MEMORANDUM OF UNDERSTANDING

 

 

                                                                    EXHIBIT 10.1

 

                           MEMORANDUM OF UNDERSTANDING

 

      This Memorandum of Understanding ("Agreement"), effective as of July 27,

2005 (the "Effective Date"), is entered into by and between PROUROCARE INC., a

Minnesota corporation ("ProUroCare"), and UROLOGIX, INC., a Minnesota

corporation ("Urologix"). ProUroCare and Urologix each may be referred to herein

individually as a "Party," or collectively as the "Parties."

 

                             Background Information

 

      ProUroCare has acquired rights to certain proprietary knowledge and

intellectual property pertaining to electrical impedance tomography for use in

diagnosing and treating urological conditions, including the exclusive worldwide

license to certain patents for electrical current computed tomography,

three-dimensional impedance imaging processes and related inventions as

described in Exhibit A attached hereto (the "EIT Technology"). EIT Technology

provides a means to image, in real-time, the three-dimensional distribution for

the heating effect from the microwave delivery system used by Urologix, in the

form of a thermally induced image. The heating effect produces a change in the

local conductivity or resistivity in the treatment area. The local changes in

the electrical properties of the tissue are measured by an electrode system

connected to an electronically controlled low-frequency power supply. The

electrodes receive specific currents and the possible induced voltages are

measured electronically. An inversion algorithm creates a real time image of the

pattern.

 

      Urologix has developed, and currently markets, products for the treatment

of benign prostatic hyperplasia ("BPH") using heat applied through controlled

microwave radiation, and is currently developing additional products for the

treatment of prostatitis/prostadynia, renal tumors and prostate cancer using

heat applied through controlled microwave radiation (the foregoing, collectively

"Urologix Products"). Urologix is the owner or licensee of certain patents and

other proprietary intellectual property used in the Urologix Products.

 

      The Parties have discussed establishing a mutually beneficial business

relationship pursuant to which the EIT Technology would be incorporated into,

and complement, certain existing and future Urologix Products. However, several

phases of research and development, along with clinical testing and FDA

approval, must be undertaken and successfully completed before any such Urologix

Product will be ready for marketing on a commercial basis.

 

      The Parties wish to memorialize their agreement with respect to the

conduct of said research, development and any subsequent commercialization of

such products, and enter into this Agreement for that reason and to that end.

 

      NOW, THEREFORE, in consideration of the foregoing premises, the mutual

promises and covenants of the Parties contained herein, and other good and

valuable consideration, the receipt and sufficiency of which are hereby

acknowledged, the Parties hereto, intending to be legally bound, do hereby agree

as follows:

 

1.    Overview

 

      1.1 The Parties will work together to develop new Urologix Products that

use the EIT Technology, in combination with refinements of existing Urologix

Products which use heat applied through controlled microwave radiation, to treat

BPH, prostatitis/prostadynia, renal tumors and prostate cancer ("New EIT

Products").

 

      1.2 While ProUroCare believes that EIT Technology may be used in

connection with diagnosing and treating urological conditions, such technology

needs to be tested, refined, developed and verified, in both laboratory and

clinical settings, to establish its efficaciousness, safety and commercial

viability in the context of any New EIT Products.

 

<PAGE>

 

      1.3 The Parties intend to undertake such testing and development as set

forth herein. If successful in that endeavor, the Parties contemplate

subsequently entering into mutually acceptable definitive agreements pursuant to

which Urologix would market New EIT Products using components supplied by

ProUroCare and licenses granted by ProUroCare (the "Project").

 

2.    Multi-Phase Approach

 

      2.1 The Parties expect that the following phases of research, testing and

development (the "Phases") will be required in connection with the Project:

 

      Phase I (Electrode Array Design and Proof of Concept)

 

      During Phase I the Parties will work with Gary J. Saulnier, Jonathan C.

Newell and David Isaacson of the Rensselaer Polytechnic Institute, Troy, New

York ("RPI"), to develop a suitable electrode array (number of electrodes, size

and distance) for use in a rectal probe and skin surface application for the New

EIT Products. (Electrodes will not be placed on the trans-urethral catheter.)

During Phase I, electrode array configurations will be assessed by their ability

to produce measurement data that shows the needed sensitivity to localized

heating as well as their ability to avoid interaction with the antenna radiation

pattern. Also, the feasibility of achieving the required resolution/sensitivity

will be assessed. Prior to commencement of work on Phase I, ProUroCare will

obtain, for the benefit of each of ProUroCare and Urologix, a confidentiality,

non-use and non-disclosure agreement from RPI in substance and form reasonably

acceptable to Urologix. The Parties anticipate that Phase I will be completed on

or before December 31, 2006.

