<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 MARCH 31, 1999
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 May 13, 1999, the Company had outstanding 11,424,100 shares of common
stock, $.01 par value.
<PAGE>
UROLOGIX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,111,536 $ 882,801
Available-for-sale securities 28,950,674 35,616,726
Accounts receivable, net 1,195,423 4,013,533
Inventories, net 2,973,967 4,313,895
Prepaids and other current assets 694,518 691,102
------------ ------------
Total current assets 34,926,118 45,518,057
------------ ------------
Property and equipment:
Machinery, equipment and furniture 4,436,619 4,902,773
Less - accumulated depreciation (2,252,529) (1,703,293)
------------ ------------
Property and equipment, net 2,184,090 3,199,480
Other assets, net 4,526,540 4,771,222
------------ ------------
$ 41,636,748 $ 53,488,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of capitalized lease obligations $ 16,432 $ 28,138
Accounts payable 891,251 1,960,768
Accrued liabilities 2,686,458 2,154,078
------------ ------------
Total current liabilities 3,594,141 4,142,984
Capitalized lease obligations, less current maturities 3,770 8,871
------------ ------------
Total liabilities 3,597,911 4,151,855
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value, 25,000,000 shares 114,236 112,399
authorized; 11,423,580 and 11,239,892 shares issued and
outstanding
Additional paid-in capital 91,110,556 91,016,366
Accumulated deficit (53,276,205) (41,780,353)
Cumulative other comprehensive income (loss) 90,250 (11,508)
------------ ------------
Total shareholders' equity 38,038,837 49,336,904
------------ ------------
$ 41,636,748 $ 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)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
--------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 1,341,892 $ 2,508,515 $ 4,200,444 $ 8,311,495
Cost of goods sold 956,368 2,601,553 4,699,070 6,479,980
----------- ----------- ------------ -----------
Gross profit (loss) 385,524 (93,038) (498,626) 1,831,515
----------- ----------- ------------ -----------
Costs and expenses:
Research and development 1,264,244 1,913,307 3,790,084 4,731,713
Sales and marketing 1,342,045 1,671,194 5,036,407 4,525,025
General and administrative 558,142 567,320 3,515,295 1,699,326
----------- ----------- ------------ -----------
Total costs and expenses 3,164,431 4,151,821 12,341,786 10,956,064
----------- ----------- ------------ -----------
Operating loss (2,778,907) (4,244,859) (12,840,412) (9,124,549)
Interest income, net 418,309 743,256 1,344,560 1,466,980
----------- ----------- ------------ -----------
Net loss $(2,360,598) $(3,501,603) $(11,495,852) $(7,657,569)
=========== =========== ============ ===========
Basic and diluted net loss per common share $ (0.21) $ (0.32) $ (1.01) $ (0.75)
=========== =========== ============ ===========
Basic and diluted weighted average number
of common shares outstanding 11,423,575 11,102,222 11,346,467 10,184,104
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months
Ended March 31,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Operating Activities:
Net loss $(11,495,852) $ (7,657,569)
Adjustments to reconcile net loss to net cash
used for operating activities -
Loss on impairment of assets 771,362 -
Depreciation and Amortization 1,151,997 1,160,888
Change in operating items:
Accounts receivable 2,818,110 (1,570,861)
Inventories 1,339,928 (1,750,215)
Prepaids and other current assets (3,415) 75,950
Accounts payable and accrued liabilities (537,137) (219,889)
------------ -------------
Net cash used for operating activities (5,955,007) (9,961,696)
------------ -------------
Investing Activities:
Purchases of property and equipment, net (663,288) (1,214,627)
Purchase of available-for-sale securities (58,255,264) (449,494,901)
Proceeds from sale of available-for-sale securities 65,023,074 429,193,953
------------ -------------
Net cash provided by (used in) investing activities 6,104,522 (21,515,575)
------------ -------------
Financing Activities:
Proceeds from the sale of common stock, net - 31,659,351
Proceeds from exercise of stock awards 96,027 131,014
Payments made on capital lease obligations (16,807) (14,964)
------------ -------------
Net cash provided by financing activities 79,220 31,775,401
------------ -------------
Net increase in Cash and Cash Equivalents 228,735 298,130
Cash and Cash Equivalents:
Beginning of period 882,801 275,571
------------ -------------
End of Period $ 1,111,536 $ 573,701
============ =============
Supplemental cash flow disclosure:
Cash paid for interest $ 707 $ 6,530
============ =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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 March 31, 1999
and the statements of operations for the three and nine-month periods ended
March 31, 1999 and 1998, and the statements of cash flows for the nine-month
periods ended March 31, 1999 and 1998, 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:
March 31, 1999 June 30, 1998
-------------- -------------
Raw materials 1,114,452 2,349,717
Work in process 1,359,228 132,559
Finished goods 500,287 1,831,619
-------------- -------------
2,973,967 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 available for sale securities.
