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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2002.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition 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 (IRS 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: (763) 475-1400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(1) Common Stock, $.01 par value.
(2) Series A Junior Participating 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 August 30, 2002, the aggregate value of the Company's Common Stock held by
non-affiliates of the Company was approximately $65.7 million based on the last
reported sales price on that date.
As of August 30, 2002, the Company had outstanding 13,915,968 shares of Common
Stock, $.01 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference to
the Proxy Statement for the Registrant's 2002 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
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PART I
Forward-Looking Statements
Statements included in this Annual Report on Form 10-K that are not
historical or current facts are forward-looking statements. Our actual results
could differ materially from any such forward-looking statements as a result of
risks and uncertainties, including those set forth below in "Risks Related to
Our Business" and in other documents we file from time to time with the
Securities and Exchange Commission, including our Quarterly Reports on Form
10-Q. Any such forward-looking statements reflect management's opinions only as
of the date of this Annual Report on Form 10-K, and we undertake no obligation
to revise or publicly release the results of any revisions to any such
forward-looking statements.
ITEM 1. BUSINESS
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Overview
Urologix has developed and offers non-surgical, catheter-based
therapies that use a proprietary cooled microwave technology for the treatment
of benign prostatic hyperplasia (BPH), a disease that dramatically affects more
than 23 million men worldwide. We market our products under the Targis(TM) and
Prostatron(R) names. Both systems utilize Cooled ThermoTherapy(TM), a targeted
microwave energy combined with a unique cooling mechanism that protects healthy
tissue and enhances patient comfort while providing safe, effective, lasting
relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without
anesthesia or intravenous sedation and can be performed in a physician's office
or an outpatient clinic. We believe that Cooled ThermoTherapy provides an
efficacious, safe and cost-effective solution for BPH with results clinically
superior to medication without the complications and side effects inherent in
surgical procedures.
Benign Prostatic Hyperplasia
BPH is a non-cancerous disease in which the prostate enlarges and
constricts the urethra causing adverse changes in urinary voiding patterns. 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. While the actual cause of BPH is not fully
understood, it is known that as men reach middle age, cells within the prostate
begin to grow at an increasing rate. As the prostate expands, it compresses or
impinges upon other portions of the prostate gland and the urethra, thereby
restricting the normal passage of urine. BPH patients typically suffer from a
variety of troubling symptoms that can have a significant impact on their
quality of life. Symptoms of BPH include frequent urination during the day and
night, urgency and painful urination. A delay in treatment can have serious
consequences, including complete obstruction (acute retention of urine), urinary
tract infections, loss of bladder functions and, in extreme cases, kidney
failure.
BPH generally affects men after the age of 50, and medical experts
suggest that nearly every man will be affected by this condition at some time in
his life. The BPH market is large and can be expected to continue to grow due to
the general aging of the world's population, as well as increasing life
expectancies.
Due in part to the side effects and complications associated with
current BPH therapies, many patients diagnosed with BPH are regularly monitored
by their physicians but elect not to receive active intervention. This course of
inaction is known as "watchful waiting." If symptoms persist or worsen, drug
therapy or surgical intervention has historically been recommended. Drug therapy
is usually the first line of treatment. It is estimated
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that more than 20% of patients who initially pursue drug therapy discontinue
treatment within 12 months due to various reasons including cost,
ineffectiveness, side effects and the burdens of compliance. The most common
surgical procedure has been Transurethral Resection of the Prostate (TURP), an
invasive surgery in which portions of the prostatic urethra and surrounding
tissue are removed, thereby widening the urethra and improving urinary flow.
While TURP results in a dramatic improvement in urine flow and reduction in
symptoms, the procedure can require a lengthy recovery time and is reported to
have a high rate of side effects and complications. Because the TURP procedure
requires a highly skilled surgeon with extensive training, the incidence of
complications are affected by the experience of the surgeon performing the TURP.
Cooled ThermoTherapy
Both our Targis and Prostatron systems utilize Cooled ThermoTherapy, a
catheter-based treatment for BPH that is clinically superior to medication and
less invasive than surgery. Cooled ThermoTherapy was developed to be the
treatment of choice for patients who have tried drugs unsuccessfully and wish to
avoid surgery.
Cooled ThermoTherapy utilizes a proprietary microwave technology,
delivered through a flexible catheter that targets energy into the diseased area
of the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the healthy, pain-sensitive urethral
tissue. During a Cooled ThermoTherapy procedure, a catheter is inserted into the
urethra, and a rectal thermosensing unit is placed into the rectum. Chilled
water is then circulated through the catheter in order to lower the temperature
of the urethra and protect it from heat and discomfort during the treatment.
Temperatures in the urethra and rectum are monitored continuously during the
treatment while microwave energy is delivered into the prostatic tissue,
ultimately resulting in a reduction in the size of the prostate as the body
re-absorbs the destroyed tissue during the months following treatment.
Cooled ThermoTherapy provides significant advantages over other BPH
therapies, producing lasting results that are clinically superior to drug
therapy while avoiding the complications associated with surgery. Because Cooled
ThermoTherapy does not require punctures or incisions and protects the urethra
during treatment, it can be performed in the physician's office or other
outpatient environments without the need for anesthesia or intravenous sedation
and results in fewer complications.
Clinical Studies
Clinical trials of the Cooled ThermoTherapy procedure have been
performed to obtain data to support new indications, to obtain long-term
durability data, and to gather data for Medicare and other reimbursement
approvals in various markets. We continue to monitor several multi-center and
multi-year studies to evaluate the long-term durability of Cooled ThermoTherapy
procedures. In our published results from multi-center clinical trials,
conducted both in the United States and internationally, the majority of Cooled
ThermoTherapy patients for whom follow-up data are available show significant
long-term relief from the symptoms of BPH, without significant post-procedure
complications.
Sales and Marketing
Our goal is to grow Cooled ThermoTherapy as a standard of care for the
treatment of BPH. Our business strategy to achieve this goal is to (i) increase
market awareness of Cooled ThermoTherapy, (ii) create access to Cooled
ThermoTherapy through both the sale and rental of Cooled ThermoTherapy systems
and (iii) increase the use of Cooled ThermoTherapy by physicians who already
have access to a Cooled ThermoTherapy system.
United States
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We have a sales and marketing team consisting of sales and marketing
management, product management, clinical and reimbursement specialists, and
direct sales representatives, all of whom are dedicated to marketing our Cooled
ThermoTherapy products. Our direct sales force and marketing efforts are
targeted at urologists who treat a large number of BPH patients. In addition to
our direct sales force, we utilize independent third-party mobile service
providers to provide smaller hospitals and urology clinics with cost-effective
access to Cooled ThermoTherapy treatment. The mobile service providers transport
the Cooled ThermoTherapy systems between sites, making the treatment available
to physicians and patients on a rotating basis. As of August 30, 2002, we
employed a total of 41 individuals in our sales and marketing department. To
facilitate the growth and expansion of the market for our products, we plan to
expand our sales and marketing team to more than 55 members by January 2003.
We offer our Cooled ThermoTherapy systems on a direct purchase and a
per-use rental basis. The list price for the purchase of a Targis or Prostatron
control unit is $90,000. The list prices for a single-use treatment catheter for
our Targis and Prostatron systems are $1,200 and $1,000 respectively. Pricing
for single-use treatment catheters purchased for use on rental equipment vary
depending on the length and terms of the agreement.
International
We have distribution agreements with Nihon Kohden Corporation and EDAP
Technomed Co. Ltd. for the market development and sale of the Targis and
Prostatron systems, respectively, in Japan. Our efforts outside of Japan are
primarily focused in Western Europe, where we use a network of local
distributors and independent agents experienced in selling products to hospitals
and urologists.
Manufacturing
We outsource all of our manufacturing, except for the assembly of the
Targis system disposable treatment catheter.
We have entered into a supply agreement for the production of the
Prostatron control unit with EDAP TMS S.A., a French corporation; Technomed
Medical Systems S.A., a French corporation and EDAP Technomed Inc., a Delaware
corporation (collectively EDAP) that continues through October 2003. During the
first fiscal quarter of 2002, we entered into a two-year supply agreement with
Plexus Corp. for the production of our Targis control unit. Plexus delivered the
first production units in December 2001 and is producing Targis control units
pursuant to our purchase orders.
We have a supply agreement with Venusa, Ltd. (Venusa) for the
production of the Prostatron disposable treatment catheter that extends though
April 2004.
We assemble Targis procedure kits using materials and components
supplied by various subcontractors and suppliers, as well as components we
fabricate. Several of the components are currently available to us through a
single vendor. Wherever possible we attempt to develop alternative sources for
critical components. Where alternative sourcing is not possible, we attempt to
enter into supply agreements with each component provider. Nevertheless, failure
to obtain components from these providers or delays associated with any future
component shortages, particularly as we increase our manufacturing level, could
have a material adverse effect on our business, financial condition and
operating results.
