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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ___________________ to
____________________.
Commission File Number 0-28414
UROLOGIX, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1697237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14405 21ST AVENUE NORTH, MINNEAPOLIS, MN 55447
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 475-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(1) COMMON STOCK, $.01 PAR VALUE.
(2) SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
As of September 1, 1998, the aggregate value of the Company's Common Stock held
by non-affiliates of the Company was approximately $47.2 million based on the
last reported sales price on that date.
As of September 21, 1998, the Company had outstanding 11,258,133 shares of
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE.
The Company's Proxy Statement for its 1998 Annual Meeting of Shareholders is
incorporated by reference into Part III of this Form 10-K.
1
PART I
ITEM 1. BUSINESS
- --------------------
OVERVIEW
Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial product,
the Targis System, is designed to treat benign prostatic hyperplasia ("BPH"),
commonly known as "enlarged prostate." BPH dramatically affects the quality of
life of millions of men often by causing adverse changes in urinary voiding
patterns. The Targis System has been approved for marketing in the United
States, the 15 European Union countries, Japan and Canada. The Company is
currently selling the Targis System outside the United States through
distributors and in the United States through its direct sales force.
The Targis procedure is a non-surgical, catheter-based therapy that uses a
proprietary microwave technology that preferentially heats diseased areas of the
prostate to a temperature sufficient to cause cell death, while simultaneously
cooling and protecting the pain-sensitive urethral tissue. Because the urethra
is protected from heat and is not punctured or penetrated, a Targis procedure
can be performed without general or regional anesthesia or intravenous sedation.
Accordingly, the procedure can be performed in a low cost setting such as a
physician's office or an outpatient clinic. The Company believes that the Targis
System provides an efficacious, safe and cost effective procedure for the
treatment of BPH without the complications and side effects inherent in most
current treatments, and as such, is well positioned to address the needs of
physicians, patients and payors.
The Company's clinical studies demonstrated that most patients who received
the Targis therapy experienced a significant improvement in BPH symptoms and
urine flow rates, minimal complications and post-treatment discomfort, and were
able to return to normal activities within a few days. As of September 15,
1998, more than 800 patients affected with BPH have been treated with the
Company's Targis System in controlled clinical studies, including 98 patients
with three-year follow-up data and 23 patients with four year follow-up data.
The Company submitted results of its clinical studies to the United States Food
and Drug Administration (the "FDA") in its premarket approval application
("PMA") in February 1997 and subsequently received FDA approval to market the
Targis System in August 1997.
The Company markets the Targis System in the United States through a direct
sales force. Beginning with the hiring of its Executive Vice President of Sales
and Marketing in February 1997, the Company has developed a sales and marketing
team consisting of sales and marketing management, product managers,
communication specialists and direct domestic sales representatives, who are all
dedicated to marketing the Targis System. The Company has hired and trained
eight sales representatives and is actively recruiting additional sales
representatives. Outside the United States, the Company has developed broad-
based relationships with two parties for market development and sales of the
Targis System. Boston Scientific Corporation ("Boston Scientific"), a worldwide
developer, manufacturer and marketer of medical devices, markets the Targis
System in all countries outside the United States, except Japan. Nihon Kohden
Corporation ("Nihon Kohden"), a major Japanese developer, manufacturer and
marketer of medical devices, markets the Targis System in Japan. Both Boston
Scientific and Nihon Kohden have marketing and sales specialists dedicated to
the Targis System.
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BENIGN PROSTATIC HYPERPLASIA
BPH is a non-cancerous urological disease in which the prostate enlarges
and constricts the urethra. Symptoms associated with BPH affect the quality of
life of millions of sufferers worldwide and BPH can lead to irreversible bladder
or kidney damage. The prostate is a walnut-size gland surrounding the male
urethra (the channel that carries urine from the bladder out of the body) that
is located just below the bladder and adjacent to the rectum. The prostate
produces seminal fluid and plays a key role in sperm preservation and
transportation. While the actual cause of BPH is not fully understood, it is
known that as men reach middle age, cells within the prostate that are located
primarily lateral, medial and anterior to the urethra (the "transition zone")
begin to grow at an increasing rate. As the transition zone of the prostate
expands, it compresses or impinges upon other portions of the prostate gland and
the urethra, thereby restricting the normal passage of urine. This constriction
of the urethra may require a patient to exert excessive bladder pressure to
begin urination. If the patient cannot generate sufficient force to adequately
void urine from the bladder, the possibility of infection and bladder and kidney
damage increases. BPH patients also typically suffer from a variety of troubling
symptoms, which primarily relate to changes in urinary voiding and may have a
significant impact on a patient's quality of life. These symptoms include:
. increased frequency of urination . stopping and starting of flow
during the day and night during urination
. sudden urge to urinate . weak flow of urine
. difficulty in starting urination . sensation of incompleteness in
emptying of the bladder
The American Urological Association ("AUA") has developed and statistically
validated a system of evaluating and monitoring BPH symptom severity called the
AUA Symptom Score. This score is composed of the sum of the patient's responses
to seven questions generally relating to the symptoms described above. The
patient ranks a symptom on a scale of 0-5, with 5 being most severe. The Agency
for Health Care Policy and Research ("AHCPR") has recommended that patients with
a total score of less than 8 not be considered candidates for BPH treatment of
any kind. A patient with a total score of 8 to 19 is considered to have moderate
symptoms of BPH, and a patient with a total score of 20 or greater is classified
as having severe symptoms. Other methods of diagnosing BPH and its severity
include measuring urinary flow rates (a ratio of the volume of urine voided to
duration of voiding expressed in milliliters per second), pressure flow data
(intravesical pressure required to urinate) and residual urine in the bladder
after voiding.
Evidence of BPH typically begins to appear in men in their 50s, and by age
70, the quality of life of most men is negatively affected by BPH symptoms.
Medical sources estimate that the percentage of men suffering from symptoms of
BPH is approximately 30% for men in their 50s and increases to more than 75% for
men over age 80. The following chart sets forth the Company's estimates of the
number of men, both in the United States, and in Europe, Japan and Canada, who
suffer moderate to severe symptoms of BPH and reduced urine flow rates, and the
approximate number of men who elected to pursue treatment for their symptoms in
1996:
3
EUROPE, JAPAN
MALE POPULATION UNITED STATES AND CANADA TOTAL
- --------------- ------------- ------------- -----------
Over age 50 31 million 90 million 121 million
Moderate to severe BPH symptoms
and reduced urine flow rates 6 million 17 million 23 million
Treated for BPH 1.7 million 1.7 million 3.4 million
Because BPH is an age-related disorder, the number of men with moderate to
severe symptoms of BPH is expected to double in the United States by the year
2020 as a result of the aging population. The Company expects similar increases
to occur worldwide. Total BPH related expenditures in the United States are
currently estimated to be approximately $3 billion annually. Outside the United
States, BPH expenditures are currently estimated at $5 billion annually. Europe
and Japan are estimated to account for 70% of the BPH treatment market outside
the United States.
With the introduction of drug therapies, which cause fewer complications
than surgery, as well as substantial advertising by pharmaceutical companies,
the number of men receiving treatment has grown dramatically over the last few
years. As the above table indicates, however, the vast majority of men with
moderate to severe symptoms of BPH and reduced urine flow rates have elected to
live with the symptoms of this chronic disease rather than pursue any of the
currently available treatments. The Company believes the percentage of men with
moderate to severe symptoms of the disease who seek treatment will increase in
the future as a result of increased awareness of the disease and the development
of treatments, like the Targis System, that are less invasive and result in less
severe complications and side effects than traditional treatments.
BPH THERAPIES AND THEIR LIMITATIONS
Historically, over 70% of men suffering moderate to severe symptoms of BPH
in the United States have elected to live with the discomfort and inconvenience
of the disease, an approach known as "watchful waiting." This has been due
primarily to a lack of understanding of the disease and limitations of existing
therapies. For many BPH sufferers, watchful waiting may represent only a
temporary option due to the significant impact BPH has on a patient's quality of
life. Of those receiving treatment in the United States, approximately 85% elect
drug therapy and approximately 15% elect surgical intervention. The Company
believes that many health care payors have encouraged watchful waiting or drug
therapy over surgical intervention due in large part to the costs and potential
complications of surgical therapies.
Drug Therapy
Drug therapy for BPH has been available in the United States since the FDA
approved marketing of four orally administered pharmaceutical products-- Proscar
(sold by Merck & Co., Inc.) in 1992, Hytrin(R) (sold by Abbott Laboratories) in
1993, Cardura(R) (sold by Pfizer Inc.) in 1995 and FLOMAX(R) (sold by Boehringer
Ingelheim Pharmaceuticals, Inc.) in 1997. Drug therapy was used by approximately
1.5 million men in the United States in 1996 for the treatment of BPH symptoms.
The Company believes the dramatic acceptance of drug therapy in the short period
since FDA approval is due to extensive drug company marketing, resulting in
increased patient awareness, and the desire of these patients for effective
treatments which have less severe complications and side effects than currently
available surgical procedures. The annual cost of drug therapy is approximately
$1,300 to $1,400 in the first year, and the typical total cost
4
ranges from $12,000 to $17,000, depending on the age of the patient when drug
therapy is initiated. Drug therapy requires daily administration for the
duration of the patient's life.
Alpha blockers, such as Hytrin(R), Cardura(R), and FLOMAX(R) treat BPH by
relaxing the muscles in the prostate and bladder neck to relieve urethral
obstruction. While alpha blockers have demonstrated some ability to relieve a
patient's BPH symptoms and improve urine flow rates, they still carry the
potential for significant side effects such as dizziness, headache, asthenia
(shortness of breath) and fatigue. Proscar(R) is designed to treat BPH by
shrinking the prostate. As much as six months of Proscar(R) treatment may be
necessary to determine efficacy and, after 12 months, at least 40% of patients
taking Proscar(R) do not experience an increase in urine flow rate or improved
AUA symptom scores. Side effects for Proscar(R) include impotence and decreased
libido. An estimated 30% to 40% of those patients who initially pursue drug
therapy discontinue treatment within 12 months due to various reasons including
ineffectiveness, side effects and the burdens of compliance and cost.
Surgical Treatments for BPH
Surgical treatments for BPH typically use various means to completely
remove the prostatic urethra along with a substantial portion of the diseased
tissue within the prostate. Approximately 1.0 million prostatic surgeries were
performed worldwide in 1995, of which 216,000 were performed in the United
States. The reimbursement of a prostatic surgery ranges from approximately
$7,000 to $12,000 in the United States. Because the average age of a patient
undergoing prostatic surgery in the United States is 66, Medicare is the primary
payor for these surgeries. The current average Medicare reimbursement for
surgery and associated complications is approximately $8,600.
The most common surgical procedure for the treatment of BPH is transurethal
resection of the prostate ("TURP") whereby a rigid instrument is inserted into
the patient's urethra through which the surgeon passes an electrosurgical loop
that is used to remove the urethra and the diseased tissue within the prostate.
While TURP has been the established standard for treating BPH since the 1930s,
this procedure requires general or spinal anesthesia and almost always requires
post-treatment hospitalization. The Company estimates approximately 800,000
TURPs were performed worldwide in 1995, making it the second most common
surgical procedure performed on men over age 55. During the past several years,
the number of TURPs performed worldwide has been decreasing, which the Company
believes is due to increased awareness of the complications of surgery and the
availability of drugs as an alternative treatment. While TURP results in a
dramatic improvement in urine flow in 90% of the patients and a reduction in the
AUA Symptom Score in 85% of the patients, a significant number of patients
experience serious complications. Virtually all patients experience a burning
sensation upon urination that lasts for up to three weeks following the
procedure. Other complications, as reported by AHCPR, include retrograde
ejaculation--the reverse flow of semen--(73.4% of patients), infection (15.5%),
impotence (13.6%), excessive hemorrhaging requiring transfusion (12.5%),
immediate surgery to stop the bleeding (2.0%), long-term incontinence (3.1%) and
urethral stricture (3.1%). In addition, approximately 1.5% of TURP patients die
as a result of the procedure and related complications. The TURP procedure
requires a highly skilled surgeon with extensive training, and the incidence of
these complications may be affected by the experience of the surgeon performing
the TURP. At least 10% of TURP patients develop BPH symptoms again and require
retreatment within five years.