Comprehensive income (loss) as defined by SFAS No. 130, was $(2,409,177) and
$(11,394,094) for the three and nine-month periods ended March 31, 1999 and
$(3,592,523) and $(7,621,013) for the three and nine-month periods ended March
31, 1998.
<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 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 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 and its co-marketing partner, Boston Scientific Corporation
("Boston Scientific"), a world wide developer, manufacturer and marketer of
medical devices. Urologix' direct sales force has sole responsibility for
completing and transacting the sales of the Targis system, while Boston
Scientific, through its Microvasive Urology sales force, assists in the
promotion and marketing of the Targis System among urologists throughout the
United States. The Company has developed a sales and marketing team consisting
of sales and marketing management, product managers, communication specialists
and direct sales representatives, who are all dedicated to marketing the Targis
System.
Outside the United States, the Company has a broad based distribution
agreement with Nihon Kohden Corporation ("Nihon Kohden"), a major Japanese
developer, manufacturer and marketer of medical devices, for market development
and sales of the Targis System in Japan. The Company has an International
Distribution Agreement with Boston Scientific covering all countries outside the
United States, except Japan. Under the agreement, which was amended in February
of 1999, Urologix has responsibility for market development of the Targis System
and works with Boston Scientific to sell Targis Systems from Boston Scientific's
inventory through Urologix' direct sales force in Europe. Boston Scientific
compensates Urologix for Urologix' market development services.
RESULTS OF OPERATIONS
Sales decreased to $1.3 million and $4.2 million for the three and
nine-month periods ended March 31, 1999 from $2.5 million and $8.3 million for
the same periods in the prior fiscal year due to a decrease in international
sales as a result of adequate inventory levels of the Targis System at
international distributors. Sales in the United States represented approximately
92% of revenue during the first nine months of 1999, compared to 27% of revenue
in the first nine months of 1998. The Company expects United States sales of the
Targis System
<PAGE>
to increase in fiscal year 1999 compared to fiscal year 1998; however,
international sales are expected to be minimal due to existing inventory levels
of 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 decreased to $956,000 during the three months ended March 31, 1999
compared to $2.6 million for the same period in 1998. The decrease in cost of
goods sold is attributable primarily to decreases in sales volume. Excluding the
impact of a $700,000 inventory write down in the three months ended March 31,
1998, gross profit as a percentage of sales increased by 5% to 29% of sales
during the three months ended March 31, 1999 when compared to the same period in
the prior year. The increase in gross margin as a percent of sales is
attributable to a reduction in operating costs and improvements in the
manufacturing process.
Cost of goods sold decreased to $4.7 million during the first nine-
months of 1999 compared to $6.5 million during the first nine months of 1998.
The decrease in cost of goods sold is attributable to decreases in sales volume.
