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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 (FEE REQUIRED) For the fiscal year ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transaction 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: COMMON STOCK, $.01
PAR VALUE.
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 23, 1996, the aggregate value of the Company's Common Stock held
by non-affiliates of the Company was approximately $68,415,000 based on the last
reported sales price on that date.
As of September 23, 1996, the Company had outstanding 8,800,519 shares of
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE.
The Company's Proxy Statement for its 1996 Annual Meeting of Shareholders to be
held on November 20, 1996 is incorporated by reference into Part III of this
Form 10-K.
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PART I
ITEM 1. BUSINESS
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OVERVIEW
Urologix is engaged in the development of minimally-invasive medical
devices for the treatment of urological disorders. The Company's initial
product, the Transurethral Thermo-ablation Therapy ("T3") System, is designed to
treat benign prostatic hyperplasia ("BPH"), commonly known as "enlarged
prostate." BPH affects millions of men as the prostate gland enlarges and causes
adverse changes in urinary voiding patterns, which can dramatically impact a
man's quality of life. The T3 procedure is a non-surgical, catheter-based
therapy that uses a proprietary microwave technology and is designed to
preferentially heat 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 T3 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 T3 System is positioned to address the
needs of physicians, patients and payors because of its potential to provide an
efficacious, safe and cost-effective procedure for the treatment of BPH without
the complications and side effects inherent in current treatments. The T3 System
is an investigational device and is not currently available for commercial
distribution in the United States. In June 1996, the Company received CE Mark
Certification, which allows the T3 to be sold in the European Community
countries.
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. These
troubling symptoms include increased frequency of urination, a sudden urgency to
urinate and a weak flow of urine. It is estimated that at least 23 million men
worldwide, including six million men in the United States, suffer moderate to
severe symptoms of BPH. It is further estimated that in the United States over
80% of these men live with the symptoms of the disease, an approach known as
"watchful waiting," rather than undergo surgery or prolonged drug treatment.
Despite the fact that only a small portion of sufferers seek treatment,
worldwide BPH-related expenditures are estimated to be $8 billion annually, with
$3 billion spent annually in the United States.
BPH has historically been treated by surgical intervention or by drug
therapy. The primary surgical treatment for BPH is transurethral resection of
the prostate ("TURP"), a procedure in which an electrosurgical loop is used to
cut away the prostatic urethra and surrounding diseased tissue in the prostate,
thereby widening the urethral channel for urine flow. The TURP procedure
requires the use of general or spinal anesthesia and almost always results in
post-treatment hospitalization, both of which add significantly to the total
treatment cost. A significant number of patients who undergo TURP encounter both
short and long-term complications. These complications can include painful
urination, retrograde ejaculation, infection, impotence, long-term incontinence
and excessive bleeding. Drug therapy has emerged as an alternative to surgery in
the last several years. While it is estimated that 1.5 million men will use drug
therapy for BPH in 1996, independent clinical studies have shown that many men
undergoing drug therapy do not realize clinically significant relief from BPH
symptoms. An estimated 30% to 40% of patients who initially pursue drug therapy
to treat their BPH symptoms discontinue treatment within twelve months for
various reasons, including the inconvenience of the daily regimen,
dissatisfaction with symptom relief and undesirable side effects ranging from
dizziness, headache and fatigue to impotence, decreased libido and other sexual
dysfunctions, depending on the type of drug therapy used.
The Company's clinical studies to date demonstrate that most patients who
received the T3 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. Although the Company
has provided the FDA with clinical information derived from its feasibility
study, the Company's results from later stage clinical studies have not yet been
submitted to or reviewed by the FDA. As of September 1, 1996, over 600 patients
affected with BPH have been treated with Urologix' T3 System in controlled
clinical studies. The Company expects to submit its premarket approval
application ("PMA") to the United States Food and Drug Administration (the
"FDA") in 1996 based on the results of its clinical trials. In June 1996, the
Company received ISO 9001 certification to meet the requirements for use of the
CE Mark, which allows the Company to market its products in the European Union.
The Company's Japanese distributor, Nihon Kohden
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Corporation ("NKC"), submitted an application for marketing approval to the
Japanese Ministry of Health and Welfare in late fiscal 1996.
CAUTIONARY STATEMENT
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. These factors include (i) the ability of the Company's
distributors to successfully market and sell the Company's products in markets
outside the United States; (ii) the Company's ability to complete and file a PMA
application that will enable it to receive FDA approval in a timely manner,
(iii) the Company's ability to successfully market its product after FDA
approval; (iv) the Company's ability to successfully complete the transition
from a research and development company to an operating company manufacturing
and distributing products; and (v) the extent to which the physicians performing
the T3 procedures are able to obtain third party reimbursement.
BENIGN PROSTATIC HYPERPLASIA ("BPH")
BPH is a non-cancerous urological disease in which the prostate enlarges
and restricts 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 other portions of the prostate gland and the
urethra, thereby restricting the normal passage of urine. This restriction 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.
The symptoms a patient experiences from BPH 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 urgency 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 should 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 urinary flow rates (a ratio of the volume of urine voided
to duration of voiding expressed in milliliters per second), pressure flow data
(pressure required to urinate) and measurements of 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 internationally, who suffer
moderate
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to severe symptoms of BPH and reduced urine flow rates and the approximate
number of men who elected to undergo treatment for their symptoms in 1995:
<TABLE>
<CAPTION>
MALE POPULATION UNITED STATES OUTSIDE U.S. TOTAL
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<S> <C> <C> <C>
Over age 50 30 million 88 million 118 million
Moderate to severe BPH symptoms
and reduced urine flow rates 6 million 17 million 23 million
Treated for BPH 1.2 million 1.4 million 2.6 million
</TABLE>
Because BPH is an age-related disorder, its incidence increases as the
population ages. 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, and the Company expects similar increases to occur worldwide.
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 chart 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 undergo 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 consumer knowledge of the disease and the development
of treatments with less severe complications and side effects than traditional
treatments.
Total BPH related expenditures in the United States are estimated to be
approximately $3 billion annually. Outside the United States, BPH expenditures
are estimated at $5 billion annually.
BPH THERAPIES AND THEIR LIMITATIONS
Historically, over 80% 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 seeking treatment in the United States, approximately 15% elect
surgical intervention and approximately 85% elect drug therapy. 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 since the FDA approved marketing of
three orally administered pharmaceutical products. Proscar(R) (sold by Merck &
Co., Inc.) in 1992, Hytrin(R) (sold by Abbott Laboratories) in 1993, and
Cardura(R) (sold by Pfizer Inc.) in 1995. Drug therapy was used by approximately
1.0 million men in the United States in 1995 for the treatment of BPH symptoms
and is expected to be used by 1.5 million men in the United States in 1996. 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 consumer awareness, and the desire of these consumers 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 approximately $750 to $1,000 per year
thereafter. Drug therapy may require daily administration for the duration of
the patient's life.
Proscar is designed to treat BPH by shrinking the prostate. As much as six
months of Proscar treatment may be necessary to determine efficacy and, after 12
months, at least 40% of patients taking Proscar do not experience an increase in
urine flow rate or improved AUA symptom scores. Side effects for Proscar include
impotence and decreased libido.
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Alpha blockers, such as Hytrin and Cardura, treat BPH by relaxing the muscles in
the prostate and bladder neck to relieve urethral obstruction. While Hytrin and
Cardura 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 and fatigue. 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.
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. With an average hospitalization of 4.2 days, 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, a primary payor for these surgeries is Medicare. 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 TURP,
whereby a rigid scope 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. The TURP procedure requires general or
spinal anesthesia and almost always requires post-treatment hospitalization, yet
it has been the established standard for treating BPH since the 1940s.
Approximately 860,000 TURP's were performed worldwide in 1994, 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%) or
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 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 two 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 cutting tool is a cylinder (roller ball) rather than a loop. TVP
removes the prostatic urethra and works by vaporizing and simultaneously
coagulating tissue with a high electrosurgical current, 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. 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 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, several other technologies are under development for
the treatment of BPH. Two of these technologies are interstitial radio frequency
therapy ("RF") and interstitial laser therapy, both of which are in clinical
trials and have not yet been commercialized in the
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United States for the treatment of BPH. 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 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 to coagulate a sufficient amount of tissue. The Company believes these
procedures require a well-trained and skilled physician to make judgments
regarding the number and depth of punctures. These procedures are designed to be
performed in approximately 30 to 45 minutes using local anesthesia. The Company
believes, however, 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 scope within the
urethra. As a result, the Company believes that it will be difficult to
consistently perform interstitial therapies in an office or outpatient setting.
Other technologies to treat BPH have been developed or are under various
stages of development, including stents, dilation balloons, transurethral and
transrectal hyperthermia and high intensity focused ultrasound.
THE UROLOGIX APPROACH
The T3 System is a non-surgical, catheter-based technology to treat BPH.
The T3 System utilizes a proprietary microwave technology delivered through a
flexible catheter designed to preferentially heat 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 T3 procedure does
not require punctures or incisions, leaving the urethra intact, and 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 office or outpatient setting and does not require an
overnight hospital stay.
The Company's clinical studies to date indicate that most patients who
received the T3 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. The
Company anticipates submitting its PMA for the T3 System to the FDA in 1996.
T3 PRODUCT DESCRIPTION AND TECHNOLOGY
The Company's T3 System consists of the T3 Control Unit and the T3
Procedure Kit, which includes the T3 Catheter, Cooling Bag and Rectal
Thermosensing Unit ("RTU"). The T3 Control Unit contains the microwave
generator, a solid-state refrigerant device, a circulation pump and electronic
circuitry to monitor therapy. The T3 Control Unit supplies microwave energy and
coolant to the T3 Catheter and collects and processes data from the T3 Catheter
and the RTU. The T3 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 T3 Catheter, Coolant Bag and
RTU are single-use devices.
In a T3 procedure, the T3 Catheter is inserted into the urethra and the RTU
is inserted into the rectum. A cooling fluid 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 from the bladder 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/o/C for one
hour will die. As temperatures increase above 45/o/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
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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 internal and external 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 should not exceed 42.5/o/C. If this temperature
is exceeded, microwave energy should be discontinued to allow the rectal
temperature 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 T3 procedure addresses these challenges through a unique
integration of the following proprietary technologies.
Transurethral Microwave Heating and Catheter Cooling
A specially designed antenna within the T3 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/o/C. Meanwhile, chilled water is circulated through outer
channels in the catheter to draw heat away from the surface of the urethra,
thereby cooling 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 indicate that the
T3 procedure produces and maintains an extensive zone within the prostate which
exceeds 45/o/C and has consistently produced tissue necrosis in all patients
evaluated. Because of urethral cooling, however, the temperature close to the
urethra is only slightly elevated. The T3 System is designed to maintain
urethral temperatures below 45/o/C during the T3 procedure, thus providing a
crucial barrier to pain and allowing the procedure to be accomplished in an
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 which could be damaging. The Company has a patented
technology which 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 T3 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 T3 System is designed to maintain rectal temperatures beneath the FDA's
guideline of 42.5/o/C. Only on rare occasions in the Company's clinical trials
has a patient's rectal temperature reached 42.5/o/C (less than 3% of the
patients treated to date). In the event that this limit is reached, the T3
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.
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Impedance Matching and Heat Generation
Transfer of microwave energy from the antenna in the T3 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. This can cause two compromising effects. The reflection of
microwave energy can 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 can also cause
resistive heating to occur. The resistive heat, which is generated by the
antenna, does no useful work because it is absorbed by the cooling channels
within the catheter. Such resistive heat diminishes the heat carrying capacity
of the catheter. This can be important because changes to the temperature of the
catheter's cooling fluid result in urethral temperature changes. The T3 System
addresses these problems by diminishing the amount of energy reflected and
therefore minimizes 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 T3 Catheter utilizes a helical shaped antenna which produces an
electrical field which 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 very even 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 1, 1996, over 600 patients affected with BPH have been
treated with the T3 System in controlled clinical studies. These patients have
been treated at 18 clinical sites in the United States, Canada, South America
and Europe. The primary endpoints of the Company's clinical trials have focused
on reducing the patient's AUA Symptom Scores, increasing flow rate during
urination and improving the patient's quality of life. Data are collected at the
following time points: initial pre-treatment, six weeks post-treatment, three
months post-treatment, six months post-treatment, nine months post-treatment
(AUA & quality of life questionnaire only), one year post-treatment, 18 months
post-treatment and two years post-treatment. The clinical results discussed
below reflect the data from patients treated with the T3 System in the
international and United States clinical studies combined. Results in the areas
of AUA Symptom Score reduction, increase in peak flow rates and improvement in
quality of life are statistically significant. However, there can be no
assurance that future clinical results will be consistent with those achieved to
date.
The combined results of the Company's clinical trials indicate that the T3
System decreases the symptoms of BPH as measured by the AUA Symptom Score and
increases urinary flow rates as compared to patients' pre-treatment scores.
These clinical results are statistically significant and, based on patients for
whom the Company has received two-year follow-up data, appear to continue for at
least two years post-treatment. Of the over 600 patients treated, approximately
200 patients ("IDE patients") were treated at eight sites in the United States
in support of a PMA for the T3 System. In late 1994, the FDA approved an IDE for
the initiation of a prospective, randomized, double-blinded clinical study with
a sham (placebo) control arm. FDA guidelines recommend blinded clinical studies.
The patients in the sham arm of the study received a complete simulated T3
treatment, but the microwave energy was never activated. Patients in both arms
are "blinded" (not told whether they receive the actual treatment). The
physician who conducts follow-up evaluations is also blinded and does not know
which procedure the patients received. The Company also is conducting an open
enrollment study, as well as a prospective study using the T3 procedure and a
TURP control arm, under the IDE.
Preliminary data from the IDE patients suggest statistically significant
improvements in AUA Symptom Scores and urinary flow rates versus their pre-
treatment scores and the patients who underwent a T3 procedure and the patients
who received sham treatments. The Company believes that when it has unblinded
data from all patients involved in the study, it will provide the Company with
sufficient data to validate its preliminary indications with respect to the
effectiveness of
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the T3 therapy. Although the Company is continuing to treat patients, it
believes it has treated a sufficient number of patients to generate data needed
to support its FDA submission.
The Company's clinical results also indicate minimal complications
resulting from T3 treatments. Of the patients from whom the Company has received
follow up data, no patient needed an anesthetist or anesthesia services during
the treatment, and 8.8 % of the patients spent one day or less in bed following
the T3 treatment. Of these patients, there were no cases of long-term
incontinence, impotence or significant bleeding resulting from the T3 procedure.
10% of patients experienced urinary retention which required catherization for
more than one week. All of these cases were resolved within 30 days.
Additionally, 9% of the patients experienced an episode of urinary tract
infection which was treated and resolved with routine antibiotic therapy, less
than one percent experienced urethral stricture and 8% experienced other minor
complications, including epididymitis (3%), transient urinary incontinence (1%)
and loss of ejaculate (3%).
There can be no assurance that equivalent results will be achieved over a
longer follow up period on a larger patient population, that retreatment will be
unnecessary or that the results of clinical trials will be sufficient to obtain
required United States or foreign regulatory approvals or physician acceptance
of the T3 procedure.
BACKLOG
Prior to receiving CE mark certification in June 1996 with respect to sales
in the European Community, the Company only recognized limited revenues in
connection with cost reimbursement. At September 1, 1996 the Company did not
have a significant backlog.
PATENTS AND PROPRIETARY RIGHTS
The Company has aggressively pursued protection of its intellectual
property. The Company has been issued seven patents and has fourteen patent
applications pending in the United States. The Company also has applied for
patent coverage in a number of foreign jurisdictions. The Company either filed
or is preparing to file international applications under the Patent Cooperation
Treaty ("PCT") for qualifying United States applications and is now entering the
national phase in the first four applications.
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
preferential heating whereby the Company's product is able to limit 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 issued patents contain claims covering the method
of, and devices for, preferentially heating the prostate.
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 two issued patents covering various
designs and methods of its helical microwave antenna with impedance matching.
There can be no assurance, however, 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. There can be no assurance 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
make, use or sell its T3 System in the United States or in international
markets.
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
9
<PAGE>
medical methods and devices. One company, BSD Medical Corporation, initiated a
patent infringement lawsuit against the Company in 1992. The Company chose to
settle that lawsuit in March 1994 by entering into a license agreement with BSD
Medical Corporation. See Item 3, Legal Proceedings.
On August 7, 1996, the Company entered into a non-exclusive, worldwide
patent license agreement with EDAP International, S.A., a French corporation,
and its subsidiary, Technomed Medical Systems S.A. (collectively referred to as
"EDAP") for certain EDAP patents relating to the microwave treatment of BPH.
Concurrently with the execution of the Company's agreement with EDAP, the
Company's principal international distributor, Boston Scientific Corporation
("Boston Scientific"), entered into a similar license agreement with EDAP. In
connection with the execution of the license agreement, the Company paid EDAP a
non-refundable, initial license fee and a non-refundable initial prepaid royalty
fee to be credited against future royalty payments due under the license
agreements. Under its license agreement, the Company agreed to pay EDAP certain
royalties based on future sales of the Company's products. The license agreement
establishes a maximum amount of all royalties which the Company is obligated to
pay EDAP.
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.
THIRD PARTY REIMBURSEMENT
The Company believes that third party reimbursement will be essential to
commercial acceptance of the T3 procedure, and that overall cost effectiveness
and physician advocacy will be keys to obtaining such reimbursement. The Company
believes that the T3 procedure can be performed for 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 lower cost will help drive acceptance of the T3
procedure.
The Company's strategy for obtaining reimbursement in the United States is
to obtain appropriate reimbursement codes and perform outcome studies in
conjunction with clinical studies to establish the efficacy and cost
effectiveness of the T3 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 also plans to work
closely with the urological community to establish an attractive relative value
and reimbursement level for the T3 procedure.
With the increasing use of managed care and capitation as a means to
control health care costs in the United States, the Company believes that
urologists may view the T3 System as a tool to efficaciously treat BPH patients
at a lower total cost, thus providing them with a competitive advantage when
negotiating managed care and capitated contracts. This is especially important
in the United States, where a portion of the aging Medicare population is moving
into a managed care system.
Following regulatory approval, physicians using the Company's T3 System to
treat BPH will submit insurance claims for reimbursement for the procedure to
third party payors, such as Medicare carriers, Medicaid carriers, Health
Maintenance Organizations ("HMOs") and private insurers. In the United States
and in international markets. third party reimbursement is generally available
for existing therapies used to treat BPH. The availability and level of
reimbursement from such payors for the use of the Company's T3 System will be a
significant factor in the Company's ability to commercialize its T3 System. The
Company believes that new regulations regarding third party reimbursement for
certain investigational devices in the United States will allow it to pursue
early reimbursement from Medicare with individual clinical sites prior to
receiving FDA approval. However, the Company believes that FDA approval will be
necessary to obtain a national coverage determination from Medicare. The
national coverage determination for third party reimbursement
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<PAGE>
will depend on the determination of the United States Health Care Financing
Administration ("HCFA"), which establishes national coverage policies for
Medicare carriers, including the amount to be reimbursed, for coverage of claims
submitted for reimbursement related to specific procedures. Private insurance
companies and HMOs make their own determinations regarding coverage and
reimbursement based upon "usual and customary" fees, and reimbursement
experience with a particular third party payor does not reflect a formal
reimbursement determination by the third party payor. There can be no assurance
that the Company will receive favorable coding, coverage and reimbursement
determinations for its T3 System from Medicare and other payors or that amounts
reimbursed to physicians for performing a T3 procedure will be sufficient to
encourage physicians to use the Company's T3 System.