 

      Phase II (Reconstruction Algorithm Development)

 

      During Phase II the Parties will work with RPI to design, implement and

test a reconstruction algorithm to produce images from data taken using

candidate electrode arrays.

 

      Phase III (Instrument Design and Implementation)

 

      During Phase III the Parties will work with RPI to design and prototype an

instrument utilizing the EIT Technology that is capable of supporting the

required number of electrodes and providing the needed measurement precision and

speed.

 

      Phase IV (Clinical Trials)

 

      During Phase IV the Parties will conduct the requisite clinical studies

upon mutually agreeable terms reflected in a definitive agreement to be

negotiated in good faith by the Parties when appropriate; provided, however,

neither Party has agreed to incur any expenses whatsoever in connection with

Phase IV.

 

      Phase V (FDA Approvals)

 

      During Phase V the Parties will cooperate to obtain all required approvals

from the U.S. Food and Drug Administration ("FDA") upon mutually agreeable terms

reflected in a definitive agreement to be negotiated in good faith by the

Parties when appropriate; provided, however, neither Party has agreed to incur

any expenses whatsoever in connection with Phase V.

 

      Phase VI (Market Release)

 

      During Phase VI the Parties will cooperate to prepare the New EIT Products

for final market release upon mutually agreeable terms reflected in a definitive

agreement to be negotiated in good faith by the Parties when appropriate;

provided, however, neither Party has agreed to incur any expenses whatsoever in

connection with Phase VI.

 

      2.2 The Parties will cooperate during all Phases of the Project during the

Term.

 

 

--------------------------------------------------------------------------------

                           Memorandum of Understanding

                                  Page 2 of 14

<PAGE>

 

      2.3 Each Phase of the Project must be successfully completed before

substantial work may begin on the next Phase.

 

      2.4 If any Phase cannot be completed due to factors affecting the ultimate

success of the Project such as (but not limited to) timeliness, cost, commercial

feasibility and technical constraints, or the Parties are unable to enter into a

definitive agreement when appropriate, or the Parties are unable to agree

regarding the responsibility for further funding of the Phases for Phases I, II

and III in excess of the $550,000 projected costs (as set forth in Section 3

hereof), either Party may, in its sole discretion and upon written notice to the

other Party, choose to abandon the Project.

 

      2.5 Attached as Exhibit B is the agreement between RPI and ProUroCare

covering the role, responsibilities, rights and obligations of RPI and

ProUroCare with respect to work to be performed by RPI during the Phase I of the

Project.

 

3.    Development Costs

 

      Urologix and ProUroCare agree to equally share in the development costs

incurred by RPI or its contractors during the first three Phases. Projected

costs for the first three Phases are as follows:

 

      --------------------------------------------------------------------------

      Phase                                                      Projected Cost

      --------------------------------------------------------------------------

      Phase I: Electrode Array Design and Proof of Concept         $150,000

      --------------------------------------------------------------------------

      Phase II: Reconstruction Algorithm Development               $200,000

      --------------------------------------------------------------------------

      Phase III: Instrument Design and Implementation              $200,000

      --------------------------------------------------------------------------

 

Each Party will make timely payment to RPI of its share of the foregoing

development costs. The Parties may in each of their sole discretion mutually

agree to share costs in excess to the foregoing projected costs.

 

4.    Development Committee

 

      4.1 ProUroCare and Urologix shall jointly establish a development

committee (the "Development Committee"), which shall oversee the Project's

Phases, its budget, and other activities related to the Project. Each Party

shall appoint an equal number of representatives with the requisite experience

and seniority to enable them to make decisions on behalf of the Parties with

respect to the project. The Development Committee shall meet monthly, or as

otherwise agreed to by the Parties. A quorum of the Development Committee shall

exist whenever there is present at a meeting at least one representative

appointed by each Party. Members of the Development Committee may attend a

meeting either in person or by telephone, video conference or similar means in

which each participant can hear what is said by the other participants.

Representation by proxy shall not be allowed.

 

      4.2 The Development Committee shall take action by unanimous consent of

ProUroCare and Urologix, with each such Party having a single vote, irrespective

of the number of representatives actually in attendance at a meeting, or by a

written resolution signed by the designated representatives of each of

ProUroCare and Urologix.

 

      4.3 Each Party agrees to designate an executive sponsor to serve as its

point of escalation for resolving disputes that may arise relative to the

Development Committee and to facilitate regular communication between the

Parties as necessary.

