<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 1998
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
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 [ ]
As of November 6, 1998, the Company had outstanding 11,356,850 shares of common
Stock, $.01 par value.
<PAGE>
UROLOGIX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 820,732 $ 882,801
Available-for-sale securities 32,885,599 35,616,726
Accounts receivable 1,695,121 4,013,533
Inventories 3,030,689 4,313,895
Prepaids and other current assets 1,019,470 691,102
------------ ------------
Total current assets 39,451,611 45,518,057
------------ ------------
PROPERTY AND EQUIPMENT:
Machinery, equipment and furniture 4,401,813 4,902,773
Less - accumulated depreciation (1,768,949) (1,703,293)
------------ ------------
Property and equipment, net 2,632,864 3,199,480
OTHER ASSETS, NET 4,671,982 4,771,222
------------ ------------
$ 46,756,457 $ 53,488,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capitalized lease obligations $ 24,351 $ 28,138
Accounts payable 867,330 1,960,768
Accrued liabilities 2,590,496 2,154,078
------------ ------------
Total current liabilities 3,482,177 4,142,984
CAPITALIZED LEASE OBLIGATIONS, less current maturities 7,219 8,871
------------ ------------
TOTAL LIABILITIES 3,489,396 4,151,855
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares 112,581 112,399
authorized; 11,258,133 and 11,239,892 shares issued and
outstanding
Additional paid-in capital 91,024,041 91,016,366
Accumulated deficit (47,978,901) (41,780,353)
Net unrealized gains (losses) on investments 109,340 (11,508)
------------ ------------
Total shareholders' equity 43,267,061 49,336,904
------------ ------------
$ 46,756,457 $ 53,488,759
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE>
UROLOGIX, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months
Ended September 30,
---------------------------
1998 1997
------------- -------------
SALES $ 1,624,605 $ 2,599,135
COST OF GOODS SOLD 2,846,411 1,738,301
------------ ------------
Gross profit (loss) (1,221,806) 860,834
------------ ------------
COSTS AND EXPENSES:
Research and development 1,496,903 1,374,165
Sales and marketing 1,656,650 1,332,966
General and administrative 2,298,429 500,805
------------ ------------
Total costs and expenses 5,451,982 3,207,936
------------ ------------
OPERATING LOSS (6,673,788) (2,347,102)
INTEREST INCOME, NET 475,240 331,442
------------ ------------
Net loss ($6,198,548) ($2,015,660)
============ ============
Basic and diluted net loss per ($0.55) ($0.22)
common share
============ ============
Basic and diluted weighted average number of
common shares outstanding 11,256,842 9,309,896
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended September 30,
-------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net loss ($6,198,548) ($2,015,660)
Adjustments to reconcile net loss to net cash
used for operating activities -
Loss on impairment of assets (Note5) 721,880 -
Depreciation and Amortization 409,178 492,336
Change in operating items:
Accounts receivable 2,318,412 (1,005,972)
Inventories 1,283,206 (221,336)
Prepaids and other current assets (328,368) 35,549
Accounts payable and accrued liabilities (657,020) (611,349)
----------- -----------
Net cash used for operating activities (2,451,206) (3,326,432)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (465,202) (406,338)
Proceeds from sale of securities 2,851,975 5,121,475
----------- -----------
Net cash provided by investing activities 2,386,773 4,715,137
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 7,857 156,420
Payments made on capital lease obligations (5,439) (5,988)
----------- -----------
Net cash provided by
financing activities 2,418 150,432
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (62,069) 1,539,137
CASH AND CASH EQUIVALENTS:
Beginning of period 882,801 275,571
----------- -----------
End of Period $ 820,732 $ 1,814,708
=========== ===========
Supplemental cash flow disclosure:
Cash paid for interest $ 1,035 $ 1,125
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Basis of presentation
The accompanying unaudited condensed financial statements of Urologix, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. The balance sheet as of September 30,
1998 and the statements of operations for the three-month periods ended
September 30, 1998 and 1997, and the statements of cash flows for the
three-month periods ended September 30, 1998 and 1997, are unaudited but include
all adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
dates and the operating results and cash flows for those periods. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information normally
included in financial statements and related footnotes prepared in accordance
with generally-accepted accounting principles has been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended June 30, 1998.
Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.
2. Basic and diluted net loss per share
Basic and diluted net loss per common share was computed by dividing basic and
diluted net loss by the weighted average number of shares of common stock
outstanding during each period. The impact of common stock equivalents has been
excluded from the computation of weighted average common shares outstanding, as
the effect would be antidilutive.
3. Inventories
Inventories consisted of the following as of:
September 30, 1998 June 30, 1998
------------------ -------------
Raw materials $2,209,019 $2,349,717
Work in process 360,943 132,559
Finished goods 460,727 1,831,619
---------- ----------
$3,030,689 $4,313,895
========== ==========
4. Recently Issued Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting in the financial statements all changes in
equity during a period, except those resulting from investments by and
distributions to owners. For the Company, comprehensive income represents net
income adjusted for unrealized gains/losses on investment adjustments.
Comprehensive income as defined by SFAS No. 130, was approximately $6.1 million
and $2.0 million for the three months ended September 30, 1998 and 1997,
respectively.
5. Fixed Asset Impairment
The Company recognized a charge of $721,880 related to assets that were
identified as impaired as a result of a reduction in work force. The carrying
values of the assets were written down to the Company's estimated fair value
based on future cash flows expected to result from the use or eventual disposal
of the assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial product,
the Targis(TM) System, is designed to treat benign prostatic hyperplasia
("BPH"), commonly known as "enlarged prostate." BPH dramatically affects the
quality of life of millions of men by causing adverse changes in urinary voiding
patterns. The Targis System has been approved for marketing in the United
States, the 15 European Union countries, Japan and Canada. The Company is
currently selling the Targis System outside the United States through
distributors and in the United States through its direct sales force.
The Targis procedure is a non-surgical, catheter-based therapy that
uses a proprietary microwave technology that preferentially heats diseased areas
of the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain-sensitive urethral tissue.
Because the urethra is protected from heat and is not punctured or penetrated, a
Targis procedure can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, the procedure can be performed in a low cost
setting such as a physician's office or an outpatient clinic. The Company
believes that the Targis System provides an efficacious, safe and cost effective
procedure for the treatment of BPH without the complications and side effects
inherent in most current treatments, and as such, is well positioned to address
the needs of physicians, patients and payors.
The Company's clinical studies demonstrated that most patients who
received the Targis therapy experienced a significant improvement in BPH
symptoms and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days. The
Company submitted results of its clinical studies to the United States Food and
Drug Administration (the "FDA") in its premarket approval application ("PMA") in
February 1997 and subsequently received FDA approval to market the Targis System
in August 1997.
The Company markets the Targis System in the United States through a
direct sales force. The Company has developed a sales and marketing team
consisting of sales and marketing management, product managers, communication
specialists and direct domestic sales representatives, who are all dedicated to
marketing the Targis System. The Company has hired and trained eight sales
representatives and is actively recruiting additional sales representatives.
Outside the United States, the Company has developed broad-based relationships
with two parties for market development and sales of the Targis System. Boston
Scientific Corporation ("Boston Scientific"), a worldwide developer,
manufacturer and marketer of medical devices, markets the Targis System in all
countries outside the United States, except Japan. Nihon Kohden Corporation
("Nihon Kohden"), a major Japanese developer, manufacturer and marketer of
medical devices, markets the Targis System in Japan. Both Boston Scientific and
Nihon Kohden have marketing and sales specialists dedicated to the Targis
System.
RESULTS OF OPERATIONS
Three months ended September 30, 1998 and 1997
Sales decreased to $1.6 million for the three months ended September
30, 1998 from $2.6 million for the same period in the prior fiscal year due to a
decrease in sales to the Company's international distributors as a result of
adequate inventory levels of the Targis System at international distributors.
