<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996
REGISTRATION NO. 333-3304
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
UROLOGIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MINNESOTA 3845 41-1697237
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S.
JURISDICTION OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR IDENTIFICATION
ORGANIZATION) 14405 21ST AVENUE NORTH NO.)
MINNEAPOLIS, MN 55447
(612) 475-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JACK E. MEYER
UROLOGIX, INC.
14405 21ST AVENUE NORTH
MINNEAPOLIS, MN 55447
(612) 475-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPY TO:
THOMAS G. LOVETT, IV, ESQ. PATRICK F. COURTEMANCHE, ESQ.
LINDQUIST & VENNUM P.L.L.P. DORSEY & WHITNEY LLP
4200 IDS CENTER PILLSBURY CENTER SOUTH
80 SOUTH 8TH STREET 220 SOUTH SIXTH STREET
MINNEAPOLIS, MN 55402 MINNEAPOLIS, MN 55402-1498
(612) 371-3211 (612) 340-2600
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
UROLOGIX, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------
<S> <C>
1.Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus
Forepart........................ Front Cover Page; Inside Front Cover Page
2.Inside Front and Outside Back
Cover Pages of Prospectus....... Inside Front Cover Page; Additional
Information; Back Cover Page
3.Summary Information, Risk Factors
and Ratio of Earnings to Fixed Cover Page; Prospectus Summary; Risk
Charges......................... Factors; The Company
4.Use of Proceeds................... Prospectus Summary; Use of Proceeds
5.Determination of Offering Price... Cover Page; Underwriting
6.Dilution.......................... Dilution
7.Selling Security Holders.......... Not Applicable
8.Plan of Distribution.............. Cover Page; Underwriting
9.Description of Securities to be Prospectus Summary; Dividend Policy;
Registered...................... Capitalization; Description of Capital
Stock
10.Interest of Named Experts and
Counsel......................... Experts; Legal Matters
11.Information with Respect to the Outside Front Cover Page; Prospectus
Registrant...................... Summary; Risk Factors; Capitalization;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Shareholders;
Description of Capital Stock
12.Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities...... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
2,700,000 Shares May 28, 1996
[LOGO]
Common Stock
--------
All of the shares of Common Stock offered hereby are being sold by Urologix,
Inc. ("Urologix" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for the factors considered in determining the initial
public offering price. The Company has applied for listing of the Common Stock
on the Nasdaq National Market under the symbol ULGX.
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- ------------------------------------------------------------------------------------------
Total(2)......................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses of the offering estimated at $500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
405,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
Alex. Brown & Sons
INCORPORATED
Vector Securities International, Inc.
Dain
Bosworth
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[UROLOGIX LOGO]
[Picture of T3 Control Unit.]
The T3 System includes the stand-alone, portable T3 Control Unit that provides
all necessary patient connections and user interfaces.
[Picture of T3 catheter.]
The single-use T3 Catheter emits microwave energy from a proprietary antenna
contained within the catheter.
[Picture of transverse section of BPH prostate showing temperature
profile created by T3 System and color/temperature key.]
Transverse section of BPH prostate showing temperature profile created by the
T3 System.
The proprietary Urologix T3 technology uses microwave energy to preferentially
heat targeted regions of the diseased prostate causing cell death. Catheter
cooling protects the urethra, minimizing risk and discomfort to the patient both
during and after treatment.
- --------------------------------------------------------------------------------
The T3 System is an investigational device and has not been approved by the
FDA for commercial sale in the United States. The T3 System is in the early
stages of clinical testing and clinical data have not been submitted to the
FDA.
-------------------------------------------------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE AFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
Urologix(R) and T3(R) are registered trademarks of the Company. Trademarks
of others are also referred to in this Prospectus.
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus.
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. Although the Company has met the
necessary registration requirements in Canada and the United Kingdom to
commercialize the T3 System in these countries, the Company's T3 System has not
been approved for commercial sale in any other foreign jurisdiction.
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 suffer moderate to severe symptoms of BPH, including six million
men in the United States. 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 in the
United States 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. As of March 1,
1996, 457 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. The Company
expects to receive ISO 9001 certification and to meet the requirements for use
of the CE Mark in 1996, which will allow the Company to market its products in
the European Union. The
3
<PAGE>
Company's Japanese distributor, Nihon Kohden Corporation, expects to submit an
application for marketing approval to the Japanese Ministry of Health and
Welfare in 1996.
The Company's objective is to establish itself as a leader in the design,
development and commercialization of clinically effective, minimally-invasive
solutions for urological disorders. To date, the Company has focused on
developing the T3 System for treating BPH. Key elements of the Company's
strategy are: (i) to focus on the large and growing urology market; (ii) to
develop a direct sales organization in the United States and build upon strong
clinical relationships worldwide; (iii) to establish strategic partnerships;
(iv) to maintain technological leadership and protect technology advantages
through patents; and (v) to seek early regulatory approvals in target markets.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby..................... 2,700,000 shares
Common Stock to be outstanding after the 8,678,526 shares(1)
offering.......................................
Use of proceeds................................. To fund research and development, clinical
trials, sales and marketing, capital
expenditures and manufacturing scale-up
expenditures and for working capital and other
general corporate purposes.
Proposed Nasdaq National Market Symbol.......... ULGX
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS FOR THE PERIOD
ENDED FROM INCEPTION
YEARS ENDED JUNE 30, MARCH 31, (MAY 29, 1991)
---------------------- -------------- THROUGH
1993 1994 1995 1995 1996 MARCH 31, 1996
------ ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Cost reimbursement(2).. $ 164 $ 9 $ 489 $ 301 $ 343 $ 1,005
Costs and expenses:
Cost of goods sold.... 254 179 785 424 866 2,084
Research and
development.......... 1,478 1,598 4,099 2,396 3,571 11,399
General and
administrative....... 468 677 883 715 823 3,130
Sales and marketing... 22 124 477 262 547 1,244
Operating loss......... (2,058) (2,569) (5,755) (3,496) (5,464) (16,852)
Net loss............... (1,997) (2,525) (5,426) (3,308) (5,381) (16,321)
Pro forma net loss per
common share(3)....... $(0.91) $(0.55) $(0.90)
Shares used in
computing pro forma
net loss per share(3). 5,996 5,990 6,010
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
JUNE 30, ------------------------
1995 ACTUAL AS ADJUSTED(4)
-------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................ $ 3,571 $ 3,399 $ 35,542
Total assets............................... 4,876 4,416 36,559
Total liabilities.......................... 899 1,187 1,187
Deficit accumulated during the development
stage..................................... (10,940) (16,321) (16,321)
Total shareholders' equity................. 3,977 3,230 35,373
</TABLE>
- -------
(1) Based on the number of shares outstanding as of April 1, 1996, excluding a
warrant to purchase 7,405 shares of Common Stock and 722,200 shares
reserved as of such date for issuance upon the exercise of outstanding
stock options.
(2) Cost reimbursement reflects the reimbursement of certain of the Company's
costs for clinical trials, as permitted by FDA regulations.
(3) Computed on the basis described for pro forma net loss per common share in
Note 1 of Notes to Financial Statements.
(4) Adjusted to give effect to the estimated net proceeds of this offering
based upon an assumed public offering price of $13.00 per share. See "Use
of Proceeds."
---------------
Except as otherwise indicated, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) reflects the
conversion of all outstanding Preferred Stock to Common Stock (the "Preferred
Stock Conversion") immediately prior to the closing of this offering and (iii)
reflects a one-for-two reverse stock split effective prior to the Preferred
Stock Conversion. See "Capitalization," "Description of Capital Stock" and
"Underwriting."
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
Lack of Regulatory Approval; Clinical Status. The Company's sole product,
the T3 System, is in the clinical testing stage and is not currently available
for commercial distribution in the United States. Although the Company has met
the necessary registration requirements in Canada and the United Kingdom to
commercialize the T3 System in these countries, the Company's T3 System has
not been approved for commercial sale in any other foreign jurisdiction.
Before the Company will be able to market the T3 System in the United States,
it will require marketing approval from the FDA. Prior to commercialization in
foreign jurisdictions, the Company will require similar approvals from the
appropriate regulatory bodies in those jurisdictions. The Company anticipates
submitting the PMA for its T3 System to the FDA in 1996. Prior to submission
of the PMA, however, additional clinical follow-up from patients that have
undergone the T3 procedure will be required. There can be no assurance that
the PMA will be submitted in the proposed time frame or that the FDA will
accept the PMA for filing or ultimately approve the PMA. The process of
attempting to obtain FDA and other regulatory approvals is unpredictable and
often lengthy and requires the expenditure of substantial resources. In
addition, the Company's clinical trials may identify significant technical or
other obstacles to be overcome prior to obtaining necessary regulatory
approvals. There can be no assurance that the Company's T3 System will prove
to be safe or effective, will be approved by appropriate regulatory
authorities or be approved for reimbursement by health care payors, will be
capable of being manufactured in commercial quantities at acceptable costs or
will be successfully marketed. If the T3 System does not prove to be safe and
effective in clinical trials to the satisfaction of the FDA and other
regulatory authorities or if the Company is otherwise unable to commercialize
the T3 System successfully, the Company's business, financial condition and
results of operations will be materially adversely affected. See "Business--
Clinical Status" and "--Government Regulation."
Development Stage Company; Limited Operating History; Accumulated Deficit.
The Company has a limited history of operations and is in the development
stage. Since its inception in 1991, the Company has been engaged primarily in
research and development and clinical trials of the T3 System. The Company has
experienced significant operating losses since inception and, as of March 31,
1996, had an accumulated deficit of $16.3 million. The development and
commercialization by the Company of the T3 System will require additional
product development, clinical, regulatory and other expenditures. The Company
expects operating losses through at least the end of 1997 as it continues to
expend substantial resources in funding clinical trials in support of
regulatory and reimbursement approvals, expansion of marketing and sales
activities and research and development. There can be no assurance that the T3
System will be successfully commercialized or that the Company will achieve
significant domestic or international revenues. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Clinical Status" and "--Government
Regulation."
Uncertainty of Market Acceptance. T3 represents a new therapy for BPH, and
there can be no assurance that the T3 System will gain any significant degree
of market acceptance among physicians, health care payors or patients, even if
necessary international and United States regulatory and reimbursement
approvals are obtained. Even if the clinical safety and effectiveness of the
T3 procedure are established and marketing approvals are obtained, physicians
may elect not to prescribe the procedure unless adequate reimbursement from
health care payors is available. Health care payor acceptance of the T3
procedure will require, among other things, evidence of the cost effectiveness
of T3 as compared to other BPH therapies. Patient acceptance of the procedure
will depend in part on physician recommendations, as well as other factors,
including the degree of invasiveness and the rate and severity of
complications and other side effects associated with the procedure as compared
to other therapies. There can be no assurance as to whether and, if so, how
frequently T3 patients will require retreatment and whether any such
retreatment would be effective or would have a negative effect on patient,
physician and payor acceptance of the T3 procedure. Failure of the T3 System
to achieve
5
<PAGE>
significant market acceptance among physicians, health care payors and/or
patients would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Clinical
Status," "--Sales and Marketing" and "--Third Party Reimbursement."
Dependence on Patents and Proprietary Rights. The Company's success depends
in part on its ability to protect its T3 System and technology under United
States and international patent laws and other intellectual property laws and
to operate without infringing upon the proprietary rights of third parties.
The validity and breadth of claims covered in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation
to gain a competitive advantage. Other companies have developed or are in the
process of developing medical methods and devices to transurethrally treat BPH
with microwave energy. Several companies have applied for, and in some cases
received, patents related to such medical methods and devices. One company,
BSD Medical Corp., 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 for the patent at issue, as well as several other patents,
under which the Company agreed to pay a small royalty on future sales of
certain of the Company's products and paid an advance royalty with respect to
those sales. Other than the license with BSD Medical Corp., the Company is not
licensed under any patents.
Another company, EDAP Technomed, Inc. ("EDAP"), has also obtained United
States and European patents relative to its transurethral, microwave-based
system for treating BPH. Its recently issued European patent is currently
subject to the opposition process. The Company received a letter dated May 13,
1996 from intellectual property counsel for EDAP alleging that the T3 System
is covered by one of EDAP's United States patents and that any commercial
manufacture, use or sale of the T3 System would infringe that United States
patent. The Company has been aware of the EDAP patent and, based on its
investigation, which included obtaining the advice of intellectual property
counsel, believes that its T3 System does not infringe the EDAP patent or any
other United States patent. Further, the Company does not believe that any
patent exists which will preclude the Company from manufacturing and selling
its T3 System on a worldwide basis. There can be no assurance, however, that
the Company's T3 System does not infringe upon the patent rights or other
intellectual property rights of EDAP or other companies, that the Company will
not be required to seek licenses from EDAP or other companies, or that EDAP or
other companies will not pursue claims of infringement against the Company.
The defense and prosecution of intellectual property suits, United States
Patent and Trademark Office interference proceedings and related legal and
administrative proceedings are both costly and time consuming and would result
in a significant diversion of effort and resources by the Company's technical
and management personnel. An adverse determination in any such litigation or
proceedings to which the Company may become a party could subject the Company
to significant liabilities to third parties, require the Company to seek
licenses from third parties and to pay ongoing royalties, require the Company
to redesign the T3 System, or subject the Company to an injunction preventing
the manufacture, use or sale of the T3 System in United States or foreign
markets. There can be no assurance that the Company could prevail in any such
actions or that necessary licenses would be available to the Company on
satisfactory terms or at all or that the Company could satisfactorily redesign
the T3 System. In addition to being costly, protracted litigation to defend or
prosecute intellectual property could result in the Company's customers or
potential customers deferring or limiting their purchase or use of the
Company's products until resolution of such litigation. The occurrence of any
of the foregoing could have a material adverse effect on the Company's
business, financial condition and result of operations.
The Company has been issued six United States patents covering its
technology. The Company has nine additional patent applications pending in the
United States and has applied for patent coverage in a number of foreign
jurisdictions. There can be no assurance, however, that any of such
applications will result in patents being issued, or that the Company's issued
patents, or any patents which may be issued
6
<PAGE>
as a result of existing or future applications, will offer any degree of
protection. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated or circumvented in the
future. In addition, litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. 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
products either in the United States or in international markets.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through non-disclosure agreements with employees,
consultants and other parties. There can be no assurance that these non-
disclosure agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors. See
"Business--Patents and Proprietary Rights."
Reliance on Single Product. The T3 System is the Company's sole product. As
such, the Company's future success is entirely reliant upon its ability to
market the T3 System commercially in the United States and elsewhere. If the
Company is unable to prove the T3 System is safe and effective, if the Company
does not receive required FDA and foreign regulatory approvals to market the
T3 System on a timely basis or at all, or if the Company is otherwise unable
to commercialize the T3 System successfully, the Company's business, financial
condition and results of operations would be materially adversely affected.
Competition and Technological Advances. Competition in the market for
treatment of BPH is intense and is expected to increase. The Company believes
its principal competition will come from existing surgical therapies, such as
TURP, and non-surgical alternatives, including drug therapy and watchful
waiting. The Company faces and expects increasing competition from numerous
other companies developing drugs and laser, radio frequency, microwave and
other procedures for the treatment of BPH. Many of the Company's competitors
have significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. In addition, the Company's
competitors may succeed in developing or marketing technologies and products
that are more effective or commercially attractive than the T3 System and may
succeed in developing commercially marketable competitive products prior to
the Company. 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.
Such developments could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--BPH
Therapies and Their Limitations" and "--Competition."
Uncertainty Relating to Third Party Reimbursement. The Company's success
will be dependent upon, among other things, the extent to which satisfactory
reimbursement for the T3 procedure can be obtained from health care payors for
physicians performing the T3 procedure and for costs of the T3 System. In the
United States and in international markets, third party reimbursement is
generally available for certain existing therapies used for treatment of BPH.
Third party reimbursement will be dependent upon decisions by the Health Care
Financing Administration ("HCFA") for Medicare, individual managed care
organizations, private insurers, foreign governmental health programs and
other payors. Failure to establish sufficient reimbursement from health care
payors or adverse changes in governmental and private third party payors'
policies toward reimbursement for BPH procedures could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Third Party Reimbursement."
Need to Comply with Government Regulation. 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 is
regulated in the United States by the FDA with respect to preclinical and
clinical testing, manufacturing, labeling, distribution, sale, marketing,
advertising and promotion of the T3 System. In order to market and sell the T3
System, the Company will be required to obtain marketing approval or clearance
from the FDA. The T3 System is currently classified as a Class III device, and
the Company intends to seek marketing approval through a PMA. The PMA process
is uncertain, requires the expenditure of
7
<PAGE>
substantial resources and can be lengthy. 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 the 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. The FDA also imposes post-marketing controls on the
Company and its products, including registration, listing, medical device
reporting and other requirements. Failure to meet these pervasive FDA
requirements or adverse FDA determinations regarding the Company's clinical
and preclinical trials could subject the Company and/or its employees to
injunction, 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.
Sales of medical devices outside the United States are subject to United
States export requirements and foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time and requirements to obtain approval by a foreign country may
differ substantially from those required for FDA approval. There can be no
assurance that the Company will be able to obtain regulatory approvals or
clearances for its products in foreign countries. See "Business--Government
Regulation."
Need For Additional Future Capital. The Company's capital requirements have
been and will continue to be significant. To date, the Company has been
dependent primarily on the net proceeds of private placements of its equity
securities, aggregating approximately $19.6 million. The Company is dependent
upon the net proceeds of this offering to fund its continued development and
commercialization efforts as well as its other working capital requirements.
The Company currently has no committed sources of, or other arrangements with
respect to, additional financing. There can be no assurance that the Company's
existing capital resources, together with the net proceeds from this offering
and future operating cash flows, will be sufficient to fund the Company's
future operations. The Company's capital requirements will depend on numerous
factors, including the time and expense involved in obtaining regulatory
approval for the T3 System and any other products developed by the Company,
the cost involved in protecting the proprietary rights of the Company, the
time and cost involved in manufacturing scale-up and in establishing
marketing, distribution, training and technical support networks and the
effectiveness of these and other commercialization activities. The Company may
require substantial additional funding to develop and to conduct clinical
testing of its T3 System and other products, if any, to expand its
manufacturing capacity and to develop marketing capability. There is no
assurance that such funding will be available on acceptable terms, if at all.
Financing production of the T3 System in quantities necessary for
commercialization, as well as supplying T3 Systems on a contracted lease
basis, will require a significant investment of working capital. This need for
working capital is likely to increase to the extent that demand for the T3
System increases and the Company leases additional units. The Company may
pursue establishment of an equipment leasing relationship with a third party
lessor. The Company has not yet obtained a commitment for such equipment
leasing, and there can be no assurance that the Company will be able to obtain
equipment financing on acceptable terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Limited Manufacturing Experience. The Company has only limited experience in
producing its T3 System and has not produced it in commercial quantities. The
Company's facilities and the facilities of certain of its contract
manufacturers will need to comply with applicable regulations including the
FDA's current Good Manufacturing Practices ("GMP") regulation, ISO 9001
certification requirements and other regulations. Any failure to comply with
applicable requirements and regulations by the Company or its contract
manufacturers could delay or prohibit manufacturing of the T3 System, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, there can be no assurance that
the Company will be able to make the transition to commercial production of
the T3 System under GMP at acceptable costs. As commercialization occurs, the
Company will need to hire and train additional staff, which may result in
delays in meeting manufacturing quality and quantity requirements. If the
Company is unable to make the transition to commercial production
8
<PAGE>
at acceptable costs, the Company's business, financial condition and results
of operations could be materially adversely affected. See "Business--
Manufacturing," "--Employees" and "--Government Regulation."
Product Liability Risk; Limited Insurance Coverage. The manufacture and sale
of medical products entail significant risk of product liability claims. The
Company maintains product liability insurance coverage 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. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the
clinical trials or future sales of the T3 System. In addition, the Company may
require increased product liability coverage as the T3 System is
commercialized. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A product liability claim or series
of claims brought against the Company with respect to uninsured liabilities or
in excess of the Company's insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, failure to comply with the FDA's GMP regulations
could have a material adverse effect on the ability of the Company to defend
against product liability lawsuits. See "Business--Product Liability and
Insurance."
Contract Manufacturing; Dependence Upon Key Suppliers. The T3 Control Unit
for the T3 System is assembled by a contract manufacturer pursuant to a supply
agreement with the Company. If for any reason the contract manufacturer is
unable or unwilling to manufacture the T3 Control Unit for the Company in the
future, the Company could incur significant delays in obtaining a substitute
contract manufacturer. In addition, the Company purchases additional
components used in the T3 System from various suppliers and relies on single
sources for several components. One such component is obtained from a source
that has a patent for the technology. Delays would be caused if supply of this
component or other components were interrupted. These delays could be extended
in certain situations where a component substitution may require approval by
the FDA of a PMA supplement. The Company expects to be dependent upon such
manufacturers and subcontractors for the foreseeable future. Therefore,
failure to obtain components from such sources or delays associated with any
future component shortages, particularly as the Company makes the transition
to commercial production, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."
Dependence Upon Key Employees. The Company is dependent upon a number of key
management and technical personnel. The Company's ability to manage its
transition from the development stage to a commercial entity will depend in
large part on the efforts of these individuals. The Company's success will
also depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, and there can be no assurance that the Company will be
able to attract and retain such personnel. The loss of the services of one or
more members of the management group or the inability to hire additional
personnel as needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Employees" and "Management."
Control by Directors, Executive Officers and Affiliates. The Company's
directors, executive officers and certain of their affiliates will, in the
aggregate, beneficially own approximately 44.5% of the Company's outstanding
Common Stock following the completion of this offering, including options
exercisable within 60 days of April 1, 1996. As a result, these shareholders
may influence and, if acting together, could control all matters requiring
approval by the shareholders of the Company, including the election of
directors, approval of amendments to the Company's Articles of Incorporation
and approval of mergers or other business combination transactions. Such
control by existing shareholders could have the effect of delaying, deferring
or preventing a change in control of the Company. See "Principal Shareholders"
and "Description of Capital Stock."
