UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the fiscal year ended March 31, 1998.
UROPLASTY, INC.
(Name of Small Business Issuer in its Charter.)
Minnesota, U.S.A. 41-1719250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2718 Summer Street NE,
Minneapolis, Minnesota 55413
(Address of principal executive offices)
Issuer's telephone number, including area code:
(612) 378-1180
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year........$4,335,908....
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate I Rule 12b-2 of the Exchange
Act.) $_not applicable_, as of May 26, 1998. However see Item 5, hereof.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non- affiliates on the basis of
reasonable assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the Issuer filed all documents and reports required to be
filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
YES [ ] NO [ ] Not subject to Exchange Act at time [X]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,192,525 shares on
May 26, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None of the type referenced.
Transitional Small Business Disclosure Format
YES [ ] NO [X]
PART I
Introduction
Uroplasty, Inc. is referred to in this Report as "Uroplasty" or the
"Registrant".
Item 1. Description of Business
General
The Registrant designs, develops, manufactures and markets medical
products primarily for the treatment of urinary incontinence. The
Registrant'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 Registrant seeks
to fund its efforts to obtain FDA pre-market approval for Macroplastique,
which would allow the Registrant 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 Registrant'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 Registrant 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 Registrant estimates that about half of this
population are candidates for Macroplastique treatments. Of the estimated
2.6 million European men who are incontinent, the Registrant 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 Registrant 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
Registrant believes that there are approximately 1 million American women
and 1.4 million European women who are suitable for treatment with
Macroplastique. The Registrant 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 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 Registrant 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.
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 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(R)paste
(polytetrafluoroethylene, also known as PTFE).
Macroplastique
The Registrant'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 Registrant'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.
The Registrant 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 Registrant'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 Registrant'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
Registrant.
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 Registrant has developed an implantation
procedure for Macroplastique that is technologically feasible, easily
performed and effective.
Marketing, Distribution and Sales
The Registrant 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 Registrant 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
Registrant markets Macroplastique, it uses a network of distributors, for
whom training is provided by the Registrant's technical staff in the
Netherlands.
Other Products
The Registrant also sells the materials contained in Macroplastique
for plastic surgery applications under the name Bioplastique(TM)Implants, in
limited markets. In addition, the Registrant has been selling some
specialized wound care products as a distributor.
The Registrant recently introduced a new product to the gynecology and
urology market called the UroScope(TM). This is a modified short endoscope
specifically designed for the administration of Macroplastique in females.
Government Regulations
As a medical device manufacturer, the Registrant 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 Registrant's designing, testing, manufacturing,
and marketing of its products.
In order to market its products within the countries of the European Union,
the Registrant 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 Registrant 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 Registrant 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 Registrant in June 1996
which allowed the Registrant 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 Registrant 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 Registrant to comply with regulatory requirements. Failure
to comply with regulatory requirements could have a material adverse effect
on the Registrant's business, financial condition and results of operations.
There can be no assurance the Registrant 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 material adverse effect upon the
Registrant's business, financial condition or results of operations.
The Registrant 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 Registrant 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
Registrant's ability to do business.
In the United States, the Registrant 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 Registrant must comply with other
FDA regulations to maintain its U.S. marketing approval. The Registrant's
manufacturing facilities will be subjected to routine inspections by the
FDA to ensure that the Registrant is in compliance with GMP regulations.
Because the Registrant's quality system has already achieved ISO 9001
registration, the Registrant 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 Registrant's quality system to be in
compliance with all relevant aspects of the requirements (See Business
Manufacturing). The Registrant 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 Registrant to ensure that
only the product indications specifically approved by the FDA are promoted
by the Registrant.
The Registrant 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
Registrant's ability to market its products in those states or localities.
Third-Party Reimbursement
Throughout much of the world, the Registrant 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
Registrant.
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
Registrant 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
Registrant, 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 Registrant for Macroplastique.
Product Liability
The medical device industry is subject to substantial litigation. The
Registrant 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 Registrant currently carries product liability insurance but there can
be no assurance the Registrant's existing insurance coverage limits are
adequate to protect the Registrant 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 limits. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. Furthermore, the Registrant 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 Registrant 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 Registrant.