Internationally, reimbursement approvals for the T3 procedure will be
sought on an individual country basis. Some countries currently have established
reimbursement authorizations for transurethral microwave therapy. Clinical
studies and physician advocacy will be used to support reimbursement requests in
countries where there is currently no reimbursement for such procedures.
SALES AND MARKETING
The Company's initial marketing strategy prior to regulatory approval
includes (i) the involvement of urologists from around the world as advisors and
clinical investigators, (ii) the preparation of papers for publication in key
medical journals and (iii) the delivery of presentations at medical and
scientific conferences highlighting clinical and scientific results from the use
of the Company's technology.
Upon appropriate regulatory approval, if granted, the Company plans to
establish a direct sales force in the United States. Of the over 7,500
urologists in the United States, the Company intends to target those that
practice in high-volume prostate treatment groups and also urologists that are
opinion-leaders in BPH treatment methods. The Company believes that the
demographics of urologists and their practices in the United States will allow
for an effective direct selling strategy.
The Company intends to market the T3 System internationally through two
distributors: Boston Scientific Corporation for all countries other than Japan,
and Nihon Kohden Corporation for Japan.
In connection with an equity investment in the Company, the Company granted
to NKC exclusive distribution rights in Japan. The distribution agreement
between the Company and NKC provides that NKC will obtain, at its own expense,
all registrations, licenses and approvals required for the import, sale and
distribution of the T3 System in Japan, including the approval of the Japanese
Ministry of Health and Welfare and reimbursements approvals. The agreement
terminates on March 31, 2000, unless renewed for additional five-year periods
upon the agreement of both parties.
On June 26, 1996, the Company entered into an international distribution
agreement with Boston Scientific Corporation ("Boston Scientific"). Under the
agreement, Boston Scientific was granted exclusive distribution rights for the
Company's T3 System in all countries outside the United States and Japan for a
period of five years. Under the agreement, Boston Scientific agreed to purchase
certain minimum numbers of the Company's control units and procedure kits. Prior
to entering into the international distribution agreement, Boston Scientific
made equity investments in the Company.
MANUFACTURING
The Company's T3 System consists of the T3 Control Unit and the T3
Procedure Kit, which includes the T3 Catheter, Cooling Bag and Rectal
Thermosensing Unit. The T3 Control Unit is currently manufactured by SeaMED
Corporation of Seattle, Washington ("SeaMED") to the Company's specifications
under a supply agreement that expires in December 1998. 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 T3 Control Unit, the microwave generator,
and provides it to SeaMED for incorporation into the final T3 Control Unit.
Although the Company expects that SeaMED will be able to adequately meet demand
for the T3 Control Unit on a timely basis for the foreseeable future, there can
be no assurance that this will be the case.
11
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The T3 Procedure Kits are assembled by the Company, using materials and
components supplied to the Company by various subcontractors. 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 scales up its manufacturing activities in preparation for
commercial distribution of the T3 System, could have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition, the Company's manufacturing operations must comply with the
FDA's Good Manufacturing Practices ("GMP") regulations, which establish
requirements for assuring quality by controlling components, processes and
document traceability and retention, among other things. The Company's
facilities will also be subject to unscheduled inspections by the FDA. Certain
requirements of state, local and foreign governments must also be complied with
in the manufacture of the Company's products. The Company believes that its
manufacturing and quality control procedures will meet the requirements of these
regulations. See "--Government Regulation."
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. See "--Government Regulation--International."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are currently focused on
improving the function and features and reducing the cost of each of the
components in the T3 System. This effort includes development of enhanced
components of the T3 Procedure Kit.
During the fiscal years ended June 30, 1994, 1995 and 1996, the Company
expended $1.6 million, $4.1 million and $4.8 million, respectively, in its
research and development efforts. As of September 23, 1996, the Company employed
10 individuals in its research and development department.
The Company intends to build upon its clinical knowledge and relationships
to develop innovative future generations of BPH and other urology products. The
Company also believes that its core technologies may have other medical
applications, notably to cancer treatment and cardiovascular disease. Pursuit of
opportunities outside the urology market will likely occur in collaboration with
a strategic partner, if at all.
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 Inc. all manufacture
equipment used in alternative surgical procedures. Drugs for the treatment of
BPH are marketed by Abbott Laboratories, Inc. (Hytrin(R)), Merck & Co.
(Proscar(R)) and Pfizer, Inc. (Cardura(R)). Companies that are investigating
less invasive interstitial therapies include Indigo Medical, Inc., Dornier
Medical Systems, Inc., Diomed Ltd., VidaMed, Inc. and U.S. Surgical, Inc. Other
companies developing less invasive microwave thermotherapy systems for the
treatment of BPH include EDAP Technomed, Inc., BSD Medical Corporation and
Dornier Medical Systems, Inc. The Company is aware of additional companies that
are developing technologies for the treatment of BPH, including Boston
Scientific Corp., InStent Inc., Thermal Therapeutics, Inc. and
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<PAGE>
FOCUS Surgery, Inc. These technologies include stents, dilatation balloons,
transurethral and transrectal hyperthermia and high intensity focused
ultrasound.
In May 1996, the FDA granted approval to EDAP Technomed, Inc. to sell its
Prostatron in the United States for the treatment of symptoms of BPH. The
Company believes the primary differences between the Company's T3 System and the
Prostatron manufactured by EDAP Technomed, Inc. are that the Company's T3 System
employs a different microwave frequency, employs proprietary preferential
heating to target energy away from the rectum and employs impedance matching to
maximize energy delivery to the diseased prostatic tissue. In addition, the
Company's T3 System is substantially smaller than the Prostatron and is more
easily transportable.
Any product developed by the Company that gains regulatory approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. The Company expects
that competition in the BPH field will also be based, among other things, on the
ability of the therapy to provide safe, effective and lasting treatment, cost
effectiveness of the therapy, physician, health care payor and patient
acceptance of the procedure, patent position marketing and sales capability, and
third party reimbursement policies.
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 T3 System
and in the Company's ongoing manufacturing and research and development
activities. The Company and the T3 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.
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 T3 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. Class I devices are those whose safety and
effectiveness can be ensured through general controls, such as labeling,
premarket notification (known as "510(k)") and adherence to FDA-mandated GMP.
Class II devices are those whose safety and effectiveness can reasonably be
ensured through the use of "special controls," such as performance standards,
post-market surveillance, patient registries and FDA guidelines. 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 ("new devices") 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
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<PAGE>
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 trial sites or 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
FDA does not object to the IDE application, human clinical trials may begin at a
specific number of investigational sites with a specific number of patients as
indicated in the application. The FDA has the authority to re-evaluate, alter,
suspend or terminate clinical testing based on its assessment of data collected
throughout the trials. 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 Company received approval of an IDE application for, and has commenced, a
controlled, randomized multi-center clinical trial of the T3 System involving up
to 500 patients with one-year follow-up. Clinical data from these trials will be
accumulated, analyzed and compiled as part of the preparation of the PMA.
Even if the Company obtains a PMA for the T3 System, modifications to the
approved device or manufacturing process may require supplemental PMAs or the
submission of a new PMA. There can be no assurance that the necessary approvals,
including approval of the Company's PMA application for the T3 System or
subsequent modifications to the T3 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 previously received approvals, would have a material adverse effect on
the business, financial condition and results of operations of the Company.
In 1995, the FDA issued a policy statement indicating that general medical
use lasers used specifically for the treatment of BPH are eligible for marketing
through 510(k)s rather than PMAs. Products under development by several of the
Company's competitors are covered by this 1995 policy statement. As a result,
those companies may be able to begin commercial marketing of their products
sooner than 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.
The FDC Act regulates the Company's's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance with
current GMP as specified in the FDA device GMP regulation. This regulation
requires, among other things, that (i) the manufacturing process be regulated
and controlled 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. The FDA has proposed changes
to the GMP regulation that would, among other things, make the regulation
applicable to manufacturers that produce components specifically for use in a
medical device, and require design controls and maintenance of service records.
These changes, if adopted as proposed, would increase the cost of complying with
GMP requirements. The FDA monitors compliance with GMP by
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conducting periodic unannounced FDA inspections of manufacturing facilities. If
violations of applicable regulations are noted during FDA inspections of the
Company's manufacturing facilities, the continued marketing of the Company's
products may 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. Export sales of
investigational devices that are subject to PMA requirements and have not
received FDA marketing approval generally may be subject to FDA export permit
requirements under the FDC Act depending upon, among other things, the purpose
of the export (investigational or commercial) and on whether the device has
valid marketing authorization in a country listed in the FDA Export Reform and
Enhancement Act of 1996. In order to obtain such a permit, when required, the
Company must provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located, stating
that the device has the approval of the country. In addition, the FDA must find
that exportation of the device is not contrary to the public health and safety
of the country in order for the Company to obtain the permit.
Although the Company has met the necessary registration requirements in
Canada and the European Union to commercialize the T3 System in these countries,
the Company's T3 System has not been approved for commercial sale in any other
jurisdiction. 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. After
June 1998, medical devices may not be sold in EU 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, NKC, is responsible for obtaining
regulatory and reimbursement approvals for the T3 System in Japan, and such
approvals will therefore be outside the Company's control. NKC has submitted to
the Japanese Ministry of Health and Welfare an application for marketing
approval in fiscal 1996. There can be no assurance as to when or whether such
approvals will be received.
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 $5.0 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 1, 1996, the Company employed 65 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
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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
Prior to receiving CE mark certification in June 1996 with respect to sales
in the European Community, the Company only recognized limited revenues in
connection with cost reimbursement. Although the Company has received cancelable
orders for future delivery of its products subsequent to commencing European
marketing and distribution, at September 1, 1996, the Company did not have a
significant backlog.
ITEM 2. PROPERTIES
The Company leases approximately 11,000 square feet of office,
manufacturing and warehouse space in a suburb of Minneapolis, Minnesota. The
lease expiration date is March 31, 1998. The Company has exercised an option to
acquire additional space at the same location. 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
On July 30, 1996, the Company filed a lawsuit under seal in United States
District Court for the District of Minnesota against BSD Medical Corporation, a
Delaware corporation, to enforce the terms of a settlement agreement and patent
license between the Company and BSD Medical Corporation. The Company's suit
requests that the court enforce the agreement and enter a declaratory judgment
stating that the settlement agreement remains in effect.
BSD Medical Corporation subsequently filed an answer and counterclaim
alleging that the license agreement was properly terminated and is seeking
relief against the Company. The lawsuit is in the discovery stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company completed a public offering of its Common Stock on May 30, 1996
and its shares are publicly traded on the Nasdaq Stock Market under the symbol
ULGX. From May 30, 1996 to June 30, 1996, the high and low sales prices per
share were $17 and $10 7/8, respectively. On September 1, 1996, the Company
had 184 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.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
FOR THE PERIOD
FROM INCEPTION
(MAY 29, 1991)
YEARS ENDED JUNE 30, THROUGH
------------------------------------------ JUNE 30,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Cost reimbursement(1)........................................... $ -- $ 164 $ 9 $ 489 $ 362 $ 1,024
Cost of goods sold.............................................. -- 254 179 785 1,177 2,395
------ ------- ------- ------- ------- --------
Gross loss................................................... -- (90) (170) (296) (815) (1,371)
Costs and expenses:
Research and development....................................... 653 1,478 1,598 4,099 4,811 12,639
General and administrative..................................... 262 468 677 884 1,192 3,499
Sales and marketing............................................ 74 22 124 477 1,007 1,704
------ ------- ------- ------- ------- --------
Total costs and expenses..................................... 989 1,968 2,399 5,460 7,010 17,842
Operating loss.................................................. (989) (2,058) (2,569) (5,756) (7,825) (19,213)
Interest income, net............................................ 14 61 44 329 232 679
------ ------- ------- ------- ------- --------
Net loss........................................................ $ (975) $(1,997) $(2,525) $(5,427) $(7,593) $(18,534)
====== ======= ======= ======= ======= ========
Net loss per common share....................................... (0.44) (0.65) (0.69) (0.91) (1.22)
Shares used in computing net
loss per share(2).............................................. 2,212 3,093 3,646 5,996 6,235
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (in thousands)
Cash, cash equivalents and
available-for-sale securities.................................. $ 160 $ 2,004 $ 9,093 $ 3,571 $ 40,844
Working capital (deficit)....................................... (17) 1,930 8,897 3,372 39,940
Total assets.................................................... 482 2,487 9,801 4,876 42,368
Total liabilities............................................... 401 422 408 899 1,780
Deficit accumulated during
the development stage.......................................... (992) (2,989) (5,514) (10,940) (18,534)
Total shareholders' equity...................................... 81 2,065 9,393 3,977 40,588
</TABLE>
- ---------------------------------
(1) Cost Reimbursement reflects the reimbursement of certain of the Company's
costs for its clinical trials, as permitted by applicable FDA regulations.
(2) Restated to reflect impact of preferred shares conversion to common shares.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Urologix, Inc., incorporated in May 1991, is a development stage enterprise
currently entering the commercial stage. Since its inception, the Company has
been engaged primarily in developing its proprietary T3 System to treat BPH;
conducting clinical trials for the T3 System; seeking various regulatory
approvals necessary to market outside the U.S.; and developing its PMA for
submission to the FDA. The Company's T3 System consists of the T3 System Control
Unit and the T3 System Procedure Kit, which includes the T3 System Catheter,
Cooling Bag and Rectal Thermosensing Unit. The T3 System is an investigational
device in the U.S. and, therefore is not currently available for commercial
distribution in the U.S. The Company obtained the CE Mark in July 1996, which
allows the T3 System to be marketed in the European Union countries. The
Company's revenues to date consist primarily of cost reimbursement, which
reflects the reimbursement of certain costs incurred by the Company for clinical
trial equipment and disposable Procedure Kits as permitted by the applicable FDA
regulation. The Company expects to file its PMA with the FDA in mid fiscal 1997.
The Company intends to market the T3 System through a direct sales force in the
U.S. if and when FDA approval is received. Internationally, the Company markets
the T3 System through two distributors. Boston Scientific Corporation, a
worldwide developer, manufacturer and marketer of medical devices, has exclusive
distribution rights for the T3 System in all countries outside the U.S., except
Japan. Nihon Kohden Corporation, a large medical device company in Japan, has
exclusive distribution rights in Japan for the T3 System.
Since inception, the Company has experienced operating losses, and, as of June
30, 1996, had an accumulated deficit of $18.5 million. Other than cost
reimbursement of $1.0 million since inception, the Company has generated no
significant revenues. The Company anticipates that its operating losses will
continue for the foreseeable future due to expenditures on T3 System
development, scale-up of commercial manufacturing capabilities, clinical trials,
regulatory matters, and sales and marketing activities.
The Company expects sales of the T3 System to account for all of its revenues
for the foreseeable future. The Company intends to offer urologists the option
to purchase the T3 System Control Unit or lease it, either under a third-party
leasing arrangement or direct from the Company. If the Company is the lessor, it
will retain title to the leased Control Units, and the leased Control Units will
be capitalized on the Company's balance sheet and depreciated over a period
representing their economic useful lives. Revenues from the sale of T3 System
Control Units and disposable Procedure Kits will be recognized upon shipment.
RESULTS OF OPERATIONS
Fiscal Years Ended June 30, 1996 and 1995
Cost reimbursement reflects the reimbursement of certain of the Company's costs
for clinical trial equipment and disposable Procedure Kits, as permitted by
applicable FDA guidelines. Cost reimbursement decreased to $362,000 in fiscal
1996, from $489,000 in fiscal 1995, due primarily to a higher number of T3
Control Units being placed in clinical sites and reimbursed in 1995 than in
1996. The Company expects to generate revenues initially from sales in European
Union countries and Canada due to recent regulatory approvals received in those
countries. A small percentage of the amount reported as cost reimbursement in
fiscal 1996 resulted from commercial sales in the United Kingdom.
Cost of goods sold includes costs incurred in connection with the production of
T3 Systems, including manufacturing and quality assurance overhead. Cost of
goods sold increased to $1.2 million for fiscal 1996 from $785,000 for fiscal
1995 due to increased production levels, expansion costs incurred in preparation
for commercial sales of the T3 System and costs related to bringing the
Company's manufacturing process into compliance with ISO 9001 standards. The
Company expects further increases in manufacturing expenses as it prepares to
increase production capacity in anticipation of the
18
<PAGE>
commencement of commercial sales of the T3 System. In addition, the Company
will begin accruing for royalty obligations related to a patent license
agreement entered into in August 1996.
Research and development expenses include those costs associated with the
development and protection of the Company's T3 System intellectual property,
treatment of patients participating in clinical trials and the accumulation of
outcome data to substantiate initial clinical results. Research and development
expenses increased to $4.8 million for fiscal 1996 from $4.1 million in fiscal
1995. The increase was the result of several factors, including increased
contract development expenditures to upgrade the T3 System to its latest
generation; higher employee compensation due to the addition of technical and
supervisory positions, an increase worldwide in the number of patients treated;
and additional submissions to the FDA of certain T3 System Investigational
Device Exemption ("IDE") supplements. Clinical and regulatory expenses are
expected to increase at least through fiscal 1997 due to the continuation of IDE
clinical trials in the U.S. and preparation of the PMA application and follow-up
submissions to the FDA.
General and administrative expenses were $1.2 million and $884,000 for fiscal
1996 and fiscal 1995, respectively. The Company anticipates increased general
and administrative expenses in fiscal 1997 related to the addition of a chief
financial officer in fiscal 1996 and the creation of other required
administrative positions as the Company begins commercial operations.
Sales and marketing expenses increased to $1.0 million for fiscal 1996 from
$477,000 for fiscal 1995, due primarily to the establishment of a sales office
in the United Kingdom during the latter part of fiscal 1995. The Company expects
sales and marketing expenses to increase as it prepares for commercial sales as
a result of obtaining international regulatory approvals.
Fiscal Years Ended June 30, 1995 and 1994
Cost reimbursement increased to $489,000 in fiscal 1995 from $9,000 in fiscal
1994 due to an increase in the number of clinical sites reimbursing the Company
for T3 Systems used in clinical trials.
Cost of goods sold increased to $785,000 in fiscal 1995 from $179,000 in fiscal
1994 due to an increase in the production of T3 System Control Units and
disposable Procedure Kits expensed for the clinical studies of the T3 System,
and additional costs related to developing manufacturing processes necessary to
increase the volume of production and to comply with international manufacturing
standards.
Research and development expenses increased to $4.1 million in fiscal 1995 from
$1.6 million in fiscal 1994 due to increased product development costs related
to new generations of, and improvements in, the T3 System. These costs included
contract development costs and higher compensation expenses resulting from the
addition of management, clinical, regulatory and technical positions, in
addition to an increase worldwide in the number of patients enrolled in the
Company's clinical trials of its T3 System.
