this Lease. The laws of the State of
shall govern the validity, performance and enforcement of this Lease.
a. This Lease and the exhibits, if any, attached hereto and forming a
part hereof, constitute the entire agreement between Lessor an Lessee affecting
the Demised Premises and there are no other agreements, either oral or written,
between them other than are herein set forth. No subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Lessor or
Lessee unless reduced to writing and executed in the same form and manner in
which this Lease is executed.
b. If any agreement, covenant or condition of this Lease or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such agreement, covenant or condition to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and each agreement, covenant or condition of this Lease shall be valid
and be enforced to the fullest extent permitted by law.
HAZARDOUS MATERIAL:
37. a. The Premises hereby leased shall be used by and/or at the sufferance
of Lessee only for the purpose set forth in Article 11 above and for no other
purposes. Lessee shall not use or permit the use of the Premises in any manner
that will tend to create waster or a nuisance, or
17
will tend to unreasonably disturb other Lessees in the Building or the Project.
Lessee, its employees and all persons visiting or doing business with Lessee in
the Premises shall be bound by and shall observe the Building Rules and
Regulations attached to this Lease as Exhibit "C", and such further and other
reasonable rules and regulations made hereafter by Lessor relating to the
Premises, the Building or the Project of which notice in writing shall be given
to the Lessee, and all such rules and regulations shall be deemed to be
incorporated into and form a part of this Lease.
b. Lessee covenants throughout the Lease Term, at Lessee's sole cost and
expense, promptly to comply with all laws and ordinances and the orders, rules
and regulations and requirements of all federal, state and municipal governments
and appropriate departments, commissions, boards, and officers thereof, and the
orders, rules and regulations of the Board of Fire Underwriters where the
Premises are situated, or any other body now or hereafter well as extraordinary,
and whether or not the same require structural repairs or alterations, which may
be applicable to the Premises, or the use or manner of use of the Premises.
Lessee will likewise observe and comply with the requirements of all policies of
public liability, fire and all other policies of insurance at any time in force
with respect to the buildings and improvements on the Premises and the equipment
thereof.
c. In the event any Hazardous Material (hereinafter defined) is brought
or caused to be brought into or onto the Premises, the Building or the Project
by Lessee, Lessee shall handle any such material in compliance with all
applicable federal, state and/or local regulations. For purposes of this
Article, "Hazardous Material" means and includes any hazardous, toxic or
dangerous waste, substance or material defined as such in (or for purposes of)
the Comprehensive Environmental Response, Compensation, and Liability Act, any
so-called "Superfund" or "Superlien" law, or any federal, state or local
statute, law, ordinance, code, rule, regulation, order decree regulating,
relating to, or imposing liability or standards of conduct concerning, any
hazardous, toxic or dangerous waste, substance or material, as now or at any
time hereafter in effect. Lessee shall submit to Lessor on an annual basis
copies of its approved hazardous materials communication plan, OSHA monitoring
plan, and permits required by the Resource Recovery and Conservation Act of
1976, if Lessee is required to prepare, file or obtain any such plans or
permits. Lessee will indemnify and hold harmless Lessor from any losses,
liabilities, damages, costs or expenses (including reasonable attorneys' fees)
which Lessor may suffer or incur as a result of Lessee's introduction into or
onto the Premises of any Hazardous Material. This Article shall survive the
expiration or sooner termination of this Lease.
CAPTIONS:
38. The captions are inserted only as a matter of convenience and for
reference, and in no way define, limit or describe the scope of this Lease nor
the intent or any provision thereof.
EXHIBITS
39. Reference is made to Exhibits A through ____________, inclusive, which
Exhibits are attached hereto and made a part hereof.
18
EXHIBIT DESCRIPTION
------- -----------
Exhibit A Legal Description
Exhibit B Demised Premises
Exhibit D Improvements
Exhibit E Sign Criteria
Exhibit C Addendum to Lease
40. Submission of this instrument to Lessee or proposed Lessee or his agents or
attorneys for examination, review, consideration or signature does not
constitute or imply an offer to lease, reservation of space, or option to lease,
and this instrument shall have no binding legal effect until execution hereof by
both Lessor/Owner and Lessee or its agents.
41. It is agreed and understood that Larry AuBuchon, agent or broker with Welsh
Companies, Inc. is representing Prairieview Jack, Ltd., Lessor, and no agent or
broker with anyone is representing Bio-Metrics Systems, Inc., Lessee.
See attached Addendum for additional provisions.
19
IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to be
executed in form and manner sufficient to bind them at law, as of the day and
year first above written.
Lessee: Bio-Metrics Systems, Inc. Lessor: Prairieview Jack, Ltd.,
(a Minnesota Corporation) by Amberjack, Ltd. its
General Partner, by Welsh
Companies, Inc., its
Manager
- --------------------------------------- ----------------------------
By: /s/ Dale R. Olseth By: /s/ Richard P. McGinley
---------------------------------- -----------------------
Dale R. Olseth
Its: Its: Vice President
---------------------------------- -----------------------
By: /s/ Robert Zabach
-----------------------
Its: Vice President
-----------------------
STATE OF
COUNTY OF ss.:
On this 22 day of Nov., 1991, personally came before me, a Notary Public
within and for said County, _____________ and ______________, to me well known
to be the same persons described in and who executed the foregoing instrument,
and acknowledged that they executed the same as their free act and deed.
/s/ Elizabeth H. Trad
---------------------------------------------
Notary Public
My commission expires: Dec. 27, 1993
-----------------------
STATE OF
COUNTY OF ss.:
On this ________ day of ________, 19___, personally came before me, a Notary
Public within and for said County, _________________ and _________________, to
me well known to be the same
20
persons described in and who executed the foregoing instrument, and acknowledged
that they executed the same as their free act and deed.
---------------------------------------------
Notary Public
My commission expires:
-----------------------
21
EXHIBIT "A"
LEGAL DESCRIPTION
Lot 1, Block 1, Norseman Industrial Park Fourth Addition according to the plat
on file and of record in the office of the County Recorder, Hennepin
County, Minnesota
EXHIBIT C
ADDENDUM TO LEASE
DATED NOVEMBER 14, 1991
BY AND BETWEEN PRAIRIEVIEW JACK LTD. (LESSOR)
AND BIO-METRICS SYSTEMS, INC. (LESSEE)
Article 42. DEMISED PREMISES.
The Demised Premises from January 1, 1992, through June 30, 1994, will be as
described on Page 1 of this Lease dated November 14, 1991, that this Addendum is
part of. Commencing July 1, 1994, through the "Expiration Date" (December 31,
1996) the Demised Premises will be increased in size to include 9936 West 74th
Street consisting of Bays 9 and 10 which consist of approximately 6,159 square
feet (3,200 square feet of office space and 2,959 square feet of warehouse
space). The total square footage of the Demised Premises as of July 1, 1994,
through the Expiration Date will consist of approximately 32,274 square feet.
Article 43. BASE RENT.
The monthly base rent for the Premises is as follows:
January 1, 1992, through and including December 31, 1992: $9,047.25 per month.
January 1, 1993, through and including June 30, 1994: $10,135.38 per month.
July 1, 1994, through and including June 30, 1995: $13,404.13 per month.
July 1, 1995, through and including December 31, 1995: $14,081.75 per month.
January 1, 1996, through and including December 31, 1996: $14,748.88 per month.
Article 44. PERCENTAGE OF REAL ESTATE TAXES AND ANNUAL AGGREGATE OPERATING
EXPENSES.
Commencing July 1, 1994, the Demised Premises is expanded as indicated in
Article 42, and the Lessee's proportionate share of Additional Rent as specified
in Article 3 attributed to the Premises is also increased from Forty and 87/100
percent to Fifty and 50/100 percent (50.50%) until the Expiration Date of
December 31, 1996.
Article 45. IMPROVEMENT ALLOWANCE FOR EXPANSION SPACE.
The Lessor will provide Sixty-Five Thousand Fifty-One and 00/100 Dollars
($65,051.00) for tenant improvements according to Exhibit D.1 and D.2 to be done
in 3,134 square feet of 9922 West 74th Street and the 6,159 square feet of 9936
West 74th Street both being added to the Lessee's Demised Premises with the
execution of this Lease. Improvements to the Demised
Premises will be approved by Lessor and Lessee by each initialing Exhibit D.1
and Exhibit D.2, the construction plans for the tenant improvements in 9922 and
9936 West 74th Street. Any amount of money spent over the tenant improvement
allowance of $65,051.00 on improvements to 9922 and 9936 West 74th Street up to
an additional Five Thousand and 00/100 Dollars ($5,000.00) will be paid for
initially by the Lessor and repaid for by the Lessee over the remaining term of
the Lease with Ten Percent (10%) interest. Any amount of money spent on tenant
improvements above Seventy Thousand Fifty-One and 00/100 Dollars ($70,051.00)
will immediately upon invoicing be paid for by the Lessee. All improvements to
9922 West 74th Street, Bay 15, will be completed prior to February 15, 1991.
All improvements to 9936 West 74th Street, Bays 9 and 10, will be completed
prior to October 1, 1994. The tenant improvement allowance will in no instance
be refunded or credited to the Lessee if not spent on construction of the
Demised Premises.
Article 46. FIRST OPPORTUNITY TO LEASE ADDITIONAL SPACE.
Provided Lessee is not in default and has performed all of its obligations
herein, Lessee shall have the First Opportunity to lease such other contiguous
space on the ground floor of the Premises as it becomes available for leasing
during the term of this Lease for a term coterminous with this Lease and at
rental rates and upon such other terms and conditions, other than rent-free
periods, as are being offered by Lessor to the general public for such space.
Upon notification in writing by Lessor that such space is available, Lessee
shall have ten (10) business days in which to elect in writing so to lease such
space, in which event the Lease for same shall commence not more than thirty
(30) days after such space becomes vacant.
In the event Lessee declines or fails to elect so to lease such space, then the
First Opportunity hereby granted shall automatically terminate and shall
thereafter be null and void as to such space.
It is understood that the First Opportunity shall not be construed to prevent
any tenant in the building from extending or renewing its Lease.
This First Opportunity hereby granted is personal to Bio-Metrics Systems, Inc.,
and is not transferable. In the event of any assignment or subletting under
this Lease, this First Opportunity shall automatically terminate and shall
thereafter be null and void.
Article 47.
With the full execution and acceptance of this Lease and the removal of any
contingency, it is understood and agreed that Lessor and Lessee will execute
Termination of Lease Agreements terminating Leases dated May 24, 1982, and April
22, 1986, and January 8, 1987, and any additional Amendments or Agreements.
Article 48.
It is understood and agreed that this Lease is contingent upon the Lessor's
ability to provide 9922 West 74th Street West consisting of 3,134 square feet
available for lease to the Lessee and therefore a Termination Agreement will
have to be executed between the Lessor and North Central Sales, the current
occupant of 9922 West 74th Street.
EXHIBIT E
Prairieview Business Center
9910-9950 - 74th Street
SIGN CRITERIA
1. Tenant identification shall be by way of 15" dimensional Helvetica upper
class letters painted ivory in color and mounted above the bay windows.
Signs shall be centered and shall not extend closer than 18" to the edge of
the bay. In some cases, letters of a smaller size will be permitted for a
portion of the message. No logos will be permitted.
2. Identification will be permitted, including logos, on the glass entry doors
to the units. Front doors will be identified with 3" Helvetica, ivory
colored, letters.
3. Rear identification shall be with bronze plastic plates, 8" in width x
length of name, with 6" ivory Helvetica upper case flat letters affixed.
4. Proposed sign layouts may be submitted to Welsh Companies for approval
prior to fabrication. The city building inspector will not issue sign
permits unless the application is accompanied by a sign layout with written
approval from Welsh Companies on the layout.
5. To facilitate preparation of approved signage, a sign consultant has been
appointed for the project. He is Richard Walsh, 561 Third Street,
Excelsior, Minnesota 55331. Telephone: 474-6943. Tenants are requested to
work with him on proposed signage layouts.
AGREEMENT TO AMEND AND EXTEND LEASE
TO LEASE DATED November 18, 1991 BY AND BETWEEN Prairieview Jack, Ltd.,
AmberJack, Ltd., its General Partner, Welsh Companies, Inc., its Manager, AS
LESSOR AND Bio-Metric Systems, Inc. (A Minnesota Corporation), as LESSEE.
THIS AMENDMENT TO LEASE, entered into and made as of the ______ day of
_____________________________, 1993, by and between Prairieview Jack, Ltd.,
AmberJack, Ltd., its General Partner, Welsh Companies, Inc., its Manager, as
Lessor and Bio-Metric Systems, Inc. (A Minnesota Corporation), as Lessee.
WITNESSETH:
WHEREAS, Lessor and Lessee have heretofore entered into a certain lease,
dated November 18, 1991 (the "Lease"), of a certain space at 9922, 9924, 9932,
9942 West 74th Street, Eden Prairie, Minnesota, also known as Bays 7, 8, 11, 12,
13, 14 & 15 of the Prairieview Business Center (the "Premises"), upon terms and
conditions described in said Lease; and
WHEREAS, Lessor and Lessee desire to amend said lease and extend the term
as described below:
NOW, THEREFORE, in consideration of the rents reserved and of the covenants
and agreements herein set forth, it is agreed that the Lease be hereby amended
from and after September 1, 1993, hereof as follows:
1. DEMISED PREMISES: The Demised Premises are as described above in this
Agreement to Amend and Extend Lease through August 31, 1993. Commencing
September 1, 1993, through June 30, 1994, the Demised Premises shall be
increased in size to include 9916 West 74th Street commonly known as Bay 16,
consisting of approximately 3,134 rentable square feet. Commencing July 1,
1994, through the Expiration Date, the Demised Premises will be increased in
size to include 9936 West 74th Street as described in Article 42, Exhibit C of
the Lease dated November 18, 1991. The total square footage of the Demised
Premises as of September 1, 1993, through June 30, 1994, shall be approximately
29,249 square feet. The total square footage of the Demised Premises as of July
1, 1994, through the Expiration Date shall be approximately 35,408 square feet.
2. TERM: Effective September 1, 1993, the Lease Term shall be extended
by thirty-six (36) months to expire on December 31, 1999, unless sooner
terminated as provided herein.
3. BASE RENT: The monthly base rent as defined in Article 2 of the Lease
and Article 43 of Exhibit C, Addendum to Lease, both dated November 18, 1991,
shall be amended as follows:
Base Rent/Month
---------------
September 1, 1993, through and including June 30, 1994 $11,735.46
July 1, 1994, through and including June 30, 1995 15,069.50
July 1, 1995, through and including June 30, 1996 15,807.17
July 1, 1996, through and including June 30, 1997 16,544.83
July 1, 1997, through and including June 30, 1998 17,282.50
July 1, 1998, through and including December 31, 1999 18,020.17
4. ADDITIONAL RENT: Article 3 of the Lease Agreement and Article 44 of
the Addendum, shall be amended by deletion of the percentages 40.87% and 50.50%
respectively and inserting, in lieu thereof, the following percentages and their
commencement dates: Commencing September 1, 1993, the Demised Premises shall be
expanded as indicated in Article 1 of this Agreement and the Lessee's
proportionate share of Additional Rent, as described in Article 3 of the Lease
Agreement, shall be increased to Forty-five and 77/100 percent (45.77%).
Commencing July 1, 1994, the Demised Premises shall be expanded as indicated in
Article 42, Exhibit C of the Lease and Lessee's proportionate share of
Additional Rent shall be increased to Fifty-five and 41/100 percent (55.41%)
until the Expiration Date of December 31, 1999.
5. IMPROVEMENT ALLOWANCE: Lessor shall provide Lessee an allowance of
Twenty-One Thousand Nine Hundred Thirty-eight and 00/100 Dollars ($21,938.00)
for tenant improvements to the approximate 3,134 rentable square feet within
9916 West 74th Street as described in the attached Exhibit E. Said allowance is
in addition to the allowance for 9922 and 9936 West 74th Street as described in
Article 45 of the Addendum to Lease and shall be used solely for improvements to
the space within 9916 West 74th Street. The allowance shall be available to
Lessee upon the delivery of receipts to Lessor's representative for work
completed to the Demised Premises. All improvements to 9916 West 74th Street
shall be completed prior to November 30, 1993. Any portion of the Allowance not
used for improvements to the Demised Premises or used for the purchase of Tenant
trade fixtures shall not be refunded or credited to Lessee.
6. REMOVAL OF FIXTURES: Notwithstanding anything to the contrary
contained in Article 25, 8 and 29 of the Lease, Lessee shall provide Lessor with
a written inventory of all trade fixtures and equipment that Lessee plans to
remove from Premises a minimum of thirty (30) days prior to the planned date of
vacancy. Trade fixtures shall include, but not be limited to that heating,
ventilating, and air conditioning equipment that serves Lessee's specialized
laboratory equipment or processes, an underground chemical receptor tank located
within 9942 West 74th Street, a steel HVAC support structure within 9942 West
74th Street and concrete block chemical storage room located in 9942 West 74th
Street. Upon removal of the chemical receptor tank Lessee shall provide Lessor
with test results from a licensed environmental testing company certifying that
the soil and groundwater surrounding said tank are free of hazardous or
deleterious substances which may have originated from the tank. Any soil or
groundwater found to contain such hazardous or deleterious materials shall be
disposed of at Lessee's sole expense in a manner and location approved by the
Minnesota Pollution Control Agency and any other local, State or Federal
agencies governing the disposal of such materials. Prior to filling of the
cavity which contained the chemical receptor tank, Lessee shall provide Lessor
with a plan
prepared by a registered architect or engineer for approval. All penetrations
through the roof of the Demised Premises or elsewhere in the building created by
or the result of removal of Lessee's fixtures shall be repaired by a contractor
approved by the Lessor.
7. FIRST OPPORTUNITY TO LEASE ADDITIONAL SPACE: Provided Lessee is not
in default and has performed all of it's obligations herein, Lessee shall have
the First Opportunity to Lease such other contiguous space as it becomes
available for Lease as described in Article 46 of the Addendum to Lease, dated
November 18, 1991.
8. OPTION TO EXTEND LEASE TERM:
a. Provided Tenant is not in default hereunder and has performed al of
its covenants and obligations hereunder, Tenant shall have the option to extend
the Term of this Lease (hereinafter the "Option") for one consecutive period of
two (2) years upon the same terms and conditions, except the Base Rent shall be
adjusted as set forth in this Section 8.
b. Should Tenant exercise its Option, Base Rent shall be as follows:
Period Monthly Base Rent
------ -----------------
January 1, 2000 through and
including December 31, 2000 $18,855.33
January 1, 2001 through and
including December 31, 2001 $19,593.00
Base Rent rates shall apply to the Option only. Base Rent for any
other renewal period shall be renegotiated by Landlord and Tenant.
c. Tenant shall exercise said Option by giving written notice to Landlord
not later than December 31, 1998. Thereafter Landlord shall advise Tenant
within ten (10) business days of the Base Rent for the Option Period, and Tenant
shall then have ten (10) business days within which to revoke in writing its
exercise of the Option.
d. It is understood and agreed that this Option is personal to Bio-Metric
Systems, Incorporated and is not transferrable. In the event of any assignment
or subleasing of any or all of the Demised Premises, said Option shall be null
and void.
9. The terms and conditions of this Agreement to Amend and Extend Lease
are contingent upon full execution of a termination agreement with Challenge
Printing for the 3,134 rentable square feet located in Bay 16.
Except as hereinabove set forth, all terms, provisions and covenants of the
Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written.