Manufacturing
The Registrant manufactures Macroplastique at its own facilities in The
Netherlands from medical grade materials obtained from qualified suppliers.
The Registrant'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
Registrant'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 Registrant for final inspection and testing.
The Registrant currently purchases all raw materials from single sources.
Alternative suppliers for these materials do exist should the current
suppliers discontinue production or distribution. However, the Registrant
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 Registrant'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 Registrant 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 Registrant's products. See Business Government
Regulations.
Competition
Competition in the urinary incontinence products market is intense. The
Registrant 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 Registrant believes the principal competitive factors
among treatment methods for urinary incontinence include physician and
patient acceptance of the method in managing or curing incontinence, cost
and the availability of third-party reimbursement, marketing and sales
capability and the existence of meaningful patent protection. The
Registrant'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 Registrant'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 Registrant 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 Registrant 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 Registrant's competitors and potential competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Registrant. In addition, many
of the Registrant'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 Registrant in the future.
Dependence on One or a Few Major Customers
Approximately 14% of the Registrant's total sales during the fiscal year
period ended March 31, 1998 were made to ABS, the distributor covering
France. ABS holds 100,000 shares of Uroplasty common stock.
Patents, Trademarks, and Licenses
The Registrant'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 Registrant 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
Registrant 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 Registrant by the United States,
United Kingdom, German and Japanese Patent Offices. Applications are also
currently pending in various other countries, including Canada and other
European countries. There can be no assurance that any of the Registrant'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 Registrant'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 Registrant 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 Registrant's
technology or provide the Registrant with any competitive advantage.
Should attempts be made to challenge, circumvent or invalidate the
Registrant's patents in the U.S. Patent and Trademark Office or courts of
competent jurisdiction, including administrative boards or tribunals, the
Registrant 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 Registrant's patent
rights could be lengthy and costly, with no guarantee of success.
The Registrant also relies heavily upon trade secrets and other proprietary
information. The Registrant 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
Registrant 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
Registrant.
In 1992, the Registrant 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 Registrant
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 Registrant
received several letters from Collagen's counsel questioning whether
additional royalties were payable as a result of either the manufacture or
sale by the Registrant of Macroplastique in the United States. The
Registrant'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
Registrant's products allegedly infringe the patent or other intellectual
property rights of others could have a material adverse effect on the
Registrant. 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 Registrant 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 Registrant and significant
diversion of the efforts of the Registrant's technical and management
personnel. An adverse outcome in any litigation could subject the Registrant
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 Registrant 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
Registrant, if at all. In addition to being costly, protracted litigation
to defend or prosecute intellectual property could result in the Registrant
being unable to commercialize Macroplastique on a timely basis or at all,
and could have a material adverse effect on the Registrant's business,
financial condition and results of operations.
Although the Registrant 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 Registrant has a Royalty Agreement with three individuals, two of
whom are former officers and directors. Under such Agreement, the
Registrant 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 for the life of the
patent referenced in the Agreement.
In December 1995, the Registrant obtained a license for a urethral
guiding device designed to make implantation of Macroplastique easier and
more precise. Under this agreement, the Registrant 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 Registrant has an active Research and Development program working to
develop new products in the field of incontinence. The Registrant 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 Registrant'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 Registrant has acquired the rights to a urethral guiding device
designed to make implantation of Macroplastique in women simpler and more
precise. The Registrant intends to introduce this device late in fiscal
year 1999. The Registrant currently does not intend to charge doctors
separately for this product. Instead, the Registrant will provide an
implantation kit including Macroplastique, the urethral guiding device and
administration needles. The Registrant 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 Registrant 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 Registrant's product line to cover a
broader range of female SUI. The Registrant 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.
Compliance with Environmental Laws
Compliance by the Registrant 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 Registrant 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 Registrant.
Former Parent, and Current Subsidiaries
The Registrant 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.