General and administrative expenses increased to $884,000 in fiscal 1995 from
$677,000 in fiscal 1994 due primarily to personnel additions associated with a
higher level of activity.
Sales and marketing expenses increased to $477,000 in fiscal 1995 from $124,000
in fiscal 1994, due primarily to the establishment of a sales office in the
United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through sales of equity
securities and, to a lesser extent, reimbursement of certain costs for the T3
Systems in connection with its clinical trials. Through June 30, 1996, the
Company had received $59.0 million in net proceeds from equity financings. As
of June 30, 1996, the Company had total cash, cash equivalents and available-
for-sale securities of $40.8 million, and working capital of $39.9 million.
In August 1996, the Company entered into a worldwide license agreement with EDAP
International S. A. (EDAP) under which EDAP granted Urologix a non-exclusive
license under all EDAP issued and pending patents pertaining to the
19
<PAGE>
microwave treatment of BPH and other conditions of the prostate. Although the
terms of the license agreement are confidential, they include an initial license
fee as well as prepaid and ongoing royalty payments, subject to a maximum
royalty.
At June 30, 1996, the Company had an accumulated deficit during the development
stage of $18.5 million. The Company expects to continue to incur additional
losses as it incurs substantial expenses in support of its clinical trials,
regulatory requirements and development of the T3 System, as well as increased
expenses and working capital related to the introduction of the T3 System in
international markets. In addition, should the Company lease T3 System Control
Units, substantial capital will be required to finance the lease arrangements.
Although the Company currently may finance part or all of the capital
requirements associated with these leasing arrangements through equipment
financing with a commercial lender, the Company has not yet obtained a
commitment for such equipment financing. The Company may also pursue a leasing
relationship with a third-party lessor, although the Company has not yet
established such an arrangement. If the Company is unable to obtain equipment
financing or a relationship with a third-party lessor, it may need to seek other
forms of financing through the sale of equity securities or other means, to
achieve its business objectives. 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 within that time frame.
Any additional required financing may not be available to the Company on
satisfactory terms, if at all.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in the Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants....................................................... 22
Balance Sheets as of June 30, 1996 and 1995.................................................... 23
Statements of Operations for years ended June 30, 1996, 1995 and 1994 and for the period from
inception (May 29, 1991) to June 30, 1996..................................................... 24
Statements of Shareholders' Equity for years ended June 30, 1994, 1995 and 1996................ 25
Statements of Cash Flows for years ended June 30, 1996, 1995 and 1994 and for the period from
inception (May 29, 1991) to June 30, 1996..................................................... 26
Notes to Financial Statements.................................................................. 27
</TABLE>
21
<PAGE>
R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S
To Urologix, Inc.:
We have audited the accompanying balance sheets of Urologix, Inc. (a Minnesota
corporation in the development stage) as of June 30, 1996 and 1995, and the
related statements of operations and cash flows for each of the three fiscal
years in the period ended June 30, 1996 and for the period from inception (May
29, 1991) to June 30, 1996, and the statement of shareholders' equity for each
of the three fiscal years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Urologix, Inc. as of June 30,
1996 and 1995, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended June 30, 1996, and for the period
from inception (May 29, 1991) to June 30, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 1, 1996
22
<PAGE>
B A L A N C E S H E E T S
<TABLE>
<CAPTION>
As of June 30: 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 65,042 $ 1,349,041
Available-for-sale securities 40,779,176 2,222,452
Accounts receivable 35,066 -
Inventories 415,920 485,633
Prepaids and other 365,976 191,687
- ---------------------------------------------------------------------------------------------------------------
Total current assets 41,661,179 4,248,813
- ---------------------------------------------------------------------------------------------------------------
Property and equipment:
Leasehold improvements 79,721 76,346
Machinery, equipment end furniture 699,694 514,050
Less - accumulated depreciation (401,381) (272,611)
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, net 378,034 317,785
OTHER ASSETS 328,641 309,117
- ---------------------------------------------------------------------------------------------------------------
$ 42,367,855 $ 4,875,715
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capitalized lease obligations $ 17,926 $ 5,128
Accounts payable 845,566 475,623
Accrued compensation and other 858,158 395,643
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 1,721,650 876,394
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES 57,868 22,632
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 1,779,518 899,026
- ---------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Note 5):
Noncumulative convertible preferred stock, Series A, $.01 par value, converted
to 137,500 shares of common stock upon close of initial public offering - 1,375
Noncumulative convertible preferred stock, Series B, $.01 par value, converted
to 1,624,555 shares of common stock upon close of initial public offering - 12,022
Noncumulative convertible preferred stock, Series C, $.01 par value, converted
to 2,264,292 shares of common stock upon close of initial public offering - 22,643
Noncumulative convertible preferred stock, Series D, $.01 par value, converted
to 638,806 shares of common stock upon close of initial public offering - -
Undesignated stock, 5,000,000 shares authorized as of June 30, 1996, none
issued or outstanding - -
Common stock, $.01 par value, 25,000,000 and 6,500,000 shares authorized;
9,128,432 and 1,197,904 shares issued and outstanding 91,284 11,979
Additional paid-in capital 59,030,559 14,868,864
Deficit accumulated during the development stage (18,533,506) (10,940,194)
--------------------------------------------------------------------------------------------------------------
Total shareholders' equity 40,588,337 3,976,689
- ---------------------------------------------------------------------------------------------------------------
$ 42,367,855 $ 4,875,715
===============================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
23
<PAGE>
S T A T E M E N T S O F O P E R A T I O N S
<TABLE>
<CAPTION>
For the Period
From Inception
For the Years Ended June 30, (May 29, 1991)
------------------------------------------ To June 30,
1996 1995 1994 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COST REIMBURSEMENT $ 362,118 $ 489,350 $ 9,350 $ 1,024,418
COST OF GOODS SOLD 1,177,455 785,298 179,233 2,395,139
- ----------------------------------------------------------------------------------------------------------------------------
Gross loss (815,337) (295,948) (169,883) (1,370,721)
- ----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Research and development 4,811,165 4,099,070 1,597,275 12,639,277
General and administrative 1,191,518 883,409 677,424 3,499,383
Sales and marketing 1,006,544 477,380 124,308 1,703,448
- ----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 7,009,227 5,459,859 2,399,007 17,842,108
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (7,824,564) (5,755,807 (2,568,890) (19,212,829)
INTEREST INCOME, net 231,252 329,060 44,374 679,323
- ----------------------------------------------------------------------------------------------------------------------------
Net Loss $(7,593,312) $(5,426,747 $(2,524,516) $(18,533,506)
- ----------------------------------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE $(1.22) $(0.91) $(0.69)
- ---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (Note 2) 6,235,291 5,996,162 3,645,960
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
24
<PAGE>
S T A T E M E N T S O F S H A R E H O L D E R S ' E Q U I T Y
<TABLE>
<CAPTION>
Noncumulative Convertible Preferred Stock
------------------------------------------------------------------
Series A Series B Series C Series D
------------------ --------------------- --------------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 137,500 $ 1,375 1,200,951 $ 12,010 - $ - - $ -
Issuance of preferred stock, net - - 1,250 12 2,264,292 22,643 - -
Stock options exercised - - - - - - - -
Net loss - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1994 137,500 1,375 1,202,201 12,022 2,264,292 22,643 - -
Stock options exercised - - - - - - - -
Net loss - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1995 137,500 1,375 1,202,201 12,022 2,264,292 22,643 - -
Issuance of preferred stock, net - - - - - - 638,806 6,388
Stock options exercised - -
Preferred stock conversion (137,500) (1,375) (1,202,201) (12,022) (2,264,292) (22,643) (638,806) (6,388)
Shares issued through initial
public offering, net - - - - - - - -
Net loss - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 - $ - - $ - - $ - - $ -
===================================================================================================================================
Deficit
Accumulated
Common Stock Additional During the Total
------------------- Paid-in Development Shareholders'
Shares Amount Capital Stage Equity
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 1,158,226 $11,583 $ 5,028,595 $ (2,988,931) $ 2,064,632
Issuance of preferred stock, net - - 9,825,395 - 9,848,050
Stock options exercised 12,284 122 4,792 - 4,914
Net loss - - - (2,524,516) (2,524,516)
- ----------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1994 1,170,510 11,705 14,858,782 (5,513,447) 9,393,080
Stock options exercised 27,394 274 10,082 - 10,356
Net loss - - - (5,426,747) (5,426,747)
- ----------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1995 1,197,904 11,979 14,868,864 (10,940,194) 3,976,689
Issuance of preferred stock, net - - 4,580,676 - 4,587,064
Stock options exercised 160,375 1,603 63,312 - 64,915
Preferred stock conversion 4,665,153 46,652 (4,224) - -
Shares issued through initial
public offering, net 3,105,000 31,050 39,521,931 - 39,552,981
Net loss - - - (7,593,312) (7,593,312)
- ----------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 9,128,432 $91,284 $58,030,559 $(18,533,506) $40,588,337
==========================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
25
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception
For the Years Ended June 30, (May 29, 1991)
--------------------------------------------- To June 30,
1996 1995 1994 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,593,312) $ (5,426,747) $ (2,524,516) $ (18,533,506)
Adjustments to reconcile net loss to
net cash used for operating activities--
Depreciation 128,770 104,433 80,659 401,381
Change in operating items:
Accounts receivable (35,065) - - (35,065)
Inventories 69,713 (273,850) 67,551 (415,920)
Prepaids and other (174,289) (191,687) - (365,976)
Accounts payable and
accrued liabilities 832,458 531,670 42,501 1,703,724
Other assets (19,524) 51,924 (347,621) (328,641)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for
operating activities (6,791,249) (5,204,257) (2,681,426) (17,574,003)
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (134,336) (259,255) (26,082) (514,351)
Purchase of securities (40,529,176) (3,229,459) (512,993) (44,271,628)
Proceeds from sale of securities 1,972,452 1,520,000 - 3,492,452
- --------------------------------------------------------------------------------------------------------------------
Net cash used for
investing activities (38,691,060) (1,968,714) (539,075) (41,293,527)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of
common stock, net 39,552,981 - - 39,574,881
Proceeds from issuance of preferred stock 4,587,064 - 9,848,050 19,461,486
Proceeds from exercise of stock options 64,915 10,356 4,914 85,476
Payments made on capital lease obligations (6,650) (68,121) (56,778) (189,271)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 44,198,310 (57,765) 9,796,186 58,932,572
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,283,999) (7,230,736) 6,575,685 65,042
CASH AND CASH EQUIVALENTS:
Beginning of period 1,349,041 8,579,777 2,004,092 -
- --------------------------------------------------------------------------------------------------------------------
End of period $ 65,042 $ 1,349,041 $ 8,579,777 $ 65,042
====================================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
26
<PAGE>
N O T E S T O F I N A N C I A L S T A T E M E N T S
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. Urologix is in the development stage, and revenues have been
limited to recovery of certain costs incurred for human clinical investigations
of its product. Future revenues of the Company are expected to come from both
domestic and international markets after appropriate regulatory approvals have
been obtained. Prior to the Company selling its products in the U.S., Food and
Drug Administration ("FDA") approval must be obtained. The Company is currently
engaged in clinical trials in the U.S. under an Investigational Device Exemption
("IDE") approved by the FDA. In July 1996, the Company received approval to
market in certain European countries.
In June 1996, the Company signed an agreement granting Boston Scientific
Corporation exclusive distribution rights of the T3 System for the treatment of
BPH in all geographic areas other than the U.S. and Japan through June 30, 2001.
Even if the Company's efforts are successful, substantial time will pass before
significant earnings might be realized in the United States or internationally.
The realization of the Company's investment in inventory, property and
equipment, and other assets is dependent upon, among other factors, the
Company's ability to obtain final FDA approval and the success of future
operations.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: The Company considers 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, which approximates
cost.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Inventories consist primarily of control units and disposable products.
PROPERTY AND EQUIPMENT: Improvements that extend the useful lives of property
and equipment are capitalized at cost and depreciated. 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 and furniture, and five years for leasehold
improvements.
OTHER ASSETS: Other assets consist primarily of prepaid royalties resulting
from a patent licensing agreement which was entered into in 1994. The agreement
requires the Company to pay a royalty on sales of certain catheters and related
systems. The amount prepaid by the Company will be charged to expense as sales
are recognized.
COST REIMBURSEMENT: The Company recognizes revenue received only to the extent
of costs incurred in the development or manufacture of a product.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to
expense as incurred. These expenses include patent costs of $422,991, $202,224
and $287,479 for the fiscal years ended 1996, 1995 and 1994.
27
<PAGE>
NET LOSS PER COMMON SHARE: Net loss per common share was 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, except as
follows, as the effect would be antidilutive. Pursuant to Securities and
Exchange Commission rules, stock options granted within one year prior to the
date of the contemplated initial public offering have been included in the
calculation of common share equivalents as if they were outstanding for all
periods presented.
In addition, all shares of preferred stock that were converted to common stock
in conjunction with the initial public offering as described in Note 5 have been
included in the computation of weighted average common shares as if converted
for all periods presented.
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 actual 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.
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:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State taxes, net of federal
tax benefit 6 6 6
Valuation allowance (40) (40) (40)
- -------------------------------------------------
-% -% -%
==== ==== ====
</TABLE>
As of June 30, 1996, the Company had net operating loss carryforwards of
$17,000,000 for federal income tax purposes that are available to offset future
taxable income through the year 2011. 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 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------
<S> <C> <C> <C>
Net operating loss
carryforwards $ 6,802 $ 3,996 $ 2,147
Temporary deductible
differences 870 - -
Valuation allowance (7,672) (3,996) (2,147)
- ---------------------------------------------------
$ - $ - $ -
======= ======= =======
</TABLE>
4. CREDIT FACILITIES
The Company has a $250,000 demand revolving credit arrangement (the "Revolver")
with a bank. Any borrowings would be collateralized by a $250,000 certificate
of deposit with interest on the Revolver computed at the bank's base rate, as
defined. No borrowings took place under the Revolver in fiscal 1996, 1995 or
1994.
5. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING: In June 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.
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
28
<PAGE>
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
1995 and March 1996, 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.
COMMON STOCK WARRANTS: The Company has a warrant outstanding to purchase 7,405
shares of common stock at $2.96 per share as of June 30, 1996, 1995 and 1994.
STOCK OPTIONS: The Company has a stock option plan (the "1991 Stock Option
Plan") that provides for the granting of incentive stock options to employees
and nonqualified stock options to employees, directors and consultants. Options
expire seven to ten years from the date of grant and are subject to varying
vesting schedules. Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
Option
Incentive Nonqualified Exercise
Stock Stock Price per
Options Options Share
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at
June 30, 1993 71,651 70,434 $ .20-.40
Options granted 399,452 19,900 .40-.44
Options canceled (41,681) - .40
Options exercised (3,484) (8,800) .40
- ------------------------------------------------------------------
Balance at
June 30, 1994 425,938 81,534 .20-.44
Options granted 201,603 11,350 .20-.60
Options canceled (1,206) - .40
Options exercised (1,294) (26,100) .20-.40
- ------------------------------------------------------------------
Balance at
June 30, 1995 625,041 66,784 .20-.60
Options granted 266,003 110,933 .60-14.00
Options canceled (454) - .60
Options exercised (134,327) (26,062) .40-.60
- ------------------------------------------------------------------
Balance at
June 30, 1996 756,263 151,655 .20-14.00
- ------------------------------------------------------------------
Options exercisable
at June 30, 1996 177,978 41,932 .20-1.60
- ------------------------------------------------------------------
</TABLE>
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 the
later of initial election or the effective date of an initial public offering.
As of June 30, 1996, 420,949 options were available for future grant under this
plan.
INCREASE IN AUTHORIZED SHARES: Effective November 29, 1995, the Company
increased its authorized shares of common and preferred stock from 6,500,000 and
4,000,000 to 12,500,000 and 6,000,000, respectively. In April 1996, the
shareholders approved an amendment to the Articles of Incorporation to provide
authorized capital stock of 25,000,000 common and 5,000,000 undesignated shares
effective immediately prior to the closing of the initial public offering.
29
<PAGE>
1996 EMPLOYEE STOCK PURCHASE PLAN: In April 1996, the Company adopted the 1996
Employee Stock Purchase Plan (the "Plan"), and reserved 100,000 common shares
for issuance under the Plan, commencing upon the effective date of an initial
public offering. 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' estimated 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.
6. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS: At June 30, 1996, the Company has orders outstanding to
purchase a certain number of T3 System Control Units, the primary system
necessary for all treatments, from a third-party vendor for a total purchase
commitment of approximately $1,155,000. Management believes that current funds
on hand will be sufficient to meet its purchase commitments.
LITIGATION: In June 1996, the Company received notice from the licensor to the
patent license agreement described in Note 2 of their intent to terminate the
agreement based on allegations of the Company's breach of the confidentiality
terms of the license agreement. The Company's management strongly believes the
licensor's allegations are without merit and has filed, subsequent to year end,
a suit against the licensor to enforce the terms of the agreement.
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 that expire at various dates through
fiscal 1999. Rent expense related to operating leases was approximately
$139,700, $102,500 and $78,500 for the years ended June 30, 1996, 1995 and 1994,
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, 1996:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
---------- --------
<S> <C> <C>
Fiscal year:
1997 $161,884 $25,896
1998 159,111 25,896
1999 151,762 31,992
2000 100,282 9,517
2001 28,210 -
-------- --------
93,301
Less-imputed interest (17,507)
Current maturities (17,926)
--------
Long-term capitalized lease obligations $ 57,868
========
</TABLE>
7. RELATED-PARTY TRANSACTIONS
In fiscal 1995, the Company entered into a consulting agreement with a member of
the board of directors under which the Company pays a minimum $4,000 monthly
retainer. The Company paid $111,000 and $32,000 under this arrangement in the
fiscal years ended June 30, 1996 and 1995, respectively.
8. SUBSEQUENT EVENT
In August 1996, the Company signed a patent license agreement that grants the
Company rights to certain technology related to treating diseases of the
prostate in exchange for an initial license fee as well as prepaid and ongoing
royalty payments, which are subject to a maximum royalty.
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For the Period
From Inception
(May 29, 1991)
For the Years Ended June 30, To June 30,
1996 1995 1994 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash paid for interest $ 3,976 $ 4,262 $ 11,365 $ 40,328
- -------------------------- ------- ------- -------- --------
Noncash investing and
financing activities:
Common stock
issued upon
conversion
of preferred
stock $42,428 $ - $ - $ -
======= ======= ======== ========
</TABLE>
30
<PAGE>
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
Annual Meeting of Shareholders to be held on September November 20, 1996 (the
"1996 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 1996 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 1996 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 1996 Proxy Statement and is incorporated
herein by reference.
31
<PAGE>
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, 1994, 1995 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(1)
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 Letter Agreement dated November 18, 1994 between the Company
and William R. Amaden(1)
10.11 Consulting Agreement dated November 28, 1994 between the
Company and William R. Amaden(1)
10.12 International Distribution Agreement made as of June 26, 1996
between the Company and Boston Scientific Corporation(2)
10.13 License Agreement dated August 7, 1996 between the Company and
EDAP International, S.A. and Technomed Medical Systems, S.A.
