UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
UROPLASTY, INC
(Name of Small Business Issuer in its Charter)
Minnesota 3841 41- 1719250
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
2718 Summer Street N.E., Minneapolis, Minnesota 55413
Telephone 612/378-1180 FAX 612/378-2027
(Address and telephone number of principal executive
offices, and of principal place of business)
Daniel G. Holman, Chairman, President, CEO, CFO
Uroplasty, Inc.
2718 Summer Street N.E., Minneapolis, Minnesota 55413
Telephone 612/378-1180 FAX 612/378-2027
(Name, address and telephone number of agent for service)
Copies to:
Richard P. Keller, Esq.
Keller & Lokken, P.A.
First National Bank Building, Suite W-790
332 Minnesota Street
St. Paul, Minnesota 55101
(651) 292-1001
(651) 292-8912 (FAX)
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to be To Be Price Per Offering Registration
Registered Registered Unit Price Fee
Common Stock, $.01 1,702,950(1)$3.1875(2) $5,428,153 $1,601.31
par value per share
TOTAL: 1,702,950 $5,428,153 $1,601.31
(1) All shares to be registered hereby are already outstanding and
owned by various Selling Shareholders identified herein.
(2) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 230.457 (c). Based on the average of prices of
$2.875 bid and 3.50 asked on July 8, 1998.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> II
UROPLASTY, INC
Registration Statement on Form SB-2
Cross Reference Sheet Between Items of Form SB-2
and Prospectus as to 1,702,950 Shares
Item in Form SB-2 Caption or Location in Prospectus
1. Front of Registration Front of Registration Statement;
Statement and Outside Front front cover page of Prospectus
Cover of Prospectus
2. Inside Front and Outside Back Inside Front and outside back
Cover Pages of Prospectus Cover Page
3. Summary Information and Summary of Offering; High Risk
Risk Factors Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not applicable
6. Dilution Not applicable
7. Selling Security Holders Selling Shareholders
8. Plan of Distribution Plan of Offering
9. Legal Proceedings Business - Legal Proceedings
10. Directors, Executive Officers, Management - Directors and Executive
Promoters and Control Persons Officers
11. Security Ownership of Certain Principle Shareholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Management-Limitation of Directors'
Position on Indemnification Liability; Item 28.c. of
for Securities Act Liabilities Registration Statement
15. Organization Within Last Five Certain Transactions
Years
16. Description of Business Business
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operation Analysis
18. Description of Property Business-Property
19. Certain Relationships and Certain Transactions
Related Transactions
III <PAGE>
20. Market for Common Equity and Cover Page of Prospectus;
Related Stockholder Matters Description of Securities
21. Executive Compensation Management - Executive
Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements Not Applicable
with Accountants on Accounting
and Financial Disclosure
IV <PAGE>
Legend Required by Item 1 of Form SB-2 and Item 501(a)(8) of
Regulation S-B:
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall
not constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any
such State.
No copies of any Preliminary Prospectus will be delivered to any
person without such legend appearing on the cover page thereof
in compliance with Item 501(a)(8) of Regulation S-B.
Should any copy of the Preliminary Prospectus be delivered to any
person, it will include on its cover the above legend and the
following words:
Preliminary Prospectus, dated October 27, 1998 Subject to Completion
V <PAGE>
UROPLASTY, INC.
1,702,950 Shares of Common Stock
This Prospectus pertains to 1,702,950 shares of common stock
the "Shares") of Uroplasty, Inc. (the "Company"). All of the
Shares are owned by and may be offered and sold at market prices
by certain Selling Shareholders identified herein. The Company is
not selling and will not receive any proceeds resulting from the
sale of any of the Shares. The Shares were issued by the Company
as part of a private placement transaction in May and June, 1998.
The Company's Common Stock is traded in the local over-the-counter
(Bulletin Board) market under the symbol "UROP".
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A
HIGH DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. See "Risk Factors" herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company expects that the Shares will be sold at market prices.
The expenses of this offering, estimated to be $20,000, not counting
any commissions or expenses payable by the Selling Shareholders,
will be paid by the Company. Selling shareholders are responsible
for any brokerage commissions payable upon the sale of their Shares.
The Company will not receive any proceeds from the sale of any of
the Shares.
The date of this Prospectus is October ___, 1998.
1 <PAGE>
TABLE OF CONTENTS
SUMMARY 4
RISK FACTORS 6
MARKET FOR COMMON STOCK 14
USE OF PROCEEDS 13
DIVIDEND POLICY 14
SELECTED FINANCIAL DATA 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 17
BUSINESS 19
MANAGEMENT 31
PRINCIPAL SHAREHOLDERS 35
DESCRIPTION OF SECURITIES 42
REPORTS TO SHAREHOLDERS 45
LEGAL MATTERS 45
EXPERTS 45
AVAILABLE, ADDITIONAL AND SUPPLEMENTAL
INFORMATION 45
FINANCIAL STATEMENTS F-1
IMPORTANT INFORMATION
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF SECURITIES TO
ANY PERSON OTHER THAN THE RECIPIENT OF THIS PROSPECTUS. THE
CONTENTS OF THIS PROSPECTUS ARE THE RESPONSIBILITY OF THE COMPANY.
NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, MUST NOT BE RELIED UPON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral "forward-
looking statements", including statements contained in this
Prospectus and in documents filed by the Company with the
Securities and Exchange Commission and in its reports to
stockholders, as well as elsewhere. "Forward-looking statements"
are statements such as those contained in projections, plans,
objectives, estimates, statements of future economic performance,
and assumptions related to any of the foregoing, and may be
identified by the use of forward-looking terminology, such as
"may, "expect," "anticipate," "estimate, "goal," "continue,"
or other comparable terminology. By their very nature, forward-
looking statements are subject to known and unknown risks and
uncertainties relating to the Company's future performance that
may cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from those
expressed or implied in any such "forward-looking statements".
Any such statement is qualified by reference to the following
cautionary statements.
2 <PAGE>
The Company's business operates in highly competitive markets
and is subject to changes in general economic conditions,
competition, customer and market preferences, government regulation,
the impact of tax regulation, foreign exchange rate fluctuations,
the degree of market acceptance of products, the uncertainties of
potential litigation, as well as other risks and uncertainties
detailed elsewhere herein and from time to time in the Company's
Securities and Exchange Commission filings.
In this Prospectus, the following sections contain "forward-
looking statements": "Summary"; "Risk Factors"; "Business"; and
"Management's Discussion and Analysis of Financial Condition and
Results of Operation". Various factors and risks (not all of
which are identifiable at this time) could cause the Company's
results, performance or achievements to differ materially from that
contained in the Company's forward-looking statements, and investors
are cautioned that any forward-looking statement contained herein or
elsewhere is qualified by and subject to the warnings and cautionary statements
contained above and in the Risk Factors section of this
Prospectus.
The Company does not undertake and assumes no obligation to update
any forward-looking statement that may be made from time to time
by or on behalf of the Company.
SUMMARY
This summary is intended for quick reference purposes only and does
not contain all facts material to a determination to invest in the
securities offered hereby, and is qualified in its entirety by the
more detailed information and financial information appearing
elsewhere in this prospectus.
The Company
The Company designs, develops, manufactures and markets medical
products primarily for the treatment of urinary incontinence.
Currently, the Company sells its products only to customers outside
the United States through its foreign subsidiaries. The Company's
key product is Macroplastique(R), an injectable soft tissue
bulking agent currently used to treat certain types of stress
urinary incontinence ("SUI"), the most common form of urinary
incontinence. SUI refers to involuntary loss of urine as a result
of activities that increase intra- abdominal pressure, such as
coughing, laughing or exercising. Macroplastique also is used to
treat vesicoureteral reflux ("VUR"), a condition occurring mostly
in children in which urine flows backward from the bladder into the
kidney. In addition, some doctors in Europe are beginning to use
Macroplastique to treat incontinence in men recovering from
prostate surgery. In June 1996, Macroplastique received a CE
mark in Europe (similar to FDA approval in the United States),
allowing the product to be sold throughout the European Union.
Macroplastique is not sold in the United States because it has
not been approved for marketing by the Food and Drug Administration
("FDA"). Through this offering, the Company seeks to fund its efforts
to obtain FDA pre-market approval for Macroplastique, which would
allow the Company to enter the United States female urinary
incontinence treatment market.
3<PAGE>
It is estimated that urinary incontinence afflicts about 5% of the
general population and women comprise about 85% of the sufferers.
In Europe, currently the Company's largest market, approximately
17 million people suffer from various forms of urinary incontinence
and about 14.5 million of these sufferers are women. Bulking agents
such as Macroplastique are used to treat women with SUI caused by
intrinsic sphincter deficiency, estimated by the Company to comprise
10% of the female incontinence market or about 1.4 million women in
Europe alone. VUR is primarily a pediatric concern, with a prevalence
estimated to be as high as 1% of the pediatric population. The
Company estimates that about half of this population are candidates
for Macroplastique treatments. Of the estimated 2.6 million European
men who are incontinent, the Company believes about 25% are candidates
for treatment with Macroplastique.
Macroplastique consists of solid, highly textured particles that are
soft and flexible, made by heat vulcanizing polydimethylsiloxane
(silicone). The particles are suspended in a water-based biocompatible
carrier solution. Macroplastique is not a silicone gel, the compound
which became controversial in connection with its use in breast
implants. Macroplastique has been used to treat approximately 15,000
patients in Europe over the last seven years with no reported serious
product-related adverse incidents.
The Company was incorporated in Minnesota in 1992 as a wholly-owned
subsidiary of Bioplasty, Inc. ("Bioplasty"), a manufacturer of breast
implants, which, along with other breast implant manufacturers, became
subject to numerous product liability class action lawsuits. In 1993,
Bioplasty and Uroplasty filed for protection under Chapter 11 of the
Federal Bankruptcy Code. The Company emerged from Chapter 11 in
February 1994 as a separate and distinct entity from Bioplasty.
Capital Structure
Common Stock outstanding as of June 30, 1998: 5,917,371 shares of Common
Stock(1)
(1) Does not include 483,200 shares underlying outstanding options, as
of June 30, 1998, nor 150,000 Shares underlying an Agent's Warrant.
Risk Factors
The securities offered hereby are highly speculative, illiquid, involve
a high degree of risk and immediate substantial dilution and should be
purchased only by persons who can afford to lose their entire
investment. See "Risk Factors" and "Dilution" herein.
4<PAGE>
Summary Financial Data
(In thousands, except per share data and shares outstanding.)
Years ended March 31, Three months ended June 30,
1998 1997 1998 1997
Consolidated Statement
of Operations Data:
Net sales $4,336 $3,335 $1,316 $1,149
Operating profit 662 376 262 354
Net income $408 $218 $249 $239
Net income per share $.10 $.06 $.05 $.07
Weighted average number
of common shares
outstanding(1) 4,026,571 3,575,609 4,740,237 3,649,525
As of As of
March 31, 1998 June 30, 1998
Consolidated Balance Sheet Data:
Cash and cash equivalents $890 $4,385
Working capital 1,514 5,160
Total shareholders' equity 2,051 5,741
(1) Does not include 505,200 shares, as of March 31, 1998, (483,200
shares, as of June 30, 1998) underlying outstanding options, nor 150,000
shares underlying an Agent's Warrant, as of June 30, 1998.
Address/Telephone Numbers
The mailing address and telephone/fax numbers of the principal executive
offices of the Company are:
Uroplasty, Inc. 2718 Summer Street N.E. Minneapolis, MN 55413
Telephone (612) 378-1180 Fax (612) 378-2027
5<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative, illiquid, involve
a high degree of risk and immediate substantial dilution and should be
purchased only by persons who can afford to lose their entire
investment. In evaluating an investment in such securities, prospective
investors should carefully consider the following risk factors and other
information contained in this Prospectus.
Government Regulation - International and United States; Inability to
Market or Sell Macroplastique in United States; Uncertainty of Obtaining
FDA Marketing Approval.
The Company's product, manufacturing processes and product development
activities are subject to extensive and rigorous regulation by
governmental and regulatory authorities in foreign countries similar to
the U.S. Food and Drug Administration ("FDA"). In Europe, where the
Company has been marketing Macroplastique since 1991, the Company's
introduction of medical devices as well as its design, manufacturing,
labeling, distribution, sale, marketing, advertising, promotion and
recordkeeping procedures for its products are subject to laws and
regulations governing medical devices contained in the European Medical
Device Directives ("MDD"). In June, 1996, the Company received a
Certificate of Authorization for affixing the CE mark (Conformite
Europeene) on Macroplastique based upon compliance with the MDD.
In the United States, the Company cannot market or sell Macroplastique
until Investigational Device Exemption ("IDE") and subsequent Pre-Market
Approval ("PMA") authorization for Macroplastique are received from the
FDA. As of the date of this Prospectus, the Company had not submitted
an IDE application to the FDA to request authority to commence human
clinical studies in the United States. There can be no assurance that
the requisite approvals or certifications will be granted for
Macroplastique or any other product, on a timely basis, or at all, or
that such regulatory reviews will not involve delays that would conflict
with the Company's ability to commercialize its products in the United
States.
In summary, the Company has received MDD approval to market
Macroplastique and Bioplastique throughout the European Community, but
the Company has not yet applied for regulatory approval from the FDA in
the United States for Macroplastique or any of it other products.
Even if regulatory approval to market a product is obtained from the
FDA, this approval may necessitate limitations on the indicated uses of
the product. Marketing approval can also be withdrawn by the FDA in the
United States (and by regulatory authorities in foreign countries) due
to failure to comply with regulatory requirements or the occurrence of
unforeseen problems following initial approval. The Company may be
required to make further filings with the FDA and other regulatory
authorities in foreign countries under certain circumstances, such as
the addition of product claims or product reformulation. The FDA and
other regulatory authorities in foreign countries could also limit or
prevent the manufacture or distribution of the Company's products and
has the power to demand the recall of such products. FDA medical device
regulations depend strongly on administrative interpretation, and there
can be no assurance that future interpretation made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely
6<PAGE>
affect the Company. The FDA and various other authorities either
currently inspect or will inspect the Company and its facilities from
time to time to determine whether the Company is in compliance with
regulations relating to medical device manufacturing, including
regulations concerning design, manufacturing, testing, quality control,
product labeling, distribution, promotion and record keeping practices.
A determination that the Company is in material violation of such
regulations could lead to the imposition of civil penalties, including
fines, product recalls, product seizures or, in extreme cases, criminal
sanctions. See "Business - Government Regulations".
Dependence on Single Product. The Company expects to derive
substantially all of its revenues for the next several years from sales
of Macroplastique. The Company's failure to continue its
commercialization of Macroplastique in Europe would have a material
adverse effect on the Company's business, financial condition and
results of operations. The Company does not expect that
commercialization of other new products will be feasible without a
substantial, continuing commitment to research and development for an
extended period of time or acquisitions of new products, or both. Also,
new medical products must typically undergo clinical trials and
regulatory clearance or approval before commercialization. There can be
no assurance as to whether or when commercialization of other products
might begin or as to the likelihood that any such initiative would be
successful. The market for medically-related products changes
constantly, and if the market changes, or if new or strengthened
competition emerges, or customer preferences change, or if new
technology causes Macroplastique to be viewed as a less effective
treatment, the Company's business, financial condition and results of
operation would be adversely affected. Unlike larger companies with many
products in the marketplace, the Company is dependent on one product and
its fate is, consequently, much more closely tied to market acceptance
of that product.
Dependence on Patents and Proprietary Rights. The Company's success
depends in part on its ability to preserve trade secrets, obtain and
maintain patent protection for its products under United States and
international patent laws and other intellectual property laws and
operate without infringing upon the proprietary rights of third parties.
Patents covering the materials, process and applications have been
issued to the Company by the Patent Offices in the United States, United
Kingdom, Japan and Germany. Applications are also currently pending in
various other countries, including Canada and other European countries.
No assurances can be given that the scope of any patent protection will
prevent competitors (most of which have financial and other resources
substantially greater than the Company) from introducing products
competitive with the Company's products, the Company's patents will be
held valid if subsequently challenged, others will not claim rights in
or ownership of the patents and other proprietary rights held by the
Company, or the Company's product and processes will not infringe, or be
alleged to infringe, the proprietary rights of others.
A number of patents have been issued to others in the area of injectable
bulking agents. The validity and breadth of claims covered in medical
device technology patents involve complex legal and factual questions
and may therefore be highly uncertain. The Company also relies upon
unpatented trade secrets to protect its proprietary technology. No
assurance can be given that others will not independently develop or
7<PAGE>
otherwise acquire substantially equivalent techniques and/or gain access
to and disclose the Company's proprietary technology. Further, no
assurance can be given that the Company can ultimately protect
meaningful rights to such unpatented proprietary technology. There has
been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Companies in the
medical device industry have employed intellectual property litigation
to gain a competitive advantage. Litigation may be necessary to enforce
any patents issued to the Company, protect trade secrets or proprietary
information owned by the Company against claimed infringement of the
rights of others or determine the scope and validity of the proprietary
rights of others. The defense and prosecution of patent litigation or
other legal and/or administrative proceedings related to patents is
costly and time-consuming regardless of the outcome. An adverse outcome
in any litigation could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from others
and/or require the Company to cease making, using or selling any
products. There can be no assurance that any licenses required under
any patents or proprietary rights would be made available on terms
acceptable to the Company, if at all. See "Business - Patents,
Trademarks, and Licenses".
Uncertainty Relating to Third-Party Reimbursement. The success of the
Company will depend, in part, upon, satisfactory reimbursement for
Macroplastique procedures from third party health care payers. In the
United States and many foreign countries, third-party reimbursement is
currently generally available for surgical procedures for urinary
incontinence, but there is no uniform policy for such reimbursements.
The Company sells Macroplastique to physicians, hospitals and other
users, which bill various third-party payers, such as government health
programs, private health insurance plans, managed care organizations and
other similar programs, for the health care products and services
provided to their patients. Payers may deny reimbursement if they
determine that a product used in a procedure was not used in accordance
with established payer protocols regarding cost-efficient treatment
methods, was used for an unapproved indication or was not otherwise
covered. Third-party payers are increasingly challenging the prices
charged for medical products and services and, in some instances, have
pressured medical suppliers to lower their prices. The availability of
third-party reimbursement for Macroplastique or competitors' products
and continuing efforts to reduce the costs of health care by decreasing
reimbursement rates may reduce the price received by the Company for
Macroplastique or increase the relative expense to the consumer. The
Company believes that a material amount of its Macroplastique revenues
are received from third party payers, and that, therefore, failure to
receive sufficient reimbursement from health care payers for procedures
using Macroplastique or adverse changes in governmental and third-party
payers' policies toward reimbursement for such procedures would
materially adversely affect the Company's business, financial condition
and results of operations. See "Business - Third Party Reimbursement".
Potential Unfavorable Public Reaction to Use of Silicone Products/Earlier
Silicone Controversies. Macroplastique is comprised of
heat vulcanized polydimethylsiloxane, which results in a solid flexible
silicone elastomer. The United States breast implant industry in the
1990's became the subject of significant controversies (some of which
continue at this time) surrounding the possible effects upon the human
8<PAGE>
body of the use of silicone gel in breast implants. One consequence was
a massive flood of products liability litigation, leading to the
bankruptcy of several companies, including Uroplasty's former parent,
Bioplasty, Inc., (which in turn, caused Uroplasty, Inc. to file for
bankruptcy in 1993). The Company uses only solid silicone material, and
not semi-liquid silicone gel (as was used in breast implants), in its
Macroplastique product. However, since the controversies in the United
States surrounding the use of silicone in breast implants have been so
widespread and resulted in such extensive litigation, there can be no
assurance that the use by the Company, and others, of solid silicone in
medical devices implanted in the human body will not result in
controversies, or even litigation. There can be no assurance that
studies or research unknown to date will not some day cast doubt, in the
mind of the public, on the safety of the Company's products and the
appropriateness of their intended use.