Other surgical techniques have been developed in an attempt to address the
complications and side effects of TURP. The three most prevalent procedures are:
(i) transurethral incision of the prostate ("TUIP"); (ii) transurethral
vaporization of the prostate ("TVP"); and (iii) laser assisted prostatectomy.
TUIP is a
5
surgical procedure performed under general or spinal anesthesia, whereby a
surgical cutting tool is passed through a cystoscope in the urethra to make one
or more incisions in the prostatic urethra near the bladder neck, thereby
reducing urethral obstruction. TVP is a surgical procedure performed under
general or spinal anesthesia, similar to a TURP, except the electrosurgical
element is a tissue vaporizing cylinder or ball rather than a loop. TVP removes
the prostatic urethra and vaporizes and coagulates prostatic tissue, thereby
widening the channel for urinary flow. Laser assisted prostatectomy includes two
similar procedures--visual laser ablation of the prostate ("V-LAP") and contact
laser ablation of the prostate ("C- LAP"), in which a laser fiber catheter is
guided through a cystoscope and used to ablate and coagulate the prostatic
urethra and prostatic tissue. Recently, studies have been conducted using
holmium lasers to surgically remove the prostatic urethra and tissue. While
these alternative surgical treatments have been effective in reducing some side
effects associated with a TURP, such as reduced risk of blood loss, they still
remove or damage the urethra, require general or regional anesthesia and are
performed in an operating room.
Less-Invasive BPH Treatments
In an effort to eliminate hospitalization and the complications arising
from surgical treatments, other technologies have been developed or are under
development for the treatment of BPH. Two of these technologies being marketed
in the United States are interstitial radio frequency therapy ("RF") and
interstitial laser therapy. In an interstitial therapy procedure, a rigid scope
is inserted into the patient's urethra and either needle electrodes or laser
fibers pierce the urethra and are advanced into the lobes of the prostate. RF or
laser energy is then delivered, causing necrosis of the surrounding tissues. Due
to the limited amount of tissue necrosis caused by each electrode or laser
fiber, multiple punctures of the urethra are required during this procedure in
order to coagulate a sufficient amount of tissue. The Company believes that a
highly trained and skilled physician is required to make judgments regarding the
number and depth of punctures and to effectively perform the procedure. While
these procedures are designed to be performed in approximately 30 to 45 minutes
using local anesthesia, the Company believes that intravenous sedation or
regional anesthesia will be required in addition to local anesthesia in most
patients due to the need to repeatedly puncture the urethra and manipulate the
large, rigid instrument within the urethra. As a result, the Company believes
that it will be difficult to consistently perform interstitial therapies in an
office setting.
Several companies, including Urologix, Inc., have developed or are
developing transurethral microwave thermotherapy technology for the treatment of
BPH. See "Competition." Other technologies to treat BPH have been developed or
are under various stages of development, including stents, dilatation balloons,
transurethral and transrectal hyperthermia and high intensity focused
ultrasound.
THE UROLOGIX APPROACH
The Targis System is a non-surgical, catheter-based technology to treat
BPH. The Targis System utilizes a proprietary microwave technology, delivered
through a flexible catheter, that preferentially heats the diseased area of the
prostate to a temperature sufficient to cause cell death, while simultaneously
cooling and protecting the pain sensitive urethral tissue. The Targis procedure
does not require punctures or incisions, thereby leaving the urethra intact. As
a result, the procedure can be performed without general or regional anesthesia
or intravenous sedation. Consequently, the procedure has been, and is expected
to be, performed in an outpatient setting and does not require an overnight
hospital stay. Unlike other FDA-approved microwave-based systems, the Company's
Targis System employs proprietary preferential heating to target energy away
from the rectum and impedance matching to maximize energy delivery to the
diseased prostatic tissue. In addition, the Targis System's Control Unit is
either substantially smaller than
6
other microwave-based systems or does not require shielding, and thus more
easily transportable. The Company believes that this will make the Targis System
easier to use in outpatient settings, which are generally less costly than
operating rooms.
The Company's clinical studies demonstrated that most patients who
received the Targis procedure experienced a significant improvement in AUA
Symptom Scores and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days.
TARGIS SYSTEM
The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and Rectal
Thermosensing Unit ("RTU"). The Targis Control Unit contains the microwave
generator, a solid-state refrigerant device, a circulation pump and electronic
circuitry to monitor therapy. The Targis Control Unit supplies microwave energy
and coolant to the Targis Catheter and collects and processes data from the
Targis Catheter and the RTU. The Targis Catheter contains a microwave antenna
for delivering microwave energy to the prostate and a thermosensor for
monitoring the urethral temperature. The Coolant Bag holds the coolant that is
circulated during therapy. The RTU monitors rectal temperatures. The Targis
Catheter, Coolant Bag and RTU are single-use devices.
In a Targis procedure, the Targis Catheter is inserted into the urethra and
the RTU is inserted into the rectum. Chilled water is then circulated through
the catheter. The coolant is designed to lower the temperature of the urethra to
protect it from heat and discomfort. When the urethra is sufficiently cooled,
the microwave energy is turned on. Temperatures in the urethra and rectum are
monitored continuously to ensure that the appropriate level of energy is
supplied. The targeted prostatic tissue that is sufficiently heated by the
microwave energy is necrosed. Following treatment, a small catheter is inserted
and the patient is released. The small catheter is typically left in place for
two to four days to drain urine while swelling subsides. Following necrosis of
the prostatic tissue, pressure on the urethra is decreased and BPH symptoms are
reduced.
The exposure time required to produce cell death decreases exponentially
with increasing temperatures. Virtually all cells heated to above 45 degrees C
for one hour will die. As temperatures increase above 45 degrees C, the time
required for cell death decreases. The challenge to providing effective
microwave therapy relates to producing and maintaining adequate temperature
elevation in the diseased tissue while, at the same time, preventing excessive
thermal exposure to the urethra and the rectum, as well as the internal and
external urinary sphincters. Protection against injury to the rectum is
particularly important, as serious complications could occur should the rectum
be thermally damaged. Protection of the urethra is important because it
decreases the pain associated with the procedure and shortens recovery time. In
addition, protection of the external and internal urinary sphincters maintains
urinary continence and may preserve ejaculatory function.
Continuous energy delivery is required to most effectively necrose diseased
tissue in the prostate and thereby relieve BPH symptoms. The prostate is highly
vascularized and, in response to increased temperature, blood supply within the
prostate is dramatically increased during therapy. This produces an efficient
heat sink which reduces the temperature in the prostate beneath the temperature
threshold required for cell death within only a few minutes after microwave
energy is discontinued. In order to prevent damage to the rectum, FDA guidelines
provide that rectal temperatures not exceed 42.5 degrees C. If this temperature
is exceeded, microwave energy is discontinued to allow the rectal temperature
7
to decrease. Because of the time/temperature relationship to cell death, a
decrease in temperature in the prostate below the threshold for cell death
during the treatment has a diminished effect on treatment outcome.
The Company's Targis System addresses these challenges through a unique
integration of the following proprietary technologies.
Transurethral Microwave Heating and Catheter Cooling
A specially designed antenna within the Targis Catheter radiates microwave
energy, at approximately 915 MHz, preferentially into the prostatic tissue. The
tissue absorbs this energy, and heat is inductively generated to increase tissue
temperature above 45 degrees C. Meanwhile, chilled water is circulated through
outer channels in the catheter to draw heat away from the surface of the
urethra, thereby cooling it and protecting it from damage. This combination of
inductive microwave heating and conductive urethral cooling results in a
temperature pattern which varies in a predictable and controllable way within
the prostate, starting relatively low at the urethral surface, increasing in
temperature rapidly within the prostate and then decreasing toward the capsule
at the perimeter of the gland.
The Company's human clinical studies demonstrated that the Targis procedure
produced and maintained an extensive zone within the prostate which exceeded 45
degrees C and consistently produced tissue necrosis in all patients evaluated.
Because of urethral cooling, however, the temperature close to the urethra was
only slightly elevated. The Targis System is designed to maintain urethral
temperatures below 45 degrees C during the Targis procedure, thus providing a
crucial barrier to pain and allowing the procedure to be accomplished in a
physician's office or outpatient setting without the need for general or
regional anesthesia or intravenous sedation. In addition, post-therapy recovery
is improved as compared to existing surgical procedures because the urethra
remains intact.
Preferential Heating and Continuous Energy Delivery
Because the rectum is located close to the prostate, some of the thermal
energy from the heated prostate conducts into the rectal tissue. Serious
complications could result from significant temperature increases to the rectal
tissue; therefore, the prostate tissue closest to the rectum must be prevented
from reaching temperatures that could be damaging. The Company has a patented
technology that enables the delivery of microwave energy in a radially
preferential fashion. This is employed to direct a greater amount of energy
toward the anterior and lateral regions of the prostate than toward the rectum.
With the use of preferential heating, limitations on heat delivery into the
prostate imposed by the proximity of the prostate to the rectum are minimized.
The Company's Targis System is designed to continuously deliver greater amounts
of energy to the diseased areas of the prostate, resulting in sustained higher
temperatures in these areas, a larger area of cell death and thus a more
effective treatment.
The Targis System is designed to maintain rectal temperatures beneath the
FDA's guideline of 42.5 degrees C. Only on rare occasions in the Company's
clinical trials or subsequent treatments has a patient's rectal temperature
reached 42.5 degrees C. In the event that this limit is reached, the Targis
System is designed to automatically shut off microwave power until the rectal
temperature returns to an acceptable level. Attempts by others to use microwave
energy non-preferentially to heat the prostate have been hindered by frequent
elevation of rectal temperatures which cause treatment to be temporarily
suspended until rectal temperatures decrease.
8
Impedance Matching and Heat Generation
Transfer of microwave energy from the antenna in the Targis Catheter to the
prostate tissue is affected by the balance between the electrical impedance of
the antenna and the tissue surrounding it. Without adequate matching of the
antenna to its environment, a large portion of the electrical energy can be
reflected back through the antenna cable instead of being radiated to the
prostate as intended, which may cause two compromising effects. The reflection
of microwave energy may cause radiant emissions to occur along the transmission
cable and could result in temperature elevation to areas outside the target
tissue in the prostate. More importantly, a mismatched system may result in the
antenna generating resistive heat. This heat is absorbed by the cooling channels
within the catheter, thereby diminishing the catheter's heat carrying capacity.
This can be important because changes to the temperature of the catheter's
cooling fluid result in urethral temperature changes. The Targis System
addresses these problems by diminishing the amount of energy reflected and
therefore maximizing the radiation of energy in the prostate by matching the
electrical impedance of the antenna with the surrounding tissue for each patient
prior to treatment.
Controlled Energy Delivery
The Targis Catheter utilizes a helical shaped antenna, which produces an
electrical field that is confined to a region of the prostate gland closely
related to the antenna length. Beyond the antenna's boundaries, the electrical
field strength drops rapidly, thus little induced heat is generated beyond the
length of the antenna. Within its length, the field is generally uniform,
resulting in uniform heat induction along the antenna length. This ensures
effective control over the zone of tissue damage and provides better assurance
against injury to the internal or external urinary sphincters, which could
affect ejaculation and urinary control.
CLINICAL STATUS
As of September 15, 1998, more than 800 patients affected with BPH had been
treated with the Targis System in controlled clinical studies. These patients
were treated at 20 clinical sites in the United States, Europe, Canada and South
America. The primary endpoints of the Company's clinical trials were to reduce
the patient's AUA Symptom Scores, increase flow rate during urination and
improve the patient's quality of life, with minimal complications.