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 Registrant'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
Item 2. Description of Property
The Registrant owns office and warehouse space at Hofkamp 2, 6161 DC
Geleen, The Netherlands. In addition, the Registrant leases office,
warehouse, laboratory and production space at 2718 Summer Street NE,
Minneapolis Minnesota 55413-2820, USA; and office and warehouse space at
Unit 3, Woodside business Park, Whitley Wood Lane, Reading, Berkshire RG2
8LW, United Kingdom; and office, warehouse, laboratory and manufacturing
space at Industrieweg 12, 5627 BS Eindhoven, The Netherlands; and office
space at Hertogsingel 54, 6214 AE Maastricht, The Netherlands. The
Registrant considers its facilities adequate for its foreseeable needs.
Item 3. Legal Proceedings
The Registrant 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant did not submit any matter to a vote of its security
holders during the fourth quarter of its recently completed fiscal year.
Item 5. 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 March
1998, and for the period April 1, 1998 through May 8, 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 May 8, 1998 3 5
As of May 8, 1998, the Company's Common Stock was held of record by
approximately 500 holders. Registered ownership includes nominees who may
hold securities on behalf of multiple beneficial owners.
Item 6. 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 REGISTRANT SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS
ENTIRETY BY, THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE
WITHIN THIS ANNUAL REPORT, AND THE MATERIAL CONTAINED IN THE "RISK FACTORS"
AND "BUSINESS" SECTIONS OF THIS ANNUAL REPORT.
Overview
The Registrant 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 Registrant filed for protection under Chapter 11 of the
Federal Bankruptcy Code in 1993. The Registrant emerged from Chapter 11 in
February, 1994, as a separate and distinct entity from Bioplasty.
The Registrant 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 Registrant does not have regulatory approval to market its
product in the United States.
The Registrant'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 Registrant also sells the Macroplastique product in a different
configuration for plastic surgery applications under the name
Bioplastique(TM), in limited markets. In addition, the Registrant has been
selling some specialized wound care products as a distributor.
Results of Operations
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 primarily
attributable to an increase in the number of employees 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
operating expenses.
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%.
Liquidity and Capital Resources
The Registrant and its wholly-owned subsidiaries' capital resources are
derived from existing sales of the Registrant's products. As of March 31,
1998, the Registrant had approximately $890,000 in cash and cash equivalents.
There is currently no financing arrangement in place for the
Registrant's working capital needs, and the Registrant has no material
unused sources of liquidity other than its cash reserves and its accounts
receivable balances.
In November, 1997, due to expansion, the Registrant 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 Registrant 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 proceeds of the sale of the maximum number of shares offered, in
addition to cash generated by product sales, will be used to pursue an
Investigational Device Exemption (IDE) application and Premarket Approval
(PMA) application for Macroplastique with the U.S. Food and Drug
Administration. If only the minimum number of shares offered is sold,
proceeds will not be sufficient to complete the PMA and additional cash
from internal or other sources will be needed.
The Registrant 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.
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
develop a plan to communicate with the unrelated parties, including its
regulatory consultants with whom it deals, to coordinate year 2000
compliance. The costs incurred in addressing year 2000 compliance will be
expensed as incurred, in compliance with GAAP.
FORWARD-LOOKING STATEMENTS
The Registrant may from time to time make written or oral
"forward-looking statements", within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements contained in this
Annual Report and in documents filed by the Registrant 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 Registrant's future performance that may cause the actual
results, performance or achievements of the Registrant, 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.
The Registrant'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 Registrant's Securities and Exchange Commission filings.
In this Annual Report, the following sections contain "forward-looking
statements": "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
Registrant's results, performance or achievements to differ materially from
that contained in the Registrant'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 Annual Report.
The Registrant 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 Registrant.
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 Report.
Government Regulation International and United States
Inability to Market or Sell Macroplastique in United States; Uncertainty of
Obtaining FDA Marketing Approval. The Registrant'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 Registrant has been marketing Macroplastique since 1991,
the Registrant'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 Registrant 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 Registrant 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 Annual Report, the Registrant
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
or 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 Registrant's ability to commercialize its products in the United
States.