The Company expects its competitors will attempt to portray silicone as
an undesirable feature of Macroplastique, and the effects of such
efforts cannot be predicted at this time. The earlier silicone
controversies may adversely affect the Company's ability to market
Macroplastique in the United States if and when the Company receives PMA
approval from the FDA for Macroplastique.
Research and Development Expenses in Fiscal Year 1999; Expected Losses.
The Company's future success will depend upon, among other factors, its
ability to introduce and market Macroplastique on a timely basis in the
United States, and to that end, it has committed the largest portion of
the proceeds resulting from its private placement of Common Stock in May
and June, 1998. Although the Company has been profitable in fiscal
years 1998 and 1997, the Company expects to incur significant operating
losses in its fiscal year 1999, due largely to the significant costs
associated with clinical trials and other aspects of the FDA approval
process. The development and commercialization by the Company of
Macroplastique and other products in the United States will require
substantial additional product development, clinical, regulatory and
other expenditures for the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Financial Statements", and "Risk Factors -
Need for Additional Capital".
Need for Additional Capital. The Company anticipates that the net
proceeds received from its private placement in May and June, 1998,
together with cash flow from operations will be sufficient to fund its
IDE submission, clinical studies and the completion of its PMA
application to the FDA for Macroplastique. However, if expenses or
operating profits differ from expected levels, the Company will require
additional financing to complete its PMA application to the FDA for
Macroplastique. Further, the Company will need additional funds in order
to introduce Macroplastique to the U.S. vesicoureteral reflux and male
incontinence markets because separate regulatory approval is needed for
each of these conditions. There can be no assurance that additional
capital will be available to the Company when needed or on terms
acceptable to the Company. The net proceeds of the Company's private
placement of the Shares in May and June, 1998, together with the
Company's existing capital resources and any funds provided by future
operations, will not be sufficient to fund new product development, and
funds for such purpose may not be available, on reasonable terms, and
9<PAGE>
there can be no assurance that other sources of funding will be
available. If equity capital is needed by the Company in the future, the
Company would attempt to obtain it on terms it considered favorable, but
the demands of the business and the nature of financial markets at the
time may be such that any resulting issuance of equity securities would
result in dilution to then existing shareholders. See "Use of Proceeds"
and "Management's Discussion and Analysis".
Lack of Marketability and Registration in All States. The Company is
not required, and does not intend, to register the Shares in two states
in which holders of the Shares presently reside, namely California and
Arizona.
Highly Competitive Industry. Competition in the urinary incontinence
management and treatment products market is fierce. The medical
condition treated by using the Company's product also may be managed or
treated using a variety of alternative products or techniques, including
adult diapers, absorbent pads, behavior therapy, pelvic muscle
exercises, drugs, surgery, implantable devices, other injectable bulking
agents and other medical devices. There is no assurance the Company's
products will be a substitute for such alternative products or
techniques or that advancements in these alternative products or
techniques will not make the Company's products obsolete. In addition,
the Company believes some of its competitors who do not currently have
injectable bulking agents are attempting to develop injectable bulking
agents which will directly compete with Macroplastique. Many of the
Company's existing as well as potential competitors have substantially
greater capital resources, name recognition, distribution capabilities,
well-known and well-established product lines and larger marketing,
research and development staffs and facilities than the Company. These
competitors may also have greater expertise than the Company in research
and development, manufacturing, marketing and sales and regulatory
affairs. There can be no assurance that the Company and Macroplastique
will be able to compete effectively with such alternative products or
techniques or with such competitors and potential competitors.
In addition, the Company's ability to compete in the urinary
incontinence treatment market will depend primarily upon physician,
patient and healthcare payer acceptance of Macroplastique as a safe,
effective and cost-effective treatment for stress urinary incontinence.
The Company's ability to compete in this market will also depend upon
product pricing and the consistency of its product quality and delivery.
Other factors within or outside the Company's control include its
product development and innovation capabilities, ability to obtain
required regulatory approvals, ability to protect its proprietary
technology, manufacturing and marketing capabilities and ability to
attract and retain skilled employees. See "Business - Competition".
Risks and Effects of Technological Developments. The Company competes
in a market characterized by technological innovation, extensive
research efforts and significant competition. Improvements in existing
treatment options or developments of new treatment methods may have a
material adverse effect on the Company's ability to increase sales of
Macroplastique and successfully commercialize any future products and
may render such products noncompetitive or obsolete. Other companies are
currently engaged in the development of products and innovative methods
for treating stress urinary incontinence that are similar to, or compete
with, Macroplastique. Significant developments by any of these companies
10<PAGE>
or advances by medical researchers at universities, government research
facilities or private research laboratories could eliminate the market
for Macroplastique or otherwise render Macroplastique obsolete. Although
technological change has not had a direct material impact on the Company
in recent years, the potential that such a change might occur is a
continuing risk for the Company. See "Business-Competition."
Risk of Product Liability; No Assurance Insurance is Adequate. The
medical products industry is subject to substantial litigation. As a
manufacturer of an implantable medical product, the Company faces an
inherent business risk of exposure to product liability claims in the
event that the use of its product is alleged to have resulted in adverse
effects to a patient. The Company maintains product liability insurance
in the amount of $2,000,000, aggregate and per occurrence, but there can
be no assurance that such coverage limits are adequate to protect the
Company from any liabilities which it might incur in connection with the
clinical trials and commercialization of Macroplastique or any other
product. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. Furthermore, the Company does
not expect to be able to obtain insurance covering its costs and losses
as a result of any recall of its products due to alleged defects,
whether such a recall is instituted by the Company or required by a
regulatory agency. Consequently, a product liability claim, recall or
other claim with respect to uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on the
business, financial condition and results of operations of the Company.
See "Business-Product Liability".
Uncertainty of Future Market Acceptance. The Company currently sells
Macroplastique in Europe and other foreign countries. Acceptance of
Macroplastique by physicians in preference to other treatment options,
including other bulking agents, will depend upon the demonstration of
its safety and effectiveness, relative performance of Macroplastique
compared to other market approved products, ease of use and relative
cost compared to other bulking agents and treatment alternatives.
Physicians may elect not to prescribe treatment using Macroplastique
unless adequate reimbursement from health care payers is available.
Health care payer acceptance of a treatment utilizing Macroplastique
will require, among other things, evidence of the cost effectiveness of
this treatment as compared to other treatment options. There can be no
assurance that the acceptance of Macroplastique by urological and
gynecological health care providers will continue to grow in Europe and
other areas where Macroplastique is already used.
The Company does not sell Macroplastique in the United States. There can
be no assurance that Macroplastique will achieve any significant degree
of market acceptance in the United States among physicians, health care
payers or patients, even if the safety and effectiveness of
Macroplastique is established in the United States and the necessary
regulatory approvals are obtained. Even if those approvals were granted,
the Company's future success in the United States market would be
entirely dependent on the successful commercialization and market
acceptance of Macroplastique. Accordingly, any delay or failure by the
Company in demonstrating that Macroplastique is safe and effective,
receiving required regulatory approvals to market Macroplastique or
achieving significant market acceptance of Macroplastique in the United
States among physicians, health care payers and/or patients would have a
material adverse effect on the Company's business, financial condition
11<PAGE>
and results of operations. In addition, the earlier controversies
surrounding silicone, and possible lingering public concerns about it,
could impede the acceptance of Macroplastique. See "Business".
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of its key
management personnel. The Company believes that its future success will
depend in large part on its ability to attract and retain highly skilled
managerial, engineering, operations and marketing personnel who are in
great demand. Failure to attract and retain key personnel could have a
material adverse effect on the Company's results of operations. The
Company does not have an employment agreement or non-compete agreement
with Daniel G. Holman, its Chairman, President, CEO and CFO, or Susan
Hartjes-Doherty, its Vice President of Operations and Regulatory Affairs
and Secretary. The Company does not maintain key person life insurance
for any of its employees.
Risks Associated with International Operations; Currency Risks. At this
time, the Company only sells Macroplastique outside the United States
through its wholly-owned foreign subsidiaries. Sales and operations
outside of the United States are subject to certain inherent risks,
including, without limitation, fluctuations in the value of the U.S.
dollar relative to foreign currencies, tariffs, quotas, taxes and other
market barriers, political and economic instability, restrictions on the
import and export of technology, difficulties in staffing and managing
international operations, difficulties in obtaining work permits for
employees, difficulties in collecting receivables, potentially adverse
tax consequences, potential language barriers, and difficulties in
operating in a different culture and legal system. There can be no
assurance that any of these factors will not have a materially adverse
effect on the Company's financial condition or results of operations. In
particular, because the Company's international sales are denominated
primarily in Dutch guilders, currency fluctuations in countries where
the Company does business may render the Company's products less price
competitive than those of foreign companies whose sales are denominated
in weaker currencies. The Company reports its financial results in U.S.
dollars, and fluctuations in the value, of either the dollar or the
currencies in which the Company transacts business, can have a negative
impact on its financial results. Consequently, the Company does have
exposure to foreign currency exchange risks. The Company attempts to
lessen that exposure by keeping to a minimum the amount of time that
trade payables and receivables are outstanding.
Dependence on Suppliers. The Company currently purchases all raw
materials from single sources. Alternative suppliers for these
materials exist should the current suppliers discontinue production or
distribution. However, the Company would need to complete additional
testing to qualify the materials obtained from any new suppliers.
Additionally, limited notice of the need to switch suppliers for either
of these materials could result in production delays and inventory
depletion. The Company has not experienced any shortage of these
materials to date; however, no assurance can be given that shortages of
these materials will not be experienced in the future.
Limited Public Market for Common Stock; Possible Stock Price Volatility.
Prior to this offering, there has been only a limited public market for
the Company's common stock, and there can be no assurance that an active
trading market for the common stock will develop in the future or be
12<PAGE>
sustained following any subsequent registration of the common stock.
There can be no assurance that future market prices of the common stock
will not be lower than the purchase price of the Shares sold in this
offering. The market price of the common stock following the offering
may be highly volatile. Announcements of new products and services by
the Company or its competitors, technological innovations, disputes
regarding patents or other proprietary rights, regulatory developments
and economic and other external factors, as well as period- to-period
fluctuations in the Company's financial results, could cause the market
price of the common stock to fluctuate significantly. In addition, the
stock market in general and, in particular the market prices for medical
technology companies, have historically experienced significant
volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating
performance of such companies. Such volatility may adversely affect the
market price of the common stock.
Absence of Long-Term Human Clinical Studies. Although the Company
believes that Macroplastique is safe when used as recommended by the
Company, there are no long-term well-controlled human clinical studies
of this product. Accordingly, no assurance can be given that
Macroplastique, even when used as recommended, will have the effects
intended or will not have adverse effects over a patient's lifetime. For
example, there can be no assurance as to whether or how frequently
patients will require additional injections of Macroplastique and
whether any such additional injections will be effective or will have a
negative effect on physician, payer or patient acceptance.
Fluctuations In Quarterly Operating Profit and Net Income. The Company
may experience variability in its net sales and operating profit on a
quarterly basis as a result of many factors, including, among others,
buying habits of European health care providers, size and timing of
orders by certain customers, shifts in demand for types of products,
technological changes and industry announcements of new products. If
revenues do not meet expectations in any given quarter, operating
results may be materially adversely affected. The Company may, in
addition, experience variability in its net income on a quarterly basis
as a result of many factors, including currency fluctuations. As a
result of these potential fluctuations in quarterly results, period-to-
period comparisons of the Company's financial results should be
approached cautiously.
Potential Control of Company by a Small Number of Persons. The
Company's officers and directors combined own 12% of the Company's
outstanding shares (if they exercise all their options) and one
shareholder owns 19% of the Company's outstanding shares. If all of
such persons cooperated, they could potentially have the ability to
elect the Company's Board of Directors and affect control of the
Company. See "Principal Shareholders."
Possible Adverse Market Effect of Shares Eligible for Future Sale.
Sales of substantial amounts of Common Stock (including shares issued
upon the exercise of outstanding options and warrants) in the public
market could have an adverse effect on the price of the Company's Common
Stock. Such sales may also make it more difficult for the Company to
sell equity or equity-related securities in the future at a time and
price that the Company would deem appropriate. As of June 30, 1998, the
Company had 5,917,371 shares of Common Stock issued and outstanding. In
13<PAGE>
addition to the 1,702,950 shares of Common Stock covered hereby, (i)
approximately 2,700,000 shares are eligible for immediate sale on the
date of this Prospectus in accordance with Rule 144(k) under the
Securities Act of 1933, as amended ("Rule 144") or otherwise; and (ii)
approximately 1,100,000 additional shares became eligible for sale in
the public market in July, 1998, in accordance with Rule 144 subject to
volume and manner of sale limitations thereunder and will become
available for immediate sale in accordance with Rule 144(k) in July,
1999. See "Description of Securities - Shares Eligible for Future Sale".
Possible Adverse Effect of Anti-Takeover Provisions and Staggered Board.
As a Minnesota corporation, the Company is subject to certain anti-
takeover provisions of the Minnesota Business Corporation Act. The
authority of the Board with regard to the anti-takeover provisions of
such Act could have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Company's
Common Stock at a premium over the then prevailing market price of the
Common Stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, Common Stock. Should the
Company issue additional shares, whether for purposes of raising
additional capital or otherwise, it could have the effect of making a
takeover more difficult. See "Description of Securities".
The Company's Articles of Incorporation and Bylaws include certain
provisions (the "Staggered Board Provisions") for staggering the
election of the members of the Board of Directors. The Board is divided
into three classes with each class serving for an independent term. The
classification of directors is intended to make it more difficult to
change the composition of the Board. At least two shareholders'
meetings, instead of one, will generally be required for shareholders to
effect a change in control of the Board. The Staggered Board Provisions
will apply to every election of directors, whether or not a change in
the Board, in the opinion of some or a majority of the Company's
shareholders, would be desirable. The Staggered Board Provisions
relating to the removal of directors and the filling of vacancies are
designed to protect the staggered Board structure in the event a third
party gains control of a majority of the Company's voting power and
could discourage an attempt to gain control of the Company. See
"Description of Securities".
Applicability of "Penny Stock Rules"; Possible Impact on Liquidity of
Stock. The Company's Common Stock is presently considered a "penny
stock" under applicable rules and is not traded on the NASDAQ Small Cap
market. If the Company fails to become listed on NASDAQ or, after such
listing, fails to satisfy the NASDAQ requirements to maintain listing on
NASDAQ in the future, the Common Stock will likely continue to be quoted
only in the local over-the-counter "pink sheets" market (which may
include, as it presently does, the NASDAQ Bulletin Board market). The
public trading market for the Common Stock could be adversely affected
by such limited quotation, and there would likely be fewer market makers
for the Company's stock, less interest by potential institutional
investors and less coverage by analysts and the financial media.
In order to be listed in the NASDAQ Small Cap Market, the Company would
need $4,000,000 in net tangible assets, a minimum bid price of $4.00 per
share for at least 30 calendar days and three market makers, as well as
meet certain other requirements. As of June 30, 1998, the Company had
over $5,000,000 in net tangible assets, but the recent bid prices per
14<PAGE>
share for its Common Stock have been in the range of $2.00 to $3.00 per
share and it had only one market maker. The Company intends to apply
for listing on the NASDAQ Small Cap Market when it meets the share price
and market maker requirements, and it will continue its efforts to
expand its business in a prudent manner so that its chances of reaching
those goals are increased.
In addition, as long as the Company's Common Stock continues not to be
listed in the NASDAQ Small Cap Market, it will be subject, as it
presently is, to SEC rules under the Securities Exchange Act of 1934
relating to "penny stocks." The "penny stock rules", which apply to
companies whose common stock trades at less than $5.00 per share,
require brokers who sell securities subject to such rules to persons
other than established customers and "institutional accredited
investors" to complete certain documentation, make suitability inquiries
of investors and provide investors with certain information concerning
the risks of trading in the security. The application of these rules may
restrict the ability of brokers to sell the Company's Common Stock, may
adversely affect the liquidity of the Shares, and may affect the ability
of purchasers to sell the Shares in the secondary market.
No Dividends. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying such dividends for the
foreseeable future. See "Dividend Policy".
Net Operating Loss Carryforwards; Effect of International Operations on
Tax Position. The Company has net operating loss carryforwards for U.S.
income tax reporting purposes of approximately $2,061,000, which can be
used to offset U.S. taxable income in future years. Sales of the
Company's voting common shares during the prior three years, combined
with the current equity offering will most likely cause a change in
ownership under Section 382 of the Internal Revenue Code of 1996.
Section 382 limits the annual use of the Company's U.S. net operating
loss carryforwards existing as of the date of the ownership change.
Notwithstanding the application of Section 382, it is not anticipated
that any limitation would have a material adverse effect on the Company.
The Company has significant operations in the United States and
internationally. United States net operating loss carryforwards cannot
be used to offset taxable income in foreign jurisdictions. Furthermore,
repatriation of dividends to the U.S. parent may result in additional
foreign or U.S. taxes.
PLAN OF OFFERING
All of the 1,702,950 shares of Common Stock offered hereby (the
"Shares") are owned by Selling Shareholders. None of the Shares is
owned by the Company, and the Company will receive none of the proceeds
resulting from the sale of any of the Shares.
Selling Shareholders will make their own arrangements for the offer and
sale of any of the Shares and will be responsible for all sales and
brokerage commissions associated with such sales. The Company will bear
the costs of registration of the Shares, such as legal and accounting
fees, filing fees, printing expenses and the like.
The Shares may be sold from time to time by or for the account of the
Selling Shareholders. Sales may be made privately or in the local over-
15<PAGE>
the-counter ("pink sheets"/NASDAQ Bulletin Board) market. Under some
circumstances, Selling Shareholders may be deemed underwriters.
The Company will not select and does not expect to have any contact with
any of the broker-dealer firms that may be used by Selling Shareholders
in making sales of the Shares.
USE OF PROCEEDS
The Company will receive none of the proceeds resulting from the sale of
any of the Shares, nor will any such proceeds become the property of the
Company. All of the Shares are owned by and will be offered and sold by
Selling Shareholders.
The Shares were acquired by the Selling Shareholders in May and June,
1998, at a price of $2.375 per share, which was considered fair market
value for the Shares at the time. The limited public trading market for
the Company's Common Stock at the time was slightly higher. (See "Market
for Common Stock", below.)
At the time of the private placement, the Company proposed to use, and
is now using, the proceeds from the sale of the Shares as follows:
IDE submission to FDA and clinical studies for Macroplastique
for female stress urinary incontinence. $1,900,000
Complete PMA application to FDA for Macroplastique $1,000,000
Working Capital $100,000
---------
$3,000,000
---------
MARKET FOR COMMON STOCK
As of the date hereof, there is only a limited public trading market for
the Company's common stock. Although one broker dealer published bid and
ask quotations for the Company's common stock on an irregular basis
during the period March through June, 1997, the Company is not aware of
any shares that were either purchased or sold through such broker
dealer.