No Prior Public Market; Possible Stock Price Volatility. Prior to this
offering, there has been no public market for the Common Stock, and there can
be no assurance that an active trading market for the Common Stock will
develop or be sustained following this offering. The initial public offering
price will
9
<PAGE>
be determined through negotiations between the Company and Alex. Brown & Sons
Incorporated, Vector Securities International, Inc. and Dain Bosworth
Incorporated, as representatives of the Underwriters (the "Representatives"),
and may bear no relationship to the price at which the Common Stock will trade
following this offering. There can be no assurance that future market prices of
the Common Stock will not be lower than the initial offering price. In
addition, the stock market historically has experienced volatility which has
affected the market price of securities of many companies and which has
sometimes been unrelated to the operating performance of such companies.
Announcements of new products and services by the Company or its competitors,
technological innovations, disputes regarding patents or other proprietary
rights, regulatory developments and economic and other external factors, as
well as period-to-period fluctuations in the Company's financial results, may
have a significant effect on the market price of the Common Stock. See
"Underwriting."
Possible Adverse Market Effect of Shares Eligible for Future Sale;
Registration Rights. Sales of substantial amounts of Common Stock in the public
market following this offering could have an adverse effect on the price of the
Company's Common Stock. The Company will have 8,678,526 shares of Common Stock
outstanding immediately following the offering. The 2,700,000 shares sold in
this offering will be eligible for sale in the public market immediately
following this offering, except for any shares purchased by an "affiliate" of
the Company, which will be subject to the limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). All officers, directors and certain
shareholders of the Company, owning an aggregate of approximately 5,752,364
shares, have agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock without the consent of Alex. Brown & Sons Incorporated
for a period of 180 days after the date of this Prospectus. Taking into
consideration these lock-up agreements, (i) approximately 170,663 shares will
be eligible for immediate sale on the date of this Prospectus in accordance
with Rule 144; (ii) approximately 47,825 shares of Common Stock will be
eligible for sale in the public market beginning 90 days after the date of this
Prospectus in accordance with Rule 144; (iii) approximately 5,121,232
additional shares will be eligible for sale beginning 180 days after the date
of this Prospectus upon the expiration of agreements not to sell such shares;
(iv) an additional 312,500 shares will become eligible for sale beginning in
December 1997 as the Rule 144 holding period for such shares expires; and (v)
an additional 326,306 shares will become eligible for sale beginning in March
1998 as the Rule 144 holding period for such shares expires. Alex. Brown & Sons
Incorporated, in its sole discretion and at any time without notice, may
release all or any portion of the securities subject to such agreements not to
sell. At March 31, 1996, options to purchase an aggregate of 722,200 shares of
Common Stock were outstanding. Of these options, 636,188 shares are subject to
a 180-day lock-up, leaving options representing 86,012 shares available for
exercise and sale upon vesting and the effective date of the Form S-8 which the
Company intends to file in respect of such options. Upon consummation of this
offering, warrants to purchase an aggregate of 7,405 shares of Common Stock
will be outstanding which will be available for exercise and sale upon the
effective date of this Prospectus in accordance with Rule 144. In addition, if
the Company is required to register shares pursuant to outstanding demand
registration rights or to include in a Company-initiated registration shares
held by holders pursuant to the exercise of their piggyback registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Shares Eligible for Future Sale."
Possible Issuances of Undesignated Shares; Anti-Takeover Provisions. Upon the
closing of this offering, the Board of Directors will be authorized to issue up
to 5,000,000 undesignated shares of capital stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the Company's shareholders. The
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any undesignated shares
that may be issued in the future. The issuance of undesignated shares could
have the effect of delaying, deferring or preventing a change in control of the
Company, which could deprive the Company's shareholders of opportunities to
sell their shares of Common Stock at a premium. Upon the closing of this
Offering, the Company's Board of Directors will be divided into three classes
serving staggered three-year terms. The staggered terms of directors may limit
the shareholders' ability
10
<PAGE>
to change control of the Company even if a change in control were in the
shareholders' interest. Additionally, the Company could adopt in the future
one or more additional anti-takeover measures, such as a shareholder rights
plan, without first seeking shareholder approval, which measures could also
make a change in control of the Company more difficult. The Company is also
subject to provisions of the Minnesota Business Combination Act and the
Minnesota Control Share Acquisition Act that make certain business
combinations more difficult. See "Description of Capital Stock."
Immediate and Substantial Dilution. Purchasers of shares of Common Stock in
this offering will incur immediate and substantial dilution in the net
tangible book value of their purchased shares of Common Stock (approximately
$8.92 per share). Investors may also experience additional dilution as a
result of the exercise of outstanding stock options. See "Dilution."
No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying such dividends for the foreseeable
future. See "Dividend Policy."
THE COMPANY
The Company was incorporated in Minnesota in 1991. The Company's executive
offices are located at 14405 21st Avenue North, Minneapolis, Minnesota 55447,
and its telephone number is (612) 475-1400.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered by the Company hereby, at an assumed offering price of
$13.00 per share, are estimated to be approximately $32,143,000 ($37,039,450
if the Underwriters' over-allotment option is exercised in full), after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The Company expects to use approximately $4.8 million of the net proceeds
from this offering to fund research and development (primarily the T3 System),
approximately $4.1 million to fund ongoing and future clinical trials,
approximately $3.9 million to fund the expansion of the Company's sales and
marketing force to commercially market its products in the United States and
internationally, approximately $3.5 million to fund the cost of T3 Control
Units available for lease, approximately $2.2 million to fund the purchase of
capital equipment and approximately $2.1 million to scale-up the manufacturing
process to meet expected demand for T3 Systems. The balance of the net
proceeds will be used for working capital and other general corporate
purposes. These amounts are estimates, and the amount and timing of the
expenditures of the net proceeds for these purposes will depend on numerous
factors, including the status of the Company's product development efforts,
the results of clinical trials, the regulatory approval process, competition,
manufacturing activities and the market acceptance of the Company's T3 System
and any other products introduced by the Company. The Company has no current
plans to introduce any other products in the foreseeable future. The Company
may also use a portion of the net proceeds to acquire complementary
businesses, products or technologies, although the Company has no agreements
and is not involved in any negotiations with respect to any such transactions.
Pending such uses, the Company plans to invest the net proceeds from this
offering in short-term, investment-grade, interest-bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of cash dividends, if any, on its Common Stock in the future is
subject to the discretion of the Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other
relevant factors. See "Description of Capital Stock."
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, after giving effect to a subsequent one-for-two reverse stock split;
on a pro forma basis after giving effect to the conversion of all outstanding
shares of the Preferred Stock into Common Stock; and on a pro forma as adjusted
basis to reflect the receipt of the net proceeds from the sale of 2,700,000
shares of Common Stock pursuant to this offering at an assumed offering price
of $13.00 per share:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term liabilities.......................... $ 19 $ 19 $ 19
Shareholders' equity(1)
Undesignated Stock: $.01 par value, no shares
authorized actual or pro forma, 5,000,000
shares authorized pro forma as adjusted; no
shares outstanding........................... -- -- --
Preferred Stock: $.01 par value, 6,000,000
shares authorized actual and pro forma, no
shares authorized pro forma as adjusted;
4,242,799 shares issued and outstanding
actual, no shares outstanding pro forma and
no shares outstanding pro forma as adjusted.. 42 -- --
Common stock: $.01 par value, 12,500,000
shares authorized actual and pro forma,
25,000,000 shares authorized pro forma as
adjusted; 1,313,373 shares issued and
outstanding actual, 5,978,526 shares issued
and outstanding pro forma and 8,678,526
shares issued and outstanding pro forma as
adjusted..................................... 13 60 87
Additional paid-in capital..................... 19,496 19,491 51,607
Deficit accumulated during the development
stage......................................... (16,321) (16,321) (16,321)
-------- -------- -------
Total shareholders' equity.................. 3,230 3,230 35,373
-------- -------- -------
Total capitalization....................... $ 3,249 $ 3,249 $35,392
======== ======== =======
</TABLE>
- --------
(1) Excludes (i) 873,788 shares of Common Stock reserved for issuance under the
Company's 1991 Stock Option Plan, under which options to purchase 722,200
shares were outstanding as of March 31, 1996 at a weighted average exercise
price of $0.50 per share and (ii) 7,405 shares of Common Stock reserved for
issuance upon the exercise of an outstanding warrant at an exercise price
of $2.96 per share. See "Management--1991 Stock Option Plan."
12
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1996 was $3.2
million, or $0.54 per share of Common Stock outstanding. Net tangible book
value per share represents the total amount of the Company's shareholders'
equity, less intangible assets, divided by 5,978,526 shares of Common Stock
outstanding after giving effect to the conversion of all outstanding shares of
Preferred Stock into 4,665,153 shares of Common Stock immediately prior to the
closing of this offering.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of this offering. After giving effect
to the sale of 2,700,000 shares of Common Stock in this offering at an assumed
offering price of $13.00 per share and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
March 31, 1996 would have been $35.4 million or $4.08 per share. This
represents an immediate increase in net tangible book value of $3.54 per share
to existing shareholders and an immediate dilution in net tangible book value
of $8.92 per share to purchasers of Common Stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $13.00
Net tangible book value per share at March 31, 1996............... $0.54
Increase per share attributable to new investors.................. 3.54
-----
Pro forma net tangible book value per share after the offering...... 4.08
------
Net tangible book value dilution per share to new investors......... $ 8.92
======
</TABLE>
The following table sets forth as of March 31, 1996, after giving effect to
the conversion of all outstanding shares of Preferred Stock into Common Stock
immediately prior to the closing of this offering, the difference between the
existing shareholders and the purchasers of shares in this offering (at an
assumed offering price of $13.00 per share) with respect to the number of
shares purchased from the Company, the total consideration paid and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 5,978,526 68.9% $20,249,391 36.6% $ 3.39
New investors............... 2,700,000 31.1 35,100,000 63.4 $13.00
--------- ----- ----------- -----
Total................... 8,678,526 100.0% $55,349,391 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Excludes 729,605 shares of Common Stock issuable upon exercise of stock
options and warrants outstanding as of March 31, 1996, at a weighted
average price per share of $0.52.
13
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of and for the period from
inception (May 29, 1991) through June 30, 1991, and as of and for the fiscal
years ended June 30, 1992, 1993, 1994 and 1995 have been derived from the
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, whose report appears elsewhere in this
Prospectus. The financial data as of March 31, 1996 and for the nine month
periods ended March 31, 1995 and 1996 and for the period from inception (May
29, 1991) through March 31, 1996 has been derived from the Company's unaudited
financial statements. The unaudited financial statements reflect, in the
opinion of management, all adjustments of a normal recurring nature necessary
for a fair presentation of financial position and results of operations. The
results for the nine months ended March 31, 1996 are not necessarily
indicative of the results to be expected for the entire year. The pro forma
financial data have not been audited. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION
(MAY 29, 1991) NINE MONTHS (MAY 29, 1991)
THROUGH YEARS ENDED JUNE 30, ENDED MARCH 31, THROUGH
JUNE 30, -------------------------------- ---------------- MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
-------------- ----- ------- ------- ------- ------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Cost reimbursement(1).. $-- $ -- $ 164 $ 9 $ 489 $ 301 $ 343 $ 1,005
Cost of goods sold..... -- -- 254 179 785 424 866 2,084
---- ----- ------- ------- ------- ------- ------- --------
Gross loss........... -- -- (90) (170) (296) (123) (523) (1,079)
Costs and expenses:
Research and
development.......... -- 653 1,478 1,598 4,099 2,396 3,571 11,399
General and
administrative....... 17 262 468 677 883 715 823 3,130
Sales and Marketing... -- 74 22 124 477 262 547 1,244
---- ----- ------- ------- ------- ------- ------- --------
Total costs and
expenses............ 17 989 1,968 2,399 5,459 3,373 4,941 15,773
Operating loss......... (17) (989) (2,058) (2,569) (5,755) (3,496) (5,464) (16,852)
Interest income, net... -- 14 61 44 329 188 83 531
---- ----- ------- ------- ------- ------- ------- --------
Net loss............... $(17) $(975) $(1,997) $(2,525) $(5,426) $(3,308) $(5,381) $(16,321)
==== ===== ======= ======= ======= ======= ======= ========
Pro forma net loss per
common share (2)...... $ (0.91) $ (0.55) $ (0.90)
Shares used in
computing
pro forma net loss per
share (2)............. 5,995 5,990 6,009
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and available-for-sale
securities............ $ 14 $ 160 $ 2,004 $ 9,093 $ 3,571 $ 3,399
Working capital
(deficit)............. 2 (17) 1,930 8,897 3,372 2,589
Total assets........... 15 482 2,487 9,801 4,876 4,416
Total liabilities...... 12 401 422 408 899 1,187
Deficit accumulated
during the development
stage................. (17) (992) (2,989) (5,514) (10,940) (16,321)
Total shareholders'
equity................ 3 81 2,065 9,393 3,977 3,230
</TABLE>
- -------
(1) Cost reimbursement reflects the reimbursement of certain of the Company's
costs for clinical trials, as permitted by FDA regulations.
(2) Computed on the basis described for pro forma net loss per common share in
Note 1 of Notes to Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a development stage enterprise that was incorporated in May
1991. Since its inception, the Company has been primarily engaged 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
United States and developing its PMA for submission to the FDA. 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
System is an investigational device and is not currently available for
commercial distribution in the United States. The Company's revenues to date
primarily consist of cost reimbursement, which reflects the reimbursement of
certain of the Company's costs for clinical trial equipment and disposable
Procedure Kits as permitted by the applicable FDA regulation.
As of March 1, 1996, 457 patients worldwide affected with BPH have been
treated with the Company's T3 System in controlled clinical studies. The
Company believes that it has treated enough patients to provide sufficient data
to support its PMA and expects to file its PMA with the FDA in 1996 based on
six month to one year follow-up data from these patients.
The Company intends to market the T3 System through a direct sales force in
the United States if and when FDA approval is received. The Company intends to
market the T3 System internationally primarily through distributors if and when
it receives the appropriate regulatory approvals. Although the Company has met
the necessary registration requirements in Canada and the United Kingdom to
commercialize the T3 System in these countries, the Company's T3 System has not
been approved for commercial sale in the United States or in any other foreign
jurisdiction. The Company expects to receive ISO 9001 certification and to meet
the other requirements for use of the CE Mark in 1996, which will allow the
Company to market its product in the European Union. Nihon Kohden Corporation,
a large medical device company in Japan, has made an equity investment in the
Company and has been granted exclusive distribution rights in Japan for the T3
System. The Company is in the process of exploring distribution arrangements
for additional foreign countries.
Since inception, the Company has experienced significant operating losses,
and, as of March 31, 1996, had an accumulated deficit of $16.3 million. Other
than cost reimbursement of $1,005,000 since inception, the Company has
generated no significant revenues. The Company anticipates that its operating
losses will continue for the foreseeable future due to significant expenditures
on T3 System development, scale-up of commercial manufacturing capabilities,
clinical trials, regulatory matters and sales and marketing activities. In
connection with its expectation that it will meet the requirements for use of
the CE Mark in 1996, the Company has begun the process of preparing for
commercialization of the T3 System in the European Union and Canada.
The Company expects sales of the T3 Control Unit and disposable Procedure
Kits, which comprise the T3 System, to account for all of its revenues for the
foreseeable future. The Company intends to offer urologists the option to
either purchase the T3 Control Unit or lease it under a third party leasing
arrangement or directly from the Company as lessor. 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 disposable Procedure Kits will be recognized upon shipment.
The Company expects to generate revenues initially from sales in foreign
jurisdictions as it receives appropriate regulatory approvals in those
jurisdictions.
The Company anticipates that its results of operations will be affected for
the foreseeable future by several factors, including actions related to
regulatory matters and health care cost reimbursement, progress of clinical
studies and the extent to which the T3 System gains market acceptance.
15
<PAGE>
RESULTS OF OPERATIONS
Nine Months ended March 31, 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 increased to $342,000 in the
nine months ended March 31, 1996 from $301,000 in the nine months ended March
31, 1995 due to an increase in reimbursement for Procedure Kits from clinical
sites. The Company expects to generate revenues initially from sales in foreign
jurisdictions as it receives appropriate regulatory approvals in those
jurisdictions. A small percentage of the amount reported as cost reimbursement
in the fiscal 1996 nine month period resulted from commercial sales in the
United Kingdom.
Cost of goods sold includes costs incurred in connection with the production
of T3 Systems, including an allocation of manufacturing and quality assurance
overhead. Cost of goods sold increased to $866,000 for the nine months ended
March 31, 1996 from $424,000 for the nine months ended March 31, 1995 due to
increased production levels, expansion costs incurred in preparation for
commercial sales of the T3 System following receipt of international regulatory
approvals 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 receipt of various regulatory approvals that would allow
the Company to market its T3 System.
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 $3.6 million for the nine month period ended March 31,
1996 from $2.4 million in the nine month period ended March 31, 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. The Company expects an increase in research and
development expenses as it completes the development of its latest generation
T3 System. Clinical and regulatory expenses are expected to increase through
fiscal 1997 due to the continuation of IDE clinical trials in the United States
and preparation of the PMA and follow-up submissions to the FDA.
General and administrative expenses were $822,000 and $715,000 for the nine
months ended March 31, 1996 and 1995, respectively. The Company anticipates
increased general and administrative expenses throughout fiscal years 1996 and
1997 related to the recent addition of a chief financial officer and the
creation of other required administrative positions as the Company begins
commercial operations.
Sales and marketing expenses increased to $547,000 for the nine month period
ended March 31, 1996 from $262,000 for the nine month period ended March 31,
1995, primarily due 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 in
anticipation of obtaining required regulatory approvals.
Fiscal Years ended June 30, 1995 and 1994
Cost reimbursement increased to $489,000 in 1995 from $9,000 in 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 1995 from $179,000 in 1994 due to
an increase in the production of T3 Control Units and disposable Procedure Kits
expensed for the clinical studies of the
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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 1995 from $1.6
million in 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 $883,000 in 1995 from
$677,000 in 1994 due primarily to personnel additions associated with a higher
level of activity.
Sales and marketing expenses increased to $477,000 in 1995 from $124,000 in
1994, due primarily to the establishment of a sales office in the United
Kingdom.
Fiscal Years ended June 30, 1994 and 1993
Cost reimbursement decreased to $9,000 in 1994 from $164,000 in 1993 as
minimal reimbursements were received in 1994.
Cost of goods sold decreased to $179,000 in 1994 from $254,000 in 1993 due to
a reduction in the number of T3 Systems shipped.
Research and development expenses increased to $1.6 million in 1994 from $1.5
million in 1993 due to an increase in activity related to the T3 System
clinical investigation and the addition of regulatory and clinical personnel.
General and administrative expenses increased to $677,000 in 1994 from
$468,000 in 1993 primarily as a result of management additions associated with
a higher level of activity.
Sales and marketing expenses increased to $124,000 in 1994 from $22,000 in
1993 as a result of the addition of marketing personnel in late fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through private sales
of equity securities and, to a lesser extent, reimbursement of certain costs
for its T3 Systems in connection with its clinical trials. Through March 31,
1996, the Company had received $19.6 million in net proceeds from equity
financings. As of March 31, 1996, the Company had used cash of $15.5 million to
fund operations and $495,000 for the purchase of capital equipment, and had
total cash, cash equivalents and available-for-sale securities of $3.4 million
and working capital of $2.6 million.
The Company maintains a $250,000 revolving credit line with Norwest Bank
Minnesota, N.A, which is collateralized by a $250,000 certificate of deposit.
Interest on outstanding borrowings is computed at the bank's base rate (8.25%
at March 31, 1996). To date, the Company has not utilized advances available
under the line of credit.
The Company expects to continue to incur 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 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
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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 otherwise,
to achieve its business objectives. There can be no assurance that the Company
will be able to obtain equipment financing or alternative financing on
acceptable terms or at all.
At March 31, 1996, the Company had a shareholders' deficit accumulated during
the development stage of $16.3 million. The Company expects to incur additional
losses in the foreseeable future at least until such time, if ever, that it
obtains necessary regulatory clearances or approvals from the FDA to market the
T3 System in the United States or it is able to market the T3 System in
countries other than the United States. Although the Company believes that net
proceeds of this offering together with 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.
At March 31, 1996, the Company had orders outstanding to purchase a number of
T3 Control Units and other components for its T3 Systems from third party
vendors totalling $605,000. Under its employment agreement with its President,
the Company is required to pay his salary of $165,000 for a period of one year
or until he has secured alternative employment if the Company terminates his
employment without cause. Under an employment letter with its Vice President,
Research and Development, the Company is required to pay his salary of $138,000
for a period of six months or until he has secured alternative employment if
the Company terminates his employment without cause.
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BUSINESS
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. Although the Company has met the
necessary registration requirements in Canada and the United Kingdom to
commercialize the T3 System in these countries, the T3 System has not been
approved for commercial sale in any other foreign jurisdiction.
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 suffer moderate to severe symptoms of BPH, including six million
men in the United States. 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 previously 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 March 1, 1996, 457
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. The Company
expects to receive ISO 9001 certification and to meet the requirements for use
of the CE Mark in 1996, which will allow the Company to market its products in
the European
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Union. The Company's Japanese distributor, Nihon Kohden Corporation ("NKC"),
expects to submit an application for marketing approval to the Japanese
Ministry of Health and Welfare in 1996.
The Company's objective is to establish itself as a leader in the design,
development and commercialization of clinically effective, minimally-invasive
solutions for urological disorders. To date, the Company has focused on
developing the T3 System for treating BPH. Key elements of the Company's
strategy are: (i) to focus on the large and growing urology market; (ii) to
develop a direct sales organization and build upon strong clinical
relationships; (iii) to establish strategic partnerships; (iv) to maintain
technological leadership and protect technology advantages through patents and
(v) to seek early regulatory approvals in target markets.
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.
Following is a diagram of the anatomy affected by BPH:
[Diagram displaying transverse section of a normal prostate.]