The combined results of the Company's clinical trials indicate that the
Targis System was effective in reducing AUA Symptom Scores by 56% at three
months and that the results were maintained for at least three years. The data
also demonstrated that the Targis procedure increased peak flow rates for
patients with a mean increase of 4 ml/sec at six months and that the flow rate
increase was maintained to the three year time point. The Company has patient
quality of life data from the 491 patients from whom the Company has received
one-year follow-up data. These patients were asked a statistically validated
quality of life assessment question to evaluate how they would feel living the
rest of their life with their current BPH symptoms. At 12 months following their
Targis procedures, 75% of these patients indicated they would be satisfied, an
increase from only 4% giving the same response prior to treatment. There can be
no assurance that future clinical results will be consistent with those achieved
to date.
Of the 714 patients from whom the Company has received follow-up data, no
patient needed an anesthetist or anesthesia services during the treatment, and
88% of the patients spent one day or less in bed
9
following the Targis treatment. Of these 714 patients, there were no cases of
long-term incontinence, impotence or significant bleeding resulting from the
Targis procedure. Twelve percent of patients experienced urinary retention which
required catheterization for more than one week. All of these cases were
resolved within 30 days. Additionally, 7% of the patients experienced an episode
of urinary tract infection which was treated and resolved with routine
antibiotic therapy, and less than 1% experienced urethral stricture requiring
intervention. Other minor complications included epididymitis (4%), loss of
ejaculate (4%), and transient urinary incontinence (3%).
SALES AND MARKETING
The Company's marketing strategy includes (i) conducting and reporting the
results of controlled clinical studies of the Targis System with leading
clinical investigators around the world, (ii) demonstrating the cost
effectiveness of the Targis System to governmental and commercial payors, and
(iii) educating urologists and BPH patients on the safety, efficacy and other
benefits of the Targis System.
United States
The Company markets the Targis System in the United States through a direct
sales force. Beginning with the hiring of its Executive Vice President of Sales
and Marketing in February 1997, the Company has developed a sales and marketing
team consisting of sales and marketing management, product managers,
communication specialists and direct domestic sales representatives, who are all
dedicated to marketing the Targis System. The Company has hired and trained
eight sales representatives and is actively recruiting additional sales
representatives. As of September 15, 1998, the Company employed a total of 26
individuals in its sales and marketing department.
The Company targets its sales to urologists who practice in high-volume
prostate treatment groups and urologists who are opinion leaders in BPH
treatment methods. The Company currently has more than 30 Targis Control Units
in operation at academic and urologic centers in the United States. The Company
believes that the demographics of urologists and their practices in the United
States will allow for an effective direct selling strategy.
In the United States, the Company offers urologists and hospitals the
option to either purchase the Targis System Control Unit or to lease it through
a third party. The list prices for the purchase of a Control Unit and Procedure
Kit are $150,000 and $1,200, respectively.
International
The Company has developed broad-based relationships with Nihon Kohden and
Boston Scientific for market development and sales of the Targis System in Japan
and all other foreign countries outside Japan, respectively. Both companies have
dedicated marketing and sales specialists for the Targis System.
The Company entered into an international distribution agreement with
Boston Scientific in 1996. Under the agreement, Boston Scientific was granted
exclusive distribution rights for the Company's Targis System in all countries
outside the United States and Japan for a period of five years ending in 2001.
Under the agreement, Boston Scientific agreed to purchase certain minimum
numbers of the Company's Control Units and Procedure Kits. The Company is
currently working with Boston Scientific to adjust the minimum purchase
requirements to reflect the fact that Boston Scientific has a significant
inventory of the Company's
10
products. Prior to entering into this distribution agreement, Boston Scientific
made equity investments in the Company.
In 1994, the Company entered into a distribution agreement with Nihon
Kohden which granted Nihon Kohden exclusive distribution rights for the
Company's Targis System in Japan for a term ending in the year 2000. Under the
agreement, Nihon Kohden agreed to purchase certain minimum numbers of the
Company's Control Units and Procedure Kits. The Company is currently working
with Nihon Kohden to adjust the minimum purchase requirements to reflect the
fact that Nihon Kohden has an adequate inventory of the Company's products.
Nihon Kohden made an equity investment in the Company concurrently with entering
into this distribution agreement.
Although the Company intends to work with these distributors to improve the
Company's international sales, in light of the significant inventory levels of
Boston Scientific and Nihon Kohden of the Company's products, the Company
expects minimal fiscal 1999 international sales.
MANUFACTURING
The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and Rectal
Thermosensing Unit. The Targis Control Unit is currently manufactured by SeaMED
Corporation ("SeaMED") of Seattle, Washington to the Company's specifications
under a supply agreement that expires in February 1999. SeaMED, a contract
manufacturer for various medical device companies, has a manufacturing facility
in which it produces Class III medical devices. Currently, the Company
manufactures a key component of the Targis Control Unit, the microwave
generator, and provides it to SeaMED for incorporation into the final Targis
Control Unit. Although the Company expects that SeaMED will be able to
adequately meet demand for the Targis Control Unit on a timely basis for the
foreseeable future, there can be no assurance that this will be the case.
The Targis Procedure Kits are assembled by the Company, using materials and
components supplied to the Company by various subcontractors and suppliers, as
well as components fabricated by the Company. Several of the components are
currently available to the Company through only one vendor. Wherever possible
and practical, the Company intends to develop alternative sources for every
critical component. Where alternative sourcing is not possible, the Company
intends to enter into supply agreements with each component provider.
Nevertheless, failure to obtain components from such providers or delays
associated with any future component shortages, particularly as the Company
increases its manufacturing level could have a material adverse effect or the
Company's business, financial condition and results of operations.
The Company's manufacturing operations must comply with the FDA's quality
system regulation, which includes, but is not limited to, the FDA's GMP
requirements, and with certain requirements of state, local and foreign
governments, which establish requirements for assuring quality by controlling
components, processes and document traceability and retention, among other
things. In June 1997 and July 1998, the FDA conducted inspections of the
Company's manufacturing facility, in which the Company's facility, documentation
and quality control systems were determined to be satisfactory and no
significant deficiencies of GMP were raised with the Company. The Company's
facilities will also be subject to periodic inspections by the FDA and by other
auditors. The Company believes that its manufacturing and quality control
procedures meet the requirements of these regulations, and has established
training and self-audit systems designed to ensure compliance.
11
The Company has received ISO 9001 certification indicating compliance of
the Company's manufacturing facilities with European standards for quality
assurance and manufacturing process control. The Company has also received CE
mark certification, which allows it to affix the CE Mark to its product and
market it in the European Union. In addition, the Targis System has been
approved for marketing by the Japanese Ministry of Health and Welfare. As of
September 15, 1998, the Company employed 57 individuals in its manufacturing
department.
RESEARCH AND DEVELOPMENT
The Company intends to build upon its clinical knowledge and relationships
to develop innovative future generations of BPH and other urology products. The
Company's research and development efforts are currently focused on improving
the function and features of the Targis System, reducing the production cost of
the components in the Targis System and investigating other applications for its
technologies. This effort includes development of enhanced components of the
Targis Procedure Kit. The Company also believes that its core technologies may
have other medical applications for prostatic diseases, including malignancies.
During the fiscal years ended June 30, 1998, 1997 and 1996, the Company
spent $6.7 million, $5.0 million, and $4.8 million, respectively, in its
research and development efforts. As of September 15, 1998, the Company employed
21 individuals in its research and development department.
THIRD-PARTY REIMBURSEMENT
The Company believes that third-party reimbursement will be essential to
commercial acceptance of the Targis procedure, and that overall cost
effectiveness and physician advocacy will be keys to obtaining such
reimbursement. The Company believes that the Targis procedure can be performed
for a substantially lower total cost than surgical treatments for BPH or
continuous drug therapy. Consequently, the Company believes that third-party
payors seeking procedures that provide quality clinical outcomes at a lower cost
will reimburse the Targis procedure.
The Company's strategy for obtaining reimbursement in the United States has
been to obtain appropriate reimbursement codes and perform outcome studies in
conjunction with clinical studies to establish the cost effectiveness of the
Targis procedure as compared to surgical and drug treatments for BPH. The
Company plans to use this information when approaching health care payors to
obtain reimbursement authorizations.
The Company estimates that 60% to 80% of patients who receive a Targis
treatment in the United States are eligible for Medicare coverage. The remaining
patients will either be covered by private insurers, including traditional
indemnity health insurers and managed care organizations, or be private-paying
patients.
The United States Health Care Financing Administration ("HCFA"), which
establishes coverage policies for Medicare carriers, can either make national
coverage reimbursement determinations or allow local Medicare carriers to adopt,
modify or ignore model reimbursement policies. Because HCFA has not made a
national coverage determination regarding transurethral microwave therapy, local
Medicare carriers have each made their own coverage decisions. Based on
communications with various local Medicare carriers, the Company believes that
coverage for transurethral microwave therapy for BPH is currently available in
49 states. In addition, a group of medical directors from local Medicare
carriers, known as the
12
Medicare Carrier Urology Workgroup, has outlined a model policy for coverage of
transurethral microwave therapy for BPH and has recommended that Medicare
carriers adopt the model policy. The Company believes that as more clinical data
are published, HCFA may consider making national coverage decision for
transurethral microwave therapy for BPH. Despite these indications and
recommendations, there can be no assurance that reimbursement will be available
to providers.
For those states where coverage is available from the Medicare carrier,
physicians' professional fees will be reimbursed for performing a Targis
procedure based on a Current Procedural Terminology ("CPT") code. CPT codes are
established by the American Medical Association's CPT Editorial Panel. This
Panel approved the addition of a CPT code and relative value for physicians to
use when submitting claims for performing transurethral microwave therapy.
This code has been published in the 1998 CPT book, which became available in
November 1997. The Company believes that the existence of this code makes it
easier for physicians to adopt the Targis procedure. Reimbursement for hospitals
by Medicare fiscal intermediaries (Medicare administrators for hospitals) for
the cost of the Targis System and other costs related to a Targis procedure
(other than the physician's professional fee) is cost-based when submitted by
hospitals to the Medicare fiscal intermediary.
HCFA has recently proposed and published in the Federal Register new rules
for reimbursement of certain procedures in Ambulatory Surgery Centers ("ACSs").
and hospital outpatient departments. The proposed hospital outpatient rules
create a system known as Ambulatory Patient Classifications ("APCs") for
procedures performed in hospital outpatient departments. This system is similar
in some respects to Diagnostic Related Groups ("DRGs") used by HCFA to
reimburse for hospital inpatient surgical procedures.
Because the proposed rules were recently published, the Company has not
completed its evaluation of the potential impact if the proposed rules are
adopted. If the reimbursement amounts proposed for the categories of procedures
that would include the Targis procedure are adopted as proposed, however, they
could have a negative impact on the Company's current list selling prices and
gross margins. The proposed rules are in a comment period and the Company
intends to comment on the proposed rules. The Company believes that a number of
other affected organizations also intend to comment on the proposed rules. In
addition to commenting on the proposed rules, the Company is currently assessing
other actions to influence the proposed rules.
Although the rules were proposed to be effective on January 1, 1999, the
Company has been advised that the proposed rules, if adopted, would most likely
not take effect until the year 2000. There can be no assurance, however, that
the rules will not be implemented or that they will not take effect earlier than
the year 2000.
Private insurance companies and HMOs make their own determinations
regarding coverage and reimbursement based upon "usual and customary" fees
established for CPT codes.
There can be no assurance that the Company will receive favorable coding,
coverage and reimbursement determinations for its Targis System from Medicare
and other payors or that amounts reimbursed to physicians for performing a
Targis procedure will be sufficient to encourage physicians to use the Company's
Targis System.