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 Registrant 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 Registrant'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 affect the
Registrant. The FDA and various other authorities either currently inspect
or will inspect the Registrant and its facilities from time to time to
determine whether the Registrant 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 Registrant
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 Registrant expects to derive substantially all of its revenues for
the next several years from sales of Macroplastique. The Registrant's
failure to continue its commercialization of Macroplastique in Europe would
have a material adverse effect on the Registrant's business, financial
condition and results of operations. The Registrant 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 Registrant's business, financial
condition and results of operation would be adversely affected. Unlike
larger companies with many products in the marketplace, the Registrant 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 Registrant'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 Registrant 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 Registrant) from introducing products
competitive with the Registrant's products, the Registrant'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
Registrant, or the Registrant'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 Registrant also relies upon
unpatented trade secrets to protect its proprietary technology. No
assurance can be given that others will not independently develop or
otherwise acquire substantially equivalent techniques and/or gain access to
and disclose the Registrant's proprietary technology. Further, no
assurance can be given that the Registrant 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 Registrant, protect trade secrets or proprietary information
owned by the Registrant 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 Registrant to significant liabilities to
third parties, require disputed rights to be licensed from others and/or
require the Registrant 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
Registrant, if at all. See Business Patents, Trademarks, and Licenses.
Uncertainty Relating to Third-Party Reimbursement
The success of the Registrant 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 Registrant 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 Registrant for
Macroplastique or increase the relative expense to the consumer. 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 Registrant'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 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 Registrant 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 Registrant, 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 Registrant's
products and the appropriateness of their intended use.
The Registrant 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 Registrant's ability to market
Macroplastique in the United States if and when the Registrant receives
PMA approval from the FDA for Macroplastique.
Research and Development Expenses in Fiscal Year 1999; Expected Losses
The Registrant'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 of this offering. Although the Registrant has been profitable in
fiscal years 1998 and 1997, the Registrant 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 Registrant 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 Registrant anticipates the proceeds from the sale of the maximum
number of Shares 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 any number of
Shares less than the maximum is sold or if the maximum number is sold and
expenses or operating profits differ from expected levels, the Registrant
will require additional financing to complete its PMA application to the
FDA for Macroplastique. Further, the Registrant 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 Registrant when needed or on
terms acceptable to the Registrant. The net proceeds of this offering,
together with the Registrant'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 there can be no assurance that other sources of funding will be
available. See "Use of Proceeds" and "Management's Discussion and
Analysis".
Lack of Marketability and Liquidity of Shares/Registration Rights Do Not
Assure Liquidity and May Not Apply in All States
The transferability of the Shares will be restricted, so an investment in
the Shares should be considered illiquid for an extended period of time.
Although purchasers of the Shares hold mandatory registration rights
(which are contained in the Subscription and Registration Rights Agreement,
Exhibit A hereto), which require the Registrant to use its best efforts to
register the Shares following the completion of this offering, there can be
no assurance that any such registration effort will be successful, and the
Registrant may not be required to register the Shares in all states in
which the Shares may be sold.
Highly Competitive Industry
Competition in the urinary incontinence management and treatment products
market is fierce. The medical condition treated by using the Registrant'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 Registrant'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 Registrant's products
obsolete. In addition, the Registrant 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 Registrant'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 Registrant. These competitors may also have greater expertise than
the Registrant in research and development, manufacturing, marketing and
sales and regulatory affairs. There can be no assurance that the
Registrant and Macroplastique will be able to compete effectively with such
alternative products or techniques or with such competitors and potential
competitors.
In addition, the Registrant'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 Registrant'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 Registrant'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 Registrant 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 Registrant'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 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. 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 Registrant 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 Registrant maintains product liability insurance, but
there can be no assurance that its coverage limits are adequate to protect
the Registrant 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 Registrant 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 Registrant 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 Registrant. See "Business Product Liability".
Uncertainty of Future Market Acceptance
The Registrant sells Macroplastique in Europe and other foreign
countries, where it has established a small, though significant,
marketshare for the product. 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 Registrant 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 Registrant'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
Registrant 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 Registrant's business, financial condition
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 Registrant's success depends to a significant degree upon the
continued contributions of its key management personnel. The Registrant
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
Registrant's results of operations. The Registrant 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.