[Drawing of partial human male anatomy showing bladder, rectum,
prostate and urethra.]
[Diagram displaying transverse section of prostate with BPH.]
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<PAGE>
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 . stopping and starting of flow
urination during the day and during urination
night
. weak flow of urine
. sudden urgency to urinate
. sensation of incompleteness in
. difficulty in starting emptying of the bladder
urination
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 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
--------------- ------------- ------------ -----
<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.
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<PAGE>
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. 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,
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<PAGE>
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 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.
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<PAGE>
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.
BUSINESS STRATEGY
The Company's objective is to establish itself as a leader in the design,
development and commercialization of clinically effective solutions for
urological disorders. To date, the Company has focused on developing the T3
System for treating BPH. The following are the key elements of Urologix's
strategy:
Focus on Urology. The Company will develop minimally invasive, cost-
effective solutions to urological problems. The urological market is a
highly fragmented market of at least $14 billion annually worldwide which
is expected to experience rapid growth due to the aging population. Many of
the currently available treatments are inadequate for the disorders they
address and as a result there are significant unmet needs in the market.
The Company believes a major opportunity exists for it to build a business
around designing, developing and commercializing innovative products for
the treatment of urological disorders.
Develop a Direct Sales Organization and Build Upon Strong Clinical
Relationships. Most major urological procedures are performed by
urologists. There are approximately 7,500 urologists practicing in the
United States. The Company believes that this relatively small number of
physicians affords it a unique opportunity to develop a cost-effective
direct sales effort. Accordingly, the Company has retained all the sales
and marketing rights to its products in the United States. The Company
intends to establish a direct sales force organization to market and
distribute its urological products in the United States. In its sales and
marketing efforts, the Company intends to utilize the strong relationships
it has established with its clinical investigators and medical advisory
board to accelerate the market acceptance of its products.
Establish Strategic Partnerships. The Company will pursue strategic
corporate partnerships with other medical device manufacturers and
marketers to assist the Company in distributing its urological products in
markets where it does not have a direct sales force, in commercializing
non-urological applications of its technology and for other corporate
purposes. The Company has no current plans to introduce any products other
than the T3 System in the foreseeable future. The Company has established
an exclusive distribution relationship for certain products for use in the
treatment of BPH in Japan with NKC, a major Japanese manufacturer and
marketer of medical devices. In addition, Boston Scientific Corporation, a
worldwide developer, manufacturer and marketer of medical devices, has made
a significant equity investment in the Company and currently has a
representative on the Board of Directors. The Company is currently pursuing
agreements with distributors of medical device products for markets other
than the United States or Japan.
Maintain Technological Leadership and Protect Technology Advantages
through Patents. Urologix' strategy is to be a technological leader in the
urological market. The Company believes that the T3 System enjoys
performance advantages over alternative BPH treatment methods. These
advantages derive from the Company's core technologies, including
preferential heating and
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<PAGE>
antenna design. The Company intends to continue to invest substantial
resources in research, development and clinical testing programs. The
Company spent approximately $4.1 million in fiscal 1995 and expects to
continue to commit significant resources in the future for research and
development. Urologix aggressively seeks to protect its proprietary
technological positions by a regular process of filing patent applications
throughout the world. The Company has been granted six United States
patents covering the key aspects of the T3 System and has applied for nine
additional patents as well as foreign patent protection.
Seek Early Regulatory Approval in Targeted Markets. The Company seeks to
obtain required regulatory approvals as early as possible, particularly in
countries with favorable regulatory environments. The Company has pursued a
scientific approach in clinical evaluation of the T3 System, including
extensive temperature mapping within the prostate to demonstrate efficacy.
The Company believes that this approach to product development and testing
will facilitate the Company's ability to obtain regulatory approvals and to
gain commercial acceptance of the T3 System. The Company is conducting a
controlled, randomized, multicenter clinical trial of the T3 System in the
United States. Data from these trials are being accumulated and analyzed in
support of a PMA which the Company plans to file in 1996. The Company
expects to receive ISO 9001 certification and to meet the requirements for
use of the CE Mark in 1996, which would allow its products to be marketed
in the European Union. The Company's Japanese distributor, NKC, will be
responsible for management of clinical trials and obtaining regulatory
approval in Japan. The Company expects application for obtaining such
approval to be made in 1996.
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<PAGE>
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.
[A diagram of the Company's T3 Catheter inserted in the urethra,
showing the location of the bladder, prostate, transition zone,
urethra, balloon in bladder, microwave antenna, the area of
preferential heating and the area of urethra cooling.]
The exposure time required to produce cell death decreases exponentially with
increasing temperatures. Virtually all cells heated to above 45(degrees)C for
one hour will die. As temperatures increase above 45(degrees)C, the time
required for cell death decreases. The challenge to providing effective
microwave
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therapy relates to producing and maintaining adequate temperature elevation in
the diseased tissue while, at the same time, preventing excessive thermal
exposure to the urethra and the rectum, as well as the internal and external
urinary sphincters. Protection against injury to the rectum is particularly
important, as serious complications could occur should the rectum be thermally
damaged. Protection of the urethra is important because it decreases the pain
associated with the procedure and shortens recovery time. In addition,
protection of the 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(degrees)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(degrees)C. Meanwhile, chilled water is circulated
through outer channels in the catheter to draw heat away from the surface of
the urethra, thereby cooling 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(degrees)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(degrees)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.
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<PAGE>
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 following charts demonstrate the temperatures predicted from laboratory
models and clinical data derived from the Company's clinical studies. The chart
on the left depicts the predicted temperature profile within the prostate as
compiled from laboratory data and numerical modeling. The darker colored areas
indicate higher temperatures that would be achieved during the administration
of the Company's therapy. The chart on the right depicts in degrees Centigrade
the predicted average temperature achieved in the selected area of the prostate
during the therapy based upon the Company's experience from human clinical
studies.
anterior
anterior
[Diagram of predicted [arrow left] [Diagram of predicted temperatures
temperature profile urethra achieved in prostate during T3
within the prostate, as [arrow right] therapy, as compiled from human
compiled from laboratory clinical study data]
data and numerical modeling]
posterior posterior
(toward rectum) (toward rectum)
Predicted temperature profile Predicted temperature profile
compiled from laboratory data and compiled from human clinical study
numerical modeling. data.
The T3 System is designed to maintain rectal temperatures beneath the FDA's
guideline of 42.5(degrees)C. Only on rare occasions in the Company's clinical
trials has a patient's rectal temperature reached 42.5(degrees)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 falls 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.
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
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<PAGE>
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 impedence 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 March 1, 1996, 457 patients affected with BPH have been treated with
the T3 System in controlled clinical studies. These patients have been treated
at 16 clinical sites in the United States, Canada, South America and Europe. Of
the 457 patients treated, 390 were treated in accordance with the standard
clinical protocol. Of these, 142 have been treated in the United States IDE
study and 248 were treated in controlled studies internationally. The remaining
67 were treated in feasibility research and are not included in the following
discussion of results of standard clinical treatments.
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
presented 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.
United States IDE Study (142 of the 390 standard clinical treatments)
The Company is conducting clinical studies at five 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.
As of March 1, 1996, 99 patients have been unblinded in the IDE study,
providing six-month follow up data on these patients. Of these 99 patients, 76
received an active T3 treatment and 23 received a
29
<PAGE>
sham treatment. Preliminary data from these patients suggest a statistically
significant decrease in AUA Symptom Scores versus their pre-treatment scores
and a statistically significant difference between the patients who underwent a
T3 procedure and the patients who received sham treatments. Peak flow rates for
patients treated with T3 suggest a statistically significant increase versus
their pre-treatment flow rate. The increase in the mean peak flow rate for
patients who underwent a T3 procedure exceeded the increase in the mean peak
flow rate for patients who received a sham treatment. However, follow-up data
from additional patients that have undergone the T3 procedure are required to
statistically validate this preliminary indication. The Company believes that
when it has unblinded data from a total of 150 patients involved in the study,
it will provide the Company with sufficient data to validate its preliminary
indications with respect to the effectiveness of 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.
International Studies of the T3 System (248 of the 390 standard clinical
treatments)
As of March 1, 1996, 248 patients had been enrolled in international studies
of the T3 System. These studies were initiated in December 1993 and are
continuing to enroll patients. The enrollment criteria, treatment protocol and
follow-up procedures are all very similar to those in the United States IDE
study, except there is no sham control arm. One-year follow-up data are
available on 106 patients and eighteen-month follow-up data are available on 59
patients from three clinical sites in Canada and England. The Company intends
to submit the results of its international studies to the FDA as supplemental
data as part of its PMA.
Clinical Results
LOWER AUA SYMPTOM SCORES. The following chart demonstrates the change in AUA
Symptom Scores for 285 of the 390 patients who received the standard clinical
treatment. The chart excludes 20 of these 390 patients (5%) known to have
withdrawn from the study and 85 patients (22%) whose treatments were recent and
for whom six-week follow up data is not yet available. The results demonstrate
that the T3 System is effective in reducing AUA Symptom scores by greater than
55% at three months and that the results are maintained for at least 18 months
(p less than 0.001).
[GRAPH APPEARS HERE]
FOLLOW UP TIME POINT AUA SCORES
- --------- ---------- ----------
INITIAL N=285 20.4
6 WEEK N=285 11.6
3 MONTH N=256 8.8
6 MONTH N=213 9.0
9 MONTH N=152 8.9
1 YEAR N=108 8.5
18 MONTH N=80 7.6
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<PAGE>
INCREASED FLOW RATES. The following chart demonstrates the change in peak
flow rates for 276 of the 390 patients who received the standard clinical
treatment. The chart excludes 20 of these 390 patients (5%) known to have
withdrawn from the study and 94 patients (24%) whose treatments were recent and
for whom six-week follow up data are not yet available or for whom initial peak
flow data were not collected. These data indicate that the T3 procedure
increases peak flow rates for patients with a mean increase of over 4 ml/sec at
three months (p less than 0.001) and that the flow rate increase is trending up
from the three month to the 18 month time point.
[GRAPH APPEARS HERE]
ML/SEC FOLLOW UP TIME POINT
------ --------------------
INITIAL N=276 8.57
6 WEEK N=276 11.49
3 MONTH N=248 12.58
6 MONTH N=182 12.86
1 YEAR N=78 13.4
18 MONTH N=67 14.0
QUALITY OF LIFE. The Company has patient quality of life data from the 106
patients from whom the Company has received one year follow up data. These
patients were asked statistically validated quality of life assessment
questions to evaluate how they would feel living the rest of their life with
their current BPH symptoms. At 12 months following their T3 procedures, 77% of
these patients indicated they would be satisfied, an increase from only 3.6%
giving the same response prior to treatment.
MINIMAL COMPLICATIONS. Of the 285 patients from whom the Company has received
follow up data, no patient needed an anesthetist or anesthesia services during
the treatment, and 85% of the patients spent one day or less in bed following
the T3 treatment. Of these 285 patients, there were no cases of long-term
incontinence, impotence or significant bleeding resulting from the T3
procedure. Nine percent of patients experienced urinary retention which
required catherization for more than one week. All of these cases were resolved
within 30 days. Additionally, 7% of the patients experienced an episode of
urinary tract infection which was treated and resolved with routine antibiotic
therapy, 1% percent experienced urethral stricture and 5% experienced other
minor complications, including epididymitis (2%), transient urinary
incontinence (2%) and loss of ejaculate (1%).
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<PAGE>
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.
Feasibility Research and Temperature Mapping Studies (67 of the 457 patient
total)
The Company conducted early feasibility and temperature mapping studies on 30
patients to determine the temperature distribution in the prostatic tissue
during treatment and to collect tissue samples to evaluate the effect of the
elevated temperature on the prostatic tissue. The Company also conducted
studies on an additional 17 patients to evaluate the patient treatment
tolerance and final treatment protocol. In connection with ongoing research, 20
patients have been treated to date in alternative protocols, primarily to
determine the ability of the T3 procedure to effectively treat patients whose
BPH disease state has progressed to the point of causing urinary retention.
These 67 patients are not pooled with the standard protocol patients because of
the variations in inclusion and exclusion criteria, the treatment methods and
follow-up testing.
PATENTS AND PROPRIETARY RIGHTS
The Company has aggressively pursued protection of its intellectual property.
The Company has been issued six patents and has nine 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
medical methods and devices. One company, BSD Medical Corp., 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 for the patent at issue,
as well as several other patents, under which the Company agreed to pay a small
royalty on future sales of certain of the Company's
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<PAGE>
products and paid an advance royalty with respect to those sales. Other than
the license with BSD Medical Corp., the Company is not licensed under any
patents.
Another company, EDAP Technomed, Inc., ("EDAP") has also obtained United
States and European patents relative to its transurethral, microwave-based
system for treating BPH. Its recently issued European patent is currently
subject to the opposition process. The Company received a letter dated May 13,
1996 from intellectual property counsel for EDAP alleging that the T3 System is
covered by one of EDAP's United States patents and that any commercial
manufacture, use or sale of the T3 System would infringe on that United States
patent. The Company has been aware of the EDAP patent and, based on its
investigation, which included obtaining the advice of intellectual property
counsel, believes that its T3 System does not infringe the EDAP patent or any
other United States patent. Further, the Company does not believe that any
patent exists which will preclude the Company from manufacturing and selling
its T3 System on a worldwide basis. There can be no assurance, however, that
the Company's T3 System does not infringe upon the patent rights or other
intellectual property rights of EDAP or other companies, that the Company will
not be required to redesign the T3 System or to seek licenses from EDAP or
other companies, or that EDAP or other companies will not pursue claims of
infringement against the Company.
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
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<PAGE>
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 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 international 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 primarily through
distributors. The Company is currently engaged in discussions with potential
distributors to market the Company's product in Europe. 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.
The Company has not yet determined the prices at which it will sell the T3
System. The Company expects that its pricing will vary from country to country
depending on a number of factors, including competitive factors, the medical
cost reimbursement structure within a country, how the Company's products are
distributed and whether products are leased or sold. The Company currently
anticipates that the price of the T3 Control Unit will be in the range of
$75,000 to $200,000 and that the price of the T3 Procedure Kit will be in the
range of $600 to $1,500.
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
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<PAGE>
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.
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 GMP,
which establish requirements for assuring quality by controlling components,
processes and document traceability and retention, among other things. The
Company's facilities will also be subject to unscheduled inspections by the
FDA. 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 is in the process of implementing ISO 9001, a certification
showing compliance of the Company's manufacturing facilities with European
standards for quality assurance and manufacturing process control. The Company
expects ISO 9001 certification in 1996. The Company also intends to establish
compliance with the applicable requirements that will allow it to affix the CE
Mark to its product in 1996. 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, 1993, 1994 and 1995, and the nine
months ended March 31, 1996, the Company expended $1.5 million, $1.6 million,
$4.1 million and $3.6 million, respectively, in its research and development
efforts. As of March 1, 1996, the Company employed nine 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.,
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<PAGE>
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
Corp. 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 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. In a letter dated May 13, 1996
EDAP advised the Company that it believes the T3 System infringes one of EDAP's
United States patents. See "--Patents and Proprietary Rights."
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
36
<PAGE>
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 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 the general medical use
lasers used specifically for the treatment of BPH are eligible for marketing
through 510(k)s rather than PMAs.
37
<PAGE>
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 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 conducting
periodic unannounced FDA inspections of manufacturing facilities. If violations
of applicable regulations are noted during FDA inspections of the Company's
manufacturing facilities or the 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 United Kingdom 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 expects to receive approvals for
marketing in a number of countries outside the United States prior to the time
that it will be able to market the T3 System in the United States. The Company
is in the process of implementing ISO 9001, a certification showing that the
Company's procedures and
38
<PAGE>
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 would evidence
compliance with the requirements enabling 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. The Company expects to receive ISO 9001
certification and to meet the requirements for use of the CE Mark in 1996.
There can be no assurance that the Company will be able to obtain regulatory
approvals or clearances for its products in foreign countries.
The Company's distributor in Japan, NKC, will be responsible for management
of clinical trials and obtaining regulatory and reimbursement approvals for the
T3 System in Japan, and such approvals will therefore be outside the Company's
control. NKC expects to submit to the Japanese Ministry of Health and Welfare
an application for marketing approval in 1996. However, 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 March 1, 1996, the Company employed 38 individuals on a full-time
basis. The Company also has several part-time employees and consultants. The
Company believes that it has been successful in attracting experienced and
capable personnel, although there can be no assurance that the Company will
continue to attract and retain qualified personnel. None of the Company's
employees is covered under a collective bargaining agreement. The Company
considers relations with its employees to be good.
FACILITIES
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.
LEGAL PROCEEDINGS
As of the date hereof, there are no material legal proceedings pending
against or involving the Company.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mitchell Dann(1)........ 35 Chairman of the Board
Jack E. Meyer........... 52 Director, President and Chief Executive Officer
William R. Amaden....... 51 Managing Director of Europe
Wesley E. Johnson....... 38 Vice President, Finance, Chief Financial Officer and Secretary
Jonathan R. McGrath..... 41 Vice President, Research and Development
W. Allen Putnam......... 48 Vice President, Operations
Buzz Benson(2).......... 41 Director
Janet G. Effland(1)(2).. 47 Director
Michael R. Henson(1).... 50 Director
Paul A. LaViolette(2)... 38 Director
Robert Momsen(1)........ 49 Director
John M. Reid............ 49 Director
David C. Utz, M.D....... 72 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
There are no family relationships between any directors and executive
officers of the Board. The following is a brief summary of the business
experience of each of the executive officers and directors of the Company:
Mr. Dann was a co-founder of the Company, has served as a director since
inception in 1991 and served as acting President from June 1993 to January
1994. He became Chairman of the Board in March 1993. Mr. Dann is currently
President of M. Dann & Co., Inc., a venture capital advisory firm. Prior to M.
Dann & Co., Mr. Dann co-founded and held the position of Managing Partner at
IAI Venture Capital Group, the venture capital division of Investment Advisers,
Inc. Mr. Dann has served as a director of several private companies. Mr. Dann
holds a B.S. degree in Engineering; Management from the University of Vermont.
Mr. Meyer has been the President and Chief Executive Officer of Urologix
since January 1994. Prior to joining Urologix, Mr. Meyer served as President
and Chief Executive Officer of FiberOptic Sensor Technologies, Inc. from March
1993 to January 1994. From January 1992 to March 1993, Mr. Meyer was President
and Chief Executive Officer of CareLink Corp., a medical device company. From
December 1982 to August 1991, Mr. Meyer held various positions, including Chief
Operating Officer and Executive Vice President at Quest Medical, Inc., a
publicly-traded medical device company. Prior thereto, Mr. Meyer was employed
by IVAC Corporation for ten years, the last five of which he was employed as
Vice President of Sales and Marketing. Mr. Meyer currently is a director of
BestWay Rental Inc. He holds an M.B.A. and a B.S. degree from Drake University.
Mr. Amaden has been the Managing Director of Europe for Urologix since
November 1994. Prior to joining Urologix, he served as a Regional Manager of
Boston Scientific Corporation from June 1993 to November 1994. From March 1990
to June 1993, Mr. Amaden served as Managing Director of Europe, Middle East,
and Africa for Advanced Surgical Intervention, Inc. Mr. Amaden also held
several positions at Shiley, Inc. (a division of Pfizer, Inc.) from August 1973
to March 1990. Mr. Amaden holds a B.S. degree from Lake Forest College.
Mr. Johnson has been the Vice President of Finance and Chief Financial
Officer of Urologix since September 1995. He was also elected Secretary in
March 1996. Prior to joining Urologix, Mr. Johnson served as Vice President,
Finance and Chief Financial Officer of Orthofix Inc., formerly American Medical
Electronics, Inc. ("Orthofix") from December 1986 to September 1995. From
October 1983 until
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<PAGE>
December 1986, Mr. Johnson served as Director of Finance at Orthofix. Prior
thereto, Mr. Johnson served four years as an auditor with the international
accounting firm of Coopers & Lybrand. Mr. Johnson is a certified public
accountant and holds a B.A. degree from Texas A&M University.
Mr. McGrath has been the Vice President of Research and Development for
Urologix since October 1994. Prior to joining Urologix, Mr. McGrath served as
Director of Advanced Development and Vice President of Research and Development
for Schneider U.S.A. from March 1990 to September 1994. Prior to 1990, Mr.
McGrath co-founded Harbor Medical Devices, where he served as Vice President
from February 1987 to February 1990. In addition, Mr. McGrath has held various
positions at Medi-Tech, Inc., Ladd Medical, Inc., and Ladd Research Industries,
Inc. Mr. McGrath holds a B.S. degree from the University of Vermont.
Mr. Putnam has been the Vice President of Operations for Urologix since
December 1993. Before joining Urologix, Mr. Putnam served as President and
Chief Operating Officer of Uroplasty, Inc. from June 1992 to November 1993.
Uroplasty was a wholly-owned subsidiary of Bioplasty, Inc., a breast implant
company, and both companies filed for Chapter 11 bankruptcy protection in April
1993. Mr. Putnam also held the position of Vice President of Quality Assurance
and Regulatory Affairs at St. Jude Medical, Inc. from December 1989 to June
1992. In addition, Mr. Putnam has held various positions at Bio-Vascular, Inc.,
Minnetonka, Inc., Hollister Corporation, and Baxter-Travenol Laboratories. Mr.
Putnam holds M.S. and B.S. degrees from the University of Missouri.
Mr. Benson has been a director of the Company since August 1992. Mr. Benson
has been the Managing Director of and a Partner in the Piper Jaffray Healthcare
Fund, a venture capital fund, since November 1992. From November 1988 to
November 1992, Mr. Benson was a Managing Director in the corporate finance
department of Piper Jaffray Inc. Mr. Benson is also a director of Exogen, Inc.,
a medical device company.
Ms. Effland has served as a director of the Company since July 1994. Since
1988, Ms. Effland has been a General Partner and Vice President of Patricof &
Co. Ventures, Inc. Prior to joining Patricof & Co., Ms. Effland was the
managing director of a portfolio of U.S. investments for CIN Investment
Company. From 1974 to 1984, Ms. Effland served as Vice President of Qume
Corporation and Courier Terminal Systems, both subsidiaries of ITT Corporation.