Our manufacturing operations and the operations of our third-party
suppliers must comply with the U.S. Food and Drug Administration's (FDA's)
quality system regulation, which includes, but is not limited to, the FDA's Good
Manufacturing Practices (GMP) requirements, and with certain requirements of
state, local and foreign governments for assuring quality by controlling
components, processes and document traceability and retention, among other
things.
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In June 1997, July 1998 and September 2000, the FDA completed
inspections of our facility, documentation and quality systems with no
significant deficiencies of GMP noted. Our facilities will continue to be
subject to periodic inspections by the FDA and by other auditors. We believe
that our manufacturing and quality control procedures meet the requirements of
these regulations and have established training and self-audit systems designed
to ensure compliance.
We have received ISO 9001 certification indicating compliance of our
manufacturing facilities with European standards for quality assurance and
manufacturing process control. We also have received CE mark certification,
which allows us to affix the CE Mark to our products and market them in the
European Union. In addition, the Targis and Prostatron systems have been
approved for marketing by the Japanese Ministry of Health and Welfare. As of
August 30, 2002 we employed 32 individuals in our manufacturing department.
Research and Development
We intend to build upon our clinical knowledge and relationships to
develop innovative future generations of BPH and other urology products. Our
research and development efforts are currently focused on improving the function
and features of our Cooled ThermoTherapy systems, reducing the production cost
of the components in our products and investigating other applications for our
core cooled microwave technology.
During the fiscal years ended June 30, 2002, 2001 and 2000, we spent
$4.1 million, $3.5 million and $3.6 million, respectively, in our research and
development efforts. As of August 30, 2002 we employed 24 individuals in our
research and development department.
Reimbursement
We believe that third-party reimbursement is essential to the
acceptance of Cooled ThermoTherapy, and that clinical efficacy, overall
cost-effectiveness and physician advocacy will be keys to obtaining such
reimbursement. We estimate that 60% to 80% of patients who receive Cooled
ThermoTherapy treatment in the United States will be eligible for Medicare
coverage. The remaining patients will either be covered by private insurers,
including traditional indemnity health insurers and managed care organizations,
or they will be private-paying patients. As a result, Medicare reimbursement is
particularly critical for widespread market acceptance of Cooled ThermoTherapy
in the United States.
The level of Medicare reimbursement for Cooled ThermoTherapy is
dependent on the site of service. Beginning on August 1, 2000, the Center for
Medicare and Medicaid Services (CMS) replaced the reasonable cost basis of
reimbursement for outpatient hospital-based procedures, including Cooled
ThermoTherapy, with a new fixed rate or prospective payment system. Under this
method of reimbursement, a hospital receives a fixed reimbursement for each
Cooled ThermoTherapy treatment performed in its facility, although the rate
varies depending on a wage index and other factors for each hospital. The
urologist performing the Cooled ThermoTherapy treatment continues to be
reimbursed approximately $600 per procedure.
In January 2001, CMS began to reimburse for Cooled ThermoTherapy
treatments performed in the urologist's office. The reimbursement rate
(inclusive of the physician's fee) in calendar year 2002 for Cooled
ThermoTherapy procedures performed in the urologist's office is approximately
$3,530, which is subject to geographic adjustment. Reimbursement rates for
calendar 2003 will be published in the November 2002 edition of the Federal
Register. At present, we expect the reimbursement rate for Cooled ThermoTherapy
treatment performed in the office to decrease approximately eight percent
beginning January 1, 2003.
Private insurance companies and HMOs make their own determinations
regarding coverage and reimbursement based upon "usual and customary" fees. To
date, we have received coverage and reimbursement in various geographies from
private insurance companies and HMOs throughout the United States. We intend to
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continue our efforts to gain coverage and reimbursement across the United
States. There can be no assurance that we will receive favorable coverage or
reimbursement determinations for Cooled ThermoTherapy systems from these payers
or that amounts reimbursed to physicians for performing Cooled ThermoTherapy
procedures will be sufficient to encourage physicians to use Cooled
ThermoTherapy.
Internationally, reimbursement approvals for the Cooled ThermoTherapy
procedure will be sought on an individual-country basis. Reimbursement approvals
have been obtained in Japan, and we are actively pursuing reimbursement
approvals on a country-by-country basis throughout Western Europe. Clinical
studies and physician advocacy will be used to support reimbursement requests in
countries where there currently is no reimbursement for such procedures.
Patents and Proprietary Rights
We have been issued 43 U.S. and 31 non-U.S. patents. We also have 18
patent applications pending in the United States and in a number of
non-U.S. jurisdictions, and we intend to file additional patent applications in
the future.
Several of our United States patents claim methods and devices that we
believe are critical to providing a safe and efficacious treatment for BPH.
There can be no assurance that our patents, or any patents that may be issued as
a result of existing or future applications, will offer any degree of protection
from competitors or that any of our patents or applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that our 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 our
ability to manufacture or market Cooled ThermoTherapy in the United States or in
international markets. Further, there can be no assurance that our Cooled
ThermoTherapy system does not infringe upon the patent rights or other
intellectual property rights of other companies, that we will not be required to
seek licenses from other companies or that other companies will not pursue
claims of infringement against us.
In March 2002, we filed a patent infringement action against ProstaLund
AB, ProstaLund Operations AB, and ACMI Corporation in the United States District
Court for the Eastern District of Wisconsin. We are seeking an injunction
prohibiting the manufacture, use, sale, or offer for sale of the "ProstaLund
Feedback Treatment" and an unspecified amount of damages. Our action alleges
that ProstaLund's microwave medical device and method, for which it has sought
pre-market approval from the FDA, infringes our United States Patents No.
5,234,004 and No. 5,509,929. Our complaint also alleges that ProstaLund has an
agreement with ACMI Corporation to distribute ProstaLund's microwave device in
the United States. The defendants have counterclaimed, alleging that they do not
infringe our patents, that our patents are invalid and that we have "marked" our
products as "patented" in a manner that violates patent law. We believe that
defendants' counterclaims are without merit.
In addition to patents, we also rely on trade secrets and proprietary
know-how that we intend to protect, in part, through proprietary information
agreements with employees, consultants and other parties. Our proprietary
information agreements with employees and most of our consultants contain
standard industry provisions requiring that the individuals assign to us,
without additional consideration, any inventions conceived or reduced to
practice while employed by or under contract with us, subject to customary
exceptions. Our officers and other key employees also agree not to compete with
us 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 we will have adequate remedies for any
such breach, or that third parties will not otherwise gain access to our
technology.
Competition
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Competition in the market for the treatment of BPH comes from invasive
therapies, such as TURP, drug therapy and other minimally invasive treatments.
There are four well-recognized prescription drugs available in the United States
for treating the symptoms of BPH: Flomax (sold by Boehringer Ingelheim
International GmbH), Hytrin (sold by Abbott Laboratories), Cardura (sold by
Pfizer Inc.) and Proscar (sold by Merck & Co., Inc.). Drug therapy is currently
the first-line therapy prescribed by most physicians in the United States for
BPH. Due to the large yet still uninformed marketplace of men suffering from
BPH, we do not consider the drug manufacturers as major threats or direct
competitors, but more as alternative therapies that have significant resources
to bring awareness to this quality of life condition for which we believe our
Cooled ThermoTherapy can provide a safe, effective and long-lasting treatment.
Competition in the market for minimally invasive treatments for BPH
continues to grow. Competitive devices include radio frequency (Medtronic),
interstitial laser (Johnson & Johnson), low energy microwave (TherMatrx, Inc)
and water-induced thermotherapy (Endocare). We believe Cooled ThermoTherapy
provides significant advantages over other minimally invasive BPH therapies.
Because Cooled ThermoTherapy does not require punctures or incisions, it can be
performed in the physician's office or other outpatient environments without the
need for anesthesia or intravenous sedation. Further, by combining microwave
energy with cooling, we can drive heat deep into the prostate, creating lasting
results while minimizing damage to the urethra enhancing patient comfort and
reducing complications.
Government Regulation
Governmental regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of our products. In the United States, the FDA has broad authority
under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act
to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of medical devices are subject to foreign governmental regulation and
restrictions that vary from country to country.
Medical devices intended for human use in the United States are
classified into one of three categories Such devices are classified by
regulation into either class I (general controls), class II (performance
standards) or class III (pre-market approval or PMA) depending upon the level of
regulatory control required to provide reasonable assurance of the safety and
effectiveness of the device. Good Manufacturing Practices, labeling, maintenance
of records and filings with the FDA also apply to medical devices.
Our Cooled ThermoTherapy systems have received FDA clearance for sale
in the United States. In addition, we have obtained CE Mark certification for
distribution in Europe and product registration for distribution in Canada and
Japan.
The FDA's regulations require agency approval of a PMA supplement for
certain changes made to a product if the changes 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 prior to
marketing of the device. There can be no assurance that the required approvals
of PMA supplements for any changes 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 either of our Cooled ThermoTherapy systems would
have a material adverse effect on our business.