Sales in the United States represented approximately 85% of fiscal 1999 first
quarter revenues, compared to no United States sales in fiscal 1998 first
quarter revenues. The Company expects United States sales of the Targis System
to increase during fiscal year 1999 compared to fiscal year 1998; however,
international sales are expected to be minimal due to existing inventory levels
of the Targis Systems at the Company's international distributors.
Cost of goods sold includes raw materials, labor and royalties, as well
as costs incurred in connection with the production of the Targis Systems. Cost
of goods sold increased to $2.8 million for the three months ended September 30,
1998 from $1.7 million for the same period in the prior fiscal year. Cost of
goods sold were impacted by two events in the first fiscal quarter of 1999.
First, as a result of a downward revision to its forecasted sales made in the
<PAGE>
first fiscal quarter and design changes to the Targis System, the Company
established a reserve of $1.3 million for inventory that exists in excess
quantities. Second, the Company operated under a reduced production schedule as
production was transitioned to a new catheter design, resulting in the
allocation of overhead over a lower production volume. The new catheter design
is expected to have significantly higher production yields and field
reliability. The Company began full production of the catheter in August 1998
and expects to continue at full production throughout the second quarter. The
Company expects costs of goods sold as a percentage of sales to decrease in 1999
from the first fiscal quarter of 1999 due to efficiencies obtained from higher
production volumes.
Research and development expenses include those costs associated with
product development, protection of the Company's intellectual property,
treatment of patients participating in clinical trials, the accumulation of
outcome data to substantiate clinical results and the preparation and submission
of applications for regulatory approvals. Research and development expenses for
the three months ended September 30, 1998 increased to $1.5 million from $1.4
million for the same period in the prior fiscal year, due primarily to costs
related to new and on-going clinical studies of the Targis System and costs
associated with product development activities related to Targis System
improvements. Research and development expenses during fiscal year 1999 are
expected to decrease compared to fiscal 1998 levels due to the conclusion of
some clinical studies, lower regulatory expenses and the recent settlement of
litigation.
Sales and marketing expenses for the three months ended September 30,
1998 increased to $1.7 million from $1.3 million in the same period in the prior
fiscal year due primarily to costs associated with the Company's U.S. marketing
launch of the Targis System and supporting the marketing of the Targis System in
Europe and Japan. These costs included the hiring of sales and marketing
management, preparation of promotional materials, recruitment of field sales
representatives and efforts related to obtaining third-party reimbursement for
the Targis System. The Company expects sales and marketing expenses to increase
as it increases its sales efforts in the United States, including the expected
expansion of its direct sales force, and continues supporting its international
distributors' sales efforts.
General and administrative expenses increased to $2.3 million for the
three month period ended September 30, 1998 from $501,000 for the same period in
the prior fiscal year. General and Administrative expenses for the period ended
September 30, 1998 reflect a non-recurring charge of $1.6 million incurred in
connection with a reduction in workforce that resulted from the downward
revision of the Company's sales forecast. The charge includes severance costs
paid to employees, future lease costs related to facilities no longer occupied
and the impairment of assets no longer used as a result of the reduction in work
force. The reduction in work force was a result of decreases to the Company's
sales forecasts.
Interest income increased to $475,000 for the three month period ended
September 30, 1998 from $331,000 for the same period in the prior fiscal year,
due primarily to higher cash and investment balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through sales of equity securities and, to a lesser extent, sales of the Targis
System. As of September 30, 1998, the Company had total cash, cash equivalents
and available-for-sale securities of $33.7 million and working capital of $36.0
million. During the three months ended September 30, 1998 the Company used
approximately $2.9 million of cash for operating activities and property and
equipment purchases, which amounts were funded primarily by proceeds from
available-for-sale securities.
At September 30, 1998, the Company had committed to purchase $1.5
million in components for the Targis Systems from a third-party vendor.
The Company expects to continue to incur additional losses, and will
use its working capital as it incurs substantial expenses related to the Targis
System market introduction in the United States, clinical trials and research
and development activities. In addition, should the Company choose to rent
Targis System control units to customers in the future, substantial capital
could be required. Although the Company believes that existing cash, cash
equivalents and available-for-sale securities will be sufficient to fund its
operations for at least the next 24
<PAGE>
months, there can be no assurance that the Company will not require additional
financing in the future or that any additional financing will be available to
the Company on satisfactory terms, if at all.