The following table sets forth the high and low bid prices for the
Company's Common Stock, as reported in the NASD'S Bulletin Board system
(market symbol UROP), on a quarterly basis, from July 1997, through
September 1998, and for the period October 1, 1998 through October 12,
1998. Such quotations represent interdealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
Quarter Low Bid High Bid
July 1 - September 30, 1997 $1/2 $3 3/16
October 1 - December 31, 1997 3 3 1/2
January 1 - March 31, 1998 2 1/4 3 1/4
April 1 - June 30, 1998 3 5
July 1 - September 30, 1998 2 1/4 3
October 1 - October 12, 1998 1 1/2 2 7/16
16<PAGE>
As of June 30, 1998, the Company's Common Stock was held of record by
approximately 600 holders. Registered ownership includes nominees who
may hold securities on behalf of multiple beneficial owners.
DIVIDEND POLICY
The Company has never declared nor paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in
the development and growth of its business and therefore does not
currently anticipate ever paying any cash dividends.
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of March 31,
1998, and for the fiscal years ended March 31, 1998 and 1997 have been
derived from, and are qualified by reference to, the consolidated
financial statements of the Company which have been audited by KPMG Peat
Marwick LLP, independent auditors, included elsewhere in this
Prospectus. The following selected financial data as of June 30, 1998,
and for the fiscal quarters ended June 30, 1998 and 1997, have been
derived from the Company's unaudited financial statements included
elsewhere in this Prospectus. Such unaudited financial statements have
been prepared on the same basis as the audited financial statements, and
include all material adjustments, consisting only of normal recurring
adjustments, which management considers necessary for a fair
presentation of the financial data shown. The selected financial data
should be read in conjunction with the Company's Consolidated Financial
Statements, related Notes, and the independent auditors' report,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," and other financial information included elsewhere in
this Prospectus.
(In thousands, except per share data and shares outstanding.)
Years ended March 31, Three months ended June 30,
1998 1997 1998 1997
Consolidated Statement
of Operations Data:
Net sales $4,336 $3,335 $1,316 $1,149
Operating profit 662 376 262 354
Net income $408 $218 $249 $239
Net income per share $.10 $.06 $.05 $.07
Weighted average number
of common shares
outstanding(1) 4,026,571 3,575,609 4,740,237 3,649,525
As of March 31, 1998 As of June 30, 1998
Consolidated Balance
Sheet Data:
Cash and cash equivalents $890 $4,385
Working capital 1,514 5,160
Total shareholders' equity 2,051 5,741
17<PAGE>
(1) Does not include 505,200 shares as of March 31, 1998 (483,200 shares
as of June 30, 1998) underlying outstanding options, nor 150,000 shares
underlying an Agent's Warrant as of June 30, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION OF THE FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN
ITS ENTIRETY BY, THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE WITHIN THIS PROSPECTUS, AND THE MATERIAL CONTAINED IN THE
"RISK FACTORS" AND "BUSINESS" SECTIONS OF THIS PROSPECTUS.
Overview
The Company was incorporated in Minnesota in 1992 as a wholly-owned
subsidiary of Bioplasty, Inc. ("Bioplasty"), a manufacturer of breast
implants. Bioplasty, along with other breast implant manufacturers,
became subject to numerous product liability class action lawsuits. As
a result, Bioplasty and the Company filed for protection under Chapter
11 of the Federal Bankruptcy Code in 1993. The Company emerged from
Chapter 11 in February, 1994, as a separate and distinct entity from
Bioplasty.
The Company sells Macroplastique and the related ancillary products for
use in augmenting soft tissues for the purpose of treating urinary
incontinence At this time, sales are only made outside the United
States because the Company does not have regulatory approval to market
its product in the United States.
The Company's current objectives are to focus on growth in sales and
market penetration of Macroplastique in the European market for urinary
incontinence and vesicoureteral reflux treatment, and to begin the U.S.
regulatory process for Macroplastique as a treatment for female stress
urinary incontinence.
The Company also sells the Macroplastique product in a different
configuration for plastic surgery applications under the name
Bioplastique(tm), in limited markets. In addition, the Company has been
selling some specialized wound care products in the Netherlands and
Great Britain as a distributor for Derma Sciences, Inc. (formerly
Genetic Laboratories, Inc.), pursuant to a non-binding written agreement
which provides for a schedule of prices.
Set forth below is management's discussion and analysis of financial
condition and results of operations for the three months ended June 30,
1998 and 1997.
Results of Operations (First Quarter Ended June 30, 1998)
Sales were $1,315,700 for the first quarter ended June 30, 1998 as
compared to $1,149,239 for the first quarter of fiscal 1998. This
increase of $166,461 (14%) is the result of increased sales of the
Macroplastique products due to aggressively expanded overseas marketing
activities. The Macroplastique product line now accounts for 93% of
total sales.
18<PAGE>
It is expected that Macroplastique sales will continue to grow through
further market awareness, expansion of the distribution network and the
introduction of innovations in Macroplastique implantation for fiscal
1999.
Management believes there will be upward pressure on selling, general
and administrative expenses as efforts continue to market
Macroplastique. Increased spending for research and development projects
in fiscal 1999 is anticipated, along with expenditures for the United
States regulatory approval process. General and administrative costs
increased 17% from $206,894 in the first quarter of fiscal 1998 to
$242,553 in the first quarter of fiscal 1999. The FDA approval costs in
the first quarter of fiscal 1999 were $62,934 compared to none in the
first quarter of 1998. Other R&D expenses increased 16% from $134,228 in
the first quarter of fiscal 1998 to $155,207 in the first quarter of
fiscal 1999. The increase resulted from development and testing efforts
on new and existing products. Selling and marketing expenses increased
53% from $217,159 in the first quarter of fiscal 1998 to $331,887 in the
first quarter of fiscal 1999, due to the addition of four sales
personnel and expanded presence at international and domestic medical
conferences to increase market awareness of Macroplastique.
The income tax expense of $34,596 relates to the profit of a foreign
subsidiary in the first quarter of fiscal 1999. Interest income
increased because of interest on the private placement proceeds.
The operating profit for the three months ended June 30, 1998 was
$261,532, compared to $354,335 for same period last year. The decrease
is primarily due to the increased operating expenses, partially offset
by increased sales.
For the three months ended June 30, 1998 net income totaled $249,234;
this includes a foreign currency exchange gain of $18,905 (which is more
favorable than the comparable period for 1997 because of a change in
exchange rates). Comparatively, the three months ended June 30, 1997
showed $238,692 net income and a $71,095 foreign currency exchange loss.
In addition to Macroplastique and its related ancillary products, the
Registrant sells Bioplastique(TM)Implants for plastic surgery
applications. The Company's current focus is on growth in sales of the
Macroplastique line for treatment of male and female urinary
incontinence and vesicoureteral reflux, while preparing for future
growth as it works toward United States regulatory approval.
Liquidity and Capital Resources (First Quarter Ended June 30, 1998)
As of June 30, 1998, the Company had $4,385,459 in cash and cash
equivalents. The $3,403,123 of net proceeds from the private placement
of common stock are invested in a short-term investment account. The
June 30, 1998 balance of this investment account was $3,413,902 and is
included in cash and cash equivalents on the balance sheet. In addition
to the private placement proceeds, the capital resources are derived
from existing sales of the Registrant's products.
There is currently no financing arrangement in place for Uroplasty's
working capital needs, and the Registrant has no material unused sources
of liquidity other than its cash reserves and its accounts receivable
19<PAGE>
balances. The Company expects that it can satisfy its cash requirements
and does not expect that it will have to raise additional funds in the
next twelve months.
In November, 1997, due to expansion, the Company purchased an office
building for its international headquarters in Geleen, The Netherlands.
The purchase price of the building was $590,000 and was fully financed
through the issuance of a Note Payable, with a variable interest rate
(5% per annum at March 31, 1998). Monthly payments consist of $2,563 of
principal plus variable rate interest through November 2017. In
addition, during the fiscal year the Company made other capital
purchases of approximately $450,000, including primarily building
improvements and equipment for a new manufacturing plant in Eindhoven,
The Netherlands, which was financed by cash from operations. The
Company is expanding its manufacturing facility in The Netherlands with
the addition of new cleanrooms to triple manufacturing capacity, for
which fiscal year 1999 funding of approximately $160,000 will be needed.
The capital equipment needs are expected to be financed through lease
financing.
The proceeds of the private placement in May and June, 1998, of
1,702,950 shares of common stock will be used to pursue an
Investigational Device Exemption (IDE) application, clinical studies and
Premarket Approval (PMA) application for Macroplastique(R) with the U.S.
Food and Drug Administration. The Company estimates that fiscal year
1999 funding of the IDE, clinical studies and PMA application will be
approximately $2,500,000; and that fiscal year 2000 funding for such
purposes will be approximately $500,000. If such proceeds are not
sufficient to complete the PMA, additional cash from internal or other
sources will be needed in fiscal year 2000 or 2001.
The Company has significant operations in the United States and
internationally. United States net operating loss carryforwards can not
be used to offset taxable income in foreign jurisdictions. Furthermore,
repatriation of dividends to the U.S. parent may result in additional
foreign or U.S. taxes.
Results of Operations (Fiscal Year Ended March 31, 1998)
During the year ended March 31, 1998, net sales were $4,335,908 compared
to $3,334,563 during the year ended March 31, 1997. This increase of
$1,001,345 (30%) is the result of substantially higher sales of the
Macroplastique product line as a result of increased market penetration
by existing distribution outlets. Unit sales of Macroplastique increased
46% for the same period. Sales of Macroplastique were approximately 91%
of total sales. It is expected that Macroplastique sales will continue
to grow through further market penetration by existing distribution
outlets, expansion of its distribution network and the introduction of
innovations in Macroplastique implantation techniques.
The gross margin percentage improved from 77% in fiscal 1997 to 78% in
fiscal 1998. Management believes that this high level of the gross
margin percentage can be maintained as a result of the establishment of
a new manufacturing facility, located in Eindhoven, The Netherlands.
Operating expenses increased 24% from $2,204,590 in fiscal 1997 to
$2,736,288 in fiscal 1998. The increase in operating expenses is
20<PAGE>
primarily attributable to an increase in the number of employees (from
25, as of 3/31/97, to 38, as of 3/31/98) and the initiation of several
research and development projects. General and administrative costs
increased from $685,430 in fiscal 1997 to $994,068 in fiscal 1998.
Research and development expenses increased from $610,677 in fiscal 1997
to $778,082 in fiscal 1998. Selling and marketing costs increased from
$908,483 in fiscal 1997 to $964,138 in fiscal 1998.
Management believes there will be upward pressure on selling, general
and administrative expenses as efforts continue to market
Macroplastique. Additionally, management anticipates increased
expenditures for research and development projects associated with U.S.
regulatory activities for fiscal 1999.
The operating profit for the year ended March 31, 1998, was $661,642,
compared to $376,204 for the same period last year, an increase of 76%.
This increase is attributed to a higher sales level and controlled
selling and marketing expenses.
Interest expense for the year ended March 31, 1998 was ($20,732) as
compared to ($36,884) for the year ended March 31, 1997, a decrease
which resulted from the conversion in July 1997, of a $496,000
promissory note into Common Stock. The foreign currency exchange loss
was ($129,503) for the year ended March 31, 1998, as compared to
($204,315) for the year ended March 31, 1997, a decrease which resulted
from more favorable exchange rates. "Other" income was $0 for the
fiscal year ended March 31, 1998, as compared to $93,134 for the fiscal
year ended March 31, 1997. The income in fiscal year 1997 resulted from
the liquidation of a foreign subsidiary.
Income tax expense for the year ended March 31, 1998, was $111,860,
compared to $0 for the twelve months ended March 31, 1997. The increase
in income tax expense results primarily from the non- availability in
1998 of foreign net operating losses which were available in 1997.
For the year ended March 31, 1998, net income totaled $407,841, compared
to $218,221 for the twelve months ended March 31, 1997, an increase of
87%.
Conversion to Euro Currency
On January 1, 1999, eleven of the fifteen member countries of the
European Union (the "participating countries") are scheduled to adopt
the euro as their common legal currency and to establish fixed
conversion rates between their existing sovereign currencies and the
euro. The euro will then trade on currency exchanges and be available
for non-cash transactions. The participating countries will issue
sovereign debt exclusively in euro, and will redenominate outstanding
sovereign debt in euro.
Although the Company does not expect that its operations will be
materially affected by the euro conversion, the Company has begun an
internal assessment of the effects of the conversion.
With respect to presently known trends and uncertainties related to the
euro conversion, the Company does not expect that there will be any
long-term competitive implications of the conversion (such as effects on
product or service pricing due to increased transparency); nor does it
20<PAGE>
anticipate any material costs in connection with the conversion nor a
lack of ability to pass any costs that might result along to customers.
Year 2000 Compliance
The financial impact to the Company of year 2000 compliance has not been
and is not expected to be material to the Company's financial position
or results of operations in any given year. The Company's existing
information system, consisting of hardware and software supplied by
third parties, is year 2000 compliant. However, because most computer
systems are by their nature, interdependent, it is possible that non-
compliant third party computers could "reinfect" the Company's computer
systems. The Company could be adversely affected by the year 2000
problem if it or unrelated parties fail to successfully address this
problem. The Company intends to communicate with the unrelated parties,
including its suppliers and regulatory consultants with whom it deals,
to coordinate year 2000 compliance. Based on the information developed,
the Company may, if needed, develop a contingency plan which will
identify where the greatest risks of non-compliance exist and what steps
the Company might take in order to deal with the most reasonably likely
worst case scenario. The costs incurred in addressing year 2000
compliance will be expensed as incurred, in compliance with GAAP.
BUSINESS
General
The Company designs, develops, manufactures and markets medical products
primarily for the treatment of urinary incontinence. The Company's key
product is Macroplastique(R), an injectable soft tissue bulking agent
currently used to treat certain types of stress urinary incontinence
("SUI"), the most common form of urinary incontinence. SUI refers to
involuntary loss of urine as a result of activities that increase intra-
abdominal pressure, such as coughing, laughing or exercising.
Macroplastique also is used to treat vesicoureteral reflux ("VUR"), a
condition occurring mostly in children in which urine flows backward
from the bladder into the kidney. In addition, some doctors in Europe
are beginning to use Macroplastique to treat incontinence in men
recovering from prostate surgery. In June 1996, Macroplastique received
a CE mark in Europe (similar to FDA approval in the United States),
allowing the product to be sold throughout the European Union.
Macroplastique is not sold in the United States because it has not been
approved for marketing by the Food and Drug Administration ("FDA"). In
May and June, 1998, the Company completed a private placement of
1,702,950 shares of its Common Stock, the proceeds of which will be used
to fund the Company's efforts to obtain FDA pre-market approval for
Macroplastique, which would allow the Company to enter the U.S. female
stress urinary incontinence treatment market.
It is estimated that urinary incontinence afflicts about 5% of the
general population and women comprise about 85% of the sufferers. In
Europe, currently the Company's largest market, approximately 17 million
people suffer from various forms of urinary incontinence and about 14.5
million of these sufferers are women. Bulking agents such as
Macroplastique are used to treat women with SUI caused by intrinsic
sphincter deficiency, estimated by the Company to comprise 10% of the
female incontinence market or about 1.4 million women in Europe alone.
VUR is primarily a pediatric concern, with a prevalence estimated to be
21<PAGE>
as high as 1% of the pediatric population. The Company estimates that
about half of this population are candidates for Macroplastique
treatments. Of the estimated 2.6 million European men who are
incontinent, the Company believes about 25% are candidates for treatment
with Macroplastique.
Macroplastique consists of soft, flexible, solid, highly textured
particles of heat vulcanized polydimethylsiloxane (solid silicone)
suspended in a water-based biocompatible carrier solution.
Macroplastique is not a silicone gel, the compound which became
controversial in its use in breast implants. Macroplastique was first
introduced in the European urological marketplace in 1991 and has been
used to treat approximately 15,000 patients over the last seven years
with no reported serious product related adverse incidents.
Urinary Incontinence Market
Urinary incontinence is an involuntary loss of urine, so severe it has
social and/or hygienic consequences. In varying degrees, urinary
incontinence is a problem suffered by millions of people worldwide.
The Agency for Health Care Policy and Research (a division of the Public
Health Service, U.S. Department of Health and Human Services) estimated
in 1996 that there were approximately 13 million adults with urinary
incontinence in the United States. The same agency estimated the total
cost (utilizing all management and curative approaches) of treating
incontinence of all types in the United States as $15 billion in 1996.
Urinary incontinence can result in a substantial decrease in a person's
quality of life and is often the main reason a family commits an elderly
person to nursing home care.
The Company estimates there are approximately 11 million female urinary
incontinence sufferers in the United States and 14.5 million female
urinary incontinence sufferers in Europe. Of these populations, the
Company believes that there are approximately 1 million American women
and 1.4 million European women who are suitable for treatment with
Macroplastique. The Company expects that the incidence of urinary
incontinence will rise as the percentage of elderly people continues to
increase.
Types of Urinary Incontinence
The mechanisms of urinary incontinence are complicated and involve the
interaction between several anatomical structures. In females, urinary
continence is primarily controlled by the urinary sphincter. This
muscle surrounds the urethra and provides constrictive pressure to
prevent urine from flowing out of the bladder. Urination occurs when
the urinary sphincter relaxes as the bladder contracts, allowing urine
to flow through the urethra. The urinary sphincter is also responsible
for maintaining continence during periods of physical stress. Urinary
incontinence may result when any part of the urinary incontinence tract
fails to function as intended. A broad range of conditions and disorders
can cause incontinence, including birth defects (e.g. spina bifida),
pelvic surgery, injuries to the pelvic region or the spinal cord,
neurological diseases, (e.g. multiple sclerosis, poliomyelitis) and
degenerative changes associated with aging.
Stress Urinary Incontinence: Stress urinary incontinence ("SUI") refers
to the involuntary loss of urine due to an increase in intra-abdominal
22<PAGE>
pressure from coughing, sneezing, laughing, straining or lifting. In
women, the most common cause of SUI is hypermobility, a lack of anatomic
stability primarily caused by weak surrounding tissue, which results in
the abnormal movement of the bladder neck and urethra. This anatomical
problem is often the result of childbirth. SUI can also be caused by
intrinsic sphincter deficiency (ISD), or the inability of the urinary
sphincter valve or muscle to function properly. ISD can be due to
congenital sphincter weakness or deterioration of the muscular wall of
the urethra after trauma, prostatectomy, spinal cord lesion or radiation
therapy. To date, Macroplastique has been used to treat incontinence in
women suffering from SUI caused by intrinsic sphincter deficiency.
Urge Incontinence: Urge incontinence refers to the involuntary loss of
urine associated with an abrupt and strong desire to urinate. Urge
incontinence often occurs with neurologic problems, causing the bladder
to contract and empty with little or no warning. Urge incontinence is
typically caused by central nervous system lesions (such as a stroke)
which impair inhibition of bladder contraction, and local irritating
factors such as urinary infection or bladder tumors.
Overflow Incontinence: Overflow incontinence is associated with an
over-distention of the bladder. This can be the result of an
underactive bladder or an obstruction in the bladder or urethra.
Mixed Incontinence: Mixed incontinence is the combination of urge and
stress incontinence (and, in some cases, overflow). Since prostate
enlargement often obstructs the urethra, older men often have urge
incontinence coupled with overflow incontinence.
Management and Treatment of Urinary Incontinence
There are two general approaches to dealing with urinary incontinence.
One approach is to manage the symptoms of urinary incontinence, such as
with pads or diapers. The other approach consists of curative measures
that attempt to restore continence, such as surgery or treatment with
bulking agents. The Company suggests the treatment of stress urinary
incontinence should proceed from the least invasive to the most invasive
therapy.