LESSEE: Bio-Metric Systems, Inc. LESSOR: Prairieview Jack, Ltd.,
(A Minnesota Corporation) AmberJack, Ltd.,
its General Partner, Welsh Companies,
Inc., its Manager
By: /s/ Dale R. Olseth By:
------------------ ------------------------------
Dale R. Olseth E. Paul Dunn
Its: President Its: Executive Vice President
By: ------------------------------
Richard P. McGinley
Its: Vice President
AMENDMENT #2
TO LEASE DATED November 18, 1991 BY AND BETWEEN
Prairieview Jack Ltd., AmberJack, Ltd. Its General Partner,
Welsh Companies, Inc., Its Manager, AS LANDLORD
AND Bio-Metric Systems, Inc. (A Minnesota Corporation), AS TENANT
THIS AMENDMENT TO LEASE, entered into and made as of the 10th day of
November, 1993, by and between Prairieview Jack Ltd., AmberJack, Ltd. Its
General Partner, Welsh Companies, Inc. Its Manager, as Landlord and Bio-Metric
Systems, Inc. (A Minnesota Corporation), as Tenant.
WITNESSETH:
WHEREAS, Landlord and Tenant have heretofore entered into a certain lease,
dated November 18, 1991 and amended September 1, 1993 (the "Lease"), of a
certain space at 9916, 9922, 9924, 9932, 9942 West 74th Street, Eden Prairie,
Minnesota, also known as Bays 7, 8, 11, 12, 13, 14, 15 & 16 (the "Premises"),
upon terms and conditions described in said Lease; and
WHEREAS, Landlord and Tenant desire to amend said lease as described below:
NOW, THEREFORE, in consideration of the rents reserved and of the covenants
and agreements herein set forth, it is agreed that the Lease be hereby amended
from and after the date hereof as follows:
1. The time allotment for use of the tenant improvement allowance in
Paragraph 5 - IMPROVEMENT ALLOWANCE of the Agreement to Amend and Extend Lease,
shall be extended to January 31, 1994.
2. Effective JANUARY 17, 1994, BioMetric Systems, Inc. shall be known as
BSI Corporation (A Minnesota Corporation). All reference to Bio-Metric Systems,
Inc. in the Lease, Amendment #1, and Amendment #2 shall be the same as if it
were specifically naming BSI Corporation.
Except as hereinabove set forth, all other terms, provisions and covenants
of the Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
TENANT: BSI Corporation LANDLORD: Prairieview Jack, Ltd.,
(A Minnesota Corporation) Its General Partner,
Welsh Companies, Inc.
Its Manager
By: /s/ Dale R. Olseth By: /s/ E. Paul Dunn
------------------ --------------------------------
Dale R. Olseth E. Paul Dunn
Its: President Its: Executive Vice President
By: /s/ Richard P. McGinley
---------------------------------
Richard P. McGinley
Its: Vice President
2016498-1
011987
BIO-METRIC SYSTEMS, INC.
1987 INCENTIVE STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) The "Company" shall mean BIO-METRIC SYSTEMS, INC., a Minnesota
corporation, and any subsidiary of the Company.
(b) "Common Stock" shall mean voting common stock of the Company.
(c) The "Plan" means the Bio-Metric Systems, Inc. 1987 Incentive Stock
Option Plan, as amended hereafter from time to time, including the form of
Option Agreement.
(d) The "Optionee" is an employee of the Company to whom an option has
been granted under the Plan.
(e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(f) "Committee" shall mean a Committee of three or more persons who may
be appointed by, and serve at the pleasure of the Board and shall have such
powers and authority as are granted to it by the Board. Each of the
members of the Committee shall be a "disinterested" person within the
meaning of Rule 16b-3, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934. As of the effective
date of the Plan, a "disinterested" person under Rule 16b-3 means a person
who, among other things, is not eligible and has not at any time within one
year prior to appointment to the Committee been eligible to participate in
the Plan or in any other plan of the Company entitling participants to
acquire stock, stock options or stock appreciation rights.
-1-
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company by
facilitating the employment and retention of competent personnel and by
furnishing incentive to employees upon whose efforts the success of the Company
will depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "Incentive Stock Options" under
the provisions of Section 422A of the Internal Revenue Code. Adoption of this
Plan shall be and is expressly subject to the condition of approval by the
shareholders of the Company within twelve (12) months before or after the
adoption of such Plan by the Board of Directors.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date such Plan is adopted by the
Board of Directors of the Company.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(the "Board") or, to the extent empowered by the Board, by the Stock Option
Committee as defined in Section 1 (f) of this Plan. The Board shall have all of
the powers vested in it under the provisions of the Plan, including but not
limited to exclusive authority (where applicable and within the limitations
described herein) to determine the employees to whom, and the time or times at
which, options shall be granted, the number of shares subject to each option and
the option price and terms and conditions of each option. Without limiting the
generality of the foregoing, the Board may, in its sole discretion, determine
the number of shares subject to an option in proportion to an employee's
compensation paid by the Company.
The Board, or the Committee if so empowered by the Board, shall have full
power and authority to administer and interpret the Plan, to make and amend
rules, regulations and guidelines for administering the Plan, to prescribe the
form and conditions of the respective stock option agreements (which may vary
from optionee to Optionee) evidencing each option and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's interpretation of the Plan, or the Committee's interpretation if so
empowered by the Board, and all actions taken and determinations made by it
pursuant to the power vested hereunder, shall be conclusive and binding on all
parties concerned. No member of the Board or the Committee shall be liable for
any action taken or determination made in good faith in connection with the
administration of the Plan.
-2-
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a ma3ority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board, or the Committee if so empowered by the Board, shall from time
to time, at its discretion and without approval of the shareholders, designate
those employees of the Company to whom stock options shall be granted.
Directors of the Company who are otherwise engaged as employees of the Company
may be designated as participants. The Board, or the Committee if so empowered
by the Board, may grant additional options to some or all participants then
holding options or may grant options solely or partially to new participants.
In designating participants, the Board, or the Committee, shall also determine
the number of shares to be optioned to each such participant.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of voting common stock. Two Hundred thousand (200,000) shares
of voting common stock shall be reserved and available for options under the
Plan; provided, however, that the total number of shares of Common Stock
reserved for options under this Plan shall be subject to adjustment as provided
in Section 11 of the Plan. In the event that any outstanding option under the
Plan for any reason expires or is terminated prior 'to the exercise thereof, the
shares of Common Stock allocable to the unexercised portion of such option shall
continue to be reserved for options under the Plan and may be optioned
hereunder.
SECTION 7.
LIMITATIONS ON OPTIONS
Effective for options granted after December 31, 1986, the aggregate fair
market value (determined as of the time an option is granted) of the stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year under this Plan and any other plans of the
Company under Section 422A of the Internal Revenue Code, shall not exceed One
Hundred Thousand Dollars ($100,000).
SECTION 8.
DURATION OF PLAN
Options may be granted pursuant to the Plan from time to time for a period
of ten (10) years from the earlier of the date the Plan is approved by the Board
of Directors or the date it is approved by the shareholders of the Company.
-3-
SECTION 9.
PAYMENT
Optionees shall pay for shares upon exercise of options granted pursuant to
this Plan with cash or certified check.
SECTION 10.
TERMS AND CONDITIONS OF OPTIONS
Each option granted pursuant to the Plan shall be evidenced by a written
stock option agreement (the "Option Agreement"). The Option Agreement shall be
in such form as may be approved by the Board, or the Committee if empowered by
the Board, from time to time and may vary from Optionee to Optionee; provided,
however, that each optionee and each Option Agreement shall comply with and be
subject to the following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares covered by the Option. The option price per
share shall not be less than one hundred percent (100%) of the fair market
value of the Common Stock per share on the date the Board or the Committee
grants the option; provided, however, that if an optionee owns stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of its parent or any subsidiary,
the option price per share of an option granted to such Optionee shall not
be less than one hundred ten percent (110%) of the fair market value of the
Common Stock per share on the date of the grant of the option. For
purposes hereof, "fair market value" of the Common Stock per share shall be
determined by the Board, or the Committee if so empowered by the Board, in
its sole discretion by applying principles of valuation with respect to all
such options. The Board shall have full authority and discretion in
establishing the option price and shall be fully protected in so doing. If
such stock is publicly traded as of the date the option is granted, the
"fair market value" of the Common Stock shall be the mean between the "bid"
and "asked" prices quoted by a recognized specialist in the Common Stock of
the Company on the date the option is granted, or if there are no quoted
"bid" and "asked" prices on such date, on the next preceding date for which
there are such quotes; provided that if such stock is then listed upon an
established stock exchange or exchanges, such "fair market value" shall be
the highest closing price of such stock on such stock exchange or exchanges
on the date the option is granted or, if no sale of such stock shall have
occurred on any stock exchange on that date, on the next preceding day on
which there was a sale of stock.
(b) TERM AND EXERCISABILITY OF OPTION. The term during which any option
granted under the Plan may be exercised shall be established in each case
by the Board, or the Committee if so empowered by the Board, but in no
event shall any option be exercisable during a term of more than five (5)
years after the date on which it is granted. The stock option agreement
shall state when the option becomes exercisable and shall also state the
maximum term during which the option may be exercised. In the event an
option is exercisable immediately, the manner of exercise of the option in
the event it is not
-4-
exercised in full immediately shall be specified in the stock option
agreement. The Board, or the Committee if so empowered by the Board, may
accelerate the exercise date of any option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) TRANSFER OF PPTION. No option shall be transferable, in whole or in
part, by the Optionee other than by will or by the laws of descent and
distribution and, during the Optionee's lifetime, the option may be
exercised only by the Optionee. If the Optionee shall attempt any transfer
of any option granted under the Plan during his lifetime, such transfer
shall be void and the option, to the extent not fully exercised, shall
terminate.
(d) OTHER PROVISIONS. The Option Agreement authorized under this Section
10 shall contain such other provisions as the Board, or the Committee if so
empowered by the Board, shall deem advisable, including, without
limitation, a provision granting the Company a repurchase right in the
event the optionee either (i) transfers or attempts to transfer stock
acquired pursuant to t e exercise of an option to an individual other than
a member of optionee's family or another employee of the Company or (ii)
terminates employment with the Company. Any such Option Agreement shall
also contain such limitations and restrictions upon the exercise of the
option as shall be necessary to ensure that such option will be considered
an "Incentive Stock Option" as defined in Section 422A of the Internal
Revenue Code or to conform to any change therein.
(e) HOLDING PERIOD. The disposition of any shares of Common Stock
acquired by an optionee pursuant to the exercise of an option described
above shall not be eligible for the favorable taxation treatment of Section
421(a) of the Internal Revenue Code unless any shares so acquired are held
by the Optionee for at least two (2) years from the date of the granting of
the option under which the shares were acquired and at least one year after
the acquisition of such shares pursuant to the exercise of such option. In
the event of an optionee's death, such holding period shall not be
applicable pursuant to Section 421(c)(1) of the Internal Revenue Code.
SECTION 11.
RECAPITALIZATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Common Stock covered by each outstanding option and the
price per share thereof shall be equitably adjusted by the Board of Directors to
reflect such change. Additional shares which may be credited pursuant to such
adjustment shall be subject to the same restrictions as are applicable to the
shares with respect to which the adjustment relates.
Unless otherwise provided in the option agreement, in the event of the sale
by the Company of substantially all of its assets and the consequent
discontinuance of its business. or in the event of a merger, exchange,
consolidation or liquidation of the Company, the Board of
-5-
Directors may in connection with the Board's adoption of the plan for sale,
merger, exchange, consolidation or liquidation, provide for the complete
termination of this Plan and cancellation of outstanding options not exercised
prior to a date (prior to the effectiveness of such sale, merger, exchange,
consolidation or liquidation) specified by the Board or for the continuance of
the Plan only with respect to the exercise of options which, under the terms of
Paragraph (b) of Section 10, were exercisable as of the date of adoption by the
Board of such plan for sale, merger, exchange, consolidation or liquidation;
provided, however, that in any event optionees holding options exercisable as of
the date of the Board's adoption of the plan for sale, merger, exchange,
consolidation or liquidation shall be given either (i) a reasonable time within
which to exercise such exercisable portions of their options prior to the
effectiveness of such sale, merger, exchange, consolidation or liquidation, or
(ii) the right to exercise their respective options as to an equivalent number
of shares of stock of the corporation succeeding the Company by reason of such
sale, merger, exchange, consolidation or liquidation. The grant of an option
pursuant to the Plan shall not limit in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure or to merge, exchange or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business or assets.
SECTION 12.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless and until
there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Common Stock to Optionee, the Board may require Optionee to (a)
represent that the shares of Common Stock are being acquired for investment and
not resale and to make such other representations as the Board shall deem
necessary or appropriate to qualify the issuance of the shares as exempt from
the Securities Act of 1933 and any other applicable securities laws, and (b)
represent that -n,pt-ioii.ee shall :not dispose of the shares of Common Stock in
violation of -the Securities Act of 1933 or any other applicable securities
laws. Company reserves the right to place a legend on any stock certificate
issued upon exercise of an option granted pursuant to the Plan to assure
compliance with this Section 12.
SECTION 13.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 11 of the Plan).
-6-
SECTION 14.
AMENDMENT OF THE PLAN
The Board of Directors of the Company may from time to time, insofar as
permitted by law, suspend or discontinue the Plan or revise or amend it in any
respect; provided, however, that no such revision or amendment, except as is
authorized in Sections 9 and 11, shall impair terms and conditions of any option
which is outstanding on the date of such revision or amendment to the material
detriment of the Optionee without the consent of the Optionee . Notwithstanding
the foregoing, no such revision or amendment shall (i) materially increase the
number of shares subject to the Plan except as provided in Section 11 hereof;
(ii) change the designation of the class of employees eligible to receive
options, (iii) decrease the price at which options may be granted, or (iv)
materially increase the benefits accruing to Optionees under the Plan, unless
such revision or amendment is approved by the shareholders of the Company.
Furthermore, the Plan may not, without the approval of the shareholders, be
amended in any manner that will cause options to fail to meet the requirements
of "Incentive Stock options" as defined in Section 422A of the Internal Revenue
Code.
SECTION 16.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any subsidiary any obligation to retain the Optionee
in its employ for any period.
-7-
011987
012087
BIO-METRIC SYSTEMS, INC.
1987 INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, made this _____ day of _____, 19 , by and between BIO-
METRIC SYSTEMS, INC., a Minnesota corporation (the "Company"), and
________________, the ("Optionee");
W I T N E S S E T H
WHEREAS, the Optionee on the date hereof is an employee of the Company; and
WHEREAS, to induce the Optionee to continue in his employ and to further
the Optionee's efforts in its behalf, the Company desires to grant to the
Optionee an option to purchase shares of its voting Common Stock;
WHEREAS, the Company's Board of Directors has adopted an incentive stock
option plan known as the "Bio-Metric Systems, Inc. 1987 Incentive Stock Option
Plan" (hereinafter referred to as the "Plan"); and
WHEREAS, on or before on the date hereof, the Company's Board of Directors
authorized the grant of this option to the optionee;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Optionee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, on the
date of this Agreement, the option to purchase __________ shares of voting
common stock of the Company (the "Option Stock") subject to the terms and
conditions herein contained, and subject only to adjustment in such number of
shares as provided in Section 11 of the Plan.
2. OPTION PRICE. During the term of this option, the purchase price for
the shares of Option Stock granted herein is $_______ per share (not less than
the fair market value as of date of grant), subject only to adjustment of such
price as provided in Section 11 of the Plan.
3. TERM OF OPTION. The term during which this option may be exercised
expires five (5) years after the date of this Agreement unless terminated
earlier under the provisions of Paragraphs 10, 11, or 12 below. This option
shall be exercisable during the term of this Agreement only with respect to the
following percentages of the Option Stock: (i) during the first year of the
term, 20% of the Option Stock; (ii) during the second year of the term, 40% of
the Option Stock; (iii) during the third year of the term, 60% of the Option
Stock; (iv) during the fourth year of the term, 80% of the Option Stock; and (v)
during the fifth year of the term, 100%
-8-
of the Option Stock. If this option has been granted prior to approval of the
Plan by the Company's shareholders, this option shall not be exercisable until
such approval is obtained. If this option terminates for any reason, including
those set forth in Paragraphs 10, 11 and 12, all unexercised options (including
those not yet exercisable) shall lapse.
4. PERSONAL EXERCISE BY OPTIONEE. This option shall, during the
lifetime of the Optionee, be exercisable only by said Optionee and shall not be
transferable by the optionee, in whole or in part, other than by will or by the
laws of descent and distribution.
5. MANNER OF EXERCISE OF OPTION. This option is to be exercised by the
Optionee (or by the Optionee's successor or successors) by giving written notice
to the Company of an election to exercise such option. Such notice shall
specify the number of shares to be purchased hereunder and shall be delivered to
the Company at its principal place of business. An option shall be considered
exercised at the time the Company receives such notice. Upon receipt of such
notice and subject to the provisions of Paraqraph 9 below, the Company shall,
within a reasonable time, and upon payment of the full purchase price for the
shares to be purchased, deliver to the Optionee certificates for the shares so
purchased. Payment for shares of Option Stock may be made in the form of cash
or certified check. All requisite original issue or transfer documentary stamp
taxes shall be paid by the Company.
6. RIGHTS AS A SHAREHOLDER. The optionee or a transferee of this option
shall have no rights as a shareholder with respect to any shares covered by this
option until the date of the issuance of a stock certificate for the Option
Stock. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 11 of the Plan.
7. STOCK OPTION PLAN. The option evidenced by this Agreement is granted
pursuant to the Plan, a copy of which Plan is attached hereto or has been made
available to the optionee and is hereby made a part of this Agreement. This
Agreement is subject to and in all respects limited and conditioned as provided
in the Plan. The Plan governs this option and the Optionee, and in the event of
any question as to the construction of this Agreement or of a conflict between
the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
8. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION BY OPTIONEE. In the
event of a disqualifying disposition of Option Stock by Optionee, optionee
hereby agrees to inform the Company of such disposition. Upon notice of a
disqualifying disposition or upon independently learning of such a disposition,
the Company shall withhold from whatever payments are due Optionee appropriate
state and federal income taxes as required by law. In the event the Company is
unable to withhold such taxes, for whatever reason, optionee hereby agrees to
pay to the Company an amount equal to the amount the Company would otherwise be
required to withhold under state or federal law.
9. INVESTMENT PURPOSE. The Company may require as a condition to the
grant and exercise of this option that any stock acquired pursuant to this
option be acquired for only
-9-
investment if, in the opinion of counsel for the Company, such is required or
deemed advisable under securities laws or any other applicable law, regulation
or rule of any government or governmental agency. In this regard, if requested
by the Company, the Optionee, prior to the acquisition of any shares pursuant to
this option, shall execute an investment letter to the effect that the Optionee
is acquiring shares pursuant to this option for investment purposes only and not
with the intention of making any distribution of such shares.
10. TERMINATION OF EMPLOYMENT. If the Optionee ceases to be an employee
of the Company for any reason (including termination of employment as a result
of the reorganization, sale or liquidation by the Company) other than because of
death or disability (as described below) this option shall terminate
(notwithstanding Paragraph 3 of this Agreement) on the earlier of (i) three
months after the date of such termination of employment and (ii) this option's
originally stated expiration date.
11. TERMINATION OF EMPLOYMENT DUE TO DISABILITY. If the Optionee ceases
to be an employee of the Company because such Optionee is disabled (as that term
is defined in Section 105(d)(4) of the Internal Revenue Code), this option shall
terminate (notwithstanding Paragraph 3 of this Agreement) on the earlier of (i)
twelve months after the date of such termination of employment due to disability
and (ii) this option's originally stated expiration date.