Excluding the impact of a $1.3 million reserve established in 1999 and a
$700,000 reserve established in 1998, gross profit as a percentage of sales
during the first nine months of 1999 decreased by 11% to 19% compared to the
same period in 1998. Apart from these adjustments, gross margin decreased in the
nine months ended March 31, 1999 when compared to the same period in 1998 as a
result of lower sales and manufacturing volume resulting in the allocation of
overhead over a lower production volume resulting in a higher product cost.
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
decreased to $1.3 million and $3.8 million for the three and nine-month periods
ended March 31, 1999 from $1.9 million and $4.7 million for the same periods in
the prior fiscal year, due primarily to the conclusion of several clinical
studies, lower regulatory expenses and the settlement of litigation.
Sales and marketing expenses for the three months ended March 31, 1999
decreased to $1.3 from $1.7 million during the same period in the prior fiscal
year. The decrease in sales and marketing expense is primarily attributable to
payments received from Boston Scientific for international market development
services provided by Urologix. These payments were recorded as a reduction to
sales and marketing expense. Sales and marketing expenses for the nine months
ended March 31, 1999 increased to $5.0 from $4.5 million during the same period
in the prior fiscal year due primarily to costs associated with the Company's
November 1997 marketing launch of the Targis System in the United States and
costs associated with 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
expands its sales efforts in the United States and continues supporting its
international distributors' sales efforts.
General and administrative expenses decreased to $558,000 for the
three-month period ended March 31, 1999 from $567,000 for the same period in the
prior fiscal year. General and administrative expenses increased to $3.5 million
for the nine month period ended March 31, 1999 from $1.7 million for the same
period in the prior fiscal year. General and Administrative expenses for the
nine month period ended March 31, 1999 reflect a non-recurring charge of $1.6
million incurred in connection with a reduction in workforce in October 1998
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.
Interest income decreased to $418,000 and $1.3 million for the three
and nine-month periods ended March 31, 1999 from $743,000 and $1.5 million for
the same periods in the prior fiscal year. Interest income decreased due
primarily to lower cash and investment balances.
<PAGE>
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 March 31, 1999, the Company had total cash, cash equivalents and
available-for-sale securities of $30.1 million and working capital of $31.3
million. During the nine months ended March 31, 1999 the Company used
approximately $6.6 million of cash for operating activities and property and
equipment purchases, which amounts were funded primarily by proceeds from
available-for-sale securities.
The Company expects to continue to incur additional losses, and will
use its working capital as it incurs substantial expenses related to the
marketing and sale of the Targis System, 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 the
next 24 months, there can be no assurance that the Company will not require
additional financing in the future or that any additional financing will be
available to the Company on satisfactory terms, if at all.
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 completed testing and established compliance with
respect to all of its systems and products, 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
<PAGE>
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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On January 14, 1999 the Company held its Annual Shareholders' Meeting.
The results of the meeting were disclosed in our previous quarterly
filing for the quarter ended December 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to the International Distribution Agreement between
Urologix, Inc. and Boston Scientific Corporation (1)
27.1 Financial Data Schedule
(1) Certain information has been deleted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment under Rule 24b-2.
(b) Reports on Form 8-K
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.
May 14, 1999
Urologix, Inc.
- ---------------------------
(Registrant)
/s/ Michael M. Selzer, Jr.
- ---------------------------
Michael M. Selzer, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
/s/ Wesley E. Johnson, Jr.
- ---------------------------
Wesley E. Johnson, Jr.
Vice President/Finance and Chief
Financial Officer
(Principal Financial Officer)
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
AMENDMENT
TO
INTERNATIONAL DISTRIBUTION AGREEMENT
This Amendment to International Distribution Agreement is made as of the
26th day of February, 1999, between Urologix, Inc., a corporation organized and
existing under the laws of the State of Minnesota ("Urologix") and Boston
Scientific Corporation, a corporation organized and existing under the laws of
Delaware ("BSC").
BACKGROUND
By an agreement dated June 26, 1996 (the "Agreement"), Urologix granted BSC
the rights and responsibilities of an exclusive distributor of the Products of
Urologix in all areas of the world except the United States and Japan.
