<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ____________________
Commission File Number 0-28414
UROLOGIX, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1697237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14405 21ST AVENUE NORTH, MINNEAPOLIS, MN 55447
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 475-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01
PAR VALUE. PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of September 23, 1997, the aggregate value of the Company's Common Stock held
by non-affiliates of the Company was approximately $154,700,000 based on the
last reported sales price on that date.
As of September 23, 1997 , the Company had outstanding 9,328,896 shares of
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE.
The Company's Proxy Statement for its 1997 Annual Meeting of Shareholders to be
held on November 19, 1997 is incorporated by reference into Part III of this
Form 10-K.
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PART I
ITEM 1. BUSINESS
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OVERVIEW
Urologix is engaged in the development of minimally-invasive medical
devices for the treatment of urological diseases. The Company's initial
product, the Targis 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 affect a man's quality of life. The Targis
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 Targis procedure can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, the procedure can be performed in a low-
cost setting such as a physician's office or an outpatient clinic. The
Company believes that the Targis System 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 Company has regulatory approvals necessary to market the Targis System in
the United States, Japan, Canada and the eighteen European Union countries.
Evidence of BPH typically begins to appear in men in their 50s, and by
age 70 the quality of life of most men is negatively affected by BPH symptoms.
These troubling symptoms include increased frequency of urination, a sudden
urgency to urinate and a weak flow of urine. It is estimated that at least 23
million men worldwide, including six million men in the United States, suffer
moderate to severe symptoms of BPH. It is further estimated that in the
United States over 70% 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 1997, 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.
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The Company's clinical studies have demonstrated that most patients who
received the Targis therapy experienced a significant improvement in BPH
symptoms and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days.
As of September 1, 1997, over 750 patients affected with BPH have been treated
with Urologix' Targis System in controlled clinical studies. The Company
submitted results of its clinical studies to the United States Food and Drug
Administration (the "FDA") in its premarket approval application ("PMA") in
February 1997, and subsequently received FDA approval to market the Targis
System in August 1997. The Company intends to begin marketing the Targis
System in the United States in the fourth calendar quarter of 1997.
The Company will market the Targis System in the United States with a
direct sales force. Outside the United States, the Company markets the Targis
System through two independent distributors. Boston Scientific Corporation
(BSC), a worldwide developer, manufacturer and marketer of medical devices,
markets the Targis System in all countries outside the U.S., except Japan.
Nihon Kohden Corporation (NKC), a large Japanese medical device manufacturer
and marketer, markets the Targis System in Japan.
CAUTIONARY STATEMENT
Statements included in this Annual Report on Form 10-K that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause
actual results to differ materially. These factors include (i) competition
from other existing or new BPH treatments; (ii) the Company's ability to
successfully market its product in the United States through sales
representatives; (iii) the ability of the Company's distributors to
successfully market and sell the Company's products in markets outside the
United States; (iv) the Company's ability to successfully manufacture the
Targis System in sufficient quantities to meet future demand for the products
and; (v) the extent to which the physicians performing the Targis System
procedures are able to obtain third party reimbursement.
BENIGN PROSTATIC HYPERPLASIA ("BPH")
BPH is a non-cancerous urological disease in which the prostate enlarges
and constricts the urethra. Symptoms associated with BPH affect the quality of
life of millions of sufferers worldwide and BPH can lead to irreversible
bladder or kidney damage. The prostate is a walnut-size gland surrounding the
male urethra (the channel that carries urine from the bladder out of the body)
that is located just below the bladder and adjacent to the rectum. The
prostate produces seminal fluid and plays a key role in sperm preservation and
transportation. While the actual cause of BPH is not fully understood, it is
known that as men reach middle age, cells within the prostate that are located
primarily lateral, medial and anterior to the urethra (the "transition zone")
begin to grow at an increasing rate. As the transition zone of the prostate
expands, it compresses or impinges other portions of the prostate gland and
the urethra, thereby restricting the normal passage of urine. This restriction
of the urethra may require a patient to exert excessive bladder pressure to
begin urination. If the patient cannot generate sufficient force to adequately
void urine from the bladder, the possibility of infection and bladder and
kidney damage increases.
The symptoms a patient experiences from BPH primarily relate to changes
in urinary voiding and may have a significant impact on a patient's quality of
life. These symptoms include:
<TABLE>
<S> <C>
. increased frequency of urination during . Stopping and starting of flow during
the day and night urination
. sudden urgency to urinate . weak flow of urine
. difficulty in starting urination . sensation of incompleteness in emptying
of the bladder
</TABLE>
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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 (intravesical 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 1996:
<TABLE>
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MALE POPULATION UNITED STATES OUTSIDE U.S. /(1)/ TOTAL
--------------- ------------- ------------------ -----
<S> <C> <C> <C>
Over age 50 31 million 90 million 121 million
Moderate to severe BPH symptoms
and reduced urine flow rates 6 million 17 million 23 million
Treated for BPH 1.7 million 1.7 million 3.4 million
</TABLE>
(1) Represents only certain markets
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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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 1.5 million men in the United States in 1996 for the treatment
of BPH symptoms. The Company believes the dramatic acceptance of drug therapy
in the short period since FDA approval is due to extensive drug company
marketing, resulting in increased 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 and cost.
Surgical Treatments for BPH
Surgical treatments for BPH typically use various means to completely
remove the prostatic urethra along with a substantial portion of the diseased
tissue within the prostate. Approximately 1.0 million prostatic surgeries
were performed worldwide in 1996, 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.
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The most common surgical procedure for the treatment of BPH is TURP,
whereby a rigid instrument is inserted into the patient's urethra through
which the surgeon passes an electrosurgical loop that is used to remove the
urethra and the diseased tissue within the prostate. 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 1930s. The Company estimates there were over 800,000
TURP's performed worldwide in 1995, making it the second most common
surgical procedure performed on men over age 55. During the past several
years, the number of TURPs performed worldwide has been decreasing, which the
Company believes is due to increased awareness of the complications of surgery
and the availability of drugs as an alternative treatment. While TURP results
in a dramatic improvement in urine flow in 90% of the patients and a reduction
in the AUA Symptom Score in 85% of the patients, a significant number of
patients experience serious complications. Virtually all patients experience a
burning sensation upon urination that lasts for up to three weeks following
the procedure. Other complications, as reported by AHCPR, include retrograde
ejaculation--the reverse flow of semen--(73.4% of patients), infection
(15.5%), impotence (13.6%), excessive hemorrhaging requiring transfusion
(12.5%) 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 element is a tissue vaporizing cylinder or ball
rather than a loop. TVP removes the prostatic urethra and vaporizes and
coagulates prostatic tissue thereby widening the channel for urinary flow.
Laser assisted prostatectomy includes two similar procedures-visual laser
ablation of the prostate ("V-LAP") and contact laser ablation of the prostate
("C-LAP"), in which a laser fiber catheter is guided through a cystoscope and
used to ablate and coagulate the prostatic urethra and prostatic tissue. 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"), which is being marketed in United States by VidaMed
(see "Competition"), and interstitial laser therapy, which is in clinical
trials and has 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 setting.
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Other technologies to treat BPH have been developed or are under various
stages of development, including stents, dilatation balloons, transurethral
and transrectal hyperthermia and high intensity focused ultrasound.
THE UROLOGIX APPROACH
The Targis System is a non-surgical, catheter-based technology to treat
BPH. The Targis System utilizes a proprietary microwave technology delivered
through a flexible catheter 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
Targis procedure does not require punctures or incisions, thereby leaving the
urethra intact. As a result, the procedure can be performed without general or
regional anesthesia or intravenous sedation. Consequently, the procedure has
been, and is expected to be, performed in an office or outpatient setting and
does not require an overnight hospital stay.
The Company's clinical studies indicate that most patients who received
the Targis procedure experienced a significant improvement in AUA Symptom
Scores and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days.
TARGIS PRODUCT DESCRIPTION AND TECHNOLOGY
The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and
Rectal Thermosensing Unit ("RTU"). The Targis Control Unit contains the
microwave generator, a solid-state refrigerant device, a circulation pump and
electronic circuitry to monitor therapy. The Targis Control Unit supplies
microwave energy and coolant to the Targis Catheter and collects and processes
data from the Targis Catheter and the RTU. The Targis Catheter contains a
microwave antenna for delivering microwave energy to the prostate and a
thermosensor for monitoring the urethral temperature. The Coolant Bag holds
the coolant that is circulated during therapy. The RTU monitors rectal
temperatures. The Targis Catheter, Coolant Bag and RTU are single-use
devices.