The process of obtaining FDA and other required regulatory clearances
or approvals is lengthy and expensive. There can be no assurance that we will be
able to obtain or maintain the necessary clearances or approvals for clinical
testing or for manufacturing or marketing of our products. Failure to comply
with applicable 1regulatory approvals can, among other things, result in warning
letters, fines, suspensions of regulatory approvals,
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product recalls, operating restrictions and criminal prosecution. In addition,
government regulation may be established that could prevent, delay, modify or
rescind regulatory clearance or approval of our products.
Medical device laws are also in effect in many of the countries outside
of the United States in which we do business. These laws range from
comprehensive device approval and quality system requirements for some or all of
our medical device products to simple requests for product data or
certifications. The number and scope of these requirements are increasing. In
June 1998, the European Union Medical Device Directive became effective, and all
medical devices must meet the Medical Device Directive standards and receive CE
Mark certification. CE Mark certification involves a comprehensive Quality
System program and submission of data on a product to the Notified Body in
Europe.
Health Care Regulatory Issues
The health care industry is highly regulated, and there can be no
assurance that the regulatory environment in which we operate will not change
significantly in the future. In general, regulation of health care related
companies is increasing. We anticipate that Congress and state legislatures will
continue to review and assess alternative health care delivery and payment
systems. We cannot predict what impact the adoption of any federal or state
health care reform measures may have on our business.
We regularly monitor developments in laws and regulations relating to
our business. We may be required to modify our agreements, operations, marketing
and expansion strategies from time to time in response to changes in the
statutory and regulatory environment. Although we plan to structure all of our
agreements, operations, marketing and strategies in accordance with applicable
law, there can be no assurance that our arrangements will not be challenged
successfully or that required changes may not have a material adverse effect on
operations or profitability.
Product Liability and Insurance
Our business subjects us to the risk of product liability claims. Any
such claims could have an adverse impact on our business. We maintain product
liability insurance with coverage of $1 million per occurrence and an annual
aggregate maximum of $2 million. We also carry a $15 million umbrella insurance
policy. We evaluate our insurance requirements on an ongoing basis. There can be
no assurance that product liability claims will be covered by our insurance,
will not exceed our insurance coverage limits, or that any insurance will be
available on commercially reasonable terms, or at all. A successful product
liability claim may prevent us from obtaining adequate product liability
insurance in the future on commercially desirable or reasonable terms. In
addition, product liability insurance may cease to be available in sufficient
amounts or at an acceptable cost. An inability to obtain sufficient insurance
coverage could prevent or inhibit the marketing and sale of our products. A
product liability claim could result in a recall of the product by the FDA and
could have a material adverse effect on our reputation, business, financial
condition and results of operations.
Employees
As of August 30, 2002, we employed 105 individuals on a full-time
basis. We also had several part-time employees and consultants. Although we
believe that we have been successful in attracting experienced and capable
personnel, there can be no assurance that we will continue to attract and retain
qualified personnel. None of our employees are covered under a collective
bargaining agreement. We consider our relationship with our employees to be
good.
Seasonality
We believe that holidays, major medical conventions and vacations taken
by physicians, patients and patient families may have a seasonal impact on our
sales. We are continuing to monitor and assess the impact seasonality may have
on demand for our products.
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Backlog
As of June 30, 2002, we maintained a minimal backlog of product orders.
Our policy is to stock enough inventory to be able to ship most orders within a
few days of receipt or as requested by our customers. Therefore, we rely on
orders placed during a given period for sales during that period. Backlog
information as of the end of a particular period is not necessarily indicative
of future levels of our revenue.
Risks Related to Our Business
The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our operations. The occurrence of any
of the following risks could harm our business. In that case, the trading price
of our common stock could decline, and investors may lose all or part of their
investment.
We have a limited operating history and expect to continue to generate losses.
We have incurred substantial losses since our inception and, if
physicians do not purchase and use our Cooled ThermoTherapy systems to treat
patients with BPH, we may never achieve or maintain profitable operation. We
incurred a net loss of approximately $1.7 million for the year ended June 30,
2002, and have incurred losses of nearly $70 million since our inception. We
expect to continue to incur operating losses in the near future as we expand our
investment in sales and marketing activities to increase sales, continue to
incur costs and expenses to protect our intellectual property, and fund research
and development activities. We will need to increase significantly the revenues
we receive from sales of our products as a result of these increased operating
expenses. We may be unable to do so, and therefore may never achieve
profitability. Even if we do achieve profitability, we cannot be certain that we
will be able to sustain or increase profitability on a quarterly or annual
basis.
Our products may not achieve market acceptance, which could limit our future
revenue.
Physicians will not recommend Cooled ThermoTherapy procedures unless
they conclude, based on clinical data and other factors, that it is an effective
alternative to other methods of enlarged prostate treatment, including more
established methods. Patient acceptance of the procedure will depend in part
upon physician recommendations and on other factors, including the degree of
invasiveness and the rate and severity of complications associated with the
Cooled ThermoTherapy procedure compared with other therapies. Patient acceptance
of the Cooled ThermoTherapy procedure also will depend upon the ability of
physicians to educate these patients on their treatment choices. Health care
payer acceptance of our procedure will require, among other things, evidence of
the cost effectiveness of Cooled ThermoTherapy compared to other BPH therapies.
Our marketing strategy must overcome the difficulties inherent in the
introduction of new technology to the medical community. If our Cooled
ThermoTherapy procedure is not accepted by physicians, patients or payers, or is
accepted more slowly than expected, we may never operate profitably.
Third-party reimbursement is critical to market acceptance of our products.
Our future revenues are subject to uncertainties regarding health care
reimbursement and reform. In the United States, health care providers, such as
hospitals and physicians, generally rely on third-party payers.
Third-party reimbursement is dependent upon decisions by the Center for
Medicare and Medicaid Services, contract Medicare carriers, individual managed
care organizations, private insurers, foreign governmental health programs and
other payers of health care cost. Failure to receive or maintain favorable
coding, coverage and reimbursement determinations for Cooled ThermoTherapy by
these organizations could discourage physicians from using our products. We may
be unable to sell our products on a profitable basis if third-party payers deny
coverage, provide low reimbursement rates or reduce their current levels of
reimbursement.
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The continuing efforts of government, insurance companies, health
maintenance organizations and other payers of health care costs to contain or
reduce costs of health care may affect our future revenues and profitability.
With recent federal and state government initiatives directed at lowering the
total cost of health care, the United States Congress and state legislatures
will likely continue to focus on health care reform including the reform of
Medicare and Medicaid systems, and on the cost of medical products and services.
Additionally, third-party payers are increasingly challenging the prices charged
for medical products and services. Also, the trend toward managed health care in
the United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may also result in lower prices for or rejection
of our products. The cost containment measures that health care payers and
providers are instituting and the effect of any health care reform could cause
reductions in the amount of reimbursement available, and could have a materially
adverse affect on our revenues and ability to operate profitably.
We are faced with intense competition and rapid technological and industry
change.
The medical device industry is characterized by rapid technological
change, changing customer needs and frequent new product introductions. Our
products may be rendered obsolete as a result of future innovations. We face
intense competition from other device manufacturers and surgical manufacturers,
as well as from pharmaceutical companies. Many of our competitors are
significantly larger than we are and have greater financial, technical,
research, marketing, sales, distribution and other resources than we do. We
believe there will be intense price competition for products developed in our
markets. Our competitors may develop or market technologies and products,
including drug-based treatments, that are more effective or commercially
attractive than any we are developing or marketing. Our competitors may succeed
in obtaining regulatory approval and introducing or commercializing products
before we do. Such developments could have a significant negative effect on our
financial condition. Even if we are able to compete successfully, we may not be
able to do so in a profitable manner.
We are dependent on adequate protection of our patent and proprietary rights.
We rely on patents, trade secrets, trademarks, copyrights, know-how,
license agreements and contractual provisions to establish and protect our
intellectual property rights. However, these legal means afford us only limited
protection and may not adequately protect our rights or remedies to gain or keep
any advantages we may have over our competitors.
In March 2002, we filed a patent infringement action against ProstaLund
AB, ProstaLund Operations AB, and ACMI Corporation in the United States District
Court for the Eastern District of Wisconsin and the defendants have raised
counterclaims against us. See "Legal Proceedings." Although we believe the
defendants' counterclaims are without merit, we cannot predict what the Court
will do. The Court may find one or more of our patents invalid or limit the
scope of the claims contained in the patents at issue or grant the relief we are
seeking. This litigation has resulted in substantial expense and may divert our
attention from implementing our business strategy.
Additional litigation against other parties may be necessary in the
future to enforce our intellectual property rights, to protect our patents and
trade secrets, and to determine the validity and scope of our proprietary
rights.
Furthermore, we cannot be assured that others have not developed or
will not develop similar products or manufacturing processes, duplicate any of
our products or manufacturing processes, or design around any of our patents.