YEAR 2000 ISSUE
The Company is evaluating the potential impact of what is commonly
referred to as the Year 2000 issue, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond. The Company has established a dedicated Year 2000 team working
with every operational area throughout the Company, and this team has worked
with management to commence the following steps: (i) implementing a Year 2000
Assessment and Testing Plan for all internal information systems and other
systems that contain microcontrollers that may be affected by the Year 2000 date
change; (ii) implementing a Year 2000 Assessment and Testing Plan for all
Company products, (iii) communicating with third parties that supply product to
the Company to ensure they are addressing the Year 2000 issue; and (iv)
contingency and disaster recovery planning to ensure Year 2000 problem
resolution.
The Company has identified and tested the systems it believes are
mission critical, and the test results indicate that these systems are Year 2000
compliant. The Company expects to complete testing and establish compliance with
respect to all of its systems and products by December 31, 1998, subject to
possible equipment upgrades during 1999 and ongoing communications with third
parties. Regardless of the Year 2000 compliance of the Company's systems and
products, there can be no assurance that the Company will not be adversely
affected by the failure of others to become Year 2000 compliant.
The Company estimates that its direct costs for Year 2000 compliance
will consist of costs related to the staff time devoted to Year 2000 compliance.
The Company does not expect capital expenditures will be necessary related to
Year 2000 compliance. Costs and capital expenditures in these areas have not
been material for historical periods.
As noted below under "Forward-Looking Statements," statements in this section
that are not historical or current facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including statements regarding the timetable for Year 2000
compliance, the Company's costs and capital expenditures, the success of the
Company's efforts and others' efforts to achieve compliance, and the effects of
the Year 2000 issue on the Company's future financial condition and results of
operations. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. The following important factors, among
others, could affect the accuracy of these statements: (i) the inherent
uncertainty of the costs and timing of achieving compliance on the wide variety
of systems used by the Company, (ii) the reliance on the efforts of vendors,
customers, government agencies and other third parties to achieve adequate
compliance and avoid disruption of the Company's business in early 2000 and
(iii) the uncertainty of the ultimate costs and consequences of any
unanticipated disruption in the Company's business resulting from the failure of
one of the Company's applications or of a third party's systems. The foregoing
list is not exhaustive, and the Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FORWARD-LOOKING STATEMENTS
Statements included in this Form 10-Q 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. A detailed discussion of risks and uncertainties may be found in
the Section entitled "Business - Forward Looking Statements" in Urologix Form
10-K for the year ended June 30, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
During the quarter for which this Quarterly Report is filed, the
Company filed no Reports on form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 12, 1998
--------------------------
Urologix, Inc.
- -------------------------------
(Registrant)
/s/ Wesley E. Johnson, Jr.
- -------------------------------
Wesley E. Johnson, Jr.
Vice President/Finance and Chief
Financial Officer
(Duly Authorized Officer)
/s/ Wesley E. Johnson, Jr.
- -------------------------------
Wesley E. Johnson, Jr.
Vice President/Finance and Chief
Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 820,732
<SECURITIES> 32,885,599
<RECEIVABLES> 1,808,757
<ALLOWANCES> 113,636
<INVENTORY> 3,030,689
<CURRENT-ASSETS> 39,451,611
<PP&E> 4,401,813
<DEPRECIATION> 1,768,949
<TOTAL-ASSETS> 46,756,457
<CURRENT-LIABILITIES> 3,482,177
<BONDS> 0
0
0
<COMMON> 112,581
<OTHER-SE> 43,154,480
<TOTAL-LIABILITY-AND-EQUITY> 46,756,457
<SALES> 1,624,605
<TOTAL-REVENUES> 1,624,605
<CGS> 2,846,411
<TOTAL-COSTS> 2,846,411
<OTHER-EXPENSES> 5,451,982
<LOSS-PROVISION> (6,673,788)
<INTEREST-EXPENSE> 1,035
<INCOME-PRETAX> (6,198,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,198,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,198,548)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