Management of Urinary Incontinence
Absorbent Products: Absorbent products are probably the most common
treatment for urinary incontinence of all types; most men and women use
these products without consulting a physician. The cost of diapers and
pads can be substantial, thus creating a continuous financial burden for
patients. Additionally, this management technique requires frequent
changing of diapers and pads to control patient embarrassment due to
odor.
Behavior Modification: The techniques used in behavior modification
include bladder training, scheduled voiding and pelvic floor muscle
exercises ("kegels"). Some of the tools used in conjunction with these
training regimes are vaginal cones or weights, biofeedback devices and
electrical stimulation. While these are typically low-risk procedures,
they do not work for many patients and even where effective they only
partly alleviate the symptoms and are seldom curative.
23<PAGE>
Penile Compression Devices: Penile clamps are reserved for temporary
use with male incontinence. Complications such as penile and urethral
erosion, penile edema, pain and obstruction can occur if clamps are
improperly used.
Pelvic Organ Support Devices: Pelvic organ support devices such as
pessaries (doughnut-shaped devices made of flexible materials) are
designed to temporarily reduce pelvic prolapse and alleviate symptoms of
pelvic relaxation in females with and without incontinence.
Complications can result when these devices are misused or neglected and
can include ulceration of the vagina and rectovaginal and vesicovaginal
fistula. Persons using pessaries require frequent and regular
monitoring.
Occlusion Devices: Urethral occlusion devices, or "plugs," consist of
tiny disposable products intended to be used by a sub-segment of stress
incontinent women (women that are younger, more physically active, and
are motivated to use a disposable urethral plug on a daily basis). The
primary problems with this device are urinary tract infections,
treatment compliance and progressive urethral dilation which may require
larger plugs over time.
Urinary Catheters and Collection Devices: There are four types of
urinary catheters: 1) intermittent (inserted through the urethra into
the bladder every 3 to 6 hours for bladder drainage; may be appropriate
for the management of acute or chronic urinary retention); 2)
indwelling (closed sterile system inserted through the urethra to allow
for bladder drainage; may be needed for short-term treatment and for
terminally ill patients); 3) suprapubic (requires percutaneous or
surgical introduction of a catheter into the bladder through the
abdominal wall, for short-term use following gynecologic, urologic and
other types of surgery or as an alternative to long-term urethral
catheter use in men); and 4) external collection (devices made from
latex rubber, polyvinyl or silicone like a condom and are secured on the
shaft of the penis by a double-sided adhesive, latex or foam strap and
are connected to urine collecting bags by a tube; may be useful for
short-term maintenance). The type and severity of incontinence and the
patient's physical and mental condition determine which is the best
catheter option for the patient.
Drug Therapy: Drug treatment is used to manage multiple types of
urinary incontinence. These drugs tend to fall into one of two
categories: those that manage urge urinary incontinence by affecting the
contraction of the muscle tissue of the bladder and those that manage
stress urinary incontinence by either affecting contraction of the
muscle tissue of the bladder neck or improving the quality of the
mucosal lining of the bladder neck and urethra. Drugs seldom cure stress
urinary incontinence and the potential side effects include urinary
retention, nausea, dizziness, blurred vision and the possibility of
unwanted interactions with other drugs.
Curative Treatments for Urinary Incontinence
Surgery: In women, stress urinary incontinence can be surgically
corrected through various suspension and sling procedures. In these
procedures, the physician elevates and stabilizes the urethra and
bladder neck. Current surgical procedures require vaginal or abdominal
24<PAGE>
incisions and are typically performed under general anesthesia. Surgery
is expensive, traumatic and involves a 3-10 day hospital stay with
several months required for full recovery. In men, the main surgical
option is an implanted artificial urinary sphincter. However, it carries
with it the inherent risks of device malfunction, tissue erosion and
atrophy and infection. In practice, the artificial urinary sphincter is
rarely applicable to the management of uncomplicated stress
incontinence.
Injectable Bulking Agents: Bulking agents are inserted with a needle
into the area around the urethra, thereby augmenting the sphincter.
Hence, these materials are often called "bulk-enhancing agents" or
"injectables." Bulking agents may be either synthetic or biologically
derived. Bulking agents are an attractive alternative to surgery
because they are considerably less invasive than many of the surgical
procedures described above. For this reason, bulking agents represent a
particularly desirable treatment option for the elderly or infirm who
may not otherwise be able to withstand the trauma and morbidity
resulting from a fully invasive surgical procedure. Active women also
can benefit from the use of bulking agents since their use will often
allow the patient to return to normal activities in a matter of days
instead of weeks for fully invasive surgical procedures. The 1996
Clinical Practice Guidelines published by the U.S. Department of Health
and Human Services recommend periurethral bulking agents as first line
treatment for men with intrinsic sphincter deficiency and for women with
intrinsic sphincter deficiency who do not have co-existing
hypermobility.
The two major types of bulking agents are biologically derived agents
and synthetic bulking agents. Biologically derived bulking agents
include injections of autologous fat and bovine collagen. Fat injections
involve complex, invasive harvesting of the patient's own fat cells and
reinjecting them into the bladder neck. Another procedure involves the
injection of processed bovine collagen. The two most commonly used
synthetic bulking agents are Macroplastique (polydimethylsiloxane) and
Teflon(C) paste (polytetrafluoroethylene, also known as PTFE).
Macroplastique
The Company's Macroplastique product is an injectable soft tissue
bulking agent primarily used to treat stress urinary incontinence in
women. Macroplastique is a proprietary composition of heat vulcanized,
highly textured, solid, soft and irregularly shaped polydimethylsiloxane
(solid silicone) particles suspended in a biocompatible carrier
solution. Based on the Company's clinical experience, Macroplastique
does not cause chronic inflammation, is not absorbable by the body and
does not migrate. Macroplastique is used to provide permanent bulking
or augmentation of the urethral sphincter. The actual implantation of
Macroplastique is minimally invasive and can be accomplished using less
than 30 minutes of the physician's time in an inpatient or outpatient
setting. It is designed to restore the patient to normal urinary
continence almost immediately following treatment. Macroplastique is
also used to treat vesicoureteral reflux, a condition occurring
primarily in children, and urinary incontinence in men after prostate
surgery.
25<PAGE>
The Company markets Macroplastique on the basis that its use can lead to
lower surgical risk, shorter recovery time and less expense than more
invasive alternatives. The advantages of Macroplastique, in the
Company's view, include the following:
No Absorption/Migration: The Macroplastique elastomer particles are
soft, heavily textured and irregularly shaped, to provide numerous
surfaces to allow for rapid deposit of host collagen (a form of scar
tissue) between the individual particles and around the periphery of the
injected product. The highly irregular shapes of optimally sized
particles minimize the potential for migration by the propensity of
individual particles to interlock with each other to form larger
agglomerates.
Biocompatible: The medical grade polydimethylsiloxane used in
Macroplastique is commonly utilized in many other biomedical
applications and has a well-documented safety record for biomedical
usage. For example, such elastomers have been and are used for long
term implants such as pacemaker leads and hydrocephalic shunts.
Macroplastique itself has undergone extensive testing to confirm its
favorable biocompatibility characteristics.
Clinical Experience: The Company's seven year clinical experience with
more than 15,000 patients, all outside the United States, supports the
effectiveness of Macroplastique. During this time period, no serious
product-related adverse reaction of any kind has been reported to the
Company.
Minimally Invasive/Cost Effective: Macroplastique is designed to offer
surgeons and their patients a minimally invasive, long-lasting and cost-
effective treatment for female and male stress urinary incontinence and
vesicoureteral reflux. The Company has developed an implantation
procedure for Macroplastique that is technologically feasible, easily
performed and effective.
Marketing, Distribution and Sales
The Company markets and sells Macroplastique and the related ancillary
products used in the implantation procedure only in countries outside
the United States, primarily in Europe. The Company uses a direct sales
force of six persons in the United Kingdom and three persons in the
Netherlands. For approximately 20 other countries in which the Company
markets Macroplastique, it uses a network of distributors. The Company
has written agreements with each of the individual distributors. None
of the distributors sell injectable products which compete directly with
Macroplastique. The Company's technical staff in the Netherlands
provides training for the distributors. The Company's largest
distributor is ABS, which sells in France, and which accounted for 14%
of the Company's sales in fiscal 1998. (See "Business - Dependence on
One or a Few Major Customers") No other distributor accounted for more
than 10% of the Company's sales. Collectively, the Company's
distributors accounted for approximately 54% and 48% of total sales in
fiscal years 1998 and 1997, respectively; and 48% and 49% of total sales
for the first quarter of fiscal years 1999 and 1998, respectively.
Other Products
The Company also sells the materials contained in Macroplastique for
26<PAGE>
plastic surgery applications under the name BioplastiqueT Implants, in
limited markets. In addition, the Company has been selling some
specialized wound care products as a distributor.
The Company recently introduced a new product to the gynecology and
urology market called the UroScopeT. This is a modified short endoscope
specifically designed for the administration of Macroplastique in
females.
Government Regulations
As a medical device manufacturer, the Company is subject to government
regulations in every market where its products are sold. In markets
such as the United States and Europe, these regulations are substantial
and play a significant role in the Company's designing, testing,
manufacturing, and marketing of its products.
In order to market its products within the countries of the European
Union, the Company is required to obtain CE marking for its products.
To obtain CE marking, a product must comply with the requirements set
forth in Council Directive 93/42/EEC published in Volume 36 (12 July
1993) of the Official Journal of the European Communities. This
document is often called the "Medical Device Directives" (MDD) in
Europe. The requirements for new medical devices set forth in this
document are based upon their relative risk to the patient. Medical
devices that present a low risk to the patient (Class I devices) have
relatively few requirements for CE mark authorization. Medical devices
that present a greater risk to the patient such as long-term
implantables (Class IIb and III) have more rigorous requirements for CE
mark approval. CE mark authorization is granted by organizations called
"Notified Bodies" that are approved by their respective national
"Competent Authorities" (which are usually referred to as national
Health Ministries) to conduct medical device evaluations. Notified
Bodies are technical expert organizations that serve as the auditing and
certifying arm of the Competent Authorities.
Under the European MDD, Macroplastique is considered a Class IIb device.
To obtain the CE Mark for Macroplastique, the Company was required to
submit extensive information regarding the product design, labeling,
safety, preclinical and clinical testing results to its Notified Body
for evaluation by expert reviewers. In addition, the Company maintains
registration to rigorous quality standards ISO 9001 and EN46001 (EN46001
references ISO 9001 with additional medical device requirements). After
successfully demonstrating full compliance to the MDD, the Notified Body
issued a "Certificate of Authorization" to the Company in June 1996
which allowed the Company to place the CE mark on Macroplastique. With
CE marking, Macroplastique can be marketed throughout the European Union
after fulfilling any additional national requirements. The Company is
subject to periodic surveillance audits by its Notified Body to ensure
it adheres to the requirements of the MDD. Changes in existing
requirements or adoption of new requirements or policies could adversely
affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have
a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance the Company will
not be required to incur significant costs to comply with laws and
regulations in the future, or that laws or regulations will not have a
27<PAGE>
material adverse effect upon the Company's business, financial condition
or results of operations.
The Company maintains facilities in the United States, United Kingdom
and The Netherlands, each of which has numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance
that the Company will not be required to incur significant costs to
comply with such laws and regulations now or in the future or that such
laws or regulations will not have a material adverse effect upon the
Company's ability to do business.
In the United States, the Company must comply with the Federal, Food,
Drug and Cosmetic Act, as amended, which is enforced by the Food and
Drug Administration (the "FDA"). These regulations are complex but
generally function by associating a level of risk with a proposed
product. Products which are lower risk, such as surgical gloves
(considered a Class I device) have fewer requirements for marketing than
products which are life sustaining, diagnostic, or long-term implants
(considered Class III devices). The FDA has determined that urethral
bulking agents such as Macroplastique are Class III devices subject to a
Pre-Market Approval (PMA) application prior to marketing in the United
States.
A PMA application is a rigorous submission that requires the
manufacturer to substantiate the product's claims of safety and
effectiveness with valid scientific evidence. The PMA process is
lengthy and expensive with no guarantee of final approval at its
completion. A typical PMA submission includes very detailed, technical
descriptions of the proposed device, the device's manufacturing and
quality control systems, the pre-clinical (biocompatibility) testing
performed on the device, and the results of human clinical studies.
After receiving the PMA submission from the manufacturer, the FDA will
normally review the information for 1-2 years. During this time period
the FDA usually assembles a panel of clinicians to make a non-binding
recommendation of whether to approve the product. The FDA will also
conduct an onsite inspection of the manufacturer to establish that the
FDA's manufacturing and quality system requirements (called Good
Manufacturing Practices, or GMP's) will be followed during the
production of the device. In some instances, the FDA will decide that
additional testing or clinical studies are necessary to support the PMA
submission. Such a decision considerably lengthens the time and expense
required for obtaining U.S. marketing approval. If the FDA approves PMA
submission, it may still place certain conditions on the manufacturer,
such as the initiation of a post-marketing study or restrictions to the
product's intended use.
After approval of the PMA submission, the Company must comply with other
FDA regulations to maintain its U.S. marketing approval. The Company's
manufacturing facilities will be subjected to routine inspections by the
FDA to ensure that the Company is in compliance with GMP regulations.
Because the Company's quality system has already achieved ISO 9001
registration, the Company believes that few additional elements will be
required to satisfy the GMP regulations. However, there can be no
assurance that the FDA would find the Company's quality system to be in
compliance with all relevant aspects of the requirements (See "Business
28<PAGE>
- - Manufacturing"). The Company must also comply with U.S. Medical Device
Reporting (MDR) regulations, which require companies to document and
investigate device malfunctions or any deaths or serious injuries that
may be associated with the use of their products. The FDA will also
scrutinize all labeling and marketing claims made by the Company to
ensure that only the product indications specifically approved by the
FDA are promoted by the company.
The Company is also subject to a variety of state and local laws and
regulations in those states or localities where its product will be
marketed. Any applicable state or local regulations may hinder the
Company's ability to market its products in those states or localities.
Third-Party Reimbursement
Throughout much of the world, the Company sells Macroplastique to
hospitals and other users who often transfer the cost of the medical
product and services to various third-party payers, such as government
health programs, private health insurance plans, managed care
organizations and other similar programs. These third-party payers may
deny or substantially limit reimbursement if they believe that a medical
device was not used in accordance with established payer protocols
regarding cost-efficient treatment methods, was used for an unapproved
indication or was not otherwise covered. In some markets, medical device
manufacturers are being forced to demonstrate the clinical efficacy and
cost-effectiveness of their products to third-party payers before these
organizations will agree to provide reimbursement to users. Changes to
third-party reimbursement policies in the United States, Europe and
other potential Macroplastique markets could result in diminished
revenues to the Company.
In most European nations and other Macroplastique markets, third party
reimbursement is currently available for Macroplastique for the
treatment of urinary incontinence. Within the United States, third-
party reimbursement is currently available for certain bulking agents
and the Company expects to obtain third-party reimbursement for
Macroplastique if and when the product is approved for marketing.
However, there is currently no uniform policy for reimbursement in the
United States and no guarantee Macroplastique will be reimbursed at the
levels expected by the Company, if at all. The availability of third-
party reimbursement for Macroplastique or competitors' products and
continuing efforts to reduce the costs of health care by decreasing
reimbursement rates may reduce the price received by the Company for
Macroplastique.
Product Liability
The medical device industry is subject to substantial litigation. The
Company is a manufacturer of a long-term implantable device and
consequently faces an inherent business risk of exposure to product
liability claims resulting from alleged adverse effects to the patient.
The Company currently carries product liability insurance but there can
be no assurance the Company's existing insurance coverage limits are
adequate to protect the Company from any liabilities which it might
incur in connection with the clinical trials of Macroplastique or the
initial commercialization of Macroplastique in the United States. There
can be no assurance that liability claims will not exceed coverage
29<PAGE>
limits. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. Furthermore, the Company does
not expect to be able to obtain insurance covering its costs and losses
as a result of any recall of its products due to alleged defects,
whether such a recall is instituted by the Company or required by a
regulatory agency. A product liability claim, recall or other claim with
respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on the business, financial
condition and results of operations of the Company.
Manufacturing
At this time, the Company only manufactures Macroplastique at its
facilities in The Netherlands from medical grade materials obtained from
qualified suppliers. At such time in the future as it receives FDA
approval of its PMA submission, the Company expects to begin
manufacturing Macroplastique in the United States. The Company's
facilities utilize dedicated heating, ventilation, and high efficiency
particulate air (HEPA) filtration systems for the manufacturing area to
provide a controlled working environment. All manufacturing processes,
including material storage and handling, gowning, and cleaning are
performed according to written procedures approved by the Company's
quality department. All critical manufacturing processes are performed
in a cleanroom environment by trained production technicians. An
outside vendor sterilizes Macroplastique using a validated method and
returns the product to the Company for final inspection and testing.
The Company currently purchases its base silicone solution from Advanced
Silicone, Inc. and its carrier solution from GAF Corporation, which are
single sources of supply for such products at the moment, and with
neither of whom does it have a supply agreement. Alternative suppliers
for these materials do exist should the current suppliers discontinue
production or distribution. However, the Company would need to complete
additional testing to qualify the materials obtained from any new
suppliers. Additionally, limited notice of the need to switch suppliers
for either of these materials could result in production delays and
inventory depletion.
The Company's manufacturing facilities are periodically audited by an
independent registrar to ensure compliance with ISO 9001 and EN 46001
quality system requirements. Prior to marketing the product in the
United States, the Company will also be inspected by the U.S. FDA and
will also be subject to any additional state, local and federal
government regulations in both the United States and The Netherlands
applicable to the manufacture of the Company's products. See "Business
- - Government Regulations".
Competition
Competition in the urinary incontinence products market is intense. The
Company faces competition from existing manufacturers of management and
curative treatments for urinary incontinence, including competing
manufacturers of commercially available bulking agents, as well as from
companies developing new or improved treatment methods for urinary
incontinence. The Company believes the principal competitive factors
among treatment methods for urinary incontinence include physician and
patient acceptance of the method in managing or curing incontinence,
30<PAGE>
cost and the availability of third-party reimbursement, marketing and
sales capability and the existence of meaningful patent protection. The
Company's ability to compete in this market also will depend on the
consistency of its product quality and delivery and product pricing.
Other factors within and outside the Company's control include its
product development and innovation capabilities, ability to obtain
required regulatory approvals, ability to protect its proprietary
technology, manufacturing and marketing capabilities and ability to
attract and retain skilled employees.
Current major competitors who compete in the urinary incontinence
management and treatment market include Kimberly-Clark Corp. and Procter
& Gamble Co. for adult diapers and absorbent pads; Empi, Inc. and
MedCare Technologies, Inc. with electrical pelvic floor stimulators and
behavioral treatments; Abbott Laboratories, Warners Wellcome and Hoechst
Marion Roussell for pharmaceutical treatments; C. R. Bard, Inc., Kendall
Co., Mentor Corp. and Baxter International for catheter/urine collection
bag drainage systems; and American Medical Systems, Inc., a division of
Pfizer, Boston Scientific Corporation, Influence, Inc. and Johnson &
Johnson for sling procedures and artificial sphincter implants. The
Company believes that some of its current competitors and others that do
not have injectable bulking products are also seeking to develop
competing bulking agents.