12
We depend upon our Cooled ThermoTherapy systems for all of our revenues.
All of our revenues are derived from sales of our Cooled ThermoTherapy
systems and single-use disposable treatment catheters. As a result, our success
is solely dependent upon the success of our Cooled ThermoTherapy systems. To
date, our Cooled ThermoTherapy systems have not received widespread market
acceptance. If we are unable to commercialize the use of these systems
successfully, our business, financial condition and results of operations will
be materially and adversely affected.
We have limited manufacturing experience and are dependent upon a limited number
of third-party suppliers to manufacture our products.
We have contracted with third parties for the production of the
Prostatron product line and the Targis system control unit pursuant to written
supply agreements. If, for any reason, any of our third-party manufacturers are
unable or unwilling to manufacture the products for us in the future, we could
incur significant delays in obtaining a substitute contract manufacturer. Also,
we purchase additional components used in our products from various suppliers
and rely on single sources for several components. One such component is
obtained from a source that has a patent for the technology. Delays could be
caused if supply of this component or other components were interrupted. These
delays could be extended in certain situations in which a substitute contract
manufacturer or a component substitution would require approval by the FDA of a
PMA supplement. The termination or interruption of any of these relationships,
or the failure of these manufacturers or suppliers to supply products or
components to us on a timely basis or in sufficient quantities, likely would
cause us to be unable to meet customer orders for our products and harm our
business.
We produce the disposable treatment catheter for the Targis system. We
have limited experience in rapidly scaling up production. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, product recalls, quality control and
assurance, component supply and lack of qualified personnel.
If we or any of our third-party manufacturers or suppliers experience
production problems, we may not be able to locate an alternate manufacturer
promptly. Identifying and qualifying alternative suppliers of components takes
time and involves significant additional costs and may delay the production of
our products. The FDA requires us to identify any supplier we use. The FDA may
require additional testing of any component from new suppliers prior to our use
of these components. The termination of our relationships with these single
source suppliers or the failure of these parties to supply us with the
components on a timely basis and in sufficient quantities likely would cause us
to be unable to meet customer orders for our products in a timely manner or
within our budget and harm our business.
We are dependent on distributors for international sales.
To date, a majority of our revenues outside the United States have been
derived from sales through third-party distributors. Although we intend to work
with our distributors and agents to improve international revenue, we expect a
decline in fiscal 2003 over fiscal 2002, driven primarily by a decrease in
reimbursement for Cooled ThermoTherapy in Japan. Further, the failure of our
distributors to market our products in the international markets effectively or
our failure to locate and establish relationships with reputable distributors
could have an adverse effect on our ability to achieve penetration of these
markets and establish long-term acceptance of Cooled ThermoTherapy.
We are dependent on key personnel.
Failure to attract and retain skilled personnel could hinder our
research and development as well as our sales and marketing efforts. Our future
success depends to a significant degree upon the continued services of key
technical and senior management personnel, including Michael M. Selzer Jr., our
chief executive officer. Our future success also depends on our continuing
ability to attract, retain and motivate highly qualified managerial,
13
technical and sales personnel. The inability to retain or attract qualified
personnel could have a significant negative effect and thereby materially harm
our business and financial condition.
Government regulation can have a significant impact on our business.
Government regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of our products. In the United States, the FDA has broad authority
under the federal Food, Drug and Cosmetic Act and the Public Health Service Act
to regulate the distribution, manufacture and sale of medical devices. Sales of
drugs and medical devices outside the United States are subject to government
regulation and restrictions that vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
We may not be able to obtain necessary approvals for clinical testing
or for the manufacturing or marketing of our products. Failure to comply with
applicable regulatory approvals can, among other things, result in fines,
suspension of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. In addition, government regulations may be established
that could prevent, delay, modify or rescind regulatory approval of our
products. Any such position, or change of position by the FDA may adversely
impact our business and financial condition. Regulatory approvals, if granted,
may include significant limitations on the indicated uses for which our products
may be marketed. In addition to obtaining such approvals, the FDA and foreign
regulatory authorities may impose numerous other requirements on us. FDA
prohibits the marketing of approved medical devices for unapproved uses. In
addition, product approvals can be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. We may not be able to obtain regulatory approvals for our products on
a timely basis, or at all, and delays in receipt of or failure to receive such
approvals, the loss of previously obtained approvals, or failure to comply with
existing or future regulatory requirements would have a significant negative
effect on our financial condition. In addition, the health care industry in the
United States is generally subject to fundamental change due to regulatory, as
well as political, influences. We anticipate that Congress and state
legislatures will continue to review and assess alternative health care delivery
and payment systems. Potential approaches that have been considered include
controls on health care spending through limitations on the growth of private
purchasing groups and price controls. We cannot predict what impact the adoption
of any federal or state health care reform measures may have on our business.
We, as well as our distributors and health care providers who purchase
our products and services, are subject to state and federal laws prohibiting
kickbacks or other forms of bribery in the health care industry. We may be
subject to civil and criminal prosecution and penalties if we or our agents
violate any of these laws.
We may be required to pay damages that exceed our insurance coverage for product
liability claims.
Our business exposes us to potential product liability claims that are
inherent in the testing, production, marketing and sale of medical devices.
While we believe that we are reasonably insured against these risks, we may not
be able to obtain insurance in amounts or scope sufficient to provide us with
adequate coverage against all potential liabilities. Currently, we maintain
product liability insurance in amounts we deem to be reasonable. A product
liability claim in excess of our insurance coverage would have to be paid out of
cash reserves and would harm our reputation in the industry and our business.
Our products may be subject to product recalls even after receiving FDA
clearance or approval, which would harm our reputation and our business.
The FDA and similar governmental authorities in other countries have
the authority to request and, in some cases, require the recall of our products
in the event of material deficiencies or defects in design or manufacture. A
government-mandated or voluntary recall by us could occur as a result of
component failures, manufacturing errors or design defects. Any recall of
product would divert managerial and financial resources and harm our reputation
with customers and our business.
14
Fluctuations in our future operating results may negatively impact the market
price of our common stock.
Our operating results have fluctuated in the past and can be expected
to fluctuate from time to time in the future. Some of the factors that may cause
these fluctuations include but are not limited to:
o the timing and volume of customer orders for both equipment and
single-use treatment catheters,
o costs and expenses related to our effort to protect intellectual
property,
o the timing of expenditures related to sales and marketing, and
research and development, and
o product availability.
If our operating results are below the expectations of securities analysts or
investors, the market price of our common stock may fall abruptly and
significantly.
Our business is exposed to risks related to acquisitions and mergers.
As part of our strategy to commercialize our products, we may acquire
one or more businesses. On October 1, 2000, we purchased the Transurethral
Microwave ThermoTherapy (TUMT or Cooled ThermoTherapy) product line and related
patents and technologies from EDAP. We may not be able to integrate our business
effectively with any other business we may acquire. The failure to integrate an
acquired company or acquired assets into our operations may cause a drain on our
financial and managerial resources, and thereby have a significant negative
effect on our business and financial results.
These difficulties could disrupt our ongoing business, distract our
management and employees or increase our expenses. Furthermore, any physical
expansion in facilities due to an acquisition may result in disruptions that
seriously impair our business. We are not experienced in managing facilities or
operations in geographically distant areas. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets. Finally, in connection with any future
acquisitions, we may incur debt or issue equity securities as part or all of the
consideration for the acquired company's assets or capital stock. We may be
unable to obtain sufficient additional financing on favorable terms or at all.
Equity issuances would be dilutive to our existing shareholders.
Our stock price may be volatile and a shareholder's investment could decline in
value.
Our stock price has fluctuated in the past and is likely to continue to
fluctuate significantly, making it difficult to resell shares at an attractive
price when an investor wants to. The market prices for securities of emerging
companies have historically been highly volatile. Future events concerning us or
our competitors could cause such volatility, including:
o actual or anticipated variations in our operating results,
o developments regarding government and third-party reimbursement,
o changes in government regulation,
o government investigation of us or our products,
o changes in reimbursement rates or methods affecting our products,
o developments concerning proprietary rights,
o litigation or public concern as to the safety of our products or our
competitors' products,
o technological innovations or new commercial products by us or our
competitors,
o investor perception of us and our industry, and
o general economic and market conditions including market uncertainty.
In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and
small-capitalization, high-technology companies in particular, which are often
unrelated
15
to the operating performance of these companies. Any failure by us to meet or
exceed estimates of financial analysts is likely to cause a decline in our
common stock price.
Future sales of shares of our common stock may negatively affect our stock
price.
Future sales of our common stock, including shares issued upon the
exercise of outstanding options or hedging or other derivative transactions with
respect to our stock, could have a significant negative effect on the market
price of our common stock. These sales also might make it more difficult for us
to sell equity securities or equity-related securities in the future at a time
and price that we would deem appropriate.
Anti-takeover provisions in our articles of incorporation may have a possible
negative effect on our stock price.