(2)
11.1 Statement re computation of Per Share Loss
23.1 Consent of Arthur Andersen, LLP
* Indicates Compensation Plan
(1) Incorporated by Reference from the Urologix, Inc. Registration
Statement on Form S-1, File No. 333-3304
(2) 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 fiscal year ended June 30,
1996
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly 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
Jack E. Meyer and Wesley Johnson, 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 26, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mitchell Dann Chairman of the Board September 26, 1996
- ----------------------
Mitchell Dann
/s/ Jack E. Meyer Director, President and September 26, 1996
- ----------------------
Jack E. Meyer Chief Executive Officer
/s/ Wesley Johnson Vice President, Chief Financial September 26, 1996
- ----------------------
Wesley Johnson Officer and Secretary
/s/ Buzz Benson Director September 26, 1996
- ----------------------
Buzz Benson
/s/ Janet G. Effland Director September 26, 1996
- ----------------------
Janet G. Effland
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Michael R. Henson Director September 26, 1996
- ------------------------
Michael R. Henson
/s/ Paul A. LaViolette Director September 26, 1996
- ------------------------
Paul A. LaViolette
/s/ Robert Momsen Director September 26, 1996
- ------------------------
Robert Momsen
/s/ David C. Utz Director September 26, 1996
- ------------------------
David C. Utz, M.D.
</TABLE>
34
<PAGE>
Exhibit 10.12
Certain information has been omitted
from this exhibit and filed separately
with the SEC pursuant to a request for
confidential treatment under Rule 24b-2
UROLOGIX, INC.
INTERNATIONAL DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of the 26th day of June, 1996, by and between
Urologix, Inc., a corporation organized and existing under the laws of the State
of Minnesota, ("Urologix") and Boston Scientific Corporation, a corporation
organized and existing under the laws of Delaware ("BSC").
BACKGROUND
Urologix is in the business of manufacturing and marketing its T3 System
for use in the treatment of benign prostatic hyperplasia (BPH). BSC is engaged
in the sale of various medical devices worldwide.
Urologix has previously granted distribution rights to the T3 System in
Japan to another party and desires to retain for itself the right to sell the T3
System in the United States. Accordingly, Urologix and BSC desire to enter into
an International Distribution Agreement under which BSC would be entitled to
sell the T3 System for the treatment of BPH outside of the United States and
Japan, on the terms and conditions set forth below.
TERMS AND CONDITIONS
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto agree as follows:
1. PRODUCTS.
1.1 The term "Products" shall mean the Urologix T3 System for the
treatment of BPH, which consists of the control unit (the "Control Unit") and
the procedure kit (the "Procedure Kits") described on Exhibit A, and all future
improvements or new generations to the T3 System which Urologix may develop for
the treatment of BPH, using microwave or other minimally invasive treatment, but
expressly excluding any modifications or adaptations of the T3 System for the
treatment of any disease or condition other than BPH. Any additional products
which Urologix may offer to BSC and which BSC elects to sell and distribute
shall be added to the list of Products on Exhibit A. Urologix shall not make
any material changes in the performance or specifications of any of the
Products without first giving at least 90 days written notice to BSC with regard
to the same. However, any changes which Urologix believes are necessary, for
reasons of safety, efficacy, or compliance with any regulatory request or
suggestion may be made with less than 90 days written notice to BSC so long as
Urologix promptly notifies BSC of any such change when it is implemented and
prior to the shipment of the changed Products and the reasons therefor.
Notwithstanding the foregoing, if
1
<PAGE>
Urologix (i) makes any change to any of the Products which change does not occur
in the normal course of developing or improving that Product or any new
generation of that Product, but rather occurs for any of the reasons described
in the immediately preceding sentence, and (ii) that change makes the changed
Product incompatible with any of the Products that BSC has previously sold or
otherwise placed with any customer or that BSC then holds in inventory, and
(iii) Urologix no longer makes available another version of the Product which
has been changed which is compatible with the related Product that BSC has
previously sold or placed with customers or then holds in inventory, Urologix
shall, at its expense, replace as soon as is reasonably practical all such
incompatible Products or, with respect to Control Units, make such modifications
to such Control Units as are necessary to make them compatible with the changed
Products. The procedure described in the immediately preceding sentence shall
not apply in the case of any change to a Product which occurs in the normal
course of developing or improving that Product or any new generation of that
Product.
1.2 If, during the term of this Agreement, Urologix wishes to explore
the possibility of entering into an exclusive distribution agreement with a
single distributor (other than an Affiliate of Urologix) for the purpose of
distributing, throughout the Territory, a product (other than the Products) for
the treatment of a disease of the prostate, Urologix shall give written notice
of the same to BSC before proceeding beyond a preliminary phase with any such
discussions with any third party other than BSC. The date on which BSC receives
any such notice from Urologix is hereafter referred to as the "First Negotiation
Date". If, within 15 days of the First Negotiation Date, BSC, by written notice
to Urologix, informs Urologix that it wishes to enter into negotiations with
Urologix with respect to such a distribution agreement, Urologix shall provide
BSC with a reasonable opportunity, for a period of 45 days from the First
Negotiation Date, to negotiate and execute a term sheet outlining the basic
business terms with respect to such distribution rights. If such a term sheet is
executed within that period, Urologix shall provide BSC with a reasonable
opportunity during the period ending 90 days from the First Negotiation Date, to
negotiate and execute a definitive distribution agreement with Urologix with
respect to such distribution rights.
1.2.1 It is expressly understood and agreed that, with respect to any
such negotiations, neither BSC nor Urologix shall be obligated to accept
any terms or conditions which are not fully acceptable to the party
involved in its sole discretion for whatsoever reason. Furthermore, if BSC
and Urologix are not able to conclude and execute such a definitive
distribution agreement within such period of time, Urologix shall have no
further obligations to BSC under this Section 1.2 and shall be free to
enter into a distribution agreement, upon any terms and conditions which
are acceptable to Urologix, with any other party for the distribution
throughout the Territory, of the product involved, subject only to the
requirement that if Urologix, in thereafter pursuing such other
relationships, makes a proposal to a third party which contains economic
terms significantly more favorable, in the aggregate, to that potential
distributor than the last proposal which Urologix made to BSC in its
earlier negotiations, then Urologix shall advise BSC of that proposal.
Urologix shall be obligated to so advise BSC of a more favorable proposal
only once, irrespective of whether Urologix makes more than one such
favorable proposal to any one or more potential distributors. After
receiving notice from Urologix as to such a proposal, BSC is free to then
determine whether it wishes to enter into renewed negotiations with
Urologix. If BSC elects to inform Urologix that it is interested in such
renewed negotiations, then without otherwise imposing any obligations upon
Urologix to negotiate with BSC, Urologix shall promptly advise BSC as to
whether it will enter into such renewed negotiations with BSC, even though
those negotiations need not be on an exclusive basis.
1.2.2 The provisions of this Section 1.2 shall apply only to the form
of distribution arrangement described in the first sentence of this Section
1.2 and shall in no manner
2
<PAGE>
affect or relate to any other distribution arrangement or arrangements
which Urologix may enter into with any one or more third parties for the
sale of any of Urologix's products in the Territory. In the event of the
expiration or termination of this Agreement for any reason, this Section
1.2 shall be null and void and of no further force or affect.
2. EXCLUSIVE DISTRIBUTORSHIP.
2.1 Subject to the terms and conditions contained herein, Urologix
grants to BSC, and BSC hereby accepts, the rights and responsibilities of an
exclusive distributor of Products for use in the treatment of BPH in all
geographic areas of the world, other than the United States and Japan (the
"Territory"). During the term of this Agreement, Urologix agrees, to the extent
permitted by law, to maintain BSC's exclusivity in the Territory for the
Products and not to appoint another distributor of Products in the Territory or
to itself sell Products directly or through a third party to customers in the
Territory for the treatment of BPH. However, nothing contained herein shall in
any manner restrict or limit Urologix in regard to providing any Products to any
other parties, either without charge or at a price which does not include a
profit for Urologix, for research or investigational purposes. BSC shall
promptly notify Urologix of the placement of any such units for research or
investigational purposes in a single-site study, which has deprived BSC of a
Product sale. In the event any such placement deprives BSC of the opportunity to
sell Products to a customer which has indicated it is likely to purchase
Products from BSC, BSC's Minimum Purchase Obligations under Section 10.1 shall
be reduced in an appropriate and mutually acceptable manner. If Urologix desires
to initiate a clinical study at more than one clinical site in the Territory (a
"Multi-Site Study") with respect to a particular Product in order to support a
submission by Urologix to the FDA with respect to that Product, Urologix shall
first inform BSC of its intentions with respect to that Multi-Site Study before
initiating the same. If, in conjunction with any such Multi-Site Study, Urologix
provides those sites which are participating in that study with Control Units
which are substantially the same as the Control Units then being sold by BSC
under this Agreement, and such placement deprives BSC of the opportunity to sell
Products to a customer, BSC's minimum purchase obligations with respect to
Control Units under Section 10.1 shall be reduced by one unit for each such
Control Unit placed with those sites. However, BSC's minimum purchase
obligations under Section 10.1 with respect to Procedure Kits shall not be
reduced with respect to any Procedure Kits supplied by Urologix to the sites
participating in that Multi-Site Study except to the extent that Urologix
provides those sites with a greater number of Procedure Kits than is reasonably
desirable with respect to the Multi-Site Study involved.
[2.2 Confidential Treatment Requested]
2.3 The parties recognize that initially, BSC's efforts with respect to
the sale of the Products shall initially be concentrated in the countries named
in Section 9.1. However, it is the expectation of the parties that BSC will also
devote reasonable commercial efforts to the market development, sales, and
marketing of Products both in other individual countries and in distinct multi-
country regions which represent a meaningful, potential market for the treatment
of BPH. This Section 2.3 establishes a procedure whereby a particular country or
region may be withdrawn from the Territory if it is neglected by BSC. This
procedure is not intended to, and shall not, entitle Urologix to withdraw an
individual country from the Territory if that country is a part of a distinct
multi-country region which, as a region, has not been neglected by BSC in the
manner described in this Section 2.3.
If BSC has neglected the market development, sales, and marketing of
Products in a country or region while third parties are making material, actual
sales of products for the treatment of BPH in that country or region, Urologix
may give written notice to BSC that Urologix desires to exclude that country or
3
<PAGE>
region from the Territory. If BSC does not, (a) within six months of the date of
such notice from Urologix, initiate and diligently seek to obtain, using
reasonable commercial efforts, all regulatory approvals (except to the extent a
particular approval is to be obtained by Urologix under Section 18.1) required
for the sale of the Products in that country or region, and (b) initiate the
sale and marketing of the Products in that country or region within a reasonable
period of time following issuance of the appropriate regulatory clearances, then
that country or region shall be excluded from the Territory if Urologix, at any
time after the expiration of either of such time periods and before BSC has
cured any such deficiency, gives written notice to BSC that Urologix wishes to
withdraw that country or region from the Territory. In the event that any such
country or region is withdrawn from the Territory in accordance with the
provisions of this Section 2.3, BSC shall thereafter have no further rights of
any nature with respect to the distribution of any of the Products in that
country or region and the terms of this Agreement shall not apply to the sale of
Products in that country or region.
2.4 The responsibilities of BSC with respect to the Products under
Section 9, Section 18, and the other sections of this Agreement, shall be
equally applicable to all future improvements or new generations to the T3
System which are deemed to be "Products" under Section 1. With regard to the
responsibilities of Urologix and BSC under Sections 18.1 and 18.2, Urologix
shall be responsible for obtaining and maintaining a CE mark for the sale of any
such improved or new generation Product in the European Union and for obtaining
regulatory approval from the primary agency which must approve the sale of
medical devices in the countries of Canada and Australia. If BSC does not
initiate reasonable commercial efforts for the sale of any such improved or
future generation Product within ninety (90) days of the date on which Urologix
receives such CE mark or receives the applicable regulatory approval for the
sale of such Product in Canada or Australia, as applicable, then any such
improved or new generation Product shall no longer be deemed to be a Product
under this Agreement and BSC shall have no rights whatsoever with respect to the
distribution of that product.
3. NO AGENCY. Each of the parties is an independent contractor and
nothing contained herein shall be deemed or construed to create the relationship
of an agency, partnership, joint venture, franchise or any other association or
relationship between the parties except that of an exclusive distributor
relationship. Neither BSC nor Urologix shall have, and shall not hold itself out
as having, any right, power or authority to create any contract, obligation or
responsibility either express or implied, on behalf of, or in the name of, the
opposite party unless the opposite party shall consent thereto in writing.
Neither party shall have any authority to bind the opposite party in any
respect. All persons engaged by either party shall be that party's employees,
legal representatives, agents or independent contractors and not those of the
opposite party.
4. PURCHASE ORDERS.
4.1. By July 1, 1996, and by each July 1 thereafter during the term
of this Agreement, BSC shall provide Urologix with a firm purchase order under
which BSC agrees to purchase the full amount of its Minimum Purchase Obligation
for the Contract Year commencing on that particular July 1st (an "Annual Firm
Order"), with all units of Products covered by that Annual Firm Order to be
delivered on delivery dates reasonably acceptable to Urologix. On the first day
of each month during the remainder of the term of this Agreement, after July 1,
1996, BSC shall provide Urologix with its reasonably best estimate ("Estimate")
of the quantity of each Product which BSC will need during each of the 12 months
thereafter. The delivery dates scheduled under each Estimate shall be as are
reasonably acceptable to Urologix. The Estimate shall be binding upon BSC only
to the extent of any units of Products scheduled for delivery in the accordance
with the terms of the Annual Firm Order which encompasses the period of a
particular Estimate. BSC shall not be obligated to purchase, and Urologix shall
not be obligated to deliver, any units of Products
4
<PAGE>
in excess of BSC's Minimum Purchase Obligations under an Annual Firm Order until
BSC has submitted, and Urologix has accepted, a purchase order for any such
additional Products. Urologix's normal lead time is [confidential treatment
requested] days for the manufacture of Control Units and [confidential treatment
reuqested] days for Procedure Kits.
4.2 The first Contract Year shall be for the period from the date of
this Agreement through June 30, 1997 and subsequent Contract Years shall be the
periods of July 1 through June 30 thereafter. Except as otherwise agreed in
writing by Urologix, an order may not be canceled by BSC after it has been
accepted, and except as otherwise provided, Products are not returnable after
they have been delivered.
4.3 In the event that, during the first Contract Year, Urologix fails
to timely deliver any Products under a purchase order which Urologix has
accepted, 1.5 units of the Product involved shall be deemed to have been
purchased by BSC for each unit of such Product which Urologix has failed to
deliver, for purposes of determining whether BSC has purchased its Minimum
Purchase Obligations under Section 10 for the first Contract Year. In the event
of any such failure to deliver during the second or any subsequent Contract
Year, one unit of the Product involved under a purchase order which Urologix has
accepted shall be deemed to have been purchased by BSC for each unit of that
Product which Urologix has so failed to deliver for purposes of determining
whether BSC has purchased its Minimum Purchase Obligations under Section 10 for
subsequent Contract Years.
4.4 All sales of Products by Urologix to BSC shall be subject to the
provisions of this Agreement and shall not be subject to the terms and
conditions contained in any purchase order of BSC or confirmation of Urologix,
except insofar as any such purchase order or confirmation establishes (a) the
quantity of Products to be sold or (b) the shipment date of Products. In the
event of any shortages in the availability of Products or in Urologix's capacity
to meet demand for Products, Urologix shall allocate available Products to and
schedule the timing of Product delivery to, BSC in a reasonable manner such that
BSC shall receive a percentage of available Products that is the same as the
percentage derived from comparing BSC's unfilled demand for Products in relation
to the total unfilled demand for Products from all Urologix customers,
distributors, and sales representatives (including BSC) on a combined basis at
the time of such unavailability (as measured from firm purchase orders).
Urologix's right to allocate available Products under this Section 4.4 shall not
relieve Urologix of the consequences under Section 4.3 for Urologix's failure to
deliver Products.
4.5 If BSC shall fail to make any payment to Urologix when due under
this Agreement, and such amount remains unpaid for fifteen (15) days following
notice of late payment given by Urologix, Urologix shall have the right to
cancel any orders, delay any shipments to BSC until payment is made or
assurances required by Urologix are received, or terminate this Agreement in
accordance with Section 11, unless there is an unresolved good faith dispute
with regard to Urologix's entitlement to such payment. In the event either BSC
or Urologix sends a notice of termination of this Agreement pursuant to Section
11, Urologix may, at its option, require all subsequent purchases by BSC of
Products from Urologix to be C.O.D.
5
<PAGE>
5. SHIPMENT.
5.1 Subject to delay due to force majeure, Urologix will ship
Products to BSC in accordance with the procedures set forth in Section 4 upon
the receipt of purchase orders that Urologix has accepted under Section 4.
5.2 All Products sold by Urologix to BSC hereunder will be shipped by
Urologix FOB from the location where the manufacture of the Products involved is
completed ("Shipping Point"). BSC will pay all loading, freight, shipping,
insurance, duties, forwarding and handling charges, taxes, storage, and all
other charges applicable to the Products after they are delivered by Urologix to
the carrier involved at the Shipping Point.
5.3 BSC shall assume all risk of loss for Products upon delivery by
Urologix of the Products to the carrier involved at the location where the
manufacture of the Products is completed by Urologix.
5.4 BSC shall, at its expense, secure and maintain all import
licenses, customs clearances, currency exchange authorizations, as required by
the appropriate governmental authorities in the countries in the Territory where
BSC determines to sell the Products. Subject to the provisions of Section 18,
BSC shall comply with all United States and foreign governmental requirements
with respect to the export and import of the Products and shall not export, or
allow to be exported or re-exported, any of the Products except in compliance
with such restrictions, laws and regulations. Similarly, BSC shall comply with
all sales, use and value added tax law requirements, including any required
filings in any foreign country.