Urologix and BSC now desire that Urologix aid BSC in developing the market
for the Products in Europe and certain other areas of the world for a particular
period of time.
The parties desire that through its efforts, Urologix will solicit the sale
of certain Products previously purchased by BSC (the "Beek Products"). BSC will
pay Urologix a certain amount to enable Urologix to pay all or a portion of its
expenses in conjunction with this effort, and the revenues derived from the
customers who purchase these Products will, in most situations, be received and
retained by BSC.
[CONFIDENTIAL TREATMENT REQUESTED]
TERMS AND CONDITIONS
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Market Development Amount. BSC will pay an amount ("the Market
Development Amount") to Urologix to enable Urologix to perform market
development activities for the Products primarily in Europe, Eastern Europe, and
the Middle East, and, upon consultation with BSC, in certain other areas of the
world offering significant near-term market potential as determined by Urologix
in its reasonable business judgment. The Market Development Amount for the
period from January 1, 1999 through December 31, 1999 (the "First Amendment
Period") shall be equal to U.S. [Confidential Treatment Requested]. The Market
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Development Amount for the period from January 1, 2000 through June 30, 2001
(the "Second Amendment Period"), if any, will be as mutually agreed upon by
Urologix and BSC. In addition, BSC will pay Urologix [Confidential Treatment
Requested] upon execution of the Amendment as the Market Development Amount for
Urologix's market development services from October 1, 1998 through December 31,
1998 (the "Prior Period"). The Market Development Amounts shall be used only for
marketing activities contemplated by Urologix' current budget for the
expenditure of the Market Development Amount for the First Amendment Period as
set forth in Exhibit II (the "Plan"), which Plan may be modified by Urologix
after consultation with BSC in accordance with Section 8 hereof from time to
time in its reasonable business judgment.
1.1. The Market Development Amount for the First Amendment Period will
be paid in quarterly installments on the dates and in the amounts set forth
on Exhibit III by wire transfer to the account designated by Urologix for
that purpose; provided that in the event that (i) Urologix fails to achieve
any periodic milestone set forth in Section 6 hereof by the end of the
quarter for which such milestone is required to be achieved, and (ii)
Urologix does not achieve the quarterly sales revenue target for sales of
Beek Products set forth in Exhibit IV for such quarter, BSC may, by written
notice given to Urologix within thirty (30) days after the end of such
quarter, elect to terminate this Amendment and the Agreement.
1.2. Beginning with the First Amendment Period, Urologix will not be
expected or obligated to fund any of these market development activities
not covered by the Market Development Amount from its own resources but may
do so if it so chooses.
1.3. If the sales of Beek Products solicited by Urologix generate more
than [Confidential Treatment Requested] in net revenue for BSC during the
First Amendment Period or during the Second Amendment Period (or both), and
Urologix achieves the minimum [Confidential Treatment Requested] aggregate
gross margin target referred to in Section 4.1 during that period, BSC will
pay Urologix, as an additional Market Development Amount, an amount equal
to [Confidential Treatment Requested] of the amount by which the net
revenues for such period exceed [Confidential Treatment Requested]. Such
additional Market Development Amount, if any, will be paid by BSC within
thirty (30) days after the end of the period to which it relates and shall
be used for market development purposes.
2. Marketing. Urologix will use reasonable commercial efforts within the
constraints of the Market Development Amount received from BSC to solicit the
sale of Beek Products during the term of this Amendment. Urologix will not,
during the term of this Amendment, make any sales of Products in the Territory
other than sales of Beek Products, unless BSC does not
2
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
have sufficient quantities after request therefor to BSC available to timely
ship the Product involved to customers solicited by Urologix. Set forth on
Exhibit I is a description of (i) all Control Units and Procedure Kits which BSC
currently holds in inventory at its warehouse in Beek, Netherlands, and
[Confidential Treatment Requested] together with its location and current book
value.