12. DEATH OF OPTIONEE. If the optionee dies (i) while an employee of the
Company, or (ii) within a period of three months after the termination of his
employment with the Company as provided in Paragraph 10, or (iii) within six
months after the termination of employment with the Company as provided in
Paragraph 11, this option shall terminate (notwithstanding Paragraph 3 of this
Agreement) on the earlier of (i) twelve months after the date of death and (ii)
this option's originally stated expiration date. In such period following the
Optionee's death, this option shall be exercisable only by the optionee's legal
representative or by the person or persons to whom the optionee's rights under
this option shall pass by the Optionee's will or by the laws of descent and
distribution.
13. RIGHT OF REPURCHASE OF OPTION STOCK BY COMPANY. In the event the
Optionee exercises this option and purchases Option Stock, the Company shall
have the right to repurchase all, but not part, of such Option Stock if the
Optionee (i) transfers or attempts to transfer any such Option Stock to any
person or entity, other than to a member of the optionee's family or another
employee of the Company, or (ii) terminates employment with the Company for any
reason other than death or disability as hereinabove defined, If the Optionee
transfers Option Stock to a family member or another employee of the Company,
the repurchase rights of the Company herein provided shall continue to apply to
all such transferred stock as if the Optionee continued to hold such stock. The
Company s a exercise its repurchase rights by giving written notice to the
record holder of the Option Stock within six (6) months after (i) with respect
to an unpermitted transfer of the Option Stock, the date when the Company is
given written notice to transfer record ownership of the affected Option Stock,
or (ii) with respect to termination of employment, the date of termination of
employment. The Company shall pay to the record holder of the Option Stock so
repurchased the Purchase Price, hereinafter defined, in cash, within 30 days
after exercise of its repurchase right.
-10-
The Purchase Price for the Option Stock shall be determined as follows:
(a) If the Plan is in effect on the date of exercise of the
Company's repurchase right, (or, if on such date there is any similar stock
option plan of the Company which, under federal income tax law, requires a
determination of fair market value of stock similar to the Option Stock to
receive favorable tax treatment), the Purchase Price shall be the value
last determined by the Board for the issuance of an option pursuant to the
Plan (provided, however, that if such option were granted to an Optionee
holding stock possessing more than 10% of the Company's voting power, as
defined in the Plan, the Purchase Price shall be 91% of such amount) if
such determination was made within two years of the exercise of the
repurchase right.
(b) If the Purchase Price is not determinable in accordance with the
preceding subparagraph, it shall be as determined by mutual agreement of
the Company and the Optionee or, in the event that a mutually agreeable
value is not determined within 30 days after the Company exercises its
repurchase option, then either the Company or the Optionee may require that
the Purchase Price be determined by appraisal. The appraisal shall be
conducted by a single appraiser if the optionee and the Company are able to
agree upon a single appraiser within 10 days after a demand for appraisal
is made. Otherwise, the Company and the optionee shall each designate an
appraiser, and the appraisers so designated shall appoint a third appraiser
or if they are not able to agree upon a third person, the third appraiser
shall be chosen by the chief judge of the District Court of Hennepin
County, Minnesota). Upon the appointment of an appraiser or appraisers,
the Purchase Price shall be the fair market value of the Option Stock as
determined by the single appraiser, or by a majority of the three
appraisers, which appraisers shall be required to issue a written report
within 45 days after their appointment (either of the single appraiser or
of the third of three appraisers). The Purchase Price as so determined
shall be binding upon the Company and the optionee.
14. MISCELLANEOUS. This Agreement shall bind and inure to the benefit of
the Company and its successors and assigns and the Optionee and any successor or
successors of the Optionee permitted by Paragraph 4 above. It is intended that
this option will qualify as an Incentive Stock option under the provisions of
Section 422A of the Internal Revenue Code; provided, however, that Optionee
hereby agrees to personally bear whatever income tax and other burden which may
arise if this option does not so qualify and hereby releases the Company from
and against any claim Optionee might otherwise have in the event this option is
not so qualified.
-11-
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement in the manner appropriate to each, as of the day and year first above
written.
BIO-METRIC SYSTEMS, INC.
By
----------------------------
Its
----------------------
------------------------------
Optionee
Optionee acknowledges receipt of a copy of the Plan concurrently with his
execution of this Agreement.
-12-
BSI CORPORATION
1997 INCENTIVE STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated below:
(a) The "Company" shall mean BSI CORPORATION, a Minnesota corporation, and any
subsidiary of the Company.
(b) "Common Stock" shall mean voting common stock of the Company.
(c) The "Plan" means the BSI Corporation 1997 Incentive Stock Option Plan, as
amended hereafter from time to time, including the form of Option Agreement.
(d) The "Optionee" is an employee of the Company to whom an option has been
granted under the Plan.
(e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(f) "Committee" shall mean a Committee of three or more persons who may be
appointed by, and serve at the pleasure of the Board and shall have such powers
and authority as are granted to it by the Board. Each of the members of the
Committee shall be a "disinterested" person within the meaning of Rule 16b-3, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934. As of the effective date of the Plan, a "disinterested"
person under Rule 16b-3 means a person who, among other things, is not eligible
and has not at any time within one year prior to appointment to the Committee
been eligible to participate in the Plan or in any other plan of the Company
entitling participants to acquire stock, stock options or stock appreciation
rights.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company by
facilitating the employment and retention of competent personnel and by
furnishing incentive to employees upon whose efforts the success of the Company
will depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "Incentive Stock Options" under
the provisions of Section 422 of the Internal Revenue Code. Adoption of this
Plan shall be and is expressly subject to the condition of approval by the
shareholders of the Company within 12 months before or after the adoption of
such Plan by the Board of Directors.
-1-
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date such Plan is adopted by the
Board of Directors of the Company.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(the "Board") or, to the extent empowered by the Board, by the Stock Option
Committee as defined in Section 1(f) of this Plan. The Board shall have all of
the powers vested in it under the provisions of the Plan, including but not
limited to exclusive authority (where applicable and within the limitations
described herein) to determine the employees to whom, and the time or times at
which, options shall be granted, the number of shares subject to each option and
the option price and terms and conditions of each option. Without limiting the
generality of the foregoing, the Board may, in its sole discretion, determine
the number of shares subject to an option, in proportion to an employee's
compensation paid by the Company.
The Board, or the Committee if so empowered by the Board, shall have full
power and authority to administer and interpret the Plan, to make and amend
rules, regulations and guidelines for administering the Plan, to prescribe the
form and conditions of the respective stock option agreements (which may vary
from Optionee to Optionee) evidencing each option and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's interpretation of the Plan, or the Committee's interpretation if so
empowered by the Board, and all actions taken and determinations made by it
pursuant to the power vested hereunder, shall be conclusive and binding on all
parties concerned. No member of the Board or the Committee shall be liable for
any action taken or determination made in good faith in connection with the
administration of the Plan.
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board, or the Committee if so empowered by the Board, shall from time
to time, at its discretion, and without approval of the shareholders, designate
those employees of the Company to whom stock options shall be granted.
Directors of the Company who are otherwise engaged as employees of the Company
may be designated as participants. The Board, or the Committee if so empowered
by the Board, may grant additional options to some or all participants then
holding options or may grant options solely or partially to new participants.
In designating participants, the Board, or the Committee, shall also determine
the number of shares to be optioned to each such participant.
-2-
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of voting common stock. 150,000 shares of voting common stock
shall be reserved and available for options under the Plan; provided, however,
that the total number of shares of Common Stock reserved for options under this
Plan shall be subject to adjustment as provided in Section 11 of the Plan. In
the event that any outstanding option under the Plan for any reason expires or
is terminated prior to the exercise thereof, the shares of Common Stock
allocable to the unexercised portion of such option shall continue to be
reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
LIMITATIONS ON OPTIONS
The aggregate fair market value (determined as of the time an option is
granted) of the stock with respect to which incentive stock options are
exercisable for the first time by an Optionee during any calendar year under
this Plan and any other plans of the Company under Section 422 of the Internal
Revenue Code, shall not exceed $100,000.
SECTION 8.
DURATION OF PLAN
Options may be granted pursuant to the Plan from time to time for a period
of 10 years from the earlier of the date the Plan is approved by the Board of
Directors or the date it is approved by the shareholders of the Company.
SECTION 9.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, personal check, certified check, Common Stock valued at
such stock's then Fair Market Value, or such other form of payment as may be
authorized by the Company. The Company may, in its sole discretion, limit the
form of the payment available to the Optionee and may exercise such discretion
at any time prior to the termination of the option granted to Optionee or upon
any exercise of the option by the Optionee. With respect to payment in the form
of Common Stock of the Company, the Administrator may require advance approval
or adopt such rules as it deems necessary to assure compliance with Rule
16(b)-3, or any successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, if applicable.
SECTION 10.
TERMS AND CONDITIONS OF OPTIONS
Each option granted pursuant to the Plan shall be evidenced by a written
stock option agreement (the "Option Agreement"). The Option Agreement shall be
in such form as may be
-3-
approved by the Board, or the Committee if empowered by the Board, from time to
time and may vary from Optionee to Optionee; provided, however, that each
Optionee and each Option Agreement shall comply with and be subject to the
following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares covered by the Option. The option price
per share shall not be less than 100% of the fair market value of the
Common Stock per share on the date the Board or the Committee grants
the option; provided, however that if an Optionee owns stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent or any subsidiary,
the option price per share of an option granted to such Optionee shall
not be less than 110% of the fair market value of the Common Stock per
share on the date of the grant of the option. For purposes thereof,
"fair market value" of the Common Stock per share shall be determined
by the Board, or the Committee if so empowered by the Board, in its
sole discretion by applying principles of valuation with respect to
all such options. The Board shall have full authority and discretion
in establishing the option price and shall be fully protected in so
doing. If such stock is publicly traded as of the date the option is
granted, the "fair market value" of the Common Stock shall be the mean
between the "bid" and "asked" prices quoted by a recognized specialist
in the Common Stock of the Company on the date the option is granted,
or if there are no quoted "bid" and "asked" prices on such date, on
the next preceding date for which there are such quotes; provided that
if such stock is then listed upon an established stock exchange or
exchanges, such "fair market value" shall be the highest closing price
of such stock on such stock exchange or exchanges on the date the
option is granted or, if no sale of such stock shall have occurred on
any stock exchange on that date, on the next preceding day on which
there was a sale of stock.
(b) TERM AND EXERCISABILITY OF OPTION. The term during which any option
granted under the Plan may be exercised shall be established in each
case by the Board, or the Committee if so empowered by the Board, but
in no event shall any option be exercisable during a term of more than
10 years after the date on which it is granted. The Option Agreement
shall state when the option becomes exercisable and shall also state
the maximum term during which the option may be exercised. In the
event an option is exercisable immediately, the manner of exercise of
the option in the event it is not exercised in full immediately shall
be specified in the Option Agreement. The Board, or the Committee if
so empowered by the Board, may accelerate the exercise date of any
option granted hereunder which is not immediately exercisable as of
the date of grant.
(c) TRANSFER OF OPTION. No option shall be transferable, in whole or in
part, by the Optionee other than by will or by the laws of descent and
distribution and, during the Optionee's lifetime, the option may be
exercised only by the Optionee. If the Optionee shall attempt any
transfer of any option granted under the Plan during
-4-
his lifetime, such transfer shall be void and the option, to the
extent not fully exercised, shall terminate.
(d) OTHER PROVISIONS. The Option Agreement authorized under this Section
10 shall contain such other provisions as the Board, or the Committee
if so empowered by the Board, shall deem advisable. Any such Option
Agreement shall also contain such limitations and restrictions upon
the exercise of the option as shall be necessary to ensure that such
option will be considered an "Incentive Stock Option" as defined in
Section 422 of the Internal Revenue Code or to conform to any change
therein.
(e) HOLDING PERIOD. The disposition of any shares of Common Stock
acquired by an Optionee pursuant to the exercise of an option
described above shall not be eligible for the favorable taxation
treatment of Section 421(a) of the Internal Revenue Code unless any
shares so acquired are held by the Optionee for at least 2 years from
the date of the granting of the option under which the shares were
acquired and at least one year after the acquisition of such shares
pursuant to the exercise of such option. In the event of an
Optionee's death, such holding period shall not be applicable pursuant
to Section 421(c)(1) of the Internal Revenue Code.
(e) The disposition of any shares of Common Stock acquired by on Optionee
pursuant to the exercise of an option describe above shall not be
eligible for the favorable taxation treatment of Section 421(a) of the
Internal Revenue Code unless any shares so acquired are held by the
Optionee for at least 2 years from the date of the granting of the
option under which the shares were acquired and at least one year
after the acquisition of such shares pursuant to the exercise of such
option. In the event of an Optionee's death, such holding period
shall not be applicable pursuant to Section 421(c)(1) of the Internal
Revenue Code.
SECTION 11.
RECAPITALIZATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Common Stock covered by each outstanding option and the
price per share thereof shall be equitably adjusted by the Board of Directors to
reflect such change. Additional shares which may be credited pursuant to such
adjustment shall be subject to the same restrictions as are applicable to the
shares with respect to which the adjustment relates.
Unless otherwise provided in the Option Agreement, in the event of the sale by
the Company of substantially all of its assets and the consequent discontinuance
of its business, or in the event of a merger, exchange, consolidation or
liquidation of the company, the Board of Directors may in connection with the
Board's adoption of the plan for sale, merger, exchange, consolidation or
-5-
liquidation, provide for the complete termination of this Plan and cancellation
of outstanding options not exercised prior to a date (prior to the effectiveness
of such sale, merger, exchange, consolidation or liquidation) specified by the
Board or for the continuance of the Plan only with respect to the exercise of
options which, under the terms of Paragraph (b) of Section 10, were exercisable
as of the date of adoption by the Board of such plan for sale, merger, exchange,
consolidation or liquidation; provided, however, that in any event Optionees
holding options exercisable as of the date of the Board's adoption of the plan
for sale, merger, exchange, consolidation or liquidation shall be given either
(i) a reasonable time within which to exercise such exercisable portions of
their options prior to the effectiveness of such sale, merger, exchange,
consolidation or liquidation , or (ii) the right to exercise their respective
options as to an equivalent number of shares of stock of the corporation
succeeding the Company by reason of such sale, merger, exchange, consolidation
or liquidation. The grant of an option pursuant to the Plan shall not limit in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all of any part of its business or assets.
SECTION 12.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Common Stock to Optionee, the Company may require Optionee to (a)
represent that the shares of Common Stock are being acquired for investment and
not resale and to make such other representations as the Board shall deem
necessary or appropriate to qualify the issuance of the shares as exempt from
the Securities Act of 1933 and any other applicable securities laws, and (b)
represent that Optionee shall not dispose of the shares of Common Stock in
violation of the Securities Act of 1933 or any other applicable securities laws.
Company reserves the right to place a legend on any stock certificate issued
upon exercise of an option granted pursuant to the Plan to assure compliance
with this Section 12.
SECTION 13.
RIGHTS AS A SHAREHOLDER
As Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 11 of the Plan).
-6-
SECTION 14.
AMENDMENT OF THE PLAN
The Board of Directors of the Company may from time to time, insofar as
permitted by law, suspend or discontinue the Plan or revise or amend it in any
respect; provided, however, that no such revision or amendment, except as is
authorized in Section 9 and 11, shall impair terms and conditions of any option
which is outstanding on the date of such revision or amendment to the material
detriment of the Optionee without the consent of the Optionee. Notwithstanding
the foregoing, no such revision or amendment shall (i) materially increase the
number of shares subject to the Plan except as provided in Section 11 hereof;
(ii) change the designation of the class of employees eligible to receive
options, (iii) decrease the price at which options may be granted, or (iv)
materially increase the benefits accruing to Optionees under the plan, unless
such revision or amendment is approved by the shareholders of the Company.
Furthermore, the Plan may not, without the approval of the shareholders, be
amended in any manner that will cause options to fail to meet the requirements
of "Incentive Stock Options" as defined in Section 422 of the Internal Revenue
Code.
SECTION 15
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any subsidiary any obligation to retain the Optionee
in its employ for any period.
-7-
BSI CORPORATION
1997 INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, made this _____ day of ____________, 1997, by and between
BSI CORPORATION, a Minnesota corporation (the "Company"), and _______________,
(the "Optionee");
WITNESSETH:
WHEREAS, the Optionee on the date hereof is an employee of the Company; and
WHEREAS, the Company's Board of Directors has adopted an incentive stock
option plan known as the "BSI Corporation 1997 Incentive Stock Option Plan"
(hereinafter referred to as the "Plan"); and
WHEREAS, the Company desires to grant the Optionee and option to purchase
shares of its voting common stock ("Common Stock");
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Optionee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, on the
date of this Agreement, the option to purchase __________ shares of the Common
Stock (the "Option Stock") subject to the terms and conditions herein contained,
and subject only to adjustment in such number of shares as provided in Section
11 of the Plan.
2. OPTION PRICE. During the term of this option, the purchase price for
the shares of Option Stock granted herein is $____________ per share (not less
than the fair market value as of date of grant), subject only to adjustment of
such price as provided in Section 11 of the Plan.
3. TERM OF OPTION. The term during which this option may be exercised
expires five years after the date of this Agreement unless terminated earlier
under the provisions of Paragraphs 10, 11, or 12 below. This option shall be
exercisable during the term of this Agreement only with respect to the following
percentages of the Option Stock: (i) during the first year of the term, 20% of
the Option Stock; (ii) during the second year of the term, 40% of the Option
Stock; (iii) during the third year of the term, 60% of the Option Stock; (iv)
during the fourth year of the term, 80% of the Option Stock; and (v) during the
fifth year of the term, 100% of the Option Stock. If this option has been
granted prior to approval of the Plan by the Company's shareholders, this option
shall not be exercisable until such approval is obtained. If this option
terminates for any reason, including those set forth in Paragraphs 10, 11, and
12, all unexercised options (including those not yet exercisable) shall lapse.
-8-
4. PERSONAL EXERCISE BY OPTIONEE. This option shall, during the lifetime
of the Optionee, be exercisable only by said Optionee and shall not be
transferable by the Optionee, in whole or in part, other than by will or by the
laws of descent and distribution.
5. MANNER OF EXERCISE OF OPTION. This option is to be exercised by the
Optionee (or by the Optionee's successor or successors) by giving written notice
to the Company of an election to exercise such option. Such notice shall
specify the number of shares to be purchased hereunder and shall be delivered to
the Company at its principal place of business. An option shall be considered
exercised at the time the Company receives such notice. Upon receipt of such
notice and subject to the provisions of Paragraph 9 below, the Company shall,
within a reasonable time, and upon payment of the full purchase price for the
shares to be purchased, deliver to the Optionee certificates for the shares so
purchased. Payment for shares of Option Stock may be made in the form of cash,
personal check, certified check, Common Stock of the Company valued at such
stock's then fair market value, or such other form of payment as may be
authorized by the Company of the Plan. All requisite original issue or transfer
documentary stamp taxes shall be paid by the Company.
6. RIGHTS AS A SHAREHOLDER. The Optionee or a transferee of this option
shall have no rights as a shareholder with respect to any shares covered by this
option until the date of the issuance of a stock certificate for the Option
Stock. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 11 of the Plan.
7. STOCK OPTION PLAN. The option evidenced by this Agreement is granted
pursuant to the Plan, a copy of which Plan is attached hereto or has been made
available to the Optionee and is hereby made a part of this Agreement. This
Agreement is subject to and in all respects limited and conditioned as provided
in the Plan. This Plan governs this option and the Optionee, and in the event
of any question as to the construction of this Agreement or of a conflict
between the Plan and this Agreement, the Plan shall govern, except as the Plan
otherwise provides.
8. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION BY OPTIONEE. In the
event of a disqualifying disposition of Option Stock by Optionee, Optionee
hereby agrees to inform the Company of such disposition. Upon notice of a
disqualifying disposition or upon independently learning of such a disposition,
the Company shall withhold from whatever payments are due Optionee appropriate
state and federal income taxes as required by law. In the event the Company is
unable to withhold such taxes, for whatever reason, Optionee hereby agrees to
pay to the Company an amount equal to the amount the Company would otherwise be
required to withhold under state and federal law.
-9-
9. INVESTMENT PURPOSE. The Company may require as a condition to the
grant and exercise of this option that any stock acquired pursuant to this
option be acquired for only investment if, in the opinion of counsel for the
Company, such is required or deemed advisable under securities laws or any other
applicable law, regulation or rule of any government or governmental agency. In
this regard, if requested by the Company, the Optionee, prior to the acquisition
of any shares pursuant to this option, shall execute an investment letter to the
effect that the Optionee is acquiring share pursuant to this option for
investment purposes only and not with the intention of making any distribution
of such shares.
10. TERMINATION OF EMPLOYMENT. If the Optionee ceases to be an employee
of the Company for any reason (including termination of employment as a result
of the reorganization, sale or liquidation by the Company) other than because of
death or disability (as described below) this option shall terminate
(notwithstanding Paragraph 3 of this Agreement) on the earlier of (i) three
months after the date of such termination of employment and (ii) this option's
originally stated expiration date. Optionee acknowledges that Optionee is and
shall remain an employee at-will; this option is not intended to and shall not
affect the at-will nature of the employment relationship.
11. TERMINATION OF EMPLOYMENT DUE TO DISABILITY. If the Optionee ceases
to be an employee of the Company because such Optionee is totally disabled, this
option shall terminate (notwithstanding Paragraph 3 of this Agreement) on the
earlier of (i) twelve months after the date of such termination of employment
due to disability and (ii) this option's originally stated expiration date.
Total disability shall not exist unless Optionee is permanently unable to engage
in any substantial gainful activity by reason of a medically determinable
physical and mental impairment which can be expected to continue for an
uninterrupted period of not less than 12 months, and such total disability is
demonstrated to the satisfaction of the Company, in its discretion.
12. DEATH OF OPTIONEE. If the Optionee dies (i) while an employee of the
Company, or (ii) within a period of three months after the termination of his
employment with the Company as provided in Paragraph 10, or (iii) within six
months after the termination of employment with the Company as provided in
Paragraph 11, this option shall terminate (notwithstanding Paragraph 3 of this
Agreement) on the earlier of (i) twelve months after the date of death and (ii)
this option's originally stated expiration date. In such period following the
Optionee's death, this option shall be exercisable only by the Optionee's legal
representative or by the person or persons to whom the Optionee's rights under
this option shall pass by the Optionee's will or by the laws of descent and
distribution.
-10-
13. MISCELLANEOUS. This Agreement shall bind and inure to the benefit of
the Company and its successors and assigns and the Optionee and any successor or
successors of the Optionee. It is intended that this option will qualify as an
Incentive Stock Option under the provisions of Section 422 of the Internal
Revenue Code; provided, however, that Optionee hereby agrees to personally bear
whatever income tax and other burden which may arise if this option does not so
qualify and hereby releases the Company from and against any claim Optionee
might otherwise have in the event this option is not so qualified.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement in the manner appropriate to each, as of the day and year first above
written.
BSI CORPORATION
By
-------------------------------------
Its
-------------------------------
----------------------------------------
Optionee
Optinee acknowledges receipt of a copy of the Plan concurrently with his
execution of this Agreement.
----------------------------------------
-11-
- --------------------------------------------------------------------------------
SURMODICS, INC.
RESTRICTED STOCK AGREEMENT/_______________________
THIS AGREEMENT, made this _____ day of ______________, 19____, by and
between SURMODICS, INC., a Minnesota corporation (the "Company"), and
_________________________________________, (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to keep personnel of experience and ability in
the employ of the Company and to provide a mechanism for additional compensation
to them dependent upon their continued employment with the Company and the
growth and profits of the Company;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Employee hereby agree as follows:
1. GRANT OF BONUS SHARES. The Company hereby authorizes an award of
_______________________ (__________) shares of voting common stock of the
Company (the "Bonus Shares") at the times and subject to the terms and
conditions hereinafter contained. In the event of any increase or decrease in
the number of shares of the Company's voting common stock ("Common Stock")
resulting from a subdivision or consolidation of shares or the payment of a
stock dividend or any other similar increase or decrease in the number of shares
of Common Stock effected without receipt of any consideration by the Company,
the number of Bonus Shares subject to this Agreement shall be equitably adjusted
by the Company to reflect such change; any additional shares of Common Stock
which become part of the Bonus Shares shall be subject to all of the
restrictions and conditions applicable to the Bonus Shares.
2. WAITING PERIOD/ISSUANCE OF STOCK. The Employee shall not be entitled
to any of the Bonus Shares unless the Employee is employed by the Company at the
end of the "Waiting Period", which shall be five years from the date of this
Agreement. If the Employee remains in the employ of the Company at the end of
the Waiting Period, the Company shall promptly thereafter issue to the Employee
a stock certificate representing the Bonus Shares. Upon such issuance, the
Employee shall have all of the rights of a shareholder with respect to such
shares, subject, however, to all of the restrictions and conditions set forth in
this Agreement. In aid of such restrictions, the Employee shall, immediately
upon receipt of the certificate(s) representing such shares, appropriately
endorse such certificate(s) in blank and deliver such certificate(s) to the
Company to be held by the Company as hereinafter provided.
3. RESTRICTION PERIOD. The "Restriction Period" shall be the five years
and seven months commencing on the date of this Agreement. During the
Restriction Period, any Bonus Shares which have been issued to the Employee as a
result of the expiration of the Waiting
-1-
Period applicable thereto, shall be known as "Restricted Bonus Shares" and be
subject, during the Restriction Period, to the following restrictions:
a. The Restricted Bonus Shares may not be sold, exchanged,
transferred, pledged, hypothecated, or otherwise disposed of
voluntarily or involuntarily and any such attempted action
shall be void and ineffective.
Until the end of the Restriction Period, all Restricted Bonus Shares shall, at
the discretion of the Company, be imprinted with a legend stating the
restrictions imposed by this Agreement. At the end of the Restriction Period,
the Restricted Bonus Shares shall be free of the restrictions herein provided
and the Company shall issue and deliver to the Employee a certificate or
certificates representing such shares free of the legend described above, but
with any such legend as the Company customarily places on its Common Stock.
4. TERMINATION OF EMPLOYMENT. Termination of employment shall occur if
the Employee ceases to be an employee of the Company for any reason whatsoever
(including, without limitation, voluntary resignation, involuntary termination
with or without cause, death, disability, termination as a result of the
reorganization, sale or liquidation of the company). Upon any such any
termination of employment, the Employee's rights with respect to any Bonus
Shares for which the Waiting Period has not yet expired shall fully and
automatically lapse and terminate and Employee shall have no further rights
whatsoever with respect to that portion of the Bonus Shares. With respect to
that portion of the Bonus Shares for which the Waiting Period has expired such
that Restricted Bonus Shares have been issued, the Employee's rights and
obligations with respect thereto are described in the preceding paragraph. The
Employee acknowledges that there have been no promises or representations
concerning his or her continued employment and that such employment is and will
continue to be an "at will" relationship.
5. CONFIDENTIALITY. The Employee agrees to maintain in strict confidence
the terms of this Agreement and the issuance of shares which are the subject
matter of this Agreement until and unless the Employee receives prior written
consent to disclosure from the President of the Company.
6. MISCELLANEOUS.
a. The Employee acknowledges that he or she has no rights as a
shareholder with respect to any shares covered by this
Agreement until the date of issuance of a stock certificate
with respect thereto. No adjustment shall be made for
dividends, distributions, or other rights for which the
record date is prior to the date such stock certificate is
issued, except for the adjustment in shares as provided in
Paragraph 1 hereof.
b. The Company may require as a condition to the issuance of
any stock acquired pursuant to this Agreement that such
stock be acquired for only investment if, in the opinion of
counsel for the Company, such is required
-2-
or deemed advisable under securities laws or any other
applicable law, regulation or rule of any government or
governmental agency. In this regard, if and when requested
by the Company, the Employee shall execute an investment
letter to the effect that the Employee is acquiring such
shares for investment purposes only and not with the
intention of making any distribution thereof.
c. It is understood that the shares of Common Stock subject to
this Agreement have not been registered under the Securities
Act of 1933, as amended, or any applicable Blue Sky laws, or
otherwise. It is further understood that the Company has no
obligation and will have no obligation to register the
shares of Common Stock subject to this Agreement.
d. The Company shall be entitled to withhold and deduct from
future wages of the Employee, or make other arrangements for
the collection of, all legally required amounts necessary to
satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to the
Bonus Shares (whether by lapse or restrictions or
otherwise), and shall be entitled to require the Employee to
remit the amount of any such tax obligations to the Company
before issuing any certificates relating to the Bonus
Shares. The Employee understands that he or she will
personally bear whatever income tax consequences may arise
from the execution of this Agreement, issuance of the Bonus
Shares, or the lapse of restrictions applicable thereto and
the Employee acknowledges that he or she has been given no
representations or warranties concerning the income tax
consequences thereof.
e. This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof and
supersedes all prior agreements, arrangements, and
communications, whether oral or written. No change to or
modification of this Agreement shall be valid unless it is
in writing and executed by the Company and Employee.
f. This Agreement shall inure to the benefit of the Company,
its successors and assigns, and shall be binding upon the
Employee (as well as his personal representatives,
successors, heirs and assigns); the Employee shall not
assign this Agreement or any rights herein.
g. This Agreement shall be construed under the laws of the
State of Minnesota.
h. Any notice required or permitted hereunder shall be in
writing and shall be deemed served when delivered personally
to the person or entity for whom intended or two days after
deposit in the United States mail, postage
-3-
prepaid, addressed to the last known address of the person
or entity for whom intended.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement in the manner appropriate to each, as of the date and year first above
written.
SURMODICS, INC.
By:
- ------------------------------ -------------------------------------
Its:
------------------------------------
-4-
SURMODICS, INC.
NONQUALIFIED STOCK OPTION
THIS AGREEMENT, made this ________ day of _________________, 19____ by and
between SurModics, Inc., a Minnesota corporation (the "Company"), and ,(the
"Optionee");
W I T N E S S E T H:
WHEREAS, on or before on the date hereof, the Company's Board of Directors
authorized the grant of this option to the Optionee;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Optionee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, on the
date of this Agreement, the option to purchase _____________ shares of voting
common stock of the Company (the "Option Stock") subject to the terms and
conditions herein contained, and subject only to adjustment in such number of
shares as provided in Paragraph 7 hereof.
2. OPTION PRICE. During the term of this option, the purchase price for
the shares of Option Stock granted herein is __________ per share, subject only
to adjustment of such price as provided in Paragraph 7 hereof.
3. TERM OF OPTION. The term during which this option may be exercised
expires ten (10) years after the date of this Agreement. This option shall be
exercisable during the term of this Agreement only with respect to the following
percentages of the Option Stock: (i) during the first year of the term, 20% of
the Option Stock; (ii) during the second year of the term, 40% of the Option
Stock; (iii) during the third year of the term, 60% of the Option Stock; (iv)
during the fourth year of the term, 80% of the Option Stock; and (v) during the
fifth through the tenth year of the term, 100% of the Option Stock. If this
option terminates for any reason, all unexercised options (including those not
yet exercisable) shall lapse.
4. PERSONAL EXERCISE BY OPTIONEE. This option shall, during the lifetime
of the Optionee, be exercisable only by said Optionee and shall not be
transferable by the Optionee, in whole or in part, other than by will or by the
laws of descent and distribution.
5. MANNER OF EXERCISE OF OPTION. This option is to be exercised by the
Optionee (or by the Optionee's successor or successors) by giving written notice
to the Company of an election to exercise such option. Such notice shall
specify the number of
shares to be purchased hereunder and shall be delivered to the Company at its
principal place of business. An option shall be considered exercised at the time
the Company receives such notice. Upon receipt of such notice and subject to
the provisions of Paragraph 8 below, the Company shall, within a reasonable
time, and upon payment of the full purchase price for the shares to be
purchased, deliver to the Optionee certificates for the shares so purchased.
Payment for shares of Option Stock may be made in the form of cash or certified
check. All requisite original issue or transfer documentary stamp taxes shall
be paid by the Company.
6. RIGHTS AS A SHAREHOLDER. The Optionee or a transferee of this option
shall have no rights as a shareholder with respect to any shares covered by this
option until the date of the issuance of a stock certificate for the Option
Stock. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Paragraph 7 of this Agreement.
7. ADJUSTMENT. In the event of an increase or decrease in the number of
shares of Common Stock resulting from a subdivision or consolidation of shares
or the payment of a stock dividend or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company, the number of shares of Common Stock covered by each outstanding
option and the price per share thereof shall be equitably adjusted by the Board
of Directors to reflect such change. Additional shares which may be credited
pursuant to such adjustment shall be subject to the same restrictions as are
applicable to the shares with respect to which the adjustment relates.
Unless otherwise provided in the option agreement, in the event of the sale
by the Company of substantially all of its assets and the consequent
discontinuance of its business or in the event of a merger, exchange,
consolidation or liquidation of the Company, the Board of Directors may in
connection with the Board's adoption of the plan for sale, merger, exchange,
consolidation or liquidation, provide for the complete termination of this
Agreement and cancellation of outstanding options not exercised prior to a date
(prior to the effectiveness of such sale, merger, exchange, consolidation or
liquidation) specified by the Board or for the continuance of this Agreement
only with respect to the exercise of options which are exercisable as of the
date of adoption by the Board of such plan for sale, merger, exchange,
consolidation or liquidation; provided, however, that if Optionee holds options
exercisable as of the date of the Board's adoption of the plan for sale, merger,
exchange, consolidation or liquidation, he shall be given either (i) a
reasonable time within which to exercise such exercisable portions of his Option
prior to the effectiveness of such sale, merger, exchange, consolidation or
liquidation, or (ii) the right to exercise his Options as to an equivalent
number of shares of stock of the corporation succeeding the Company
by reason of such sale, merger, exchange, consolidation or liquidation. The
grant of this option shall not limit in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure or to merge, exchange or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business or assets.
8. INVESTMENT PURPOSE. The Company may require as a condition to the
grant and exercise of this option that any stock acquired pursuant to this
option be acquired for only investment if, in the opinion of counsel for the
Company, such is required or deemed advisable under securities laws or any other
applicable law, regulation or rule of any government or governmental agency. In
this regard, if requested by the Company, the Optionee, prior to the acquisition
of any shares pursuant to this option, shall execute an investment letter to the
effect that the Optionee is acquiring shares pursuant to this option for
investment purposes only and not with the intention of making any distribution
of such share.
9. RIGHT OF FIRST REFUSAL. Optionee shall not sell, assign, give, or
otherwise transfer or dispose of any of his shares of stock of the Company
acquired pursuant to this Agreement without first giving written notice to the
Company of his intention to sell or make disposition thereof, which notice shall
state the shares proposed to be disposed of, the amount of any consideration
offered, and the name of the prospective purchaser or assignee. The Company, or
such one or more of its shareholders as the Company may designate, shall have,
for a period of ninety (90) days after receipt of such notice, an option to
purchase all, but not part, of the shares of the stock specified in such notice
on the same terms and conditions set out in the notice. If the Company shall
fail, during the specified option period, to exercise the option, Optionee may,
at any time within sixty (60) days after the expiration of the option period,
sell or otherwise deal with or dispose of such stock in the manner and on the
terms set forth in the notice provided above. If such sale or disposition is
not made within such sixty (60) day period, Optionee must again comply with all
provisions of this paragraph.
10. MISCELLANEOUS. This Agreement shall bind and inure to the benefit of
the Company and its successors and assigns and the Optionee and any successor or
successors of the Optionee permitted by Paragraph 4 above. Optionee hereby
agrees to personally bear whatever income tax consequences may arise from the
issuance of or exercise of this Option.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement in the manner appropriate to each, as of the day and year first above
written.
SURMODICS, INC.
By
----------------------------
Its
------------------------
------------------------------
FORM OF LICENSE AGREEMENT
THIS AGREEMENT by and between SurModics, Inc., a corporation of the State of
Minnesota, which has an office at 9924 West 74th Street, Eden Prairie, MN 55344,
(hereinafter referred to as SURMODICS), and ZZ, a corporation of XX, which has
offices located at XX (hereinafter referred to as ZZ).
WHEREAS, SurModics is engaged in biological, chemical and technical research and
has developed a body of technology and know-how, including reagents, processes
and devices which the parties believe will improve the performance of various
products and processes of ZZ.
WHEREAS, the technology of SurModics includes confidential information
(including trade secrets and other know-how) which is proprietary to SurModics
and SurModics is in the process of securing patent coverage for certain items of
its technology, and continues to maintain the confidentiality of other portions
of its technology.
WHEREAS, ZZ and SurModics are parties to a Mutual Confidential Disclosure
Agreement dated XX ("Prior Disclosure Agreement");
WHEREAS, ZZ may desire to acquire additional licenses under SurModics's know-how
and patent rights such licenses to be added to this Master Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below and for other good and valuable consideration of which receipt is
acknowledged, the parties agree as follows:
1. DEFINITIONS
The following definitions apply to this Agreement and to all addenda
thereto:
a. "Effective Date" means the date upon which this Agreement is fully
executed.
b. "Licensed Product Effective Date" shall mean the date specified in
Attachment B1, B2, and so forth, for that Licensed Product and all payments
due upon execution for that Licensed Product are received by SurModics.
c. "Patent Rights" means the patent application(s) and patent(s)
identified in Attachment A hereof, together with all foreign counterparts,
divisions, and continuation applications based thereon, any patent issuing
on any of said applications, and any reissues or extensions based on any of
such patents. The term "Patent Rights" shall include Improvement Patents
as defined in Paragraph 1(d).
d. "Improvement Patents" means any U.S. patents or patent applications,
and all foreign counterparts, divisions, continuations, continuations in
part, reissues and extensions thereof specifically pertaining to a Licensed
Product:
i. which are filed on an invention conceived or reduced to
practice by SurModics during the exclusive term (if any) of the
license granted herein for that Licensed Product, and
ii. with respect to which SurModics has the right to grant a
license, and
iii. which but for the license granted herein would be infringed by
the manufacture, use or sale (or by a surface treatment process
employed to produce that product or a reagent used in such process) by
ZZ of Medical Products having a surface treated through the use of
SurModics's Know-how.
e. "Medical Products" means products that are specifically described in
Attachment B1, B2, and so forth.
f. "Licensed Products" means each of the separately sold Medical Products
specifically described in Attachment B1, B2, and so forth, which bear a
SurModics coating and which:
i. but for the license granted herein the manufacture, use or sale
would infringe (or a surface treatment process employed to produce a
product or a reagent used in such process would infringe) any claim of
Patent Rights, or
ii. are produced through the use of SurModics's Know-how.
g. "Know-how" means SurModics's trade secrets and other technical
information relating to the surface-treatment of medical devices and which
SurModics has the right to transmit to others. Know-how includes but is
not limited to information contained in pending patent applications of
Patent Rights and information that is Confidential Information as defined
in Paragraph 13.
h. "Future Know-how" with respect to any Licensed Product means Know-how
that is acquired by SurModics during the exclusive term (if any) of the
license granted herein for that Licensed Product.
i. "Net Sales" means the total actual billing for sales of Licensed
Products, less the following deductions where they are applicable with
respect to such billings and when separately shown on invoices:
i. discounts actually allowed and taken;
2
ii. any customs, duties, taxes or other governmental excise or
charge upon or measured by the production, sale, transportation,
delivery or use of Licensed Product and actually paid by ZZ;
iii. amounts allowed or credited on rejections or returns;
iv. transportation charges prepaid or allowed.