 

 

--------------------------------------------------------------------------------

                           Memorandum of Understanding

                                  Page 3 of 14

<PAGE>

 

5.    Initial Products

 

      5.1 Assuming successful completion of Phases I through V, the Parties

contemplate that the first New EIT Product to be marketed and sold will be a

system for the treatment of BPH using heat applied through controlled microwave

radiation (the "Initial Product") comprised of the following:

 

            5.1.1 External Box. An EIT external box compatible with the Urologix

      product currently described as the Targis control unit as well as any

      subsequent versions of the control unit ("EIT External Box"). If this

      product proves efficacious and is commercially viable, the Parties expect

      that subsequent versions of Urologix control unit products will either

      have EIT Technology incorporated into the control unit or continue to be

      used with a compatible EIT External Box. Any such EIT External Box will be

      manufactured by or for Urologix. In accordance with and subject to the

      terms of this Agreement, Urologix will have an exclusive, sub-licensable,

      worldwide, fully paid-up license to use the EIT Technology in connection

      with any sale, marketing, manufacture, importation, export and/or

      distribution of the EIT External Box and any control unit containing the

      EIT External Box, but only in conjunction with the Rectal Sheath and

      Abdominal Belt (hereinafter described) manufactured or supplied by

      ProUroCare.

 

            5.1.2 Rectal Sheath and Abdominal Belt. A separate but integral

      component of the Initial Product will be a disposable rectal sheath (the

      "Rectal Sheath") and an abdominal belt containing electrodes (the

      "Abdominal Belt") (collectively, together with any additional components,

      products, materials or supplies provided or to be provided by ProUroCare,

      the "ProUroCare Products"). ProUroCare, in consultation with Urologix,

      will determine whether the Abdominal Belt is disposable or reusable. The

      ProUroCare Products will be manufactured to Urologix's specifications by

      ProUroCare or by a supplier to ProUroCare reasonably acceptable to

      Urologix. The Parties contemplate that Urologix will purchase the kit

      including the ProUroCare Products for approximately $150 based upon

      ProUroCare's estimated cost of less than $50, and a minimum markup of $100

      and a minimum multiple of price to cost of four times (4x). Urologix and

      ProUroCare may jointly determine to purchase all rectal sheaths both with

      and without EIT electrodes from the same supplier. Urologix may continue

      to purchase rectal sheaths from its current supplier without EIT

      capability. The details of such purchase(s) will be reflected in a

      definitive agreement to be negotiated in good faith by the Parties when

      appropriate.

 

      5.2 Assuming successful completion of Phases I through V, the Parties

agree to negotiate, in good faith, the preparation of definitive agreements

covering the manufacture, sourcing, sale and distribution of the New EIT

Products and the constituent components thereof. As a guide to preparation of

such definitive agreements, the Parties expect that such agreements will include

the following provisions (among others):

 

            5.2.1 Subject to and upon the terms of the aforementioned definitive

      agreement(s), ProUroCare will be the exclusive provider of the ProUroCare

      Products to Urologix, and Urologix will purchase one hundred percent

      (100%) of its requirements for ProUroCare Products from ProUroCare. Such

      definitive agreement will, among other things, (a) provide for alternative

      sourcing and manufacture of the ProUroCare Products under certain

      commercially reasonable circumstances, (b) contemplate that ProUroCare

      will seek ways to reduce the cost of manufacturing or sourcing the

      ProUroCare Products by methods such as elimination of components,

      obtaining alternate sources of materials, redefinition of ProUroCare

      Product specifications in ways that do not detract from ProUroCare Product

      quality and improved assembly or test methods, (c) provide licensing

      rights adequate to protect Urologix's interests, and (d) grant Urologix or

      its designee the right (but not the obligation) to monitor all

      manufacture, sourcing and distribution of the ProUroCare Products.

 

            5.2.2 Urologix will convert then-existing Targis (or successor)

      control units located in the United States, Europe and Japan to include

      EIT Technology functionality according to the schedule immediately

      following.