6. PRICE AND PAYMENT.
6.1 Base Price and Sharing Adjustment for Control Units. The base
price of all Control Units sold by Urologix to BSC shall be $ [Confidential
Treatment Requested] (the "Base Price"). If BSC's average selling price (the
"Average Selling Price") for all Control Units sold by BSC and its Affiliates is
more than $[Confidential Treatment Requested] but less than $[Confidential
Treatment Requested], then the final price which BSC shall pay Urologix for each
Control Unit sold to BSC (the "Transfer Price") shall be that amount which is
equal to [Confidential Treatment Requested] of BSC's Average Selling Price. If
BSC's Average Selling Price is $[Confidential Treatment Requested] or more, then
the Transfer Price shall be an amount equal to the Base Price plus a certain
percentage of the amount by which BSC's Average Selling Price exceeds
$[Confidential Treatment Requested] (the "Sharing Adjustment") as follows:
AVERAGE SELLING PRICE SHARING ADJUSTMENT
--------------------- ------------------
[Confidential Treatment Requested]
For example, if BSC's Average Selling Price for a particular month was $
[Confidential Treatment Requested], then the Transfer Price would be
$[Confidential Treatment Requested], calculated as follows: [Confidential
Treatment Requested]
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6.2 Base Price and Sharing Adjustment for Procedure Kits. The base price
for all Procedure Kits sold by Urologix to BSC shall be $[Confidential Treatment
Requested] (the "Base Price"). If BSC's average selling price (the "Average
Selling Price") for all Procedure Kits sold by BSC and its Affiliates is
$[Confidential Treatment Requested] or more but less than $[Confidential
Treatment Requested], then the final price which BSC shall pay Urologix for each
Procedure Kit sold to BSC (the "Transfer Price") shall be that amount which is
equal to [Confidential Treatment Requested] of BSC's Average Selling Price. If
BSC's Average Selling Price is either less than $[Confidential Treatment
Requested] or is $[Confidential Treatment Requested] or more, then the Transfer
Price shall be an amount equal to the Base Price plus a certain percentage of
the amount by which BSC's Average Selling Price exceeds $[Confidential Treatment
Requested] (the "Sharing Adjustment") as follows:
AVERAGE SELLING PRICE SHARING ADJUSTMENT
--------------------- ------------------
[Confidential Treatment Requested]
For example, if BSC's Average Selling Price for a particular month was
$[Confidential Treatment Requested], then the Transfer Price would be
$[Confidential Treatment Requested], calculated as follows:
[Confidential Treatment Requested]
6.2.1 The parties expect that BSC's Average Selling Price for
Procedure Kits sold during the sixth month after BSC has initiated its
full scale product launch in Europe for the Products will be at least
$ [Confidential Treatment Requested] If this is not so, then BSC and
Urologix will discuss modifying the Sharing Adjustments in this
Section 6.2 on an interim basis in a manner which endeavors to provide
BSC with an average gross margin (defined as BSC's Average Selling
Price less the Transfer Price) of [Confidential Treatment Requested]
(before the payment of any royalties). Any such interim modification
of the Sharing Adjustments will remain in effect for such period as is
then agreed by BSC and Urologix, it being understood that whenever
BSC's average selling price during a particular calendar quarter is
$[Confidential Treatment Requested] or more, the original Sharing
Adjustments under Section 6.2 will apply.
6.3 Prior to the commencement of the third, fourth, and fifth Contract
Years, the parties will review BSC's then current Average Selling Price and
Urologix's then current manufacturing costs for each of the Products. If the
gross margin which BSC is then earning on its sales of a Product is materially
less or greater than [Confidential Treatment Requested], (before the payment of
any royalties), the parties will discuss modifying the Sharing Adjustments in
Sections 6.1 and 6.2 in a manner which endeavors to provide BSC with an average
gross margin of [Confidential Treatment Requested] (before the payment of any
royalties). The determination as to whether any such modification is appropriate
will also take into account Urologix's gross margin on its sales of that Product
to BSC.
6.4 [Confidential Treatment Requested]
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6.5 Average Sales Price. For purposes of this Agreement, the term
Average Sales Price shall mean, with respect to each Product, (i) the gross
invoice or billing price of the Product sold, leased by BSC or any Affiliate of
BSC with no deductions except for: (a) the actual cost of freight, shipping, and
insurance charges, if any, if stated separately from BSC or its Affiliates
ordinary net invoice price for that Product; (b) trade, quantity, and cash
discounts, if any, actually allowed; (c) any VAT applicable to the sale of the
Product, provided such tax is actually paid by BSC or its Affiliate and is shown
separately from the net invoice price of the Product; and (d) such credits or
allowances, if any, actually given or made because of the rejection or return of
a Product previously delivered to a customer by BSC or its Affiliate; divided by
(ii) the number of units of the Product which were sold by BSC during the
applicable period.
In determining the number of units of a Product sold by BSC or any
Affiliate of BSC during a particular period, units which BSC or any Affiliate of
BSC makes available at a reduced price for promotional or other marketing
purposes shall not be included in the calculation of Average Selling Price. If
BSC or any Affiliate of BSC leases any Products, the sales price of such units
for purposes of calculating their Average Sales Price, shall be the price at
which the leasing company involved purchases that product from BSC or from that
Affiliate of BSC. If that leasing company is an Affiliate of BSC, the price of
any units of a Product sold to that leasing company shall, for purposes of
calculating Average Sales Price, in no event be less than the price which would
be charged by BSC or an Affiliate of BSC for a Product sold to a leasing company
which is not an Affiliate of BSC.
6.6 Audit. Upon reasonable written notice to BSC, Urologix shall
have the right to inspect the books and records of BSC and its Affiliates
relating to the sale of Products by itself or by an independent firm of
accountants designated by Urologix for purposes of verifying BSC's calculation
of the Average Selling Price for either or both Products during any particular
period. BSC agrees to create accurate records sufficient to determine the
reports and payments due under this Agreement, all in accordance with generally
accepted accounting practices, and to permit Urologix or the independent firm of
accountants designated by Urologix to inspect and copy such records in
confidence during normal business hours for such verification. Once made, the
accounting records of BSC and its Affiliates shall be retained by BSC for at
least 36 months from the end of the Contract Year to which they pertain. This
right of inspection shall continue throughout the term of this Agreement. In the
event this Agreement shall be terminated for any reason, Urologix shall retain
its right to inspect BSC's books and records for a period of three years from
the date of termination.
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At Urologix's election, it may select as its auditor, the regular firm
of accountants of BSC who may complete the audit permitted by this Section 6.5.
To facilitate any audit under this Section 6.5, BSC shall, upon the request of
the accountants appointed by Urologix, provide the accountants with a full and
accurate description of BSC's accounting practices and records as they relate to
the audit. BSC shall also identify, segregate, and make readily available to
Urologix's accountants all source documents and computer programs as may be
necessary or useful for the accountants to make a full and accurate examination
and audit.
Any under payment by BSC will bear interest at an annual rate of
interest equal to 2% more than the prime rate in effect from Urologix's
commercial bank, as the same may change from time to time, from the date the
payment was due, until paid in full. In the event a payment deficiency is
determined and such deficiency exceeds 5% of the amount which was due Urologix,
BSC shall also be responsible for promptly paying, or reimbursing Urologix for,
all examination fees, costs and expenses charged by the independent accountants
designated by Urologix. In addition, if agreement cannot be reached by Urologix
and BSC as to the appropriate deficiency amount and Urologix seeks relief
through the judicial process, then in the event that Urologix is awarded 50% or
more of the amount claimed by it, BSC shall pay all reasonable attorneys' fees
and costs incurred by Urologix in connection with those proceedings. If Urologix
is not awarded such amount, Urologix shall pay all reasonable attorneys' fees
and costs incurred by BSC in connection with those proceedings.
6.7 For purposes of determining the Average Sales Price, all Products
sold by BSC or its Affiliates shall be converted into U.S. Dollars at the end of
each month from the currency of the country of sale using a foreign exchange
rate based upon the applicable monthly average of the daily exchange rates as
listed in the Wall Street Journal, or using such other methodology as may be
agreed to by the partner from time to time.
6.8 Except as otherwise provided in this Agreement, BSC shall pay
Urologix, in U.S. dollars for each shipment of Products within thirty (30) days
of the date of the invoice issued by Urologix in conjunction with such shipment.
Any payment received more than forty-five (45) days after invoice date will be
subject to a service charge of 2% per month.
7. SHIPMENT SHORTAGES OR DAMAGE. In the event of any shortage or damage
to Products in a shipment to BSC, Urologix shall deliver additional or
substitute Products to BSC as soon as practicable. If such shortage or damage
existed at the time of the release of the Products to the carrier involved,
Urologix shall either deliver the additional or substitute Products to BSC at
the expense of Urologix or refund the purchase price of the Damaged Products,
and BSC shall be credited, for purposes of BSC's Minimum Purchase Obligations
hereunder, with the entire amount of all Products which should have been
delivered in connection with the delivery in question pursuant to the Annual
Firm Order therefore if substitute Products are not delivered to BSC by
Urologix. If such shortage or damage occurs after the time of the release of the
Products to the carrier involved, BSC shall promptly pay Urologix for all
additional or substitute Products supplied by Urologix to BSC as a result of any
such shortage or damage.
8. NO COMPETING PRODUCTS.
8.1 BSC agrees that BSC shall not, either directly or through any
other party, advertise, conduct clinical trials with respect to, arrange for the
sale of, or sell, in any market outside the United States except Japan, any
microwave or any minimally invasive, office-based system or product for the
treatment of BPH, including without limitation, [Confidential Treatment
Requested], but excluding the photo dynamic
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therapy system currently being developed by BSC. The performance of any of these
activities by an "Affiliate" of BSC shall be deemed to be the performance of
those activities by BSC. For purposes of this Agreement, the term an "Affiliate"
of BSC shall mean any person, corporation, partnership, or other legal entity
which is in control of, is controlled by, or is under common control with BSC,
directly or indirectly and "control" shall mean possession, directly or
indirectly, of the power to direct or cause the direction of management or
policies (whether through the ownership of voting securities, by contract, or
otherwise). The provisions of this Section 8.1 shall apply during the term of
this Agreement and for a period of twelve (12) months after the effective date
of any termination of this Agreement by Urologix under the provisions of Section
11.2.2, but shall not apply after the expiration of the original term of this
agreement on June 30, 2001 or after any termination of this Agreement by BSC
under the provisions of Section 11.2.3.
8.2 If during the term of this Agreement, BSC or any Affiliate of BSC
shall desire to initiate the sale or marketing, in any area of the United
States, of any competing product described in Section 8.1, BSC shall first
notify Urologix at least ninety (90) days in advance of the date when BSC
initiates any such efforts. In the event BSC does initiate the sales or
marketing of any such competing product in any area of the United States during
the term of this Agreement, then: (a) the provisions of Section 2.2 of this
Agreement shall, effective as of the date on which BSC initiates any such
efforts, automatically terminate and be of no further force or effect; and (b)
Urologix may, at any time within 180 days thereafter, elect, by written notice
to BSC, to terminate this Agreement effective as of any date which is at least
one year after the date of such notice; provided, however, that Urologix may not
elect to so terminate this Agreement if Urologix's election occurs after
September 30, 1998 and Urologix has not obtained Pre-Market Approval from the
FDA on or before September 30, 1998.
9. BSC RESPONSIBILITIES. In addition to the duties and responsibilities
outlined elsewhere in this Agreement, BSC agrees as follows:
9.1 BSC shall devote reasonable commercial efforts to the market
development, sales and marketing of Products in the Territory, with BSC's
efforts being initially focused upon Germany, France, United Kingdom, Spain,
Italy, Sweden, Belgium, Holland, Canada, and Australia. BSC shall set up
Products for its customers and make available to its customers with all
necessary and appropriate training and support regarding the use of the
Products, as well as with repair service (provided by BSC either directly or
through third parties) and technical support of a commercially acceptable nature
and of high quality. Urologix will furnish reasonable assistance in training of
the persons who will, in turn, train BSC's sales and service personnel. If
travel is required by Urologix employees in conjunction with such training
assistance, Urologix shall pay all coach air fare, meals, lodging, ground
transportation and other travel expenses involved.
9.2 BSC shall provide a trained staff which will devote a substantial
portion of their efforts to the market development, sales, marketing and service
of Products. At Urologix's request, BSC shall periodically review with Urologix
BSC's current and planned marketing plans and staffing levels with regard to the
sale of Products in the Territory.
9.3 BSC's marketing efforts will include such efforts as are normally
employed by BSC. BSC shall provide to Urologix, in English, on a timely and
periodic basis, copies of all promotional and technical written support
materials for all Products ("Product Materials") that are developed by BSC
during the term of this Agreement, and Urologix shall provide to BSC, on a
timely and periodic basis, copies of all Product Materials that are so developed
by or on behalf of Urologix. All BSC Product Materials must be approved in
advance by Urologix, whose approval shall not be unreasonably withheld. During
the term of this Agreement, BSC and Urologix shall each have a paid up, non-
exclusive right to use all Product Materials
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developed by or on behalf of the opposite party in connection with the
promotion, demonstration and sale of the Products. Each party shall be deemed to
be the owner of all Product Materials developed by it or on its behalf and of
all copyrights related thereto, except to the extent that any such Product
Materials utilize any Product Material developed by or on behalf of the opposite
party or utilize any trademarks or tradenames of the opposite party. Upon the
termination of this Agreement, Urologix may purchase from BSC, at its out-of-
pocket cost for developing the same, the right to use all promotional and
advertising materials and other publications developed by BSC for use in
conjunction with the promotion and sale of the Products.
9.4 BSC shall promptly furnish to Urologix such information as
Urologix may reasonably request (including such detail as Urologix may request)
to ascertain current sales of the Products in the Territory, including without
limitation, a quarterly report as to each Product sold by country. BSC shall,
from time to time, discuss with Urologix any changes in market conditions in the
Territory which might materially affect current or potential sales of Products
in the Territory. Urologix and BSC will maintain a cooperative relationship
under which both parties will have reasonable access to all customers and
customer sales information directly related to the Products.
9.5 BSC shall provide reasonable technical support to customers
purchasing Products, including assisting with respect to proper use and
solutions to technical problems encountered by those customers, and Urologix
shall provide reasonable assistance to BSC with respect to such technical
support.
9.6 Each party shall cooperate fully with the opposite party in
dealing with customer complaints concerning the Products and shall take such
action to promptly resolve such complaints as may be reasonably requested by the
opposite party. BSC will, reasonably cooperate with Urologix to enable Urologix
to maintain the Product vigilance system established by Urologix in order to
fulfill all regulatory requirements of the country in which the Product involved
is sold, as well as all regulatory requirements of the FDA and of the European
Union. Without limiting the generality of the foregoing, BSC shall (i) keep a
record of all customer complaints relating to Products and promptly advise
Urologix of all such complaints, the resolution thereof (if any) and all
customer suggested modifications, design changes, and/or improvements intended
to avoid the problem on which the complaint was based, or to maximize the
potential market for the Products within the Territory, (ii) notify Urologix by
telephone, of all MDR reportable events within 4 working days of knowledge
thereof and in writing within 10 working days of the receipt of the preliminary
details thereof, and (iii) establish a "customer by product" and "product by
customer" tracking system for all Products so as to permit successful tracking
in the event of recall. Urologix shall also (i) keep a record of all customer
complaints relating to Products (on a world-wide basis) and promptly but in no
event later than 30 days thereafter, advise BSC of all complaints requiring MDR
or vigilance reporting and the resolution thereof (if any), (ii) file MDR's in
accordance with the Food and Drug Act, and (iii) establish a tracking system for
all Products (on a worldwide basis) so as to permit successful tracking in the
event of a recall.
9.7 BSC shall not, in any way, alter Products, except by prior
written approval of Urologix, except that BSC may, in its discretion, add a
Product label which is reasonably acceptable to Urologix, or require Urologix to
add such a Product label, to the effect that the Products is being distributed
by BSC.
9.8 Urologix may, upon reasonable notice, visit BSC's Product sales
managers at their respective offices upon reasonable notice and visit the places
of business of BSC's subdistributors and accompany BSC during sales or service
calls or training sessions with customers. By appointment upon reasonable
notice, Urologix may review and inspect BSC's inventory of and service
facilities for the Products,
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subject to reasonable restrictions that may be imposed by BSC to limit access to
restricted areas in order to protect confidential information not related to the
Products.
9.9 BSC shall establish such service capabilities in selected
countries within the Territory as may be necessary to reasonably support the
sale and servicing of the Products, either using its own personnel or a well-
qualified third party service organization. If requested by Urologix, BSC will
provide warranty service for Products. Urologix shall provide, at its expense,
the parts required for, and shall reimburse BSC for the reasonable cost of, all
such warranty repairs and services. BSC shall provide Urologix with copies of
all service records for the Products, including the lot numbers of replacement
parts, in sufficient detail for compliance with FDA Good Manufacturing Practices
requirements and all ISO 9,000 and 9,002 requirements.
9.10 Any statements, representations, warranties, or advertisements
made by BSC concerning any Product which exceeds in scope or is different in
meaning from the statements made by Urologix in its own literature or
specifications or product warranties or which exceeds in scope or is different
in meaning from statements made in Product Materials that have been developed by
BSC and approved by Urologix pursuant to Section 9.3, shall be the sole
responsibility of BSC.
9.11 BSC shall be responsible for determining the labeling
requirements (other than with respect to FDA and CE Mark labeling requirements)
for each country in which it wishes to sell the Products and providing Urologix
with that information (with appropriate translations).
10. MINIMUM PURCHASE OBLIGATIONS.
10.1 During each Contract Year during the term of this Agreement, BSC
shall purchase the following minimum number of units of each of the Products
(the "Minimum Purchase Obligation"):
Control Units Procedure Kits
------------- --------------
First Contract Year [Confidential Treatment Requested]
Second Contract Year
During the Third, Fourth, and Fifth Contract Years, BSC's Minimum Purchase
Obligations shall be as mutually agreed by BSC and Urologix. If BSC and Urologix
are unable, prior to the commencement of the applicable Contract Year, to agree
upon BSC's Minimum Purchase Obligations for that Contract Year, then BSC's
Minimum Purchase Obligations for that Contract Year shall be [Confidential
Treatment Requested] of the greater of (i) BSC's actual sales of each of the
Products during the immediately preceding Contract Year or (ii) BSC's Minimum
Purchase Obligations for each of the Products for the immediately preceding
Contract Year.
10.2 If BSC does not during any Contract Year purchase and take
delivery of such quantity of Products, which when added to the quantity of any
other Products for which BSC has received credit pursuant to Section 4.3 or 7
hereof, satisfies the minimum quantity of Products which it is obligated to
purchase under Sections 4.1 or 10.1 during that period, Urologix will suffer
damage which is serious but difficult to determine and quantify. Accordingly,
BSC and Urologix agree that BSC shall, within ten (10) days after written notice
and demand for payment given by Urologix after the end of the applicable
Contract Year, pay to Urologix (as liquidated damages and not as a penalty) for
each Product not purchased, an amount equal to [Confidential Treatment
Requested] of BSC's purchase price for that Product under this
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Agreement (the "Shortfall Payment"). Rather than accept the payment of a
Shortfall Payment from BSC in the manner described in the immediately preceding
sentence, Urologix may instead elect to terminate this Agreement under Section
11 for BSC's failure to fulfill its Minimum Purchase Obligations if (i) BSC has
failed to purchase at least (Confidential Treatment Requested) of its Minimum
Purchase Obligation for both Control Units and Procedure Kits for the Contract
Year involved, or (ii) BSC has failed to purchase (Confidential Treatment
Requested) of its Minimum Purchase Obligation for both Control Units and
Procedure Kits in any two out of any three consecutive Contract Years. Thus,
Urologix may elect to so terminate this Agreement under Section 11 rather than
accept a Shortfall Payment under this Section 10.2. However, Urologix shall not
be entitled to terminate this Agreement under Section 11 for BSC's failure to
meet its Minimum Purchase Obligations for any particular Contract Year as to
which Urologix has demanded and received a Shortfall Payment pursuant to this
Section 10.2.
11. TERM OF AGREEMENT AND TERMINATION.
11.1 This Agreement shall commence on the date of this Agreement and
continue through June 30, 2001. On such date, this Agreement shall expire
automatically, unless extended upon both parties' written agreement.