Notwithstanding the above, if any Licensed Product is sold both separately
and as an integral part of a combination product containing one or more
integral components in addition to that Licensed Product, then Net Sales of
that Licensed Product resulting from sales of that combination product will
be calculated by multiplying the Net Sales for the combination product as
calculated above by the fraction A/B where A is the invoice price of the
Licensed Product as sold separately and B is the invoice price of the
combination product.
A Licensed Product shall be considered sold when it is shipped or when it
is invoiced, whichever is earlier. To assure SurModics the full royalty
payment contemplated in this Agreement, ZZ agrees that in the event any
Licensed Product is sold to an Affiliate for purposes of resale, Earned
Royalties for that Licensed Product shall be computed upon the selling price
at which such Licensed Product would ordinarily be sold to a non-Affiliate,
rather than on the selling price of ZZ to the Affiliate.
j. "Affiliate" means any entity which owns at least 50% of, is at least
50% owned by, or is under common (at least 50%) ownership with ZZ.
k. "Valid Claim" means a claim of Patent Rights that has not been held
invalid by a court of competent jurisdiction beyond possibility of appeal.
2. LICENSE
a. With respect to the Licensed Product defined in each of Attachments
B1, B2, and so forth, SurModics grants to ZZ, a separate worldwide license
under SurModics's Patent Rights and Know-how to make, have made for it, use
and sell that Licensed Product. The license granted herein does not
include the right to sublicense and is expressly limited to the specific
Licensed Products defined herein. Additional terms of each license are set
out in the respective Attachments B1, B2, and so forth. To the extent of
any inconsistency between the terms set forth in the text of this Agreement
and the terms set forth in Attachments B1, B2, and so forth, the terms set
forth in the text of this Agreement shall be controlling.
b. Subject to the limited license granted herein, SurModics shall retain
all rights to the Patent Rights and the Know-how, including SurModics's
right to use Patent Rights and Know-how for its own research purposes.
3
3. LICENSE FEES
License Fees paid to SurModics by ZZ for each license granted herein are
set out in the respective Attachment B1, B2, and so forth.
4. ROYALTIES
For each license granted herein, ZZ shall pay to SurModics a royalty for
each quarter calendar year during the term of this License Agreement which
will be the greater of the royalties of Paragraphs 4(a) or 4(b).
a. Earned Royalties shall be calculated as provided for in the respective
Attachment B1, B2, and so forth. No more than one Earned Royalty shall be
paid by ZZ for any Licensed Product. However, if any Licensed Product is
covered by more than one Attachment B1, B2, and so forth, then the Earned
Royalty rate shall be the highest rate specified for such Licensed Product.
b. Minimum Royalties shall be paid for each Licensed Product as provided
for in the respective Attachment B1, B2, and so forth.
5. ROYALTY PAYMENTS, REPORTS, RECORDS
a. During the term of this Agreement, and for each license granted
hereunder, ZZ will make written reports and payments to SurModics within
thirty (30) days after the last day of each calendar quarter ending March
31, June 30, September 30, and December 31. Each such report shall state
the Net Sales, unit volumes, Earned Royalty, corrections of error in prior
royalty payments, and data and calculations used by ZZ to determine such
payments for each of the licenses corresponding to the respective
Attachments B1, B2, and so forth. Each report shall be accompanied by
payment in full of the royalty due SurModics for that quarter. The
December 31 quarterly report shall also consist of a summary progress
report regarding ZZ's relevant developmental, manufacturing scale-up,
regulatory affairs, and marketing activities with respect to all Licensed
Products along with a summary forecast of projected sales of Licensed
Products and forecasted reagent usage for the next calendar year.
b. ZZ will maintain, for a period of five (5) years following the sale of
Licensed Product, true and accurate records supporting the reports and
payments made under this Agreement. SurModics shall have the right to
carry out an audit of such records no more frequently than once per
calendar year by a certified public accountant of its choice. Such
accountant shall have reasonable access to ZZ's offices and the relevant
records, files and books of account, and such accountant shall have the
right to examine any other records reasonably necessary to determine the
accuracy of the calculations provided by ZZ under Paragraph 5(a). Such
audit shall be at SurModics's expense except that if cumulative
underpayment errors for any period are found that exceed 5% of the payment
made to SurModics during that period being audited, then ZZ will bear the
cost of such audit.
4
c. All royalties on sales of each Licensed Product to be paid to
SurModics by ZZ under this Agreement shall be paid in U.S. Dollars to
SurModics in the United States. For the purpose of calculating Earned
Royalties on sales outside the United States, ZZ shall utilize the average
rate of exchange on the last business day of that calendar quarter as
quoted in the Wall Street Journal.
d. Any sum required under U.S. tax laws (or the tax laws of any other
government) to be withheld by ZZ from payment for the account of SurModics
shall be promptly paid by ZZ for and on behalf of SurModics to the
appropriate tax authorities, and ZZ shall furnish SurModics with official
tax receipts or other appropriate evidence issued by the appropriate tax
authorities sufficient to enable SurModics to support a claim for income
tax credit in respect to any sum so withheld.
6. DEVELOPMENT FEES
ZZ agrees to pay SurModics for development efforts ("Development Fees")
while working on ZZ's products at SurModics's then standard hourly rate for
development efforts provided, however, that such development effort is
pursuant to a mutually agreed upon project plan. SurModics's standard
hourly rate includes direct labor costs plus direct labor overhead.
SurModics shall additionally charge direct materials plus direct materials
overhead of fifteen percent (15%). Direct materials may include expenses
such as travel and special equipment, but only as mutually agreed upon in
writing. SurModics shall invoice ZZ monthly for such Development Fees and
payment is due within thirty (30) days thereafter.
7. TERM
a. Unless earlier terminated, each license herein granted shall begin
upon the Licensed Product Effective Date set out in the respective
Attachment B1, B2, and so forth, and shall extend for each Licensed Product
so licensed until expiration of the last to expire patent of Patent Rights
that covers that product or for a period of fifteen (15) years following
the first bona fide commercial sale of such Licensed Product, whichever is
longer; provided, however, that for a Licensed Product that embodies or is
manufactured through the use of Future Knowhow, the license herein granted
shall extend until expiration of the last to expire patent of Patent Rights
that covers that Licensed Product or for a period of fifteen (15) years
from the date of the first bona fide commercial sale by ZZ of that Licensed
Product, whichever is longer.
b. Upon expiration of the full term of the license granted herein for any
Licensed Product, and upon full payment by ZZ to SurModics of any monies
due under this Agreement, the license with respect to Know-how licensed
herein for that Licensed Product shall be deemed paid up and non-exclusive
(if any such license was exclusive), and SurModics may negotiate additional
license agreements with any other party for that Licensed Product.
5
8. PATENTS
a. ZZ shall see to it that all Licensed Products sold by ZZ shall be
appropriately marked with the applicable patent numbers, in conformity with
applicable law.
b. SurModics recognizes that it is an objective of ZZ to obtain patents
on technology that it develops concerning chemicals having latent reactive
groups and their uses. ZZ recognizes that a vital part of SurModics's
business involves the licensing of others under SurModics's patents and
know-how to make, use and sell products, and that it is an objective of
SurModics to enable its present and future licensees to exploit patent
licenses from SurModics to produce and sell products without interference
from any patent that ZZ might obtain. A purpose of this Paragraph 8(b) is
to establish a system under which each party may accomplish their
respective objectives.
i. "ZZ Patents" means patents which (a) claim inventions conceived
or first reduced to practice during the term of this Agreement solely
by one or more ZZ employees or others who are required to assign
inventions to ZZ, and (b) claim inventions relating to chemical
species having photo-reactive or other latent reactive groups for the
purpose of bonding chemicals such as synthetic polymers and
biologically active materials onto surfaces or into matrices or to
other molecules, the use of such chemicals species, or the products
resulting from such use, and (c) which could be infringed by the
manufacture, use or sale of any product or process covered by any
claim of any patent that SurModics has the right to license to others.
ii. During the term of this Agreement, ZZ will provide SurModics
with a copy of each proposed patent application for a ZZ Patent, and
SurModics will provide comments concerning such application, including
comments regarding inclusion of SurModics's Confidential Information,
prior work done by SurModics in connection with the claimed invention,
and the state of the art. No application for a ZZ Patent shall be
made without SurModics's prior written permission. If SurModics can
fairly show that it had substantial knowledge of the invention of any
ZZ Patent application before receiving from ZZ that patent
application, SurModics shall promptly notify ZZ and the parties shall
cooperate in comparing records of conception of that invention to
determine in good faith which party was the earliest to conceive the
invention.
iii. SurModics shall have and is hereby granted a noncancelable,
nonexclusive, worldwide license, with the right to sublicense, to
make, have made for it, use and sell products and processes covered by
each ZZ Patent to the extent that such manufacture, use or sale also
is covered by any claim of any patent that SurModics has the right to
license to others. If ZZ was the earliest to conceive the invention
of that patent, then the license granted to SurModics, and SurModics's
right to sublicense, shall exclude the right to manufacture, use or
sell Medical Products.
6
iv. In return for such license, SurModics will pay ZZ a total of
five percent (5%) of the royalties (regardless of the number of ZZ
Patents that are licensed to SurModics or the number of licenses
involved) that SurModics receives from its sublicensees based on sales
by its sublicensees of products that but for such sublicenses would
infringe any Valid Claim of ZZ Patents. Notwithstanding the above, if
SurModics was the earliest to conceive the invention of any ZZ Patent,
then the license granted to SurModics shall be considered paid-up.
c. Each party shall own an undivided one-half interest in inventions made
jointly by one or more employees (or others who are required to assign
inventions to a party) of each party ("Joint Inventions"). With respect to
Joint Inventions, the parties agree that mutually acceptable patent counsel
shall be retained to render an opinion as to the patentability thereof and
to prepare, file, and prosecute such patent applications as may reasonably
be required to provide protection for such inventions. Jointly owned
patents resulting therefrom ("Jointly Owned Patents") shall be considered
Patent Rights in determining payment of royalties to SurModics under
Paragraphs 4. With respect to Jointly Owned Patents:
i. SurModics agrees it will not grant licenses for the
manufacture, use or sale of Medical Products as specified in
Attachment B1, B2, and so forth, as of the filing date of such Jointly
Owned Patents, without the advance written consent of ZZ.
ii. ZZ agrees it will not grant any licenses other than for the
manufacture, use or sale of Medical Products as specified in
Attachments B1, B2, and so forth, as of the filing date of such
Jointly Owned Patents, without the advance written consent of
SurModics.
iii. The limitations of Paragraphs 8(c)(i) and 8(c)(ii) apply only
to Jointly Owned Patents and not to any other patents owned by either
party.
iv. Should either party choose to bring suit for infringement by a
third party of any Jointly Owned Patent, the party bringing suit shall
have the right to join the other party as a party to the suit to the
extent required by law.
d. The parties agree to execute and exchange upon request such documents
as may be necessary or desirable to carry out the provisions of Paragraphs
8(b) and 8(c).
9. ALLOCATION OF ROYALTIES
After five (5) years from the Licensed Product Effective Date, the Earned
Royalty rate with respect to any Licensed Product shall be prospectively
reduced to seventy percent (70%) of the Earned Royalty rate set out in
Paragraph 4(a) and the respective Attachments B1, B2, and so forth, to the
extent that and during the term that the
7
manufacture, use or sale of that specific Licensed Product (or a surface
treatment process or a reagent used in such process) is not covered by any
Valid Claim of Patent Rights. The provisions of this Paragraph 9 shall not
apply to payment of Minimum Royalties as provided in Paragraph 4(b) and the
respective Attachments B1, B2, and so forth.
10. TERMINATION
a. For each license granted herein:
i. ZZ shall have the right to terminate the respective Attachment
B1, B2, and so forth, under which such license was granted, but only
in its entirety, at any time upon ninety (90) days advance written
notice. Upon termination of such license, ZZ shall have no further
rights under Patent Rights or Know-how. However, ZZ shall be allowed
to sell any inventory of Licensed Products existing at the time of
termination for a period of six (6) months thereafter (thereafter
destroying any remaining inventory), provided ZZ accounts for such
sales of inventory and pays SurModics the appropriate Earned Royalty
for such sales as set out in Paragraph 4(a) of this Agreement.
ii. SurModics may terminate this Agreement in whole or with respect
to any license granted herein upon thirty (30) days written notice for
any material breach or default by ZZ, including without limitation,
failure to comply with the confidentiality provisions of Paragraph 13,
failure to make reports and payments when due, failure to pay Minimum
Royalties, and withholding or notice of intent to withhold any
royalties provided for in this Agreement. Said termination under this
Paragraph 10(a)(ii) shall become effective at the end of the thirty
(30) day period unless during that period ZZ shall first cure such
breach or default.
iii. Upon termination of any license under any of the provisions of
this Paragraph 10, but subject to the provisions of Paragraph
10(a)(i), referring to the sale of inventory, ZZ shall cease making,
having made for it, using and selling the Licensed Products of such
license that are produced through the use of SurModics's Know-how.
SurModics shall have the right to seek equitable relief to enforce the
provisions of this Paragraph 10(a)(iii).
b. Either party may terminate this Agreement if the other party hereto is
involved in insolvency, dissolution, bankruptcy or receivership proceedings
affecting the operation of its business.
c. Notwithstanding the provisions of Paragraph 20, failure of ZZ to bring
to market any Licensed Product by the date set out for that Licensed
Product in the respective Attachment B1, B2, and so forth, to this
Agreement shall permit SurModics to terminate the license for that Licensed
Product upon thirty (30) days written notice at any time prior to the date
ZZ begins bona-fide commercial sales of that Licensed Product.
8
d. In the event that all licenses granted herein are terminated,
SurModics shall have the right to terminate this Agreement in its entirety
upon written notice.
11. CONTINUING OBLIGATIONS SUBSEQUENT TO TERMINATION
a. Upon any termination of this Agreement or any of the licenses granted
herein, the following rights and obligations shall continue to the degree
necessary to permit their complete fulfillment or discharge:
i. SurModics's right to receive and ZZ's obligation to pay
royalties to the extent owed; and
ii. ZZ's obligation to maintain records and SurModics's right to
audit under Paragraph 5, with respect to sales made and to be made
under Paragraph 10(a)(i); and
iii. Any cause of action or claim of either party, accrued or to
accrue, because of any breach or default by the other party; and
iv. ZZ's obligation to maintain confidentiality under Paragraph 13;
and
v. ZZ's obligation to forebear from use of SurModics's Know-how as
provided in Paragraph 10(a)(iii); and
vi. The parties' obligations under Paragraphs 8(b) and 8(c) with
respect to filing patent applications and payment of royalties on
issued patents.
b. Within thirty (30) days of the date of termination of this Agreement,
ZZ shall return to SurModics all copies of documents and other materials
containing or disclosing any of SurModics's Confidential Information.
12. REPRESENTATIONS AND WARRANTIES
a. Each party warrants to the other that it has not accepted and will not
accept commitments or restrictions with respect to its rights or
obligations under this Agreement which will materially affect the value of
the rights granted by SurModics nor the obligations undertaken by ZZ.
b. Each party has the full and unrestricted right to enter into this
Agreement.
c. Nothing in this Agreement shall be construed as:
i. A warranty or representation by SurModics as to the validity or
scope of any Patent Rights; or
9
ii. A warranty or representation that anything made, used, sold, or
otherwise disposed of, or any process practiced, under any License
granted in this Agreement is or will be free from infringement of
patents of third persons; or
iii. A requirement that SurModics file any patent application,
secure any patent, or maintain any patent in force; or
iv. An obligation to bring or prosecute actions or suits against
third parties for infringement of any patent; or
v. An obligation to furnish any manufacturing or technical
information not encompassed within Know-how; or
vi. Conferring any right on either party to use in advertising,
publicity, or otherwise any trademark or trade name of the other; or
vii. Granting by implication, estoppel, or otherwise any licenses or
rights under patents or other proprietary information of SurModics
other than those included within Patent Rights and Know-how.
d. With respect to photo-reactive reagents supplied at any time by
SurModics, SurModics disclaims all warranties, express or implied,
including but not limited to warranties of merchantability, noninfringement
and fitness for a particular purpose. Notwithstanding anything to the
contrary, SurModics shall not be liable for incidental, consequential,
special, extraordinary or punitive damages of any description, whether for
damage to reputation or goodwill, lost profits, claims of third parties or
otherwise, whether such asserted damage purports to be based on warranty or
guarantee, indemnity or other contract, contribution, negligence or other
tort, or otherwise.
e. SurModics does not make any representations, extend any warranties of
any kind, either express or implied, or assume any responsibilities
whatever with respect to use, sale, or other disposition by ZZ or its
vendees or transferees of Licensed Products incorporating or made by use of
the Patent Rights and Know-how licensed under this Agreement.
f. ZZ represents that it will take action to reasonably bring to market
and to sell Licensed Product throughout ZZ's world-wide marketing territory
during the term of this Agreement. Failure to adequately promote and
market Licensed Product may, at SurModics's option, be interpreted as a
material breach or default of this Agreement. SurModics expects ZZ to
demonstrate appropriate product development activities, participate in
clinical trials, submit appropriate regulatory or governmental filings for
appropriate marketing clearances, integrate the Licensed Product into ZZ's
manufacturing operations, educate appropriate sales and marketing staff,
and introduce and actively market the Licensed Product upon completion of
product development and obtaining appropriate regulatory approvals.
10
13. CONFIDENTIALITY
a. Each party agrees to retain in confidence all Know-how and other
information received from the other, including without limitation,
information required to be maintained in confidence under prototype
development or manufacturing scale-up or postscale-up relationships between
the parties, for a period of fifteen (15) years from the date of disclosure
or five (5) years from the date of termination of this Agreement, whichever
is longer. Each party agrees not to disclose any of such Know-how or other
information to third parties nor to use the same except in accordance with
this Agreement. Each party's obligation of nondisclosure and non-use shall
not apply to information which:
i. at the time of its disclosure to the receiving party is
available to the public;
ii. after disclosure becomes available to the public through no
fault of the receiving party;
iii. the receiving party can show was in its possession at the time
of disclosure to it by the other;
iv. the receiving party can show was received by it from a third
party without breach of a confidential obligation; or
v. is required to be disclosed by any governmental agency.
Even after any of such information becomes available to the public, each
party shall not disclose without the other's prior written approval the
fact that such information was furnished by or originated with the other.
b. For the purpose of this entire Paragraph 13, Know-how or other
information which is specific shall not be deemed to be within any of the
specified exceptions merely because it is embraced by more general
information in such exception. In addition, any combination of features
shall not be deemed to be within any of the specified exceptions merely
because individual features are in such exception, but only if the
combination itself and its principle of operation are in such exception.
c. Notwithstanding the above, ZZ specifically agrees that it will not
disclose to any Affiliates or other third party any of SurModics's Know-how
relating to the manufacture of SurModics's chemical reagents, the precise
chemical composition of such reagents, how such reagents are tested, how
they are quality controlled, and any other specific information concerning
the production of such reagents.
d. The provisions of this entire Paragraph 13 shall survive termination
of this Agreement for any reason.