Certain provisions of our certificate of incorporation and bylaws may
make it more difficult for a third party to acquire, or discourage a third party
from attempting to acquire, control of us. We have in place several
anti-takeover measures that could discourage or prevent a takeover, even if an
acquisition would be beneficial to our shareholders. Our stock option plans
contain provisions that allow for the acceleration of vesting or payments of
awards granted under the plans in the event of specified events that result in a
"change in control." In addition, we have adopted a shareholder rights plan that
would cause substantial dilution to any person or group attempting to acquire
our company on terms not approved in advance by our board of directors.
The felony conviction of Arthur Andersen LLP may adversely affect its ability to
satisfy claims against it.
On June 15, 2002, our former independent auditors, Arthur Andersen LLP,
were convicted on federal charges of obstruction of justice arising from the
government's investigation of Enron Corp. Events arising out of the conviction
may adversely affect the ability of Arthur Andersen LLP to satisfy any claims
arising from its provision of auditing and other services to us, including
claims that may arise out of Arthur Andersen LLP's audit of our financial
statements.
16
ITEM 2. PROPERTIES
- -------------------
We lease approximately 37,000 square feet of office, manufacturing and
warehouse space in a suburb of Minneapolis, Minnesota, pursuant to a lease that
expires on January 31, 2003. We are currently negotiating a new lease for our
existing premises and believe we will be able to obtain a lease at market rates
comparable to our existing lease. We believe our facilities will be sufficient
to meet our current and future requirements and that additional space at or near
the current location will be available at a reasonable cost if additional space
is required in the future.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, we may be involved in litigation that arises through
the normal course of business. As of the date of this Annual Report on Form
10-K, we are not a party to any litigation we believe could reasonably be
expected to have a material adverse effect on our business or results of
operations except as noted below.
In March 2002, we filed a patent infringement action against ProstaLund
AB, ProstaLund Operations AB, and ACMI Corporation in the United States District
Court for the Eastern District of Wisconsin. We are seeking an injunction
prohibiting the manufacture, use, sale, or offer for sale of the "ProstaLund
Feedback Treatment" and an unspecified amount of damages. Our action alleges
that ProstaLund's microwave medical device and method, for which it has sought
pre-market approval from the FDA, infringes our United States Patents No.
5,234,004 and No. 5,509,929. Our complaint also alleges that ProstaLund has an
agreement with ACMI Corporation to distribute ProstaLund's microwave device in
the United States. The defendants have counterclaimed, alleging that they do not
infringe our patents, that our patents are invalid and that we have "marked" our
products as "patented" in a manner that violates patent law. We believe the
defendants' counterclaims are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- -----------------------------------------------------------------------------
MATTERS
-------
Our common stock is traded on the Nasdaq stock market under the symbol
ULGX. The following table sets forth quarterly high and low last-sale prices of
our common stock for the past two years.
Quarter
Fiscal Year First Second Third Fourth
- ----------- ----- ------ ----- ------
2002 High $22.60 $22.02 $21.35 $18.07
Low 12.40 11.15 12.70 11.00
2001 High $9.00 $13.63 $23.50 $27.79
Low 3.75 6.88 12.13 18.31
The foregoing prices reflect inter-dealer prices, without dealer
markup, markdown or commissions, and may not represent actual transactions.
Dividends
To date, we have not declared or paid any cash dividends on our common
stock, and we do not intend to do so in the foreseeable future.
18
Equity Compensation Plan Information
The following table below presents our equity compensation plan
information:
(a) (b) (c)
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a)
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Equity compensation plans 1,676,091 $8.06 708,910
approved by security holders
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Equity compensation plan not 400,000 $3.875 None
approved by security holders
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Total 2,076,091 $7.25 708,910
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
The "equity compensation plans approved by security holders" listed
above represents shares issuable under the Urologix 1991 Stock Option Plan. The
most recent amendment to the Plan, an increase of 500,000 shares, was approved
by shareholders in November 2001.
The 400,000 shares listed under "equity compensation plans not approved
by security holders" represent a 400,000 share option granted to Michael M.
Selzer, Jr. the Company's President and Chief Executive Officer. The option was
granted to Mr. Selzer in connection with his original employment agreement dated
November 10, 1998. The option is a non-qualified option exercisable at a price
of $3.875.
The first 200,000 shares began vesting over the period commencing on
December 8, 1998 and ending on January 4, 2003, with 50,000 shares vesting on
January 4, 2000, and 1/36th of the remaining 150,000 shares vesting on the 4th
of each of the 36 months following January 4, 2000. The next 100,000 shares
began vesting over a period of four years beginning on January 4, 2000, with
25,000 shares vesting on January 4, 2001 and 1/36th of the remaining 75,000
shares vesting on the 4th of each of the 36 months following January 4, 2001.
The remaining 100,000 shares began vesting over a period of four years
commencing on January 4, 2001, with 25,000 shares vesting on January 4, 2002 and
the 1/36th of the remaining 75,000 shares vesting on the 4th of each of the 36
months following January 4, 2002.
19
ITEM 6. SELECTED FINANCIAL DATA
Years Ended June 30,
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ----------------------------------------- --------------- --------------- -------------- --------------- -------------
(in thousands, except per share data)
Statements of Operations Data:
Sales $ 22,742 $ 15,337 $ 8,163 $ 6,110 $ 11,194
Cost of goods sold 7,844 5,804 4,357 5,910 9,162
--------------- --------------- -------------- --------------- -------------
Gross profit 14,898 9,533 3,806 200 2,032
--------------- --------------- -------------- --------------- -------------
Costs and Expenses:
Research and development 4,073 3,533 3,614 5,106 6,676
Sales, general and administrative 12,046 10,799 8,767 10,856 9,049
Amortization of intangibles 664 1,082 - - -
--------------- --------------- -------------- --------------- -------------
Total costs and expenses 16,783 15,414 12,381 15,962 15,725
--------------- --------------- -------------- --------------- -------------
Operating loss (1,885) (5,881) (8,575) (15,762) (13,693)
Interest income, net 234 746 1,477 1,746 2,056
Litigation settlement expense - - - - (3,376)
--------------- --------------- -------------- --------------- -------------
Net loss $ (1,651) $ (5,135) $ (7,098) $ (14,016) $ (15,013)
=============== =============== ============== =============== =============
Basic and diluted:
Net loss per common share $ (0.12) $ (0.40) $ (0.62) $ (1.24) $ (1.44)
Weighted average shares used in
computing net loss per share 13,810 12,760 11,514 11,346 10,429
June 30,
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ----------------------------------------- --------------- --------------- -------------- --------------- -------------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and
available-for-sale investments $ 12,713 $ 14,921 $ 23,598 $ 28,036 $ 36,500
Working capital 14,007 14,935 23,131 28,803 41,375
Total assets 46,437 46,860 31,956 38,988 53,489
Long term obligations 926 1,439 - 3 9
Total liabilities 7,490 7,351 3,186 3,521 4,152
Shareholders equity 38,947 39,509 28,770 35,467 49,337
20
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------
Year Ended June 30, 2002
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
(in thousands, except per share data)
Sales $5,184 $5,257 $6,027 $6,274
Gross profit 3,346 3,446 3,913 4,193
Net loss (733) (470) (95) (353)
Basic and diluted net loss per share $(0.05) $(0.03) $(0.01) $(0.03)
Year Ended June 30, 2001
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
(in thousands, except per share data)
Sales $1,935 $3,202 $4,509 $5,691
Gross profit 1,097 1,997 2,794 3,645
Net loss (1,460) (1,607) (1,214) (854)
Basic and diluted net loss per share $(0.13) $(0.12) $(0.09) $(0.06)
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with our
consolidated financial statements and related notes contained elsewhere in this
Annual Report on Form 10-K. This discussion may contain forward-looking
statements based upon current expectations that involve risks and uncertainties.
Our actual results and the timing of selected events could differ materially
from those anticipated in these forward-looking statements as a result of
selected factors, including those set forth under "Risk Related to Our Business"
in Item 1. All forward-looking statements included here are based on information
available to us as of the date hereof, and we assume no obligation to update any
such forward-looking statements.
OVERVIEW
Urologix, Inc., based in Minneapolis, develops, manufactures and
markets minimally invasive medical products for the treatment of urological
disorders.
We have developed and offer non-surgical, catheter-based therapies that
use a proprietary cooled microwave technology for the treatment of BPH, a
disease that dramatically affects more than 23 million men worldwide by causing
adverse changes in urinary voiding patterns. We market our products under the
Targis and Prostatron names. Both systems utilize Cooled ThermoTherapy, a
targeted microwave energy combined with a unique cooling mechanism that protects
healthy tissue and enhances patient comfort while providing safe, effective,
lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed
without anesthesia or intravenous sedation and, as a result, can be performed in
a physician's office or an outpatient clinic. We believe Cooled ThermoTherapy
provides an efficacious, safe and cost-effective solution for BPH that is
superior to medication without the complications and side effects inherent in
clinically surgical procedures.