 

 

--------------------------------------------------------------------------------

                           Memorandum of Understanding

                                  Page 4 of 14

<PAGE>

 

<TABLE>

<CAPTION>

      -----------------------------------------------------------------------------------------------------------

      Period (number of years    Minimum percentage of existing Urologix systems to be retrofitted to use EIT

      after FDA approval):       Technology within Period:

      -----------------------------------------------------------------------------------------------------------

<S>                              <C>

      1                          5%

      -----------------------------------------------------------------------------------------------------------

      2                          10%

      -----------------------------------------------------------------------------------------------------------

      3                          15%

      -----------------------------------------------------------------------------------------------------------

      4                          20%

      -----------------------------------------------------------------------------------------------------------

      5                          30%

      -----------------------------------------------------------------------------------------------------------

</TABLE>

 

            5.2.3 Urologix will sell new control systems incorporating EIT

      Technology according to the following schedule:

 

<TABLE>

<CAPTION>

      -----------------------------------------------------------------------------------------------------------

      Period (number of years    Minimum percentage of new Urologix systems to use EIT Technology within Period:

      after FDA approval):

      -----------------------------------------------------------------------------------------------------------

<S>                              <C>

      1                          30%

      -----------------------------------------------------------------------------------------------------------

      2                          40%

      -----------------------------------------------------------------------------------------------------------

      3                          50%

      -----------------------------------------------------------------------------------------------------------

      4                          60%

      -----------------------------------------------------------------------------------------------------------

      5                          70%

      -----------------------------------------------------------------------------------------------------------

</TABLE>

 

            5.2.4 In the event that Urologix fails to meet the minimum

      percentages set forth in Sections 5.2.2 or 5.2.3, ProUroCare may, at its

      option, give written notice to Urologix that Urologix's license with

      respect to the EIT Technology and/or the Patents as further described in

      Section 6.2 hereof will become non exclusive (in addition to being

      royalty-free, worldwide, fully paid and sub-licensable) and such non

      exclusivity shall become effective upon receipt of said notice by Urologix

      for the remaining Term.

 

6.    EIT Technology - Representations, Ownership and Exclusive License Rights

 

      6.1 ProUroCare represents and warrants:

 

            6.1.1 That the execution and delivery of this Agreement by

      ProUroCare and the performance of and compliance by ProUroCare with the

      terms and conditions of this Agreement will not result in the imposition

      of any lien or other encumbrance on the EIT Technology or the Patents, and

      will not conflict with or result in a breach by ProUroCare of any of the

      terms, conditions or provisions of any order, injunction, judgment,

      decree, statute, rule or regulation applicable to ProUroCare, the EIT

      Technology or the Patents, or any note, indenture or other agreement,

      contract, license or instrument by which any of the EIT Technology or the

      Patents may be bound or affected. No consent or approval by any person or

      public authority is required to authorize or is required in connection

      with, the execution, delivery or performance of this Agreement by

      ProUroCare.

 

 

--------------------------------------------------------------------------------

                           Memorandum of Understanding

                                  Page 5 of 14

<PAGE>

 

            6.1.2 That it has the necessary right, title, interest and power to

      grant the licenses to Urologix set forth in this Agreement, free and clear

      of any liens, claims, options, rights, mortgages, licenses(s) to any third

      party, encumbrances or security interests of any kind.

 

            6.1.3 That it is not currently the subject of any litigation or

      pending claim that would affect its ability to perform under this

      Agreement nor is it aware of any question or challenge to its ability to

      perform under this Agreement.

 

            6.1.4 That no agreement or understanding with any third party exists

      or will exist that would interfere with its obligations hereunder;

      provided, however, ProUroCare derives its exclusive rights to the EIT

      Technology and Patents from a License Agreement with Renesselaer

      Polytechnic Institute ("RPI") dated July 13, 2001, as amended by Amendment

      #1 to License Agreement (the "RPI License"), a true and correct copy of

      which is attached hereto as Exhibit C. This Agreement does not interfere

      with, and will not cause a default under, the RPI License.

 

            6.1.5 That the licenses granted and the use of the EIT Technology as

      contemplated by this Agreement, does not and will not infringe any patent,

      copyright, trademark, trade secret or other intellectual property right of

      any third party; provided, however, Urologix's remedy for breach of the

      warranty contained in this Section 6.1.5 shall be limited to the

      indemnification rights set forth in Section 7 hereof.

 

            6.1.6 In addition, ProUroCare represents and warrants that it has

      sole and exclusive rights to the patents identified on Exhibit A and has

      or will have such rights to any patents which issue from the applications

      made with respect to such patents, including, without limitation, any

      continuations, continuations-in-part, reissues, reexaminations and patent

      applications ("Patents").

 

      6.2 During the Term of this Agreement, Urologix shall have, and ProUroCare

hereby grants, an exclusive, royalty-free, worldwide, fully paid license to

make, have made, use, sell, sub-license, offer to sell, and/or import any and

all products and services embodying, incorporating, based upon or derived from

the EIT Technology and/or the Patents, in connection with or related to the

treatment of BPH, prostatitis/prostadynia, renal tumors and/or prostate cancer

using heat applied through controlled microwave radiation, but only in

conjunction with the Rectal Sheath and Abdominal Belt manufactured or supplied

by ProUroCare, in accordance with and subject to the terms hereof or any other

applicable definitive agreement subsequently executed by the Parties (the

"License"). The License is further evidenced by the Sublicense Agreement dated

of even date herewith between Urologix and ProUroCare and approved by RPI, a

true and correct copy of which is attached hereto as Exhibit D.