Ms. Effland is also a director of CYTYC Corporation and several privately-held
medical companies.
Mr. Henson has served as a director of the Company since September 1991. From
February 1988 to May 1995, Mr. Henson served as President and Chief Executive
Officer of Endosonics Corporation, a publicly-held medical device company, and
currently serves as the Chairman of its Board of Directors. From April 1983 to
February 1988, Mr. Henson served as President and Chief Executive Officer of
Trimedyne, Inc., a manufacturer of medical lasers and catheters. Prior to
joining Trimedyne in 1983, Mr. Hensen held positions as Vice President for G.
D. Searle & Company, Director of Marketing for the Hospital Products Division
of Abbott Laboratories and Marketing Manager for Bristol Myers and Company.
Mr. LaViolette has served as a director of the Company since March 1996. Mr.
LaViolette is a Senior Vice President and Group President of Boston Scientific
Corporation. He joined Boston Scientific Corporation in 1994 as President of
Boston Scientific International and in 1995 became Group President for the
Nonvascular Businesses, which includes Microvasive Endoscopy and Microvasive
Urology. Previously, Mr. LaViolette was with C. R. Bard, Inc. for ten years,
where he served as President of C. R. Bard's USCI Division from 1993 to 1994
and its USCI Angioplasty Division from 1991 to 1993. Before that time, he held
several other marketing positions at C. R. Bard. Previously, he was with the
Kendall Company, Hospital Products Division, in Boston.
Mr. Momsen has served as a director of the Company since December 1992. Since
1981, Mr. Momsen has been a general partner of Interwest Partners, a group of
venture capital management funds.
41
<PAGE>
Mr. Momsen is also a director of COR Therapeutics, Inc., a biopharmaceutical
company, Ventritex, Inc., a medical device company, and ArthroCare Corporation,
a maker of arthroscopic tools.
Mr. Reid was a co-founder of the Company and has served as a director since
the Company's inception in 1991. Mr. Reid was employed by Urologix from
inception until December 1994. He held the position of President and Chief
Executive Officer until June 1993. Mr. Reid is currently a private investor,
and was formerly a vice president of SciMed Life Systems Inc.
Dr. Utz has been a director of the Company since September 1994. Dr. Utz was
Professor of Urology at Mayo Clinic and the Mayo Medical School from 1957 to
1988, and has served as a consultant in Urology to the Mayo Clinic Scottsdale
from 1988 to the present. He holds an M.D. degree from St. Louis University
School of Medicine and a M.S. degree in Urology from the University of
Minnesota. Dr. Utz has served in many medical and professional urological
associations and received numerous prestigious awards in the field of urology.
He has been the author of over 143 publications and 28 abstracts and
editorials.
Pursuant to the terms of the Company's Amended and Restated Articles of
Incorporation which will become effective immediately prior to the closing of
this offering, the directors will be divided into three classes, with the term
of one class expiring each year. As the term of each class expires, the
successors to the directors in that class will be elected for a term of three
years. The Company believes that classification of the Board of Directors will
help to ensure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Directors. The terms of
Messrs. Dann, Meyer and Utz will expire at the Annual Meeting of Shareholders
following fiscal 1996, the terms of Messrs. Reid, Benson and LaViolette will
expire at the Annual Meeting of Shareholders following fiscal 1997, and the
terms of Ms. Effland and Messrs. Henson and Momsen will expire at the Annual
Meeting of Shareholders following fiscal 1998. Vacancies on the Board of
Directors and newly created directorships can be filled by vote of the majority
of the directors then in office. Executive officers are elected by the Board of
Directors and serve until their successors are elected or appointed.
EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth the annual compensation and option grants for
the fiscal years ending June 30, 1995 and 1994 for the Chief Executive Officer
and certain other executive officers of the Company, including all of those
whose salary and bonus earned in the fiscal year ending June 30, 1995 exceeded
$100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
----------------------- ---------------------
NAME AND PRINCIPAL FISCAL SECURITIES UNDERLYING
POSITION YEAR SALARY BONUS OPTIONS (# SHARES)
- ------------------ ------ ----------- ----------- ---------------------
<S> <C> <C> <C> <C>
Jack E. Meyer........... 1995 $150,000 -- --
President and Chief
Executive Officer 1994(2) 68,750 -- 237,500
Wesley E. Johnson....... 1995(3) -- -- --
Vice President, Finance 1994 -- -- --
and Chief Financial
Officer
Jonathan R. McGrath..... 1995(4) 94,083 -- 100,000
Vice President,
Research & 1994 -- -- --
Development
W. Allen Putnam......... 1995 100,417 -- --
Vice President,
Operations 1994(5) 55,909 -- 65,000
William R. Amaden....... 1995(6) 65,436 $ 20,000 60,000
Managing Director of
Europe 1994 -- -- --
</TABLE>
42
<PAGE>
- --------
(1) No executive officer of the Company received an aggregate amount of
perquisites and other personal benefits exceeding $50,000 or 10% of the
officer's total annual salary and bonus for the fiscal year.
(2) Mr. Meyer became President and Chief Executive Officer effective January
26, 1994 and received a salary for only six months of the fiscal year ended
June 30, 1994.
(3) Mr. Johnson began employment with the Company on September 27, 1995. His
current annual base salary is $110,000.
(4) Mr. McGrath began employment with the Company on October 10, 1994 and
received a salary for only nine months of the fiscal year ended June 30,
1995. His current annual base salary is $138,000.
(5) Mr. Putnam became Vice President of Operations effective December 20, 1993
and received a salary for only six months of the fiscal year ended June 30,
1994. His current annual base salary is $110,000.
(6) Mr. Amaden began employment with the Company in December 1994 and received
a salary for only seven months of the fiscal year ended June 30, 1995. His
current annual base compensation is $116,000. Mr. Amaden received a $20,000
bonus upon joining the Company in December 1994.
Option Grants
The following table contains information concerning the grant of stock
options under the Company's 1991 Stock Option Plan to the Named Executive
Officers during the fiscal year ended June 30, 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL
REALIZABLE
% OF VALUE AT
TOTAL ASSUMED ANNUAL
OPTIONS RATES OF STOCK
NUMBER OF GRANTED PRICE
SECURITIES TO MARKET APPRECIATION
UNDERLYING EMPLOYEES EXERCISE PRICE FOR OPTION TERM
OPTIONS IN FISCAL PRICE ON DATE EXPIRATION ---------------
NAME GRANTED YEAR PER SHARE OF GRANT DATE 5% 10%
- ---- ---------- --------- --------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack E. Meyer........... -- -- -- -- -- -- --
Wesley E. Johnson....... -- -- -- -- -- -- --
Jonathan R. McGrath..... 100,000(1) 49.6% $.60 $.60 10/10/01 $24,426 $56,923
W. Allen Putnam......... -- -- -- -- -- --
William R. Amaden....... 60,000(1) 29.8 .60 .60 11/08/01 14,656 34,154
</TABLE>
- --------
(1) These options vest over a 16-quarter period, with a portion of the options
commencing their vesting immediately upon grant and an additional portion
commencing one year from the date of grant.
Option Exercises and Year-End Values
No stock options were exercised by the Named Executive Officers during the
fiscal year ended June 30, 1995. The following table sets forth certain
information regarding unexercised options held by each of the Named Executive
Officers at the end of the fiscal year ended June 30, 1995.
OPTION VALUES AT FISCAL YEAR END
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT JUNE 30, 1995 AT JUNE 30, 1995(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Jack E. Meyer............... 47,500/190,000 $ 598,500/$2,394,000
Wesley E. Johnson........... --/-- --/--
Jonathan R. McGrath......... 7,500/ 92,500 93,000/ 1,147,000
W. Allen Putnam............. 17,875/ 47,125 225,225/ 593,775
William R. Amaden........... 3,750/ 56,250 46,500/ 697,500
</TABLE>
- --------
(1) Based upon difference between the public offering price and the exercise
price.
43
<PAGE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
On January 26, 1994, the Company entered into an employment agreement with
Jack Meyer under which Mr. Meyer agreed to serve as the Chief Executive Officer
and President of the Company for a base salary of $150,000 per year, with
salary increases subject to the discretion of the Company's Board of Directors.
Effective January 1, 1996, Mr. Meyer's salary was increased to $165,000. Under
the agreement, the Company agreed to grant Mr. Meyer an option to purchase
237,500 shares of Common Stock, vesting at various rates over a six year
period. In addition, the Company has agreed that if Mr. Meyer's employment is
terminated without cause, it will pay him his salary for a period of twelve
months or until he has secured alternative employment, whichever occurs first.
The Company has also entered into agreements with Mr. Amaden setting forth his
responsibility in the United Kingdom and Europe. Under these agreements, both
the Company and Mr. Amaden are required to give 60 days notice prior to
termination of the agreements. The Company does not have written employment
agreements with the other Named Executive Officers. Under the terms of a letter
agreement between the Company and Mr. McGrath, the Company has agreed that if
it terminates the employment of Mr. McGrath without cause, it will pay him his
salary for a period of six months or until he has secured alternative
employment, whichever occurs first.
DIRECTOR COMPENSATION
Under the terms of the Company's 1991 Stock Option Plan, each person
currently serving as a non-employee director has been granted a non-qualified
option to purchase 10,000 shares of the Company's Common Stock at a price equal
to initial public offering price. The options vest over four years and expire
ten years from the date of grant, subject to earlier termination one year after
the person ceases to be a director of the Company. In addition, persons first
elected as non-employee directors in the future will receive options to
purchase 10,000 shares at a price equal to fair market value on the date of
grant. Each director is also reimbursed for expenses associated with attending
Board of Directors meetings. Beginning in April 1996, non-employee directors
are paid $1,000 per board meeting and $500 per committee meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Dann served as a member of the Company's Compensation Committee during
the last fiscal year. Mr. Dann is currently the Company's Chairman of the Board
and served as acting President of the Company from June 1993 to January 1994.
Mr. Dann is President of M. Dann & Co., Inc., which is currently paid a minimum
fee of $4,000 per month in return for a minimum of four to five days per month
of consulting services. These consulting services include the arrangement of
business opportunities for the Company, the review of the Company's
intellectual property strategy, the assessment of new technologies and other
strategic business matters. Mr. Dann received $40,970 as salary for the period
from June 30, 1994 to November 30, 1994, and M. Dann & Co., Inc. received
consulting fees in the aggregate amount of $32,000 from December 1994 through
June 30, 1995.
1991 STOCK OPTION PLAN
The Company's 1991 Stock Option Plan was adopted in August 1991 and was most
recently amended in April 1996 (as amended, the "Stock Option Plan"). The
maximum number of shares authorized to be issued under the Stock Option Plan is
1,550,910 shares of Common Stock, of which 177,122 options have been exercised,
722,200 shares are subject to currently outstanding options and 651,588 shares
are eligible for future grant. Of the 651,588 shares available for grant, an
aggregate of 229,998 have been reserved for issuance pursuant to options to be
granted upon the closing of this offering at an exercise price equal to the
offering price. The Stock Option Plan permits the granting of stock options,
including incentive stock options ("ISO"s) as defined under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and non-qualified stock
options ("NQSOs") which do
44
<PAGE>
not qualify as ISOs. The purpose of the Stock Option Plan is to reward and
provide incentives for executive officers, key employees, non-employee
directors and consultants of the Company by providing them with an opportunity
to acquire an equity interest in the Company, thereby increasing their personal
interest in its continued success and progress. The purpose of the Stock Option
Plan is also to retain the services of key employees and non-employee directors
as well as to assist in attracting new key employees and non-employee
directors. Options granted under the Stock Option Plan to executive officers
generally vest over a 16-quarter period with a portion of the options
commencing their vesting immediately upon grant and an additional portion
commencing one year from the date of grant.
The Stock Option Plan is administered by the Compensation Committee, which
has the sole and complete authority to select the employees (including
executive officers) who will receive options or other awards under the Plan.
The Compensation Committee has the authority to determine the number of stock
options to be granted to eligible individuals, whether the options will be ISOs
or NQSOs, and the terms and conditions of the options (which may vary from
optionee to optionee). The Compensation Committee determines the period for
which each stock option may be exercisable, but in no event may a stock option
be exercisable more than 10 years from the date the option is granted. The
number of shares available under the Stock Option Plan and the exercise price
of options granted or restricted stock awarded hereunder are subject to
adjustment by the Compensation Committee to reflect stock splits, stock
dividends, recapitalization, mergers or other major corporate actions. The
Stock Option Plan has a term of ten years, and no option may be granted after
its termination date. Options granted prior to the termination date may be
exercised in accordance with their terms beyond the termination date. In the
event of the sale by the Company of substantially all of its assets, or in the
event of a merger of the Company, if the successor corporation does not
substitute equivalent options, the Compensation Committee shall provide for the
acceleration of the vesting of all outstanding stock options.
The exercise price for options granted under the Stock Option Plan shall be
at a price determined at the sole discretion of the Compensation Committee,
provided, however, that ISOs granted under the Stock Option Plan shall be
granted at exercise prices equal to the fair market value of the Company's
Common Stock on the date of grant (110% for a shareholder holding 10% or more
of the outstanding shares of Common Stock).
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the Urologix, Inc. 1996 Employee Stock Purchase Plan
(the "1996 Purchase Plan"). All employees of the Company that have met the
service eligibility requirements are eligible to participate in the 1996
Purchase Plan.
Eligible employees elect to participate in the 1996 Purchase Plan through
payroll deductions. The 1996 Purchase Plan will commence on the date this
offering commences and will terminate ten years thereafter or such sooner date
as all of the shares reserved under such plan have been issued. The 1996
Purchase Plan will be carried out in phases, with each phase lasting for a
period of one year, or such other length of time as may be determined by the
Board of Directors or any Committee thereof. As of each commencement date of a
phase of the 1996 Purchase Plan, any eligible employee who elects to
participate in the 1996 Purchase Plan is granted an option for as many full
shares as he or she will be able to purchase through the payroll deduction
procedure. The maximum level of payroll deductions is set by the Board of
Directors for each phase, but may not exceed 10% of a participant's base pay
during that phase. The option exercise price is established by the Board of
Directors and may be as low as the lower of (i) 85% of the fair market value of
the Common Stock on the commencement date of the phase or (ii) 85% of the fair
market value of the Common Stock on the Termination Date of the phase. The
Termination Date with respect to each phase is the date designated by the Board
for the phase to end or the effective date of any merger or consolidation in
which the Company is not the surviving corporation.
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<PAGE>
The 1996 Purchase Plan is administered by the Board of Directors or a
Committee, and authorizes the issuance of up to 100,000 shares. The 1996
Purchase Plan is intended to qualify as an "Employee Stock Purchase Plan"
within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended. If the 1996 Purchase Plan so qualifies, employees exercising options
would not have a taxable transaction on exercise.
401(K) PLAN
Under the Urologix, Inc. 401(k) Plan and Trust (the "401(k) Plan"), each
employee of the Company who has attained age 21, is not part of a collective
bargaining unit and is not a nonresident alien who does not receive any United
States source income from the Company will become a participant in the 401(k)
Plan on the January 1, April 1, July 1 or October 1 next occurring after the
employee has completed three months of employment with the Company.
Participants may elect to contribute up to 15% of their compensation to the
401(k) Plan on a pre-tax basis. The Company may match participants'
contributions to the Plan. The Company has not made any matching contributions
to the 401(k) Plan in the past. Neither the employee's nor the Company's
matching contribution is subject to federal income tax in the year contributed.
An employee's contributions are fully vested when made. Participants direct the
investment of contributions allocated to their 401(k) Plan accounts in funds
selected by the Company.
MEDICAL ADVISORY BOARD
The Company has established a Medical Advisory Board to meet with Company
management semi-annually to review and comment on the scientific progress of
the Company and to develop suggestions for new initiatives and applications.
Individual members of this Board will also be consulted from time to time on
specific scientific questions. The members of the Medical Advisory Board of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AFFILIATION
---- -----------
<C> <S>
Martin I. Resnick, M.D., Chairman.... Chairman and Professor, Department of
Urology at Case Western Reserve
University
Donald Griffith, M.D................. Professor of Urology, Baylor College of
Medicine
H. Logan Holtgrewe, M.D.............. Associate Professor of Urology, John
Hopkins University School of Medicine;
Chairman, Health Policy Council of the
American Urological Association
John D. McConnell, M.D............... Chairman and Professor, Division of
Urology at Southwestern Medical Center,
University of Texas at Dallas
Glenn Preminger, M.D................. Professor of Urologic Surgery, Duke
University Medical Center
Claus Roehrborn, M.D................. Assistant Professor of Urology,
Southwestern Medical Center, University
of Texas at Dallas
David C. Utz, M.D.................... Professor of Urology, Mayo Medical
School; Consultant Emeritus, Mayo
Clinic
</TABLE>
46
<PAGE>
CERTAIN TRANSACTIONS
The Company was incorporated in Minnesota in May 1991. In connection with its
incorporation, John Reid and Mitchell Dann each acquired 562,500 shares in
exchange for contributions of $10,000 each.
M. Dann & Co., Inc., a company owned by Mitchell Dann, the Company's
Chairman, currently provides consulting services to the Company. See
"Management--Compensation Committee Interlocks and Insider Participation."
Between December 1991 and February 1994, the Company issued 1,202,201 shares
of Series B Preferred Stock at a price of $4.00 per share. Each share of Series
B Preferred Stock was convertible into approximately 1.35 shares of Common
Stock. In March and June 1994, the Company issued 2,264,292 shares of Series C
Preferred Stock at a price of $4.40 per share, each convertible into one share
of Common Stock. In December 1995, the Company issued 312,500 shares of Series
D Preferred Stock at a price of $8.00 per share, each convertible into one
share of Common Stock. In March 1996, the Company issued 326,306 shares of
Series D Preferred Stock at a price of $8.00 per share, each convertible into
one share of Common Stock. The following directors and major shareholders of
the Company participated in these offerings as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
PURCHASED
-----------------------
SERIES SERIES SERIES
B C D
------- ------- -------
<S> <C> <C> <C>
Mitchell Dann........................................... 12,500 5,000 1,566
Michael Henson.......................................... 5,550 7,500 1,966
John Reid............................................... 18,750 -- --
Jack E. Meyer........................................... -- 11,364 813
Investment Advisers, Inc................................ 287,500 171,388 --
InterWest Partners IV................................... 250,000 363,637 --
Piper Jaffray Healthcare Fund........................... 125,000 102,273 --
Funds Managed by Patricof & Co. Ventures, Inc........... -- 909,092 --
Boston Scientific Corporation........................... -- -- 587,500
</TABLE>
Robert Momsen, a director of the Company, is a General Partner of InterWest
Partners IV. Buzz Benson, a director of the Company, is a Managing Director of
and a Partner in the Piper Jaffray Healthcare Fund. Janet Effland, a director
of the Company, is a General Partner and Vice President of Patricof & Co.
Ventures, Inc. Paul A. LaViolette, a director of the Company, is a Senior Vice
President and Group President with Boston Scientific Corporation.
The Company entered into a Consulting Agreement with Dr. Utz, a director of
the Company, for the period from September 1, 1993 through August 31, 1994. The
agreement has been extended on a yearly basis and currently runs through
September 30, 1996. Dr. Utz provides consulting services to the Company in
connection with the Medical Advisory Board, as well as general consultation on
the Company's products and clinical evaluation of those products. In exchange
for his services, Dr. Utz is paid $24,000 per year and through June 30, 1995
had received non-qualified stock options to purchase 14,450 shares of the
Company's Common Stock under this agreement.
47
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of the Common Stock,
including options exercisable within 60 days of April 1, 1996, by (i) each
person known to the Company to beneficially own more than 5% of the Common
Stock, (ii) each director, (iii) each of the Named Executive Officers and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise indicated in the table below, all shareholders have sole voting and
investment power over the shares beneficially owned. This table does not
reflect any shares that may be acquired in this offering by these existing
shareholders.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING
SHARES OF SHARES
COMMON STOCK -----------------
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
- ---- ------------ -------- --------
<S> <C> <C> <C>
Funds Managed by Patricof &
Co. Ventures, Inc. ......... 909,092(1) 15.2% 10.5%
445 Park Avenue
New York, NY 10022
InterWest Partners IV........ 701,474 11.7% 8.1%
3000 Sandhill Road
Menlo Park, CA 94025
John Reid.................... 600,337 10.0% 6.9%
775 Applegarden Rd.
Minnetrista, MN 55364
Boston Scientific
Corporation................. 587,500 9.8% 6.8%
One Boston Scientific Place
Natick, MA 01670
Mitchell Dann................ 575,488(2)(3) 9.6% 6.6%
14405-21st Ave. No.
Minneapolis, MN 55447
Investment Advisers, Inc..... 559,899(4) 9.4% 6.5%
3700 First Bank Place
Minneapolis, MN 55440
Pathfinder Venture Capital
Fund III.................... 271,499 4.5% 3.1%
7300 Metro Blvd., Suite 585
Minneapolis, MN 55439
Piper Jaffray Healthcare
Fund........................ 271,191 4.5% 3.1%
222 South Ninth Street
Minneapolis, MN 55402
Jack E. Meyer................ 110,146(3)(5) 1.8% 1.3%
Buzz Benson.................. 271,191(6) 4.5% 3.1%
Janet Effland................ 909,092(7) 15.2% 10.5%
Michael Henson............... 55,778(3) * *
Paul A. LaViolette........... 587,500(8) 9.8% 6.8%
Robert Momsen................ 701,474(9) 11.7% 8.1%
David C. Utz, M.D............ 17,000(3) * *
William R. Amaden............ 17,000(3)(5) * *
Wesley E. Johnson............ 11,250(3)(5) * *
Jonathan R. McGrath.......... 27,500(3)(5) * *
W. Allen Putnam.............. 30,062(3)(5) * *
All directors and executive
officers as a group
(13 persons)................ 3,913,818(2)(3)(5)(6)(7)(8)(9) 64.5% 44.5%
</TABLE>
- --------
*Indicates ownership of less than one percent.