Third-party reimbursement is essential to acceptance of the Cooled
ThermoTherapy procedure. We estimate that 60% to 80% of patients who receive
treatment in the United States are eligible for Medicare coverage, making
Medicare reimbursement critical for widespread market acceptance in the United
States. The remaining patients will either be covered by private insurers,
including traditional indemnity health insurers and managed care organizations,
or they will be private-paying patients.
The rate of Medicare reimbursement for Cooled ThermoTherapy is
dependent on the site of service. Through July 31, 2000, Medicare had reimbursed
hospitals on a reasonable cost basis for each Cooled ThermoTherapy procedure
performed. Under the reasonable cost basis of reimbursement, Medicare reimbursed
all reasonable costs the hospital incurred in conducting the procedures.
Beginning August 1, 2000, the Center for Medicare and Medicaid Services (CMS),
which administers Medicare, replaced the reasonable cost basis of reimbursement
for outpatient hospital-based procedures with a new fixed rate or "prospective
payment system." Under this new method of reimbursement, a hospital receives a
fixed reimbursement for each procedure performed in its facility.
Medicare began to reimburse for Cooled ThermoTherapy procedures
performed in a physician's office on a fixed-rate basis on January 1, 2001. The
change was a significant milestone, as it marked the first time patients were
covered directly by Medicare for in-office Cooled ThermoTherapy procedures. We
believe that this change in reimbursement allows Cooled ThermoTherapy treatments
to be performed in the environment the technology was designed to serve and will
lead to increased demand for our products.
22
Our goal is to grow Cooled ThermoTherapy as a standard of care for the
treatment of BPH. Our business strategy to achieve this goal is to (i) increase
market awareness of Cooled ThermoTherapy, (ii) create access to Cooled
ThermoTherapy through both the sale and rental of Cooled ThermoTherapy systems
and (iii) increase the use of Cooled ThermoTherapy by physicians who already
have access to a Cooled ThermoTherapy System.
We expect to continue to incur operating losses as we expand our
marketing and sales activities, continue clinical trials in support of
regulatory and reimbursement approvals, and continue to invest in our effort to
protect our intellectual property. Our future profitability will be dependent
upon, among other factors, our success in achieving market acceptance of the
Cooled ThermoTherapy procedures in the physician's office, our success in
obtaining and maintaining necessary regulatory clearances, our ability to
manufacture at the volumes and quantities the market requires, the extent to
which Medicare and other health care payers continue to reimburse costs of
Cooled ThermoTherapy procedures performed in hospitals, ambulatory surgery
centers and physicians' offices and the amount of reimbursement provided.
Critical Accounting Policies:
In accordance with recent Securities and Exchange Commission guidance,
we set forth below those material accounting policies that we believe are the
most critical to an investor's understanding of our financial results and
condition, and require complex management judgment.
Revenue Recognition
We recognize revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin 101. Revenue from product sales is
recognized at the time of shipment, net of estimated returns, which also are
established at the time of shipment. Deferred revenue for warranty service
contracts is recognized over the contract period. Revenue from equipment rental
through our "per procedure" fee program is recognized at the time of treatment.
We also record a provision for estimated sales returns on product sales in the
same period as the related revenue is recorded. These estimates are based on
historical sales returns, analysis of credit memo data and other known factors.
If the historical data we used to calculate these estimates does not properly
reflect future returns, revenues could be overstated.
Product Warranty
We record a liability for warranty claims at the time of sale. The
amount of the liability is based on the trend in the historical ratio of product
failure rates, material usage and service delivery costs to sales, the
historical length of time between the sale and resulting warranty claim and
other factors. Should actual product failure rates, material usage or repair
costs differ from our estimates, revisions to the estimated warranty liability
would be required.
Inventory Reserves
We record reserves for inventory shrinkage and for potentially excess,
obsolete and slow moving inventory. The amounts of these reserves are based upon
historical experience and forecasted demand. Our reserve requirements could be
materially different if demand for our products decreased because of competitive
conditions or market acceptance, or if products become obsolete because of
advancements in the industry.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. This
allowance is a significant estimate and is regularly evaluated by us for
adequacy by taking into consideration factors such as past experience, credit
quality of the customer base, age of the receivable balances, both individually
and in the aggregate, and current economic conditions that may affect a
23
customer's ability to pay. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Valuation of Long-Lived and Intangible Assets and Goodwill
In fiscal 2002, we adopted Statement of Financial Accounting Standards
(SFAS) 142, "Goodwill and Other Intangible Assets," and as a result, we have
ceased to amortize approximately $10.2 million of goodwill and $1.1 million of
trademarks. Goodwill is tested for impairment annually or more frequently if
changes in circumstance or the occurrence of events suggests an impairment
exists. The test for impairment requires us to make several estimates about fair
value, most of which are based on projected future cash flows. Our estimates
associated with the goodwill impairment tests are considered critical, due to
the amount of goodwill recorded on our balance sheets and the judgment required
in determining fair value amounts, including projected future cash flows.
Other intangible assets consist of purchased technology, customer base
and trademarks. Purchased technology and customer base are amortized using the
straight-line method over their estimated useful lives of 15 and 14 years,
respectively. The trademark asset is considered to be an intangible asset with
an indefinite useful life, and it will not be amortized until its useful life is
determined to be no longer indefinite. We review these definite and indefinite
lived intangible assets for impairment annually or as changes in circumstance or
the occurrence of events suggests the remaining value is not recoverable.
Results of Operations
Fiscal Years Ended June 30, 2002 and 2001
Net sales for fiscal 2002 increased $7.4 million or 48% to $22.7
million, compared to sales of $15.3 million in the prior fiscal year. The growth
in revenue was fueled primarily by a 58% increase in sales of single-use
treatment catheters. Revenue in fiscal 2002 was also positively affected by a
full year of revenue from the Prostatron product line, compared to nine months
in fiscal 2001. We expect revenue in fiscal 2003 to increase as the sale of
single-use treatment catheters continues to grow and more physicians begin to
use Cooled ThermoTherapy. Sales increases in the domestic market will be
partially offset by decreased international sales as reimbursement declines in
Japan adversely affect sales in that marketplace.
Cost of goods sold increased to $7.8 million in fiscal 2002 compared to
$5.8 million in fiscal 2001. The increase in cost of goods sold resulted from an
increase in the volume of Cooled ThermoTherapy systems and single-use treatment
catheters sold in 2002, partially offset by a reduction in the per unit
production costs of our products, due to increased manufacturing efficiencies
and lower product cost.
Gross profit as a percentage of sales increased to 66% in fiscal 2002
from 62% in fiscal 2001, due primarily to continued manufacturing process
improvements, increased production volumes, decreased raw material costs, price
reductions from key suppliers, and a continued mix shift to the sale of our
higher margin single-use treatment catheters from Cooled ThermoTherapy system
sales.
Research and development expenses, which include expenditures for
product development, regulatory compliance and clinical studies, increased to
$4.1 million in fiscal 2002 from $3.5 million in the prior fiscal year. The
increase in research and development expenses resulted from increased
investments in new product development and clinical study activity. We expect
research and development expenses to increase as we continue clinical trial
activity on our next generation of Cooled ThermoTherapy treatment catheters.
24
Sales, general and administrative expenses increased to $12 million
from $10.8 million in the prior fiscal year. The increase in expenses resulted
from the continued expansion of our direct sales force, training and promotion,
and expenses related to a patent infringement suit that we filed to protect our
intellectual property. We expect sales and marketing expenses to increase as we
expand our direct sales force, intensify our efforts to generate awareness and
acceptance of Cooled ThermoTherapy, and protect our intellectual property.
Amortization of goodwill and other intangible assets decreased to
$664,000 in fiscal 2002 from $1.1 million in fiscal 2001. The decrease in the
amortization of goodwill and other indefinite-lived intangible assets resulted
from the adoption of Financial Accounting Standard Board (FASB) Statement 141,
"Business Combinations," and Statement 142, "Goodwill and Other Intangible
Assets," effective July 1, 2001. These statements eliminate the pooling of
interests method of accounting for business combinations and the systematic
amortization of goodwill. We expect future annual amortization expense to be
consistent with fiscal 2002 levels.
Net interest income decreased to $234,000 during fiscal 2002 from
$746,000 in the prior fiscal year. The decrease was attributable to lower
interest income due to lower cash and investment balances and lower average
investment yields.
Fiscal Years Ended June 30, 2001 and 2000
Net sales for fiscal 2001 increased $7.2 million or 88% to $15.3
million, compared to sales of $8.2 million in fiscal 2000. The growth in sales
was the direct result of a favorable reimbursement change that allowed
physicians to perform Cooled ThermoTherapy procedures in their office, and
approximately $6.2 million increase in sales generated by the acquisition of the
Prostatron Cooled ThermoTherapy product line from EDAP TMS S.A (EDAP) in October
2000.