In a Targis procedure, the Targis Catheter is inserted into the urethra
and the RTU is inserted into the rectum. 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 while swelling
subsides. Following necrosis of the prostatic tissue, pressure on the urethra
is decreased and BPH symptoms are reduced.
The exposure time required to produce cell death decreases exponentially
with increasing temperatures. Virtually all cells heated to above 45 C for
one hour will die. As temperatures increase above 45 C, the time required for
cell death decreases. The challenge to providing effective microwave therapy
relates to producing and maintaining adequate temperature elevation in the
diseased tissue while, at the same time, preventing excessive thermal exposure
to the urethra and the rectum, as well as the internal and external urinary
sphincters. Protection against injury to the rectum is particularly
important, as serious complications could occur should the rectum be thermally
damaged. Protection of the urethra is important because it decreases the pain
associated with the procedure and shortens recovery time. In addition,
protection of the internal and external urinary sphincters maintains urinary
continence and may preserve ejaculatory function.
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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 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 Targis System addresses these challenges through a unique
integration of the following proprietary technologies.
Transurethral Microwave Heating and Catheter Cooling
A specially designed antenna within the Targis Catheter radiates
microwave energy, at approximately 915 MHZ, preferentially into the prostatic
tissue. The tissue absorbs this energy, and heat is inductively generated to
increase tissue temperature above 45 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 Targis procedure produces and
maintains an extensive zone within the prostate which exceeds 45 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 Targis System is designed to maintain urethral
temperatures below 45 C during the Targis 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, that could be damaging. The Company
has a patented technology that enables the delivery of microwave energy in a
radially preferential fashion. This is employed to direct a greater amount of
energy toward the anterior and lateral regions of the prostate than toward the
rectum. With the use of preferential heating, limitations on heat delivery
into the prostate imposed by the proximity of the prostate to the rectum are
minimized. The Company's Targis System is designed to continuously deliver
greater amounts of energy to the diseased areas of the prostate, resulting in
sustained higher temperatures in these areas, a larger area of cell death and
thus a more effective treatment.
The Targis System is designed to maintain rectal temperatures beneath the
FDA's guideline of 42.5 C. Only on rare occasions in the Company's clinical
trials has a patient's rectal temperature reached 42.5 C. In the event that
this limit is reached, the Targis System is designed to automatically shut off
microwave power until the rectal temperature returns to an acceptable level.
Attempts by others to use microwave energy non-preferentially to heat the
prostate have been hindered by frequent elevation of rectal temperatures which
cause treatment to be temporarily suspended until rectal temperatures
decrease.
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Impedance Matching and Heat Generation
Transfer of microwave energy from the antenna in the Targis Catheter to
the prostate tissue is affected by the balance between the electrical
impedance of the antenna and the tissue surrounding it. Without adequate
matching of the antenna to its environment, a large portion of the electrical
energy can be reflected back through the antenna cable instead of being
radiated to the prostate as intended. This can cause two compromising
effects. The reflection of microwave energy can cause radiant emissions to
occur along the transmission cable and could result in temperature elevation
to areas outside the target tissue in the prostate. More importantly, a
mismatched system can also cause resistive heating to occur. The resistive
heat, which is generated by the antenna, does no useful work because it is
absorbed by the cooling channels within the catheter. Such resistive heat
diminishes the heat carrying capacity of the catheter. This can be important
because changes to the temperature of the catheter's cooling fluid result in
urethral temperature changes. The Targis System addresses these problems by
diminishing the amount of energy reflected and therefore minimizing the
radiation of energy in the prostate by matching the electrical impedance of
the antenna with the surrounding tissue for each patient prior to treatment.
Controlled Energy Delivery
The Targis Catheter utilizes a helical shaped antenna, which produces an
electrical field which is confined to a region of the prostate gland closely
related to the antenna length. Beyond the antenna's boundaries, the
electrical field strength drops rapidly, thus little induced heat is generated
beyond the length of the antenna. Within its length, the field is generally
uniform, resulting in very even heat induction along the antenna length. This
ensures effective control over the zone of tissue damage and provides better
assurance against injury to the internal or external urinary sphincters, which
could affect ejaculation and urinary control.
CLINICAL STATUS
As of September 1, 1997, over 750 patients affected with BPH have been
treated with the Targis System in controlled clinical studies. These patients
have been treated at 20 clinical sites in the United States, Europe, Canada
and South America. The primary end-points 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, two years post-treatment, and three years
post-treatment. The clinical results discussed below reflect the data from
patients treated with the Targis System in the international and United States
clinical studies combined. Results in the areas of AUA Symptom Score
reduction, increase in peak flow rates and improvement in quality of life are
statistically significant. However, there can be no assurance that future
clinical results will be consistent with those achieved to date.
The combined results of the Company's clinical trials indicate that the
Targis System decreases the symptoms of BPH as measured by the AUA Symptom
Score and increases urinary flow rates as compared to patients' pre-treatment
scores, and to a control group of patients who received a "sham" treatment.
These clinical results are statistically significant and, based on patients
for whom the Company has received three-year follow-up data, appear to
continue for at least three years post-treatment.
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The Company's clinical results also indicate minimal complications
resulting from Targis treatments. Of the patients from whom the Company has
received follow up data, no patient needed an anesthetist or anesthesia
services during the treatment, and 88% of the patients spent one day or
less in bed following the Targis treatment. Of these patients, there were no
cases of long-term incontinence, impotence or significant bleeding resulting
from the Targis procedure. Twelve percent of patients experienced urinary
retention, which required catherization for more than one week. All of these
cases were resolved within 30 days. Additionally, 6% of the patients
experienced an episode of urinary tract infection which was treated and
resolved with routine antibiotic therapy, less than one percent experienced
urethral stricture requring intervention. Other minor complications,
including epididymitis -3%, transient urinary incontinence -3% and loss of
ejaculate -3%.
PATENTS AND PROPRIETARY RIGHTS
The Company has aggressively pursued protection of its intellectual
property. The Company has been issued twelve patents and has twenty patent
applications pending in the United States. The Company also has applied for
patent coverage in a number of foreign jurisdictions. The Company has either
filed or is preparing to file international applications under the Patent
Cooperation Treaty ("PCT") for qualifying United States applications and is
now pursuing 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 Targis System in the United States or in
international markets. In addition, there can be no assurance the Company's
Targis System does not infringe upon the patent rights or other intellectual
property rights of other companies, that the Company will not be required to
seek licenses from other companies or that other companies will not pursue
claims of infringement against the Company.
Other companies have developed or are in the process of developing
medical methods and devices to transurethrally treat BPH with microwave
energy. Several companies have applied for, and in some cases received,
patents related to such medical methods and devices. One company, BSD Medical
Corporation, initiated a patent infringement lawsuit against the Company in
1992. The Company chose to settle that lawsuit in March 1994 by entering into
a license agreement with BSD Medical Corporation. See Item 3, Legal
Proceedings.
9
<PAGE>
In August, 1996, the Company entered into a non-exclusive, worldwide
patent license agreement with EDAP International, S.A., a French corporation,
and its subsidiary, Technomed Medical Systems S.A. (collectively referred to
as "EDAP") for certain EDAP patents relating to the microwave treatment of
BPH. Concurrently with the execution of the Company's agreement with EDAP, the
Company's principal international distributor, Boston Scientific, Corporation
entered into a similar license agreement with EDAP.
The Company also relies on trade secrets and proprietary know-how, which
it seeks to protect, in part, through proprietary information agreements with
employees, consultants and other parties. The Company's proprietary
information agreements with its employees and most of its consultants contain
industry standard provisions requiring such individuals to assign to the
Company, without additional consideration, any inventions conceived or reduced
to practice while retained by the Company, subject to customary exceptions.
The Company's officers and other key employees also agree not to compete with
the Company for a period following termination. There can be no assurance
that proprietary information or non-compete agreements with employees,
consultants and others will not be breached, that the Company would have
adequate remedies for any breach, or that third parties will not nonetheless
gain access to the Company's technology.