48
<PAGE>
- --------
(1) Includes (i) 634,488 shares beneficially owned by APA Excelsior III, L.P.
("Excelsior"), (ii) 241,876 shares of Series C Preferred Stock beneficially
owned by Coutts & Co. (Jersey) Ltd., Custodian for APA Excelsior
III/Offshore, L.P. ("Coutts & Co."), and (iii) 32,728 shares of
beneficially owned by CIN Venture Nominees, Ltd. ("CIN Ventures") (see
footnote (4)). In addition, a European affiliate of Patricof & Co., APAX CR
III, owns 136,364 shares of Series C Preferred Stock which are not deemed
beneficially owned by virtue of separate voting and investment discretion.
(2) Includes 5,358 shares owned by M. Dann & Co. Profit Sharing Trust.
(3) Includes options to purchase the following number of shares, which are or
will become exercisable within 60 days of April 1, 1996: Mr. Dann, 12,031
shares; Mr. Meyer, 14,844 shares; Mr. Henson, 250 shares; Dr. Utz, 9,500
shares; Mr. Amaden, 15,000 shares; Mr. Johnson, no shares; Mr. McGrath,
27,500 shares; Mr. Putnam, 30,062 shares; all officers and directors as a
group, 109,187 shares.
(4) These shares are held by a group of IAI funds.
(5) This table only reflects options exercisable within 60 days of April 1,
1996. Total options held by executive officers as of the date of this
Prospectus, including options listed in the table above, will be as
follows: Mr. Meyer, 204,375 shares; Mr. Amaden, 68,575 shares; Mr. Johnson,
67,680 shares; Mr. McGrath, 119,290 shares; and Mr. Putnam, 89,290 shares.
(6) Includes 271,191 shares owned by the Piper Jaffray Healthcare Fund Limited
Partnership. Mr. Benson, a director of the Company, is a partner in such
partnership and, as such, may be deemed to share voting and investment
power with respect to such shares. Mr. Benson disclaims beneficial
ownership of such shares except to the extent of his respective interest in
such shares arising from his interest in the partnership.
(7) Includes (i) 634,488 shares beneficially owned by Excelsior, (ii) 241,876
shares beneficially owned by Coutts & Co., and (iii) 32,728 shares
beneficially owned by CIN Ventures. Ms. Effland is a general partner of APA
Excelsior III Partners, L.P., which is a general partner of Excelsior and
Coutts & Co. Ms. Effland is a Vice President of Patricof & Co. Ventures,
Inc., which acts as the investment manager for CIN Ventures. As a result of
these affiliations, Ms. Effland may be deemed to beneficially own all
shares beneficially owned by Excelsior, Coutts & Co., and CIN Ventures and
may be deemed to hold shared voting and investment power with respect to
such shares beneficially owned by Excelsior, Coutts & Co. and CIN Ventures.
Ms. Effland disclaims beneficial ownership of such shares except to the
extent of her pecuniary interest therein.
(8) Includes 587,500 shares owned by Boston Scientific Corporation. Mr.
LaViolette is Senior Vice President and Group President of Boston
Scientific Corporation. Mr. LaViolette disclaims beneficial ownership of
such shares held by Boston Scientific Corporation.
(9) Includes 701,474 shares that are owned by InterWest Partners IV. Mr. Momsen
is a general partner of InterWest Management Partners IV, the general
partner of InterWest Partners IV. Mr. Momsen disclaims beneficial ownership
of these shares, except to the extent of his proportionate partnership
interest in InterWest Management Partners IV.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares which are designated as Common Stock,
$.01 par value per share, and 5,000,000 shares that are not designated as to
terms and preferences.
COMMON STOCK
All shares of Common Stock have equal voting rights and have one vote per
share in all matters to be voted upon by shareholders. Cumulative voting in the
election of directors is not allowed. No share of Common Stock is entitled to
preference over any other share of Common Stock, and each share of Common Stock
is equal to any other share of Common Stock in all respects. All of the
outstanding shares of Common Stock are, and the shares to be sold pursuant to
this offering will be, fully paid and nonassessable. The shares of Common Stock
have no preemptive or conversion rights, no redemption or sinking fund
provisions, and are not liable for further call or assessment. Subject to the
rights of holders of any Preferred Stock that may be outstanding, each share of
Common Stock is entitled to share in any distribution of capital assets
remaining after payment of liabilities. Subject to the rights of holders of any
Preferred Stock that may be outstanding, shareholders of Common Stock are
entitled to receive dividends when and as declared by the Company's Board of
Directors out of funds legally available thereof. Any such dividends may be
paid in cash, property or shares of Common Stock.
As of April 1, 1996, there were 5,978,526 shares of Common Stock outstanding
(after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock), which were held by 90 shareholders of record.
PREFERRED STOCK
All the Company's Preferred Stock is being converted into Common Stock
immediately prior to the closing of this offering. Prior to this conversion,
the Company had 6,000,000 shares of Preferred Stock authorized, which was
divided into the following four series: (i) 175,000 shares of Series A
Preferred Stock, of which 137,500 shares were outstanding and were convertible
into 137,500 shares of Common Stock; (ii) 1,250,000 shares of Series B
Preferred Stock, of which 1,202,201 shares were issued and outstanding and were
convertible into 1,624,555 shares of Common Stock; (iii) 2,500,000 shares of
Series C Preferred Stock, of which there were 2,264,292 shares outstanding and
were convertible into 2,264,292 shares of Common Stock; and (iv) 650,000 shares
of Series D Preferred Stock, of which 638,806 shares were outstanding and were
convertible into 638,806 shares of Common Stock. An additional 1,425,000 shares
of Preferred Stock were undesignated. Under the terms of the Company's Articles
of Incorporation in effect prior to the closing of this offering, the shares of
Preferred Stock are automatically converted into Common Stock immediately prior
to the closing of an initial public offering of the Company's Common Stock
equal to or greater than $15.00 per share with aggregate proceeds to the
Company of $10,000,000. In addition, all shares of Preferred Stock are
automatically converted into Common Stock in the event that holders of 50% or
more of all Preferred Stock convert their shares into Common Stock. Holders of
a majority of the Company's Preferred Stock have agreed to convert their
Preferred Stock to Common Stock immediately prior to the closing of this
offering. Immediately after the conversion of the Preferred Stock into Common
Stock, there will be no Preferred Stock outstanding and the Amended and
Restated Articles of Incorporation will become effective. Upon the
effectiveness of the Company's Amended and Restated Articles of Incorporation,
the Company will no longer have any Preferred Stock outstanding, but will have
5,000,000 shares of undesignated stock authorized, as described below.
UNDESIGNATED STOCK
Under governing Minnesota law and the Company's Amended and Restated Articles
of Incorporation, no action by the Company's shareholders is necessary, and
only action of the Board of Directors is required, to authorize the issuance of
any of the undesignated stock. The Board of Directors
50
<PAGE>
is empowered to establish, and to designate the name of, each class or series
of the undesignated shares and to set the terms of such shares (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences). Accordingly, the Board of
Directors, without shareholder approval, may issue undesignated stock with
terms (including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences) that
could adversely affect the voting power and other rights of holders of the
Common Stock.
The existence of undesignated stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common Stock,
to acquire control of the Company with a view to effecting a merger, sale or
exchange of assets or a similar transaction. The anti-takeover effects of the
undesignated shares may deny shareholders the receipt of a premium on their
Common Stock and may also have a depressive effect on the market price of the
Common Stock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Bylaws and the statutes of the State of Minnesota require the
Company to indemnify any director, officer, employee or agent who was or is a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, against certain
liabilities and expenses incurred in connection with the action, suit or
proceeding, except where such persons have not acted in good faith or did not
reasonably believe that the conduct was in the best interests of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or other persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission (the "Commission"), such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect
of discouraging certain attempts to acquire the Company which could deprive the
Company's shareholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act ("MBCA") provides
that, unless the acquisition of certain new percentages of voting control of
the Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or
other person is approved by a majority of the disinterested shareholders of the
Company, the shares acquired above such new percentage level of voting control
will not be entitled to voting rights. The Company is required to hold a
special shareholders' meeting to vote on any such acquisition within 55 days
after the delivery to the Company by the acquirer of an information statement
describing, among other things, the acquirer and any plans of the acquirer to
liquidate or dissolve the Company and copies of definitive financing agreements
for any financing of the acquisition not to be provided by funds of the
acquirer. If any acquirer does not submit an information statement to the
Company within ten days after acquiring shares representing a new threshold
percentage of voting control of the Company, or if the disinterested
shareholders vote not to approve such an acquisition, the Company may redeem
the shares so acquired by the acquirer at their market value. Section 302A.671
generally does not apply to a cash offer to purchase all shares of voting stock
of the issuing corporation if such offer has been approved by a majority vote
of disinterested board members of the issuing corporation.
51
<PAGE>
Section 302A.673 of the MBCA restricts certain transactions between the
Company and a shareholder who becomes the beneficial holder of 10% or more of
the Company's outstanding voting stock (an "interested shareholder") unless a
majority of the disinterested directors of the Company have approved, prior to
the date on which the shareholder acquired a 10% interest, either the business
combination transaction suggested by such a shareholder or the acquisition of
shares that made such a shareholder a statutory interested shareholder. If such
prior approval is not obtained, the statute imposes a four-year prohibition
from the statutory interested shareholder's share acquisition date on mergers,
sales of substantial assets, loans, substantial issuances of stock and various
other transactions involving the Company and the statutory interested
shareholder or its affiliates.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock,
and any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
Upon consummation of the offering, the Company will have outstanding an
aggregate of 8,678,526 shares of Common Stock (assuming no exercise of the
Underwriters' over-allotment option). Of the aggregate number of outstanding
shares of Common Stock, the 2,700,000 shares of Common Stock sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, unless purchased by an "affiliate" of the Company, as
that term is defined by Rule 144 promulgated under the Securities Act (an
"Affiliate"), whose sales would be subject to certain volume limitations and
other restrictions described below.
All officers, directors and certain shareholders of the Company, owning in
the aggregate approximately 5,752,364 shares, have agreed pursuant to the
Underwriting Agreement dated the date hereof (the "Underwriting Agreement") and
other contractual lock-up agreements (the "Lock-up Agreements") not to sell,
offer to sell or otherwise dispose of any shares of Common Stock without the
prior consent of the Representatives for a period of 180 days from the date of
this Prospectus. Taking into consideration the Lock-up Agreements, the number
of shares that will be available for sale in the public market will be as
follows: (i) approximately 170,663 shares will be eligible for immediate sale
on the date of this Prospectus in accordance with Rule 144, (ii) approximately
47,825 additional shares will be eligible for sale beginning 90 days after the
date of this Prospectus in accordance with Rule 144, (iii) approximately
5,121,232 additional shares will be eligible for sale beginning 180 days after
the date of this Prospectus upon the expiration of agreements not to sell such
shares; (iv) an additional 312,500 shares will become eligible for sale
beginning in December 1997 as the Rule 144 holding period for such shares
expires; and (v) an additional 326,306 shares will become eligible for sale
beginning in March 1998, as the Rule 144 holding period for such shares
expires.
The 5,978,526 shares of Common Stock originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Securities
Act held by shareholders upon the consummation of this offering will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act, and may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144, 144(k) or 701
or otherwise.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least two years
(including the holding period of any prior
52
<PAGE>
owner except an Affiliate), is entitled to sell, in "brokers' transactions" or
to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock (approximately 86,786
shares immediately after the offering); or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the
required filing of a Form 144 with respect to such sale. Sales under Rule 144
are generally subject to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may therefore be sold immediately upon
the consummation of the Offering.
The Commission has recently proposed reducing the initial Rule 144 holding
period to one year and the Rule 144(k) holding period to two years. There can
be no assurance as to when or whether such rule changes will be adopted.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits non-
Affiliates to sell their Rule 701 shares without complying with the public
information, holding period, volume limitation or notice provisions of Rule 144
and which permits Affiliates to sell their Rule 701 shares without complying
with the Rule 144 holding period restrictions, in each case commencing 90 days
after the date of this Prospectus.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
the Company's 1991 Stock Option Plan, thus permitting the resale of such shares
by non-Affiliates in the public market without restriction under the Securities
Act. Such registration statement is expected to become effective shortly after
the date of this Prospectus. At March 31, 1996, options to purchase 722,200
shares of Common Stock were outstanding. Of these shares, 636,188 shares are
subject to a 180 day lock-up. Therefore 86,012 shares of Common Stock will be
available for sale after the effective date of the registration statement on
Form S-8 upon the vesting and exercise of options.
Upon consummation of this offering, warrants to purchase an aggregate of
7,405 shares of Common Stock will be outstanding, which shares will be
available for sale on the date of this Prospectus upon the exercise of
warrants.
The Company has adopted an employee stock purchase plan (the "Purchase
Plan"), effective upon completion of the offering, and has reserved up to
100,000 shares of Common Stock for issuance thereunder. The Company will also
register these shares on Form S-8 as soon as practicable after the closing of
this offering. Shares issued under the Purchase Plan after the effective date
of such registration statement, other than shares issued to affiliates of the
Company, will be freely tradeable in the public market, subject to any
applicable lock-up agreements.
REGISTRATION RIGHTS
In connection with their acquisition of securities of the Company, a number
of shareholders entered into an Investor Rights Agreement ("Agreement") with
the Company under which the shareholders have the right to have their shares of
Common Stock included in future registration statements filed by the Company
under the Securities Act. In addition, beginning six months from the effective
date of the offering covered by this Prospectus, upon the request of
shareholders holding twenty-five percent of the securities covered under the
Agreement and aggregating $5,000,000, the Company is required to file a
registration statement with the Commission covering these securities. These
shareholders also have additional demand registration rights at such time as
the Company is eligible to use Form S-3.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Vector Securities International, Inc. and Dain
Bosworth Incorporated, have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Vector Securities International, Inc..................................
Dain Bosworth Incorporated............................................
---------
Total................................................................. 2,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 405,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,700,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,700,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Shareholders of the Company, holding in the aggregate approximately 5,752,364
shares of Common Stock have agreed not to offer, sell or otherwise dispose of
any of such Common Stock for a period of 180 days after the date of this
Prospectus without the prior consent of the Representatives of the
Underwriters. See "Shares Eligible for Future Sale."
54
<PAGE>
In consideration for services offered in connection with a private placement
of the Company's preferred stock, Vector Securities International, Inc. and
Dain Bosworth Incorporated received aggregate cash payments of $75,000 and
$15,000 respectively, and aggregate reimbursement for expenses incurred in
connection with such private placement totalling $30,375 and $3,468,
respectively.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of the
Underwriters believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the Company
by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Dorsey &
Whitney LLP, Minneapolis, Minnesota.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to the Company and the Common Stock, reference is made to such
Registration Statement and exhibits. Statements made in this Prospectus as to
the contents of any contract, agreement or other documents referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved. The
Registration Statement and exhibits may be inspected without charge and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; Northwestern Atrium Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates from the Commission's Public Reference Section at 450 Fifth Street, NW.,
Washington, D.C. 20549.
Prior to this offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. After completion of this
offering, the Company intends to comply with such requirements, including the
distribution to its shareholders of an annual report containing audited
financial statements.
55
<PAGE>
UROLOGIX, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets as of June 30, 1994 and 1995 and March 31, 1996
(unaudited)............................................................. F-3
Statements of Operations for the years ended June 30, 1993, 1994 and
1995, and for the period from inception (May 29, 1991) to June 30, 1995,
and the nine months ended March 31, 1995 and 1996 (unaudited), and for
the period from inception (May 29, 1991) to March 31, 1996 (unaudited).. F-4
Statements of Shareholders' Equity for the period from inception (May 29,
1991) to June 30, 1992, and for the years ended June 30, 1993, 1994 and
1995, and the nine months ended March 31, 1996 (unaudited).............. F-5
Statements of Cash Flows for the years ended June 30, 1993, 1994 and
1995, and for the period from inception (May 29, 1991) to June 30, 1995
and the nine months ended March 31, 1995 and 1996 (unaudited), and for
the period from inception (May 29, 1991) to March 31, 1996 (unaudited).. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Urologix, Inc.:
We have audited the accompanying balance sheets of Urologix, Inc. (a
Minnesota corporation in the development stage) as of June 30, 1994 and 1995,
and the related statements of operations, shareholders' equity and cash flows
for each of the three fiscal years in the period ended June 30, 1995, and for
the period from inception (May 29, 1991) to June 30, 1995. 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,
1994 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, 1995, and for the period
from inception (May 29, 1991) to June 30, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 4, 1995 (except for Note 5,
as to which the date is April 30, 1996)
F-2
<PAGE>
UROLOGIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, 1996
------------------------ ------------------------
PRO FORMA
1994 1995 ACTUAL (NOTE 5)
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 8,579,777 $ 1,349,041 $ 3,148,904
Available-for-sale
securities.............. 512,993 2,222,452 250,000
Inventories.............. 211,783 485,633 57,724
Prepaids and other
current assets.......... -- 191,687 300,137
----------- ----------- -----------
Total current assets... 9,304,553 4,248,813 3,756,765
----------- ----------- -----------
Property and equipment:
Leasehold improvements... 9,710 76,346 79,721
Machinery, equipment and
furniture............... 293,671 514,050 625,519
Less--Accumulated
depreciation............ (168,178) (272,611) (363,289)
----------- ----------- -----------
Property and equipment,
net................... 135,203 317,785 341,951
Other assets............... 361,041 309,117 317,583
----------- ----------- -----------
$ 9,800,797 $ 4,875,715 $ 4,416,299
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of
capitalized lease
obligations............. $ 68,121 $ 5,128 $ 5,128
Accounts payable......... 249,878 475,623 563,043
Accrued liabilities...... 89,718 395,643 599,757
----------- ----------- -----------
Total current
liabilities........... 407,717 876,394 1,167,928
Capitalized lease
obligations, less current
maturities................ -- 22,632 18,847
----------- ----------- -----------
Total liabilities...... 407,717 899,026 1,186,775
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES (Note 6)
Shareholders' equity (Note
5):
Noncumulative convertible
preferred stock, Series
A, $.01 par value,
175,000 shares
authorized; 137,500
shares issued and
outstanding (aggregate
liquidation preference
of $275,000)............ 1,375 1,375 1,375 --
Noncumulative convertible
preferred stock, Series
B, $.01 par value,
1,250,000 shares
authorized; 1,202,201
shares issued and
outstanding (aggregate
liquidation preference
of $4,808,804).......... 12,022 12,022 12,022 --
Noncumulative convertible
preferred stock, Series
C, $.01 par value,
2,500,000 shares
authorized; 2,264,292
shares issued and
outstanding (aggregate
liquidation preference
of $9,962,885).......... 22,643 22,643 22,643 --
Noncumulative convertible
preferred stock, Series
D, $.01 par value, 0, 0
and 650,000 shares
authorized; 638,806
shares issued and
outstanding at March 31,
1996 (aggregate
liquidation preference
of $2,500,000).......... -- -- 6,388 --
Noncumulative convertible
preferred stock,
Undesignated, $.01 par
value, 75,000, 75,000
and 1,425,000 shares
authorized; no shares
issued and outstanding.. -- -- -- --
Common stock, $.01 par
value, 6,500,000,
6,500,000 and 12,500,000
shares authorized;
1,170,510, 1,197,904 and
1,313,373 shares issued
and outstanding......... 11,705 11,979 13,134 59,785
Additional paid-in
capital................. 14,858,782 14,868,864 19,495,328 19,491,105
Deficit accumulated
during the development
stage................... (5,513,447) (10,940,194) (16,321,366) (16,321,366)
----------- ----------- ----------- -----------
Total shareholders'
equity................ 9,393,080 3,976,689 3,229,524 3,229,524
----------- ----------- ----------- -----------
$ 9,800,797 $ 4,875,715 $ 4,416,299 $ 4,416,299
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
UROLOGIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION FOR THE INCEPTION
(MAY 29, NINE MONTHS ENDED MARCH (MAY 29,
YEARS ENDED JUNE 30, 1991) TO 31, 1991) TO
------------------------------------- JUNE 30, ------------------------ MARCH 31,
1993 1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cost reimbursement...... $ 163,600 $ 9,350 $ 489,350 $ 662,300 $ 301,100 $ 342,355 $ 1,004,655
Cost of goods sold...... 253,153 179,233 785,298 1,217,684 423,970 866,057 2,083,741
----------- ----------- ----------- ------------ ----------- ----------- ------------
Gross loss........... (89,553) (169,883) (295,948) (555,384) (122,870) (523,702) (1,079,086)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Costs and expenses:
Research and
development........... 1,478,889 1,597,275 4,099,070 7,828,112 2,396,165 3,571,314 11,399,426
General and
administrative........ 468,082 677,424 883,409 2,307,865 714,567 822,250 3,130,115
Sales and marketing.... 21,415 124,308 477,380 696,904 261,896 546,802 1,243,706
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total costs and
expenses............ 1,968,386 2,399,007 5,459,859 10,832,881 3,372,628 4,940,366 15,773,247
----------- ----------- ----------- ------------ ----------- ----------- ------------
Operating loss.......... (2,057,939) (2,568,890) (5,755,807) (11,388,265) (3,495,498) (5,464,068) (16,852,333)
Interest income......... 78,697 55,939 333,322 484,709 191,731 85,357 570,066
Interest expense........ (17,395) (11,565) (4,262) (36,638) (4,106) (2,461) (39,099)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net loss................ $(1,996,637) $(2,524,516) $(5,426,747) $(10,940,194) $(3,307,873) $(5,381,172) $(16,321,366)