3. Term of Amendment. This Amendment will be effective from October 1,
1998, through December 31, 1999. During the First Amendment Period, the parties
will discuss their satisfaction with this arrangement and determine whether they
mutually wish to extend the term of this Amendment for a portion or all of the
Second Amendment Period , and if so, the terms of that extension. Neither party
will be obligated to extend the term of this Amendment to include a portion or
all of the Second Amendment Period unless all of the terms of any such extension
are acceptable to that party in its sole discretion. If the term of this
Amendment is not extended after December 31, 1999, the rights and obligations of
BSC and Urologix thereafter under this Amendment and the Agreement will be as
set forth in Section 13.
4. Procedure. The Beek Products sold by Urologix during the term of this
Amendment will be sold in accordance with following procedures:
4.1. Price. Urologix will determine the price at which the Beek
Products are sold. BSC will provide Urologix monthly with the actual book
value of all Control Units and Procedure Kits. Except with respect to the
sale of Products described in Section 4.5 hereof, Urologix will seek an
average gross margin of not less than [Confidential Treatment Requested],
in the aggregate, with respect to all Beek Products sold by Urologix during
the First Amendment Period. There are no assurances that Urologix will
achieve such a gross margin, and Urologix will not be penalized in any
manner if it does not achieve such a gross margin. For this purpose, gross
margin is defined as the difference between the actual sales price of the
Control Unit sold less (a) in the case of Control Units in the field as
demonstration, clinical, or seeding units, BSC's transfer price from
Urologix or (b) in the case of Control Units held by BSC in inventory,
BSC's transfer price from Urologix, unless otherwise agreed by BSC and
Urologix, for each such unit. BSC shall receive and retain the entire price
at which the Beek Products are sold.
4.2. Regular Purchase Orders. Urologix will inform BSC of all purchase
orders received with respect to Products within three business days of
receipt thereof. Within three days after being so informed by Urologix, BSC
may accept any such purchase order in accordance with its terms. If BSC so
accepts such a purchase order, BSC will be responsible for the proper and
timely shipment of the Products involved to, and the invoicing of, that
customer and for the collection of all amounts due BSC from any such
3
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
sale.
4.3. Special Purchase Orders. If BSC does not accept any purchase
order in accordance with the procedure described in Section 4.2, BSC will
be deemed to have allowed Urologix the opportunity, at its option, to
itself complete that sale under an arrangement whereby Urologix will: (i)
take possession and title of those Products F.O.B. Beek and pay all
shipping costs for the Products involved; (ii) [Confidential Treatment
Requested]; and (iii) be responsible for the collection of all amounts due
from the customer under that purchase order and retain for itself all
amounts so collected. If Urologix elects to so proceed with the transaction
involved, BSC will promptly ship the Products involved to that customer on
behalf of Urologix in accordance with Urologix= instructions and warrant to
Urologix that the Product functions in accordance with original Product
specifications at the time of installation if properly installed. All
amounts paid by Urologix to BSC under this Section 4.3 will be considered
revenue to BSC for purposes of Sections 1.1 and 1.3.
4.4. Demonstration Units; Clinical Units; Seeding Units. BSC has
placed [Confidential Treatment Requested] Control Units for demonstration,
clinical, seeding, and other non-revenue purposes. Urologix may not place
any additional Control Units from the Beek Products for any such purposes
without the written consent of BSC. Urologix may solicit the sale of up to
[Confidential Treatment Requested] of these [Confidential Treatment
Requested] Control Units as used equipment at special prices if it has an
opportunity to do so, subject to Section 4.1 hereof.
4.5. Demonstration Catheters. Urologix may provide Procedure Kits from
the Beek Products to third parties without charge. Any such Procedure Kits
will be deemed to have been sold by Urologix for [Confidential Treatment
Requested], which amounts shall be remitted by Urologix to BSC in
accordance with the terms hereof. Such deemed sales of Procedure Kits shall
not be included in the calculation of aggregate gross margin set forth in
Section 4.1 hereof.