THIRD PARTY REIMBURSEMENT
The Company believes that third party reimbursement will be essential to
commercial acceptance of the Targis procedure, and that overall cost
effectiveness and physician advocacy will be keys to obtaining such
reimbursement. The Company believes that the Targis procedure can be
performed for 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 Targis 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 Targis procedure as compared to surgical and drug
treatments for BPH. The Company plans to use this information when
approaching health care payors to obtain reimbursement authorizations. The
Company also plans to work closely with the urological community to establish
an attractive relative value and reimbursement level for the Targis 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 Targis 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 an increasing portion of the
aging Medicare population is moving into a managed care system.
Physicians using the Company's Targis System to treat BPH in the United
States 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. The American
Medical Association's CPT Editorial Review Board approved the addition of a
CPT code for physicians to use when submitting claims for performing
transurethral microwave therapy in November 1996, and recommended a work value
for the CPT code in February 1997. This code is expected to be published in
the 1998 CPT book.
In the United States and in international markets, third party
reimbursement is generally available for existing therapies used to treat BPH.
The availability and level of reimbursement from such payors for the use of
the Company's Targis System will be a significant factor in the Company's
ability to commercialize its Targis System. For patients covered by Medicare,
coverage of Targis procedures will be determined either by local Medicare
carriers or by a national coverage 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
10
<PAGE>
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 Targis System from Medicare and other payors or that
amounts reimbursed to physicians for performing a Targis procedure will be
sufficient to encourage physicians to use the Company's Targis System.
Internationally, reimbursement approvals for the Targis procedure will be
sought on an individual country basis. Some countries currently have
established reimbursement authorizations for transurethral microwave therapy.
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 marketing strategy includes (i) conducting and reporting
the results of controlled clinical studies of the Targis System with leading
clinical investigators around the world, (ii) demonstrating to healthcare
reimbursers the cost effectiveness of the Targis System, and (iii) educating
urologists and BPH patients on the safety, efficacy and other benefits of the
Targis System.
In the United States, the Company will sell its Targis System through a
direct sales force upon the launch of the product in the second fiscal quarter
of 1998. The Company is currently hiring and training its sales force in
preparation of the product launch. Of the over 7,500 urologists in the United
States, the Company intends to target urologists that practice in high-volume
prostate treatment groups and 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 distributes the Targis System internationally through two
distributors: Boston Scientific Corporation (BSC) for all countries other than
Japan, and Nihon Kohden Corporation (NKC) for Japan.
In connection with an equity investment in the Company, the Company
granted to NKC exclusive distribution rights in Japan. The distribution
agreement between the Company and NKC provides that NKC will obtain, at its
own expense, all registrations, licenses and approvals required for the
import, sale and distribution of the Targis 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. In
February 1997, NKC received regulatory approval from the Japanese Ministry of
Health and Welfare.
In 1996, the Company entered into an international distribution agreement
with BSC. Under the agreement, BSC was granted exclusive distribution rights
for the Company's Targis System in all countries outside the United States,
and Japan for a period of five years. Under the agreement, BSC agreed to
purchase certain minimum numbers of the Company's control units and procedure
kits. Prior to entering into the international distribution agreement, BSC
made equity investments in the Company.
11
<PAGE>
MANUFACTURING
The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and
Rectal Thermosensing Unit. The Targis Control Unit is currently manufactured
by SeaMED Corporation 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 Targis Control
Unit, the microwave generator, and provides it to SeaMED for incorporation
into the final Targis Control Unit. Although the Company expects that SeaMED
will be able to adequately meet demand for the Targis Control Unit on a timely
basis for the foreseeable future, there can be no assurance that this will be
the case.
The Targis Procedure Kits are assembled by the Company, using materials
and components supplied to the Company by various subcontractors and
suppliers. 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 Targis System in the United
States, could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the Company's manufacturing operations must comply with the
FDA's Good Manufacturing Practices ("GMP") regulations, which establish
requirements for assuring quality by controlling components, processes and
document traceability and retention, among other things. The Company's
facilities will also be subject to unscheduled inspections by the FDA.
Certain requirements of state, local and foreign governments must also be
complied with in the manufacture of the Company's products. The Company
believes that its manufacturing and quality control procedures meet the
requirements of these regulations. See "--Government Regulation."
The Company has received ISO 9001 certification indicating compliance of
the Company's manufacturing facilities with European standards for quality
assurance and manufacturing process control. The Company has also received CE
mark certification which allows it to affix the CE Mark to its product and
market it in the European Union. See "--Government Regulation--
International."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are currently focused on
improving the function and features of the Targis System, reducing the
production cost of the components in the Targis System and investigating
other applications for its technologies. This effort includes development of
enhanced components of the Targis Procedure Kit.
During the fiscal years ended June 30, 1995, 1996 and 1997 the Company
spent $4.1 million, $4.8 million, and $5.0 million respectively, in its
research and development efforts. As of September 1, 1997, the Company
employed 12 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 for urologic malignancies and
cardiovascular disease.
12
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COMPETITION
Competition in the market for BPH treatments is intense and is expected
to increase. The Company believes that its principal competition will come
from both surgical and non-surgical therapies. Surgical therapies include
TURP, TUIP or alternative surgical procedures for vaporization of the prostate
tissue using laser or RF energy. Non-surgical alternatives include drug
therapy and emerging less invasive technologies.
The primary manufacturer of equipment used in the TURP procedure is
ValleyLab, a subsidiary of Pfizer, Inc. In addition, Trimedyne, Inc., C.R.
Bard, Inc., Coherent, Inc., Surgical Laser Technologies, Inc., Circon
Corporation, Richard Wolf GmbH, Karl Storz GmbH & Company and ProSurg Inc. all
manufacture equipment used in alternative surgical procedures. Drugs for the
treatment of BPH are marketed by Abbott Laboratories, Inc. (Hytrin(R)), Merck
& Co. (Proscar(R)) and Pfizer, Inc. (Cardura(R)). Companies that are
investigating less invasive interstitial therapies include Johnson & Johnson,
Inc., Dornier Medical Systems, Inc., Diomed Ltd., VidaMed, Inc. and U.S.
Surgical, Inc. Other companies developing less invasive microwave
thermotherapy systems for the treatment of BPH include EDAP Technomed, Inc.,
BSD Medical Corporation and Dornier Medical Systems, Inc. The Company is
aware of additional companies that are developing technologies for the
treatment of BPH, including Boston Scientific Corporation, InStent Inc. (a
subsidiary of Medtronic Inc.), Argomed, 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 Targis System
and the Prostatron manufactured by EDAP Technomed, Inc. are that the Company's
Targis 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 Targis System is substantially smaller
than the Prostatron and is more easily transportable.
In October 1996, the FDA granted approval to VidaMed, Inc. to sell its
TUNA System in the United States for the treatment of symptoms of BPH. See
("BPH Treatments and Their Limitations- Less Invasive BPH Treatments"). Any
product developed by the Company that gains regulatory approval would 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 Targis
System and in the Company's ongoing manufacturing and research and development
activities. The Company and the Targis System are regulated in the United
States by the FDA under a number of statutes including the Federal Food, Drug
and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA regulates the
pre-clinical and clinical testing, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of medical devices in the United
States. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
distribution, sales and marketing, suspension
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<PAGE>
or withdrawal of existing product approvals or clearances, refusals to approve
or clear new applications or notices and criminal prosecution of a company and
its officers and employees.
Prior to commercial sale in the United States, most medical devices,
including the Company's products, must be cleared or approved by the FDA. In
general, the regulatory process can be lengthy, expensive and uncertain, and
securing FDA clearances or approvals may require the submission of extensive
clinical data together with other supporting information to the FDA. Medical
devices such as the Targis System are classified into one of three classes,
Class I, II or III, on the basis of the controls necessary to reasonably
ensure their safety and effectiveness. 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 general controls plus the use of "special controls," such as
performance standards, post-market surveillance, patient registries and FDA
guidelines. Generally, Class III devices are those that must receive approval
of a PMA by the FDA to ensure their safety and effectiveness. They are
generally life-sustaining, life-supporting or implantable devices and also
include most devices that were not on the market before May 28, 1976 ("new
devices") and for which the FDA has not made a finding of "substantial
equivalence" based upon a 510(k).