=========== =========== =========== ============ =========== =========== ============
Net loss per common
share.................. $ (1.03) $ (1.30) $ (2.75) $ (1.68) $ (2.71)
=========== =========== =========== =========== ===========
Weighted average number
of common shares
outstanding............ 1,934,572 1,945,623 1,969,815 1,963,976 1,983,332
=========== =========== =========== =========== ===========
Pro forma (Note 1)
(Unaudited):
Net loss per common
share................. $ (0.91) $ (0.55) $ (0.90)
=========== =========== ===========
Weighted average
number of common
shares outstanding.... 5,996,162 5,990,323 6,009,679
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
UROLOGIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------
<CAPTION>
DEFICIT
ACCUMULATED
SERIES A SERIES B SERIES C SERIES D COMMON STOCK ADDITIONAL DURING THE
-------------- ----------------- ----------------- -------------- ----------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
------- ------ --------- ------- --------- ------- ------- ------ --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 29,
1991............. -- $ -- -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of
common stock,
net............. -- -- -- -- -- -- -- -- 1,136,251 11,363 10,537 --
Issuance of
preferred stock,
net............. 137,500 1,375 194,000 1,940 -- -- -- -- -- -- 1,046,995 --
Stock options
exercised....... -- -- -- -- -- -- -- -- 1,475 15 575 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (992,294)
------- ------ --------- ------- --------- ------- ------- ------ --------- ------- ----------- ------------
Balance, June 30,
1992............. 137,500 1,375 194,000 1,940 -- -- -- -- 1,137,726 11,378 1,058,107 (992,294)
Issuance of
preferred stock,
net............. -- -- 1,006,951 10,070 -- -- -- -- -- -- 3,965,992 --
Stock options
exercised....... -- -- -- -- -- -- -- -- 20,500 205 4,496 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (1,996,637)
------- ------ --------- ------- --------- ------- ------- ------ --------- ------- ----------- ------------
Balance, June 30,
1993............. 137,500 1,375 1,200,951 12,010 -- -- -- -- 1,158,226 11,583 5,028,595 (2,988,931)
Issuance of
preferred stock,
net............. -- -- 1,250 12 2,264,292 22,643 -- -- -- -- 9,825,395 --
Stock options
exercised....... -- -- -- -- -- -- -- -- 12,284 122 4,792 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (2,524,516)
------- ------ --------- ------- --------- ------- ------- ------ --------- ------- ----------- ------------
Balance, June 30,
1994............. 137,500 1,375 1,202,201 12,022 2,264,292 22,643 -- -- 1,170,510 11,705 14,858,782 (5,513,447)
Stock options
exercised....... -- -- -- -- -- -- -- -- 27,394 274 10,082 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (5,426,747)
------- ------ --------- ------- --------- ------- ------- ------ --------- ------- ----------- ------------
Balance, June 30,
1995............. 137,500 1,375 1,202,201 12,022 2,264,292 22,643 -- -- 1,197,904 11,979 14,868,864 (10,940,194)
Issuance of
preferred stock,
net (unaudited). -- -- -- -- -- -- 638,806 6,388 -- -- 4,580,676 --
Stock options
exercised
(unaudited)..... -- -- -- -- -- -- -- -- 115,469 1,155 45,788 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- (5,381,172)
------- ------ --------- ------- --------- ------- ------- ------ --------- ------- ----------- ------------
Balance, March
31, 1996
(unaudited)...... 137,500 $1,375 1,202,201 $12,022 2,264,292 $22,643 638,806 $6,388 1,313,373 $13,134 $19,495,328 $(16,321,366)
======= ====== ========= ======= ========= ======= ======= ====== ========= ======= =========== ============
TOTAL
SHARE-
HOLDERS'
EQUITY
-----------
<S> <C>
Balance, May 29,
1991............. $ --
Issuance of
common stock,
net............. 21,900
Issuance of
preferred stock,
net............. 1,050,310
Stock options
exercised....... 590
Net loss........ (992,294)
-----------
Balance, June 30,
1992............. 80,506
Issuance of
preferred stock,
net............. 3,976,062
Stock options
exercised....... 4,701
Net loss........ (1,996,637)
-----------
Balance, June 30,
1993............. 2,064,632
Issuance of
preferred stock,
net............. 9,848,050
Stock options
exercised....... 4,914
Net loss........ (2,524,516)
-----------
Balance, June 30,
1994............. 9,393,080
Stock options
exercised....... 10,356
Net loss........ (5,426,747)
-----------
Balance, June 30,
1995............. 3,976,689
Issuance of
preferred stock,
net (unaudited). 4,587,064
Stock options
exercised
(unaudited)..... 46,943
Net loss
(unaudited)..... (5,381,172)
-----------
Balance, March
31, 1996
(unaudited)...... $3,229,524
===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
UROLOGIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION FOR THE INCEPTION
(MAY 29, NINE MONTHS ENDED MARCH (MAY 29,
FOR THE YEARS ENDED JUNE 30, 1991) TO 31, 1991) TO
------------------------------------- JUNE 30, ------------------------ MARCH 31,
1993 1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................ $(1,996,637) $(2,524,516) $(5,426,747) $(10,940,194) $(3,307,873) $(5,381,172) $(16,321,366)
Adjustments to reconcile
net loss to net cash
used for operating
activities--
Depreciation........... 74,729 80,659 104,433 272,611 77,565 90,678 363,289
Change in operating
items:
Inventories............ (185,404) 67,551 (273,850) (485,633) (817,355) 427,909 (57,724)
Prepaids and other..... 1,987 -- (191,687) (191,687) (153,913) (108,450) (300,137)
Accounts payable and
accrued liabilities... 71,848 42,501 531,670 871,266 473,775 291,534 1,162,800
Other assets........... -- (347,621) 51,924 (309,117) 41,630 (8,466) (317,583)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash used for
operating activities... (2,033,477) (2,681,426) (5,204,257) (10,782,754) (3,686,171) (4,687,967) (15,470,721)
----------- ----------- ----------- ------------ ----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (52,581) (26,082) (259,255) (380,015) (195,269) (114,844) (494,859)
Purchase of securities.. -- (512,993) (3,229,459) (3,742,452) -- -- (3,742,452)
Proceeds from sale of
securities............. -- -- 1,520,000 1,520,000 262,993 1,972,452 3,492,452
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by
(used for) investing
activities............. (52,581) (539,075) (1,968,714) (2,602,467) 67,724 1,857,608 (744,859)
----------- ----------- ----------- ------------ ----------- ----------- ------------
FINANCING ACTIVITIES:
Issuance of preferred
stock, net............. 3,976,062 9,848,050 -- 14,874,422 -- 4,587,064 19,461,486
Issuance of common
stock, net............. 4,701 4,914 10,356 42,461 5,316 46,943 89,404
Payments made on capital
leases................. (50,984) (56,778) (68,121) (182,621) (46,997) (3,785) (186,406)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by
(used for) financing
activities............. 3,929,779 9,796,186 (57,765) 14,734,262 (41,681) 4,630,222 19,364,484
----------- ----------- ----------- ------------ ----------- ----------- ------------
Increase (decrease) in
cash and cash
equivalents............ 1,843,721 6,575,685 (7,230,736) 1,349,041 (3,660,128) 1,799,863 3,148,904
CASH AND CASH
EQUIVALENTS:
Beginning of period..... 160,371 2,004,092 8,579,777 -- 8,579,777 1,349,041 --
----------- ----------- ----------- ------------ ----------- ----------- ------------
End of period........... $ 2,004,092 $ 8,579,777 $ 1,349,041 $ 1,349,041 $ 4,919,649 $ 3,148,904 $ 3,148,904
----------- ----------- ----------- ------------ ----------- ----------- ------------
Cash paid for:
Interest............... $ 17,395 $ 11,365 $ 4,262 $ 36,638 $ 4,106 $ 2,461 $ 39,099
=========== =========== =========== ============ =========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
UROLOGIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
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 United States, Food and Drug Administration (FDA)
approval must be obtained. The Company is currently engaged in clinical trials
in the United States under an investigational device exemption approved by the
FDA in late 1994.
Even if the Company's efforts are successful, substantial time will pass
before significant revenues might be realized in the United States.
Internationally, clinical investigations are in process that are expected to
lead to international regulatory approvals. 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 and
international regulatory approvals and the success of future operations.
INTERIM FINANCIAL STATEMENTS
The balance sheet as of March 31, 1996 and the related statements of
operations and cash flows for the nine-month periods ended March 31, 1995 and
1996, and for the period from inception (May 29, 1991) to March 31, 1996, and
the statement of shareholders' equity for the nine-month period ended March 31,
1996 are unaudited. However, in the opinion of management, these interim
financial statements include all adjustments (consisting of only normal
recurring adjustments) which are necessary for the fair presentation of the
results for the interim periods presented. The results of operations for the
unaudited nine-month period ended March 31, 1996 are not necessarily indicative
of the results which may be expected for the entire 1996 fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
90 days or less to be cash equivalents. Cash equivalents consist of money
market funds and are stated at cost, which approximates market value.
AVAILABLE-FOR-SALE SECURITIES
The Company invests in U.S. Treasury bills with original maturities ranging
from 90 days to one year. 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 and
consist primarily of completed units. Inventories of disposable products are
charged to expense as purchased.
F-7
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Improvements that extend the useful lives of property and equipment are
capitalized at cost. Repairs and maintenance are charged to expense as
incurred. Depreciation for machinery, equipment and furniture is provided using
the straight-line method based upon estimated useful lives of three to seven
years. Leasehold improvements and property and equipment under capitalized
leases are amortized over the lesser of the estimated useful life of the asset
or the term of the lease.
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 of a product.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. These
expenses include patent costs of $165,132, $287,479 and $202,224 for the years
ended June 30, 1993, 1994 and 1995.
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,
shares of convertible preferred stock sold and stock options granted within one
year of 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.
Unaudited pro forma net loss per common share is computed by dividing net
loss by weighted average common shares outstanding as described above, and as
adjusted to reflect the conversion to common stock of preferred shares not
already included in the above computation of weighted average shares
outstanding.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
F-8
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. 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>
1993 1994 1995
---- ---- ----
<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)
--- --- ---
0% 0% 0%
=== === ===
</TABLE>
As of June 30, 1995, the Company had net operating loss carryforwards of
$9,989,000 for federal income tax purposes that are available to offset future
taxable income through the year 2010. Additional tax losses of $5,306,000 were
generated for the nine months ended March 31, 1996. 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:
<TABLE>
<CAPTION>
1993 1994 1995
----- ------- -------
<S> <C> <C> <C>
Net operating loss carryforwards................. $ 790 $ 2,147 $ 3,996
Valuation allowance.............................. (790) (2,147) (3,996)
----- ------- -------
$ 0 $ 0 $ 0
===== ======= =======
</TABLE>
3. 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 1993, 1994 or
1995.
4. EMPLOYEE BENEFIT PLANS:
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.
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.
5. SHAREHOLDERS' EQUITY:
COMMON AND CONVERTIBLE PREFERRED STOCK
In May and June 1991, the Company issued 1,125,000 and 11,250 shares of
common stock at $.02 and $.20 per share, respectively, for net proceeds of
$21,900. In July and December 1991, the Company issued 137,500 Series A and
194,000 Series B convertible preferred shares at $2.00 and $4.00 per share,
respectively, for total proceeds of $1,050,310. In August through November
1992, the Company issued
F-9
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1,006,951 Series B convertible preferred shares at $4.00 per share for net
proceeds of $3,976,062. 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, the Company completed the sale of 312,500 Series D convertible
preferred shares at $8.00 per share, for total net proceeds of $2,035,528. In
March 1996, the Company completed the sale of 326,306 Series D convertible
preferred shares at $8.00 per share for net proceeds of $2,551,536.
Holders of the preferred stock have the number of votes equal to the largest
number of full shares of common stock into which the preferred shares may be
converted. All preferred shares are convertible at the holder's option, or
immediately upon a public offering of the Company's common stock at an offering
price of at least $15.00 per share and total gross proceeds of $10,000,000. All
shares of preferred stock are automatically converted into common stock in the
event that holders of 50% or more of all preferred stock convert their shares
to common stock. Preferred shares contain a liquidation preference, including
all declared but unpaid dividends, in the event of liquidation. Dividends on
the preferred shares are noncumulative and occur only as declared by the board
of directors. No dividends have been declared to date.
Conversion ratios and liquidation preferences of each preferred stock series
are as follows:
<TABLE>
<CAPTION>
PER SHARE
CONVERSION LIQUIDATION
SERIES TO COMMON PREFERENCE
------ ---------- -----------
<S> <C> <C>
A.................................................. 1 : 1 $2.00
B.................................................. 1 : 1.35 $4.00
C.................................................. 1 : 1 $4.40
D.................................................. 1 : 1 $8.00
</TABLE>
In conjunction with the Company's initial public offering, all shares of
convertible preferred stock will be converted to common stock, in accordance
with each Series' respective conversion ratio. The accompanying balance sheets
reflect actual shareholders' equity at March 31, 1996, and pro forma to reflect
the conversion of all preferred shares to common stock.
COMMON STOCK WARRANTS
The Company had a warrant to purchase 7,405 shares of common stock at $2.96
per share as of June 30, 1994 and 1995, and March 31, 1996.
STOCK OPTION PLAN
The Company has a stock option plan which provides for the granting of
incentive stock options to employees and nonqualified stock options to
employees, directors and consultants. As of June 30, 1995, the Company has
reserved 800,910 shares of common stock under this plan. In December 1995, the
Company reserved an additional 250,000 shares of common stock for issuance
under this plan. Options generally expire seven years from the date of grant
and are subject to varying vesting schedules. Shares subject to options are
summarized as follows:
<TABLE>
<CAPTION>
OPTION
INCENTIVE NONQUALIFIED EXERCISE
STOCK STOCK PRICE PER
OPTIONS OPTIONS SHARE
--------- ------------ ---------
<S> <C> <C> <C>
Balance at May 29, 1991........................ -- -- --
Options granted.............................. 58,350 37,675 $.20-.40
Options exercised............................ -- (1,475) .40
------- ------ --------
Balance at June 30, 1992....................... 58,350 36,200 .20-.40
Options granted.............................. 43,901 34,234 .40
Options canceled............................. (10,100) -- .40
Options exercised............................ (20,500) -- .20-.40
------- ------ --------
</TABLE>
F-10
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<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............................ 142,625 3,563 .60-1.60
Options canceled........................... (344) -- .60
Options exercised.......................... (115,469) -- .60
-------- ------- ---------
Balance at March 31, 1996.................... 651,853 70,347 $.20-1.60
======== ======= =========
Options exercisable at June 30, 1995......... 63,681 37,621 $ .20-.60
======== ======= =========
Options exercisable at March 31, 1996........ 204,335 40,950 $.20-1.60
======== ======= =========
</TABLE>
As of June 30, 1995 and March 31, 1996, 47,436 and 151,588 options,
respectively, were available for future grant under this plan.
In April 1996, the Company's shareholders reserved an additional 500,000
common shares for issuance under the Plan. In addition, 149,998 options were
granted to employees, at an exercise price equal to the offering price, to be
issued at the effective date of an initial public offering.
In April 1996, the Company amended its 1991 Stock Option Plan to provide for
the automatic grant of 10,000 stock options to each non-employee director upon
the later of initial election or the effective date of an initial public
offering. Options are granted at fair market value, vest over four years, and
expire ten years from date of grant, or one year after the person ceases to be
a director of the Company, whichever occurs earlier.
REVERSE STOCK SPLIT
The Company's shareholders approved a 1-for-2 reverse common and convertible
preferred stock split effective April 30, 1996. The effect of the reverse stock
split has been reflected for all periods presented in the accompanying
financial statements.
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 an initial public offering.
F-11
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
6. COMMITMENTS AND CONTINGENCIES:
PURCHASE COMMITMENTS
At June 30, 1995, the Company has orders outstanding to purchase a certain
number of T3 Control Units, the primary system necessary for all T3 treatments,
from a third-party vendor for a total purchase commitment of approximately
$500,000. Management believes that current funds on-hand will be sufficient to
meet its purchase commitments or that alternate sources of financing will be
available.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The manufacture and sale of medical products entail significant risk of
product liability claims. The Company maintains product liability insurance
coverage 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.
There can be no assurance that the Company's existing insurance coverage limits
are adequate to protect the Company from any liabilities it might incur in
connection with the clinical trials or future sales of the T3 System.
LEASES
The Company leases its facility and certain equipment under noncancelable
operating or capital leases which expire at various dates through fiscal 1999.
Rent expense related to operating leases was approximately $62,000, $78,500 and
$102,500 for the years ended June 30, 1993, 1994 and 1995, and $76,900 and
$140,200 for the nine-month periods ended March 31, 1995 and 1996,
respectively. Future minimum lease commitments under noncancelable operating
and capital leases with initial remaining terms of one year or more are as
follows as of June 30, 1995:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Fiscal year:
1996................................................. $111,189 $ 8,328
1997................................................. 101,992 8,328
1998................................................. 71,155 8,328
1999................................................. 904 11,105
-------
36,089
Less--Imputed interest................................. (8,329)
Current maturities..................................... (5,128)
-------
Long-term capitalized lease obligations................ $22,632
=======
</TABLE>
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 $32,000 under this arrangement in the fiscal year
ended June 30, 1995.
PATENT MATTERS
A company, EDAP Technomed, Inc., ("EDAP") has obtained United States and
European patents relative to its transurethral, microwave-based system for
treating BPH. Its recently issued European patent is currently subject to the
opposition process. The Company received a letter dated May 13, 1996 from
intellectual property counsel for EDAP alleging that the T3 System is covered
by one of EDAP's United States patents and that any commercial manufacture, use
or sale of the T3 System would infringe that United States patent. The Company
has been aware of the EDAP patent and, based on its investigation, which
included obtaining the advice of intellectual property counsel, believes that
its T3 System does not infringe the EDAP patent or any other United States
patent. Further, the Company does not believe that any patent exists which will
preclude the Company from manufacturing and selling its T3 System on a
worldwide basis. There can be no assurance, however, that the Company's T3
System does not infringe upon the patent rights or other intellectual property
rights of EDAP or other companies, that the Company will not be required to
redesign the T3 System or to seek licenses from EDAP or other companies, or
that EDAP or other companies will not pursue claims of infringement against the
Company. Management believes that the occurrence of any of the foregoing could
have a material adverse effect on the Company's results of operations,
financial position and cash flows.
F-12
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 11
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Dilution.................................................................. 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 19
Management................................................................ 40
Certain Transactions...................................................... 47
Principal Shareholders.................................................... 48
Description of Capital Stock.............................................. 50
Shares Eligible for Future Sale........................................... 52
Underwriting.............................................................. 54
Experts................................................................... 55
Legal Matters............................................................. 55
Additional Information.................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,700,000 Shares
[LOGO]
Common Stock
-----------
PROSPECTUS
-----------
Alex. Brown & Sons
INCORPORATED
Vector Securities International,
INC.
Dain Bosworth
INCORPORATED
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following fees and expenses will be paid by the Company in connection
with issuance and distribution of the securities registered hereby and do not
include underwriting commissions and discounts. All of such expenses, except
for the SEC, NASD and NASDAQ fees are estimated.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 14,990
NASD filing fee................................................. $ 4,847
NASDAQ fee...................................................... $ 39,197
Legal fees and expenses......................................... $160,000
Accounting fees and expenses.................................... $ 60,000
Blue Sky fees and expenses...................................... $ 17,500
Transfer agent and registrar fees............................... $ 10,000
Printing expenses............................................... $100,000
Miscellaneous expenses.......................................... $ 93,466
--------
TOTAL....................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Articles of Incorporation and Bylaws of Urologix
provide for indemnification of directors to the full extent permitted by the
Minnesota Business Corporation Act. Minnesota Statutes (S)302A.521 provides
that a Minnesota business corporation shall indemnify any director, officer,
employee or agent of the corporation made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity (as defined
therein) of the person, against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding if
certain statutory standards are met. "Proceeding" means a threatened, pending
or completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of Urologix.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Urologix
pursuant to the foregoing provisions, Urologix has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Under Section 8 of the Underwriting Agreement to be filed as Exhibit 1.1
hereto, the Underwriters agreed to indemnify, under certain conditions, the
Company, its directors, certain of its officers and persons who control the
Company within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The information in this Item gives retroactive effect to the one-for-two
reverse stock split of the Company to be effective immediately prior to the
closing of this offering.
The Company has sold the following unregistered securities during the past
three years:
In March and June 1994, the Company issued a total of 2,264,292 shares of its
Series C Preferred Stock at a price of $4.40 per share to 36 investors,
including 20 individual investors at a price of $4.00 per share and raised
gross proceeds of $9,962,885. Of the shares purchased in that offering,
2,223,151 shares were purchased by institutional investors including venture
capital companies, investment partnerships and a corporate strategic investor.
II-1
<PAGE>
On December 5, 1995, the Company sold 312,500 shares of Series D Preferred
Stock at a price of $8.00 per share to one corporate investor and raised gross
proceeds of $2,500,000. In March 1996, the Company sold 326,306 shares of
Series D Preferred Stock to 49 existing security holders in a rights offering
and raised gross proceeds of $2,610,448.
As of March 31, 1996, options to purchase up to 899,322 shares had been
issued by the Company under the 1991 Stock Option Plan. During the last three
years, the Company has issued a total of 177,122 shares upon exercise of such
options at a weighted average exercise price of $0.38 per share and received
gross proceeds of $67,504.