11
e. Nothing herein shall in any way affect the obligations of the parties
under any prior secrecy or confidential disclosure agreements, including
the Prior Disclosure Agreement, which obligations shall continue in
accordance with the terms of each such agreement to the extent not
inconsistent with the present Agreement.
14. ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors to the entire assets and business of
the respective parties hereto. Either party may assign its rights and
obligations under this Agreement to a financially responsible third party,
but only in connection with a complete transfer to the third party of the
business to which this Agreement pertains. The assigning party will so
inform the other party to this Agreement without delay of any assignment
made in accordance with the conditions of this Agreement. This Agreement
shall not otherwise be assignable by either party without the prior written
consent of the other party. Any and all assignments of this Agreement or
any interest therein not made in accordance with this paragraph shall be
void.
15. GOVERNMENT APPROVAL
ZZ shall have the sole responsibility, at ZZ's sole expense, for obtaining
any government approvals that may be required for the investigation or
marketing of Licensed Products.
16. PRODUCT LIABILITY
ZZ will defend and indemnify SurModics against all losses, liabilities,
lawsuits, claims, expenses (including attorney's fees), costs, and
judgments incurred through personal injury, property damage, or other
claims of third parties, arising from the design, manufacture, use, or sale
of Licensed Products.
17. NO WAIVER
Any waiver of any term or condition of this Agreement by either party shall
not operate as a waiver of any other or continued breach of such term or
condition, or any other term or condition, nor shall any failure to enforce
a provision hereof operate as a waiver of such provision or of any other
provision hereof.
18. NOTICES
All communications or other notices required or permitted under this
Agreement shall be in writing and shall be deemed to be given when
personally delivered, or when mailed by registered or certified mail,
postage prepaid, and addressed as follows:
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If to SurModics:
License Administration
SurModics, Inc.
9924 West 74th Street
Eden Prairie, MN 55344
If to ZZ:
X
X
X
Either party shall have the right to change the person and/or address to
which notices hereunder shall be given, by notice to the other party in the
manner set out above.
19. CAPTIONS
The captions and headings of this Agreement are for convenience only and
shall in no way limit or otherwise affect any of the terms or provisions
contained herein. This Agreement shall be construed without regard to any
presumption or other rule requiring construction hereof against the party
drafting this Agreement.
20. FORCE MAJEURE
Neither party shall be liable for failure to perform as required by any
provisions of this Agreement where such failure results from a cause beyond
such party's reasonable control such as acts of God, regulation or other
acts of civil or military authority, required approval(s) of government
bodies, fires, strikes, floods, epidemics, quarantine restrictions, riot,
delays in transportation and inabilities to obtain necessary labor,
materials, or manufacturing facilities. In the event of any delay
attributable to any of the foregoing causes, the time for performance
affected thereby shall be extended for a period equal to the time lost by
reason of such delay. The cumulative effect of all such delays under this
Paragraph 20 shall not exceed one (1) year.
21. NO AGENCY
Nothing in this Agreement authorizes either SurModics or ZZ to act as agent
for the other as to any matter, or to make any representations to any third
party indicating or implying the existence of any such agency relationship.
SurModics and ZZ shall each refrain from any such representations. The
relationship between SurModics and ZZ is that of independent contractors.
22. SEVERABILITY
Should any provision of this Agreement, or the application thereof, to any
extent be held invalid or unenforceable, the remainder of this Agreement
and the application thereof
13
other than such invalid or unenforceable provisions shall not be affected
thereby and shall continue valid and enforceable to the fullest extent
permitted by law or equity.
23. GOVERNING LAW
For all purposes under this Agreement, the parties agree and admit that
jurisdiction and venue are proper in the Federal District Court, District
of Minnesota. This Agreement shall for all purposes be governed and
interpreted in accordance with the laws of the State of Minnesota, except
for its conflict of laws provisions.
24. ARBITRATION
a. In the event of any dispute concerning this Agreement, including its
interpretation, performance, breach or termination, the procedures of this
Paragraph 24 shall apply; provided, however, that either party shall have
the unrestricted right at any time to seek a court injunction prohibiting
the other party from making unauthorized disclosure or use of Confidential
Information as provided for in Paragraph 13 or unauthorized use of
SurModics's Knowhow as provided for in Paragraph 10(a)(iii).
b. Both parties will use good faith and reasonable efforts to resolve any
dispute informally and as soon as practical. If any such dispute is not
resolved informally within a reasonable period, then the Chief Executive
Officers of the parties will meet at a mutually agreeable time and place to
attempt to resolve the dispute.
c. If the parties are unable to resolve a dispute as provided immediately
above, either party may submit the dispute for resolution by mandatory,
binding arbitration in the city of Minneapolis, MN (or such other place as
the parties may mutually agree) under the auspices of the American
Arbitration Association under it's Commercial Arbitration Rules. Each
party shall select one independent, qualified arbitrator and the two
arbitrators so selected shall then select a third arbitrator in accordance
with the Commercial Rules. Each party reserves the right to object to any
individual arbitrator (no matter by whom chosen) who has been employed by
or affiliated with a competing organization.
d. The arbitrators, who shall act by majority vote, shall be empowered to
decree any and all relief of an equitable nature, including but not limited
to temporary restraining orders, temporary injunctions, and/or permanent
injunctions, and shall also be able to award damages, with or without an
accounting of costs. Judgement on the award rendered by the arbitrator(s)
may be entered into any court having jurisdiction thereof. Each party
shall bear its own costs and divide other reasonable arbitrator costs
equally.
25. ENTIRE AGREEMENT
This Agreement, together with the Prior Disclosure Agreement and all
addenda, attachments, and writings required or contemplated hereby,
constitutes the entire agreement between the parties with respect to the
Licenses granted herein, and no party
14
shall be liable or bound to the other in any manner by any warranties,
representations or guarantees except as specifically set forth herein.
This Agreement shall not be altered or otherwise amended except by an
instrument in writing signed by both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date last
written below.
SurModics, Inc. ZZ
By: By:
----------------------------- ----------------------------------
Its: Its:
----------------------------- ----------------------------------
Date: Date:
----------------------------- ----------------------------------
Secondary approval: Secondary approval:
---------------- ---------------------
15
ATTACHMENT A
SURMODICS, INC. U.S. PATENTS
1. METHOD OF IMPROVING THE BIOCOMPATIBILITY OF SOLID SURFACES
U.S. Patent No. 4,973,493 issued 11/27/90
2. BIOCOMPATIBLE COATINGS FOR SOLID SURFACES
U.S. Patent No. 4,979,959 issued 12/25/90
3. BIOCOMPATIBLE DEVICE WITH COVALENTLY BONDED BIOCOMPATIBLE AGENT
U.S. Patent No. 5,263,992 issued 11/23/93
4. BIOMOLECULE ATTACHMENT TO HYDROPHOBIC SURFACES
U.S. Patent No. 5,217,492 issued 6/8/93
5. METHOD OF BIOMOLECULE ATTACHMENT TO HYDROPHOBIC SURFACES
U.S. Patent No. 5,258,041 issued 11/2/93
6. PREPARATION OF POLYMERIC SURFACES VIA COVALENTLY ATTACHING POLYMERS
U.S. Patent No. 5,002,582 issued 3/26/91
7. RESTRAINED MULTIFUNCTIONAL REAGENT FOR SURFACE MODIFICATION
U.S. Patent No. 5,414,075 issued 5/9/95
8. PREPARATION OF POLYMERIC SURFACES (Divisional)
Filed 5/29/92, allowed 11/1/95
SURMODICS, INC. U.S. PATENT APPLICATIONS
1. IMMOBILIZATION OF CHEMICAL SPECIES IN CROSSLINKED MATRICES
Filed 2/13/92
2. VIRUS INACTIVATING COATINGS
Filed 6/7/95
3. METHOD AND IMPLANTABLE ARTICLE FOR PROMOTING ENDOTHELIALIZATION
Filed 5/26/95
4. WATER SOLUBLE CROSSLINKING AGENTS
Filed 11/3/95
16
SURMODICS, INC. FOREIGN PATENTS
1. IMPROVEMENT OF THE BIOCOMPATIBILITY OF SOLID SURFACES
Canadian Patent No. 1305068, issued 7/14/92
Australian Patent No. 615637, issued 10/16/87
EPO Patent No. 0326579, issued 1/11/95
2. BIOMOLECULE ATTACHED TO A SOLID SURFACE BY MEANS OF A SPACER AND METHODS OF
ATTACHING BIOMOLECULES TO SURFACES
Canadian Patent No. 1335721, issued 5/30/95
SURMODICS, INC. FOREIGN PATENT APPLICATIONS
1. BIOCOMPATIBLE COATINGS
Filed in Canada, Europe, Japan, Denmark, and Norway
2. PREPARATION OF POLYMERIC SURFACES
Filed in Canada, Europe, Japan, Denmark, and Norway
3. IMMOBILIZATION OF CHEMICAL SPECIES IN CROSSLFNKED MATRICES
Filed in Canada, Europe, Australia, Japan
4. IMPROVEMENT OF THE BIOCOMPATIBILITY OF SOLID SURFACES
Filed in Japan
5. RESTRAINED MULTIFUNCTIONAL REAGENTS FOR SURFACE MODIFICATION
Filed in Canada, Europe, Australia and Japan
17
ATTACHMENT B1
Title of Attachment
1. MEDICAL PRODUCTS
"Medical Products" means X.
2. LICENSED PRODUCT
"Licensed Products" means Medical Products which are surface-treated with
_______.
3. GRANT OF LICENSE The license granted under this Attachment is
non-exclusive.
4. LICENSE FEES
ZZ will pay to SurModics a one-time, nonrefundable License Fee of $________
upon execution of this Agreement.
5. ROYALTY PAYMENTS
ZZ shall pay to SurModics a royalty, for the Patent Rights and Know-how
license granted herein, which will be the greater of Paragraphs a) or b) as
follows:
a. Earned Royalties on Net Sales ($U.S.) of Licensed Products sold in
each calendar year of:
----------------------------------------------------------------
Net Sales In Each
Calendar Year Earned Royalty Rate
----------------------------------------------------------------
On the first $10,000,000 ? %
----------------------------------------------------------------
On the next $10,000,000 ? %
----------------------------------------------------------------
On Net Sales over $20,000,000 ? %
----------------------------------------------------------------
b. Quarterly Minimum Royalties for all Attachment B1 Products as follows:
----------------------------------------------------------------
For Each Quarter Calendar
Year Beginning Quarterly Minimum Royalty
----------------------------------------------------------------
January 1, 1998 $ ?
----------------------------------------------------------------
January 1, 1999 $ ?
----------------------------------------------------------------
January 1, 2000 $ ?
----------------------------------------------------------------
For the quarter calendar year commencing with January 1, XXXX, and each
year thereafter, the quarter calendar year Minimum Royalty shall be the
prior year's quarterly Minimum Royalty adjusted by a percentage equal to
the percentage change in the "Consumer Price Index For All Urban Consumers"
for the prior calendar year as reported by the U.S. Department of Labor.
6. PERFORMANCE
18
Notwithstanding the provisions of Paragraph 20 of the Master License
Agreement:
a. Failure of ZZ to begin bona fide commercial sales by January 1, XXXX
of a Licensed Product as defined in this Attachment, shall permit SurModics
to terminate the license for that Licensed Product upon thirty (30) days
written notice at any time prior to the date ZZ begins bona-fide commercial
sales of that Licensed Product.
b. If, after January 1, XXXX, there are four (4) consecutive quarters in
which ZZ fails to generate Earned Royalties under Paragraph 5(a) of this
Attachment then upon thirty (30) days written notice given to ZZ, the
license granted herein shall, at SurModics's option, be terminated.
The Licensed Product Effective Date of this Attachment shall be the date last
written below.
SurModics, Inc. ZZ
By: By:
----------------------------- ----------------------------------
Its: Its:
----------------------------- ----------------------------------
Date: Date:
----------------------------- ----------------------------------
Secondary approval: Secondary approval:
---------------- ---------------------
19
AMENDED LICENSE AGREEMENT
THIS AGREEMENT shall be effective on the last date of execution hereof, by
and between Bio-Metric Systems, Inc. ("BSI"), a corporation of the State of
Minnesota, having a principal place of business at 9924 West Seventy-Fourth
Street, Eden Prairie, Minnesota 55344, and Abbott Laboratories ("ABBOTT"), a
corporation of the State of Illinois, having a principal place of business at
Abbott Park, Illinois 60064-3500. This Agreement amends and supersede that
License Agreement between BSI and ABBOTT ("The Parties") dated May 30, 1989.
WHEREAS, BSI is engaged in biological, chemical and technical research, has
developed a body of proprietary technology useful in reagents, processes and
devices related thereto, and possesses certain intellectual property including
patents, patent applications, trade secrets, know-how and other information
related to such proprietary technology;
WHEREAS, ABBOTT has expertise in developing and marketing diagnostic
products and intends to develop and market diagnostic products that utilize, in
whole or in part, such proprietary technology of BSI;
WHEREAS, ABBOTT desires to receive an exclusive license under such
proprietary technology of BSI;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.01 "PROPRIETARY RIGHTS" shall mean the rights under:
(a) all foreign and United States Patent applications related in whole
or in part to BSI's United States Patent Applications Serial No. 467,229 (filed
February 23, 1983) and Serial No. 356,459 (filed March 9, 1982);
(b) all continuation, continuation-in-part, divisional, reissue and
reexamination applications and any foreign or United States equivalent of such
applications described above;
(c) all patents that issue on the applications defined in (a) and (b)
above; and
(d) related trade secrets and know-how of BSI and which are based in
whole or in part upon BSI's technology exemplified in such applications
described above.
1.02 "DIAGNOSTIC APPLICATIONS" shall mean the four following fields of
application of PROPRIETARY RIGHTS: HUMAN DIAGNOSTICS, VETERINARY DIAGNOSTICS,
FOOD/AGRICULTURAL DIAGNOSTICS and ENVIRONMENTAL DIAGNOSTICS.
1.03 "HUMAN DIAGNOSTICS" shall mean the detection and measurement of
substances in human source materials.
1.04 "VETERINARY DIAGNOSTICS" shall mean the detection and measurement
of substances in non-human animal source materials.
1.05 "FOOD/AGRICULTURAL DIAGNOSTICS" shall mean the detection and
measurement of substances in human or animal feedstuffs, including but not
limited to toxins, nutrients, contaminants and the like.
2
1.06 "ENVIRONMENTAL DIAGNOSTICS" shall mean the detection and
measurement of substances in materials not included in the other three fields of
DIAGNOSTIC APPLICATIONS as defined in Paragraphs 1.03, 1.04 and 1.05.
1.07 "LICENSED PRODUCT(S)" shall mean an apparatus sold by ABBOTT or an
ABBOTT AFFILIATE which but for the license granted herein:
(a) for each country where a patent(s) exist the manufacture, use or
sale of such apparatus in such country would infringe a valid and enforceable
claim of an unexpired patent included in PROPRIETARY RIGHTS; or
(b) utilizes trade secrets or know-how included in PROPRIETARY RIGHTS.
As used herein a "valid and enforceable claim" is a claim that has
not been held invalid or unenforceable by order of a court of competent
jurisdiction from which no appeal is taken.
1.08 "AFFILIATE" shall mean any corporation or other business entity
controlled by, controlling, or under common control with the affected party,
wherein control means direct or indirect ownership of at least thirty percent
(30%) of the voting stock, or at least thirty percent (30%) interest in the
equity, of such corporation or other business entity, or in either case the
maximum amount allowed by law.
1.09 "NET SALES" shall mean the total invoiced price for sales by
ABBOTT, an ABBOTT AFFILIATE or an ABBOTT sublicensee of LICENSED PRODUCTS less:
(a) actual credited allowances to customers for spoiled, damaged,
outdated or returned LICENSED PRODUCTS;
(b) any taxes or other governmental charges levied or measured or both
by sales and included in the billing price; and
3
(c) amounts for transportation, insurance, handling or shipping charges
to purchasers.
In the event that a LICENSED PRODUCT is increased in price to
include an amount to cover instrument system recovery under a Reagent Agreement
Plan, Reagent Rental Plan, or other successor or similar plan (collectively
referred to herein as 'RAP"), the NET SALES for such LICENSED PRODUCT sold under
a RAP shall be reduced as follows: Total instrument depreciation and service
charges (determined according to generally accepted accounting principles and
not primarily for the purpose of avoiding royalties under this Agreement)
applicable to both licensed and unlicensed products sold under a RAP shall be
divided by total sales under a RAP on a quarterly basis to determine an overall
RAP factor percentage. The RAP factor percentage shall then be multiplied by
quarterly Net Sales of Licensed Products sold under RAP to determine the amount
by which Net Sales shall be reduced under this paragraph. The depreciation rate
for the instruments shall be calculated by generally accepted accounting
principles, an in any event, such instruments shall not be depreciated over a
period less than three (3) years. In no event shall the NET SALES for a
LICENSED PRODUCT under a RAP plan be less than the invoiced price, less the
above-identified credits under (a) through (c) of this Paragraph 1.09, of
LICENSED PRODUCTS sold in other than RAP sales.,
1.10 "FIRST COMMERCIAL SALE" shall mean the earlier of the first sale by
ABBOTT, an ABBOTT AFFILIATE or an ABBOTT sublicensee for monetary or other
valuable consideration of a LICENSED PRODUCT to (a) a customer, who is not an
AFFILIATE, or (b) to an AFFILIATE for consumption by the AFFILIATE.
1.11 "REAGENTS" shall mean substances, used in LICENSED PRODUCTS for
detecting the presence or quantity of analyte in a sample, which have physical
properties that are applicable to such detection or which, because of their
chemical or biological activity,
4
produce reactions that are applicable to such detection; or substances which
improve the stability or efficacy of such substances used in LICENSED PRODUCTS.
ARTICLE 2
LICENSE TO ABBOTT
2.01 BSI hereby grants to ABBOTT a worldwide, exclusive license, with
the right to grant sublicenses with BSI's prior written approval, under
PROPRIETARY RIGHTS to make, have made, use and sell LICENSED PRODUCTS for
DIAGNOSTIC APPLICATIONS. Such exclusive license, with respect to patents
included within PROPRIETARY RIGHTS, shall continue until the expiration of the
last to expire of such patents, and with respect to unpatented aspects of
PROPRIETARY RIGHTS, shall be perpetual.
2.02 ABBOTT shall inform BSI in advance of ABBOTT's desire to grant
sublicenses hereunder, the identity of the proposed sublicensee and the terms of
the proposed sublicense. BSI approval of such proposed sublicenses shall NOT be
unreasonably withheld.
2.03 If, within four (4) years following May 30, 1989, ABBOTT or an
ABBOTT sublicensee have not, in each field of DIAGNOSTIC APPLICATIONS, either
(a) submitted an application for governmental regulatory approval required for
the sale of a LICENSED PRODUCT, or (b) made a FIRST COMMERCIAL SALE of a
LICENSED PRODUCT which does not require governmental regulatory approval, BSI
shall, after the expiration of said four (4) year period, have the option to
convert ABBOTT's exclusive license under Paragraph 2.01 to a non-exclusive
license for each field of DIAGNOSTIC APPLICATIONS in which neither (a) nor (b)
above has occurred, provided that BSI provides ABBOTT with ninety (90) days
written notice prior to exercise of such option for each such field. After such
four (4) year period has expired, for each field of DIAGNOSTIC APPLICATIONS in
which ABBOTT or a sublicensee
5
has performed either (a) or (b) above, prior to notification by BSI to ABBOTT
that BSI is exercising the option under this Paragraph 2.03, BSI's option shall
terminate.