Before a new device may 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 ordinarily requires the
performance of at least two independent, statistically significant clinical
studies that must demonstrate the safety and effectiveness of the device in
order to obtain FDA approval of the PMA. The PMA process is expensive and
often lengthy, typically requiring several years, and may never result in
approval. If the device presents a "significant risk," the manufacturer or the
distributor of the device must obtain approval of an IDE from the FDA prior to
commencing human clinical trials in support of the PMA. The IDE application
must be supported by data, typically including the results of animal and
laboratory testing. If the IDE application is approved by the FDA (or the FDA
does not notify the sponsor 30 days after receipt of the application that the
trials may not begin) and one or more appropriate institutional review boards
approves the study protocol, clinical trials may begin at a specified number
of investigational sites with a specific number of patients, as approved by
the FDA. The FDA has the authority to re-evaluate, alter, suspend or terminate
clinical testing based on its assessment of data collected throughout the
trials. An IDE supplement must be submitted to, and approved by, the FDA (or
the FDA does not notify the sponsor 30 days after receipt of the supplement
that the change may not be implemented) before a sponsor or an investigator
may make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects. Sponsors of
clinical trials are permitted under FDA regulations to sell the devices
distributed in the course of the clinical study, provided that such
compensation does not exceed recovery of the costs of manufacturing, research,
development and handling.
In 1993, the FDA issued a policy statement indicating that medical
devices seeking to be labeled for use in treatment of BPH would be classified
as Class III devices which will require FDA approval of a PMA before marketing
may begin. The FDA approved the PMA for the Targis System by a letter (order)
14
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dated August 22, 1997. As approved, the Targis System is indicated to relieve
symptoms associated with BPH in men with prostatic lengths of 30 to 50
millimeters. The FDA made the Targis System a restricted devise which means
that its labeling specifies requirements for the training of physicians who
may use the device and that the FDA has greater control over advertising for
the Targis System. The FDA imposed a number of postapproval requirements,
including a study to collect 5-year follow-up data to evaluate the long-term
effects of the Targis System treatment in at least 100 patients. This
postapproval study must assess the rates of adverse events that occurred
during the 5-year follow-up period , as well as the rate of repeat and
alternative treatments that were administered. Once it is marketed, the Targis
System will be subject to continual FDA and other regulatory agency review and
regulation. Subsequent discovery of previously unknown problems or failure to
comply with applicable requirements can result in severe administrative,
civil, and criminal sanctions.
The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device.
Such changes include but are not limited to: new indications for use; the use
of a different facility or establishment to manufacture, process or package
the device; changes in manufacturing methods or quality control systems;
changes in vendors used to supply components of the device; changes in
performance or design specifications, and certain labeling changes. Any such
changes will require FDA approval of a PMA supplement before marketing. There
can be no assurance that the required approvals of PMA supplements for any
changes to the Targis System will be granted on a timely basis or at all, and
delays in receipt of, or failure to receive such approvals, or the loss of the
approval of the PMA for the Targis System, would have a material adverse
effect on the business, financial condition and results of operations of the
Company.
In 1995, the FDA issued a policy statement indicating that general
medical use lasers used specifically for the treatment of BPH are eligible for
marketing through 510(k)s rather than PMAs. Products under development by
several of the Company's competitors are covered by this 1995 policy
statement. As a result, those companies may be able to begin commercial
marketing of their products sooner than the Company.
Advertising and promotional activities are subject to regulation by the
FDA and, in certain instances, by the Federal Trade Commission. Other
applicable requirements include the FDA's medical device reporting
regulations, which 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 extensive FDA requirements could subject the Company
and/or its officers or 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 quality system including GMP requirements as specified in the FDA device
quality system ("QS") regulation. This regulation requires, among other
things, that (i) the manufacturing process be regulated, controlled, and
documented by the use of written procedures and (ii) the ability to produce
devices which meet the manufacturer's specifications be validated by extensive
and detailed testing of every aspect of the process. The regulation also
requires investigation of any deficiencies in the manufacturing process or in
the products produced and detailed record keeping. In addition, the QS
regulation requires preproduction design controls, purchasing controls and
maintenance of service records, except that FDA has stated that as long as
manufacturers are taking reasonable steps to come into compliance with the
design control requirements, the FDA will not initiate action (including
enforcement cases) based on a failure to comply with these requirements before
June 1, 1998. The QS regulation is expected to increase the cost of complying
with the FDA GMP and related requirements. The FDA monitors compliance with QS
including GMP requirements by conducting periodic unannounced inspections of
manufacturing facilities. If violations of the applicable regulations are
noted during FDA inspections of manufacturing facilities, the FDA or the
government through court enforcement action can prohibit further
manufacturing, distribution, sale and marketing of the device until the
violations are cured, and in that circumstance the continued marketing of the
Company's products would be adversely affected. Such regulations are subject
to change and depend heavily on administrative interpretations. Their 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.
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International
Sales of medical devices outside of the United States are subject to United
States export requirements and foreign regulatory requirements. Exportation of a
device that complies with FDA requirements for commercial distribution in the
United States is not subject to any FDA export permit requirement so long as the
device is exported for the indication(s) for which commercial distribution in
the United States is lawful under the FDA Act. Exportation of devices that are
subject to PMA or IDE requirements and that 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), the country to which the device is intended for
export, 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 the
European Union, Japan and Canada to commercialize the Targis System in these
countries, the Company's Targis System has not been approved for commercial sale
in any other jurisdiction outside the United States. Legal restrictions on the
sale of imported medical devices vary from country to country. The time required
to obtain approval by a foreign country may be longer or shorter than that
required for FDA approval, and the requirements may differ. The Company has
implemented ISO 9001, a certification showing that the Company's procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. The ISO 9001 certification, along with the
European Medical Device Directive ("MDD") certification, received in early
fiscal 1997, evidences compliance with the requirements and enables the Company
to affix the CE Mark to its current products. The CE Mark denotes conformity
with European standards for safety and allows certified devices to be placed on
the market in all EU countries. After June 1998, medical devices may not be sold
in EU countries unless they display the CE Mark. There can be no assurance that
the Company will be able to obtain regulatory approvals or clearances for its
products in other foreign countries.
The Company's distributor in Japan, NKC, is responsible for obtaining
regulatory and reimbursement approvals for the Targis System in Japan. In
February 1997, NKC received regulatory approval from the Japanese Ministry of
Health and Welfare.
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 $10.0 million umbrella insurance policy. The Company evaluates it
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.
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EMPLOYEES
As of September 1, 1997, the Company employed 87 individuals on a full-
time basis. The Company also has several part-time employees and consultants.
The Company believes that it has been successful in attracting experienced and
capable personnel, although there can be no assurance that the Company will
continue to attract and retain qualified personnel. None of the Company's
employees is covered under a collective bargaining agreement. The Company
considers relations with its employees to be good.
BACKLOG
Although the Company has received orders for future delivery of its
products at September 1, 1997, the Company did not have a significant backlog.
ITEM 2. PROPERTIES
------- ----------
The Company leases approximately 20,000 square feet of office,
manufacturing and warehouse space in a suburb of Minneapolis, Minnesota. The
lease expiration date is March 31, 2002. The Company has exercised an option
to acquire additional space at the same location. The Company believes its
facilities will be sufficient to meet the Company's current requirements and
that additional space at or near the current location will be available at a
reasonable cost if such space is required in the future.
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
On July 30, 1996, the Company filed a lawsuit under seal in United States
District Court for the District of Minnesota against BSD Medical Corporation,
a Delaware corporation, to enforce the terms of a settlement agreement, which
includes a patent license, between the Company and BSD Medical Corporation.
The Company's suit requests that the court enforce the agreement and enter a
declaratory judgment stating that the settlement agreement remains in effect.