There are currently at least two injectable soft tissue bulking agent
products that compete directly with Macroplastique, both of which are
supplied by companies with considerably larger financial and other
resources than Uroplasty. These products are Urethrin(R), manufactured
and distributed only outside the United States by Mentor, Inc. and
Contigen(R), manufactured by Collagen Corporation and distributed by
C.R. Bard, in both the United States and foreign markets. The Company
expects other devices for treating urinary incontinence by means of soft
tissue injection therapy will become available in the future and
competition will continue to intensify. In addition, Advanced
Uroscience, Inc. and the Convatec division of Bristol, Meyers, Squibb
are seeking regulatory approval for an injectable bulking agent.
Many of the Company's competitors and potential competitors have
significantly greater financial, manufacturing, marketing, distribution
and technical resources and experience than the Company. In addition,
many of the Company's competitors offer broader product lines within the
urology market, which may give such competitors the ability to negotiate
exclusive, long-term supply contracts and to offer comprehensive pricing
for their products. It is possible that other large health care and
consumer products companies may enter this industry in the future.
Furthermore, smaller companies, academic institutions, governmental
agencies and other public and private research organizations will
continue to conduct research, seek patent protection and establish
arrangements for commercializing products. Such products may compete
directly with any products which may be offered by the Company in the
future.
Dependence on One or a Few Major Customers
Approximately 14% of the Company's total sales during the fiscal year
period ended March 31, 1998 were made to ABS, the Company's distributor
for France. ABS, is a shareholder of the Company, owning 100,000
31<PAGE>
shares, or 1.7%, of the Company's common stock. It has no other
relationship with the Company. No other distributor accounts for in
excess of 10% of the Company's sales.
For the three months ended June 30, 1998, and June 30, 1997, the Company
made 10.8% and 11.3% of its sales, respectively, to ABS.
Patents, Trademarks, and Licenses
The Company's success depends in part on its ability to obtain and
maintain patent protection for its products, to preserve its trade
secrets and to operate without infringing the proprietary rights of
third parties. The Company seeks to protect its technology by filing
patent applications for patentable technologies that it considers
important to the development of its business based on an analysis of the
cost of obtaining a patent, the likely scope of protection and the
relative benefits of patent protection compared to trade secret
protection, among other considerations. The Company also relies upon
trade secrets, know-how and continuing technological innovation to
develop and maintain its competitive position.
Multiple patents covering the Macroplastique materials, processes and
applications have been issued to the Company by the United States,
United Kingdom, German and Japanese Patent Offices. Such patents will
expire in the United States at various times between 2010 and 2013.
Applications are also currently pending in various other countries,
including Canada and other European countries. There can be no assurance
that any of the Company's pending or future U.S. or foreign patent
applications will result in issued patents, or that any issued patents
will be of sufficient scope or strength to provide meaningful protection
of the Company's products. The coverage sought in a patent application
can be denied or significantly reduced before the patent is issued. In
addition, there can be no assurance that any current or future U.S. or
foreign patents of the Company will not be challenged or circumvented by
competitors or others, or that such patents will be found to be valid or
sufficiently broad to protect the Company's technology or provide the
Company with any competitive advantage. Should attempts be made to
challenge, circumvent or invalidate the Company's patents in the U.S.
Patent and Trademark Office or courts of competent jurisdiction,
including administrative boards or tribunals, the Company may have to
participate in legal or quasi-legal proceedings therein to maintain,
defend or enforce its rights in these patents. Any legal proceedings to
maintain, defend or enforce the Company's patent rights could be lengthy
and costly, with no guarantee of success.
The Company also relies heavily upon trade secrets and other proprietary
information. The Company seeks to maintain the confidentiality of such
information by requiring employees, consultants and other parties to
sign confidentiality agreements and by limiting access by parties
outside the Company to such information. There can be no assurance,
however, that these measures will prevent the unauthorized disclosure or
use of this information or that others will not be able to independently
develop such information. Additionally, there can be no assurance that
any agreements regarding confidentiality and non-disclosure will not be
breached, or, in the event of any breach, that adequate remedies would
be available to the Company.
32<PAGE>
In July 1998, the Company announced that the United States Patent and
Trademark Office ("USPTO") had informed the Company that the USPTO will,
as Uroplasty requested, initiate an interference proceeding between
Uroplasty and Advanced UroScience, Inc. ("AUI"), White Bear Lake,
Minneosta, to determine which company was the first to invent carbon-
coated micro beads for use in treating urinary incontinence. Although
the USPTO originally granted the applicable patent to AUI, the
interference proceeding may result in a determination that either
Uroplasty or AUI is the proper holder, or that a patent should not have
been granted. Uroplasty expects that it could take the USPTO twenty-
four months or more to reach a final decision concerning this matter.
An interference proceeding, like other patent litigation, can be
complex, time-consuming and expensive. The interference proceeding does
not involve Macroplastique. Subsequently, the Company brought suit
against AUI and certain related defendants, alleging a wrongful taking
and misuse of the Company's trade secrets pertaining to the carbon-
coated micro beads.
In 1992, the Company and its then parent, Bioplasty, Inc., were sued by
Collagen Corporation, which alleged that Macroplastique infringed on one
of its U.S. patents for a bulking agent. The parties entered into a
license and settlement agreement in 1993 pursuant to which the Company
pays Collagen a royalty of 5% of net sales of certain products sold in
the United States with a minimum of $50,000 per year. Recently, the
Company received several letters from Collagen's counsel questioning
whether additional royalties were payable as a result of either the
manufacture or sale by the Company of Macroplastique in the United
States. The Company's position is that royalties are payable only on
"net sales" in the United States, and, there having been none, no
additional royalties are payable. Collagen has not brought any new or
renewed legal action in connection with its claims and allegations.
There can be no assurance, however, that Collagen or any other third
party will not pursue legal action with respect to these matters.
Claims by competitors such as Collagen and other third parties that the
Company's products allegedly infringe the patent or other intellectual
property rights of others could have a material adverse effect on the
Company. There has been substantial litigation regarding patent and
other intellectual property rights in the medical device industry, and
intellectual property litigation may be used against the Company as a
means of gaining a competitive advantage. Intellectual property
litigation is complex, time-consuming and expensive, and the outcome of
such litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the
Company and significant diversion of the efforts of the Company's
technical and management personnel. An adverse outcome in any litigation
could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from others, if licenses to such
rights could be obtained, or require the Company to cease making, using
or selling certain products. There can be no assurance that any licenses
required under any patents or proprietary rights would be made available
on terms acceptable to the Company, if at all. In addition to being
costly, protracted litigation to defend or prosecute intellectual
property could result in the Company being unable to commercialize
Macroplastique on a timely basis or at all, and could have a material
adverse effect on the Company's business, financial condition and
results of operations.
33<PAGE>
Although the Company intends to apply for additional patents and
vigorously defend issued patents, management believes that its success
as a business will depend primarily upon its development and marketing
skills, and the quality and economic value of its products rather than
on its ability to obtain and defend patents.
The Company has a Royalty Agreement with three individuals, two of whom
are former officers and directors. Under such Agreement, the Company
pays royalties, in the aggregate, of three to five percent of net sales
of Macroplastique, subject to a monthly minimum of $4,500. The royalties
payable under this Agreement will continue until the patent referenced
in the Agreement expires in 2010.
In December 1995, the Company obtained a license from a British surgeon,
Sam M. Henalla, for a urethral guiding device designed to make
implantation of Macroplastique easier and more precise. Under this
agreement, the Company made a cash payment of approximately $30,000 to
the licensor and will make royalty payments at the rate of 10% of the
worldwide net sales of this device for a period of 10 years.
Research and Development
The Company has an active Research and Development program working to
develop new products in the field of incontinence. The Company is also
continually working on new methods and devices for the implantation of
Macroplastique and on new applications for this material. Expenditures
for research and development totaled $778,082 and $610,677 for the
fiscal years ended March 31, 1998 and March 31, 1997, respectively.
None of these costs were borne directly by customers.
For fiscal year 1999, the Company's research and development expenses
will increase significantly. This is due, in part, to the accounting
protocol of treating regulatory expenses as research and development
expenses. See "Management's Discussion and Analysis".
The Company has acquired the rights to a urethral guiding device
designed to make implantation of Macroplastique in women simpler and
more precise. The Company intends to introduce this device late in
fiscal year 1999. The Company currently does not intend to charge
doctors separately for this product. Instead, the Company will provide
an implantation kit including Macroplastique, the urethral guiding
device and administration needles. The Company expects the new device
to make implantation easier and allow it to be performed on an
outpatient basis at the doctor's office. Currently, Macroplastique is
injected using a more cumbersome endoscope and patients are usually
admitted to the hospital and put under general anesthesia during the
procedure.
The Company is developing a pubovaginal sling which is a surgically
implanted device providing support for the bladder neck and urethrea.
This device is expected to expand the Company's product line to cover a
broader range of female SUI. The Company intends to introduce this
product into the U.S. market in early fiscal 2000, pending submission
and approval of a 510(k) review by the FDA.
34<PAGE>
Compliance with Environmental Laws
Compliance by the Company with applicable environmental requirements
during its fiscal years ended March 31, 1998 and 1997 has not had a
material effect upon the capital expenditures, earnings or competitive
position.
Employees
As of March 31, 1998, the Company had thirty-eight employees, of which
thirty-two were full-time, two temporary and four part time. None of
such employees has a collective bargaining agreement with the Company.
Property
The Company owns office and warehouse space at Hofkamp 2, 6161 DC
Geleen, The Netherlands. In addition, the Company leases office,
warehouse, laboratory and production space at 2718 Summer Street NE,
Minneapolis Minnesota 55413-2820, USA pursuant to a lease expiring in
February, 2000; and office and warehouse space at Unit 3, Woodside
business Park, Whitley Wood Lane, Reading, Berkshire RG2 8LW, United
Kingdom pursuant to a lease expiring in September, 2001; and office,
warehouse, laboratory and manufacturing space at Industrieweg 12, 5627
BS Eindhoven, The Netherlands pursuant to a lease expiring July, 2002;
and office space at Hertogsingel 54, 6214 AE Maastricht, The Netherlands
pursuant to a lease expiring in October, 1999. The Company considers its
facilities adequate for its foreseeable needs.
Litigation
The Company is not, as of the date hereof, a party to any material
pending legal proceedings, nor is its property the subject of any such
proceedings. However, the Company has been informed that it will be a
party to an interference proceeding, brought at its request, in the
United States Patent and Trademark Office and it is a party to a related
lawsuit, which it brought for misappropriation of trade secrets. (see
"Business - Patents, Trademarks and Licenses")
Former Parent, and Current Subsidiaries
The Company was incorporated in January 1992 as a wholly-owned
subsidiary of Bioplasty, Inc., which was primarily a manufacturer and
distributor of breast implants. Because of extensive products liability
litigation brought against Bioplasty and all other manufacturers of
breast implant products, Bioplasty, Inc. and Uroplasty, Inc. filed for
protection from creditors under Chapter 11 of the United States
Bankruptcy Code in April 1993. On January 31, 1994, the U.S. Bankruptcy
Court confirmed the Joint Plan of Reorganization (the "Plan") of
Bioplasty, Inc. and Uroplasty, Inc. Under the Plan, all equity interests
held by Bioplasty, Inc. in Uroplasty, Inc. were canceled and new shares
of each of Bioplasty, Inc. and Uroplasty, Inc. were issued to creditors,
claimants and certain investors. Such persons became the shareholders of
Uroplasty, Inc. In addition, under the Plan all pre-petition claims,
including known and unknown products liability claims, against
Bioplasty, Inc. and Uroplasty, Inc. were discharged, except for certain
claims and expenses identified by name and amount, which were allowed by
the Court.
35<PAGE>
In January 1995, Uroplasty, Inc. acquired from Bioplasty, Inc. in a tax-
free exchange transaction approved by the shareholders of both companies
all its remaining operating assets and liabilities, including the stock
of its foreign subsidiaries, in satisfaction of obligations due
Uroplasty, Inc. generated in the normal course of business.
The Company's wholly-owned foreign subsidiaries and their respective
principal functions are as follows:
Uroplasty BV - Incorporated in The Netherlands, is the
manufacturer of Macroplastique, and sells
Macroplastique outside of The Netherlands to
distributors
Uroplasty LTD - Incorporated in and acts as the sole distributor of
Macroplastique, Bioplastique and wound care
products in the United Kingdom
Bioplasty BV - Incorporated in and acts as a distributor of
Macroplastique, Bioplastique and wound care
products in The Netherlands
MANAGEMENT
Directors and Executive Officers
The Company's Directors and Executive Officers, as of August 31, 1998,
were as follows:
Name Age Position Director Since Term Expires
Daniel G. Holman 52 Chairman, 1994 2000
President, CEO, CFO
Joel R. Pitlor 59 Director 1994 1999
R. Patrick Maxwell 53 Director 1994 1999
Alexander S. Gerwer 43 Director 1998 1999
Susan Hartjes-Doherty 44 Vice President of Operations
and Regulatory Affairs, Secretary
Germain E. Willem 51 Vice President of Sales
and Marketing
Christopher Harris 39 Vice President of Corporate
Development
All directors are members of the Nominating Committee; all directors
except Mr. Holman are members of the Compensation Committee; and Mr.
Maxwell and Mr. Pitlor are members of the Audit Committee.
The Company does not have any employment or non-compete agreement with
Mr. Holman or Ms. Doherty, whose employment, as such, is at will, but
the Company does have employment agreements with Messrs. Willem and
Harris.
The following paragraphs describe the business experience of each of the
Company's directors and officers. Several of these individuals have
served as directors or officers of Bioplasty, Inc., which filed for
bankruptcy in April 1993. See "Business - Former Parent and Current
Subsidiaries".
36<PAGE>
Daniel G. Holman has served as Chairman of the Board, President and
Chief Executive Officer of Uroplasty, Inc. since February 1994, and as
Chief Financial Officer since June 1996. Mr. Holman was Executive Vice
President of Bioplasty, Inc. from 1973 to 1985, its President from 1985
to 1987, and Secretary from 1986 to March 1992. Mr. Holman has been
Chairman of the Board of Bioplasty, Inc. since March 1992, and President
and CEO since February 22, 1993. Mr. Holman served as Chairman of the
Board and Chief Executive Officer of Bio-Vascular, Inc. from June 1988,
to September 1991, served as a director of Genetic Laboratories Wound
Care, Inc. from February 1988 until July 1993, and as Vice President
from February 1988 through November 1992. Mr. Holman holds a Bachelor
of Arts degree in Biology from St. Cloud State University.
Joel R. Pitlor has been a director since February 1994. Mr. Pitlor
served as a director of Bioplasty from January 1989 until May 1996. For
over sixteen years, he has been the owner and manager of a management
consulting firm. Mr. Pitlor is presently a Director of Precision Optics
Corporation, which is publicly-held. Mr. Pitlor holds a Bachelor of
Science degree from MIT and serves as Personal Advisor to several CEOs.
R. Patrick Maxwell was appointed a Director of Uroplasty in April 1994
and elected by shareholders in August 1997. Mr. Maxwell has been an
attorney since 1969. Mr. Maxwell holds and has held management
positions in numerous other businesses (primarily temporary placement
services, telemarketing and legal expense insurance).
Alexander Gerwer was elected a director of Uroplasty in August, 1998.
Mr. Gerwer has been a Principal and Consultant for AKN in San Diego,
California, a management consulting firm to medical product companies
since 1990. From 1988 to 1990, he was the Manager of New Business
Development for Nihon Kohden America, a medical electronics company in
Irvine, California. Mr. Gerwer was a Research Scientist for Diatek,
Inc. in San Diego, California from 1986 to 1988. Mr. Gerwer received a
B.S. in Chemistry and Physics from the University of Michigan, and a
Master of Science in Chemical Physics from the California Institute of
Technology.
Susan Hartjes-Doherty joined Bioplasty, Inc. in September 1991 as
Director of Operations and served as Vice President of Operations from
April 1993 until May 1996. In November 1994, Ms. Doherty was appointed
Vice-President of Operations for Uroplasty, Inc. and was elected
Secretary in September, 1996. Prior to 1991, Ms. Doherty was Director
of Operations at Bio-Vascular, Inc. in St. Paul, Minnesota from November
1989 to September 1991. Prior to that time, she served at various other
pharmaceutical and medical device companies in management-oriented
positions in production, quality assurance and research. Ms. Doherty
has Bachelor of Arts degrees in Biology- Microbiology and BioMedical
Science from St. Cloud State University, and has done graduate work in
the biological sciences. Ms. Doherty is a senior member and a Certified
Quality Auditor of the American Society for Quality and served several
years on its Executive Committee and is a member of the American Society
of Microbiology, and the Henrici Society for Microbiologists. She has
served on several national and international standards committees.
Germain E. Willem joined the Company in November 1994 as Director of
International Sales and Marketing and became Vice President of Sales and
Marketing in January 1997. Mr. Willem has 20 years of experience in
37<PAGE>
international sales and marketing of medical devices, including the AMS
division of Pfizer Product Group. Mr. Willem has a degree in engineering
from the 'Industriele Hogeschool West Vlaanderen' in Belgium. He has
been active in standardization organizations for medical devices both in
Belgium and The Netherlands.
Christopher Harris joined Bioplasty in October 1989 as Area Sales
Manager in the United Kingdom. Since September 1994, Mr. Harris has been
the Managing Director of the Company's subsidiary in the United Kingdom.
In February 1996, Mr. Harris was appointed as Director of Corporate
Development and in January 1997 he was appointed Vice President of
Corporate Development. Mr. Harris, a certified nurse in the United
Kingdom, practiced general surgery nursing for two years and operating
room nursing for nine years prior to 1989.
Management Compensation
The following table sets forth, in summary form, (1) the compensation
paid for the years shown in the table, to Daniel G. Holman, the
Company's Chairman, President, CEO and CFO and to Susan Hartjes-
Doherty, the Company's Vice President of Regulatory Affairs and
Operations and Secretary; (2) the stock options and stock appreciation
rights granted to such individuals for the years shown; and (3) long-
term payouts and other compensation for the years shown:
Summary Compensation Table
Long Term Compensation (1)
Fiscal Year --------------------------
Annual Compensation Awards
Other Securities
Name Annual Restricted Under-
and Compen- Stock lying
Principal sation Awards Options
Position Year Salary($) Bonus($) ($) ($) SARs(#)
Daniel G. Holman 1998 161,919 -- 25,632(2) -- 70,000
CEO 1997 154,162 -- 28,818(2) -- 0
1996 146,534 -- 18,016(2) -- 15,000
Susan Hartjes- 1998 102,160 5,000 -- -- 40,000
Doherty
Vice President
Total Compensation for All Executive Officers
For Fiscal Year 1998:
(Four Persons) 475,617
(1) There were no payouts under a "long-term incentive plan" (called
"LTIP") for the years shown, nor was any other form of compensation paid
or awarded.
(2) Reimbursement of expatriot living expenses in The Netherlands.
Mr. Pitlor receives a $2,000 per month consulting fee from the
Registrant under a month to month agreement. All non-employee Board
38<PAGE>
members who do not receive any other form of compensation from the
Registrant receive $500 per board meeting attended. In addition,
directors participate in the Registrant's option plan.
Option/SAR Grants Table
Option Grants in Fiscal Year Ended March 31, 1998
Number of Percent of
Securities Total Op-
Underlying tions/SARS
Options Granted to Exercise or Securities
/SARS Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Share) Date
Daniel G. 50,000 15.1% $1.00 April 2002
Holman, CEO 20,000 6.0% $3.25 February 2003
Susan Hartjes- 25,000 7.6% $1.00 April 2002
Doherty, V.P. 15,000 4.5% $3.25 February 2003
(1) Options for 250,000 shares were granted to officers and directors
during the fiscal year ended March 31, 1998.