All Common Stock and Preferred Stock was sold in reliance upon Section 4(2)
of the Securities Act of 1933, as amended. All options and shares issued upon
exercise of options were issued pursuant to Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<S> <C>
1.1 Underwriting Agreement.(3)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws of the Company.(3)
4.1 Form of Common Stock Certificate.(3)
5.1 Opinion of Lindquist & Vennum P.L.L.P.(3)
10.1 Amended and Restated Urologix, Inc. 1991 Stock Option Plan.*(3)
10.2 Employment Agreement dated January 26, 1994 between the Company and Jack
Meyer.*(3)
10.3 Letter Agreement dated as of October 10, 1994 between the Company and
Jonathan R. McGrath.*(3)
10.4 Supply Agreement dated August 24-25, 1995 between the Company and SeaMED
Corporation.(1)(2)
10.5 Lease Agreement dated January 20, 1992, between the Company and Parkers
Lake Pointe I Limited Partnership, including Addendum to Lease Agreement
dated June 20, 1994, Addendum to Lease Agreement dated April 5, 1995 and
Addendum to Lease Agreement dated March 7, 1996.(3)
10.6 Investor Rights Agreement dated December 5, 1995 between the Company and
certain of its shareholders.(3)
10.7 Distribution Agreement dated February 28, 1994 between the Company and
Nihon Kohden Corporation.(2)(3)
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.*(3)
10.9 Letter agreement dated October 10, 1994 between the Company and Mitchell
Dann.*(3)
10.10 Letter Agreement dated November 18, 1994 between the Company and William
R. Amaden.*(3)
10.11 Consulting Agreement dated November 28, 1994 between the Company and
William R. Amaden.*(3)
11.1 Statement re: Computation of Loss per Common Share.(3)
23.1 Consent of Arthur Andersen, LLP.(1)
23.2 Consent of Lindquist & Vennum P.L.L.P., included in Exhibit 5.1.
24.1 Power of Attorney (included in the Signature Page).(3)
</TABLE>
- --------
*Indicates Compensation Plan
(1) Filed herewith.
(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 406.
(3) Previously filed.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are either not required, are not
applicable, or the required information is shown in the Financial Statements
and related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter had been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and this offering of such securities at that
time be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE FORM S-1 REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF PLYMOUTH, STATE OF MINNESOTA, ON THE 28TH DAY OF MAY, 1996.
UROLOGIX, INC.
/s/ Jack E. Meyer
BY: _________________________________
Jack E. Meyer, President and
Chief Executive Officer and
Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON MAY 28, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
* Chairman of the Board
____________________________________
Mitchell Dann
/s/ Jack E. Meyer Director, President and
____________________________________ Chief Executive Officer
Jack E. Meyer (principal executive
officer)
* Vice President, Chief
____________________________________ Financial Officer and
Wesley E. Johnson Secretary (principal
accounting officer)
* Director
____________________________________
Buzz Benson
* Director
____________________________________
Janet G. Effland
* Director
____________________________________
Michael R. Henson
* Director
____________________________________
Robert Momsen
* Director
____________________________________
John M. Reid
* Director
____________________________________
David C. Utz, M.D.
* Director
____________________________________
</TABLE> Paul A. LaViolette
/s/ Jack E. Meyer
*By ___________________________
Jack E. Meyer,
Attorney-In-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<C> <S> <C>
1.1 Underwriting Agreement(3)
3.1 Amended and Restated Articles of Incorporation(1)......
3.2 Amended and Restated Bylaws of the Company(3)
4.1 Form of Common Stock Certificate.(3)
5.1 Opinion of Lindquist & Vennum P.L.L.P.(3)
10.1 Amended and Restated Urologix, Inc. 1991 Stock Option
Plan.*(3)
10.2 Employment Agreement dated January 26, 1994 between the
Company and Jack Meyer.*(3)
10.3 Letter Agreement dated as of October 10, 1994 between
the Company and Jonathan R. McGrath.*(3)
10.4 Supply Agreement dated August 24-25, 1995 between the
Company and SeaMED Corporation.(1)(2)..................
10.5 Lease Agreement dated January 20, 1992, between the
Company and Parkers Lake Pointe I Limited Partnership,
including Addendum to Lease Agreement dated June 20,
1994, Addendum to Lease Agreement dated April 5, 1995
and Addendum to Lease Agreement dated March 7, 1996.(3)
10.6 Investor Rights Agreement dated December 5, 1995
between the Company and certain of its shareholders.(3)
10.7 Distribution Agreement dated February 28, 1994 between
the Company and Nihon Kohden Corporation.(2)(3)
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.*(3)
10.9 Letter agreement dated October 10, 1994 between the
Company and Mitchell Dann.*(3)
10.10 Letter Agreement dated November 18, 1994 between the
Company and William R. Amaden*(3)
10.11 Consulting Agreement dated November 28, 1994 between
the Company and William R. Amaden*(3)
11.1 Statement re: Computation of Loss per Common Share(3)
23.1 Consent of Arthur Andersen, LLP(1).....................
23.2 Consent of Lindquist & Vennum P.L.L.P., included in
Exhibit 5.1.
24.1 Power of Attorney (included in the Signature Page)(3)
</TABLE>
- --------
*Indicates Compensation Plan
(1) Filed herewith.
(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 406.
(3) Previously filed.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
UROLOGIX, INC.
Pursuant to the provisions of Chapter 302A of the Minnesota Statutes, known
as the Minnesota Business Corporation Act, and amendments thereto, the following
Amended Articles of Incorporation, as amended, are adopted and shall supersede
and take the place of the existing Articles of Incorporation and all amendments
thereto.
ARTICLE I - NAME
----------------
The name of the corporation shall be Urologix, Inc.
ARTICLE II - REGISTERED OFFICE
------------------------------
The registered office of the corporation is located at 14405 Twenty-First
Avenue North, Minneapolis, Minnesota 55447.
ARTICLE III - CAPITAL STOCK
---------------------------
The aggregate number of shares the corporation has authority to issue shall
be 30,000,000 shares, $.01 par value per share, which shall consist of
25,000,000 common shares and 5,000,000 undesignated shares. The Board of
Directors of the corporation is authorized to establish from the undesignated
shares, by resolution adopted and filed in the manner provided by law, one or
more classes or series of shares, to designate each class or series (which may
include but is not limited to designation as additional common shares), and to
fix the relative powers, qualifications, restrictions, rights and preferences of
each such class or series, including, without limitation, the right to create
voting, dividend and liquidation rights and preferences greater than those of
common stock.
ARTICLE IV - RIGHTS OF SHAREHOLDERS
-----------------------------------
Section 1. No Preemptive Rights. No shares of any class or series of the
corporation shall entitle the holders to any preemptive rights to subscribe for
or purchase additional shares of that class or series or any other class or
series of the corporation now or hereafter authorized or issued.
Section 2. No Cumulative Voting Rights. There shall be no cumulative
voting by the shareholders of the corporation.
<PAGE>
ARTICLE V - DIRECTORS
---------------------
Section 1. Number and Term. The business and affairs of this corporation
shall be managed by or under the direction of a Board of Directors consisting of
not less than 3 or more than 9 directors, as may be designated by the Board of
Directors from time to time. The directors shall be divided into three (3)
classes, as nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one class
expiring each year at the annual meeting of shareholders. Except as otherwise
provided in this Article V, each director shall be elected by the shareholders
to hold office for a term of three consecutive years. Each director shall serve
until a successor shall have been duly elected and qualified, or until the
earlier death, resignation, removal, or disqualification of the director.
Section 2. Transitional Board. Upon the adoption of these Amended Articles
of Incorporation, one class of directors shall hold office for a term expiring
at the annual meeting of shareholders to be held after the end of the
corporation's 1996 fiscal year, another class shall hold office for a term
expiring at the annual meeting of shareholders to be held after the end of the
corporation's 1997 fiscal year and another class shall hold office for a term
expiring at the annual meeting of shareholders to be held after the end of the
corporation's 1998 fiscal year. After the expiration of each term, the
provisions of Section 1 of this Article V shall control.
Section 3. Vacancies. Any vacancies occurring in the Board of Directors
for any reason, and any newly created directorships resulting from an increase
in the number of directors, may be filled by a majority of the directors then in
office. Any directors so chosen shall hold office until the next election of the
class for which such directors shall have been chosen and until their successors
shall be elected and qualified subject, however, to prior retirement,
resignation, death or removal from office. Any newly created directorships
resulting from an increase in the authorized number of directors shall be
apportioned by the Board of Directors among the three classes of directors so as
to maintain such classes as nearly equal in number as possible.
Section 4. Quorum. A majority of the members of the Board of Directors
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but if less than such a majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice. The directors present at a duly organized meeting may
continue to transact business until adjournment notwithstanding that the
withdrawal of enough directors originally present leaves less than the number
otherwise required for a quorum.
Section 5. Nomination. Advance notice of nominations for the election of
directors, other than by the Board of Directors or a committee thereof, shall be
given within the time and in the manner provided in the Bylaws.
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<PAGE>
Section 6. Written Action by Directors. Any action required or permitted
to be taken at a meeting of the Board of Directors, or a committee thereof, may
be taken by written action signed by all of the directors or, in cases where the
action need not be approved by the shareholders, by written action signed by the
number of directors that would be required to take the same action at a meeting
of the Board or a committee thereof at which all directors were present.
ARTICLE VI - LIMITATION OF DIRECTOR LIABILITY
---------------------------------------------
Section 1. Liability and Indemnification. No director shall be personally
liable to the corporation or to its shareholders for monetary damages for any
breach of fiduciary duty as a director, except to the extent such exemption from
liability or limitation thereof is not permitted under the laws of the State of
Minnesota as the same may exist or may hereafter be amended. Any repeal or
modification of the provisions of this Article shall not adversely affect any
right or protection of a director of the corporation existing at the time of
such repeal or modification.
Any person who at any time shall serve or shall have served as a director,
officer, or employee of the corporation, or of any other enterprise at the
request of the corporation, and the heirs, executors and administrators of such
person shall be indemnified by the corporation in accordance with, and to the
fullest extent permitted by, the provisions of the Minnesota Business
Corporation Act, as it may be amended from time to time.
Section 2. Insurance. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liability under the
provisions of the Minnesota Business Corporation Act.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 24th day
of May, 1996.
/s/ Jack E. Meyer
____________________________________
Jack E. Meyer, President
/s/ Wesley E. Johnson, Jr.
ATTEST: ____________________________________
Wesley E. Johnson, Jr., Secretary
3
<PAGE>
EXHIBIT 10.4
The Company has omitted portions of this document and requested Confidential
Treatment with respect to these portions.
UROLOGIX SUPPLY AGREEMENT
This Supply Agreement and all attachments (called the "Agreement") is made
by Urologix, Inc., ("Buyer") its principal place of business at 14405 Twenty-
First Avenue North, Minneapolis, Minnesota 55447 and SeaMED Corporation,
("Contractor") it's principal place of business at 14500 N.E. 87th Street,
Redmond, Washington 98052. This Agreement sets forth the mutual understanding by
which the Buyer and the Contractor will conduct business for the life of this
Agreement.
Whereas, the Contractor has the facilities and expertise to manufacture,
test and distribute electronic devices in accordance with GMP practices.
Whereas, Buyer desires to engage the services and the facilities of
Contractor for the production and ongoing maintenance of an electronic device
known as the T3 Control Unit (hereinafter "Product") and other related
electronic assemblies as may be specified in the future;
In return for the authorization to build the Buyer's product both parties
agree as follows:
I. DEFINITIONS
(A) "Qualification Testing" shall be defined as the systematic process of
comparing the actual operation of production units to the functional and
engineering specifications and to the established qualification test
procedure.
(B) "Verification Testing" shall be defined as the systematic process of
comparing the actual operation of engineering prototypes of the product to
the functional and engineering specifications.
(C) "Medical Device Reporting" ("MDR") shall be defined as any event
associated with the use of the Product which is required to be reported to
the FDA in accordance with 21 CFR Part 803.
(D) "Device Master Record" shall be defined as the file containing all
pertinent records relative to design, specifications, formulations,
complete manufacturing procedures and quality assurance requirements
relative to production of this medical Product and it's subassemblies.
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(E) "Device History Record" shall be defined as the compilation of records
containing the complete production/maintenance history of a finished
Product and showing latest revision history, maintenance history and
any other records required by the FDA.
(F) "Certificate of Compliance" shall be defined as Contractor's
notification that the Product (including subassemblies for service)
conforms to all established qualification criteria agreed to between
both the Contractor and Buyer as stated in Exhibit C, Quality
Protocols.
(G) "Buyer's Equipment" shall be defined as capital equipment such as
production molds, fixtures or testing equipment purchased for and
charged to the Buyer specifically to manufacture and test the Product.
(H) "Product Complaint" shall be defined as failures which occur in use
which lead to events requiring reporting under the MDR or failures
which occur prior to the minimum life expectancy of the component or
assemblies, latent defects or software anomalies.
(I) "Pre-production Product" shall be defined as the fabrication of
products in the manufacturing area under full GMP control using pre-
production released documentation.
(J) Good Manufacturing Practices ("CGMP") shall mean the Current Good
Manufacturing Practices standards as defined in "Title 21-Food & Drugs"
of the Code of Federal Regulations, as the same may be amended from
time to time.
(K) "Product" shall mean the Buyer's T3 Control Unit as described in
Buyer's Specification No. 40001 (or derivatives thereof), as the same
may from time to time be modified by Buyer.
(L) "FDA" shall mean the Food and Drug Administration of the United States
Department of Health and Human Services.
(M) "ISO" shall mean the International Organization for Standardization.
II. GENERAL TERMS AND CONDITIONS
A. This Agreement is a supply agreement whereby the Buyer agrees to
purchase most of its requirements for the term shown; it does not
obligate Buyer to purchase any specific quantity but only establishes
the terms and conditions for such purchases if they occur. All such
quantities will be specified on Buyer's Purchase Orders, issued under
the provision of this
2
<PAGE>
Agreement and incorporated herein by reference. Contractor agrees to
sell and deliver to Buyer all Products ordered by Buyer.
B. All sales of Products by Contractor to Buyer 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 Buyer or confirmation of
Contractor, except insofar as such Purchase Order or confirmation
establishes the quantity and shipment dates for the Products involved.
C. Buyer may add products to the list of "Products" available for purchase
hereunder by adding such products to a Purchase Order that is accepted
by Contractor. Such added products shall be deemed "Products" as
defined herein as though described in this Agreement at the time of
executing this Agreement. The price for which such added products shall
be available for purchase under this Agreement shall be as stated on
such accepted Purchase Order(s), subject to the provisions of this
Agreement.
D. Payment - Payment for any shipment of product is due thirty (30) days
subsequent to the date of invoice for such shipment. Unless otherwise
specified or required by law, all prices will be quoted and billed
exclusive of federal, state, or local excise, sales, or other similar
taxes. Such taxes, where applicable, will appear as additional terms on
invoices.
E. During the first Contract Year, Buyer shall purchase ***% of its
requirements for the Product from the Contractor and during each
complete or partial Contract Year thereafter, shall purchase ***% of
its requirements for the Product from Contractor.
III. PURCHASE ORDERS
A. The term "Purchase Order" shall mean Buyer's written Purchase Order
form and any documents incorporated therein by reference.
IV. PURCHASE TERM
A. The term during which Buyer may issue Purchase Order for Product, and
Contractor shall supply Product to Buyer under this Agreement
("Purchase Term") shall begin on August 1, 1995 and end three and one-
half years later. Each successive twelve (12) month period beginning
with the sale of commercial Product is referred to as a "Contract
Year." This Agreement governs Purchase Orders issued by Buyer during
the Purchase Term and any extension so long as Buyer has requested
delivery of Product within three (3) months beyond the end of the
Purchase Term or any extension.
3
<PAGE>
B. The Purchase Term will be extended automatically for one (1) year
increments unless written notice not to extend the Agreement is given
by either party at least six (6) months in advance of completion of
current Agreement term.
V. PRODUCT PRICING
A. PREPRODUCTION PRICING will be conducted on a time and material basis
using the standard floor rates and will include G&A and warranty
expenses and operating margin. Refer to Appendix Exhibit A for
additional details.
B. PRODUCTION PRICING
(i) The price which Buyer shall pay for each Product shall be
determined monthly in accordance with the formula set forth on
Exhibit A. The initial Assembly and Test costs on Exhibit A will be
established within one (1) month from completion of the pre-
production units. Assembly and Test costs and Material costs
determined from pre-production and the pricing formula in Exhibit A
will be utilized to establish the initial selling price. A review
of Material and Outplant costs (but not Assembly and Test Costs)
will occur on an annual basis at the beginning of each Contract
Year, after a first review after the first six months of the first
Contract Year. Contractor agrees to open books to Buyer for
verification of material, labor, G&A, warranty, and other costs
listed on Exhibit A.
(ii) Prices include all charges, including without limitation,
packaging, packing, and all taxes except sales, use, and other such
taxes imposed upon the sale or transfer of Product. Buyer shall
have no liability for such taxes if it has complied with statutory
resale tax certificate requirements. If Buyer is liable to pay
these taxes, they shall be specifically listed in Contractor's
invoice.
VI. DELIVERY, LEADTIME AND FLEXIBILITY
A. Contractor shall deliver Product to Buyer within 120 days ("Leadtime")
of the date of Buyer's Purchase Order, unless Buyer requests a later
delivery date or Contractor agrees to an earlier delivery date. TIME AND
RATE OF DELIVERY ARE OF THE ESSENCE OF ALL PURCHASES MADE UNDER THIS
AGREEMENT.
B. All shipments shall be F.O.B. Origin. Buyer shall select the carrier
and shall pay transportation charges in a "freight collect" basis.
4
<PAGE>
C. Buyer may require that shipments of Product under this Agreement be
shipped by Contractor to various destinations. Buyer will clearly
specify the "SHIP TO" location for each Product.
D. Buyer may, without cost or liability, increase or decrease the quantity
under any particular Purchase Order within the following parameters:
*** Months Firm; unchangeable
From Delivery Date
*** Months Increase by *** or *** units, whichever is
From Delivery Date greater; no limit on decreases.
More than *** Months Increase by *** or *** units, whichever
From Delivery Date is greater; no limit on decreases.
If Buyer decreases the quantity under a particular Purchase Order and
does not reschedule the delivery of those units for a date which is
within 60 days of their original delivery date, Buyer shall reimburse
Contractor for all amounts paid to third parties for components
purchased for any units which were cancelled and not so rescheduled.
Any components which Buyer has paid for in this manner shall then
belong to Buyer.
E. Buyer shall use its reasonable efforts to forecast it's intended
purchases for a twelve (12) month period on a quarterly basis. Such
forecast is for Contractor's convenience only and shall not create any
liability on Buyer or obligation to purchase Product.
F. Buyer may, without cost or liability, reschedule the delivery of any or
all Product under any particular Purchase Order by up to 60 days in
accordance with the following schedule:
<TABLE>
<CAPTION>
Number of Days Percentage of
Advance Notice Shipment to be Rescheduled
-------------- --------------------------
<S> <C>
0 - 30 ***
31 - 60 ***
61 - 90 ***
Over 90 ***
</TABLE>
VII. WARRANTY
A. LIMITED WARRANTY
(i) Contractor warrants for fifteen (15) months from date of shipment
to Buyer's customer (but in no event for more than eighteen (18)
months after the date of Contractor's shipment to and acceptance
5
<PAGE>
by the Buyer) that all Product shall be free from defects in
material, and workmanship and shall conform to current,
applicable specifications, drawings, samples and descriptions
referred to in this Agreement. Contractor warrants it has the
right to convey the Product and that the Product is free of all
liens and encumbrances. These warranties shall survive any
inspection, delivery, payment, and termination of this Agreement,
and shall run to Buyer, its customers, successors, and assigns.
(ii) Except with respect to work performed by foreign service centers
operated by third parties under VII D, Contractor shall correct
defects in Product at its facility. At Buyer's option, Contractor
shall complete an assessment of product returned within 72 hours
of receipt of Product and use its best efforts to repair or
replace all defective Product within fourteen (14) days of
receipt of such Product. Contractor agrees to pay returned
freight to the customer and method of shipment will be consistent
with the method of inbound freight to the Contractor. Any other
freight will be the responsibility of the Buyer.
(iii) Contractor warrants that all Products shall not be "adulterated"
or "misbranded" at the time of manufacture within the meaning of
the U.S. Food, Drug and Cosmetic Act, as amended and shall be
produced, manufactured and assembled in compliance with (a) all
applicable federal and state laws and rules and regulations,
including but not limited to The Food, Drug and Cosmetic Act of
1938 as amended and all regulations promulgated thereunder,
including without limitation, Good Manufacturing Practices for
medical devices and, (b) the International Standards Organization
Rules 9000 et seq. in effect at the time of production.
(iv) Contractor warrants that, to its knowledge, none of the processes
and equipment which it utilizes in the manufacturing of the
Product infringes, violates, or breaches any U.S. patent or the
intellectual property rights of any third party, and shall not,
to its knowledge, in the future violate any such rights of any
third party.
B. NON-WARRANTY SERVICE
(i) To the extent desired by Buyer, repair services outside the scope
of the warranties described in this Section VII shall be provided
by the Contractor pursuant to a Repair and Service Agreement to
be negotiated in good faith by the parties and signed within a
reasonable time following execution of this Agreement.
6
<PAGE>
C. SUPPLY OF REPLACEMENT PARTS
(i) Contractor agrees to promptly provide Buyer, or Buyer's designee,
in a timely manner and upon request, Buyer's requirements of
replacement parts for warranty and non-warranty repairs or
service. Buyer shall pay for such non-warranty replacement parts
at a cost equal to SeaMED's cost for the component involved
increased by a material burden of ***%, and an operating margin
of ***%, plus freight and shipping charges actually incurred by
the Contractor. The cost of replacement parts required for
warranty repair services including freight and shipping charges,
shall be at the Contractor's expense as part of it's warranty
services.
(ii) Contractor warrants that for a period of time beginning on the
date of delivery to the Buyer, or the Buyer's designee, of any
replacement parts provided pursuant to this Section A, Limited
Warranty, and continuing thereafter for ninety (90) days
following installation of such replacement parts (but in no event
to exceed six (6) months from the date of delivery of such
replacement parts to the Buyer), each such part shall be free
from defects in material and workmanship and shall be subject to
the same additional warranties and terms as are contained in
Section VII A (excluding the term of the warranty under VII A
(i)) with respect to the Product generally. In the event any
replacement part provided pursuant to this Section does not
conform with the above, the Buyer or, at the Buyer's option, the
Buyer's designee shall return such replacement part to the
Contractor, and the Contractor shall, within seven (7) days
following the receipt, promptly repair or replace such
replacement part without charge and refund to the Buyer or the
Buyer's designee freight paid by the Buyer or the Buyer's
designee for the original and return shipment, such freight cost
not to exceed the then current surface rate, freight charge
charged by United Postal Service ("UPS") or, if such UPS freight
charge is not readily available, the rate charged by a shipping
company similar to UPS.