BSD Medical Corporation subsequently filed an answer and counterclaim alleging
that the license agreement was properly terminated and is seeking relief
against the Company. The Formal Discovery period in the lawsuit has closed and
the case is set for trial no later than April 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- ------- --------------------------------------------------------------------
MATTERS
-------
The Company completed a public offering of its Common Stock on May 30,
1996 and its shares are publicly traded on the Nasdaq Stock Market under the
symbol ULGX. The following table sets forth high and low last sales prices of
the Company's Common Stock for the quarters completed subsequent to the
Company's initial public offering:
<TABLE>
<CAPTION>
Quarter
Fiscal Year First Second Third Fourth
----------- ------ ------ ------- ------
<S> <C> <C> <C> <C>
1996 High -- -- -- 17
Low -- -- -- 10
1997 High 10 13 1/4 19 18
Low 15 3/4 16 1/2 15 12
</TABLE>
On September 11, 1997, the Company had 228 shareholders of record. The Company
has never paid cash dividends on its Common Stock. The Board of Directors of the
Company currently intends to retain any and all income for use in the Company's
business and does not anticipate paying any cash dividends in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales.................................. $ 164 $ 9 $ 489 $ 362 $ 5,504
Cost of goods sold..................... 254 179 785 1,177 4,866
---------------------------------------------------
Gross profit (loss)................... (90) (170) (296) (815) 638
Costs and expenses:
Research and development.............. 1,478 1,598 4,099 4,811 5,049
Sales and marketing................... 22 124 477 1,007 3,430
General and administrative............ 468 677 884 1,192 2,226
Total costs and expenses............... 1,968 2,399 5,460 7,010 10,705
---------------------------------------------------
Operating loss......................... (2,058) (2,569) (5,756) (7,825) (10,067)
Interest income, net................... 61 44 329 232 1,833
---------------------------------------------------
Net loss............................... $(1,997) $(2,525) $ (5,427) $ (7,593) $ (8,234)
===================================================
Net loss per common share.............. $(0.65) $(0.69) $(0.91) $(1.22) $(0.90)
Shares used in computing net
loss per share(1)..................... 3,093 3,646 5,996 6,235 9,173
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
- -------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
available-for-sale securities......... $ 2,004 $ 9,093 $ 3,571 $ 40,844 $ 26,101
Working capital........................ 1,930 8,897 3,372 39,940 27,013
Total assets........................... 2,487 9,801 4,876 42,368 35,582
Total liabilities...................... 422 408 899 1,780 3,185
Accumulated deficit.................... (2,989) (5,514) (10,940) (18,534) (26,767)
Total shareholders' equity............. $ 2,065 $ 9,393 $ 3,977 $ 40,588 $ 32,397
</TABLE>
______________________
(1) Restated to reflect impact of preferred shares conversion to common shares.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
Urologix, Inc., incorporated in May 1991, has been engaged primarily in
developing its proprietary Targis System to treat BPH; conducting clinical
trials for the Targis System; seeking various regulatory approvals necessary to
market the Targis System; and producing Targis system components in order to
supply the Company's international distributors. These efforts resulted in the
Company obtaining the regulatory approvals necessary to market the Targis System
in Canada, Japan and the 18 European Union countries in fiscal year 1997. In
August 1997 the Company also received United States Food and Drug Administration
(FDA) approval to market the Targis System in the U.S. and intends to launch the
Targis System in the U.S. in the second fiscal quarter of 1998. The Company's
Targis System consists of a control unit and a procedure kit, which includes the
microwave delivery system incorporated in a catheter, a cooling bag and rectal
thermosensing unit. The Company's revenues to date consist primarily of Targis
System sales to its two international distributors. The Company intends to
continue conducting clinical trials and developing its proprietary technologies.
The Company intends to market the Targis System through a direct sales force in
the U.S. Internationally, the Company markets the Targis System through two
distributors. Boston Scientific Corporation, a worldwide developer,
manufacturer and marketer of medical devices, has exclusive distribution rights
for the Targis System in all countries outside the U.S., except Japan. Nihon
Kohden Corporation, a large medical device company in Japan, has exclusive
distribution rights in Japan for the Targis System.
Since inception, the Company has experienced operating losses and anticipates
that its operating losses will continue for the foreseeable future.
Expenditures will be primarily related to the Targis System market introduction
in the U.S., scale-up of commercial manufacturing, clinical trials and research
and development activities.
The Company expects sales of the Targis System to account for all of its
revenues for the foreseeable future. The Company intends to offer urologists
the option to purchase, lease or rent the Targis System control unit. The
leases will either be offered under a third-party leasing arrangement or
directly from the Company. Revenues from the sale of Targis System control
units and disposable procedure kits will be recognized upon shipment.
RESULTS OF OPERATIONS
Fiscal Years Ended June 30, 1997 and 1996
Sales increased to $5.5 million in fiscal year 1997 from $362,000 in fiscal year
1996 due to sales of the Targis System to the Company's international
distributors as a result of marketing approvals obtained during fiscal 1997 in
the European Union and Japan. As a result of U.S. FDA marketing approval of the
Targis System in August 1997, the Company expects sales to increase in fiscal
1998.
Cost of goods sold includes costs incurred in connection with the production of
Targis systems, including manufacturing and quality assurance overhead. Costs
of goods sold increased to $4.9 million in fiscal year 1997 from $1.2 million in
fiscal year 1996 due primarily to the increase in sales of the Targis System.
The Company expects further increases in cost of goods sold as sales increase
and production capacity is increased in anticipation of the U.S. launch of the
Targis System. If sales of the Targis System increase, the Company expects
costs of goods sold, as a percent of sales, to decrease due to efficiencies
obtained from higher production volumes.
Research and development expenses include those costs associated with the
development and protection of the Company's Targis System intellectual property,
treatment of patients participating in clinical trials and the accumulation of
outcome data to substantiate clinical results. These costs increased slightly
in fiscal 1997 over fiscal 1996 due primarily to costs associated with the
filing of the Targis System pre-market approval application (PMA) with the FDA
and clinical studies conducted to document the safety and efficacy of the Targis
System.
20
<PAGE>
Research and development expenses are expected to increase in fiscal 1998 due to
continuing clinical study expenses and product development projects to further
develop the Company's technologies.
Sales and marketing expenses increased to $3.4 million in fiscal 1997 from $1.0
million in fiscal 1996, due primarily to costs associated with the marketing
launch of the Targis System in Europe and Japan and preparation for the U.S.
marketing launch. Preparations included the hiring of sales and marketing
management, preparation of promotional materials, recruiting for field sales
representatives and efforts related to obtaining medical reimbursement for the
Targis System. The Company expects sales and marketing expenses to increase
significantly as it prepares to commercially launch the Targis System in the U.
S. and continues supporting its international distributors sales efforts.
General and administrative expenses increased to $2.2 million in fiscal 1997
from $1.2 million in fiscal 1996 due to administrative costs associated with an
increase in employees in connection with the Company's growth and commencement
of sales activities, and costs related to the Company's external reporting
obligations as a public company.
Interest income increased significantly during fiscal year 1997, due primarily
to income from the investment of proceeds from the Company's initial public
offering, completed in June 1996.
Fiscal Years Ended June 30, 1996 and 1995
Sales decreased to $362,000 in fiscal 1996, from $489,000 in fiscal 1995, due
primarily to a higher number of Targis control units being placed in clinical
sites and reimbursed in 1995 than in 1996.
Cost of goods sold increased to $1.2 million for fiscal 1996 from $785,000 for
fiscal 1995 due to increased production levels, expansion costs incurred in
preparation for commercial sales of the Targis System and costs related to
bringing the Company's manufacturing process into compliance with ISO 9001
standards.
Research and development expenses increased to $4.8 million for fiscal 1996 from
$4.1 million in fiscal 1995. The increase was the result of several factors,
including increased contract development expenditures to upgrade the Targis
System to its latest generation; higher employee compensation due to the
addition of technical and supervisory personnel, an increase worldwide in the
number of patients treated; and additional submissions to the FDA of certain
Targis System Investigational Device Exemption ("IDE") supplements.
Sales and marketing expenses increased to $1.0 million for fiscal 1996 from
$477,000 for fiscal 1995, due primarily to the establishment of a sales office
in the United Kingdom during the latter part of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through sales of equity
securities and, to a lesser extent, sales of the Targis System to its
distributors. Through June 30, 1997, the Company had received approximately
$59.0 million in net proceeds from equity financings. During fiscal 1997, the
Company used approximately $11.5 million of cash for operating activities and
property and equipment purchases funded primarily by proceeds from the sale of
available-for-sale securities. As of June 30, 1997, the Company had total cash,
cash equivalents and available-for-sale securities of $26.1 million, and working
capital of $27 million.