11.2 This Agreement may be terminated as follows:
11.2.1 Either party may terminate this Agreement immediately upon
written notice to the opposite party if the opposite party shall:
(a) Become insolvent, make a general assignment for the benefit
of its creditors, have a receiver or manager appointed or otherwise commence, or
become the subject of, any action relating to bankruptcy, insolvency,
reorganization, dissolution, or winding up; or
(b) Attempt to assign, convey, or otherwise transfer in whole or
in part any of its rights hereunder to any third party without the opposite
party's prior written consent based upon full, true and correct disclosure of
the proposed transaction to the opposite party.
11.2.2 Urologix may terminate this Agreement upon sixty (60) days
written notice to BSC in the event of any material breach of this Agreement by
BSC (including without limitation a breach of Sections 6 (Price and Payment), 8
(Non-Compete), 10 (Minimum Purchase Obligations), 15 (Trademarks) or 20
(Confidential Information)), which remains uncured after such sixty (60) days.
BSC acknowledges that, because of Urologix's manufacturing lead times, BSC will
not be able to cure a breach under Section 10.1 within 60 days, and thus BSC's
ability to cure any such default will depend upon its ability to arrange
mutually acceptable terms with Urologix for the delivery of and payment for the
units of Product involved in any such breach.
11.2.3 BSC may terminate this Agreement upon sixty (60) days written
notice to Urologix in the event of any material breach of this Agreement by
Urologix, which remains uncured after such sixty (60) days.
11.3 Except as provided in Section 11.4, neither BSC nor Urologix
shall be liable to the opposite party for any direct, indirect, collateral,
special, incidental or consequential losses, or other damages,
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(including lost profits or any other financial loss) incurred by the opposite
party arising, directly or indirectly, from a breach of this Agreement.
11.4 The termination of this Agreement by either party for any reason
shall not relieve BSC of its obligation to pay for all Products delivered by
Urologix to BSC pursuant to Annual Firm Orders or purchase orders accepted by
Urologix prior to the termination of this Agreement and shall not relieve
Urologix of its obligation to deliver all Products under all such accepted
orders.
11.5 Except as expressly provided in this Agreement, termination of
this Agreement shall not relieve or release either party from its obligation to
make any payments which it may owe the other party under the terms of this
Agreement, (including without limitation, payment for any Products delivered to
BSC), or from any other liability which either party may have to the other party
arising out of this Agreement or the breach of this Agreement.
11.6 In the event of termination, BSC shall furnish Urologix with
reasonably detailed information as to the status of all its efforts pertaining
to the sale of the Products in the Territory and shall promptly furnish
Urologix, in writing, with the names and addresses of all end users to whom BSC
or any of its distributors or dealers has sold any Products. Acceptance by
Urologix of any orders from BSC after termination of this Agreement shall not
constitute a renewal of this Agreement or a waiver of the right of Urologix to
treat the Agreement as terminated. In the event any Control Units are under
lease by BSC on the date of the termination of this Agreement, BSC and Urologix
shall endeavor to arrange for the transfer of the lessor's interest under those
leases from BSC to Urologix upon mutually agreeable terms.
11.7 Upon termination or expiration of this Agreement, BSC agrees to
immediately cease using all advertising and promotional matters and other
printed matter in its possession or under its control containing any of the
tradenames or trademark of Urologix except to the extent any such materials are
indicated in BSC's existing inventory of catalogs at the time of termination,
and BSC shall deliver all such materials to Urologix at Urologix's request
unless BSC's name or products other than the Products are featured in such
materials, in which event BSC may destroy such materials rather than deliver the
same to Urologix.
11.8 It is expressly understood and agreed that the right of
termination set forth in this Article 11 is absolute, and that the parties have
considered the possibility of such termination and the possibility of loss and
damage resulting therefrom, in making expenditures pursuant to the performance
of this Agreement. It is the express intent and agreement of the parties that
neither shall be liable to the other for damages or otherwise by reason of the
termination of this Agreement as hereinabove provided. The parties expressly
agree that the notice periods in this Section 11 are reasonable under the
contemplated circumstances.
12. WAIVER OF BREACH. The waiver or failure of either party to enforce
the terms of this Agreement in one instance shall not constitute a waiver of
said party's rights under this Agreement with respect to other violations. No
waiver of any of the terms of this Agreement shall be binding unless it is in
writing.
13. WARRANTY AND LIMITATION OF REMEDIES.
13.1 Urologix warrants to BSC that Control Units shall perform in
accordance with their specifications and be free of defects in materials and
workmanship for a period of one (1) year after the date
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of delivery of the Control Unit by BSC to its customer (but in any event, not
more than fifteen (15) months after delivery of the Control Unit to BSC by
Urologix), and that Procedure Kits shall perform in accordance with their
specifications until the expiration of their 24 month sterility period, when any
such Product is used properly in accordance with Urologix's specifications.
Urologix further warrants that the Products shall be manufactured in compliance
with the International Standards Organization Rule 9001 and, upon receipt of
U.S. commercial marketing approval from the U.S. Food & Drug Administration,
with the Good Manufacturing Practices for medical devices promulgated by the
U.S. Food and Drug Administration. Except where Urologix states otherwise in
writing, disposable Products are not warranted for use more than once. Urologix
shall, in its discretion, either repair or replace any Product it determines was
defective or refund the purchase price of any such Product, provided that BSC
returns the Product prepaid to Urologix within one (1) year after the date of
the delivery of the Control Unit involved by BSC to its customer (but in any
event, not more than fifteen (15) months after delivery of the Control Unit to
BSC by Urologix) or within the sterility period in the case of Procedure Kits.
BSC shall not be required to return any such Procedure Kit to Urologix if BSC is
unable to obtain that Procedure Kit from the end-user involved. Except as
expressly provided under Section 14 or 16, repair, replacement, or refund shall
be the exclusive remedy with respect to all Products. This warranty does not
apply to damage resulting from misuse, neglect, accident, failure to maintain
sterilization, or improper installation or maintenance or to any Product altered
or repaired by anyone other than Urologix or its authorized representative. NO
OTHER WARRANTY, EXPRESS OR IMPLIED, (INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY
REPRESENTATION AS TO PERFORMANCE, QUALITY OR ABSENCE OF HIDDEN DEFECTS) IS MADE.
13.2 Urologix shall not be liable to BSC, its agents or purchasers,
for any indirect, collateral, special, incidental or consequential loss,
personal injury, damage or expense (including without limitation, loss of
profits, or goodwill and any losses arising from claims by third parties)
arising, directly or indirectly, from the sale or use of the Product whether
such claim is based on warranty, tort, contract, negligence, strict liability or
on any other basis. Except as expressly provided under Sections 14 and 16, under
no circumstances shall the liability of Urologix to BSC exceed the amount paid
by BSC to Urologix for the particular Product involved. BSC shall notify
Urologix of any claimed defect and shall include model and lot number of each
Product, as well as the number and date of invoice therefor.
14. PRODUCT LIABILITY AND INDEMNIFICATION.
14.1 BSC shall indemnify, defend Urologix against, and hold Urologix
harmless from any and all claims, liabilities, judgments, losses, damages, costs
and expenses (including reasonable attorney's fees incurred by Urologix if BSC
fails to accept the tender of the defense of the claim and to defend or
otherwise resolve the claim) asserted against Urologix by any person or entity
or incurred by Urologix as a result of any injury, illness, death, property
damage, or other loss or damage (collectively "Damage") to the proportional
extent the Damage arises out of any statements, representations, warranties or
advertisements issued by the BSC which exceed in scope or are different in
meaning in a material manner from the statements made by Urologix in its own
literature, or specifications, or the statements approved by Urologix under
Section 9.3, or arises from the negligence, fault, or wrongful activity of BSC,
including without limitation, any demonstration or installation operations
undertaken pursuant to training or supervision by employees or agents of BSC.
14.2 Urologix shall indemnify, defend BSC against, and hold BSC
harmless from any and all claims, liabilities, judgments, losses, damages, costs
and expenses (including reasonable attorney's fees incurred by BSC if Urologix
fails to accept the tender of the defense of the claim and to defend or
15
<PAGE>
otherwise resolve the claim) asserted against BSC by any person or entity or
incurred by BSC as a result of any injury, illness, death, property damage, or
other loss or damage (collectively "Damage") to the proportional extent the
Damage arises from a defect in any Product or a failure of any Product to meet
specifications, or resulting from the negligence, fault, or wrongful activity of
Urologix.
14.3 Neither the Indemnitor nor the Indemnitee shall settle or
compromise any such claim, suit, action or proceeding without the consent of the
opposite party (which consent shall not be unreasonably withheld) and unless the
terms of any such settlement or compromise release the opposite party from any
and all liability with respect to such claim and do not impose upon the opposite
party any obligation involving its business operations or assets which is to be
satisfied other than by the payment of money.
14.4 In the event any claim, suit, action or proceeding is asserted
against both BSC and Urologix, or one party to this Agreement joins the opposite
party in any such claim, suit, action or other proceeding, a party shall be
obligated to indemnify the opposite party with respect to any such matter only
if, and in proportion to the extent that, such party is first found to have been
at fault with respect to such matter by a final, non-appealable judgment of a
court of law.
14.5 The indemnification obligations of each party to the opposite
party shall extend only to losses, damages, costs and expenses (including
reasonable attorney's fees) incurred with respect to claims of any third parties
and shall not include any claims for incidental or consequential damages
(including, without limitation, loss of profits or business opportunities) by a
party to this Agreement or any of its Affiliates as a result of the incident or
matter involved. Except as set forth in this Section 14, each party waives and
relinquishes any and all claims it may have against the opposite party arising
out of the events described in sections 14.1, and 14.2, including, without
limitation, claims for incidental or consequential damages, lost profits, loss
of business reputation, and lost business opportunity.
14.6 Urologix shall maintain products liability insurance for the
Products in a combination of primary and excess coverage aggregating at least
$5,000,000 in total coverage and at least $4,000,000 per occurrence. In
addition, Urologix will take reasonable actions to name BSC as an additional
insured under its product liability insurance policy and provide BSC with a
certificate confirming the same.
15. TRADEMARKS AND TRADENAMES.
15.1 No rights are granted hereunder to BSC under any patents,
copyrights or trademarks which are used by Urologix except as are incidental
only to the sale of Products by BSC and the right to use such Products by BSC's
customers. BSC shall not use a trademark or trade name of Urologix or any
variation thereof, alone or in combination with other words, in connection with
any product which has not been supplied by Urologix. BSC shall not register
Urologix's tradename or trademark or any other tradenames or trademarks
associated with the Products in the Territory.
15.2 BSC shall not remove, cover, change, or add to the labels,
trademarks, or tradenames affixed by Urologix to Products without first
receiving Urologix's written approval; provided, however that the labels on the
Products may state that the Products are distributed by BSC.
16. PATENT INFRINGEMENT.
16.1 Urologix shall reimburse BSC for damages awarded in a final
judgment, from which no appeal is or can be taken, entered by a court of
competent jurisdiction against BSC (together with all costs
16
<PAGE>
and expenses, including appeal bonds and reasonable attorney's fees incurred by
BSC if Urologix fails to accept the tender of the defense of the claim and to
defend or otherwise resolve the claim) arising from or relating to, and defend
BSC against, any claim that a Product manufactured by Urologix and sold to BSC
infringes any patent or other intellectual property rights of a third party
("Infringement Claim"). For purposes of the preceding sentence, the term "third
party" shall be deemed to exclude BSC, any Affiliate of BSC, and any party which
is a licensor to, licensee of, co-owner with, or has any other business
relationship with BSC or any Affiliate of BSC with respect to the patent or
intellectual property rights which are allegedly infringed by a Product
manufactured by Urologix and sold to BSC. BSC shall give Urologix written notice
of an Infringement Claim against BSC promptly upon BSC's receipt of notice
thereof. BSC shall, at its own expense, cooperate fully and promptly with
Urologix in defending or otherwise resolving any such claims, actions, suits and
proceedings. Urologix shall have full control of any litigation relating to an
Infringement Claim, and BSC shall promptly tender defense thereof to Urologix.
16.2 In the event of an Infringement Claim, Urologix may elect to
discontinue, or have discontinued, the manufacture, use and the sale of the
Product involved in any jurisdiction to which the Infringement Claim relates, in
which event, immediately upon written notice from Urologix, BSC shall
discontinue the use and sale of that Product in that jurisdiction, and shall
advise its customers to discontinue the use and sale of that Product. Urologix's
obligation for indemnification under Section 16.1 is conditioned upon BSC's
compliance with Urologix's request under the first sentence of this Section
16.2. BSC shall indemnify and hold Urologix harmless against any and all
liabilities, losses and expenses (including reasonable attorney's fees),
judgments and awards suffered or incurred by Urologix as a result of BSC's
failure to promptly discontinue the use and sale of the Product involved in a
given jurisdiction if so requested by Urologix. Similarly, in the event of an
Infringement Claim, BSC may elect to discontinue the sale of the Product
involved in the jurisdiction to which the infringement claim relates. In the
event that BSC discontinues the use and sale of any such Product in a particular
jurisdiction under the circumstances described in this Section 16.2, BSC's
minimum purchase obligations under Section 10.1 shall be reduced in proportion
to the direct effect of such discontinuance upon BSC's sales forecast for the
entire Territory during any such Contract Year. In the event that BSC recalls
any Products from its customers in the jurisdiction to which such infringement
claim relates, Urologix shall reimburse BSC for the price BSC paid Urologix with
respect to any such recalled Product as to which BSC makes a refund to its
customer.
16.3 Except to the extent set forth in Sections 16.1 and 16.2,
Urologix shall not be liable to BSC or any of its Affiliates for any indirect,
collateral, special, incidental or consequential loss, damage or expense
(including without limitation, loss of profits or other financial loss) arising,
directly or indirectly, from any Infringement Claim.
17. RECALL. BSC shall maintain complete and accurate records of all
Products sold by BSC, its agents or employees in the manner established by
Urologix to comply with all FDA and ISO traceability requirements (including
without limitation a complete and current accounting of all Products purchased
by BSC, including the names of all customers who have purchased, the date of
such purchases and the lot or serial numbers of the units purchased). In the
event of a recall of any of the Products, each party will, at its own expense,
cooperate fully with the opposite party in effecting such recall, including
without limitation, BSC promptly contacting any purchasers Urologix desires be
contacted during the course of any such recall, and promptly communicating to
such purchasers such information or instructions as Urologix may desire be
transmitted to such purchasers. In any such recall, BSC and Urologix shall
comply with all applicable regulatory requirements, including without
limitation, such requirements of the FDA, the European Union, and the particular
countries involved. Upon the return to Urologix of a Product which Urologix
requests be returned to Urologix and which Urologix does not repair and return
to BSC's customer or to BSC, Urologix
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<PAGE>
shall reimburse BSC for any refund which BSC makes to that customer, up to the
amount which BSC paid Urologix for that Product, or reimburse BSC for the amount
which BSC paid Urologix for that Product, as applicable.
18. LICENSES, APPROVALS AND REGISTRATION OF PRODUCTS, COMPLIANCE WITH
LAWS.
18.1 Urologix shall be responsible for obtaining and maintaining a CE
mark for the sale of the Products in the European Union. If Urologix does not
maintain this CE mark once it is issued, BSC's minimum purchase obligations for
the Contract Year during which the CE mark for the Products is withdrawn shall
be reduced in proportion to the direct effect of any such withdrawal upon BSC's
sales forecast for the entire territory for that Contract Year. Urologix shall
also be responsible for obtaining regulatory approval from the primary agency
which must approve the sale of medical devices in the countries of Canada and
Australia.
18.2 Subject to the provisions of Section 18.1, BSC shall use
reasonable commercial efforts to obtain, as soon as possible, all regulatory
agency approvals required for the marketing and sale of the Products in those
areas of the Territory where BSC intends to sell Products. Urologix shall
cooperate with and provide BSC with such information and data regarding the
Products as may be reasonably required in order for BSC to obtain such
approvals. All registrations, licenses and approvals required for the import,
sale and distribution by BSC of the Products in the Territory shall, if
possible, be in the name of Urologix. BSC shall promptly send a copy of any such
registration or license to Urologix together with a copy of all materials
submitted to the agency involved with respect to BSC's application for that
registration or license. Upon termination of this Agreement, for any reason
whatsoever, BSC shall assign and transfer to Urologix any and all such
registrations and/or registration rights for the Products in the Territory which
are not in the name of Urologix and shall take any and all such necessary steps
to effectuate such assignment and transfer, or if such assignment and transfer
is not possible, to use its reasonable commercial efforts to obtain in
Urologix's name, all licenses and approvals which may be necessary for the
import and sale of the Products in the Territory. Upon completion by BSC of its
obligations under the preceding sentence, Urologix shall pay BSC $5,000 with
respect to each country where Urologix desires such transfers by or assistance
from BSC.
18.3 BSC shall quarterly submit a written report to Urologix which
describes: (i) the countries in which BSC and its affiliates have applied for
regulatory approval for Products; (ii) the countries where such regulatory
approval has been obtained; (iii) the countries in which BSC and its affiliates
have initiated significant marketing efforts for the sale of Products; and (iv)
the number of units of all Products sold during the preceding calendar year by
BSC and its affiliates in each country where regulatory approval has been
obtained. The first such periodic report shall be provided to Urologix on or
before December 31, 1996, and BSC shall continue to submit such written reports
to Urologix within 15 days after the end of each calendar quarter thereafter.
18.4 BSC shall comply with all applicable laws and regulations of the
Territory pertaining to the importation, distribution, sales and marketing of
the Products in the Territory and in any manner otherwise pertaining to
performance by BSC of its obligations under this Agreement. Urologix will
comply with all applicable laws and regulations of the Territory pertaining to
the manufacture of the Products and in any other manner pertaining to
performance by Urologix of its obligations under this Agreement. BSC shall
accept and assume full responsibility for any or all civil or criminal
liabilities and costs that may be assessed as a result of BSC's performance of
BSC's duties in this Agreement and shall hold Urologix harmless from and against
any and all fines, damages, levies, costs and judgments which Urologix may
18
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thereby be required to pay as a result of BSC's performance of its duties,
unless the same shall result from the breach by Urologix of its obligations
under this Agreement.
19. APPOINTMENT OF SUBDISTRIBUTORS. BSC may appoint subdistributors in
the Territory in connection with the performance of this Agreement, provided
that any such appointment shall be made only in the name and for the account of
BSC and shall be for a term no greater than the term of this Agreement. BSC
shall not grant to such Subdistributors any rights greater than those which are
granted by Urologix to BSC under this Agreement. BSC shall also impose on such
Subdistributors the same obligations (including without limitation those under
Section 8 relating to the sale of any microwave or any minimally invasive
office-based based system or product for the treatment of BPH) as Urologix has
imposed on BSC under this Agreement for the purpose of protecting the goodwill
of Urologix and the Products. BSC shall defend, indemnify and hold Urologix
harmless against any claim, loss, liability or expense (including attorney's
fees and court costs) arising out of or based upon any claim made by any of
BSC's Subdistributors, sales representatives, or employees against Urologix.