The Company adopted an Incentive Stock Option Plan (the "1995 Plan") in
May 1995 which provided for the granting of options to purchase 350,000
shares of stock. At March 31, 1998 there were 177,200 options
outstanding under the 1995 Plan. In April 1997, the Board of Directors
adopted and in August 1997, the Company's shareholders approved the 1997
Stock Option Plan (the "1997 Plan") pursuant to which 500,000 shares of
common stock have been reserved. At March 31, 1998 there were 313,000
options outstanding under the 1997 Plan. (In addition, the Company had
15,000 options outstanding not issued pursuant to either Plan.) Both
Plans required that options be granted at exercise prices equal to or
greater than the fair market value of the stock at the time of the
grant.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Option/SARs Options/SARs
Shares acquired Value At FY-End(#) at FY-End($)
Name on Exercise Realized($) Exercisable Exercisable
Daniel G. 10,000 27,000 95,000 181,250
Holman, CEO
Susan Hartjes- -- -- 65,000 125,000
Doherty, V.P.
PRINCIPAL SHAREHOLDERS
At June 30, 1998, the Company had 5,917,371 shares of common stock
outstanding and options for 483,200 shares of common stock outstanding.
39<PAGE>
The following table sets forth the number of shares of the Company's
common stock and the percentage of the total number of shares
outstanding beneficially owned, as of June 30, 1998, by (i) each person
known to the Company to be the beneficial owner of more than five
percent of the Company's Common Stock, (ii) each director, (iii) each
executive officer of the Company who is named in "Management
Compensation" above, and by (iv) all directors and executive officers as
a group:
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned Percent of Class(7)
Bruce P. Mindich
555 White Plains Road
Tarrytown, NY 10591 1,100,000 18.6%
Daniel G. Holman
2718 Summer Street NE
Minneapolis, MN 55413-2820 299,981 (1) 5.1%
Susan Hartjes-Doherty
2718 Summer Street NE
Minneapolis, MN 55413-2820 122,203 (2) 2.1%
Joel R. Pitlor
19 Chalk Street
Cambridge, MA 02139 145,000 (3) 2.5%
R. Patrick Maxwell
Templeton & Associates
10 South Fifth Street, Suite #990
Minneapolis, MN 55402 65,307 (3) 1.1%
Alexander S. Gerwer
2718 Summer Street NE
Minneapolis, MN 55413-2820 43,800 (4) .7%
Directors and Executive
Officers as a Group (7 persons) 768,291 (5)(6) 12.2%
(1) Includes 95,000 shares held under options to purchase common stock.
(2) Includes 65,000 shares held under options to purchase common stock.
(3) Includes 45,000 shares held under options to purchase common stock.
(4) Includes 30,000 shares held under options to purchase common stock.
(5) Includes 372,000 shares held under options to purchase common stock.
(6) To the Company's knowledge, the persons named have both voting and
investment power over the shares listed.
(7) Percentages were calculated on the basis of outstanding securities
owned by each person or group of persons named, plus, for each person or
group any securities that can be acquired within 60 days pursuant to
exercise of options.
40<PAGE>
SELLING SHAREHOLDERS
All of the shares of the Company's Common Stock offered hereby are being
offered by certain shareholders of the Company (referred to herein as
the "Selling Shareholders"). None of the Selling Shareholders is an
affiliate of the Company, except for Patrick Maxwell and Alex Gerwer,
each of whom is a director of the Company.
The names of the Selling Shareholders are stated below. None of such
persons has had or held a position, office or material relationship with
the Company or any of its predecessors or affiliates within the past
three years, except for Patrick Maxwell, who has been a director of the
Company throughout the period, and Alex Gerwer, who has been a director
since August, 1998. The table below also states the total number of
shares of the Company's Common Stock registered in the name of each of
such persons which are covered by this Prospectus. A list of
abbreviations used in the table follows the table.
In the States of Nebraska and New Jersey, as well as all other states, all
sales by Selling Shareholders of shares owned hereby must be made through
registered broker-dealers or pursuant to an exemption from registration.
This table covers only shares of the Company's stock covered by this
Prospectus and owned by the Selling Shareholders. Such persons may own
other shares of the Company's stock.
Name of Shareholder Number of Shares
Frank S. Amendola, Jr. 5,000
Robert W. Amis, Jr. 15,000
Frederick P. Angst 10,000
Glenn Bartoo 6,000
John D. Bartsh and Lonna Bartsh, JTWROS 2,500
Robert James Beck 5,000
First Trust NATL ASSN TTEE
FBO Arthur A. Beisang IRA 20,000
First Trust NATL ASSN TTEE
FBO Shirley F. Beisang IRA 20,000
William W. Berg 2,500
Herbert J. Bernick 10,000
Randy E. Bickmann 5,000
James G. Bigelow, Sr. 10,000
Vannoy C. Black and Cynthia F. Black JTWROS 10,000
First Trust NATL ASSN TTEE
FBO Gertrude L. Blackshear IRA 5,000
Robert Blain 30,000
Frederick C. Boos 10,000
First Trust NATL ASSN TTEE
FBO Dennis G. Bottjen IRA 10,500
First Trust NATL ASSN TTEE
FBO Dennis G. Bottjen M/P/P 17,500
Elraine A. Brennan 5,500
O. Charles Brow 2,500
Joseph J. Buska 10,000
Michael F. Cassel 10,000
First Trust NATL ASSN TTEE
FBO Patricia A. Cellitti IRA 10,000
41<PAGE>
Walter T. Cleveland TTEE
Martha E. Cleveland TTEE
Walter T. Cleveland Trust 10,000
James G. Cowan 7,000
Larry R. Cramer 5,000
Joseph J. Christensen 5,000
Dennis M. Davidson and
Barbara A. Davidson, JTWROS 5,000
First Trust NATL ASSN TTEE
FBO Bruce N. Davis IRA 10,000
First Trust NATL ASSN TTEE
FBO Jack G. Davis IRA 8,400
Daniel J. Dokken and Ruth Dokken, JTWROS 5,000
Jeff Dousette 10,000
Del Dozak 6,000
Justin Droessler 7,300
Paul K. Ebel 5,000
First Trust NATL ASSN TTEE
FBO Werner H. Egli IRA 10,000
Ronald A. Erickson, Trustee 10,000
Lary B. Falck and Judith A. Falck, FTWROS 2,500
John E. Feltl 10,000
Carol M. Ford 5,000
John M. Friedges 6,500
Karl Fromm 20,000
Craig R. Geller 2,500
Alexander S. Gerwer and Dena J. Gerwer, JTWROS 13,800
Kathryn R. Gilbertson 20,000
First Trust NATL ASSN TTEE
FBO Joseph Hafermann IRA 5,000
William E. Hanneman 5,000
Hartman Hanson and Marguerite Hanson, JTWROS 10,000
Gerald L. Heinzen and Andrea M. Heinzen, JTWROS 6,500
Joseph P. Hennen 10,000
Douglas L. Hildreth and Ruth M. Hildreth, JTWROS 5,000
First Trust NATL ASSN TTEE
FBO James A. Hinrichs IRA 10,000
William J. Holman Jr. and Dianna J. Holman, JTWROS 5,000
Randall D. Horan 2,500
Per Huffeldt, Trustee 10,000
Robert G. Hulke 5,000
Thomas Hunt 10,000
William D. Hunt TTEE and Constance J. Hunt TTEE 2,500
Richard Huselid and Marlys Huselid, JTWROS 5,000
David P. Ihle 10,000
Industricorp & Co. FBO, Twin City Carpenters
Pension 60,000
Dana J. Isaacson 10,000
Roland Isaacson 10,000
John B. Jasper 10,000
Morris G. Jesperson and Beverly A.
Jesperson, JTWROS 10,000
First Trust National Association,
Trustee FBO Cheryl L. Johnson Roth IRA 5,000
David T. Johnson 10,000
Donald O. Johnson 5,000
Earl Johnson and Cheryl L. Johnson, JTWROS 4,500
42<PAGE>
First Trust National Association,
Trustee FBO Earl Johnson IRA 2,500
Bryan L. Jones 5,000
Peggy Kaplan 10,000
Jennifer Katz 5,000
Claire M. King 10,000
Steven King 10,000
Daniel T. Koch 50,000
Richard J. Koehler and Sally J. Koehler, JTWROS 5,000
William W. Koop 10,000
Robert J. Korkowski and Phyllis M. Korkowski,
JTWROS 10,000
First Trust National Association,
Trustee FBO Raymond P. Kruse IRA 10,000
Mark Laskowski 10,000
Larry Laughlin 5,000
James E. Lindell 5,600
Mac W. Lutz III 2,000
Dennis Leslie Maetzold 20,000
Jan Magnuson 15,000
Stanley R. Magnuson and Jayne M. Magnuson JTWROS 10,000
Piper Jaffray as Custodian
FBO Wallace A. Marx 10,000
R. Patrick Maxwell 20,000
Timothy J. McCarthy 2,000
Timothy J. McCoy 10,000
First Trust National Association,
Trustee FBO Timothy J. McCoy IRA 5,000
First Trust National Association,
Trustee FBO Lyle McMurchie 3,750
First Trust NATL ASSN TTEE
FBO Charles J. Meler, Jr. IRA 10,000
Dean L. Melnyk 10,000
Brian H. Miller 9,900
Robert Duane Miller 10,000
Dennis M. Mills and Nancy M. Mills, JTWROS 5,000
James J. Moore 10,000
Phil C. Murray 1,200
Ronald S. Musich 20,000
Theodore C. Nagel and Judy Ann Nagel, JTWROS 5,000
Philip A. Nasby 10,000
Drs. Nelson & Schultz Profit Sharing Trust 12,500
Daniel W. O'Brien 9,000
Kome Okposo 10,000
Rodney L. Olsen and Alyce J. Olsen, JTWROS 10,000
Donald L. Olson and Kaye F. Olson JTWROS 5,000
Roger A. Olson, Trustee 5,000
Michael Ormond and Miriam E. Cameron JTWROS 5,000
Perkins Foundation 10,000
R.W. Perkins TTE, Perkins Capital Management 15,000
Richard W. Perkins, TTEE 25,000
Warren E. Peterson 8,000
Pyramid Partners L.P. 100,000
James E. Reasoner and Suzanne M. Reasoner JTWROS 10,000
Ben Reuben and Sophie Reuben JTWROS 20,000
Thomas Reynolds 5,000
Devin Patrick Rice 1,700
43<PAGE>
First Trust National Association, Trustee
FBO Devin Patrick Rice IRA 3,300
Dale Roberts 10,000
Gary A. Ross 10,000
Anita A.H.Y Rullens 30,000
First Trust National Association,
Trustee FBO Terry H. Rust IRA 10,000
Peter Sajevic 10,000
Frank W. Smith 5,000
Gary Specketer and Eileen Specketer, JTWROS 5,000
SRMI Inc. 10,000
First Trust NATL ASSN TTEE
FBO James F. Stattmiller IRA 5,500
Barbara H. Steinkamp, Trustee 1,500
Richard Stiers and Janice Stiers, JTWROS 10,000
First Trust NATL ASSN TTEE
FBO William G. Strop IRA 8,000
Gerald Swedeen and Marcia Swedeen, JTWROS 10,000
Denise W. Templeton and James W. Templeton, JTWROS 10,000
William I. Thompson 10,000
Dennis J. Truempi 10,000
Leo Tutewohl and Sharon Tutewohl, JTWROS 10,000
Sylvester M. Vanyo 10,000
Francis P. Veit 4,000
Dean Vlahos and Michelle Redmond Vlahos, JTWROS 10,000
Carl Vogt and Marjorie Vogt, JTWROS 10,000
Donald W. Walczak 5,000
Ronald E. Wald, Jr. and Michele R. Wald, JTWROS 10,000
William G. Walker, Sr. 2,500
First Trust NATL ASSN TTEE
FBO William G. Walker, Sr. IRA 5,000
Jerome R. Welle and Mary K. Welle, JTWROS 10,000
Don W. Wennberg 10,000
Jeffrey I. Werbalowsky 20,000
Joseph H. Whitney 10,000
Brian D. Wilcox and Mary T. Wilcox, JTWROS 15,000
Ronald J. Will 5,000
Duane H. Windhorst and Marilyn Windhorst JTWROS 10,000
Judith C. Winge 5,000
Steven E. Wirth and Kathryn E. Wirth, 3,000
David Y. Wolfenson 10,000
Marvin Wolfenson and Elayne Wolfenson JTWROS 20,000
First Trust National Association,
Trustee FBO James E. Wolff IRA 7,000
First Trust National Association,
Trustee FBO Roberta M. Wolff IRA 3,000
Roger Wothe 5,000
Yushya Yang 95,000
James R. Zylla TTEE 10,000
---------
Total 1,702,950
Abbreviations:
JTWROS - Joint Tenants with Right of Survivorship
TTEE - Trustee
IRA - Individual Retirement Account
FBO - For Benefit Of
NATL ASSN - National Association
LP - Limited Partnership
44<PAGE>
CERTAIN TRANSACTIONS
The Company has a Royalty Agreement with three individuals
(collectively, the "Licensors"), namely Arthur A. Beisang, Jr., Robert
A. Ersek, M.D., and Arthur A. Beisang, III, M.D. Mr. Beisang and Dr.
Ersek are former officers and directors of the Company (see "Business -
Patents, Trademarks, and Licenses"), and each previously owned more than
5% of the Company's outstanding stock. Under the terms of such Royalty
Agreement, the Company is obligated until 2010 to pay the Licensors 3 to
5% of net sales of Macroplastique (see Note 4(e) of Notes to Financial
Statements). The aggregate amount of royalty expense recognized by the
Company pursuant to such Royalty Agreement during each of the past three
fiscal years was as follows.
Fiscal Year ended 3/31/98 Uroplasty, Inc. $147,860
Fiscal Year ended 3/31/97 Uroplasty, Inc. $110,495
Fiscal Year ended 3/31/96 Bioplasty, Inc. $1,000
Uroplasty, Inc. 64,695
Total $65,695
On July 11, 1997, the Company's then second largest shareholder, the
Bioplasty Product Claimants Trust (the "Trust"), which prior to such
date owned 640,000 shares, or 17.5% of the Company's then outstanding
shares of common stock, sold such shares to a group of investors (the
"Investors"). In connection with such transaction, the Trust sold to
the Investors its interest in that certain Promissory Note, dated March
30, 1994, (the "Note") which, at March 31, 1997, had a principal balance
outstanding of $496,000. Although the Note did not by its terms have a
convertibility feature, concurrently with the sale by the Trust of the
640,000 shares to the Investors, the Company agreed to convert and did
convert the Note into 496,000 shares of Common Stock, at a conversion
ratio of $1.00 per share. The market prices for the Company's Common
Stock during the period June 1 to July 11, 1997, were $.50, bid and
$1.50, asked, on a workout basis. The Company and the Investors used
such market prices in arm's length negotiations in determining the
conversion ratio. The Investors, who included certain registered
representatives (or their customers) employed by RJ Steichen & Co.,
consisted of 33 individuals, retirement accounts and corporations
located primarily in the Minneapolis/St. Paul, Minnesota area. The
aforementioned transaction was facilitated by certain registered
representatives of RJ Steichen & Co., but they were not directly
compensated for their efforts by either the Trust or the Company, and
the Investors did not pay a commission on the transaction. There was no
involvement whatsoever by R.J. Steichen & Co. as an entity.
DESCRIPTION OF SECURITIES
The Company is not presently aware of any arrangements which may result
in a change in its control.
Common Stock
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.01 par value. There were 5,917,371 shares of Common
Stock issued and outstanding as of June 30, 1998.
45<PAGE>
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could
result in a dilution of the interest of existing shareholders should
additional shares of Common Stock be issued. Holders of the Common
Stock are entitled to receive such dividends as may be declared by the
Board of Directors out of assets legally available therefore, and to
share ratably in the assets of the Company available upon liquidation.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors.
Accordingly, the holders of more than fifty percent of all of the
outstanding shares of voting stock can elect all of the directors.
Significant corporate transactions such as amendments to the articles of
incorporation, mergers, sales of assets and dissolution or liquidation
require approval by the affirmative vote of the majority of the
outstanding shares of the voting stock. Other matters to be voted upon
by the holders of voting stock normally require the affirmative vote of
a majority of the shares present at the particular shareholder's
meeting.
The rights of holders of the shares of Common Stock may become subject
in the future to prior and superior rights and preferences in the event
the Board of Directors establishes one or more additional classes of
Common Stock or one or more additional series of Preferred Stock. The
Board of Directors has no present plans to establish any such additional
class or series.
Shares Eligible For Future Sale
There are 5,917,371 shares of Common Stock issued and outstanding as of
June 30, 1998. The 1,702,950 shares of Common Stock covered by this
Prospectus (the "Shares") are freely tradable without registration or
other restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except for any Shares owned by an "affiliate" of the
Company (as defined in the Securities Act).
In addition to the Shares, 3,400,000 shares are presently eligible for
sale under Rule 144 and an additional 1,100,000 shares will become
eligible for sale under Rule 144 by the end of July, 1998, assuming all
of the other requirements of Rule 144 have been satisfied.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) including persons deemed to be
affiliates, whose restricted securities have been fully paid for and
held for at least one year from the later of the date of issuance by the
Company or acquisition from an affiliate, may sell such securities in
broker's transactions or directly to market makers, provided that the
number of shares sold in any three month period may not exceed the
greater of 1% of the then outstanding shares of Common Stock or the
average weekly trading volume of the shares of Common Stock in the over-
the-counter market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain notice requirements and
the availability of current public information about the Company. After
two years have elapsed from the later of the issuance of restricted
securities from the Company or their acquisition from an affiliate, such
securities may be sold without limitation by persons who are not
affiliates under the rule.
46<PAGE>
The Company cannot predict the effect, if any, that sales of its Common
Stock or the availability of such Common Stock for sale, will have on
the market price prevailing from time to time. Nevertheless, sales by
existing shareholders of substantial amounts of Common Stock could
adversely affect prevailing market prices for the Company's Common
Stock.
Minnesota Anti-Takeover Law
The Company is governed by the provisions of Sections 302A.671 and
302A.673 of the Minnesota Business Corporation Act. In general, Section
302A.671 provides that the shares of a corporation acquired in a
"control share acquisition" have no voting rights unless voting rights
are approved in a prescribed manner. A "control share acquisition" is
an acquisition, directly or indirectly, of beneficial ownership of
shares that would, when added to all the other shares beneficially owned
by the acquiring person, entitle the acquiring person to have voting
power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a publicly held Minnesota corporation from engaging
in a "business combination" with an "interested shareholder" for a
period of four years after the date of the transaction in which the
person became an interested shareholder, unless the business combination
is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a
person who is the beneficial owner, directly or indirectly, of 10% or
more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to
the date in question was the beneficial owner, directly or indirectly,
of 10% or more of the corporation's voting stock.
Transfer Agent and Registrar
The Company has selected Stock Trans, Inc., Philadelphia, PA, telephone
(610) 649-7300, to act as Registrar and Transfer Agent for the Company's
Common Stock.