Cost of goods sold increased to $5.8 million in fiscal 2001 compared to
$4.4 million in fiscal 2000 due to higher sales volume. Gross profit as a
percentage of sales increased to 62% in fiscal 2001 from 47% in fiscal 2000 due
primarily to manufacturing process improvements, increased production volumes,
decreased raw material costs and the elimination of royalties previously paid to
EDAP.
Sales, general and administrative expenses increased to $10.8 million
in fiscal 2001 from $8.8 million in fiscal 2000. The increased expenses were
primarily attributable to the expansion of our direct sales force, investments
in customer training, advertising and expenditures related to the integration of
acquired Prostatron products.
Research and development expenses decreased to $3.5 million in fiscal
2001 from $3.6 million in fiscal 2000. The slight decrease in research and
development expenses resulted from reduced clinical study activity offset by
increased staffing.
Amortization of goodwill and other intangible assets was $1.1 million
for fiscal 2001. The amortization of goodwill and other intangible assets was a
result of the purchase of the Prostatron product line from EDAP in October 2000.
Net interest income decreased to $746,000 during fiscal 2001 from $1.5
million in the prior fiscal year. The decrease was primarily attributable to
lower interest income due to lower cash and investment balances as well as
higher interest expenses resulting from debt assumed in the EDAP product line
acquisition.
25
Liquidity and Capital Resources
We have financed our operations since inception through sales of equity
securities and, to a lesser extent, sales of our Cooled ThermoTherapy systems
and single-use treatment catheters. As of June 30, 2002, we had total cash, cash
equivalents and available-for-sale securities of $12.7 million and working
capital of $14.0 million.
During fiscal 2002, we used cash of $1.5 million in operating
activities, primarily as a result of our net loss of $1.7 million. Additionally,
depreciation and amortization of $1.8 million and an increase in accounts
payable and accrued expenses of $412,000 were offset by increases in net
accounts receivable of $1.4 million, prepaid and other assets of $441,000 and
inventories of $221,000.
Our investing activities generated $2.4 million of cash in 2002
primarily resulting from the net sale of investment securities of $3.8 million,
offset by purchases of equipment of approximately $1.4 million.
Our financing activities generated proceeds of $602,000 during fiscal
2002, reflecting $1.0 million received through the issuance of common stock,
offset by $419,000 in payments on capital lease obligations.
On October 1, 2000, we paid $7.6 million in cash to EDAP in connection
with the acquisition of EDAP's Cooled ThermoTherapy product line, related
patents and technologies. This acquisition was funded through existing cash
balances and the issuance of common stock and warrants to purchase common stock.
As part of the acquisition, we agreed to assume approximately $1.5
million dollars in lease obligations related to control units located at
customer sites within the United States and also issued a promissory note to pay
EDAP $575,000, plus accrued interest on December 30, 2003. Future contractual
commitments that will affect cash flows are as follows (in thousands):
Total FY2003 FY2004
----- ------ ------
Acquired lease obligation $1,019 $644 $ 375
Promissory note 693 0 693
Building lease 180 180 0
------ ---- ------
Total $1,892 $824 $1,068
We have no contractual commitments beyond fiscal year 2004.
As of June 30, 2002, we did not have any significant purchase
commitments.
We expect to continue to incur additional losses in the near future and
will use our working capital as we incur expenses related to our sales,
marketing, and research and development activities. In addition, we plan to
continue offering customers a per procedure rental program. As of June 30, 2002
our Property and Equipment, net, included approximately $2.2 million of control
units under per procedure or rental agreements. Depending on the growth of this
program, we may use substantial capital to finance the units rented by
customers.
Although we believe that existing cash, cash equivalents and
available-for-sale investments will be sufficient to fund our operations for at
least the next 12 months, there can be no assurance that we will not require
additional financing in the future or that any additional financing will be
available to us on satisfactory terms, if at all.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Our financial instruments include cash and cash equivalents. The fair
value of our financial investment portfolio at June 30, 2002, approximated
carrying value. Increases and decreases in prevailing interest rates generally
translate into decreases and increases in the fair value of these instruments.
Also, fair values of interest rate sensitive instruments may be affected by the
credit worthiness of the issuer, prepayment options, relative values of
alternative instruments, the liquidity of the instrument and other general
market conditions.
Market risk was estimated as the potential decrease in fair value
resulting from a hypothetical 1% change in interest rates for the issues
contained in the investment portfolio and was not materially different from the
year-end carrying value. Due to the nature of our short-term investments, we
have concluded that we do not have a material market risk exposure.
Our policy is not to enter into derivative financial instruments. We do
not have any significant foreign currency exposure since we do not generally
transact business in foreign currencies. Therefore, we do not have significant
overall currency exposure. In addition, we do not enter into any futures or
forward contracts and, therefore, do not have significant market risk exposure
with respect to commodity prices.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following financial statements are included in the Form 10-K.
Reports of Independent Public Accountants
Balance Sheets as of June 30, 2002 and 2001
Statements of Operations for the years ended June 30, 2002, 2001
and 2000
Statements of Shareholders' Equity for the years ended June 30,
2002, 2001 and 2000
Statements of Cash Flows for the years ended June 30, 2002, 2001
and 2000
Notes to Financial Statements
28
Report of independent public accountants
Board of Directors and Shareholders
of Urologix, Inc.:
We have audited the accompanying balance sheet of Urologix, Inc. as of June 30,
2002, and the related statements of operations, shareholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the fiscal 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Urologix, Inc. as of
June 30, 2002, and the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in note 2 to the financial statements, the Company adopted the
provisions in Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, on July 1, 2001.
KPMG LLP
Minneapolis, Minnesota
August 2, 2002
29
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, 2001 and 2000, and the related statements of
operations, shareholders' equity and comprehensive income (loss) and cash flows
for each of the three fiscal years in the period ended June 30, 2001. 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 auditing standards generally accepted
in the United States. 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,
2001 and 2000, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Minneapolis, Minnesota
July 31, 2001
The opinion above was issued by Arthur Andersen LLP in connection with our Form
10-K for the year ended June 30, 2001. After reasonable efforts, we have been
unable to obtain the written consent of Arthur Andersen LLP to our naming it in
this document as having certified our financial statements for the year ended
June 30, 2001, as required by Section 2-02 of Regulation S-X. Accordingly, you
will not be able to sue Arthur Andersen LLP pursuant to Section 18 of the
Securities Exchange Act of 1934 and therefore your right of recovery under that
section may be limited as a result of the lack of consent.
30
Urologix, Inc.
Balance Sheets
(In thousands, except per share data)
June 30
-----------------------
2002 2001
----------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,604 $ 26
Available-for-sale investments 11,109 14,895
Accounts receivable, net of allowance of $483 and $396 4,554 3,284
Inventories, net 2,424 2,203
Prepaids and other current assets 880 439
- ----------------------------------------------------------------------------------------------------
Total current assets 20,571 20,847
- ----------------------------------------------------------------------------------------------------
Property and equipment:
Machinery, equipment and furniture 8,227 6,847
Less accumulated depreciation (5,007) (4,240)
- ----------------------------------------------------------------------------------------------------
Property and equipment, net 3,220 2,607
Other assets 2,676 3,003
Goodwill, net 10,193 9,961
Other intangible assets, net 9,777 10,442
- ----------------------------------------------------------------------------------------------------
Total assets $ 46,437 $ 46,860
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,117 $ 1,781
Accrued compensation 686 705
Other accrued expenses 1,357 861
Current portion of lease obligation 513 419
Deferred income 1,891 2,146
- ----------------------------------------------------------------------------------------------------
Total current liabilities 6,564 5,912
- ----------------------------------------------------------------------------------------------------
Long-term debt 575 575
Long-term lease obligation 351 864
- ----------------------------------------------------------------------------------------------------
Total liabilities 7,490 7,351
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
Shareholders' equity:
Common stock, $.01 par value, 25,000 shares authorized; 13,902 and
13,630 shares issued and outstanding 139 136
Additional paid-in capital 108,449 107,397
Accumulated deficit (69,680) (68,029)
Accumulated other comprehensive income 39 5
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 38,947 39,509
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 46,437 $ 46,860
====================================================================================================
The accompanying notes to financial statements are an
integral part of these balance sheets.
31
Urologix, Inc.
Statements of Operations
(In thousands, except per share data)
For the Years Ended June 30
--------------------------------
2002 2001 2000
-------- -------- --------
SALES $ 22,742 $ 15,337 $ 8,163
COST OF GOODS SOLD 7,844 5,804 4,357
-------- -------- --------
Gross profit 14,898 9,533 3,806
-------- -------- --------
COSTS AND EXPENSES
Research and development 4,073 3,533 3,614
Sales, general and administrative 12,046 10,799 8,767
Amortization of goodwill and other intangible assets 664 1,082 --
-------- -------- --------
Total costs and expenses 16,783 15,414 12,381
-------- -------- --------
OPERATING LOSS (1,885) (5,881) (8,575)
INTEREST INCOME 495 993 1,477
INTEREST EXPENSE (261) (247) --
-------- -------- --------
NET LOSS $ (1,651) $ (5,135) $ (7,098)
======== ======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.12) $ (0.40) $ (0.62)
======== ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 13,810 12,760 11,514
======== ======== ========
The accompanying notes to financial statements are an
integral part of these statements.