20. CONFIDENTIAL INFORMATION. During the term of this Agreement, and so
long thereafter as any particular item of confidential and proprietary
information is deemed to be confidential or proprietary under the terms of this
Agreement, BSC and Urologix each agrees to keep confidential and not to disclose
to any other party any and all technical and other information marked
"Confidential" or "Proprietary" (or if disclosed other than in documentary form
and is designated as "Confidential") made available to either of them by the
opposite party. Upon the request of the disclosing party, or in the event of
the expiration or other termination of this Agreement, each receiving party
shall promptly return all such confidential and proprietary information to the
disclosing party. Urologix and BSC each agrees not to use any such confidential
or proprietary information of the opposite party except in conjunction with the
purposes of this Agreement. The parties agree that data or other information
disclosed pursuant to this Agreement shall not be deemed to be confidential or
proprietary information of the disclosing party if: (a) it is already in the
receiving party's position, provided that such information is not known to the
receiving party to be subject to another Confidentiality Agreement with or other
obligation of secrecy to Urologix or another party, or (b) it becomes generally
available to the public in its entirety in a unified form other than as a result
of a disclosure by the receiving party or its officers, directors, employees,
agents or advisors, or (c) it becomes available to the receiving party in its
entirety in a unified form from a source other than the disclosing party or its
directors, officers, employees, agents, or advisors, provided that such source
is not bound by a confidentiality agreement with or other obligation of secrecy
to the disclosing party or another party, or (d) it can be shown to have been
developed independently by the receiving party employees or consultants who have
not had access to the data or other information disclosed pursuant to this
Agreement, as evidenced by appropriate documentation.
21. FORCE MAJEURE. Urologix assumes no liability and shall not be liable
to BSC for any failure to fill, or any delay in filling, orders received and
accepted by Urologix, and BSC assumes no liability and shall not be liable to
Urologix for any failure to sell Products, to the extent any such event is
caused, in whole or in part, directly or indirectly, by any strike, lockout, or
any other labor trouble, fire, flood, act of God, accident, explosion, sabotage,
embargo, war, riot, act or order of any government or governmental agency,
inability to obtain or delay in the delivery of raw material, parts, or
completed merchandise by the supplier thereof, or any other cause beyond the
control of, or occurring without the fault of, Urologix or BSC, as applicable.
22. NOTICE. All notices under this Agreement shall be in writing, and may
be delivered by hand or sent by facsimile transaction, telex, or registered
mail, return receipt requested. Notices sent by mail shall
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<PAGE>
be deemed received on the date of receipt indicated by the return verification
provided by the U.S. postal service. Notices sent by facsimile transaction or
telex shall be deemed received the day on which sent, and shall be conclusively
presumed to have been received in the event that the sender's copy of the
facsimile transmission or telex contains the "answer back" of the other party's
facsimile transmission or telex. Notices shall be given, or sent to the parties
at the following addresses:
If to BSC: Boston Scientific Corporation
1 Boston Scientific Place
Natick, MA 01760-1537
Attn: Mr. Paul A. LaViolette
If to Urologix: Urologix, Inc.
14405 - 21st Avenue North
Minneapolis, MN 55447
Attn: Jack E. Meyer
Chief Executive Officer
Any party hereto may designate any other address for notices given it
hereunder by written notice to the other party given at least ten (10) days
prior to the effective date of such change.
23. ENTIRE CONTRACT. This Agreement and that certain letter of even date
herewith is the entire agreement between the parties with respect to the selling
or purchase of Products. This Agreement supersedes all previous oral and
written arrangements between the parties and is intended as a complete and
exclusive statement of the terms of their understanding with respect to the
subject of this Agreement
24. AMENDMENTS. Amendments, if any, shall be in writing and valid only
when signed by both parties.
25. ASSIGNABILITY; CHANGE IN OWNERSHIP. This Agreement is personal to BSC
and Urologix and may not be sold, assigned, or transferred by either party
without the written consent of the opposite party. Either party may assign this
Agreement to any subsidiary controlled by it; provided that such party shall
thereafter remain fully responsible and liable for the performance of that
subsidiary's obligations under this Agreement.
26. SEVERABILITY. If any term or other provision of this Agreement is
held invalid, illegal or incapable of being enforced by any rule of Law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect, so long as the economic or legal
substance of the transaction hereunder involving the purchase and sale of
Products is not affected in any manner materially adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall in good faith discuss
whether this Agreement can be modified in a manner which resolves any such
problem and which is acceptable to each party in its sole discretion.
27. REMEDIES. In recognition of the irreparable harm that a violation of
BSC's obligations under Sections 8, 9.3, 9.6, 9.7, 9.8, 14, 15, 16.2, 17, 18 and
20, this Agreement would cause Urologix, BSC agrees that, in addition to any
other relief afforded by law, an injunction against such violation may be issued
against it and every other person concerned thereby, it being understood that
both damages and an injunction shall be proper modes of relief and are not to be
considered mutually exclusive remedies.
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28. U.N. CONVENTION EXCLUDED. The U.N. Convention on Contracts for the
International Sale of Goods shall not apply to this Agreement.
29. APPLICABLE LAW AND FORUM SELECTION. This Agreement shall be governed
and construed in accordance with the laws of the State of Minnesota, without
regard to the rules or principles of any jurisdiction with respect to conflict
of laws. Any disputes between the parties hereto arising out of this Agreement
shall be resolved before the United States federal district court for the
District of Minnesota, located in Minneapolis, Minnesota, and jurisdiction is
hereby conferred upon such court. Each party hereby agrees to and consents to
submit to the exclusive jurisdiction, venue and process of said court for all
actions, suits, or proceedings arising out of this Agreement.
30. SURVIVAL. All representations or warranties made in this Agreement
and the provisions of Sections 6, 8, 11, 13, 14, 15, 16, 17, 18, 20, 22 through
30 and all other provisions hereof intended to be observed and performed after
the termination of this Agreement shall survive such termination and continue,
thereafter, in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seal as
of the day and year first above written.
UROLOGIX, INC.
By: /s/ Mitchell Dann
- --------------------------------- --------------------------------------
(Witness) Its: Chairman
Date: June 26, 1996
BOSTON SCIENTIFIC CORPORATION
By: /s/ Paul A. LaViolette
- --------------------------------- --------------------------------------
(Witness) Its: Senior Vice President and
Group President
Date: June 26, 1996
21
<PAGE>
EXHIBIT A
---------
PRODUCTS
--------
<TABLE>
<CAPTION>
Catalog Number Product Description
- -------------------------------------------------------------
<S> <C> <C>
Control Units: 4000A.................. Model 4000A T3 Control Unit (110 v.)
4000E.................. Model 4000E T3 Control Unit (220 v.)
Procedure Kit: PT1007................. Model 4000 T3 Procedure Kit, comprised
of:
TA1121D Model 4000 Microwave Delivery System
RA1111B Model 4000 Rectal Thermosensing Unit
CA1111B Model 4000 Disposable Coolant Bag
</TABLE>
22
<PAGE>
Exhibit 10.13
Certain information has been omitted
from this exhibit and filed separately
with the SEC pursuant to a request for
confidential treatment under Rule 24b-2
LICENSE AGREEMENT
This Agreement, effective this 7th day of August, 1996, is by and between
Urologix, Inc., a Minnesota corporation, having its principal place of business
at 14405 Twenty First Avenue North, Minneapolis, Minnesota 55447 (hereinafter
referred to as "UROLOGIX"), and EDAP International S.A., a French corporation,
having its principal place of business at B.P. 69, F77312 Marne la Vallee, Cedex
2, France, and its subsidiary, Technomed Medical Systems S.A., a French
corporation, having its principal place of business at 4 Rue du Dauphine, 69120
Vauix-en-Velin, France (hereinafter collectively referred to as "EDAP").
RECITALS:
WHEREAS, EDAP has developed and obtained patents regarding certain
technology for the treatment of benign prostatic hyperplasia, hereinafter
referred to as BPH, and other urological conditions;
WHEREAS, UROLOGIX desires to obtain from EDAP a non-exclusive worldwide
license to the patents pertaining to the technology; and
WHEREAS, this Agreement embodies the terms and conditions of the non-
exclusive license of the intellectual property pertaining to the technology by
EDAP to UROLOGIX, WHEREAS, an agreement substantially identical to this
Agreement will be executed by and between EDAP and Boston Scientific Corporation
contemporaneous with the execution of this Agreement.
<PAGE>
NOW THEREFORE in consideration of the promises, the mutual covenants and
agreements hereinafter set forth and other good consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I. DEFINITIONS
1.1 "LICENSED INTELLECTUAL PROPERTY" shall include all claimed subject
matter in the following patents and specifications:
a. French Patent No. 2,639,238 (Application No. 88 15126);
b. French Patent No. 2,659,519 (Application No. 90 03121);
c. European Patent Specification Pub. No. 0 370-890 Bl;
d. European Patent Specification Pub. No. 0 519-958 Bl;
e. U.S. Patent No. 5,234,004; and
f. U.S. Patent No. 5,480,417;
and all other issued U.S. and non-U.S. patents and patent applications, to the
extent they contain a claim or claims supported entirely by the disclosure of
any or all of the above-listed patents, including reissues, reexaminations,
divisionals, continuations, and continuations in part. Additionally, the
LICENSED INTELLECTUAL PROPERTY shall include all claimed subject matter in
issued patents, pending patent applications and pending specifications assigned
to or owned by EDAP which pertain to the microwave treatment of BPH and other
conditions of the prostate.
1.2. "TERRITORY" shall mean each and every country and territory in the
world.
1.3. "NET SALES" shall mean the net amounts collected by UROLOGIX from any
customer, subdistributor, sublicensee or other person relating to or arising
from the sale, rental or lease of LICENSED PRODUCTS, F.O.B. shipping point,
less; (i) all taxes and duties actually paid
2
<PAGE>
or allowed; (ii) any regular trade, quantity or cash discounts actually allowed;
(iii) insurance and transportation charges; (iv) any interest, service, finance,
or sales carrying charges paid by customers for extension or credit on sales;
(v) amounts repaid or credited for returns; and (vi) other customary exclusions.
1.4. "CONTRACT QUARTER" shall mean the periods of January 1 through March
31, April 1 through June 30, July 1 through September 30, and October 1 through
December 31 of each year of this Agreement.
1.5. "LICENSED PRODUCTS" shall mean those devices which are covered by or
are made or used in accordance with at least one valid, enforceable claim of the
LICENSED INTELLECTUAL PROPERTY.
1.6. "BSC" shall mean a Delaware corporation which is a party to a
Distribution Agreement with UROLOGIX with its principal place of business at One
Boston Scientific Place, Natick, Massachusetts 01769-1537.
1.7. "CONFIDENTIAL INFORMATION" shall mean the unpublished patent
applications as set forth in Section 1.1, records as set forth in Section 3.8
and financial terms of this Agreement and any other information provided to a
party, whether in spoken, written or visual form which the receiving party
learns or receives from the disclosing party that is designated or marked as
"CONFIDENTIAL." CONFIDENTIAL INFORMATION shall be identified at the time of
disclosure as confidential and if orally delivered, summarize the information in
writing within thirty (30) days of disclosure and delivered to the receiving
party. CONFIDENTIAL INFORMATION shall not include (a) the existence of this
Agreement and the non-financial terms of this Agreement; or (b) information that
was known to or used by the receiving party prior to disclosure by the
disclosing
3
<PAGE>
party; or (c) information that is lawfully disclosed to a party by a third party
who is not in violation of any written confidentiality obligation between that
third party and that party to whom the information involved relates; (d)
information that is now or later becomes available to the public, through no
fault of the receiving party; or (e) information that the publication or
disclosure of which by the parties is permitted under the terms of a subsequent
written agreement between the parties hereto.
1.8. "DISTRIBUTION AGREEMENT" shall mean the agreement dated as of June
26, 1996 by and between UROLOGIX and BSC for the lease and sale of certain
UROLOGIX products by BSC.
ARTICLE II. GRANT
2.1. GRANT - EDAP hereby grants to UROLOGIX a non-exclusive license in the
Territory to manufacture, have manufactured, use, rent lease, sell, offer for
sale, or import LICENSED PRODUCTS and to otherwise practice the inventions
covered by the LICENSED INTELLECTUAL PROPERTY.
2.2. NOTICE OBLIGATION - EDAP shall provide written notification to
UROLOGIX of the existence and identification of all LICENSED INTELLECTUAL
PROPERTY licensed under this Agreement within thirty (30) days of the effective
date of this Agreement or of the filing date of any and all patent applications
or specifications meeting the definition of LICENSED INTELLECTUAL PROPERTY.
2.3. AFFILIATES - All of UROLOGIX's Affiliates or successors shall have
all of the same rights granted hereunder to UROLOGIX. As used herein, the term
"AFFILIATES" means any entity,
4
<PAGE>
as designated by UROLOGIX to EDAP from time to time, in which UROLOGIX, directly
or indirectly, holds at least fifty percent (50%) of the voting power.
2.4. SUBLICENSING. UROLOGIX shall have the right to grant sublicenses to
suppliers, distributors or dealers solely for resale, rental or leasing of
LICENSED PRODUCTS to customers. Except for such sublicenses, the granting of
any other sublicenses by UROLOGIX to any third party which is not an AFFILIATE
is subject to prior written approval by EDAP. (Confidential Treatment
Requested)
2.5. MARKING. Within ninety (90) days following EDAP's written
notification pursuant to Section 2.2, UROLOGIX and any and all sublicensees
shall mark, in accordance with UROLOGIX's regular practice, all LICENSED
PRODUCTS or the packaging of all LICENSED PRODUCTS sold, rented or leased in the
TERRITORY with the numbers of all patents of the LICENSED INTELLECTUAL PROPERTY
corresponding thereto. Nothing in this Agreement, including the acts of
entering into this Agreement and of marking with the patent numbers of the
LICENSED INTELLECTUAL PROPERTY, shall constitute or shall be deemed, or
construed, or asserted by EDAP to constitute an admission by UROLOGIX that the
LICENSED PRODUCTS are covered by or are made or used in accordance with the
LICENSED INTELLECTUAL PROPERTY.
ARTICLE III. ROYALTIES AND FEES
3.1. COVERED COUNTRIES - UROLOGIX shall pay to EDAP a royalty
of [Confidential Treatment Requested] of NET SALES of LICENSED PRODUCTS by
UROLOGIX to its customers within the TERRITORY where the LICENSED PRODUCT sold,
rented or leased is covered by at least one valid, enforceable claim of a
patent, within the definition of LICENSED
5
<PAGE>
INTELLECTUAL PROPERTY, which has issued and is in force in the country of sale.
This royalty will be reduced to [Confidential Treatment Requested] under the
circumstances described in Section 5.1(h).
3.2. NON-COVERED COUNTRIES - UROLOGIX shall pay to EDAP a royalty of
[Confidential Treatment Requested] of NET SALES of LICENSED PRODUCTS by UROLOGIX
to its customers within the TERRITORY in countries where the LICENSED PRODUCT
sold, rented or leased is not covered by at least one valid, enforceable claim
of a patent, within the definition of LICENSED INTELLECTUAL PROPERTY, which has
issued and is in force in the country of sale, renting or leasing but the
LICENSED PRODUCT sold, rented or leased is manufactured in a country where that
LICENSED PRODUCT is covered by at least one valid, enforceable claim of a
patent, within the definition of LICENSED INTELLECTUAL PROPERTY, which has
issued and is in force in the country of manufacture.
3.3. INITIAL LICENSE FEE AND PREPAYMENT OF ROYALTY - Upon execution of
this Agreement, and the simultaneous execution of a similar license agreement
between EDAP and BSC, UROLOGIX and BSC shall collectively pay an aggregate, non-
refundable, initial license fee of [Confidential Treatment Requested] U.S.
Dollars to EDAP. Additionally, UROLOGIX and BSC shall make an aggregate, non-
refundable, initial pre-paid royalty payment of [Confidential Treatment
Requested] U.S. Dollars to EDAP to be credited to UROLOGIX's royalty payment
obligations under Sections 3.1, 3.2 or 5.1(h) and credited to the ROYALTY CAP
under Section 3.5.
3.4. (Confidential Treatment Requested)
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<PAGE>
3.5. ROYALTY CAP - The maximum amount of all royalties which UROLOGIX is
obligated to pay EDAP under this Agreement is [Confidential Treatment Requested]
U.S. Dollars (the "ROYALTY CAP"). After EDAP has received [Confidential
Treatment Requested] U.S. Dollars in royalties under this Agreement, UROLOGIX
shall have a fully paid up, irrevocable, non-exclusive license to the LICENSED
INTELLECTUAL PROPERTY in the TERRITORY.
(a) [Confidential Treatment Requested]
(b) UROLOGIX shall give notice to EDAP of the termination of the
DISTRIBUTION AGREEMENT with BSC within fifteen (15) days of the effective date
of said termination.
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3.6 PAYMENT TERMS - All royalties due EDAP from UROLOGIX hereunder shall
be payable on a quarterly basis. Within sixty (60) days after the end of each
CONTRACT QUARTER during the term of this Agreement, UROLOGIX shall pay to EDAP
the royalties due to EDAP on the NET SALES of all LICENSED PRODUCTS sold, rented
or leased by UROLOGIX through the end of that CONTRACT QUARTER; provided
however, that actual payments to EDAP shall not commence until UROLOGIX shall
have fully utilized its credit for the pre-paid royalty provided for in Section
3.3 and the aggregate amount of all royalties due EDAP under Sections 3.1, 3.2,
and 5.1(h) exceeds the amount of the pre-paid royalty under Section 3.3. Each
payment or credit report shall be accompanied by a written statement setting
forth the NET SALES of LICENSED PRODUCTS collected at each royalty rate, a list
of the countries in which NET SALES occurred by each royalty rate and the
resulting calculation of amount of all royalties due to EDAP for that CONTRACT
QUARTER and the unused pre-paid royalty remaining. To the extent any
jurisdiction impose a withholding tax upon royalty payments to EDAP, such tax
may be paid by UROLOGIX on behalf of EDAP in that jurisdiction out of the
royalty proceeds, and any such tax payment made by BSC shall not reduce the
royalty amounts credited to UROLOGIX's ROYALTY CAP. Royalty payments shall be
made in U.S. Dollars. Royalties due on sales of LICENSED PRODUCTS in countries
foreign to the United States shall be calculated in the currency of the sale and
converted into U.S. Dollars, using a foreign exchange rate based upon the
applicable monthly average of the daily exchange rates as listed in the Wall
Street Journal, or using such other methodology as may be agreed to by the
parties from time to time. The royalty calculations shall be done monthly for
all Net Sales of LICENSED PRODUCTS during a particular month based on the
applicable average exchange rate for that month and paid quarterly as set forth
above.