Indemnification
The Company's Bylaws and the provisions of the Minnesota Business
Corporation Act, which govern the actions of the Company, provide that
present and former directors and officers of the Company shall be
indemnified against certain liabilities and expenses which any of them
may incur as a result of being, or having been, a director or officer of
the Company. Indemnification is contingent upon certain conditions being
met, including, that the person: has not been previously indemnified by
another party for the same matter; has acted in good faith; has received
no improper personal benefit; and, in the case of a criminal proceeding,
has no reason to believe that the conduct complained of was unlawful and
reasonably believed that the conduct complained of was in the best
interests of the Company, or in certain circumstances, reasonably
believed that, the conduct complained of was not opposed to the best
interests of the Company.
In addition, the Company's Articles of Incorporation provide that a
director of the Company shall not be liable for monetary damages for a
breach of such director's fiduciary duty, except for a breach of the
47<PAGE>
duty of loyalty, acts not in good faith or in knowing violation of law,
violations of state securities laws, or for actions from which the
director derived an improper personal benefit. The Company has obtained
directors and officers liability insurance.
Insofar, as the indemnification of liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions of its Articles of
Incorporation, Bylaws and the provisions of the Minnesota Business
Corporation Act, or otherwise, the Company has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
Penny Stock
The Company's securities are considered "penny stock" under a Securities
and Exchange Commission rule that imposes additional sales practice
requirements on agents and broker-dealers who sell such securities to
persons other than established customers and institutional accredited
investors. For transactions covered by the rule, the agent or broker-
dealer must make a special suitability determination about the
purchaser (which concerns financial and business sophistication,
previous investment experience and financial condition) and have
received the purchaser's written agreement to the transaction prior to
the sale. Such agents or broker-dealers must also, prior to the
purchase, provide the customer with a risk disclosure document which
identifies risks associated with investing in "penny stocks" and which
describes the market therefor as well as a brief description of the
broker-dealer's obligations under certain "Penny Stock Rules" and rights
and remedies available to customers under federal and state securities
laws. The broker-dealer must obtain a signed and dated acknowledgement
from its customer demonstrating that the customer has actually received
the required risk disclosure document before the first transaction in a
penny stock. Consequently, such rules may restrict the ability of
brokers to sell the Company's Common Stock, may adversely affect the
liquidity of the Shares and may affect the ability of purchasers to sell
the Shares in the secondary market.
REPORTS TO SHAREHOLDERS
The Company is currently a reporting company and it will make available
to its shareholders annual reports containing audited financial
statements and a report by independent certified public accountants, and
quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
LEGAL MATTERS
The validity of the issuance of the Shares covered hereby will be passed
upon for the Company by Keller & Lokken, P.A., St. Paul, Minnesota.
EXPERTS
The consolidated financial statements of Uroplasty, Inc. and
subsidiaries as of March 31, 1998, and 1997, and for the years then
48<PAGE>
ended, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick LLP covering the March 31, 1998 financial statements refers
to a prior period adjustment.
AVAILABLE AND ADDITIONAL INFORMATION
The Company is a reporting company under the Securities Exchange Act of
1934, as amended, and therefore files periodic reports with the
Securities and Exchange Commission.
For further information with respect to the Company and the Shares,
reference is made to the Company's periodic reports and other documents
filed with the Securities and Exchange Commission ("SEC") in Washington,
D.C., which may be inspected without charge, or copies of which may be
obtained from the Public Reference Section of the SEC's Washington, D.C.
office, 450 Fifth Street N.W., Washington, D.C. 20549 upon payment of
the prescribed fees. In addition, such information is available without
charge through use of the SEC's EDGAR system, which allows interested
persons to obtain on-line access to such information.
The SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that
file electronically with the SEC, including the Company. The address is
(http://www.sec.gov).
The Company will provide without charge to each person who receives a
copy of this Prospectus, upon written or oral request of such person, a
copy of the information, if any, that is incorporated by reference in
this Prospectus. Inquiries should be directed to Uroplasty, Inc., 2718
Summer Street NE, Minneapolis, MN 55413-2820, telephone number
612-378-1180, FAX 612-378-2027.
49<PAGE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1998 and 1997
June 30, 1998 and 1997
TABLE OF CONTENTS
Page(s)
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-17
Unaudited Financial Statements for the Three Months
Ended June 30, 1998 F-17 - F-22
F-1<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders Uroplasty, Inc.:
We have audited the accompanying consolidated balance sheets of
Uroplasty, Inc. and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Uroplasty, Inc. and subsidiaries as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in footnote 7, the fiscal 1997 consolidated financial
statements have been revised to reflect a prior period adjustment.
KPMG Peat Marwick LLP
April 23, 1998
Minneapolis, Minnesota
F-2<PAGE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1998 and 1997
CONSOLIDATED BALANCE SHEETS
March 31, 1998 AND 1997
1998 1997
Assets
Current assets:
Cash and cash equivalents $889,541 814,603
Accounts receivable trade,
less allowance for doubtful
accounts of $64,930 in 1998
and $124,000 in 1997 766,835 502,744
Inventories 294,424 387,373
Prepaid expenses 184,628 105,625
Total current assets 2,135,428 1,810,345
Property, plant, and equipment 1,261,059 241,075
Less accumulated depreciation 216,529 92,745
1,044,530 148,330
Intangible assets, net of accumulated
amortization of $64,252 in 1998
and $44,500 in 1997 101,586 80,030
Total assets $3,281,544 2,038,705
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 358,782 160,811
Accrued liabilities:
Compensation and payroll taxes 81,526 62,364
Royalties 16,900 12,400
Other 116,755 95,575
Capital lease obligations current
maturities 16,463 32,191
Note payable-current maturities 30,756 36,954
Total current liabilities 621,182 400,295
Capital lease obligations, less current
maturities 31,893 0
Note payable, less current maturities 577,713 407,994
Total liabilities 1,230,788 808,289
Shareholders' equity
Common stock $.01 par value; authorized
20,000,000 shares 4,191,525 and
F-3<PAGE>
3,649,525 issued and outstanding at
March 31, 1998 and 1997,
respectively 41,915 36,495
Additional paid-in capital 2,432,599 1,963,560
Accumulated deficit (256,629) (664,470)
Cumulative translation adjustment (162,129) (100,169)
Note receivable shareholder (5,000) (5,000)
Total shareholders' equity 2,050,756 1,230,416
Commitments and contingencies (note 4)
Total liabilities and
shareholders' equity $3,281,544 2,038,705
See accompanying notes to consolidated financial statements.
F-4<PAGE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1998 and 1997
1998 1997
Net sales $4,335,908 3,334,563
Cost of goods sold 937,978 753,769
Gross profit 3,397,930 2,580,794
Operating expenses:
General and administrative 994,068 685,430
Research and development 778,082 610,677
Selling and marketing 964,138 908,483
2,736,288 2,204,590
Operating profit 661,642 376,204
Other income (expense)
Interest income 8,294 2,389
Interest expense (20,732) (36,884)
Liquidation loss on foreign subsidiary 0 (12,307)
Foreign currency exchange loss (129,503) (204,315)
Other 0 93,134
(141,941) (157,983)
Net income before income taxes 519,701 218,221
Income tax expense 111,860 0
Net income $407,841 218,221
Net income per common share $0.10 0.06
Net income per common share
assuming dilution 0.09 0.06
Weighted average common shares outstanding:
Basic 4,026,571 3,575,609
Diluted 4,321,132 3,670,275
[FN]
See accompanying notes to consolidated financial statements.
F-5<PAGE>
UROPLASTY, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Shareholders' Equity
Years ended March 31, 1998 and 1997
<CAPTION>
Total
Common Stock Additional Cumulative share-
Paid in accumulated translation Note holder
Shares Amount capital deficit adjustment receivable equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
March 31, 1996 3,472,525 $34,725 1,811,830 (882,691) (224,922) (5,000) 733,942
Issuance of 130,000
shares of common stock 130,000 1,300 128,700 0 0 0 130,000
Issuance of 17,000
shares of common
stock pursuant to
stock option exercise 17,000 170 8,330 0 0 0 8,500
Issuance of 30,000
shares of common
stock for note
payable conversion 30,000 300 14,700 0 0 0 15,000
Net income 0 0 0 218,221 0 0 218,221
Translation adjustment 0 0 0 124,753 0 124,753
Balance at
March 31, 1997 3,649,525 36,495 1,963,560 (664,470) (100,169) (5,000) 1,230,416
Issuance of 46,000
shares of common
stock pursuant to
stock option exercise 46,000 460 23,540 0 0 0 24,000
Issuance of 496,000
shares of common
stock for note
payable conversion,
net of $5,146 of
conversion costs 496,000 4,960 436,499 0 0 0 441,459
Stock options issued
in lieu of cash
compensation 0 0 9,000 0 0 0 9,000
Net income 0 0 0 407,841 0 0 407,841
Translation
adjustment 0 0 0 0 (61,960) 0 (61,960)
Balance at
March 31, 1998 4,191,525 $41,915 2,432,599 (256,629) (162,129) (5,000) 2,050,756
See accompanying notes to consolidated financial statements.
F-6<PAGE>
</TABLE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1998 and 1997
1998 1997
Cash flows from operating activities:
Net income $407,841 $218,221
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 121,640 63,913
Loss on disposal of assets 0 45,000
Liquidation loss on foreign
subsidiary 0 12,307
Stock options issued in lieu
of cash compensation 9,000
Changes in operating assets and
liabilities:
Accounts receivable (264,091) (166,596)
Inventories 92,949 (130,718)
Prepaid expenses (79,003) (12,062)
Accounts payable 197,971 (47,592)
Accrued liabilities 44,842 (40,525)
Net cash provided by (used in)
operating activities 531,149 (58,052)
Cash flows from investing activities:
Payments for property, plant,
and equipment (1,045,386) (85,276)
Payments relating to intangible assets (41,308) (7,202)
Net cash used in investing activities (1,086,694) (92,478)
Cash flows from financing activities:
Repayment of long-term obligations (63,404) (35,947)
Proceeds from issuance of notes payable 684,549 8,909
Net proceeds from issuance of stock 24,000 138,500
Payments received on note receivable 0 22,595
Net cash provided by financing activities 645,145 134,057
Effect of exchange rates on
cash and cash equivalents (14,662) 112,446
Net increase in cash and cash equivalents 74,938 95,973
Cash and cash equivalents
at beginning of year 814,603 718,630
Cash and cash equivalents
at end of year $889,541 814,603
Supplemental disclosure of
Cash Flow information:
F-7<PAGE>
Cash paid during the year
for interest $20,732 37,425
Cash paid during the year
for income taxes 87,522 0
Supplemental disclosure of
non-cash financing activities:
During the years ended March 31, 1998 and 1997, $441,459 and $15,000,
respectively, in notes payable were converted into common stock.
See accompanying notes to consolidated financial statements.
F-8<PAGE>
UROPLASTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Uroplasty, Inc. (the Company or UPI) is a manufacturer and distributor
of urological and plastic surgery implantable medical devices. The
primary focus of the Company's business is the marketing of an
implantable device for the management of stress urinary incontinence and
vesicoureteral reflux. Currently, all sales of the Company's products
are to customers outside the United States by the Company's foreign
subsidiaries.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned foreign subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
(c) Revenue Recognition
The Company recognizes revenue upon shipment of product to customers.
(d) Cash and Cash Equivalents
The Company considers highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(e) Patents
Patents are stated at cost and are amortized over six years using the
straight line method.
(f) Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying
amounts of existing assets and liabilities and their respective tax
bases.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
F-9<PAGE>
(h) Inventories
Inventories are stated at the lower of cost, (first-in, first-out
method), or market (net realizable value), and consist of the following
at March 31, 1998 and 1997:
1998 1997
Raw materials $47,891 88,864
Work-in-process 118,973 136,204
Finished goods 127,560 162,305
$294,424 387,373
(i) Property, Plant, and Equipment
Property, plant, and equipment are carried at cost and consist of the
following at March 31, 1998 and 1997:
1998 1997
Land $129,465 -
Building 526,639 -
Equipment 604,955 241,075
---------- --------
1,261,059 241,075
Less accumulated depreciation (216,529) (92,745)
$1,044,530 148,330
Depreciation is provided for using both straight-line and accelerated
methods over useful lives of four to seven years for equipment and 40
years for the building. Maintenance and repairs are charged to expense
as incurred. Renewals and betterments are capitalized and depreciated
over their estimated useful service lives.
(j) Research and Development
Research and development costs are expensed as incurred.
(k) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries were
translated in accordance with the provisions of Statement of Financial
Accounting Standards No. 52. Under this Statement, all assets and
liabilities are translated using period-end exchange rates and
statements of operations items are translated using average exchange
rates for the period. The resulting translation adjustment is recorded
as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are recognized currently in net income.
(l) Stock Based Compensation
The Company applies the intrinsic value method described in Accounting
Principles Board (APB) Opinion No. 25 in accounting for the issuance of
stock incentives to employees and directors and, accordingly, no
compensation expense has been recognized in the financial statements.
Effective April 1, 1996, in accordance with Statement of Financial
F-10<PAGE>
Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based
Compensation, pro forma information reflecting compensation cost for
such issuances is presented in the Shareholders' Equity footnote.
(m) Net Income Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS 128
simplifies the computation of earnings per share ("EPS") previously
required by replacing primary and fully diluted EPS with basic and
diluted EPS. Under SFAS 128, basic EPS is calculated by dividing net
earnings by the weighted-average common shares outstanding during the
period. Diluted EPS reflects the potential dilution to basic EPS that
could occur upon conversion or exercise of securities, options, or other
such items, to common shares using the treasury stock method based upon
the weighted-average fair value of the Company's common shares during
the period. Reconciliations of basic and diluted average common shares
outstanding are as follows:
1998 1997
Average common shares outstanding 4,026,571 3,575,609
Assumed conversion of stock options 294,561 94,666
Average common and
assumed conversion shares 4,321,132 3,670,275
Options to purchase 17,753 and 8,740 shares of common stock at $3.19 and
$3.25 per share, respectively, were outstanding during 1998 but were not
included in the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market
price of the common shares. The options expire from 2002 to 2004.
(n) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(o) New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, and Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an
Enterprise and Related Information, were issued in June 1997. SFAS 130
and SFAS 131 are effective for fiscal years beginning subsequent to
December 15, 1997 and, therefore, will be adopted by the Company on
April 1, 1998. The Company does not expect the adoption of SFAS 130 or
SFAS 131 to result in any substantive changes in its disclosure, except
that comprehensive income will be adjusted by the amount of the annual
translation adjustment.
(2) Long-term Debt
Long-term debt consists of the following at March 31, 1998 and 1997:
F-11<PAGE>
1998 1997
Non-interest bearing, unsecured promissory
note payable, discounted at 8% per annum,
$16,000 quarterly payments, remaining
balance due February 1999 $- 444,948
Mortgage note, monthly payments of $2,563 plus
variable rate interest through November 2017
(rate at March 31, 1998 - 5%) 608,469 -
Less current maturities 30,756 36,954
-------- --------
$577,713 $407,994
The promissory note payable was converted into 496,000 shares of common
stock during 1998.
Future payments of long-term debt are as follows:
1999 $30,756
2000 30,756
2001 30,756
2002 30,756
2003 30,756
Thereafter 454,689
--------
$608,469
(3) Shareholders' Equity
(a) Stock Options
Pursuant to the Uroplasty, Inc. Qualified Incentive Stock Option Plans,
the Company has reserved 677,200 shares of its common stock for issuance
to employees and directors. Employee options vest on the date of grant
and director options vest evenly over two years. Outstanding options
generally expire five years from date of grant. Options are granted at
the discretion of the directors and are exercisable in amounts equal to
or greater than the fair market value of the Company's common stock at
date of grant. The plans provide for the exercise of options during a
limited period following termination of employment, death, or
disability.
Stock option activity under these plans is summarized as follows:
Weighted-average
Shares exercise price
outstanding per share
Balance at March 31, 1996 246,700 0.50
Granted 3,000 1.00
Exercised (17,000) 0.50
Canceled (9,500) 0.50
Balance at March 31, 1997 223,200 0.51
Granted 328,000 1.58
Exercised (46,000) 0.52
F-12<PAGE>
Balance at March 31, 1998 505,200 $1.20
At March 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.50- $3.25 and
3.8 years, respectively. At March 31, 1998, and 1997, 445,200 and
223,200 options, respectively, were exercisable with weighted average
exercise prices of $1.13 and $.51, respectively.
(b) Fair Value of Stock Plans
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees in accounting for its stock incentive plans for designated
persons and, accordingly, no compensation cost has been recognized in
the financial statements for employee and director stock options granted
under its stock option plans. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options
under SFAS 123, Accounting for Stock-based Compensation, the Company's
net income would have decreased to the pro forma amounts shown below:
1998 1997
Net income:
As reported $407,841 218,221
Pro forma 167,695 217,705
Net income per common share - basic:
As reported 0.10 0.06
Pro forma 0.04 0.06
Pro forma net income only reflects options granted in 1998, 1997, and
1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to April 1, 1995 is not considered.
The per share weighted-average fair value of stock options granted
during 1998 and 1997 was $0.97 and $0.17, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 6.0% 6.5%
Expected volatility 156.0% 0.0%
Expected life, in years 3.0 3.0
(4) Commitments and Contingencies
(a) License Agreement
On December 7, 1995, the Company entered into an agreement as licensee
to obtain exclusive patent rights covering certain injection-related
instrumentation. Under this agreement, the Company made a cash payment
of approximately $30,000 to the licensor and will make royalty payments
at the rate of 10% of the worldwide net sales for a period of 10 years.
No additional payments have been made in either fiscal 1998 or 1997.
F-13<PAGE>
(b) Savings and Retirement Plans
The Company sponsors various plans for eligible employees both
domestically as well as in the United Kingdom and the Netherlands. The
total contribution expense associated with these plans was $43,782 and
$13,985 for the years ended March 31, 1998 and 1997, respectively.
(c) Operating Lease Commitments
UPI leases office, warehouse, and production space under four operating
leases and leases various automobiles for its European employees. Future
minimum lease payments under non-cancelable operating leases with an
initial or remaining lease term in excess of one year for the ensuing
years ending March 31 are as follows:
1999 $279,959
2000 193,606
2001 98,159
2002 56,728
2003 11,211
--------
$639,663
Total rent expense paid for operating leases was $241,732 and $167,999
in 1998 and 1997, respectively.
(d) Capital Lease Obligations
UPI leases various equipment under non-cancelable capital leases. The
leases call for aggregate monthly payments of $2,034 with various
expiration dates through July 2002. Equipment includes $85,854 and
$46,661 of cost and $22,070 and $10,340 of accumulated amortization as
of March 31, 1998 and 1997, respectively, related to these leases.
Future minimum capital lease payments are as follows as of March 31, 1998:
1999 $20,371
2000 17,783
2001 10,146
2002 8,665
2003 4,667
-------
61,632
Amount representing interest (13,276)
Present value of capital lease payments 48,356
Current maturities 16,463
Obligations under capital leases
less current maturities $31,893
(e) Royalties
Under the terms of an agreement with former officers and directors of
the Company, UPI pays royalties equal to between three percent and five
F-14<PAGE>
percent of the net sales of certain products, subject to a specified
monthly minimum of $4,500. The royalties payable under this agreement
will continue for the longer of the term of the patent or ten years from
the date of this agreement, which began in November, 1993. Total expense
recognized under the agreement was $147,860 and $110,495 for the years
ended March 31, 1998 and 1997, respectively.