13
Internationally, reimbursement approvals for the Targis procedure will be
sought on an individual country basis. Some countries currently have established
reimbursement authorizations for transurethral microwave therapy. Reimbursement
approvals have been obtained through Nihon Kohden Corporation for the Targis
System in Japan. The Company and its marketing partner, Boston Scientific, are
actively pursuing reimbursement approvals on a country-by-country basis
throughout Western Europe. Clinical studies and physician advocacy will be used
to support reimbursement requests in countries where there is currently no
reimbursement for such procedures.
PATENTS AND PROPRIETARY RIGHTS
The Company aggressively pursues protection of its intellectual property
and has been issued a number of United States patents. The Company also has
patent applications pending in the United States and in a number of foreign
jurisdictions and intends to file additional patent applications in the future.
The United States patents issued to the Company claim methods and devices
which the Company believes are critical to providing a safe and efficacious
treatment for BPH. Several of the claims under these patents relate to devices
and methods for preferentially limiting the amount of microwave energy directed
toward the rectum. Because cell death is a function of time and temperature and
because the rectum is in close proximity to the prostate, the Company believes
preferential heating is critical to enable continuous delivery of energy to
achieve an adequate zone of necrosis to durably treat BPH while not endangering
the rectum.
The Company also has several issued patents and pending applications
relating to its gamma-matched, helical-dipole microwave antenna. For a microwave
antenna to radiate energy efficiently, it must be impedance matched to its
environment. Further, the antenna design controls the evenness of the heating
and the area to be heated. The Company has been issued patents covering various
designs and methods of its helical microwave antenna with impedance
matching.
There can be no assurance that these patents, or any patents that may be
issued as a result of existing or future applications, will offer any degree of
protection from competitors or that any of the Company's patents or applications
will not be challenged, invalidated or circumvented in the future. In addition,
there can be no assurance that competitors, many of which have substantial
resources and have made substantial investments in competing technologies, will
not seek to apply for and obtain patents that will prevent, limit or interfere
with the Company's ability to manufacture or market its Targis System in the
United States or in international markets. Further, there can be no assurance
the Company's Targis System does not infringe upon the patent rights or other
intellectual property rights of other companies, that the Company will not be
required to seek licenses from other companies or that other companies will not
pursue claims of infringement against the Company.
Other companies have developed or are in the process of developing medical
methods and devices to transurethrally treat BPH with microwave energy. Several
companies have applied for, and in some cases received, patents related to such
medical methods and devices. One company, BSD Medical Corporation ("BSD"),
initiated a patent infringement lawsuit against the Company in 1992. The Company
chose to settle that lawsuit in March 1994 by entering into a settlement
agreement with BSD ("the 1994 BSD Settlement Agreement"), under which BSD
granted the Company a license for the patent at issue, as well as several other
patents. In May 1998 the Company entered into a settlement agreement ("1998
Agreement") with BSD
14
Medical Corporation and Thermatrix, Inc. which resolved a dispute about the 1994
BSD Settlement Agreement. Under the terms of the 1998 Agreement, the Company
paid a total of $5.0 million and now holds a fully-paid, non-cancellable, non-
exclusive, worldwide license from BSD Medical and Thermatrix, Inc. with respect
to patents relating to the microwave treatment of BPH and other urological
diseases.
In August 1996, the Company entered into a non-exclusive, worldwide patent
license agreement with EDAP TMS S.A., a French corporation, and its subsidiary,
EDAP Technomed, Inc. (collectively referred to as "EDAP") for certain EDAP
patents relating to the microwave treatment of BPH.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through proprietary information agreements with
employees, consultants and other parties. The Company's proprietary information
agreements with its employees and most of its consultants contain industry
standard provisions requiring such individuals to assign to the Company, without
additional consideration, any inventions conceived or reduced to practice while
retained by the Company, subject to customary exceptions. The Company's
officers and other key employees also agree not to compete with the Company for
a period following termination. There can be no assurance that proprietary
information or non-compete agreements with employees, consultants and others
will not be breached, that the Company would have adequate remedies for any
breach, or that third parties will not nonetheless gain access to the Company's
technology.
COMPETITION
Competition in the market for BPH treatments is intense and is expected to
increase. The Company believes that its principal competition will come from
both surgical and non-surgical therapies. Surgical therapies include TURP, TUIP
or alternative surgical procedures for vaporization of the prostate tissue using
laser or RF energy. Non-surgical alternatives include drug therapy and emerging
less invasive technologies.
The primary manufacturer of equipment used in the TURP procedure is
ValleyLab, a subsidiary of Pfizer, Inc. In addition, Trimedyne, Inc., C.R. Bard,
Inc., Coherent, Inc., Surgical Laser Technologies, Inc., Circon Corporation,
Richard Wolf GmbH, Karl Storz GmbH & Company and ProSurg Corp. all manufacture
equipment used in alternative surgical procedures. Drugs for the treatment of
BPH are marketed by Abbott Laboratories (Hytrin(R)), Merck & Co., Inc.
(Proscar(R)), Pfizer, Inc. (Cardura(R)) and Boehringer Ingelheim
Pharmaceuticals, Inc. (FLOMAX(R)). Companies that have developed or are
developing less invasive interstitial therapies include Johnson & Johnson,
Dornier Medical Systems, Inc., Diomed Ltd., VidaMed, Inc. and U.S. Surgical
Corporation. Other companies have developed or are developing less invasive
microwave thermotherapy systems for the treatment of BPH including EDAP, Lund
Instruments, Thermatrix, Inc. and Dornier Medical Systems, Inc. The Company is
aware of additional companies that have developed or are developing technologies
for the treatment of BPH, including Boston Scientific Corporation, InStent Inc.,
a subsidiary of Medtronic, Inc., Argomed, Inc., Celsion Corporation, Thermal
Therapeutics, Inc. and FOCUS Surgery, Inc. These technologies include stents,
dilatation balloons, transurethral and transrectal hyperthermia, and high
intensity focused ultrasound.
The Company expects that competition in the BPH field will be based, among
other things, on the ability of the therapy to provide safe, effective and
lasting treatment, cost effectiveness of the therapy, acceptance of the
procedure by physicians, health care payors and patients, patent position,
marketing and sales capabilities, and third-party reimbursement policies.
Another factor in competition may be the timing of market introduction of
competitive products.
15
GOVERNMENT REGULATION
United States
Government regulation in the United States and other countries is a
significant factor in the development and marketing of the Company's Targis
System and in the Company's ongoing manufacturing and research and development
activities. The Company and the Targis System are regulated in the United
States by the FDA under a number of statutes including the Federal Food, Drug
and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA regulates the
pre-clinical and clinical testing, manufacturing, labeling, distribution, sale,
marketing, advertising and promotion of medical devices in the United States.
Failure to comply with applicable requirements can result in fines, recall or
seizure of products, total or partial suspension of production, distribution,
sales and marketing, suspension or withdrawal of existing product approvals or
clearances, refusals to approve or clear new applications or notices and
criminal prosecution of a company and its officers and employees.
Prior to commercial sale in the United States, most medical devices,
including the Company's products, must be cleared or approved by the FDA. In
general, the regulatory process can be lengthy, expensive and uncertain, and
securing FDA clearances or approvals may require the submission of extensive
clinical data together with other supporting information to the FDA. Medical
devices such as the Targis System are classified into one of three classes,
Class I, II or III, on the basis of the controls necessary to reasonably ensure
their safety and effectiveness. Generally, Class III devices are those that
must receive approval of a PMA by the FDA to ensure their safety and
effectiveness. They are generally life-sustaining, life-supporting or
implantable devices and also include most devices that were not on the market
before May 28, 1976 and for which the FDA has not made a finding of "substantial
equivalence" based upon a 510(k).
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance of a 510(k) or approval of a PMA. Following
submission of the 510(k), the manufacturer may not market the new device until
an order is issued by the FDA finding the device to be "substantially
equivalent" to a legally marketed medical device, i.e., a legally marketed Class
I or Class II medical device or a legally marketed Class III medical device that
does not itself require premarket approval ("predicate device"). The FDA has no
specific time limit by which it must respond to a 510(k). It generally takes
from three to twelve months from the date of submission for the FDA to respond
to a 510(k) application depending on the complexity of the technology and the
level of review the FDA employs for evaluating the 510(k), but it may take
longer. The FDA may determine that the proposed device is not substantially
equivalent, or that additional clinical or other data are needed before a
substantial equivalence determination can be made.
If a new device is not found to be substantially equivalent to a legally
marketed predicate device, a PMA must be filed with and approved by the FDA
before the product may be marketed. The PMA process is significantly more
complex than the 510(k) process. The PMA process requires the performance of at
least two independent, statistically significant clinical studies that must
demonstrate the safety and effectiveness of the device in order to obtain FDA
approval of the PMA. The PMA process is expensive and often lengthy, typically
requiring several years, and may never result in approval. If the device
presents a "significant risk", the manufacturer or the distributor of the device
must obtain approval of an IDE from the FDA prior to commencing human clinical
trials in support of the PMA. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA (or the FDA does not notify the sponsor 30
days after receipt of the application that the trials may not begin) and one or
more appropriate institutional review boards approves the study protocol,
16
clinical trials may begin at a specified number of investigational sites with a
specific number of patients, as approved by the FDA. The FDA has the authority
to re-evaluate, alter, suspend or terminate clinical testing based on its
assessment of data collected throughout the trials. An IDE supplement must be
submitted to, and approved by, the FDA (or the FDA does not notify the sponsor
30 days after receipt of the supplement that the change may not be implemented)
before a sponsor or an investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or welfare
of human subjects. Sponsors of clinical trials are permitted under FDA
regulations to sell the devices distributed in the course of the clinical study,
provided that such compensation does not exceed recovery of the costs of
manufacturing, research, development and handling.
In 1993, the FDA issued a policy statement indicating that medical devices
seeking to be labeled for use in treatment of BPH would be classified as Class
III devices which will require FDA approval of a PMA before marketing may begin.
The FDA approved the PMA for the Targis System by a letter (order) dated
August 22, 1997. In July 1998, the FDA approved expanded claims for the product
allowing treatment for obstruction of the urethra caused by BPH. The FDA made
the Targis System a restricted device which means that its labeling specifies
requirements for the training of physicians who may use the device and that the
FDA has greater control over advertising for the Targis System.
The FDA imposed a number of postapproval requirements, including a study to
collect 5-year follow-up data to evaluate the long-term effects of the Targis
System treatment in at least 100 patients. This postapproval study must assess
the rates of adverse events that occurred during the 5-year follow-up period, as
well as the rate of repeat and alternative treatments that were administered.
As with all such medical devices, the Targis System will be subject to continual
FDA and other regulatory agency review and regulation. Subsequent discovery of
previously unknown problems or failure to comply with applicable requirements
can result in severe administrative, civil, and criminal sanctions.
The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device. Such
changes include, but are not limited to: new indications for use; the use of a
different facility or establishment to manufacture, process or package the
device; changes in manufacturing methods or quality control systems; changes in
vendors used to supply components of the device; changes in performance or
design specifications, and certain labeling changes. Any such changes will
require FDA approval of a PMA supplement before marketing. There can be no
assurance that the required approvals of PMA supplements for any changes to the
Targis System will be granted on a timely basis or at all, and delays in receipt
of, or failure to receive such approvals, or the loss of the approval of the PMA
for the Targis System, would have a material adverse effect on the business,
financial condition and results of operations of the Company.
Advertising and promotional activities are subject to regulation by the FDA
and, in certain instances, by the Federal Trade Commission. Other applicable
requirements include the FDA's medical device reporting regulations, which will
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its marketed devices,
as well as product malfunctions that would likely cause or contribute to a death
or serious injury if the malfunction were to recur. Failure to meet these
pervasive FDA requirements could subject the Company and/or its employees to
injunction, prosecution, civil fines, seizure or recall of products, prohibition
of manufacturing, distribution, sales or marketing or suspension or withdrawal
of any previously granted approvals.