8
<PAGE>
3.7. [Confidential Treatment Requested]
3.8. RECORDS - UROLOGIX shall at all times maintain accurate and up-to-
date records containing complete data from which amounts due to EDAP under this
Agreement may be calculated. UROLOGIX shall maintain those records for three
years after the end of the calendar year to which those records relate. UROLOGIX
shall, upon reasonable notice from EDAP, permit examination of those records by
an independent firm of accountants selected by EDAP and reasonably acceptable to
UROLOGIX. EDAP may not conduct more than two such audits during any calendar
year, any such audit may not cover a period of more than the three years for
which UROLOGIX is obligated to maintain the records described in this Section
3.8. Upon request, UROLOGIX shall supply those accountants with the records
reasonably necessary to make a proper audit and verification of UROLOGIX's
performance of its obligations under this Agreement. All records disclosed to
those accountants shall be deemed to be "CONFIDENTIAL INFORMATION" under this
Agreement. Because EDAP and UROLOGIX may be competitors with respect to the sale
of BPH products, the independent accountants selected by EDAP may not disclose
to EDAP any information which they
9
<PAGE>
learn from their audit other than their conclusion as to NET SALES of LICENSED
PRODUCTS collected at each royalty rate together with a list of all countries
covered by each royalty rate which were sole or leased by UROLOGIX during the
period under examination and the aggregate amount of all royalties due EDAP as a
result of those sales.
ARTICLE IV. INFRINGEMENT
4.1. EDAP'S RIGHTS - In the event that either party learns of a potential
or actual infringement of any patent rights subject to this Agreement then that
party shall promptly notify the other in writing of its information. In the
event that any of the LICENSED INTELLECTUAL PROPERTY is infringed by a third
party within the TERRITORY, EDAP may bring suit in its name and at its sole
expense to protect its rights under the LICENSED INTELLECTUAL PROPERTY and this
Agreement. In any such suit, EDAP shall be entitled to keep all proceeds
therefrom. UROLOGIX will without expense to UROLOGIX, cooperate with EDAP in
such suit, including, at EDAP's request or upon an order of court, becoming a
party to such suit. If UROLOGIX becomes a party to the lawsuit at EDAP's
request, UROLOGIX may obtain separate counsel reasonably acceptable to EDAP to
represent UROLOGIX in that matter, and EDAP shall pay for all reasonable
attorney fees and costs incurred up to a maximum of [Confidential Treatment
Requested] U.S. Dollars per year per lawsuit.
4.2. UROLOGIX'S RIGHTS - If EDAP does not bring suit against any infringer
in accordance with Section 4.1, within ninety (90) days after UROLOGIX provides
to EDAP written notice of the alleged infringement, including a request that
EDAP commence such a suit, or if EDAP gives UROLOGIX written notice of EDAP's
intention not to bring such a suit, UROLOGIX may, at any time thereafter and at
its sole discretion and its sole expense, bring suit against the third party
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<PAGE>
infringer to protect its rights in the LICENSED INTELLECTUAL PROPERTY and this
Agreement. In any suit brought by UROLOGIX in accordance with this Section 4.2,
UROLOGIX shall be entitled to keep any proceeds therefrom, and EDAP agrees,
without expense to EDAP, to cooperate with UROLOGIX in such suit, including, at
UROLOGIX's request or upon an order of court, becoming a party to such suit.
EDAP agrees not to enter into any license agreement or any settlement agreement
with any party joined in a lawsuit commenced by UROLOGIX pertaining to the
LICENSED INTELLECTUAL PROPERTY without UROLOGIX's express written consent, the
consent not to be unreasonably withheld by UROLOGIX. With respect to such
consent, the amount which EDAP is willing to reimburse UROLOGIX for the
reasonable attorney fees and expenses incurred by UROLOGIX through the date of
such license agreement or settlement agreement and the timing of such
reimbursement shall be two factors, although not the only factors, in
determining the reasonableness of UROLOGIX's actions in evaluating the proposed
license agreement or settlement agreement. If EDAP becomes a party to the
lawsuit, EDAP may obtain separate counsel reasonably acceptable to UROLOGIX to
represent EDAP in any such lawsuit commenced by UROLOGIX, and UROLOGIX shall pay
all reasonable attorney fees and costs incurred up to a maximum of [Confidential
Treatment Requested] U.S. Dollars per year per lawsuit
4.3. SETTLEMENTS - Notwithstanding Section 2.4, UROLOGIX shall have the
right to grant non-exclusive sublicenses to the LICENSED INTELLECTUAL PROPERTY
in connection with the settlement of any suit brought by UROLOGIX in accordance
with Section 4.2 of this Agreement. UROLOGIX's right to sublicense the LICENSED
INTELLECTUAL PROPERTY under this Section 4.3 shall be subject to EDAP's prior
written consent, which consent shall not be unreasonably withheld by EDAP.
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<PAGE>
4.4. JOINT COOPERATION - EDAP and UROLOGIX may jointly agree to prosecute
any infringer. The expenses incurred in any such effort, including without
limitation, the initiation of any lawsuits pursued by EDAP and UROLOGIX jointly
against an infringer, shall be divided between EDAP and UROLOGIX in the manner
agreed upon by them and all proceeds resulting from such joint effort shall be
divided in the same proportion as the expenses were paid by EDAP and UROLOGIX.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.1. EDAP REPRESENTATIONS AND WARRANTIES - EDAP hereby warrants and
represents to UROLOGIX as follows:
(a) EDAP International S.A. is a French Societe Anonyme registered
with the Chambre Du Commerce of Meaux under Number B 311.6488204. Technomed
Medical Systems S.A. is a French Societe Anonyme registered with the Chambre Du
Commerce of Lyon under Number B 394 804 447.
(b) This Agreement has been duly authorized, executed and delivered
by EDAP, (and approved by the Directoire and the shareholders of EDAP to the
extent any such approval is required), and constitutes a valid and binding
obligation of EDAP, enforceable in accordance with its terms. The execution,
delivery and performance of this Agreement by EDAP and the consummation of the
transactions contemplated hereby do not and will not conflict with or result in
any material breach of, or constitute a material default under, or result in a
material violation of, or require any other authorization, consent or approval
under, the provisions of any organizational document, agreement or instrument to
which EDAP is bound or affected, or any law, statute, rule, regulation,
judgment, order or decree to which EDAP is subject.
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<PAGE>
(c) EDAP owns all the rights with respect to the LICENSED
INTELLECTUAL PROPERTY and has full power and authority to enter into this
Agreement.
(d) To EDAP's knowledge, there is no reason that enforceable patents
will not issue from any patent applications under the definition of LICENSED
INTELLECTUAL PROPERTY in any jurisdictions where corresponding rights are
sought.
(e) To EDAP's knowledge, the LICENSED INTELLECTUAL PROPERTY are
valid, enforceable and do not infringe any patent, copyright or other
intellectual property right of any third party. BSC has been informed of the
opposition actions known to EDAP as of the date hereof, which have been filed in
the following jurisdictions: France, Israel, and the European Patent Office.
(f) EDAP has not received notice of any claims, actions, suits, or
proceedings pending or threatened affecting EDAP and the LICENSED PROPERTY
which, if adversely determined, would have a material adverse effect upon
UROLOGIX's or BSC's ability to manufacture, have manufactured, use or sell,
offer for sale or import the LICENSED PRODUCTS under this Agreement, and to
EDAP's knowledge, there is no reasonable basis for anyone to bring such claims,
actions, suits or proceedings. EDAP has disclosed to UROLOGIX the existence of
a patent issued to BSD Medical Corp.
(g) EDAP has not received any claim from any third party relating to
the LICENSED INTELLECTUAL PROPERTY which is based upon misappropriation or
misuse of trade secrets.
(h) EDAP will continue to use reasonable efforts to prosecute all
pending and future patent applications as defined in Section 1.1 to obtain valid
and enforceable LICENSED INTELLECTUAL PROPERTY. EDAP will take all reasonable
steps necessary to maintain the
13
<PAGE>
LICENSED INTELLECTUAL PROPERTY, including paying all fees and complying with all
requirements pertaining to the maintenance of the LICENSED INTELLECTUAL
PROPERTY. If EDAP intends to abandon any portion of the LICENSED INTELLECTUAL
PROPERTY, EDAP shall give three (3) months written notice to UROLOGIX of that
intent and shall allow UROLOGIX, at UROLOGIX'S expense, to continue the
prosecution and or maintenance of the affected LICENSED INTELLECTUAL PROPERTY
for such period as UROLOGIX may elect during the term of this Agreement. Net
Sales of LICENSED PRODUCT under such LICENSED INTELLECTUAL PROPERTY shall be
subject to a royalty of [Confidential Treatment Requested] rather than
[Confidential Treatment Requested] as provided for in Section 3.1.
5.2. UROLOGIX REPRESENTATIONS AND WARRANTIES. UROLOGIX hereby warrants
and represents to EDAP as follows:
(a) UROLOGIX is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota.
(b) This Agreement has been duly authorized, executed and delivered by
UROLOGIX and constitutes a valid and binding obligation of UROLOGIX, enforceable
in accordance with its terms. The execution, delivery and performance of this
Agreement by UROLOGIX and the consummation of the transactions contemplated
hereby do not and will not conflict with or result in any material breach of, or
constitute a material default under, or result in a material violation of, or
require any authorization, consent, or approval under, the provisions of
UROLOGIX's Certificate of Incorporation or Bylaws or any other agreement or
instrument to which UROLOGIX is bound or affected, or any law, statute, rule,
regulation, judgment order or decree to which UROLOGIX is subject.
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<PAGE>
5.3. CONFIDENTIAL INFORMATION - Except for a mutually agreed upon press
release to be issued upon execution of this Agreement, the parties agree:
(a) EDAP, UROLOGIX, and their respective officers, directors,
employees, agents, successors and assigns agree to use their respective best
efforts, to the same extent that each party protects its own information, to
neither disclose, transfer nor publish any CONFIDENTIAL INFORMATION without
prior written approval from the party so affected.
(b) Section 5.3(a) above shall not apply and shall have no effect in
the event a disclosure is required by the disclosing party's auditors, is
required by law in the judgment of legal counsel to the disclosing party
(including without limitation in response to subpoena, discovery in any action
or proceeding, or applicable securities laws), or is required to enforce the
provisions of this Agreement. The disclosing party shall use reasonable efforts
to maintain the confidentiality of CONFIDENTIAL INFORMATION, such as requesting
protective orders in response to subpoenas or requesting confidential treatment
of CONFIDENTIAL INFORMATION in this Agreement in connection with filings under
the securities laws. The foregoing does not require the disclosing party to
contest any decision denying confidential treatment to the CONFIDENTIAL
INFORMATION involved. The parties recognize that UROLOGIX is a public company
and as such is required, among other requirements, to publish its financial
statements in full in accordance with generally accepted accounting principles
and to file material contracts with the Securities and Exchange Commission. Any
specific financial terms publicly disclosed by a party pursuant to this Section
5.3(b) shall no longer be subject to the restrictions of this Section 5.3 and
may thereafter be disclosed by both parties
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<PAGE>
to this Agreement without restriction. The foregoing sentence shall not be
construed to excuse a party for any breach of this Section 5.3.
5.4. COVENANT NOT TO SUE - Subject to the compliance with the terms of
this Agreement, EDAP covenants not to sue UROLOGIX for the manufacture, use,
lease, sale, offer for sale, or importation of LICENSED PRODUCTS, including the
Transurethral Thermo-ablation Therapy System ("T3"), or other systems of
UROLOGIX or BSC which have substantially the same structure, function and use as
the T3 system.
ARTICLE VI. TERM AND TERMINATION
6.1. LICENSE TERM - This Agreement shall be in full force and effect
commencing on the effective date of this Agreement and shall remain in effect
until the expiration, invalidation or other termination of the last remaining
claim(s) of any patent defined under the LICENSED INTELLECTUAL PROPERTY which
covers products made, used, sold, offered for sale, or imported by UROLOGIX.
6.2. PATENT CHANGES - Nothing in this Agreement shall preclude UROLOGIX
from challenging the validity of any of the LICENSED INTELLECTUAL PROPERTY. In
the event that UROLOGIX does challenge the validity of any of the LICENSED
INTELLECTUAL PROPERTY through a court or patent office proceeding, EDAP may, at
its option, terminate the non-exclusive license granted to UROLOGIX throughout
the TERRITORY. EDAP may exercise its option to terminate that license by
written notice to UROLOGIX at any time within one hundred twenty (120) days
after UROLOGIX has filed its challenge in the court or patent office proceeding.
The license termination will be effective thirty (30) days after UROLOGIX
receives the written notice from EDAP. This Section 6.2 shall not apply and
shall be of no effect in any country in which it is not
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<PAGE>
permitted under applicable law or where the existence of this Section 6.2 would,
in any manner, limit or impair the ability of any party to enforce the LICENSED
INTELLECTUAL PROPERTY. This Section 6.2 shall no longer apply and shall be of
no further force or effect if this Agreement terminates or in the event that
EDAP provides to UROLOGIX a written notice of termination of this Agreement as
provided for in Section 6.3.
6.3. BREACH OF AGREEMENT - A party may commence termination of this
Agreement in the event that another party shall have materially breached or
failed to perform in a timely manner any of its duties or obligations hereunder
by written notice of breach given to the other party, and in the event a
material breach shall remain uncured, or the failure to perform shall continue,
for at least sixty (60) days after the notice of breach, the aggrieved party may
terminate this Agreement by a written notice of termination given to the other
party. For the purposes of this section, a "material breach" or "failure to
perform" shall include without limitation: (a) failure of UROLOGIX to remit when
due any calculated royalty payment, or other payment or fee hereunder; or (b)
failure of UROLOGIX to substantially comply with the reporting requirements
hereof.
6.4. LICENSED PRODUCTS REMAINING - Upon the effective date of the
termination of this Agreement by EDAP, pursuant to Section 6.2, UROLOGIX shall
have the right to sell all LICENSED PRODUCTS remaining in inventory or in
process of being manufactured at the time of such termination, provided that
UROLOGIX shall be obligated to pay EDAP royalties on receipts from such sales in
accordance with Article III above. UROLOGIX will have six (6) months from the
effective date of termination within which to dispose of remaining inventory.
6.5. ACQUISITION - If the DISTRIBUTION AGREEMENT involving UROLOGIX and
BSC changes or terminates as a result of one party acquiring at least fifty
percent (50%) of the voting
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power of the other, the relationship of UROLOGIX and BSC will nonetheless be
deemed to continue under the "DISTRIBUTION AGREEMENT" for all purposes of this
Agreement.
ARTICLE VII. MISCELLANEOUS
7.1. NOTICE - All notices required hereunder shall be in writing, signed
by the party giving notice, and either delivered by hand or sent by facsimile,
overnight courier service, or certified or registered mail, postage prepaid,
return receipt requested, and properly addressed to the other party. Notices
sent by mail shall be deemed received on the date of receipt indicated by the
receipt verification provided by the United States Postal Service or French
equivalent. Notices sent by facsimile shall be deemed received on the date
indicated on the sender's confirmation report. Notice sent by overnight courier
service shall be deemed received on the date indicated by the receipt
verification provided by the courier service. Notice shall be given, mailed or
sent to the other party at the following addresses or at such other addresses as
may be given by proper notice:
If to UROLOGIX: Urologix, Inc.
14405 Twenty First
Avenue North
Minneapolis, Minnesota 55447
Attn.: Jack E. Meyer, Chief Executive Officer
Phone: 612-475-1400
Fax: 612-475-9073
If to EDAP: EDAP International S.A.
B.P. 69
F77312 Marne la Vallee
Cedex 2, France
Attn.: Eric Simon
Phone: 331 6006 2450
Fax: 331 6017 2962
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<PAGE>
7.2. GOVERNING LAW - This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts, applicable to contacts entered into and performed
entirely within the Commonwealth of Massachusetts. The Massachusetts federal
courts (or state courts, if the federal courts do not have jurisdiction) only,
will have jurisdiction of any controversies regarding this Agreement. Any action
or other proceeding which involves such a controversy will be brought within
those courts and not elsewhere.
7.3. INTEGRATION AND AMENDMENT - This Agreement embodies the entire
understanding and agreement of the parties related to the subject matter of this
Agreement, and supersedes all other discussions, undertakings and agreements of
the parties whether oral or written (including without limitation, the Letter of
June 24, 1996 among EDAP, BSC, and UROLOGIX), relating to that subject, except
for the Confidentiality Agreement dated May 26, 1996. This Agreement is to be
construed and interpreted in English. This Agreement may be modified or amended
only by a written instrument executed by the parties hereto. Neither course of
performance nor waiver shall have the effect of modifying the written terms to
this Agreement.
7.4. NO WAIVER - No waiver of any right or remedy in the event of a
default of any provisions hereunder shall constitute a waiver of any subsequent
default with respect to the same or any right or remedy under the same or any
other provision.
7.5. SEVERABILITY - In the event that any provision to this Agreement is
determined to be invalid or unenforceable for any reason in any country, such
provision shall be deemed inoperative only to the extent that it violates or
conflicts with law or public policy in that country, and such provision shall be
deemed modified to the extent necessary to conform to such law or policy. All
other provisions of this Agreement shall remain in full force and effect. In the
event that the terms
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and conditions of this Agreement are materially altered as a result of this
section 7.5, the parties shall renegotiate in good faith to amend the terms and
conditions of this Agreement to resolve any inequities.
7.6. HEADINGS - The headings herein are inserted for convenience of
reference only and are not intended to be a part or to affect the meaning or
interpretation of this Agreement.
7.7. BENEFIT - This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective successors and assigns.
7.8. EFFECTIVE DATE - This Agreement shall become effective upon being
duly signed by the authorized representatives of each party whereupon this
Agreement shall enter into full force and effect in accordance with its terms as
of the date set forth in the first paragraph of this Agreement.
7.9. REGISTRATION OF AGREEMENT - EDAP shall carry out any registration of
this Agreement as may be required by applicable law, for example, registration
with the French National Institute of Industrial Property. All fees and charges
corresponding to these legal formalities shall be paid by EDAP.
7.10. COUNTERPARTS - This Agreement may be executed in one or more
counterparts (including by delivery of facsimile transmission) each of which
when executed and delivered shall be deemed to be an original but all of which
taken together shall constitute one and the same Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
indicated above.
EDAP INTERNATIONAL S.A. UROLOGIX, INC.
By: By:
---------------------------- -------------------------------
Its: Its:
---------------------------- -------------------------------
TECHNOMED MEDICAL SYSTEMS S.A.
By:
----------------------------
Its:
----------------------------
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EXHIBIT 11.1
UROLOGIX, INC.
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED:
Net Loss $(2,524,516) $(5,426,747) $(7,593,312)
=========== =========== ===========
Weighted average common shares
outstanding (1) 2,861,726 5,211,928 5,507,073
Effect of cheap shares issued (2) 784,234 784,234 728,217
----------- ----------- -----------
3,645,960 5,996,162 6,235,290
=========== =========== ===========
Loss per common share $ (0.69) $ (0.91) $ (1.22)
=========== =========== ===========
</TABLE>
- --------------------
(1) Includes effect of convertible preferred shares not included as cheap
shares (see (2) below) as if converted to common shares at date of original
issuance. All preferred shares were converted to common in conjunction with
the Company's initial public offering (June 4, 1996).
(2) All preferred shares issued and options granted from April 5, 1995 to April
4, 1996 are included in the calculation for all periods presented.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement No. 333-11981.
ARTHUR ANDERSEN L.L.P.
Minneapolis, Minnesota
September 26, 1996