In August 1996, the Company entered into a worldwide license agreement with EDAP
International S. A. (EDAP) under which EDAP granted Urologix a non-exclusive
license under all EDAP issued and pending patents pertaining to the microwave
treatment of BPH and other conditions of the prostate. Although the terms of
the license agreement are confidential, they include an initial license fee as
well as prepaid and ongoing royalty payments, subject to a maximum royalty.
The Company expects to continue to incur additional losses, and will require
additional working capital, as it incurs substantial expenses related to the
Targis System market introduction in the U.S., scale-up of commercial
21
<PAGE>
manufacturing, clinical trials and research and development activities. In
addition, should the Company choose to rent, or become the lessor of Targis
System control units, substantial capital could be required to finance the lease
or rental arrangements. Although the Company 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. Although the Company believes that
existing cash, cash equivalents and available-for-sale securities will be
sufficient to fund its operations for at least the next 12 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.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The following financial statements are included in the Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.........................................
Balance Sheets as of June 30, 1997 and 1996......................................
Statements of Operations for years ended June 30, 1997, 1996 and 1995............
Statements of Shareholders' Equity for years ended June 30, 1995, 1996 and 1997..
Statements of Cash Flows for years ended June 30, 1997, 1996 and 1995............
Notes to Financial Statements....................................................
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Urologix, Inc.:
We have audited the accompanying balance sheets of Urologix, Inc. (a Minnesota
corporation) as of June 30, 1997 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for each of the three fiscal
years in the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Urologix, Inc. as of June 30,
1997 and 1996, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 8, 1997
24
<PAGE>
UROLOGIX, INC.
Balance Sheets
As of June 30
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 275,571 $ 65,042
Available-for-sale securities 25,825,238 40,779,176
Accounts receivable 1,272,994 35,066
Inventories 2,119,373 415,920
Prepaids and other current assets 667,593 365,976
------------ ------------
Total current assets 30,160,769 41,661,180
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements 539,039 79,721
Machinery, equipment and furniture 2,141,622 699,694
Less- Accumulated depreciation and amortization (832,604) (401,381)
------------ ------------
Property and equipment, net 1,848,057 378,034
OTHER ASSETS 3,573,261 328,641
------------ ------------
$ 35,582,087 $ 42,367,855
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capitalized lease obligations $ 19,531 $ 17,926
Accounts payable 2,087,443 845,566
Accrued liabilities 1,040,345 858,158
------------ ------------
Total current liabilities 3,147,319 1,721,650
CAPITALIZED LEASE OBLIGATIONS, less current maturities 37,725 57,868
------------ ------------
Total liabilities 3,185,044 1,779,518
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (Note 4):
Undesignated stock, 5,000,000 shares authorized; none issued or
outstanding - -
Common stock, $.01 par value, 25,000,000 shares
authorized; 9,256,593 and 9,128,432 shares issued and outstanding 92,566 91,284
Additional paid-in capital 59,131,097 59,030,559
Accumulated deficit (26,767,362) (18,533,506)
Net unrealized losses on investments (59,258) -
------------ ------------
Total shareholders' equity 32,397,043 40,588,337
------------ ------------
$ 35,582,087 $ 42,367,855
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
25
<PAGE>
UROLOGIX, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended June 30
----------------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
SALES $ 5,503,800 $ 362,118 $ 489,350
COST OF GOODS SOLD 4,866,082 1,177,455 785,298
------------- ------------- ------------
Gross profit (loss) 637,718 (815,337) (295,948)
COSTS AND EXPENSES: ------------- ------------- ------------
Research and development 5,048,917 4,811,165 4,099,070
Sales and marketing 3,429,443 1,006,544 477,380
General and administrative 2,226,012 1,191,518 883,409
------------- ------------- ------------
Total costs and expenses 10,704,372 7,009,227 5,459,859
------------- ------------- ------------
OPERATING LOSS (10,066,654) (7,824,564) (5,755,807)
INTEREST INCOME, net 1,832,798 231,252 329,060
------------- ------------- ------------
NET LOSS $ (8,233,856) $(7,593,312) $(5,426,747)
============= ============= ============
NET LOSS PER COMMON SHARE $(0.90) $(1.22) $(0.91)
============= ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Note 2) 9,173,419 6,235,291 5,996,162
============= ============= ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
26
<PAGE>
UROLOGIX, INC.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Noncumulative
Convertible Preferred Additional
Stock Common Stock Paid-In Accumulated
----------------------- ---------------------
Shares Amount Shares Amount Capital Deficit
----------- -------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 3,603,993 $ 36,040 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 3,603,993 36,040 1,197,904 11,979 14,868,864 (10,940,194)
Issuance of preferred stock, net 638,806 6,388 - - 4,580,676 -
Stock options exercised - - 160,375 1,603 63,312 -
Preferred stock conversion (4,242,799) (42,428) 4,665,153 46,652 (4,224) -
Shares issued through initial public
offering, net - - 3,105,000 31,050 39,521,931
Net loss - - - - - (7,593,312)
----------- -------- --------- ------- ----------- ------------
BALANCE, June 30, 1996 9,128,432 91,284 59,030,559 (18,533,506)
Stock options exercised - - 128,161 1,282 100,538 -
Net unrealized losses on investment - - - - - -
Net loss - - - - - (8,233,856)
----------- -------- --------- ------- ----------- ------------
BALANCE, June 30, 1997 - $ - 9,256,593 $92,566 $59,131,097 $(26,767,362)
=========== ======== ========= ======= =========== ============
<CAPTION>
Net Total
Unrealized Shareholders'
Losses Equity
----------- -------------
<S> <C> <C>
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 - 4,587,064
Stock options exercised - 64,915
Preferred stock conversion - -
Shares issued through initial public
offering, net - 39,552,981
Net loss - (7,593,312)
----------- -------------
BALANCE, June 30, 1996 - 40,588,337
Stock options exercised - 101,820
Net unrealized losses on investment (59,258) (59,258)
Net loss - (8,233,856)
----------- -------------
BALANCE, June 30, 1997 $(59,258) $32,397,043
=========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
27
<PAGE>
UROLOGIX, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended June 30
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (8,233,856) $ (7,593,312) $(5,426,747)
Adjustments to reconcile net loss to net cash used for
operating activities-
Depreciation and amortization 431,223 128,770 104,433
Change in operating items:
Inventories (1,703,453) 69,713 (273,850)
Accounts receivable (1,237,928) (35,065) -
Prepaids and other current assets (301,617) (174,289) (191,687)
Accounts payable and accrued liabilities 1,424,064 832,458 531,670
Other assets - (19,524) 51,924
------------ ------------ -----------
Net cash used for operating activities (9,621,567) (6,791,249) (5,204,257)
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,901,246) (134,336) (259,255)
Purchase of securities (83,807,022) (40,529,176) (3,229,459)
Proceeds from sale of securities 98,701,702 1,972,452 1,520,000
Purchase of intangible assets, net (3,244,620) - -
------------ ------------ -----------
Net cash provided by (used for) investing activities 9,748,814 (38,691,060) (1,968,714)
------------ ------------ -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net - 39,552,981 -
Proceeds from issuance of preferred stock, net - 4,587,064 -
Proceeds from exercise of stock options 101,820 64,915 10,356
Payments made on capital lease obligations (18,538) (6,650) (68,121)
------------ ------------ -----------
Net cash provided by (used for) financing activities 83,282 44,198,310 (57,765)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 210,529 (1,283,999) (7,230,736)
CASH AND CASH EQUIVALENTS:
Beginning of period 65,042 1,349,041 8,579,777
------------ ------------ -----------
End of period $ 275,571 $ 65,042 $ 1,349,041
============ ============ ===========
</TABLE>
Supplemental cash flow disclosed.