 

      6.3 ProUroCare retains all right, title and interest, including the right

to grant licenses to third parties, in and to the Patents, EIT Technology,

Rectal Sheath and Abdominal Belt, but only to the extent not manifestly

inconsistent with the licenses granted to Urologix herein. Notwithstanding the

foregoing, during the Term of this Agreement ProUroCare will not, directly or

indirectly, grant any license (or right) to any third party with respect to the

Patents, the EIT Technology or the ProUroCare Products for treatment of BPH,

prostatitis/prostadynia, renal tumors or prostate cancer using heat applied

through controlled microwave radiation, to the extent, if any, these Indications

(as such term is hereafter defined) have not been terminated by ProUroCare

pursuant to Section 12.2 hereof and only for so long as Urologix's license to

the EIT Technology and Patents is exclusive.

 

      6.4 Intellectual Property Rights.

 

            6.4.1 Each Party agrees to provide the other Party, at its

      reasonable request, all such assistance as may reasonably be required to

      obtain, evidence and/or perfect such Intellectual Property Rights in any

      country or jurisdiction worldwide; provided, however, such assistance

      shall be at the cost and expense of the Party requesting assistance.

 

 

--------------------------------------------------------------------------------

                           Memorandum of Understanding

                                  Page 6 of 14

<PAGE>

 

            6.4.2 Except as expressly stated herein, each Party reserves all

      rights in and to its pre-existing Intellectual Property Rights.

 

            6.4.3 For all purposes of this Section 6.4, "Intellectual Property

      Rights" means all worldwide (a) patents, patent applications, and patent

      rights; (b) rights associated with works of authorship including

      copyrights, copyright applications, copyright restrictions, mask work

      rights, mask work applications, and mask work registrations: (c) rights

      relating to the protection of trade secrets and confidential information;

      (d) moral rights; (e) rights analogous to those set forth herein and any

      other proprietary rights relating to intangible property; and (f)

      divisions, continuations, substitutions, continuations-in-part, renewals,

      reissues, extensions, registration, confirmations, re-examinations,

      supplementary protection certificates and the like of the foregoing (as

      applicable) now existing or hereafter filed, issued or acquired.

 

            6.4.4 If during the Term of this Agreement and in connection with

      the performance thereof by the Parties, new Intellectual Property Rights

      are developed, created or authored ("New Intellectual Property Rights"),

      then Urologix reserves the rights to, and shall own exclusively, all New

      Intellectual Property Rights pertaining to treatment of BPH,

      prostates/prostadynia, renal tumors and prostate cancer using heat applied

      through controlled microware radiation (whether such New Intellectual

      Property Rights were created through joint efforts of the Parties or not)

      and ProUroCare reserves the rights to, and shall own exclusively, all New

      Intellectual Property Rights pertaining to EIT Technology whether

      contained in the EIT External Box, control unit or the ProUroCare

      Products, including, without limitation, new algorithms specifically

      created for the EIT External Box or control unit (whether such New

      Intellectual Property Rights were created through joint efforts of the

      Parties or not); provided, however, that Urologix shall have the license

      rights granted to it with respect to New Intellectual Property of

      ProUroCare to the same extent as shall exist with respect to the License

      granted herein and, provided further, this Section 6.4.4 will not prevent

      the use or resale of any Urologix Products sold and delivered or placed in

      service by Urologix during the Term hereof.

 

7.    Indemnification

 

      7.1 ProUroCare will indemnify and hold harmless Urologix, and will

reimburse Urologix for any loss, liability, claim, damage, expense (including

costs of investigation and defense and reasonable attorneys' fees and expenses),

arising from or in connection with any claim asserted by an unaffiliated third

party that any Patent or aspect of the EIT Technology infringes or violates such

third party's confidentiality rights or any patent, copyright or trademark, or

misappropriates its trade secret ("Claim"). Each Party must notify the other

promptly in writing of a Claim and agree to cooperate with each other in

defending the claim. ProUroCare shall have the right to defend such claim, and

Urologix shall have the right, at its option and expense, to participate in

defense of the claim and any settlement negotiations relating to such claim,

through counsel of its own choosing. In addition, ProUroC