17
The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance with
quality system including GMP requirements as specified in the FDA device quality
system ("QS") regulation. This regulation requires, among other things, that
(i) the manufacturing process be regulated and controlled, and documented by the
use of written procedures and (ii) the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. The regulation also requires investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. In addition, the QS regulation requires preproduction
design controls, purchasing controls and maintenance of service records, except
that FDA has stated that as long as manufacturers are taking reasonable steps to
come into compliance with the design control requirements, the FDA will not
initiate action (including enforcement cases) based on a failure to comply with
these requirements before June 1, 1998. The QS regulation is expected to
increase the cost of complying with the FDA GMP and related requirements. The
FDA monitors compliance with QS including GMP requirements by conducting
periodic inspections of manufacturing facilities. If violations of applicable
regulations are noted during FDA inspections of manufacturing facilities, the
FDA or the government through court enforcement action can prohibit further
manufacturing, distribution, sale and marketing of the device until the
violations are cured, and in that circumstance the continued marketing of the
Company's products would be adversely affected. Such regulations are subject to
change and depend heavily on administrative interpretations. There can be no
assurance that future changes in regulations or interpretations made by the FDA
or other regulatory bodies, with possible retroactive effect, will not adversely
affect the Company.
International
Sales of medical devices outside of the United States are subject to United
States export requirements and foreign regulatory requirements. Exportation of
a device that complies with FDA requirements for commercial distribution in the
United States is not subject to any FDA export permit requirement so long as the
device is exported for the indication(s) for which commercial distribution in
the United States is lawful under the FDA Act.
The Company has met the necessary registration requirements in the European
Union, Japan and Canada to commercialize the Targis System. In addition, the
Company's distributors have obtained the necessary registration requirements to
commercialize the Targis System in a number of different countries. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be
longer or shorter than that required for FDA approval, and the requirements may
differ. The Company has implemented ISO 9001, a certification showing that the
Company's procedures and manufacturing facilities comply with standards for
quality assurance and manufacturing process control. The ISO 9001
certification, along with the European Medical Device Directive ("MDD")
certification, received in early fiscal 1997, evidences compliance with the
requirements and enables the Company to affix the CE Mark to its current
products. The CE Mark denotes conformity with European standards for safety and
allows certified devices to be placed on the market in all EU countries.
Medical devices may not be sold in European Union countries unless they display
the CE Mark. There can be no assurance that the Company will be able to obtain
regulatory approvals or clearances for its products in other foreign countries.
The Company's distributor in Japan, Nihon Kohden, is responsible for
obtaining regulatory and reimbursement approvals for the Targis System in Japan.
In February 1997, the Company's Targis System received regulatory approval from
the Japanese Ministry of Health and Welfare.
18
PRODUCT LIABILITY AND INSURANCE
The business of the Company entails the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
maintains product liability insurance with coverage of $1.0 million per
occurrence and an annual aggregate maximum of $2.0 million. The Company also
carries a $15.0 million umbrella insurance policy. The Company evaluates its
insurance requirements on an ongoing basis. There can be no assurance that
product liability claims will be covered by such insurance, will not exceed such
insurance coverage limits or that such insurance will be available on
commercially reasonable terms, or at all.
EMPLOYEES
As of September 15, 1998, the Company employed 139 individuals on a full-
time basis. The Company also has several part-time employees and consultants.
The Company believes that it has been successful in attracting experienced and
capable personnel, although there can be no assurance that the Company will
continue to attract and retain qualified personnel. None of the Company's
employees is covered under a collective bargaining agreement. The Company
considers relations with its employees to be good.
BACKLOG
Although the Company has received orders for future delivery of its
products at September 1, 1998, the Company did not have a significant backlog.
FORWARD LOOKING STATEMENTS
The statements included in this Form 10-K that are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. In particular, the Company's forward looking statements,
including those regarding the Company's ability to: (i) successfully
commercialize the Targis System, (ii) obtain satisfactory reimbursement for the
Targis procedure from governmental and private payors, and (iii) achieve
acceptable profit margins, could be affected by a number of risks and
uncertainties including those described below.
Uncertainty of Market Acceptance
The Targis procedure represents a new therapy for BPH, and there can be no
assurance that the Targis System will gain any significant degree of market
acceptance among physicians, health care payors or patients. Physicians may
elect not to perform the procedure unless adequate reimbursement from health
care payors is available. Health care payor acceptance of the Targis procedure
will require, among other things, evidence of the cost effectiveness of the
Targis procedure as compared to other BPH therapies. Patient acceptance of the
procedure will depend in part on physician recommendations, as well as other
factors, including the degree of invasiveness, the rate and severity of
complications and other side effects associated with the procedure, as compared
to other therapies.
19
Dependence on Third-Party Reimbursement
The Company's success will be largely dependent upon the extent to which
satisfactory reimbursement for the Targis procedure can be obtained from health
care payors for physicians performing the Targis procedure and for costs of the
Targis System. In the United States and in international markets, third-party
reimbursement is generally available for certain existing therapies used for
treatment of BPH. Third-party reimbursement is dependent upon decisions by the
Health Care Financing Administration ("HCFA") and contract Medicare carriers for
Medicare, individual managed care organizations, private insurers, foreign
governmental health programs and other payors. Any failure to receive favorable
coding, coverage and reimbursement determinations for the Targis System by these
organizations could discourage physicians from using the Targis System.
Dependence on Patents and Proprietary Rights
The Company's success depends in part on its ability to protect its Targis
System and technology under United States and international patent laws and
other intellectual property laws and to operate without infringing upon the
proprietary rights of third parties. The validity and breadth of claims covered
in medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. Companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
Other companies have developed or are in the process of developing medical
methods and devices to transurethrally treat BPH with microwave energy.
Reliance on Single Product
The Targis System is the Company's sole product. As such, the Company's
future success is entirely reliant upon its ability to market the Targis System
commercially in the United States and elsewhere. If the Company is unable to
commercialize the Targis System successfully, the Company's business, financial
condition and results of operations would be materially adversely affected.
Limited Manufacturing Experience
The Company has only limited experience in manufacturing its Targis System
and has only recently begun expanding its manufacturing capabilities for
commercial quantities. The Company's facilities and the facilities of certain of
its contract manufacturers will need to comply with applicable regulations
including the FDA's quality system regulation which includes the FDA's current
good manufacturing practice ("GMP") requirements, and with ISO 9001
certification requirements and other regulations. Any failure to comply with
applicable requirements and regulations by the Company or its contract
manufacturers could interrupt or delay manufacturing of the Targis System, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Third-Party Distributors for International Sales
To date, a majority of the Company's revenues outside the United States
have been derived from sales of its Targis System through third-party
distributors. Boston Scientific has exclusive distribution rights for the Targis
System in all countries outside the United States, except Japan, and Nihon
Kohden has exclusive distribution rights in Japan. Although the Company intends
to work with these distributors to improve the Company's international sales, in
light of the current significant inventory levels of Boston
20
Scientific and Nihon Kohden of the Company's products, the Company expects
minimal fiscal 1999 international sales. If the Company is unable to generate
significant international sales the future through Boston Scientific or Nihon
Kohden, it could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the failure of
either of these companies to effectively market the Company's Targis System
could have an adverse effect on the Company's ability to achieve penetration of
these markets and establish long-term acceptance of the Targis System.
Contract Manufacturing; Dependence Upon Key Suppliers
The control unit for the Targis System is assembled by a contract
manufacturer pursuant to a supply agreement with the Company. If for any reason
the contract manufacturer is unable or unwilling to manufacture the control unit
for the Company in the future, the Company could incur significant delays in
obtaining a substitute contract manufacturer. In addition, the Company purchases
additional components used in the Targis System from various suppliers and
relies on single sources for several components. One such component is obtained
from a source that has a patent for the technology. Delays could be caused if
supply of this component or other components were interrupted. These delays
could be extended in certain situations where a substitute contract manufacturer
or a component substitution would require approval by the FDA of a PMA
supplement.
Competition and Technological Advances
Competition in the market for treatment of BPH is intense and is expected
to increase. The Company believes its principal competition will come from
existing surgical therapies and non-surgical alternatives, including drug
therapy and watchful waiting. The Company faces and expects increasing
competition from numerous other companies developing drugs and laser, radio
frequency, microwave and other procedures for the treatment of BPH. Many of the
Company's competitors have significantly greater financial, technical, research,
marketing, sales, distribution and other resources than the Company. In
addition, the Company's competitors may succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than the Targis System. In addition, some of the Company's competitors have
introduced commercially marketable competitive products prior to the Company.
There can be no assurance that Urologix will be able to compete successfully
against any competitors.
Product Liability Risk; Limited Insurance Coverage
The manufacture and sale of medical products entail significant risk of
product liability claims. The Company maintains product liability insurance
coverage in amounts it believes are adequate. There can be no assurance that
the Company's existing insurance coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the clinical
trials or sales of the Targis System.
Year 2000 Issue Risks
The Company is evaluating the potential impact of what is commonly referred
to as the Year 2000 issue, concerning the inability of certain information
systems to properly recognize and process dates containing the year 2000 and
beyond. Although the Company believes that the Year 2000 issue will not have
a significant effect on the Company, there can be no assurance that the Company
will not be affected by this issue. See Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Issue in Item 7 of
this Form 10-K for a detailed discussion of the Company's preparation for the
year 2000 issue.
21
ITEM 2. PROPERTIES
- --------------------
The Company leases approximately 37,000 square feet of office,
manufacturing and warehouse space in a suburb of Minneapolis, Minnesota. The
lease expiration date is March 31, 2002. The Company believes its facilities
will be sufficient to meet the Company's current requirements and that
additional space at or near the current location will be available at a
reasonable cost if such space is required in the future.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
As previously reported, on July 30, 1996, the Company filed a lawsuit under
seal in United States District Court for the District of Minnesota (the "Court")
against BSD Medical Corporation ("BSD") to enforce the terms of a settlement and
patent license agreement between the Company and BSD ("the 1994 BSD Settlement
Agreement"). A bench trial was held in March and April 1998.
In May 1998, prior to the Court issuing a decision on the trial, the
Company entered into a settlement agreement ("1998 Agreement") with BSD Medical
Corporation and Thermatrix, Inc. which resolved the dispute about the 1994 BSD
Settlement Agreement. Under the terms of the 1998 Agreement, the Company paid a
total of $5.0 million and now holds a fully-paid, non-cancellable, non-
exclusive, worldwide license from BSD Medical and Thermatrix, Inc. with respect
to patents relating to the microwave treatment of BPH and other urological
diseases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
Not applicable.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- -------------------------------------------------------------- ---------------
MATTERS
-------
The Company's Common Stock is traded on the Nasdaq Stock Market under the
symbol ULGX. The following table sets forth quarterly high and low last sales
prices of the Company's Common Stock for the past two years.