<TABLE>
<CAPTION>
For the Years Ended June 30
----------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Cash paid for:
Interest $8,706 $ 3,976 $4,262
======== ========= =========
Noncash investing and financing activities:
Common stock issued upon conversion of
Preferred Stock $ - $42,428 $ -
======== ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
28
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
DESCRIPTION OF OPERATING ACTIVITIES
Urologix, Inc. (Urologix or the Company) was organized to research, develop,
manufacture and market innovative devices for the treatment of benign prostatic
hyperplasia (BPH) and other urologic diseases. Since inception (May 29, 1991)
through June 30, 1996, the Company was a development stage enterprise, having
devoted substantially all of its efforts to proprietary product development and
selling the Targis system to international distributors. Such efforts also
included raising capital, performing clinical trials, and developing commercial
markets. As of June 30, 1997, the Company had regulatory approvals necessary to
market the Targis system in the European Union Countries, Japan and Canada. On
August 26, 1997, the Company received United States Food and Drug Administration
approval to market the Targis system in the United States.
Although the Company began actively selling its products during 1997 and no
longer considers itself to be in the development stage, it has not operated
profitably to date and there are no assurances that it will operate profitably
in the future.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company classifies highly liquid investments with original maturities of 90
days or less to be cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
AVAILABLE-FOR-SALE SECURITIES
The Company invests in money market funds and U.S. government and investment-
grade corporate securities with original maturities ranging from 90 days to two
years. These investments are considered to be available-for-sale, and are
stated at market value, which approximates cost.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of:
<TABLE>
<CAPTION>
June 30
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 915,609 $ 48,459
Work-in-process 352,174 54,969
Finished goods 851,590 312,492
---------- ----------
$2,119,373 $ 415,920
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements that extend the useful
lives of property and equipment are capitalized at cost and depreciated.
Repairs and maintenance are charged to expense as incurred. Depreciation is
provided using the straight-line method based upon estimated useful lives of
three to seven years for machinery, equipment, furniture, and leasehold
improvements.
29
<PAGE>
OTHER ASSETS
Other assets consist primarily of license fees and prepaid royalties resulting
from patent licensing agreements. The agreements require the Company to pay a
royalty on sales of certain catheters and related systems. The license fees and
amounts prepaid by the Company will be charged to expense as sales are
recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period. The
impact of common stock equivalents has been excluded from the computation of
weighted average common shares outstanding, except as follows, as the effect
would be antidilutive. Pursuant to Securities and Exchange Commission rules,
stock options granted within one year prior to the date of the initial public
offering have been included in the calculation of common share equivalents as if
they were outstanding for the years ended June 30, 1996 and 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
FINANCIAL INSTRUMENTS
For most financial instruments, including cash, available-for-sale securities,
accounts payable and accruals, management believes that the carrying amount
approximates fair value, as the majority of these instruments are short-term in
nature.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt in the fiscal year ending June 30, 1998, Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128),
which was issued in February 1997. SFAS No. 128 requires disclosure of basic
earnings per share (EPS) and diluted EPS, which replaces the existing primary
EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed similar to primary EPS as
previously reported, provided that, when applying the treasury stock method to
common equivalent shares, the Company must use its average share price for the
period rather than the more dilutive greater of the average share price or end
of period share price required by APB No. 15. The Company believes this will
not have a material affect on EPS.
3. INCOME TAXES:
A reconciliation of the Company's statutory tax rate to the effective rate for
the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996 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)
------- ------- -------
-% -% -%
======= ======= =======
</TABLE>
30
<PAGE>
As of June 30, 1997, the Company had net operating loss carryforwards of
approximately $25,000,000 for federal income tax purposes that are available to
offset future taxable income through the year 2011. Certain restrictions caused
by the change in ownership resulting from sales of stock will limit annual
utilization of the net operating loss carryforwards.
The components of the Company's deferred tax asset for the years ended June 30,
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 10,151 $ 6,802 $ 3,996
Temporary deductible differences 160 870 -
Valuation allowance (10,311) (7,672) (3,996)
---------- ---------- -----------
$ - $ - $ -
------------ ------------ ------------
</TABLE>
4. SHAREHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
In May 1996, the Company completed an initial public offering of 3,105,000
shares of common stock which generated net proceeds of $39,552,981, to be used
to fund research and development, clinical trials, sales and marketing
activities, and fixed asset and working capital requirements.
REVERSE STOCK SPLIT
The Company's shareholders approved a 1-for-2 reverse common and convertible
preferred stock split effective April 30, 1996. The effect of the reverse stock
split has been reflected for all periods presented in the accompanying financial
statements.
CONVERTIBLE PREFERRED STOCK
From February through June 1994, the Company issued 1,250 Series B and 2,264,292
Series C convertible preferred shares at $4.00 and $4.40 per share,
respectively, for total net proceeds of $9,848,050. In December 1996 and March
1997, the Company completed the sales of 312,500 and 326,306 Series D
convertible preferred shares at $8.00 per share, for total net proceeds of
$4,587,064.
In conjunction with the Company's initial public offering, all shares of
convertible preferred stock were converted to 4,665,153 shares of common stock,
in accordance with each series' respective conversion ratio.
STOCK OPTIONS
The Company has a stock option plan (the 1991 Stock Option Plan) which provides
for the granting of incentive stock options to employees and nonqualified stock
options to employees, directors and consultants. As of June 30, 1997, the
Company has reserved 1,550,910 shares of common stock under this plan. As of
June 30, 1997, 266,969 options were available for future grants under this plan.
Options expire seven to ten years from the date of grant and are subject to
varying vesting schedules. In April 1996, the Company amended the 1991 Stock
Option Plan to provide for the automatic grant of 10,000 stock options to each
nonemployee director upon 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.
31
<PAGE>
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Stock Exercise
Options Price
----------------- -----------------
<S> <C> <C>
Balance at June 30, 1994 507,472 $ .39
Options granted 212,953 .60
Options canceled (1,206) .40
Options exercised (27,394) .36
-------------- -----------------
Balance at June 30, 1995 691,825 .46
Options granted 376,936 8.83
Options canceled (454) .60
Options exercised (160,389) .48
-------------- -----------------
Balance at June 30, 1996 907,918 3.93
Options granted 196,000 16.35
Options canceled (2,020) .60
Options exercised (128,161) .81
-------------- -----------------
Balance at June 30, 1997 973,737 $ 5.47
============== =================
Options exercisable at June 30, 1997 581,721 $ 2.00
============== =================
</TABLE>
The Company accounts for stock options under Accounting Principles Board Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these options been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation,"the net loss and loss per share would have been
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C> <C>
Net loss As reported $(8,233,856) $(7,593,312)
Pro forma (9,872,331) (7,913,515)
Net loss per share As reported $ (0.90) $ (1.22)
Pro forma (1.08) (1.27)
</TABLE>
For purposes of calculating the above required disclosure, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1997 and 1996, respectively: risk-free interest rates of 6.87% and
5.0%, no expected dividend yield, expected lives of seven years and expected
volatility of 54.25%.
The weighted average fair value of options granted during 1997 and 1996 was
$16.35 and $8.83, respectively. Options issued during 1997 and 1996, which
remain outstanding at June 30, 1997, have an exercise price between $.60 and
$18.50, a weighted average exercise price of $11.56 and a weighted average
remaining contractual life of 9.0 years.
32
<PAGE>
1996 EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the Plan),
and reserved 100,000 common shares of issuance under the Plan, commencing upon
the effective date of an initial public offering. Under the terms of the Plan,
employees may purchase common shares at prices to be determined by the Company's
board of directors, ranging from 85% to 100% of the shares' estimated fair
market value. Eligible employees elect to participate through payroll
deductions at the maximum level established by the board of directors, but not
to exceed 10% of the participant's base pay, as defined. As of June 30, 1996,
10,540 shares had been purchased under the Plan for gross proceeds of $125,426.
5. COMMITMENTS AND CONTINGENCIES:
PURCHASE COMMITMENTS
At June 30, 1997, the Company has orders outstanding to purchase Targis Control
Systems, the primary system necessary for all treatments, from a third-party
vendor for a total purchase commitment of approximately $4,050,000.
SALES COMMITMENTS
The Company has signed agreements granting Boston Scientific Corporation and
Nihon Kohden Corporation exclusive distribution rights of the Targis system in
all geographic areas other than the United States. Nihon Kohden Corporation has
exclusive distribution rights for Japan. Boston Scientific Corporation has
exclusive distribution rights for the rest of the world.