Under the terms of a settlement agreement for a patent suit brought by a
competitor in 1991, UPI is obligated to pay the plaintiff a royalty
equal to five percent of the net sales of certain products in the United
States, or a minimum of $50,000 per year as long as the products are
being marketed abroad. Total expense recognized under the agreement was
$50,000 for each of the years ended March 31, 1998 and 1997.
(f) Contingencies
The Company, as of March 31, 1998, is not party to any material pending
legal proceedings; however, because of the nature of its business, it
may become subject to certain claims and lawsuits filed in the ordinary
course of business that could adversely affect the Company's financial
position.
(5) Income Taxes
The components of income tax expense for each of the years in the two-
year period ended March 31, 1998 consist of the following:
1998 1997
Income tax provision:
Current:
U.S. and state $1,000 -
Foreign 111,000 -
Total income tax expense $112,000 -
Effective tax rates differ from statutory federal income tax rates
for the year ended March 31, 1998 and 1997 as follows:
1998 1997
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit (1.2) 2.0
Valuation allowance decrease (22.6) (36.0)
Other permanent differences 2.0 0.0
Impact of foreign operations 9.6 0.0
------ ------
21.8% 0.0%
Deferred taxes as of March 31, 1998 and 1997 consist of the following:
1998 1997
Deferred tax assets:
Other reserves and accruals $14,000 8,000
Deferred profit on intercompany sales 208,000 300,000
Net operating loss carryforwards 1,001,000 1,031,000
--------- ---------
1,223,000 1,339,000
F-15<PAGE>
Less valuation allowance (1,223,000)(1,339,000)
$- -
At March 31, 1998, the Company had U.S. net operating loss carryforwards
(NOL) of approximately $2,061,000 for U.S. income tax purposes, which
begin to expire in 2012, and a foreign NOL of approximately $739,000,
which carries forward indefinitely. U.S. net operating loss
carryforwards cannot be used to offset taxable income in foreign
jurisdictions. In addition, U.S. tax rules impose limitations on the use
of net operating losses following certain changes in ownership. Such a
change in ownership may limit the amount of these benefits that would be
available to offset future taxable income each year, starting with the
year of ownership change.
The Company has not reflected any benefit of such net operating loss
carryforwards in the accompanying financial statements in accordance
with Financial Accounting Standards Board Statement No. 109.
(6) Major Customers and Domestic and Foreign Operations
During fiscal 1998 and 1997, approximately 12% and 14% of the Company's
net sales were to one customer.
Information regarding operations in different geographies for the years
ended March 31, 1998 and 1997 is as follows:
United Adjustments
States Europe and eliminations Consolidated
Fiscal 1998
Sales to
unaffiliated
customers $- 6,335,002 (1,999,094) 4,335,908
Income from
operations (719,552) 1,056,408 324,786 661,642
Other income
(expense) 99,104 (240,649) (396) (141,941)
Net income
(loss) (621,010) 704,461 324,390 407,841
Identifiable
assets at
March 31, 1998 $3,919,360 2,391,218 (3,029,034) 3,281,544
Fiscal 1997
Sales to
unaffiliated
customers $- 3,972,740 (638,177) 3,334,563
Income from
operations 201,931 909,960 (735,687) 376,204
Other income
(expense) 29,764 57,058 (244,805) (157,983)
F-16<PAGE>
Net income 231,694 967,024 (980,497) 218,221
Identifiable
assets at
March 31, 1997 $4,434,731 3,032,906 (5,428,932) 2,038,705
(7) Liquidation Loss on Foreign Subsidiary-Prior Period Adjustment
In 1997, the Company liquidated its interest in a wholly owned foreign
subsidiary and recognized a net gain of $59,245 in the statement of
operations. However, cumulative translation losses of $71,552 related to
the Company's net investment in this subsidiary were excluded from the
gain or loss on liquidation.
Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation, requires that upon complete or substantial liquidation of
an investment in a foreign entity, the amount attributable to that
entity and accumulated in the translation adjustment component of equity
shall be removed from the separate component of equity and shall be
reported as part of the gain or loss on sale or liquidation of the
investment for the period during which the sale or liquidation occurs.
Accordingly, the net loss on liquidation charged to other income in 1997
is $12,307, or $.02 per common share, rather than previously reported
net gain on liquidation of $59,245. At March 31, 1997 this adjustment
reduces previously reported 1997 net income by $71,552, or $.02 per
common share, and increases the accumulated deficit, which increase is
offset within shareholders' equity by an equivalent reduction in the
cumulative translation adjustment.
F-17<PAGE>
UNAUDITED FINANCIAL STATEMENTS for the Three Months Ended June 30, 1998
UROPLASTY, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 1998 March 31, 1998
ASSETS
Current Assets
Cash and cash equivalents $4,385,459 $889,541
Accounts receivable trade 795,096 766,835
Inventories 377,208 294,424
Prepaid expenses 209,945 184,628
--------- ----------
Total Current Assets 5,767,708 2,135,428
--------- ----------
Property, Plant and Equipment 1,351,801 1,261,059
Less accumulated depreciation
and amortization (256,046) (216,529)
--------- ----------
1,095,755 1,044,530
--------- ----------
Intangible assets, net of
accumulated amortization 108,445 101,586
--------- ----------
TOTAL ASSETS $6,971,908 $3,281,544
========== ==========
F-18<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $331,660 $358,782
Accrued liabilities
Compensation and payroll taxes 56,724 81,526
Royalties 25,800 16,900
Other 141,869 116,755
Current maturities - long term debt 51,556 47,219
------- -------
Total Current Liabilities 607,609 621,182
------- -------
Long term debt - less current
maturities 623,587 609,606
Total Liabilities 1,231,196 1,230,788
--------- ---------
Shareholders' equity
Common stock $.01 par value;
Authorized 20,000,000 shares
Issued and outstanding - 5,917,371
and 4,191,525 shares at June 30
and March 31, 1998, respectively. 59,174 41,915
Additional paid in capital 5,829,964 2,432,599
Accumulated deficit (7,395) (256,629)
Cumulative translation adjustment (136,031) (162,129)
Note receivable shareholder (5,000) (5,000)
--------- ----------
Total Shareholders' Equity 5,740,712 2,050,756
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' __________ __________
EQUITY $6,971,908 $3,281,544
See accompanying notes to consolidated financial statements.
F-19<PAGE>
UROPLASTY, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
June 30
1998 1997
Net sales $1,315,700 $1,149,239
Cost of goods sold 261,587 236,623
--------- ---------
Gross profit 1,054,113 912,616
Operating expenses:
General and administrative 242,553 206,894
Research and development 218,141 134,228
Selling and marketing 331,887 217,159
-------- -------
792,581 558,281
-------- -------
Operating profit 261,532 354,335
Other income (expense)
Interest income 15,754 1,167
Interest expense (8,829) (8,757)
Foreign currency exchange gain (loss) 18,905 (71,095)
Other (3,532) 0
------- -------
22,298 (78,685)
Income pretax 283,830 275,650
Income tax expense 34,596 36,958
-------- --------
Net income $249,234 $238,692
======== ========
Net income per common share $0.05 $0.07
Net income per common share
assuming dilution $0.05 $0.06
Weighted average common shares
outstanding:
Basic 4,740,237 3,649,525
Diluted 5,079,455 3,916,073
See accompanying notes to consolidated financial statements.
F-20<PAGE>
UROPLASTY, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
June 30
1998 1997
Cash flows from operating activities:
Net income $249,234 $238,692
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 45,914 46,628
Changes in operating assets and
liabilities
Accounts receivable (28,261) (229,362)
Inventories (82,784) 18,888
Prepaid expenses (25,317) 10,863
Accounts payable (27,122) 106,049
Accrued liabilities 9,212 (5,110)
-------- --------
Net cash provided by operating activities 140,876 186,648
-------- --------
Cash flows from investing activities:
Payments for property, plant and equipm. (90,742) (58,613)
Payments relating to intangible assets (13,256) (8,103)
-------- -------
Net cash used in investing activities (103,998) (66,716)
-------- -------
Cash flows from financing activities:
Repayment of long-term obligations (14,087) (10,081)
Proceeds from issuance of notes payable 16,883 0
Net proceeds from issuance of stock 3,414,624 0
---------- -------
Net cash provided by (used in)
financing activities 3,417,420 (10,081)
---------- -------
Effect of exchange rates on
cash and cash equivalents 41,620 (5,260)
--------- --------
Net increase in cash and cash
equivalents 3,495,918 104,591
Cash and cash equivalents at beginning
of period 889,541 814,603
-------- --------
Cash and cash equivalents at end
of period $4,385,459 $919,194
---------- ---------
See accompanying notes to consolidated financial statements.
F-21<PAGE>
UROPLASTY, INC. and Subsidiaries
FOOTNOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
These interim consolidated financial statements have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to such rules and regulations, although
management believes the disclosures are adequate to make the information
presented not misleading. The results of operations for any interim
period are not necessarily indicative of results for a full year. These
statements should be read in conjunction with the financial statements
and related notes included in the Company's Annual Report on Form 10-KSB
for the year ended March 31, 1998.
The financial statements presented herein as of June 30, 1998 and for
the three months ended June 30, 1998 and 1997 reflect, in the opinion of
management, all material adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods.
(2) Inventories
Inventories are summarized as follows:
June 30, 1998 March 31, 1998
Raw materials $43,627 $47,891
Work-in-process 178,553 118,973
Finished goods 155,028 127,560
--------- --------
$377,208 $294,424
(3) Private Placement
On June 18, 1998, the Company completed a private placement of 1,702,950
shares of Common Stock at $2.375 per share, which resulted in net
proceeds to the Company of approximately $3,400,000. In connection with
the private placement, the Company issued warrants to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of
$2.375 per share. The warrants are exercisable until June 18, 2003.
(4) Effective April 1, 1997, the Company adopted FASB Statement No. 130
(SFAS No. 130), "Reporting Comprehensive Income." SFAS No. 130 requires
that an entity report a total for comprehensive income in condensed
financial statements of interim periods issued to shareholders. For the
three-month periods ended June 30, 1998 and 1997 the net income (loss),
items of comprehensive income and comprehensive income are as follows:
1998 1997
Net income $249,234 $238,692
Items of comprehensive income:
Foreign currency translation 26,098 (76,812)
-------- --------
Comprehensive income $275,332 $161,880
======== ========
F-22<PAGE>
THIS PROSPECTUS DOES NOT 1,702,950
CONSTITUTE AN OFFER TO BUY ANY SHARES OF COMMON STOCK
SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO ANYONE IN UROPLASTY, INC.
ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO
DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
ALL INFORMATION CONTAINED PROSPECTUS
HEREIN IS AS OF THE DATE OF THIS
PROSPECTUS, AND NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR
ANY SALES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, IMPLY
THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
BROKERS OR DEALERS EXECUTING
A TRANSACTION ON BEHALF OF A
SELLING SHAREHOLDER MAY BE
REQUIRED TO DELIVER A
PROSPECTUS.
October ,1998
50<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 302A.521, Subd. 2., Minnesota Statutes, requires the Registrant
to indemnify its directors, officers and employees against liabilities
incurred as a result of legal proceedings, unless the Registrant's
Articles or Bylaws provide otherwise. Article Five of the Registrant's
Bylaws, incorporated by reference as Exhibit 3.2, requires
indemnification to the full extent required by Minnesota law. The
general effect of such provisions is to relieve the directors and
officers of the Registrant from personal liability which may be imposed
for certain acts performed in their capacity as directors or officers of
the Registrant.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the Registrant in connection with the
registration of the securities covered hereby are set forth in the
following table:
SEC Registration Fee $1,633
Blue Sky Registration Fees 2,000
NASD Filing Fee 1,732
Transfer agent 1,000
Printing and engraving 2,000
Legal 5,000
Accounting 5,000
Miscellaneous 1,635
-------
Total: $20,000
Note: All of such expenses will be paid by the Registrant, and none by
the Selling Shareholders. The foregoing estimated expenses do not
include any commissions or expenses payable by the Selling Shareholders
on their own behalf.
Item 26. Recent Sales of Unregistered Securities.
During the period of three or more years since June 30, 1995, the
Registrant has sold securities not registered under the Securities Act
in the transactions described below.
1. In November, 1995, the Registrant sold 1,000,000 shares of its Common
Stock to one accredited investor, Bruce P. Mindich, for $500,000 in
cash and short-term notes pursuant to a private placement.
2. In August, 1996, the Registrant sold 100,000 shares for $100,000 to
one investor, ABS, a French corporation, for cash pursuant to a private
placement.
3. During the period October, 1996, through June 1998, the Registrant
sold 116,000 shares to various employees upon exercise of stock options.
51<PAGE>
4. In October, 1996 the Registrant sold 60,000 shares to Precision
Optics Corporation pursuant to the conversion of a promissory note.
5. In July, 1997, the Registrant sold 496,000 shares to a group of
investors upon conversion of a promissory note having a principal
balance of $496,000. See Item 12 of Form 10-KSB for the fiscal year
ended March 31, 1998, or Certain Transactions in the Prospectus which is
part of this Registration Statement.
6. In May and June, 1998, the Registrant sold 1,702,950 shares of its
Common Stock for an aggregate of $4,044,506.20 to a group of accredited
investors (identified in the Selling Shareholders section of the
Prospectus) for cash pursuant to a private placement. As part of the
transaction, the Registrant paid to R.J. Steichen & Co., as Placement
Agent, an Agent's commission of $404,450.62 (10% of gross proceeds) and
a non-accountable expense allowance of $121,335.18 (3% of gross
proceeds).
Except for item no. 6, there were no underwriting discounts or sales
commissions paid by the Registrant as part of any such transactions.
All securities transactions identified above were made in reliance upon
the exemptions from registration under either or both of Sections 3(b)
and 4(2) of the Securities Act of 1933, as amended (in that sales were
made to a small number of persons, many of whom were accredited
investors, and all of whom were required to purchase for investment
purposes only, and each of the subscription agreements recited that the
purchases were made for investment purposes only), with the exception
that the Company relied on Rule 506 pursuant to Section 4(2) for item
no. 6.
Item 27. Exhibits.
(a) The following Exhibits are incorporated by reference to the
Registrant's Registration Statement on Form 10-SB, filed July 10, 1996:
2.1 First Amended Joint Plan of Reorganization (Modified), of the
Registrant, dated January 31, 1994. (Filed as Exhibit 8.2 to Form10SB)
3.1 Articles of Incorporation of Uroplasty, Inc. (Filed as Exhibit 2.1
to Form 10SB)
3.2 Bylaws of Uroplasty, Inc. (Filed as Exhibit 2.2 to Form 10SB)
4.1 Form of Stock Certificate of the Registrant, representing shares of
the Registrant's common stock. (Filed as Exhibit 3.1 to Form 10SB)
10.1 Settlement Agreement and Release dated November 30, 1993 by and
between Bioplasty, Inc., Bio-Manufacturing, Inc., Uroplasty, Inc.,
Arthur A. Beisang, Arthur A. Beisang, III, MD and Robert A. Ersek, MD.
(Filed as Exhibit 6.1 to Form 10SB)
10.2 Purchase and Sale Agreement dated December 1, 1995 by and among
Bio-Vascular, Inc., Bioplasty, Inc. and Uroplasty, Inc. (Filed as
Exhibit 6.2 to Form 10SB)
10.3 License Agreement dated December 1, 1995 by and among Bio-
Vascular, Inc. and Uroplasty, Inc. (Filed as Exhibit 6.3 to Form 10SB)
52<PAGE>
10.4 Lease Agreement dated January 10, 1995 between Summer Business
Center Partnership and Uroplasty, Inc. (Filed as Exhibit 6.4 to Form
10SB)
10.5 Unsecured $640,000 Promissory Note dated March 30, 1994 by and
between Bioplasty, Inc., Uroplasty, Inc. and Bioplasty Product
Claimants' Trust. (Filed as Exhibit 6.5 to Form 10SB)
10.6 Agreement and Satisfaction dated January 30, 1995 by and between
Bioplasty Product Claimants' Trust and Bioplasty, Inc. (Filed as Exhibit
6.6 to Form 10SB)
10.7 Asset Sale and Satisfaction of Debt Agreement dated June 23, 1995
by and between Bioplasty, Inc. and Uroplasty, Inc. (Filed as Exhibit 6.7
to Form 10SB)
10.8 Executory Contract Assumption Stipulation dated December 28, 1993
by and between Bioplasty, Inc., Uroplasty, Inc. and Collagen
Corporation. (Filed as Exhibit 6.8 to Form 10SB)
10.9 Settlement and License Agreement dated July 23, 1992 by and
between Collagen Corporation, Bioplasty, Inc. and Uroplasty, Inc. (Filed
as Exhibit 6.9 to Form 10SB)
(b) The following exhibits were previously filed as part of this
Registration Statement:
2.2 Order Confirming First Amended Plan of Reorganization (Modified)
dated January 31, 1994; issued by the United States Bankruptcy Court,
District of Minnesota.
5.1 Opinion of Keller & Lokken, P.A. regarding legality of securities
being registered.
10.10 Form of employment agreement between the Registrant and two of
its officers (Messrs. Willem and Harris).
21.1 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1998).
23.1 Consent of KPMG Peat Marwick LLP - Independent Auditor.
23.2 Consent of Keller & Lokken, P.A. Contained in Exhibit 5.1 to this
Registration Statement.
24.1 Form of Power of Attorney, running from each of the Registrant's
directors namely Joel R. Pitlor, R. Patrick Maxwell, Carolyn A.
Bruhjell, and Daniel G. Holman to Daniel G. Holman CEO, CFO, Chairman
and President and Susan Hartjes-Doherty, Vice President of Operations
and Regulatory Affairs, of the Registrant, respectively, with respect to
signing of this Registration Statement and any amendments.
27.1 Financial Data Schedule (Incorporated by reference to Exhibit 27.1
to the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1998).
53<PAGE>
27.1 Financial Data Schedule (Incorporated by reference to Exhibit 27.1
to the Registrant's Quarterly Report on Form 10Q-SB for the period ended
June 30, 1998.
(c) The following exhibits are filed as part of this Amendment No. 2 to
Registration Statement:
*23.1 Consent of KPMG Peat Marwick LLP - Independent Auditor.
*Included with this filing
Item 28. Undertakings.
a. Rule 415 Offering [Item 512(a) of Regulation S-B] The small business
issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(1) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the
initial bona fide offering.
(2) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
b. Request for Acceleration of Effective Date [Item 512(e) of
Regulation S-B]:
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
54<PAGE>
Signatures
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized
this Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, in the City of Minneapolis, State of
Minnesota, on October 26, 1998.
UROPLASTY INC.
/s/ Daniel G. Holman
By: Daniel G. Holman,
Chairman,President, CEO, CFO
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the
following persons in the capacities and on the dates stated.
Signature Title Dated:
/s/ Daniel G. Holman Chairman, President, October 26, 1998
Daniel G. Holman CEO and CFO (Principal
executive officer, principal
financial officer and principal
accounting officer)
* Director)
Joel R. Pitlor)
)
)
* Director)
R. Patrick Maxwell)
)
)
Director) By: /s/ Daniel G. Holman
Alexander S. Gerwer) Daniel G. Holman
) Attorney-in-Fact
October 26, 1998
* Executed by Daniel G. Holman as Attorney-in-Fact
<PAGE>
Consent of Independent Auditors
The Board of Directors
Uroplasty, Inc.:
We consent to the use of our report included herein and to the
references to our Firm under the headings "Selected Financial Data" and
"Experts" in the prospectus. Our report refers to a prior period
adjustment.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 23, 1998
Exhibit 23.1