4.6. Congresses and Trade Shows. Urologix may display the Products at
congresses and trade shows in Europe and certain other areas of the world.
If Urologix prefers to display the Products at a BSC booth at any of those
congresses or trade shows, Urologix may do so on terms to be coordinated
between Urologix and BSC with reasonable lead time and planning.
4.7. Personnel. Urologix will offer a market development position for
the German speaking countries to an employee of BSC who was involved in the
sale of the
4
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Products in Europe on behalf of BSC.
4.8. Inventory. BSC may purchase from Urologix from time to time, such
additional units of any of the Products as may be necessary to enable BSC
to fill orders for the sale of the Products on a timely basis. BSC shall
pay Urologix [Confidential Treatment Requested] for each such Procedure Kit
and [Confidential Treatment Requested] for each such Control Unit, unless
otherwise agreed by BSC and Urologix.
5. Reports. Each party will provide the other party with the reports
described below:
5.1. By Urologix to BSC. By the 25th day of each calendar quarter,
Urologix will provide to BSC (a) a quarterly report which describes the
aggregate amount of all expenses paid from the Market Development Amount
during the preceding quarter, and year to date, in each of the expense
categories described on Exhibit V and (b) a quarterly report of all sales
and placements of Beek Products during the preceding calendar quarter and
related transfer prices.
5.2. By BSC to Urologix. By the 25th day of each calendar quarter, BSC
will provide a quarterly report which contains the following information
for the preceding quarter and year to date: BSC's inventory of Control
Units and of Procedure Kits, the book value of the Control Units which
remain in the field as demonstration, clinical or seeding units, BSC's
gross revenue from the sale of Control Units and from the sale of Procedure
Kits under this Amendment, BSC's average gross margin with respect to the
sale of Control Units under this Amendment and the number of Control Units
installed by BSC.
6. Other Efforts: Within the constraints of the Market Development Amount
and Urologix= reasonable commercial efforts as to the appropriate priorities
with respect to the use of the Market Development Amount to develop the market
for the Products in Europe all as reflected in the Plan, Urologix will endeavor
to achieve the following:
6.1. Clinical Research Activities: Initiate and conduct clinical
studies, after consultation with BSC in accordance with Section 8, with
respect to Products in the following countries in accordance with the
following timetables:
[Confidential Treatment Requested]
5
<PAGE>
6.2. Training and Education:
(a) [Confidential Treatment Requested]
(b) [Confidential Treatment Requested]
6.3. Key Opinion Leaders:
(a) [Confidential Treatment Requested]
(b) [Confidential Treatment Requested]
7. Independent Distribution Agreements. Even though BSC currently has
exclusive distribution rights in the Territory, Urologix may enter into
distributor agreements directly between Urologix and the distributor involved in
any country in the Territory as part of its market development activities under
this Amendment. Urologix expenses in establishing these relationships will be
paid from the Market Development Amount. Those agreements may be for terms which
exceed the term of this Amendment or the Agreement, provided such agreements do
not have terms in excess of twelve (12) months or are terminable on six (6)
months notice.
7.1. New Distributors. When Urologix has entered into such a
distributor agreement, it will so advise BSC in writing. Within five
business days after BSC receives that notice, BSC will advise Urologix as
to whether it wishes to deal with any such distributor (a "New
Distributor") as a Regular Distributor or Special Distributor, as both of
those relationships are defined below. If BSC does not so notify Urologix
within that period, any such New Distributor will be deemed to be a Special
Distributor.
7.2. Regular Distributors. If BSC designates the New Distributor as a
Regular Distributor, then BSC will accept all purchase orders received from
that New Distributor in accordance with their terms; will be responsible
for the proper and timely shipment of all Products to that New Distributor,
and will be responsible for all invoicing and collection with respect to
all purchase orders from that New Distributor.