LITIGATION
In 1996, the Company received notice from a licensor to a patent license, which
was contained in a settlement agreement, of its intent to terminate the license
based on allegations of the Company's breach of certain terms of the settlement
agreement. The Company's management strongly believes the licensor's
allegations are without merit and has filed a suit against the licensor to
enforce the terms of the license. The formal discovery period in the lawsuit
has closed and the case is set for trial no later than April 1998.
401(K) PLAN
The Company provides a 401(k) savings plan to which eligible employees may make
pretax payroll contributions up to 15% of compensation. Company matching
contributions are discretionary, and none have been made to date.
33
<PAGE>
LEASES
The Company leases its facility and certain equipment under noncancelable
operating or capital leases, which expire at various dates through fiscal 2002.
Rent expense related to operating leases was approximately $139,700, $102,500
and $78,500 for the years ended June 30, 1997, 1996 and 1994, respectively.
Future minimum lease commitments under noncancelable operating and capital
leases with initial remaining terms of one year or more are as follows as of
June 30, 1997:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
---------------- --------------
Fiscal year:
<S> <C> <C>
1998 $ 207,600 $ 25,896
1999 207,600 32,005
2000 207,600 9,517
2001 207,600 -
2002 207,600 -
------------ ---------
$ 1,038,000 67,418
============
Less- Imputed interest (10,162)
Current maturities (19,531)
---------
Long-term capitalized lease obligations $ 37,725
=========
</TABLE>
34
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
Information required under this item with respect to directors is
contained in the section "Election of Directors" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on November 19, 1997
(the "1997 Proxy Statement"), a definitive copy of which will be filed with the
Commission within 120 days of the close of the past fiscal year, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------
Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 1997 Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------
Information required under this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1997 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ------------------------------------------------------------------
(a) Documents filed as part of this report.
--------------------------------------
(1) Financial Statements. The financial statements of the Company are
--------------------
listed at Item 8 of this Form 10-K.
(2) Financial Statement Schedules for years ended June 30, 1997, 1996
-----------------------------------------------------------------
and 1995
--------
No schedules are required in connection with the filing of this Form
10-K.
(3) Exhibits
--------
3.1 Amended and Restated Articles of Incorporation, filed as
Exhibit 3.1 to Form S-1 Registration Statement, File No. 333-
3304, and incorporated herein by reference.
35
<PAGE>
3.2 Amended and Restated Bylaws of the Company filed as Exhibit
3.2 to Registration Statement on Form S-1, File No. 333-3304,
and incorporated herein by reference.
10.1* Urologix, Inc. 1991 Stock Option Plan, filed as Exhibit 10.1
to Registration Statement on Form S-1, File No. 333-3304, and
incorporated herein by reference.
10.2* Employment Agreement dated January 26, 1994 between the
Company and Jack Meyer, filed as Exhibit 10.2 to the
Registration Statement on Form S-1, File No. 333-3304, and
incorporated herein by reference.
10.3* Employee Agreement dated February 18, 1994 between the
Company and Ward Allen Putnam filed as Exhibit 10.3 to
Registration Statement on Form S-1, File No. 333-3304, and
incorporated herein by reference.
10.4 Supply Agreement dated August 24-25, 1995 between the Company
and SeaMED Corporation filed as Exhibit 10.4 to Form S-1
Registration Statement, File No. 333-3304, and incorporated
herein by reference.
10.5 Lease Agreement dated January 20, 1992, between the Company
and Parkers Lake Pointe I Limited Partnership, including
Addendum to Lease Agreement dated April 5, 1995, filed as
Exhibit 10.5 to Form S-1 Registration Statement, File No.
333-3304, and incorporated herein by reference.
10.6 Investor Rights Agreement dated December 5, 1996 between the
Company and certain of its shareholders, filed as Exhibit
10.6 to Form S-1 Registration Statement, File No. 333-3304,
and incorporated herein by reference.
10.7 Distribution Agreement dated February 28, 1994 between the
Company and Nihon Kohden Corporation, filed as Exhibit 10.7
to Form S-1 Registration Statement, File No. 333-3304, and
incorporated herein by reference.
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, filed as Exhibit 10.8 to
Form S-1 Registration Statement, File No. 333-3304, and
incorporated herein by reference.
10.9* Letter Agreement dated October 10, 1994 between the Company
and Mitchell Dann, filed as Exhibit 10.9 to Form S-1
Registration Statement, File No. 333-3304, and incorporated
herein by reference.
10.10 International Distribution Agreement made as of June 26, 1996
between the Company and Boston Scientific Corporation, filed
as Exhibit 10.12 to the Form 10-K for the year ended June 30,
1996 and incorporated herein by reference.
10.11 License Agreement dated August 7, 1996 between the Company
and EDAP International, S.A. and Technomed Medical Systems,
S.A., filed as Exhibit 10.13 to the Form 10-K for the year
ended June 30, 1996 and incorporated herein by reference.
11.1 Statement re computation of Per Share Loss
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule.
* Indicates Compensation Plan
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the fiscal year ended June 30,
1997.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duty caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UROLOGIX, INC.
BY: /S/ JACK E. MEYER
---------------------
JACK E. MEYER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Each person whose signature appears below hereby constitutes and appoints
Jack E. Meyer and Wesley Johnson, and each of them his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf, individually and in each capacity stated below, all amendments and
post-effective amendments to this Form 10-K and to file the same, with all
exhibits thereto and any other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as each might or could do in person, hereby ratifying
and confirming each act that said attorneys-in-fact and agents may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons in the
capacities indicated on September 26, 1997.
SIGNATURE TITLE DATE
-------------------------------------------------------------
/s/ Mitchell Dann Chairman of the Board September 26, 1997
- -------------------------
Mitchell Dann
/s/ Jack E. Meyer Director, President and September 26, 1997
- -------------------------
Jack E. Meyer Chief Executive Officer
/s/ Wesley Johnson Vice President, Chief Financial September 26, 1997
- -------------------------
Wesley Johnson Officer and Secretary
/s/ Buzz Benson Director September 26, 1997
- -------------------------
Buzz Benson
/s/ Janet G. Effland Director September 26, 1997
- -------------------------
Janet G. Effland
/s/ Michael R. Henson Director September 26, 1997
- -------------------------
Michael R. Henson
/s/ Paul A. LaViolette Director September 26, 1997
- -------------------------
Paul A. LaViolette
Director
- -------------------------
Robert Momsen
/s/ David C. Utz Director September 26, 1997
- -------------------------
David C. Utz, M.D.
37
<PAGE>
EXHIBIT 11.1
UROLOGIX, INC.
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED:
Net Loss $(5,426,747) $(7,593,312) $(8,233,856)
=========== =========== ===========
Weighted average common shares
outstanding (1) 5,211,928 5,507,073 9,173,419
Effect of cheap shares issued (2) 784,234 728,218 --
----------- ----------- -----------
5,996,162 6,235,291 9,173,419
=========== =========== ===========
Loss per common share $ (0.91) $ (1.22) $ (0.90)
=========== =========== ===========
</TABLE>
_________________
(1) Includes effect of convertible preferred shares not included as cheap shares
(see(2) below) as if converted to common shares at date of original
issuance. All preferred shares were converted to common in conjunction with
the Company's initial public offering (June 4, 1996).
(2) All preferred shares issued and options granted from April 5, 1995 to April
4, 1996 are included in the calculation for all periods presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement No. 333-11981.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UROLOGIX FDS
FOR FISCAL YEAR ENDED JUNE 30, 1997 FORM-10K
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 275,571
<SECURITIES> 25,825,238
<RECEIVABLES> 1,272,994
<ALLOWANCES> 0
<INVENTORY> 2,119,373
<CURRENT-ASSETS> 30,160,769
<PP&E> 2,680,661
<DEPRECIATION> 832,604
<TOTAL-ASSETS> 35,582,087
<CURRENT-LIABILITIES> 3,147,319
<BONDS> 0
0
0
<COMMON> 92,566
<OTHER-SE> 32,304,477
<TOTAL-LIABILITY-AND-EQUITY> 35,582,087
<SALES> 5,503,800
<TOTAL-REVENUES> 5,503,800
<CGS> 4,866,082
<TOTAL-COSTS> 4,866,082
<OTHER-EXPENSES> 10,704,372
<LOSS-PROVISION> 10,066,654
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,233,856)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,233,856)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,233,856)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