(iii) Contractor is not responsible for the workmanship of third party
whose work is not performed under contract with Contractor.
D. FOREIGN SERVICE CENTERS
(i) If Contractor does not establish a warranty service center in a
country where Buyer desires such a service center by such date as
may from time to time be requested by Buyer, Buyer may establish
such service centers with third parties. Contractor shall, in a
prompt
7
<PAGE>
and timely manner and at Contractor's expense, supply any such
third party service center with all parts required for warranty
repairs or service, and shall promptly reimburse Buyer for the
reasonable cost of all such warranty repairs and services
performed by any such third party service center.
VIII. CONFIDENTIAL INFORMATION AND ADVERTISING
A. Contractor shall maintain as confidential any specifications,
drawings, blueprints, data, business information, trade secrets, or
other information ("Confidential Information") which Contractor learns
or acquires by virtue of this Agreement, except as required by law,
and after written notice to Buyer. Contractor further agrees to
protect the "Confidential Information" against disclosure to persons
who have not been authorized, in writing, by Buyer to receive the same
and Contractor shall not use any Confidential Information for any
purpose other than manufacturing the Product for Buyer.
B. Contractor may disclose Confidential Information to Contractor's
employees who have a need to know and a legal duty to protect such
confidential information. At Buyer's request Contractor agrees to
return any or all Confidential Information to Buyer, or to destroy or
otherwise dispose of any or all Confidential Information, as directed
by Buyer.
C. Without Buyer's prior written consent, Contractor shall not in any
manner disclose (except as required for financing), advertise, or
publish the existence of this Agreement nor the terms of transactions
under this Agreement, which shall be considered as part of the
"Confidential Information".
D. The term Confidential Information shall not include information which
Contractor demonstrates is in the public domain at the time of
disclosure or afterward, except where such information becomes public
due to a breach by Contractor of its obligations hereunder, nor shall
the term Confidential Information include information which is in
Seller's possession at the time of disclosure as evidenced by the
written records of Contractor or which may be disclosed to Contractor
by a third party having the right to disclose the same.
IX. OWNERSHIP
A. Specifications. Contractor acknowledges that the specifications and
all related writings, drawing, artwork, computer assisted designs and
similar works (collectively "Manufacturing Information") are and shall
be the
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exclusive property of Buyer, and Buyer retains all right, title and
interest, including copyright, relating to such material. Contractor
agrees to deliver to Buyer copies of all Manufacturing Information
within ten (10) business days of the date when Contractor begins to
utilize any particular items of Manufacturing Information in the
manufacturing of the Product. Upon termination of this Agreement for
any reason, Contractor agrees to deliver to Buyer copies of all
Manufacturing Information within ten (10) business days of such
termination; this material shall be complete in every respect, so as to
permit an experienced manufacturer to manufacture, assemble, maintain
and service the Product described in this Agreement. Manufacturing
Information shall include a full drawing package in reproducible form,
and any revisions or updates, including but not limited to: DXF Autocad
files, fabrication drawings, an approved supplier list which identifies
the names and addresses of all current suppliers of all raw materials,
parts and components, test specifications, tooling specifications and
drawings, manufacturing assembly instructions, routings, quality
assurance protocols, test equipment, lists of parts and components,
specs and drawings, engineering change notice history, device master
records, device history records, complaint files, and any other records
or files which Contractor must maintain for FDA or other regulatory
purposes. Transfer of all Manufacturing Information will be product
specific not including Contractor's proprietary policies and
procedures.
B. Buyer's Equipment. Set forth on Exhibit B is a list of all of Buyer's
Equipment as of the date of this Agreement. Contractor and Buyer shall
periodically update Exhibit B to include newly acquired items of
Buyer's Equipment. Contractor shall install, maintain and account for
Buyer's Equipment at Contractor's or subcontractor's of the Contractor
facilities in accordance with GMP. Contractor hereby acknowledges that
the Buyer's Equipment is the sole and exclusive property of Buyer.
Buyer shall provide identification and ownership tags (also called
asset tags) for the Buyer's Equipment, and Contractor shall ensure that
such tags are properly placed and maintained on all Buyer's Equipment.
Contractor hereby covenants that, during the term of this Agreement:
(i) Contractor and any subcontractor of Contractor using Buyer's
Equipment shall utilize Buyer's Equipment solely for
manufacturing Buyer's requirements of the Product as ordered
hereunder,
(ii) Contractor shall not encumber any of the Buyer's Equipment, nor
shall Contractor permit the Buyer's Equipment to become
encumbered as a result of any act or omission or Contractor or a
subcontractor of Contractor.
9
<PAGE>
C. Within five (5) business days following termination or expiration of
this Agreement for any reason, Contractor agrees to properly pack and
return to Buyer, or cause to be properly packed and returned to Buyer,
F.O.B. point of shipment, all Buyer Equipment, the same to be shipped
to such facility as Buyer directs at Buyer's expense.
D. Improvements. Contractor hereby acknowledges that all improvements to
the Product, the manufacturing process for the Product and any Buyer's
Equipment shall be the sole property of Buyer, and Contractor shall
provide Buyer, at Buyer's request and at a reasonable charge,
reasonable assistance in securing patents for such improvements.
Contractor agrees to promptly disclose all improvements to Buyer and to
execute documents reasonably requested by Buyer to evidence Buyer's
ownership of such improvements.
X. INDEMNITY FOR THIRD PARTY CLAIMS
A. Buyer agrees to indemnify and hold Contractor, its affiliated entities,
and their respective officers, directors, shareholders, employees and
agents, harmless from and against all costs, claims, losses, damages,
liability and expenses (including, without limitation, attorney's fees
and disbursements) incurred on account of any injury to persons or
property arising out of, or in any way connected with the Product
unless the same results from Contractor's negligence or from the
failure of the Product involved to conform, for a period of five (5)
years, with Contractor's warranties contained in Article VII, without
regard to the 15/18 month limitation contained in the warranty under
VII A (i). In the event any claim is asserted or any suit is filed
against Contractor for which Buyer may be required to indemnify
Contractor under this provision, Contractor shall give Buyer prompt
written notice of same. Contractor shall cooperate with Buyer, at
Buyer's request and expense, in the defense of any such claim. Buyer
shall have the sole right to defend and/or settle such a claim,
including selecting counsel of its choice.
B. Contractor agrees to indemnify and hold Buyer, its affiliated entities,
and their respective officers, directors, shareholders, employees and
agents, harmless from and against all costs, claims, losses, damages,
liability and expenses (including, without limitation, attorney's fees
and disbursements) incurred on account of any injury to persons or
property arising out of, or in any way connected with, Contractor's
negligence or from failure of the Product involved to conform, for a
period of five (5) years, with Contractor's warranties contained in
Article VII, without regard to the 15/18 month limitation contained in
the warranty under VII A (i). In the event any claim is asserted or any
suit is filed against Buyer for which Contractor may be
10
<PAGE>
required to indemnify Buyer under this provision, Buyer shall give
Contractor prompt written notice of same. Buyer shall cooperate with
Contractor, at Contractor's request and expense, in the defense of any
such claim. Contractor shall have the sole right to defend and/or
settle such a claim, including selecting counsel of its choice.
C. Contractor agrees to indemnify and hold Buyer, its affiliated entities,
and their respective officers, directors, shareholders, employees and
agents, harmless from and against all costs, claims, losses, damages,
liability and expenses (including, without limitation, attorney's fees
and disbursements) arising out of or in conjunction with any claim that
any of the processes or equipment utilized by Contractor, excluding
equipment specified for use by Buyer, in the manufacturing of the
Product violates or infringes any U.S. patent or the intellectual
property rights of any third party.
XI. FORCE MAJEURE
Neither party shall be considered to be in default in respect of any
obligation hereunder, if failure of performance shall be due to Force
Majeure. If either party is affected by a Force Majeure event, such
party shall, within ten (10) days of its occurrence, give notice to the
other party stating the nature of the event, its anticipated duration
and any action being taken to avoid or minimize its effect. The
suspension of performance shall be of no greater scope and no longer
duration than is required and the non-performing party shall use
reasonable efforts to remedy its inability to perform. Force Majeure
shall mean explosion, flood, fire, war (whether declared or otherwise),
accident, labor strike, or other labor disturbance, sabotage, acts of
God, or acts of regulatory agencies, (other than the FDA, or a Notified
Body or Competent Authority with respect to ISO certification), failure
of suppliers to deliver components when ordered in a timely manner by
the party involved, which are unforeseeable or unavoidable and beyond
the control and without the fault or negligence of a party.
XII. REGULATORY MATTERS
A. Complaints - Buyer shall forward to Contractor copies of customer
Product complaints relating to the manufacture and operation of the
Product which it determines are to be reported as a MDR within 48 hours
of such determination, and Contractor will cooperate fully with the
Buyer in investigating such complaints. In the event that customer
complaints are received by the Contractor they are to be forwarded to
the Buyer's Customer Quality within forty-eight (48) hours of receipt.
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Upon the request of the Buyer, and at a reasonable charge mutually
agreed upon between the parties, Contractor will conduct a
comprehensive analysis and test of any Product subject to a complaint
and will promptly provide Buyer with a written report on such analysis
and testing period. The cost of any such analysis and testing shall be
paid by the party which is responsible for the problem which resulted
in the issuance of the MDR involved.
B. Registration - Contractor hereby represents to Buyer that it shall, at
its sole cost and expense, timely register with the FDA as a Medical
Device Manufacturer, or cause to be timely registered with the FDA, in
accordance with the Federal Food, Drug and Cosmetic Act 21 CFR Part 807
as amended, and obtain appropriate ISO certification for its
establishment and will maintain all such FDA and ISO registrations and
certifications in effect at all times during the term of this
Agreement.
C. Product Reports - Buyer shall provide Contractor with a copy of all
medical device reports ("MDR") pertaining to the Product which are
issued under the Federal Food, Drug and Cosmetic Act as amended.
D. Regulatory Reports - Contractor shall provide or cause to be provided
to Buyer within five (5) days of their receipt by Contractor, or
subcontractor of Contractor, copies of any ISO summary reports and of
any FDA Form 483 observations, follow-up warning letters and/or
closeout reports for those portions of FDA GMP compliance inspection
reports relating in general or specifically to the manufacture of the
Product(s) or any facility where the Product(s) is manufactured.
Confidential information of other customers which is contained in
reports which relate generally, but not specifically, to the Product
may be redacted.
E. Contacts - Each party shall designate an individual within their
organization to be the primary contact regarding regulatory issues.
Such individual can be changed by giving written notice thereof to the
other party.
F. Regulatory Audits - Buyer may, from time to time and upon notice to
Contractor, review and inspect all documents and records of Contractor
relating to the Product, and pertaining to Contractor's compliance with
GMP and ISO requirements. All such regulatory audits shall be conducted
during normal business hours. Contractor shall make appropriate
personnel available to assist Buyer in evaluating such records.
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XIII. NOTICES
A. Any notice under this Agreement shall be in writing, and may be
delivered by hand or sent by mail or facsimile transmission. Notices
sent by mail shall be sent by registered mail or certified mail,
postage prepaid, return receipt requested, and shall be deemed received
on the date of receipt indicated by the receipt verification provided
by the United States Postal Service. All notices shall be effective
when first received at the following addresses:
If to Contractor: If to Buyer:
SeaMED Corporation Urologix, Inc.
14500 N.E. 87th Street 14405 Twenty-First Avenue North
Redmond, WA 98052 Minneapolis, MN 55447
Attn: Vice President,
Research & Development
with copies to: with copies to:
Manager, Customer Support
Vice President, Operations
Vice President Regulatory Affairs and
Quality Assurance
Either party may designate any other address for notices given it by
written notice to the other party given at least ten (10) days prior to
the effective date of such change.
XIV. TERMINATION
(A) Upon any breach of the terms and provisions herein, this agreement may
be terminated by either party hereto if such breach is not corrected
within sixty (60) days after written notice to the defaulting party
calling for remedy of such breach; provided however that if the breach
involved is the failure of Contractor to deliver conforming Products on
time, Contractor shall cure any such breach within fifteen (15) days.
If Contractor fails to deliver conforming Products on time on three or
more occasions in any period of 120 days, Buyer may at any time
thereafter terminate this Agreement. If any provision of this agreement
gives any party the right to terminate this agreement, upon the
occurrence or non-occurrence of certain stipulated events, such
termination shall be effective upon written notice to the other party.
(B) In the event that this agreement is terminated, the parties agree as
follows:
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(1) Regardless of which party terminates the agreement, BUYER shall buy
from CONTRACTOR, at cost plus one-half of normal mark-up, any and
all transferable parts and other raw materials which are in
inventory or are on order and non-cancelable by CONTRACTOR and
which are new and in serviceable condition; provided however, BUYER
shall not be required to purchase more than a three (3) month
supply of any particular part, based on BUYER's most recent
quarterly forecast plus up to an additional $50,000 in the
aggregate for any additional parts and raw materials which were
purchased in good faith by Contractor to achieve economies of scale
or reduce leadtimes. BUYER shall reimburse CONTRACTOR for all
finished goods and work in process either on hand or on order and
non-cancelable, purchased and/or manufactured as a result of
BUYER's purchase orders; provided however, that Buyer shall not be
required to purchase more than a three (3) month supply of any such
items, based upon Buyer's most recent purchase order. The price for
finished goods shall be the most recent price for Products under
Exhibit A and the price for any work in process shall be as agreed
at that time. CONTRACTOR shall complete any work in process if so
requested by BUYER as if no termination notice was given.
(2) If BUYER terminates this agreement, and if BUYER requests
CONTRACTOR's assistance in establishing an alternate source for the
production of the product, CONTRACTOR shall provide to BUYER design
details, tooling, work in process, and other Manufacturing
Information relating to the Product. BUYER shall be responsible for
the costs, if any, of copying records and the costs of transferring
transferable parts to such alternate source. CONTRACTOR shall
provide a complete listing of parts including traceability records.
XV. GENERAL
A. Only the authorized representatives of the parties may amend or waive
provisions of this Agreement. Any such amendment or waiver shall not be
binding unless it is in writing and signed by both parties. If either
party fails to enforce any term of this Agreement, failure to enforce
on that occasion shall not prevent enforcement on any other occasion.
B. As used in this Agreement, except where otherwise noted, the term
"days" shall mean calendar days.
C. Contractor, including its servants, agents and employees, is an
independent contractor and not an agent or employee of Buyer. Without
limiting the
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generality of the foregoing, Contractor is not authorized to represent
or make any commitments on behalf of Buyer, and Buyer expressly
disclaims any liability therefore.
D. All rights and remedies conferred by this Agreement, by any other
instrument, or by law are cumulative and may be exercised singularly or
concurrently. If any provision of this Agreement is held invalid by any
law or regulation or any government or by any court, such invalidity
shall not affect the enforceability of any other provisions hereof.
This Agreement and any Purchase Orders issued hereunder shall be
governed by and interpreted in accordance with the laws of the State of
Washington.
E. The provisions of this Agreement dealing with Delivery, Payment and
Off-Set, Warranty, Confidential Information and Advertising, Ownership,
Intellectual Property Indemnity, Changes Term of Availability, U.S.
Customs, Marking and Duty Drawback Requirements, Compliance with Laws,
General, Manufacturing Assistance, and any other provisions which by
their terms are intended to survive the termination of this Agreement
shall survive termination or expiration of this Agreement and remain in
full force and effect thereafter.
F. The parties agree that, in addition to any other relief afforded under
the terms of this Agreement or by law, each party shall have the right
to enforce this Agreement by injunction issued against the other party,
it being understood that both damages and injunctive relief shall be
proper modes of relief and are not to be considered as alternative
remedies.
G. This Agreement represents the entire agreement between the parties and
supersedes all previous communications, representations, understandings
and agreements, either oral or written, between the parties with
respect to the subject matter of this Agreement.
XVI. BUSINESS REVIEWS
A. Buyer and Contractor shall, each at their own expense, meet
periodically to review performance and business transacted, and to
identify and resolve those issues which have arisen since the last
business review meeting.
B. Buyer and Contractor shall furnish agenda items not later than one (1)
week prior to scheduled business review meetings. Minutes shall
document action items, open items, and committed dates which may be the
result from such business review meetings, and shall be sent by the
drafting party to the other party within ten (10) days after each
meeting.
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XVII. INSURANCE
A. Contractor agrees to carry at all times, and with companies acceptable
to Buyer, insurance of the kinds and in the amounts listed below:
(i) Worker's Compensation statutory limits in each state in which
Contractor is required to provide Worker's Compensation coverage.
(ii) Employee's Liability not less than $500,000 per employee.
(iii) Comprehensive General Liability - including Contractual
Liability, Independent Contractor's Liability, Products and/or
Completed Operations Liability, and Personal Injury / Property
Damage Coverage's in a combined single limit of not less than
$1,000,000.
(iv) Automobile Liability for owned, nonowned and hired vehicles in a
combined single limit of not less than $1,000,000.
(v) Umbrella Liability a combined single limit of not less than
$2,000,000.
B. Buyer agrees to carry at all times, and with companies acceptable to
Contractor, insurance of the kinds and in the amounts listed below:
(i) Comprehensive General Liability - including Contractual
Liability, Independent Contractor's Liability, Products and/or
Completed Operations Liability, and Personal Injury / Property
Damage Coverage's in a combined single limit of not less than
$1,000,000.
(ii) Umbrella Liability a combined single limit of not less than
$3,000,000.
XVIII. LIMITATION OF LIABILITY
A. Except as otherwise provided in this Agreement, neither party shall be
liable for special, indirect, incidental, or consequential damages
arising from its breach of warranty or negligence. The foregoing
limitation shall not limit Contractor's liability for any costs,
expenses, and damages arising from Contractor's breach of warranty or
negligence if the same arises out of or in connection with: claims
brought by third parties; Contractor's unauthorized disclosure of
Buyer's confidential information; or any indemnification granted by
Contractor in connection with this Agreement.
B. In no event shall Buyer's liability to Contractor exceed the total
amount to be paid to Contractor hereunder.
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XIX. NO IMPLIED LICENSE
A. The parties understand that, except as may be otherwise expressly
stated herein, neither the Terms or Conditions of this Agreement, nor
the acts of either party arising out of this Agreement or related to
Buyer's purchase, use, sale, or other distribution of Product may be
considered in any way as a grant of any license whatsoever under any of
Buyer's present or future patents, copyrights, trademarks, trade
secrets, or other proprietary rights, nor is any such license granted
by implication, estoppel, or otherwise.
XX. MANUFACTURING ASSISTANCE
For purposes of Buyer's Pre-Market Application with the FDA and to reduce
the consequences to Buyer of an interruption in the supply of Products,
Buyer may establish an alternate source of supply for a portion of Buyer's
requirements for the Product. Contractor agrees to assist Buyer in
establishing and developing the necessary facilities, equipment and skills
to enable Buyer to itself manufacture the Product. Contractor's assistance
shall include, without limitation, providing the Manufacturing Information
to Contractor in a prompt and timely manner and making Contractor's
employees available for consultation and training, both by phone and from
time to time at Buyer's facilities. Any transportation, food, lodging, and
other out-of-pocket travel expenses and direct labor expenses incurred by
Contractor in conjunction with providing such assistant at Buyer's
manufacturing site shall be reimbursed to Contractor by Buyer. Direct labor
expenses shall be charged to Buyer at the actual hourly wage rate paid the
employee involved by Contractor, plus an additional ***% as an allowance
for all fringe benefit costs. To the extent that any Manufacturing
Information includes any inventions, know-how, or other proprietary rights
(whether patented or unpatented) of Contractor, Contractor hereby grants a
perpetual, non-exclusive, royalty free, worldwide right and license to
Buyer to utilize the same in conjunction with the manufacture of the
Product(s). All Manufacturing Information shall be considered Confidential
Information and shall be governed by the terms of Article VIII of this
Agreement.
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IN WITNESS WHEREOF, the authorized representatives of the parties have
executed this Agreement under seal of the date(s) set forth below.
SeaMED Corporation Urologix, Inc.
Contractor Buyer
By: /s/ W. ROBERT BERG By: /s/ JONATHAN R. McGrath
------------------------- ---------------------------
(Signature) (Signature)
W. Robert Berg Jonathan R. McGrath
- ----------------------------- --------------------------------
(Printed Name) (Printed Name)
PRES./C.E.O. VP R&D
- ----------------------------- --------------------------------
(Title) (Title)
8/24/95 25/AUG/1995
- ----------------------------- --------------------------------
(Date) (Date)
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EXHIBIT A
Price = ***
Where:
M = Material Cost
Mb = Material Burden
A = Assembly and Test cost
Op = Outplant Costs
Mo = Other Manufacturing
Ga = G&A and Mktg.
Om = Operating Margin
Material Burden, Assembly and Test costs, Outplant costs, Other Manufacturing
costs, and G&A and Mktg. costs shall be adjusted in accordance with Buyer's
Estimated Annual Purchases of Products in accordance with the following
schedule.
The price for Products purchased each month by Buyer shall be determined
according to the following schedule, based upon the Estimated Annual Purchases
of Buyer. At the beginning of each month, Buyer's Estimated Annual Purchases
shall be deemed to be two times the sum of (i) the amount of Buyer's purchases
during the preceding three months plus (ii) the amount of Buyer's purchases for
the following three months, which for this purpose, shall be determined by
multiplying the number of units of Product for which Buyer has issued purchase
orders for that period by the average per unit price paid by Buyer for the
Product during the preceding three months.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estimated (lesser than)$*** $*** to $*** to (greater than)$***
Annual Purchases $*** $***
Material Cost *** *** *** ***
Material Burden ***% ***% ***% ***%
Assembly & Test *** *** *** ***
Outplant Costs *** *** *** ***
Other Manufacturing ***% ***% ***% ***%
G&A & Mktg. ***% ***% ***% ***%
Operating Margin ***% ***% ***% ***%
</TABLE>
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
Arthur Andersen LLP
Minneapolis, Minnesota,
May 28, 1996