7.3. Special Distributors. If BSC designates, or is deemed to have
designated, a New Distributor as a Special Distributor, then BSC will sell
to Urologix, on the following terms, all Products which Urologix desires to
resell to the Special Distributor: (i) Urologix will take possession of
those Products F.O.B. Beek and pay all shipping costs for the Products
involved; (ii) Urologix will
6
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
pay BSC, within 90 days of shipment [Confidential Treatment Requested],
unless otherwise agreed by BSC and Urologix; (iii) Urologix will be
responsible for the collection of all amounts from the Special Distributor
and will retain for itself all amounts so collected; and (iv) BSC will
promptly ship the Products involved to Special Distributors on behalf of
Urologix in accordance with Urologix instructions and warrant to Urologix
that the Product functions in accordance with original Product
specifications at the time of installation if properly installed. All
amounts paid by Urologix to BSC under this Section 7.3 will be considered
revenue to BSC for purposes of Section 1.1 and Section 1.3.
8. Reporting Relationship. Rob ten Hoedt of Urologix will report quarterly
on the progress of the market development effort to Paul LaViolette and Michael
Darnaud of BSC, and will have regular contact on an operational matters with
Dean Gray of BSC in Natick. The foregoing persons or their representatives will
attend quarterly management meetings to review the progress of the arrangements
contemplated by the Amendment and to discuss potential revisions to the Plan,
Market Development Amounts and performance targets, which are mutually
acceptable.
9. Service. Urologix shall be responsible for service of all existing and
future Control Unit placements. No funding for this activity will be provided by
BSC, although a portion of the Market Development Amount may be used for this
purpose in accordance with the Plan. BSC will make available, at its expense,
one qualified technician who will be responsible for fully servicing two (2)
European treatment sites reasonably designated by Urologix.
10. Regulatory Matters; Labeling; and Product Materials. BSC will remain
responsible for the following responsibilities under Sections 9 and 18 of the
Agreement during the term of the Agreement. Specifically, after consultation
with Urologix in accordance with Section 8 hereof, BSC will use commercially
reasonably efforts to: (i) maintain all existing regulatory agency approvals
which (A) are maintained by BSC as of the effective date of the Amendment as set
forth on Exhibit VI hereto, including regulatory approvals in such countries for
improvements to existing Products and (B) are required for the marketing and
sale of the Products in Europe and those portions of the world where Urologix
establishes distributors; (ii) update as required the labeling and manual
requirements for each of those countries with respect to which it has provided
Urologix information pursuant to Section 9.11 of the Agreement and provide
Urologix with that updated information, with appropriate translations; and (iii)
provide Urologix with translations of all updated promotional and technical
written support materials produced by BSC.
11. Suspension of Agreement Terms. During the period of time this Amendment
is in effect, the applicability of the following portions of the Agreement will
be terminated and of no force or effect with respect to the rights and
obligations of the parties : 4.1, 4.3, 6.1 through 6.6, 7, 9.1, 9.2, 9.3, 9.4
(except for the last sentence thereof), 9.5, 9.9, 10, 11.2 through 11.5, 18.3,
7
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
and 19. In the event of any conflict between the terms of the Amendment and the
Agreement as amended by the Amendment, the provisions of the Amendment shall
govern. In addition, Urologix shall indemnify BSC in a parallel fashion to BSC's
indemnification obligations under Section 14.1 of the Agreement.
12. Breach. In the event of a breach of the Agreement or this Amendment by
either party which is not cured within sixty (60) days after written notice of
that breach is given by the other party, the non-breaching party may, at any
time thereafter, terminate both the Agreement and this Amendment upon written
notice given to the breaching party.
13. Termination. Upon the expiration or termination of this Amendment or
the Agreement for any reason, both this Amendment and the Agreement will
terminate and, except as provided in this Section 13, neither party will have
any further rights or obligations to the other party under either this Amendment
or the Agreement, and neither BSC nor Urologix will be liable to the other party
for any direct, indirect, collateral, incidental or consequential losses, or
other damages, incurred by the other party arising, directly or indirectly, from
a breach of this Amendment or the Agreement or the termination of this Amendment
and the Agreement. In addition, BSC shall then have the right (i) to cancel any
purchase orders issued by BSC for Products after January 1, 1999, without
penalty, but only with respect to any Products which have not been shipped by
Urologix under those purchase orders, and (ii) to return for refund any Products
which are delivered to BSC either within 30 days before or 30 days after the
receipt by either party of any notice of termination from the other party.