Quarter
Fiscal Year First Second Third Fourth
- ----------- ----- ------ ----- ------
1998 High 23 1/4 25 1/4 19 7/8 11 3/8
Low 16 16 1/4 8 1/4 8 1/4
1997 High 15 3/4 16 1/2 19 7/8 18 1/8
Low 10 3/8 13 1/4 15 12 5/8
On September 15, 1998, the Company had 291 shareholders of record. The Company
has never paid cash dividends on its Common Stock. The Board of Directors of
the Company currently intends to retain any and all income for use in the
Company's business and does not anticipate paying any cash dividends in the
foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
YEARS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales............................ $ 11,194 $ 5,504 $ 362 $ 489 $ 9
Cost of goods sold............... 9,162 4,866 1,177 785 179
-------- -------- -------- -------- -------
Gross profit (loss)........... 2,032 638 (815) (296) (170)
COSTS AND EXPENSES:
Research and development...... 6,676 5,049 4,811 4,099 1,598
Sales and marketing........... 6,765 3,430 1,007 477 124
General and administrative.... 2,284 2,226 1,192 884 677
Total costs and expenses......... 15,725 10,705 7,010 5,460 2,399
-------- -------- -------- -------- -------
Operating loss................... (13,693) (10,067) (7,825) (5,756) (2,569)
Interest income, net............. 2,056 1,833 232 329 44
Litigation expense............... (3,376) -- -- -- --
Net loss......................... $(15,013) $ (8,234) $ (7,593) $ (5,427) $(2,525)
======== ======== ======== ======== =======
BASIC AND DILUTED LOSS:
Net loss per common share........ $(1.44) $(0.90) $(1.22) $(0.91) $(0.69)
Shares used in computing net
loss per share (1)............ 10,429 9,173 6,235 5,996 3,646
JUNE 30,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities.. $ 36,500 $ 26,101 $ 40,844 $ 3,571 $ 9,093
Working capital.................. 41,375 27,013 39,940 3,372 8,897
Total assets..................... 53,489 35,582 42,368 4,876 9,801
Total liabilities................ 4,152 3,185 1,780 899 408
Accumulated deficit.............. (41,780) (26,767) (18,534) (10,940) (5,514)
Total shareholders' equity....... $ 49,337 $ 32,397 $ 40,588 $ 3,977 $ 9,393
- ---------------------
(1) Restated to reflect impact of preferred share conversion to common
shares in May 1996.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
Urologix, Inc., incorporated in 1991, develops, manufactures and markets
minimally invasive medical devices for the treatment of urological diseases. The
Company has developed the Targis System, a non-surgical, anesthesia-free,
catheter-based therapy that uses a proprietary microwave technology for the
treatment of benign prostatic hyperplasia (BPH), a disease that affects over 23
million men worldwide. In August 1997, the Company received Food and Drug
Administration (FDA) approval to market the Targis System in the United States
and launched the Targis System in the United States during the fourth calendar
quarter of 1997. Regulatory approvals necessary to market the Targis System in
Japan and the European Union countries were obtained in fiscal year 1997. The
Company's Targis System consists of a control unit and a procedure kit, which
includes the microwave delivery system incorporated in a catheter, a cooling bag
and a rectal thermosensing unit.
The Company markets the Targis System through a direct sales force in the
United States. Internationally, the Company has developed broad based
relationships with two parties for market development and sales of the Targis
System. Boston Scientific Corporation, a worldwide developer, manufacturer and
marketer of medical devices, has exclusive distribution rights for the Targis
System in all countries outside the United States, except Japan. Nihon Kohden
Corporation, a major Japanese developer, manufacturer and marketer of medical
devices, has exclusive distribution rights for the Targis System in Japan.
Since inception, the Company has experienced operating losses and
anticipates that its operating losses will continue for the foreseeable future.
Expenditures will be primarily related to the continuing Targis System market
introduction in the United States, scale-up of commercial manufacturing,
clinical trials and research and development activities.
The Company expects sales of the Targis System to account for all of its
revenues for the foreseeable future. In the United States, the Company offers
urologists or hospitals the option to purchase or lease the Targis System
control unit. The leases are offered by a third-party lessor directly to the
Company's customer, allowing the Company to record the transaction as a sale.
Revenues from the sale of Targis System control units and disposable procedure
kits are recognized upon shipment.
RESULTS OF OPERATIONS
Fiscal Years Ended June 30, 1998 and 1997
Sales increased to $11.2 million in fiscal year 1998 from $5.5 million in
fiscal year 1997 due to initial sales in the United States resulting from FDA
commercial marketing approval and an increase in shipments of the Targis System
to the Company's international distributors resulting from regulatory marketing
approvals obtained in the European Union and Japan. Sales in the United States
represented approximately 27% of total sales in fiscal year 1998. The Company
expects to continue increasing United States sales of the Targis System in
fiscal year 1999; however, international sales are expected to be minimal due to
significant inventory levels of the Targis System at the Company's international
distributors.
25
Cost of goods sold includes raw materials, labor and royalties, as well as
costs incurred in connection with the production of Targis Systems. Cost of
goods sold increased to $9.2 million in fiscal year 1998 from $4.9 million in
fiscal year 1997, due primarily to the significant increase in sales and
production. Cost of goods sold were impacted by two events in 1998. First, the
Company wrote down finished goods inventory by $700,000 during the third quarter
as a result of a component that caused an occasional failure of the Targis
System catheters. Second, during the fourth quarter, the Company reduced its
current production schedule in anticipation of introducing an upgraded catheter
in fiscal year 1999, resulting in the allocation of overhead over a lower
production volume. The upgraded catheter production began in July 1998. The
Company expects costs of goods sold as a percentage of sales to decrease in 1999
due to higher United States sales as a percentage of total sales and
efficiencies obtained from higher production volumes.
Research and development expenses include those costs associated with the
development and protection of the Company's intellectual property, treatment of
patients participating in clinical trials, the accumulation of outcome data to
substantiate clinical results and the preparation and submission of applications
for regulatory approvals. Research and development expenses in fiscal year 1998
increased to $6.7 million from $5.0 million in fiscal year 1997 primarily due to
costs related to new and on-going clinical studies of the Targis System, product
development activities related to Targis System improvements and alternative
applications for the Company's technology, and the Company's settlement of
litigation concerning its rights under a previous settlement agreement (see Note
5 of Notes to Financial Statements). Research and development expenses in fiscal
year 1999 are expected to decrease due to the conclusion of some clinical
studies, lower regulatory expenses and the recent settlement of litigation.
Sales and marketing expenses in fiscal year 1998 increased to $6.8 million
from $3.4 million in fiscal year 1997, due primarily to costs associated with
the Company's U.S. marketing launch of the Targis System and supporting the
marketing of the Targis System in Europe and Japan. These costs included the
hiring of sales and marketing management, preparation of promotional materials,
recruitment of field sales representatives and efforts related to obtaining
third-party reimbursement for the Targis System. The Company expects sales and
marketing expenses to increase as it increases its sales efforts in the United
States, including the expected expansion of its direct sales force, and
continues supporting its international distributors' sales efforts.
General and administrative expenses in fiscal year 1998 increased slightly
to $2.3 million from $2.2 million in fiscal year 1997 due to administrative
costs associated with an increase in employees in connection with the Company's
growth and commencement of United States sales activities.
Interest income was relatively unchanged for year 1998 compared to fiscal
year 1998, primarily as a result of similar average invested balances.
Litigation settlement expenses resulted from the settlement agreement described
above.
Fiscal Years Ended June 30, 1997 and 1996
Sales increased to $5.5 million in fiscal year 1997 from $362,000 in fiscal
year 1996 due to sales of the Targis System to the Company's international
distributors as a result of marketing approvals obtained during fiscal 1997 in
the European Union and Japan.
26
Costs of goods sold increased to $4.9 million in fiscal year 1997 from $1.2
million in fiscal year 1996, primarily due to the increase in sales of the
Targis System.
Research and development expenses increased to $5.0 million in fiscal year
1997 from $4.8 million in fiscal year 1996 due primarily to costs associated
with the filing of the Targis System pre-market approval application (PMA) with
the FDA and clinical studies conducted to document the safety and efficacy of
the Targis System.
Sales and marketing expenses increased to $3.4 million in fiscal year 1997
from $1.0 million in fiscal year 1996, primarily due to costs associated with
the marketing launch of the Targis System in Europe and Japan and preparation
for United States marketing launch. Preparations included the hiring of sales
and marketing management, preparation of promotional materials, recruiting for
field sales representatives and efforts related to obtaining medical
reimbursement for the Targis System.
General and administrative expenses increased to $2.2 million in fiscal
year 1997 from $1.2 million in fiscal year 1996 due to administrative costs
associated with an increase in employees in connection with the Company's growth
and commencement of sales activities, and costs related to the Company's
external reporting obligations as a public company.
Interest income increased significantly during fiscal year 1997, due
primarily to income from the investment of proceeds from the Company's initial
public offering, completed in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through sales of
equity securities and, to a lesser extent, sales of the Targis System. As of
June 30, 1998, the Company had total cash, cash equivalents and available-for-
sale securities of $36.5 million and working capital of $41.4 million.
During fiscal year 1998, the Company used $17.3 million in operating
activities, primarily reflecting the Company's net loss, an increase in
inventories of $2.2 million and an increase in accounts receivable of $2.7
million. The Company used $14.0 million in investing activities, primarily
reflecting the net purchase of $9.7 million in securities, $2.2 million for the
purchase of property and equipment and $2.0 million for the purchase of other
assets. The Company financed its fiscal year 1998 operating and investing
activities primarily through a November 1997 secondary offering that raised net
proceeds of $31.5 million.
At June 30, 1998, the Company had committed to purchase $2.5 million in
components for the Targis Systems from a third-party vendor (see Note 5 to Notes
to Financial Statements).
The Company expects to continue to incur additional losses, and will use
its working capital as it incurs substantial expenses related to the Targis
System market introduction in the United States, clinical trials and research
and development activities. In addition, should the Company choose to rent
Targis System control units to customers in the future, substantial capital
could be required. Although the Company believes that existing cash, cash
equivalents and available-for-sale securities will be sufficient to fund its
operations for at least the next 24 months, there can be no assurance that the
Company will not require additional financing in the future or that any
additional financing will be available to the Company on satisfactory terms, if
at all.
27
YEAR 2000 ISSUE
The Company is evaluating the potential impact of what is commonly referred
to as the Year 2000 issue, concerning the inability of certain information
systems to properly recognize and process dates containing the year 2000 and
beyond. The Company has established a dedicated Year 2000 team working with
every operational area throughout the Company, and this team has worked with
management to commence the following steps: (i) implementing a Year 2000
Assessment and Testing Plan for all internal information systems and other
systems that contain microcontrollers that may be affected by the Year 2000 date
change; (ii) implementing a Year 2000 Assessment and Testing Plan for all
Company products, (iii) communicating with third parties that supply product to
the Company to ensure they are addressing the Year 2000 issue; and (iv)
contingency and disaster recovery planning to ensure Year 2000 problem
resolution.
The Company has identified and tested the systems it believes are mission
critical, and the test results indicate that these systems are Year 2000
compliant. The Company expects to complete testing and establish compliance with
respect to all of its systems and products by December 31, 1998, subject to
possible equipment upgrades during 1999 and ongoing communications with third
parties. Regardless of the Year 2000 compliance of the Company's systems and
products, there can be no assurance that the Company will not be adversely
affected by the failure of others to become Year 2000 compliant.
The Company estimates that its direct costs for Year 2000 compliance will
consist of costs related to the staff time devoted to Year 2000 compliance. The
Company does not expect capital expenditures will be necessary related to Year
2000 compliance. Costs and capital expenditures in these areas have not been
material for historical periods.
As noted below under "Forward-Looking Statements," statements in this
section that are not historical or current facts are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including statements regarding the timetable for Year 2000
compliance, the Company's costs and capital expenditures, the success of the
Company's efforts and others' efforts to achieve compliance, and the effects of
the Year 2000 issue on the Company's future financial condition and results of
operations. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results and
those presently anticipated or projected. The following important factors, among
others, could affect the accuracy of these statements: (i) the inherent
uncertainty of the costs and timing of achieving compliance on the wide variety
of systems used by the Company, (ii) the reliance on the efforts of vendors,
customers, government agencies and other third parties to achieve adequate
compliance and avoid disruption of the Company's business in early 2000 and
(iii) the uncertainty of the ultimate costs and consequences of any
unanticipated disruption in the Company's business resulting from the failure of
one of the Company's applications or of a third party's systems. The foregoing
list is not exhaustive, and the Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FORWARD-LOOKING STATEMENTS
Statements included in this report that are not historical or current facts
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and are subject to certain
risks and uncertainties that could cause actual results to differ materially.
These risks and uncertainties include: competition from other BPH treatments;
the ability of the Company's
28
distributors and representatives to successfully market and sell the Targis
System; the Company's ability to manufacture the Targis Systems in sufficient
quantities; the Company's ability to maintain intellectual property protection
for its proprietary products and to defend its existing intellectual property
rights from challenges by third parties; and the extent to which the physicians
performing the Targis System procedures are able to obtain third-party
reimbursement. In addition, a detailed discussion of risks and uncertainties may
be found in the Section entitled "Business-Forward Looking Statements" in this
Form 10-K.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The following financial statements are included in the Form 10-K.