ARTICLE 3
LICENSE FEES, CONSIDERATION
3.01 As consideration for the license granted hereunder to ABBOTT,
ABBOTT has paid to BSI a QQ Indicates that material has been omitted pursuant to
a request for confidential treatment. Such material has been filed separately
with the SEC., in accordance with a certain Letter of Intent between ABBOTT and
BSI dated December 29, 1988, a copy of which is appended hereto as Exhibit A.
3.02 As further consideration for the license granted hereunder to
ABBOTT, ABBOTT shall pay to BSI during the term of this Agreement *. Such
annual license fee shall be payable until the minimum royalty payments under
Article 5 hereof commence or until ABBOTT's exclusive license hereunder with
respect to all DIAGNOSTIC APPLICATIONS has been converted to non-exclusive as
provided under Paragraph 2.03 hereof, whichever event occurs earlier. Each such
annual license fee payment shall be due within thirty (30) days of May 30th
beginning with May 30, 1990.*
3.03 ABBOTT shall mark LICENSED PRODUCTS made or sold in the United
States with the appropriate patent marking under 35 USC 287.
ARTICLE 4
ROYALTIES
4.01 As additional consideration for the license granted hereunder to
ABBOTT, ABBOTT shall pay to BSI a royalty of * of NET SALES, commencing upon the
FIRST COMMERCIAL SALE of LICENSED PRODUCT manufactured and sold in countries
which are not countries that have granted patents included within PROPRIETARY
RIGHTS, and continuing for so long as such LICENSED PRODUCT is so manufactured
or sold during the *, in accordance with a certain Letter of Intent between
ABBOTT and BSI dated December 29, 1988, a copy of which is appended hereto as
Exhibit A.
3.02 As further consideration for the license granted hereunder to
ABBOTT, ABBOTT shall pay to BSI during the term of this Agreement *. Such
annual license fee shall be payable until the minimum royalty payments under
Article 5 hereof commence or until ABBOTT's exclusive license hereunder with
respect to all DIAGNOSTIC APPLICATIONS has been converted to non-exclusive as
provided under Paragraph 2.03 hereof, whichever event occurs earlier. Each such
annual license fee payment shall be due within thirty (30) days of May 30th
beginning with May 30, 1990.*
3.03 ABBOTT shall mark LICENSED PRODUCTS made or sold in the United
States with the appropriate patent marking under 35 USC 287.
ARTICLE 4
ROYALTIES
4.01 As additional consideration for the license granted hereunder to
ABBOTT, ABBOTT shall pay to BSI a royalty of * of NET SALES, commencing upon the
FIRST COMMERCIAL SALE of LICENSED PRODUCT manufactured and sold in countries
which
- ------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
6
are not countries that have granted patents included within PROPRIETARY RIGHTS,
and continuing for so long as such LICENSED PRODUCT is so manufactured or sold
during the * period following the Effective Date of this Agreement, with the
exception that no such royalty obligation shall apply to ABBOTT products having
only one analyte measuring zone unless such products utilize trade secrets or
know-how included in PROPRIETARY RIGHTS. After the expiration of such * period,
the royalty obligation under this Paragraph 4.01 shall cease.
4.02 In lieu of payments of royalty due under Paragraph 4.01 hereof, if
the manufacture, use or sale of a LICENSED PRODUCT would infringe, in the
absence of this Agreement, any claims of a patent included within PROPRIETARY
RIGHTS, ABBOTT shall pay to BSI * of NET SALES for the full term set out in
Paragraph 8.0 4 (a).
4.03 ABBOTT shall pay to BSI, in addition to any royalty payable under
Paragraphs 4.01 or 4.02 hereof, a royalty of * of NET SALES of LICENSED PRODUCTS
that incorporate REAGENTS developed by BSI for said LICENSED PRODUCTS.
4.04 In the event that a license from a third party is necessary in
order to manufacture, use or sell any LICENSED PRODUCT, solely because of the
incorporation in such LICENSED PRODUCT of technology included in PROPRIETARY
RIGHTS, any royalty payments or other monetary consideration paid by ABBOTT to
such third party for such license shall be credited * of the royalty due BSI for
that LICENSED PRODUCT in any one year, on a year-by-year basis until fully
credited.
4.05 In any one year, the sum of the amounts creditable, under
Paragraphs 3.02 and 4.04, against royalties due BSI shall not exceed * of the
royalty due BSI in such year.
- ------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
7
4.06 Only one royalty shall be due BSI on NET SALES of any specific
LICENSED PRODUCT hereunder irrespective of the number of covering patents,
patent claims, trade secrets or know-how included in PROPRIETARY RIGHTS which
may be embodied in or utilized by such LICENSED PRODUCT.
4.07 LICENSED PRODUCT shall be considered as sold when invoiced to a
customer by ABBOTT, an ABBOTT AFFILIATE or an ABBOTT sublicensee. Royalty shall
be due for sales to an ABBOTT AFFILIATE only if LICENSED PRODUCT is consumed by
such AFFILIATE, in which case, royalty shall be calculated from the invoiced
price to such AFFILIATE or a reasonable arms-length invoice price if such
AFFILIATE is treated on a more favorable basis than the general trade.
Otherwise, royalty shall be due when sold by such AFFILIATE to a third party and
NET SALES calculated based on the invoiced price to such third party.
4.08 If during the term hereof, for all DIAGNOSTIC APPLICATIONS for
which BSI converts the exclusive license granted to ABBOTT to non-exclusive as
provided in Paragraph 2.03 hereof, BSI grants a license to a third party other
than an AFFILIATE of BSI to make, have made, use or sell LICENSED PRODUCT with a
more favorable royalty to such licensee than that set forth in Paragraphs 4.01,
4.02 and 4.03 above, BSI shall so notify ABBOTT in writing and the royalty set
forth in Paragraphs 4.01, 4.02 and 4.03 above shall thereupon become the same as
the royalty to such third party licensee.
8
ARTICLE 5
MINIMUM ROYALTIES
5.01 ABBOTT shall pay to BSI a first minimum royalty of * six (6) months
after the date of the FIRST COMMERCIAL SALE.
5.02 ABBOTT shall pay to BSI a second minimum royalty of * eighteen (18)
months after the date of the FIRST COMMERCIAL SALE.
5.03 ABBOTT shall pay to BSI a third minimum royalty of * thirty (30)
months after the date of the FIRST COMMERCIAL SALE, and further minimum royalty
payments of * each twelve (12) months thereafter for the term of this Agreement.
5.04 Each minimum royalty payment under Paragraphs 5.01, 5.02 and 5.03
above shall be one-hundred percent (100%) credited against royalties that become
due hereunder as a result of the sale of LICENSED PRODUCTS during the twelve
(12) month period that follows each minimum royalty payment.
5.05 Minimum royalty payments hereunder shall be due within thirty (30)
days of the dates specified in Paragraphs 5.01, 5.02 and 5.03 above.
5.06 In the event that the exclusive licenses for all DIAGNOSTIC
APPLICATIONS have been converted under Paragraph 2.03 herein to non-exclusive
licenses, * royalty payments shall be due.
- ------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
9
ARTICLE 6
ROYALTY PAYMENTS, REPORTS, RECORDS
6.01 ABBOTT, ABBOTT AFFILIATES and ABBOTT sublicensees shall keep
complete and accurate records containing all information required for the
computation and verification of the royalties to be paid hereunder.
6.02 On or before sixty (60) days following each consecutive three (3)
month period beginning on the date of FIRST COMMERCIAL SALE and continuing
through the remainder of the term of this Agreement, ABBOTT shall deliver to BSI
a written statement of account of NET SALES of LICENSED PRODUCT of such three
(3) month period and a calculation of the royalty due thereon to BSI. Such
statement shall show the gross sales of LICENSED PRODUCT and shall itemize the
deductions allowed in calculating NET SALES as defined in Paragraph 1.09 hereof.
6.03 Payment of royalties shall accompany the statements to be submitted
in accordance with Paragraph 6.02 above.
6.04 If royalties are not paid when due, interest shall be accrued on
the unpaid royalties from the date due until paid, at a rate per annum which
shall be the lesser of either the prime rate of the Citibank, N.A., New York,
then in force for short-term borrowing, or the maximum legal rate then permitted
under the laws of the State of Minnesota.
6.05 All royalties due hereunder shall be payable in United States
Dollars. All royalties due for sales in countries foreign to the United States
shall be converted (for the purposes of calculation only) into equivalent United
States funds at the exchange rate published by the Wall Street Journal on the
last business day of the reporting period.
10
6.06 Payment of royalties on sales of LICENSED PRODUCT shall be subject
to any restrictions imposed by the local government. If foreign exchange is not
freely available, BSI shall have the option to accept payment in the currency of
the country from which royalties are due. In the event that local law restricts
such royalty payment, the royalty due shall be paid to the extent permitted by
local law. In the event that a withholding or other tax is imposed on a royalty
payment due hereunder, the amount of royalty payable shall be the amount due
less the amount of such tax actually paid.
6.07 ABBOTT shall, upon written request of BSI, permit an independent
public accountant selected by BSI and acceptable to ABBOTT to have access during
ordinary business hours to examine such records referred to in paragraph 6.01 as
may be necessary to determine either the accuracy of any report or the
sufficiency of any royalty payment made under this Agreement. ABBOTT shall only
be obligated to permit access once each year during the term of this Agreement
and to such of its records which directly relate to such royalty payments which
accrued or occurred within three (3) years prior to such request.
ARTICLE 7
CONFIDENTIALITY
7.01 Information and materials exchanged between the parties in
performing hereunder shall be deemed Confidential Matter as provided below.
7.02 Confidential Matter received by a party from the other shall not be
disclosed by such receiving party to any third party, or used by such receiving
party for its own benefit, or for the benefit of a third party, except as
expressly provided herein.
7.03 To be accorded treatment as Confidential Matter, however, such
Matter:
11
(a) must be first disclosed to the receiving party in writing and
plainly marked "Confidential" or words to the same effect; or
(b) if first disclosed orally, must be summarized in writing by the
disclosing party and plainly marked "Confidential", or words to the same effect,
and delivered to the receiving party within thirty (30) days of its first oral
disclosure to the receiving party; or
(c) if a physical thing, must be marked "Confidential", or words to the
same effect, or be accompanied by a writing specifically identifying such thing
as "Confidential".
Information and material provided by one party to the other hereunder which is
not identified as "Confidential" as provided above shall be considered as given
and received without any obligation of confidentiality or nonuse and the
receiving party shall be free to use such information in any way it sees fit,
subject only to any rights that the disclosing party may have under applicable
United States or foreign Patent Laws.
7.04 Subject to Paragraph 15.01 (a) and (b), the specific terms of this
Agreement and the identity of the parties shall be considered Confidential
Matter.
7.05 Further, the obligations of confidentiality and nonuse of this
Article 7 shall not apply to information or material:
(a) which is known by the receiving party prior to receipt from the
disclosing party as evidenced by documents in the possession of the receiving
party at the time of disclosure,
(b) which, after receipt from the disclosing party, is disclosed to
the receiving party by a third party having the legal right to do so,
(c) which is available to the public at the time of receipt from the
disclosing party,
(d) which becomes available to the public after receipt from the
disclosing party through no fault of the receiving party,
12
(e) which is independently developed by employees of the receiving
party not having access to Confidential Matter of the disclosing party,
(f) which is required, in the opinion of legal counsel of the receiving
party, to be disclosed for securing approval of governmental regulatory
agencies, including but not limited to the U.S. Food and Drug Administration, to
market LICENSED PRODUCTS, provided that the receiving party shall use its
reasonable efforts to seek to obtain from such agencies such protection for such
information against public disclosure as may be legally available,
(g) which is required, in the opinion of legal counsel of the receiving
party, to be disclosed for the filing of patent applications by the receiving
party, provided that the disclosing party is timely advised of the receiving
party's intention to include such information in a patent application of the
receiving party and the disclosing party does not notify the receiving party
within thirty (30) days of its objection to such disclosure, or
(h) which is reasonably necessary to be disclosed by the receiving
party to its individual agents or third parties who require knowledge thereof in
order to perform their normal duties or services, such as legal counsel,
certified public accountants, and the like, provided that such agents and third
parties are advised of and acknowledge the confidential nature of such
disclosure and agree in writing to maintain the confidential nature of the
disclosed information under terms no less rigid than those imposed upon the
parties to this Agreement.
7.06 Each party shall use the same level of care in complying with the
obligations hereof respecting Confidential Matter as it does with respect to its
own information of similar nature. The parties mutually represent and warrant
that each and every employee who will have access to the other party's
Confidential Matter hereunder shall be under contractual obligation not to
disclose or use such Confidential Matter except as directed by such other party.
13
ARTICLE 8
TERM AND TERMINATION
8.01 Either party may terminate this Agreement at any time if the other
party fails to perform any material obligation, covenant, condition, or
limitation herein, provided such other party shall not have remedied its failure
within ninety (90) days after receipt of written notice of such failure.
8.02 If performance of this Agreement or any part hereof by either party
shall be rendered unenforceable or impossible under, or in conflict with any
law, regulation, or official action by any government agency having jurisdiction
over such party, then such party shall not be considered in default by reason of
failure to perform and the validity of all remaining provisions hereof shall not
be affected by such result.
8.03 Abbott may terminate this Agreement beginning three (3) years after
May 30th, 1989, upon ninety (90) days prior written notice. Such termination
shall not relieve ABBOTT of the obligation to pay royalties or make any other
payments owed to BSI which accrues prior to the termination date.
8.04 Unless earlier terminated as provided in Paragraphs 8.01 and 8.03
above, this Agreement shall continue: (a) with respect to issued patents under
PROPRIETARY RIGHTS, until the expiration of the last to expire patent included
within PROPRIETARY RIGHTS, and (b) with respect to unpatented aspects of
PROPRIETARY RIGHTS, perpetually.
8.05 Upon expiration or earlier termination of this Agreement, the
obligations under Article 7 hereof shall survive and continue in effect for the
longer of three (3) years following such expiration or termination, or seven (7)
years from the effective date of this Agreement.
14
8.06 Neither party shall be liable in damages for, nor shall this
Agreement be terminable or cancellable by reason of, any delay or default in any
such party's performance hereunder if such default or delay is caused by events
beyond such party's reasonable control including, but not limited to, acts of
God, regulation or law or other action of any government or agency thereof, war
or insurrection, civil commotion, destruction of production facilities or
materials by earthquake, fire, flood or storm, labor disturbances, epidemic, or
failure of suppliers, public utilities or common carriers. Each party agrees to
endeavor to resume its performance hereunder if such performance is delayed or
interrupted by reason of such forces majeure as listed above.
ARTICLE 9
WARRANTIES
9.01 BSI warrants that BSI has good, clear title to the PROPRIETARY
RIGHTS.
9.02 Each party warrants and represents that it has the full and
unrestricted right to enter into this Agreement, and that the terms of this
Agreement are not inconsistent with any other contractual arrangement it may
have.
9.03 Nothing in this Agreement shall be construed as:
(a) A warranty or representation by BSI as to the scope or validity of
any claim or patent in PROPRIETARY RIGHTS;
(b) A warranty or representation by BSI that any product made, used, or
sold by ABBOTT under any license granted hereunder is or will be free from
infringement of patents of any third parties;
(c) An obligation to furnish any manufacturing or technical information
not encompassed within PROPRIETARY RIGHTS;
15
(d) Conferring any right to use in advertising, publicity or otherwise
any trademark or trade name of BSI;
(e) Granting by implication, estoppel or otherwise any licenses or
rights under patents or other proprietary information of BSI other than those
included within PROPRIETARY RIGHTS; or
(f) A representation, a warranty or assumption of responsibility with
respect to use, sale or other disposition by ABBOTT, ABBOTT's AFFILIATES,
sublicensees, vendees or transferees of LICENSED PRODUCT.
9.04 BSI shall promptly notify ABBOTT if at any time BSI learns of any
matter which does or might materially and adversely affect or differ from the
representations and warranties made pursuant to this Article 9.
ARTICLE 10
PATENT INFRINGEMENT, INTERFERENCE & PROSECUTION
10.01 In the event that a party becomes aware of an infringement or
potential infringement of any patent included in PROPRIETARY RIGHTS, that party
shall inform the other in writing of all details available.
10.02 In the event of infringement by any third party of any patent
included in PROPRIETARY RIGHTS, BSI shall have the right, at BSI's own expense,
to enforce by appropriate legal proceedings or otherwise, such patent against
such third party infringer. All recoveries by way of costs, royalties, damages,
lost profits, royalties or settlements shall be retained by BSI. ABBOTT may, at
ABBOTT's own expense, be represented by ABBOTT's counsel, acting in an advisory
but not controlling capacity.
16
10.03 In the event of infringement by any third party as described in
Paragraph 10.02, if BSI fails to proceed against such infringer within ninety
(90) days after receipt of a written request by ABBOTT to do so, or if BSI does
not exercise due diligence in legal proceedings instituted pursuant to Paragraph
10.02, then ABBOTT, at ABBOTT's own discretion, during the term of exclusivity
of any patent licensed under this Agreement, shall have the right but not the
obligation to prosecute the infringer by appropriate legal proceedings in the
name of BSI at ABBOTT's own expense, and may collect and retain, for ABBOTT's
own use, any and all recoveries by way of costs, damages, lost profits,
royalties or settlements. BSI, at BSI's own expense, may be represented in such
proceedings by BSI's own counsel, acting in an advisory but not controlling
capacity. BSI shall complete all acts and execute all documents as may be
necessary in order to permit ABBOTT to exercise ABBOTT's right pursuant to this
clause.
10.04 At ABBOTT's expense, ABBOTT shall prepare, file and prosecute, or
have prepared, filed and prosecuted by a patent lawyer in independent practice
who shall be nominated by ABBOTT and approved by BSI, any foreign or United
States patent application related to United States Patent Applications Serial
No. 467,220 (filed February 23, 1983) and Serial No. 356,459 (filed March 9,
1982), including without limitation any and all continuation, continuation-in
part, divisional, reissue and reexamination applications or the equivalent
thereof, and such expense shall include BSI's reasonable expense, having
ABBOTT's prior written approval, for BSI's attorney's review of such
applications and prosecution documents.
(a) Any patent which issues from such patent applications shall be
assigned to BSI, shall be included in PROPRIETARY RIGHTS and shall be subject to
the terms and conditions of this Agreement.
17
(b) BSI shall disclose to ABBOTT, and the patent lawyer referred to
above, all information in BSI's possession pertaining to PROPRIETARY RIGHTS
which may be necessary for the preparation, filing and prosecution of such
patent applications.
(c) BSI and ABBOTT shall consult in the preparation, filing and
prosecution of such applications, and BSI shall cooperate with ABBOTT in
executing such documents and taking such other reasonable actions necessary or
appropriate to obtain patents issuing from such applications, provided that:
i) Each party shall promptly transmit to the other all official
communications sent to or received from any patent office, court or
opposing party,
ii) Each party shall submit to the other for consideration and advice
all applications and responses to official communications before
filing such applications and responses in sufficient time to enable
the receiving party to appropriately review the applications or
responses before such are filed,
iii) Each party shall file only those applications and responses approve
the other, which approval shall not be unreasonably withheld,
iv) ABBOTT shall reimburse BSI for its employee's time, its
out-of-pocket expenses (including reasonable travel and lodging
expenses) for efforts made under Article 10(b) and (c), including
any actions required by court order relating to any of such patents
or patent applications. For the time spent by BSI's technical
employees under 10(b), ABBOTT will reimburse BSI at a reasonable
rate (the rate on the
18
date of execution being * per employee hour). ABBOTT will make
such reimbursements within sixty (60) days of receipt of BSI's
invoice,
v) BSI and ABBOTT shall pursue the broadest possible patent claims and
shall continue the prosecution of such applications as long as this
action is in the best interest of both parties, and
vi) ABBOTT shall do nothing to inhibit the issuance of the patent or
patents drawn to the originally claimed multi-zone invention of
Patent Application Serial No. 467,220 as amended or refiled.