Except as provided by the immediately preceding sentence, BSC must pay Urologix
for all Products delivered by Urologix to BSC pursuant to purchase orders
accepted by Urologix prior to the expiration or termination of this Amendment.
BSC shall have the right to sell to customers in the Territory, or otherwise
transfer to customers in the Territory, any Products in its possession at the
expiration or termination of the Agreement.
14. Waiver and Release. Urologix and BSC each hereby waive and release the
other party from any liability of whatsoever nature arising from any breach by
the other party under the Agreement occurring prior to the effective date of
this Amendment.
15. Entire Agreement. This Amendment is the entire agreement between the
parties with respect to this Amendment. It supersedes all previous oral and
written arrangements between the parties with respect thereto and is intended as
a complete and exclusive statement of the terms of their understanding with
respect to this Amendment.
16. Survival. The provisions of Sections 13 and 14 of this Amendment and
all of the sections cited under Section 30 (Survival) of the Agreement, except
for Sections 11.2 through
8
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
11.6, shall survive the termination of this Amendment and the Agreement and
continue thereafter in full force and effect.
17. Effect of Amendment. Except as modified by this Amendment, the
Agreement remains in full force and effect.
18. Definitions. Capitalized terms in this Amendment have the same meanings
as under the Agreement, unless separately defined in this Amendment.
IN WITNESS WHEREOF, the parties have signed this Amendment as of its
effective date.
UROLOGIX, INC. BOSTON SCIENTIFIC CORPORATION
By /s/ Wesley E. Johnson, Jr. By /s/ Paul A. LaViolette
----------------------------------- -------------------------------
Its: CFO Its: President, International
------------------------------- ---------------------------
Dated: March 1, 1999 Dated: February 26, 1999
----------------------------- -------------------------
9
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Exhibit I
Description of Products Inventory at Beek, Netherlands
and
[Confidential Treatment Requested] Control Units Described in Section 4.8
Beek Inventory
[Confidential Treatment Requested]
10
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Exhibit II
Current Plan
[Confidential Treatment Requested]
11
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Exhibit III
Market Development Amount Payments
[Confidential Treatment Requested]
12
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Exhibit IV
Quarterly Targets
[Confidential Treatment Requested]
13
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Exhibit V
Expense Categories
Under Section 5.1
[Confidential Treatment Requested]
14
<PAGE>
Exhibit 10.1 - CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
Certain information has been omitted from this exhibit
and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2
Exhibit VI
Existing Regulatory Approvals
Approved
--------
Argentina
Australia
Canada
European Union
Submitted and Waiting for Approval
----------------------------------
Brazil
Taiwan
Korea
15
<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> MAR-31-1999
<CASH> 1,111,536
<SECURITIES> 28,950,674
<RECEIVABLES> 1,366,156
<ALLOWANCES> 170,733
<INVENTORY> 2,973,967
<CURRENT-ASSETS> 34,926,118
<PP&E> 4,436,619
<DEPRECIATION> 2,252,529
<TOTAL-ASSETS> 41,636,748
<CURRENT-LIABILITIES> 3,594,141
<BONDS> 0
0
0
<COMMON> 114,236
<OTHER-SE> 91,200,806
<TOTAL-LIABILITY-AND-EQUITY> 41,636,748
<SALES> 1,341,892
<TOTAL-REVENUES> 1,341,892
<CGS> 956,368
<TOTAL-COSTS> 956,368
<OTHER-EXPENSES> 3,164,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 707
<INCOME-PRETAX> (2,360,598)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,360,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,360,598)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