Page
----
Report of Independent Public Accountants ........................................ 31
Balance Sheet as of June 30, 1998 and 1997....................................... 32
Statements of Operations for years ended June 30, 1998, 1997 and 1996............ 33
Statements of Shareholders' Equity for years ended June 30, 1998, 1997 and 1996.. 34
Statements of Cash Flows for years ended June 30, 1998, 1997 and 1996............ 35
Notes to Financial Statements.................................................... 36
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Urologix, Inc.:
We have audited the accompanying balance sheets of Urologix, Inc. (a Minnesota
corporation) as of June 30, 1998 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended June 30, 1998. 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 Urologix, Inc. as of June 30,
1998 and 1997, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 31, 1998
31
UROLOGIX, INC.
Balance Sheets
As of June 30
1998 1997
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 882,801 $ 275,571
Available-for-sale securities 35,616,726 25,825,238
Accounts receivable 4,013,533 1,272,994
Inventories 4,313,895 2,119,373
Prepaids and other current assets 691,102 667,593
------------ ------------
Total current assets 45,518,057 30,160,769
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements 1,001,934 539,039
Machinery, equipment and furniture 3,900,839 2,141,622
Less- Accumulated depreciation and amortization (1,703,293) (832,604)
------------ ------------
Property and equipment, net 3,199,480 1,848,057
OTHER ASSETS 4,771,222 3,573,261
------------ ------------
$ 53,488,759 $ 35,582,087
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capitalized lease obligations $ 28,138 $ 19,531
Accounts payable 1,960,768 2,087,443
Accrued liabilities 2,154,078 1,040,345
------------ ------------
Total current liabilities 4,142,984 3,147,319
CAPITALIZED LEASE OBLIGATIONS, less current maturities 8,871 37,725
------------ ------------
Total liabilities 4,151,855 3,185,044
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (Note 4):
Undesignated stock, 5,000,000 shares authorized; none issued or
outstanding - -
Series A Junior Participating Preferred Stock, 250,000 shares
authorized, none issued or outstanding - -
Common stock, $.01 par value, 25,000,000 shares authorized; 11,239,892
and 9,256,594 shares issued and outstanding 112,399 92,566
Additional paid-in capital 91,016,366 59,131,097
Accumulated deficit (41,780,353) (26,767,362)
Net unrealized losses on investments (11,508) (59,258)
------------ ------------
Total shareholders' equity 49,336,904 32,397,043
------------ ------------
$ 53,488,759 $ 35,582,087
============ ============
The accompanying notes to financial statements are an integral part of these
balance sheets.
32
UROLOGIX, INC.
Statements of Operations
For the Years Ended June 30
----------------------------------------
1998 1997 1996
------------ ------------ -----------
SALES $ 11,194,212 $ 5,503,800 $ 362,118
COST OF GOODS SOLD 9,161,708 4,866,082 1,177,455
------------ ------------ -----------
Gross profit (loss) 2,032,504 637,718 (815,337)
------------ ------------ -----------
COSTS AND EXPENSES:
Research and development 6,676,716 5,048,917 4,811,165
Sales and marketing 6,764,832 3,429,443 1,006,544
General and administrative 2,283,817 2,226,012 1,191,518
------------ ------------ -----------
Total costs and expenses 15,725,365 10,704,372 7,009,227
------------ ------------ -----------
OPERATING LOSS (13,692,861) (10,066,654) (7,824,564)
INTEREST INCOME, net 2,056,014 1,832,798 231,252
LITIGATION SETTLEMENT EXPENSE (Note 5) (3,376,144) - -
------------ ------------ -----------
NET LOSS $(15,012,991) $ (8,233,856) $(7,593,312)
============ ============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $(1.44) $(0.90) $(1.22)
============ ============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING (Note 2) 10,428,520 9,173,419 6,235,291
============ ============ ===========
The accompanying notes to financial statements are an integral part of these
statements.
33
UROLOGIX, INC.
Statements of Shareholders' Equity
Noncumulative
Convertible Preferred
Stock Common Stock
--------------------- ----------------------
Shares Amount Shares Amount
---------- -------- --------- ---------
BALANCE, June 30, 1995 3,603,993 $ 36,040 1,197,904 $ 11,979
Issuance of preferred stock, net 638,806 6,388 - -
Stock options exercised - - 160,375 1,603
Preferred stock conversion (4,242,799) (42,428) 4,665,154 46,652
Shares issued through initial
public offering, net - - 3,105,000 31,050
Net loss - - - -
---------- -------- ---------- ---------
BALANCE, June 30, 1996 - - 9,128,433 91,284
Stock options exercised - - 128,161 1,282
Change in unrealized losses
on investment - - - -
Net loss - - - -
---------- -------- ---------- ---------
BALANCE, June 30, 1997 - - 9,256,594 92,566
Stock options exercised - - 240,562 2,406
Shares issued through
public offering, net - - 1,725,000 17,250
Shares issued pursuit to
employee stock purchase plan - - 17,736 177
Change in unrealized losses
on investment - - - -
Net loss - - - -
---------- -------- ---------- ---------
BALANCE, June 30, 1998 - $ - 11,239,892 $112,399
========== ======== ========== =========
Net
Additional Unrealized Total
Paid-In Accumulated Losses on Shareholders'
Capital Deficit Investments Equity
----------- ------------- ----------- --------------
BALANCE, June 30, 1995 $14,868,864 $(10,940,194) $ - $ 3,976,689
Issuance of preferred stock, net 4,580,676 - - 4,587,064
Stock options exercised 63,312 - - 64,915
Preferred stock conversion (4,224) - - -
Shares issued through initial
public offering, net 39,521,931 - - 39,552,981
Net loss (7,593,312) - (7,593,312)
----------- ------------ ----------- ------------
BALANCE, June 30, 1996 59,030,559 (18,533,506) - 40,588,337
Stock options exercised 100,538 - - 101,820
Change in unrealized losses
on investment - - (59,258) (59,258)
Net loss - (8,233,856) - (8,233,856)
----------- ------------ ----------- ------------
BALANCE, June 30, 1997 59,131,097 (26,767,362) (59,258) 32,397,043
Stock options exercised 198,142 - - 200,548
Shares issued through
public offering, net 31,509,851 - - 31,527,101
Shares issued pursuit to
employee stock purchase plan 177,276 - - 177,453
Change in unrealized losses
on investment - 47,750 47,750
Net loss - (15,012,991) - (15,012,991)
----------- ------------ ----------- ------------
BALANCE, June 30, 1998 $91,016,366 $(41,780,353) $ (11,508) $ 49,336,904
=========== ============ =========== ============
The accompanying notes to financial statements are an integral part of these
statements.
34
UROLOGIX, INC.
Statements of Cash Flows
For the Years Ended June 30
-------------------------------------------
1998 1997 1996
-------------------------------------------
OPERATING ACTIVITIES:
Net loss $(15,012,991) $ (8,233,856) $ (7,593,312)
Adjustments to reconcile net loss to net cash used for operating
activities-
Depreciation and amortization 1,619,940 431,223 128,770
Change in operating items:
Inventories (2,194,522) (1,703,453) 69,713
Accounts receivable (2,740,539) (1,237,928) (35,065)
Prepaids and other assets 29,278 (301,617) (193,813)
Accounts payable and accrued liabilities 987,058 1,424,064 832,458
------------- ------------- -------------
Net cash used for operating activities (17,311,776) (9,621,567) (6,791,249)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,222,112) (1,901,246) (134,336)
Purchase of securities (57,164,738) (83,807,022) (40,529,176)
Proceeds from sale of securities 47,421,001 98,701,702 1,972,452
Purchase of intangible assets, net (2,000,000) (3,244,620) -
------------- ------------- -------------
Net cash provided by (used for) investing activities (13,965,849) 9,748,814 (38,691,060)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 31,704,554 - 39,552,981
Proceeds from issuance of preferred stock, net - - 4,587,064
Proceeds from exercise of stock options 200,548 101,820 64,915
Payments made on capital lease obligations (20,247) (18,538) (6,650)
------------- ------------- -------------
Net cash provided by (used for) financing activities 31,884,855 83,282 44,198,310
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 607,230 210,529 (1,283,999)
CASH AND CASH EQUIVALENTS:
Beginning of period 275,571 65,042 1,349,041
------------- ------------- -------------
End of period $ 882,801 $ 275,571 $ 65,042
============= ============= =============
Supplemental Cash Flow Disclosures:
Cash paid for interest: $ 5,863 $ 8,706 $ 3,976
============= ============= =============
Noncash investing and financing activities:
Common stock issued upon conversion of preferred stock $ - $ - $ 42,428
============= ============= =============
The accompanying notes to financial statements are an integral part of these
statements.
35
UROLOGIX, INC.
Notes to Financial Statements
1. NATURE OF BUSINESS:
DESCRIPTION OF OPERATING ACTIVITIES
Urologix, Inc. (Urologix or the Company) was organized to research, develop,
manufacture and market innovative devices for the treatment of benign prostatic
hyperplasia (BPH) and other urologic diseases. Since inception (May 29, 1991)
through June 30, 1996, the Company was a development stage enterprise, having
devoted substantially all of its efforts to proprietary product development and
selling the Targis System to international distributors. These efforts also
included raising capital, performing clinical trials and developing commercial
markets. The Company received regulatory approvals necessary to market the
Targis system in the European Union Countries, Japan and Canada prior to fiscal
year 1998 and in August 1997, received United States Food and Drug
Administration approval to market the Targis System in the United States.
Although the Company began actively selling its products during 1997 and no
longer considers itself to be in the development stage, it has not operated
profitably to date and there are no assurances that it will operate profitably
in the future.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company classifies highly liquid investments with original maturities of 90
days or less to be cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
AVAILABLE-FOR-SALE SECURITIES
The Company invests in money market funds and U.S. government and investment-
grade corporate securities with original maturities ranging from 90 days to two
years. These investments are considered to be available-for-sale and are stated
at market value, with the resulting unrealized gains or losses reported as a
component of shareholders' equity.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of:
June 30
-----------------------------------
1998 1997
---- ----
Raw materials $2,349,717 $ 915,609
Work-in-process 132,559 352,174
Finished goods 1,831,619 851,590
---------- ----------
$4,313,895 $2,119,373
========== ==========
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements that extend the useful
lives of property and equipment are capitalized at cost and depreciated over the
remaining useful lives. Repairs and maintenance are charged to expense as
incurred. Depreciation is provided using the straight-line method based upon
estimated useful lives of three to seven years for machinery, equipment,
furniture, and leasehold improvements.
OTHER ASSETS
Other assets consist primarily of license fees and prepaid royalties resulting
from patent licensing agreements. The agreements require the Company to pay a
royalty on sales of certain catheters and related systems. The license fees and
amounts prepaid by the Company have been charged to expense as sales are
recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
36
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed by dividing net loss by
the weighted average number of shares of common stock outstanding during each
period. The impact of common stock equivalents has been excluded from the
computation of weighted average common shares outstanding, as the effect would
be antidilutive.
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. The
ultimate results could differ from those estimates.
FINANCIAL INSTRUMENTS
For most financial instruments, including cash, available-for-sale securities,
accounts payable and accruals, management believes that the carrying amount
approximates fair value, as the majority of these instruments are short-term in
nature.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 establishes
accounting standards for computing and presenting earnings per share. Basic
earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. No
dilution for potentially dilutive securities is included. Diluted earnings per
share are computed under the treasury stock method and are calculated to compute
the dilutive effect of outstanding options, warrants and other securities. The
adoption had no effect on previously reported income per share.
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" in June 1997. SFAS No. 130 requires the disclosure of
other comprehensive income in the Company's financial statements and will be
adopted in fiscal year 1999. The adoption of SFAS No. 130 is not expected to
have a material impact on the Company's financial statements or the disclosures
contained therein.