32
Urologix, Inc.
Statements of Shareholders' Equity
(In thousands)
Accumulated
Common Stock Additional Other Total
-------------------- Paid-In Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit Income (Loss) Equity
-----------------------------------------------------------------------
Balance, June 30, 1999 11,429 $ 114 $ 91,150 $(55,796) $ (2) $ 35,466
Change in unrealized losses
on investments -- -- -- -- (33) (33)
Net loss -- -- -- (7,098) -- (7,098)
-------
Comprehensive loss -- -- -- -- -- (7,131)
Stock options exercised 147 2 313 -- -- 315
Common shares issued under employee
stock purchase plan 32 -- 120 -- -- 120
-------------------------------------------------------------------
Balance, June 30, 2000 11,608 116 91,583 (62,894) (35) 28,770
Change in unrealized gains
on investments -- -- -- -- 40 40
Net loss -- -- -- (5,135) -- (5,135)
------
Comprehensive loss -- -- -- -- -- (5,095)
Value of options issued to consultants -- -- 172 -- -- 172
Stock options and warrants exercised 633 6 3,663 -- -- 3,669
Issuance of common stock for
acquisition, net 1,365 13 11,896 -- -- 11,909
Common shares issued under employee
stock purchase plan 24 1 83 -- -- 84
-------------------------------------------------------------------
Balance, June 30, 2001 13,630 136 107,397 (68,029) 5 39,509
Change in unrealized gains
on investments -- -- -- -- 34 34
Net loss -- -- -- (1,651) -- (1,651)
------
Comprehensive loss -- -- -- -- -- (1,617)
Value of options issued to consultants -- -- 34 -- -- 34
Stock options exercised 266 3 958 -- -- 961
Common shares issued under employee stock
purchase plan 6 -- 60 -- -- 60
-------------------------------------------------------------------
Balance, June 30, 2002 13,902 $ 139 $108,449 $(69,680) $ 39 $ 38,947
===================================================================
The accompanying notes to financial statements are an
integral part of these statements.
33
Urologix, Inc.
Statements of Cash Flows
(In thousands)
For the Years Ended June 30
-----------------------------------
2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net loss $ (1,651) $ (5,135) $ (7,098)
Adjustments to reconcile net loss to net cash used for operating activities,
net of effects of acquisition
Depreciation and amortization 1,759 1,949 1,516
Value of options issued to consultants 34 172 --
Provision for bad debts 212 137 163
Change in operating items
Accounts receivable (1,568) (1,470) 70
Inventories (221) (3) 982
Prepaids and other assets (441) 1,695 350
Accounts payable 336 399 247
Accrued expenses 76 (1,499) (571)
--------- --------- ---------
Net cash used for operating activities (1,464) (3,755) (4,341)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (1,380) (873) (487)
Purchase of investments (61,758) (114,063) (55,620)
Proceeds from sales of investments 65,578 122,346 59,826
Cash paid for acquisition, net of cash acquired -- (7,578) --
--------- --------- ---------
Net cash provided by (used for) investing activities 2,440 (168) 3,719
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,021 3,753 435
Payments made on capital lease obligations (419) (263) (12)
--------- --------- ---------
Net cash provided by financing activities 602 3,490 423
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,578 (433) (199)
CASH AND CASH EQUIVALENTS
Beginning of year 26 459 658
--------- --------- ---------
End of year $ 1,604 $ 26 $ 459
========= ========= =========
The accompanying notes to financial statements are an
integral part of these statements.
34
UROLOGIX, INC.
Notes to Financial Statements
1. Nature of Business
Description of Operating Activities
Urologix, Inc. (Urologix or "the Company") designs, develops,
manufactures and markets innovative devices for the treatment of benign
prostatic hyperplasia (BPH), a disease that affects more than 23 million men
worldwide by causing adverse changes in urinary voiding patterns. We have
developed a catheter-based therapy that uses a proprietary cooled microwave
technology for the treatment of BPH. We market our products under the Targis and
Prostatron names. Both systems utilize Cooled ThermoTherapy, a targeted
microwave energy combined with a unique cooling mechanism that protects healthy
tissue and enhances patient comfort while providing safe, effective, lasting
relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without
anesthesia or intravenous sedation and can be performed in a physician's office
or an outpatient clinic. Although we began actively selling our products in
1997, we have not operated profitably to date, and there are no assurances that
we will operate profitably in the future.
2. Significant Accounting Policies
Cash and Cash Equivalents
We classify highly liquid investments with original maturities of 90
days or less as cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
Available-for-Sale Investments
We invest in money market funds and U.S. government and
investment-grade corporate debt investments with original maturities ranging
from 91 days to two years. These investments are considered to be available for
sale and are stated at market value, with the resulting unrealized gains or
losses reported as a component of comprehensive loss in the statement of
shareholders' equity. The gross realized gains and losses on sales of
available-for-sale investments were not material for the years ended June 30,
2002, 2001 and 2000. Current available for sale investments are quoted at their
estimated fair value based on current market quotes. Short term investments
consist of the following at June 30, 2002 and 2001 (in thousands):
2002 2001
----------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------------- ----------------------------------------------
Commercial paper
and cash $ 76 $ 0 $0 $ 76 $ 8,302 $0 $0 $ 8,302
Corporate and
government bonds 10,994 47 (8) $11,033 6,588 8 (3) 6,593
----------------------------------------------- ----------------------------------------------
$11,070 $47 ($8) $11,109 $14,890 $8 ($3) $14,895
----------------------------------------------- ----------------------------------------------
Major Suppliers
We obtain our Targis and Prostatron control units and the Prostatron
Prostaprobe from single sources. If the supply of a single-sourced product were
to be delayed or curtailed, our ability to ship related products in desired
quantities and in a timely manner could be adversely affected. Our business and
financial performance could also be adversely affected depending on the time
required to obtain sufficient quantities from the original source, or to
identify and obtain sufficient quantities from an alternative source.
35
Revenue Recognition
Revenue from product sales is recognized at the time of shipment, net
of estimated returns, which also are established at the time of shipment.
Deferred revenue for warranty service contracts is recognized over the contract
period. Revenue from equipment rental through our "per procedure" fee program is
recognized at the time of treatment.
Inventories
Inventories are stated at the lower of first-in, first-out cost or
market, net of reserves, and consist of (in thousands):
June 30, 2002 June 30, 2001
- ----------------------------------------- ------------------- -----------------
Raw materials $ 936 $ 1,041
Work-in-process 415 385
Finished goods 1,073 777
- ----------------------------------------- ------------------- -----------------
Total inventories $ 2,424 $ 2,203
========================================= =================== =================
Goodwill and Other Intangible Assets
For fiscal 2001 and 2000, our policy was to review goodwill and other
intangible assets periodically for impairment and assess whether significant
events or changes in business circumstances indicated that the carrying value of
the assets may not be recoverable, based on an undiscounted cash flow analysis.
In fiscal 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" and as a result, we have
ceased to amortize approximately $10.2 million of goodwill and $1.1 million of
trademarks. Goodwill is tested for impairment annually or more frequently if
changes in circumstance or the occurrence of events suggest an impairment
exists. The test for impairment requires us to make several estimates about fair
value, most of which are based on projected future cash flows. We have completed
our initial assessment upon adoption and have concluded that no impairment
existed as of July 1, 2001 or as of June 30, 2002.
Other intangible assets consist of purchased technology, customer base
and trademarks. Purchased technology and customer base are amortized using the
straight-line method over their estimated useful lives of 15 and 14 years,
respectively. The trademark asset is considered to be an intangible with an
indefinite useful life, and it will not be amortized until its useful life is
determined to be no longer indefinite. We review these definite and indefinite
lived intangible assets for impairment annually or as changes in circumstance or
the occurrence of events suggests the remaining value is not recoverable.
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
over their remaining useful lives. Repairs and maintenance are charged to
expense as incurred. Depreciation is provided using the straight-line method
based upon estimated useful lives of three to seven years for machinery,
equipment and furniture. Leasehold improvements are amortized over the shorter
of the useful life or term of the lease.
Other Assets
Other assets consist of prepaid royalties resulting from patent
licensing agreements. The agreements require us to pay a royalty on sales of
equipment. The license fees and amounts we prepaid are charged to expense as
sales are recognized.
Warranty Costs
Certain of our products are covered by warranties against defects in
material and workmanship for periods of up to twenty-four months. The estimated
warranty cost is recorded at the time of sale and is adjusted periodically to
reflect actual experience.
36
Stock-Based Compensation
We account for stock-based employee compensation arrang