(d) If at any time during the life of this Agreement, ABBOTT intends to
allow any such application or patent issuing therefrom to lapse or become
abandoned or forfeited without having first filed a substitute, ABBOTT shall
notify BSI of such intention at least sixty (60) days before the date on which
the application is due to lapse or to become abandoned or forfeited.
(e) If a patent claim is allowed for a single zone test strip device or
a method of using same, royalties due under Article 4.02 shall begin accruing no
later than forty-five (45) days following Notice of Allowability of such claims.
10.05 In consideration of ABBOTT's payments to BSI under this Agreement,
and the financial and other support provided by ABBOTT with respect to the
patent applications set forth in Paragraph 10.04, BSI shall make no claims
against and hereby waives any claim BSI may have or acquire against ABBOTT,
ABBOTT's employees or agents for injury, loss or damage resulting from acts or
omissions by ABBOTT, ABBOTT's employees or agents in
- ------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
19
connection with such patent applications prepared, filed or prosecuted in
accordance with the provisions set forth in Paragraph 10.04.
ARTICLE 11
NOTICES
11.01 Any notice required or permitted by this Agreement shall be in
writing. A notice shall be considered served when deposited in the national
postal system in a sealed envelope with sufficient postage affixed and addressed
to the party to whom such notice is directed at the post office address given
below:
If to BSI: Bio-Metric Systems, Inc.
9924 West 74th Street
Eden Prairie, MN 55344
If to ABBOTT: Director, Technology Assessment and Acquisition
Abbott Diagnostics Division
One Abbott Park Road
Abbott Park, IL 60064-3500
copy to: Office of General Counsel
Abbott Laboratories
One Abbott Park Road
Abbott Park, IL 60064-3500
11.02 Either party shall have the right to change the person and/or
address to which notices hereunder shall be given, by notice to the other party
in the manner set out in Paragraph 11.01.
ARTICLE 12
INTERPRETATION
12.01 This Agreement shall be construed and the rights of the parties
hereunder shall be determined in the State of Minnesota in accordance with the
laws thereof.
20
12.02 All section captions or titles are inserted herein for reference
only and are without contractual significance or effect.
ARTICLE 13
ASSIGNMENT
13.01 Except where the assignee is a successor to substantially the
entire business to which this license pertains, a party hereto must have the
prior written consent from the other party in order to assign this Agreement in
whole or in part.
ARTICLE 14
ENTIRE AGREEMENT; MISCELLANEOUS
14.01 This writing constitutes the entire agreement between the parties
relating to the subject matter hereof. There are no other understandings,
representations, or warranties of any kind except as expressly set forth herein.
14.02 This Agreement may not be waived, altered, extended, or modified
except by written agreement of the parties.
14.03 Any waiver of any term or condition of this Agreement by either
party shall not operate as a waiver of any other term or condition, nor shall
any failure to enforce a provision hereof operate as a waiver of such provision
or of any other provision hereof.
14.04 Should any provision of this Agreement, or the application thereof,
to any extent be held invalid or unenforceable, the remainder of this Agreement
and the application thereof other than such invalid or unenforceable provisions
shall not be effected thereby and shall continue valid and enforceable to the
fullest extent permitted by law or equity.
21
ARTICLE 15
PUBLIC DISCLOSURE OF AGREEMENT
15.01 No public disclosure of this Agreement shall be made by either
party without prior review and consent of the other party, which consent shall
not be unreasonably withheld. Notwithstanding the foregoing:
(a) Either party may disclose the existence and nature of this
Agreement to its shareholders, but only to the extent necessary to comply with
applicable securities laws:
(b) BSI may disclose any or all of the following information, but not
in greater detail than that which follows:
Minneapolis, Minnesota - October 17, 1990 - Bio-Metric
Systems, Inc. (BSI) announced it has entered into an agreement with
Abbott Laboratories, Abbott Park, Illinois, relating to diagnostic
products developed by BSI.
Bio-Metric Systems, Inc. of Minneapolis, Minnesota is a
privately-held company, developing advanced biological coatings and
diagnostic formats.
Abbott Laboratories is a world leader in diagnostics and
offers a broad and diversified line of human health care products and
services.
15.02 Neither party shall use the name of the other party in connection
with any commercial activity, advertising or sales promotion without the prior
written consent of the other party.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their respective duly authorized officers or representatives on the
respective dates indicated below.
22
ABBOTT LABORATORIES BIO-METRIC SYSTEMS, INC.
By: /s/David V. Milligan By: /s/Dale R. Olseth
-------------------------- ---------------------------
David V. Milligan, Ph.D. Dale Olseth
Corporate Vice President President and
Diagnostic Products Chief Executive Officer
Research and Development
Date: 11-12-90 Date: 11-20-90
------------------------- ----------------------------
23
June 11, 1992
Dale Olseth
President and Chief Executive officer
Bio-Metric Systems, Inc.
9924 West Seventy-Fourth Street
Eden Prairie, MN 55344
Dear Mr. Olseth,
The Amended License Agreement between Abbott Laboratories and Bio-Metric
Systems, Inc., executed November 11th, 1990 and November 20th 1990 respectively,
contains a typographical error. Article 1.01 (a) should read, "all foreign and
United States applications related in whole or in part to BSI's United States
Patent Applications Serial No. 467,229 (filed February 23, 1983) an Serial No.
356,459 (filed March 9, 1982)."
Your signature will confirm your acknowledgment of the error and your acceptance
of the change to our Amended License Agreement.
Please return one signed copy to my attention. If you have any questions,
please give me a call at 708-937-5437.
ABBOTT LABORATORIES BIO-METRIC SYSTEMS, INC.
By: /s/Brian B. Spear By: /s/Dale R. Olseth
-------------------------- ---------------------------
Brian B. Spear, Ph.D. Dale Olseth
Director, Technology President and
Assessment and Acquisitions Chief Executive Officer
Diagnostic Division
Date: June 25, 1992 Date: June 29, 1992
-------------------------- ---------------------------
AMENDMENT TO THE BSI-ABBOTT
LICENSE AGREEMENT
The License Agreement between Bio-Metric Systems, Inc. (now known as BSI
Corporation) and Abbott Laboratories dated May 30, 1989, as amended November 20,
1990, is further amended as follows:
Delete Articles 4.04 and 4.05.
Add the following new Article 4.09:
4.09 ABBOTT shall have the right prospectively to credit against
royalties otherwise payable to BSI under Articles 4.01-4.03, inclusive, but only
against such royalties,* per calendar quarter or * of such royalties otherwise
due for such quarter, whichever is less, beginning with royalties for sales for
the calendar quarter beginning July 1, 1994, up to a maximum credit of *. The
right granted to ABBOTT in this Article 4.09 is accepted by ABBOTT as a final
settlement of all royalties payable to BSI for sales made through March 31, 1994
and as final settlement of all credits and offsets against such royalties for
sales made through March 31, 1994 that were taken or that could have been taken
by ABBOTT. In no event will BSI have any obligation to repay any of the
royalties received as of July 1, 1994.
Article 10.02 is replaced with the following new Article 10.02:
- ------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
10.02
a. In the event ABBOTT believes any third party is infringing any
patent included in PROPRIETARY RIGHTS, ABBOTT shall have the right, but not the
obligation, to prosecute the infringer by diligent and appropriate legal
proceedings, (including the Abbott Laboratories v. Biosite Diagnostics, Inc.,
currently pending in the United States District Court, N.D. IL), at ABBOTT's own
expense and in ABBOTT's own name, provided, however, that ABBOTT shall first
fully appraise BSI of the infringing product.
b. In the event that ABBOTT prosecutes such a proceeding and BSI
becomes a party, ABBOTT shall select counsel to represent BSI and shall
indemnify and hold harmless BSI from any damages, liabilities (excluding lost
royalties), cost and expense resulting from any such proceeding. ABBOTT will
provide BSI with copies of all pleadings and BSI may be represented by BSI's own
counsel, acting in an advisory but not controlling capacity. ABBOTT shall
promptly reimburse BSI for its costs of retaining outside counsel, as determined
under Article 10.02(d), in such proceedings. ABBOTT will retain the
decision-making power on behalf of ABBOTT and BSI in pursuit or settlement of
such a proceeding. All recoveries by way of cost, judgment, damages, lost
profits or settlements shall be retained by ABBOTT. Notwithstanding the
foregoing, ABBOTT will not indemnify BSI in the event such damages, liabilities,
cost and expense is the result of any proceeding (i) brought by BSI against
ABBOTT, or (ii) brought by the third party against BSI which is not related to
the subject matter of this License Agreement.
c. In the event that ABBOTT prosecutes such a proceeding and BSI does
not become a party, ABBOTT will provide BSI with copies of all pleadings and BSI
may be represented by BSI's own counsel, acting in an advisory but not
controlling capacity. ABBOTT shall promptly reimburse BSI for its costs of
retaining outside counsel, as determined under
2
Article 10.02(d), in such proceedings. BSI's outside counsel's duties are
expected to be directed primarily to assist ABBOTT in the areas of document
discovery, witness preparation, attendance at depositions of BSI employees, and
preparing answers to interrogatories. BSI may request attendance of BSI counsel
at hearings and trial, however, reimbursement for such attendance shall require
the consent of ABBOTT, which consent shall not be unreasonably withheld.
d. The parties contemplate that BSI's outside counsel fees in any one
proceeding under Article 10.02(b) or 10.02(c) will not exceed * and *,
respectively. In the event that BSI's outside counsel fees in any one
proceeding under Article 10.02(b) or 10.02(c) exceed such amounts, BSI shall
bear the expense of fifty percent (50%) of such fees in excess of such amount.
e. For any proceeding brought under Article 10.02, ABBOTT shall have
the right to settle such litigation, but only upon the advance written
permission of BSI, which shall not be unreasonably withheld. Settlement by way
of sublicense from ABBOTT which provides BSI with at least a * prospective
royalty based on sales by the sublicensee or its designees shall not require
BSI's advance written permission. For any other settlement terms, ABBOTT and
BSI shall meet in good faith to determine mutually acceptable terms. In the
event of settlement by way of a sublicense, ABBOTT shall have the right to
recover the amount reimbursed to BSI under Articles 10.02(b), 10.02(c) and
10.02(d) for its outside counsel fees by reducing by * the royalty payments due
BSI resulting from said sublicense until such reimbursed amount has been fully
recovered by ABBOTT.
Article 10.03 is replaced with the following new Article 10.03.
- ------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
3
10.03 In the event of infringement by any third party as described in
Article 10.02, if ABBOTT fails to proceed against such infringer within one
hundred eighty (180) days after receipt of a written request by BSI to do so, or
if ABBOTT does not exercise due diligence in legal proceedings instituted
pursuant to Article 10.02 within sixty days (60) days after receipt of a written
request by BSI to do so, then BSI at its own discretion shall have the right but
not the obligation to prosecute the infringer by appropriate legal proceedings
in the name of BSI at BSI's own expense, and BSI may collect and retain for its
own use any and all recoveries by way of costs, damages, lost profits, past
royalties or settlements relating to the foregoing. ABBOTT, at ABBOTT's own
expense, may be represented in such proceedings by ABBOTT's own counsel, acting
in an advisory but not controlling capacity. ABBOTT shall complete all acts and
execute all documents as may be necessary in order to permit BSI to exercise
BSI's right pursuant to this clause.
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
by their duly authorized officers or representatives on the dates indicated
below.
ABBOTT LABORATORIES BIO-METRIC SYSTEMS, INC.
By: /s/James Koziarz By: /s/Dale R. Olseth
-------------------------- ---------------------------
James Koziarz, Ph.D. Dale Olseth
Corporate Vice President President and
Diagnostic Products Chief Executive Officer
Research & Development
Date: 11/10/94 Date: 11/23/94
-------------------------- ---------------------------
4
SECOND AMENDMENT TO
AMENDED LICENSE AGREEMENT
THIS SECOND AMENDMENT TO AMENDED LICENSE ("Second Amendment") shall be
effective April 19, 1996 ("Effective Date") and is entered into by and between
Abbott Laboratories, an Illinois corporation having principal place of business
at 100 Abbott Park Road, Abbott Park, Illinois 60064-3500 ("Abbott"), and BSI
Corporation, a Minnesota corporation having a principal place of business at
9924 West Seventy-Fourth Street, Eden Prairie, Minnesota 55344 ("BSI").
WHEREAS, BSI and Abbott entered into a License Agreement dated May 30, 1989
("License Agreement") pursuant to which Abbott acquired an exclusive license
under Proprietary Rights to make, have made, use and sell Licensed Products for
Diagnostic Applications;
WHEREAS, BSI and Abbott entered into an Amended License dated November 20,
1990 ("Amended License") which amended and superseded the License Agreement and
pursuant to which Abbott made a First Commercial Sale of a Licensed Product in
the Field of Human Diagnostics thereby eliminating the field of Human
Diagnostics from BSI's option under Paragraph 2.03 of the Amended License;
WHEREAS, BSI and Abbott entered into an Amendment to the BSI-Abbott License
Agreement dated November 23, 1994 ("First Amendment") which addressed certain
royalty and infringement issues; and
WHEREAS, BSI and Abbott desire to further amend the Amended License to
extend the term of Abbott's exclusivity under the license grant.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereto agree as follows:
1. DEFINITIONS. The capitalized terms used herein shall have the same
meanings ascribed to them in the Amended License.
2. LICENSE TO ABBOTT. For a period of four (4) years following the
Effective Date of this Second Amendment, BSI shall not have the option to
convert Abbott's exclusive license under Paragraph 2.01 of the Amended
License to a non-exclusive license for the fields of Veterinary
Diagnostics, Food/Agricultural Diagnostics and Environmental Diagnostics.
Thereafter, BSI shall have such option under the same terms and conditions
set forth in Paragraph 2.03 of the Amended License.
3. LICENSE FEE. Not withstanding any other provisions of the Amended
License or the First Amendment, as consideration for extending the term of
exclusivity for the fields of Veterinary Diagnostics, Food/Agricultural
Diagnostics and Environmental
1
Diagnostics, Abbott shall pay BSI a non-refundable, non-creditable license
fee of * within 30 days of execution this Amendment.
4. PREVIOUS AGREEMENT. Except as otherwise provided herein, all other
terms and conditions of the Amended License and the First Amendment shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
Amended License to be executed by their duly authorized representatives as of
the later date written below.
ABBOTT LABORATORIES BIO-METRIC SYSTEMS, INC.
By: /s/James Koziarz By: /s/Andrew B. Summerville
-------------------------- ---------------------------
James Koziarz, Ph.D. Andrew B. Summerville
Corporate Vice President Vice President
Diagnostic Products
Research & Development
Date: 4/18/96 Date: Apr. 11, 1996
-------------------------- ---------------------------
*Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the
SEC.
2
PROMISSORY NOTE
Employee Name:
------------------------
Social Security Number:
------------------------
Address:
------------------------
------------------------
Amount of Note:
------------------------
Date of Note:
------------------------
FOR VALUE RECEIVED, the undersigned (the "Maker") promises to pay to the
order of SurModics, Inc, a Minnesota corporation (the "Payee"), the principal
sum of $______________ together with interest on the unpaid principal amount
outstanding from time to time from the date hereof at ___ % per annum. Accrued
interest shall be payable on each annual anniversary of the date hereof. The
total unpaid principal and interest on this Note shall be due and payable on
the fifth anniversary of the date hereof, with full right of prepayment.
Notwithstanding the previous paragraph, the total unpaid principal and
interest on this Note shall be due and payable on the earlier of the 90th day
following the date on which the Maker leaves the employ of the Payee or the
180th day following the first date on which the Maker is able to sell his or
her SurModics, Inc. stock in the public market.
Any payments made by the Maker shall be applied by the Payee when
received, first to the payment of interest and then to the reduction of
unpaid principal balance. Interest as determined hereunder shall in no event
exceed the maximum amount permitted by law.
This Note is secured by a security interest in _______ shares of Maker's
SurModics, Inc. stock.
If any one or more of the following events of default shall occur:
(a) Maker shall fail to pay any sum hereunder when due and such failure
shall continue for ten (10) days after such payment is due;
(b) Maker shall become insolvent, unable to pay his debts as they
mature, or admit in writing his inability to pay his debts as they mature;
(c) Maker shall make a general assignment for the benefit of creditors;
-1-
(d) Maker shall become or be adjudicated bankrupt or shall voluntarily
file a petition for bankruptcy; or
(e) Maker shall apply for appointment of a receiver or a trustee for
any substantial portion of his property or assets or shall permit the
appointment of such receiver or trustee who is not discharged within a period
of 30 days after such appointment.
then, upon the occurrence of any one or more such events of default, any
holder of this Note may immediately require the unpaid principal balance of
and all interest accrued on this Note to be immediately due and payable, and
the unpaid balance of and accrued interest on this Note shall thereupon be
due and payable without further demand, presentment, protest, or further
notice of any kind, all of which are hereby waived.
The Maker shall pay on demand all costs reasonably incurred by the
holder hereof in effecting collection of the principal of and interest on
this Note, including the fees and disbursements of counsel.
No delay or omission on the part of the holder hereof in exercising any
right, power or privilege hereunder shall operate as a waiver hereof, nor
shall single or partial exercise of any right, power or privilege hereunder
include other or further exercise thereof or the exercise of any other right,
power or privilege.
The rights and powers granted and evidenced hereby shall extend to any
holder of this Note and shall be binding upon the Maker and shall be
applicable to this Note and to all renewals and/or extensions thereof.
The Maker hereby waives presentment, demand, notice of dishonor and
notice of protest.
Dated this day of , 19
---- --------- --
- -------------------------------- -----------------------------------
Maker Witness
-2-
Exhibit 11
SURMODICS, INC.
Computation of Pro Forma Per Share Earnings
For the Years Ended September 30
1995 1996 1997
------------ ------------ ------------
NET INCOME (LOSS) $ (322,179) $ (193,727) $ 235,673
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Common shares outstanding 3,206,126 3,268,286 3,334,853
Conversion of Series A Convertible Preferred Stock into common stock 1,507,312 1,507,312 1,507,312
Common stock equivalents - - 487,637
Common stock equivalents calculated pursuant to Securities and
Exchange Commission Staff Bulletin No. 83(1) 75,525 75,525 63,229
------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (PRO FORMA) 4,788,963 4,851,123 5,393,031
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (PRO FORMA) $ (.07) $ (.04) $ .04
------------ ------------ ------------
------------ ------------ ------------
(1) Reflects the issuance of restricted voting common stock and stock options
issued to purchase voting common stock within the 12-month period prior to
the Company's proposed initial public offering at a price less than the
proposed public offering price using the treasury stock method.
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
December 23, 1997
5
1,000
YEAR
SEP-30-1997
OCT-01-1996
SEP-30-1997
492
1,456
951
(29)
264
3,208
3,912
2,847
6,450
1,081
0
0
19
170
4,913
6,450
2,159
7,582
1,432
7,545
0
24
2
236
0
236
0
0
0
236
.04
.04