3. INCOME TAXES:
A reconciliation of the Company's statutory tax rate to the effective rate for
the years ended June 30 is as follows:
1998 1997 1996
-------- -------- --------
Federal statutory rate 34% 34% 34%
State taxes, net of federal tax benefit 6 6 6
Valuation allowance (40) (40) (40)
-------- -------- --------
-% -% -%
======== ======== ========
As of June 30, 1998, the Company had net operating loss carryforwards of
approximately $42,000,000 for federal income tax purposes that are available to
offset future taxable income through the year 2012. Certain restrictions caused
by the change in ownership resulting from sales of stock will limit annual
utilization of the net operating loss carryforwards.
The components of the Company's deferred tax asset for the years ended June 30
is as follows:
1998 1997 1996
------------- ------------- ------------
Net operating loss carryforwards $ 16,762,000 $ 10,151,000 $ 6,802,000
Temporary deductible differences 228,000 160,000 870,000
Valuation allowance (16,990,000) (10,311,000) (7,672,000)
------------- ------------- ------------
$ - $ - $ -
============= ============= ============
37
4. SHAREHOLDERS' EQUITY:
INITIAL AND SECONDARY PUBLIC OFFERINGS
In May 1996, the Company completed an initial public offering of 3,105,000
shares of common stock which generated net proceeds of $39,552,981, to be used
to fund research and development, clinical trials, sales and marketing
activities, and fixed asset and working capital requirements.
In November 1997, the Company completed a secondary public offering of 1,725,000
shares of common stock which generated net proceeds of $31,527,101, to be used
primarily to fund the commercial launch of the Company's Targis System in the
United States.
REVERSE STOCK SPLIT
The Company's shareholders approved a 1-for-2 reverse common and convertible
preferred stock split effective April 30, 1996. The effect of the reverse stock
split has been reflected for all periods presented in the accompanying financial
statements.
CONVERTIBLE PREFERRED STOCK
From February through June 1994, the Company issued 1,250 Series B and 2,264,292
Series C convertible preferred shares at $4.00 and $4.40 per share,
respectively, for total net proceeds of $9,848,050. In December 1996 and March
1997, the Company completed the sale of 312,500 and 326,306 Series D convertible
preferred shares at $8.00 per share, for total net proceeds of $4,587,064.
In conjunction with the Company's initial public offering, all shares of
convertible preferred stock were converted to 4,665,153 shares of common stock,
in accordance with each series' respective conversion ratio.
STOCK OPTIONS
The Company has a stock option plan (the 1991 Stock Option Plan) which provides
for the granting of incentive stock options to employees and nonqualified stock
options to employees, directors and consultants. As of June 30, 1998, the
Company has reserved 1,950,910 shares of common stock under this plan. As of
June 30, 1998, 341,634 shares were available for future grants under this plan.
Options expire seven to ten years from the date of grant and are subject to
varying vesting schedules. In April 1996, the Company amended the 1991 Stock
Option Plan to provide for the automatic grant of 10,000 stock options to each
nonemployee director upon their of initial election. Options are granted at fair
market value, vest over four years and expire ten years from date of grant, or
one year after the person ceases to be a director of the Company, whichever
occurs earlier. In May 1998, the Company repriced certain stock options
previously granted to $8.81, the fair market value on the date of repricing.
38
Shares subject to option are summarized as follows:
Weighted
Average
Stock Exercise
Options Price
------------- --------------
Balance at June 30, 1995 691,825 $ .46
Options granted 376,936 8.83
Options canceled (454) .60
Options exercised (160,389) .48
------------- --------------
Balance at June 30, 1996 907,918 3.93
Options granted 196,000 16.35
Options canceled (2,020) .60
Options exercised (128,161) .81
------------- --------------
Balance at June 30, 1997 973,737 5.47
Options granted 447,234 10.51
Options canceled (161,885) 8.27
Options exercised (238,312) 1.19
------------- --------------
Balance at June 30, 1998 1,020,774 $ 8.23
============= ==============
Options exercisable at June 30, 1998 394,299 $ 5.85
============= ==============
The Company accounts for stock options under Accounting Principles Board Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these options been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the basic and diluted net loss and basic and
diluted net loss per share would have been increased to the following pro forma
amounts:
1998 1997 1996
-------------- ------------- -------------
Basic and diluted As reported $ (15,012,991) $ (8,233,856) $ (7,593,312)
net loss Proforma (16,942,255) (9,872,331) (7,913,515)
Basic and diluted net
loss per share As reported $ (1.44) $ (0.90) $ (1.22)
Proforma (1.62) (1.08) (1.27)
For purposes of calculating the above required disclosure, 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 1998, 1997 and 1996, respectively: risk-free interest rates of 5.52%,
6.87% and 5% no expected dividend yield, expected lives of seven years and
expected volatility of 54.25%.
The weighted average fair value of options granted during 1998, 1997 and 1996
was $10.51, $16.35 and 8.83, respectively. Options issued during 1998, 1997 and
1996, which remain outstanding at June 30, 1998, have an exercise price between
$0.60 and $20.88, a weighted average exercise price of $9.43 and a weighted
average remaining contractual life of 7.25 years.
1996 EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the Plan)
and reserved 100,000 common shares for issuance under the Plan. Under the terms
of the Plan, employees may purchase common shares at prices to be determined by
the Company's board of directors, ranging from 85% to 100% of the shares' fair
market value. Eligible employees elect to participate through payroll deductions
at the maximum level established by the board of directors, but not to exceed
10% of the participant's base pay, as defined. As of June 30, 1998, 17,736
shares had been purchased under the Plan for gross proceeds of $177,543.
39
5. COMMITMENTS AND CONTINGENCIES:
PURCHASE COMMITMENTS
At June 30, 1998, the Company has orders outstanding to purchase Targis Control
Systems, the primary system necessary for all treatments, from a third-party
vendor for a total purchase commitment of approximately $2,500,000.
SALES COMMITMENTS
The Company has signed agreements granting Boston Scientific Corporation and
Nihon Kohden Corporation exclusive distribution rights of the Targis system in
all geographic areas other than the United States. Nihon Kohden Corporation has
exclusive distribution rights for Japan. Boston Scientific Corporation has
exclusive distribution rights for the rest of the world.
LITIGATION
In May 1998, the Company entered into a settlement agreement resolving
litigation with BSD Medical Corporation (BSD) and TherMatrx, Inc. (TherMatrx)
regarding a dispute about a previous settlement agreement. Pursuant to the
settlement agreement, the Company paid $5 million to BSD and TherMatrix and will
maintain its non-exclusive license to certain patents owned by BSD and TherMatrx
pertaining to transurethral insertable applicators and systems for the treatment
of BPH and other urological conditions. Of the $5 million settlement amount, $2
million is included in Other Assets and will be amortized against future sales
and the remaining $3 million plus related legal expenses were charged to
Litigation Settlement Expense for the year ended June 30, 1998.
401(K) PLAN
The Company provides a 401(k) savings plan to which eligible employees may make
pretax payroll contributions up to 15% of compensation. Company matching
contributions are discretionary, and none have been made to date.
LEASES
The Company leases its facility and certain equipment under noncancelable
operating or capital leases, which expire at various dates through fiscal year
2003. Rent expense related to operating leases was approximately $195,500,
$139,700 and $102,500 for the years ended June 30, 1998, 1997 and 1996,
respectively. Future minimum lease commitments under noncancelable operating and
capital leases with initial remaining terms of one year or more are as follows
as of June 30, 1998:
Operating Leases Capital Leases
-------------------- ------------------
Fiscal year:
1999 $ 280,409 $ 31,170
2000 280,409 9,517
2001 280,409 -
2002 296,763 -
2003 205,632 -
---------- ------------------
$1,343,622 40,687
==========
Less- Imputed interest (3,678)
Current maturities (28,138)
Long-term capitalized lease obligations $ 8,871
==================
40
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
Information required under this item with respect to directors is contained
in the section "Election of Directors" in the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders (the "1998 Proxy Statement"), a definitive
copy of which will be filed with the Commission within 120 days of the close of
the past fiscal year, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------
Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 1998 Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required under this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1998 Proxy Statement and is incorporated
herein by reference.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
- ----------------------------------------------------------------------------
(a) Documents filed as part of this report.
--------------------------------------
(1) Financial Statements. The financial statements of the Company are
--------------------
listed at Item 8 of this Form 10-K.
(2) Financial Statement Schedules for years ended June 30, 1998, 1997 and
---------------------------------------------------------------------
1996. No schedules are required in connection with the filing of this Form
----
10-K.
(3) Exhibits
--------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
10.1* Urologix, Inc. 1991 Stock Option Plan filed as Exhibit 1 to
Form S-8 Registration Statement, File No. 333-41365 and
incorporated herein by reference.
10.2* Employment Agreement dated January 26, 1994 between the Company
and Jack Meyer(1)
10.3* Employee Agreement dated February 18, 1994 between the Company
and Ward Allen Putnam(1)
10.4 Supply Agreement dated August 24-25, 1995 between the Company
and SeaMED Corporation(1)
10.5 Lease Agreement dated January 20, 1992, between the Company and
Parkers Lake Pointe I Limited Partnership, including Addendum
to Lease Agreement dated April 5, 1995(1)
10.6 Investor Rights Agreement dated December 5, 1996 between the
Company and certain of its shareholders(1)
10.7 Distribution Agreement dated February 28, 1994 between the
Company and Nihon Kohden Corporation(1)
10.8* Agreement dated November 5, 1993 between the Company and Dr.
David C. Utz, including supplemental letter agreements dated
November 2, 1994 and July 31, 1995(1)
10.9* Letter Agreement dated October 10, 1994 between the Company and
Mitchell Dann(1)
10.10 International Distribution Agreement made as of June 26, 1996
between the Company and Boston Scientific Corporation. (2)(3)
10.11 License Agreement dated August 7, 1996 between the Company and
EDAP International, S.A. and Technomed Medical Systems, S.A.
(2)(3)
23.1 Consent of Arthur Andersen, LLP
27.1 Financial Data Schedule
* Indicates Compensation Plan
42
(1) Incorporated by Reference from the Urologix, Inc. Registration
Statement on Form S-1, File No. 333-3304.
(2) Incorporated by reference from the Urologix, Inc. Form 10-K for the
year ended June 30, 1996.
(3) Certain information has been deleted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment under Rule 24b-2.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the
-------------------
fourth quarter of the fiscal year ended June 30, 1998.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duty caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UROLOGIX, INC.
BY: /S/ JACK E. MEYER
------------------------------------
JACK E. MEYER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Each person whose signature appears below hereby constitutes and appoints
Mitchell Dann, Jack E. Meyer and Wesley E. Johnson, Jr. , and each of them 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 each capacity
stated below, all amendments and post-effective amendments to this Form 10-K and
to file the same, with all exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as each might or could do in
person, hereby ratifying and confirming each act that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons in the
capacities indicated on September 25, 1998.
SIGNATURE TITLE DATE
- -------------------------------- ----------------------------- ------------------
/s/ Mitchell Dann Chairman of the Board September 25, 1998
- --------------------------------
Mitchell Dann
/s/ Jack E. Meyer Director, President and September 25, 1998
- --------------------------------
Jack E. Meyer Chief Executive Officer
/s/ Wesley E. Johnson, Jr. Vice President, Chief Financial September 25, 1998
- --------------------------------
Wesley E. Johnson, Jr. Officer and Secretary
/s/ Buzz Benson Director September 25, 1998
- --------------------------------
Buzz Benson
/s/ Janet G. Effland Director September 25, 1998
- --------------------------------
Janet G. Effland
/s/ Paul A. LaViolette Director September 25, 1998
- --------------------------------
Paul A. LaViolette
/s/ Robert Momsen Director September 25, 1998
- --------------------------------
Robert Momsen
Director September 25, 1998
- --------------------------------
David C. Utz, M.D.
44