Risks Associated with International Operations;Currency Risks
At this time, the Registrant 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
Registrant's financial condition or results of operations. In particular,
because the Registrant's international sales are denominated primarily in
Dutch guilders, currency fluctuations in countries where the Registrant
does business may render the Registrant's products less price competitive
than those of foreign companies whose sales are denominated in weaker
currencies. The Registrant reports its financial results in U.S. dollars,
and fluctuations in the value of the dollar or the currencies in which the
Registrant transacts business can have a negative impact on its financial
results.
Dependence on Suppliers
The Registrant currently purchases all raw materials from single sources.
Alternative suppliers for these materials exist should the current
suppliers discontinue production or distribution. However, the Registrant
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 Registrant 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
Registrant'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
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
Registrant 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 Registrant'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 Registrant believes that Macroplastique is safe when used
as recommended by the Registrant, 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 Registrant 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 Registrant 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 Registrant's financial results should be approached cautiously.
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 Registrant's Common Stock.
Such sales may also make it more difficult for the Registrant to sell
equity or equity-related securities in the future at a time and price that
the Registrant would deem appropriate. Upon completion of this offering, if
the maximum number of Shares offered is sold, the Registrant will have
5,692,525 shares of Common Stock issued and outstanding. The 1,500,000
shares offered hereby are expected to become freely tradable within 90
days following the registration of the Shares offered because of mandatory
registration requirements, except for any shares purchased by an
"affiliate" of the Registrant, which will be subject to the limitations of
Rule 144 under the Securities Act of 1933, as amended ("Rule 144"). In
addition to the 1,500,000 shares of Common Stock offered hereby, (i)
approximately 3,400,000 shares are eligible for immediate sale on the date
of this Report in accordance with Rule 144(k) or otherwise; and (ii)
approximately 1,100,000 additional shares will be eligible for sale in the
public market beginning in July, 1998, in accordance with Rule 144;
subject, in certain cases, to volume and manner of sale limitations under
Rule 144. See "Description of Securities Shares Eligible for Future
Sale".
Possible Adverse Effect of Anti-Takeover Provisions and Staggered Board
As a Minnesota corporation, the Registrant 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 Registrant, may discourage bids for the
Registrant'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. See
"Description of Securities".
The Registrant'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 Registrant'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
Registrant's voting power and could discourage an attempt to gain control
of the Registrant. See "Description of Securities".
Potential Applicability of "Penny Stock Rules"; Possible Impact on
Liquidity of Stock
If the Registrant 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. The public trading market for
the Common Stock could be adversely affected by such limited quotation.
In addition, the Common Stock would be subject to SEC rules under the
Securities Exchange Act of 1934 relating to "penny stocks." The "penny
stock rules" apply to companies whose common stock trades at less than
$5.00 per share or which have a tangible net worth of less than $5,000,000
($2,000,000 if the Registrant has been operating for three or more years).
These rules 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 Common Stock, may adversely
affect the liquidity of the Shares, and may affect the ability of
purchasers in this offering to sell their Shares in the secondary market.
Immediate, Substantial Dilution to Purchasers in this Offering
Purchasers of the Shares offered hereby will incur immediate and
substantial dilution in the net tangible book value of their purchased
Shares. Investors may also experience additional dilution as a result of
the exercise of outstanding stock options and warrants. See "Dilution".
No Dividends
The Registrant 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 Registrant 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 Registrant'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
Registrant'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 Registrant.
The Registrant 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.
Item 7. Financial Statements
The information contained under the headings "Consolidated Statements
of Operations," "Consolidated Balance Sheets," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes
to Consolidated Financial Statements" and Independent Auditors Report is
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The Registrant's Directors and Executive Officers, as of March 31, 1998,
were as follows:
Name Age Position Director Since Term Expires
Daniel G. Holman 52 Chairman, President, 1994 2000
CEO, CFO
Joel R. Pitlor 59 Director 1994 1999
R. Patrick Maxwell 53 Director 1994 1999
Carolyn A. Bruhjell 48 Director 1997 1998
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 Ms. Bruhjell are members of the Audit Committee.
The Registrant does not have any employment or non-compete agreement
with Mr. Holman or Ms. Doherty, whose employment, as such, is at will.
The following paragraphs describe the business experience of each of the
Registrant'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".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).
Carolyn A. Bruhjell was elected a Director of Uroplasty in August 1997.
Ms. Bruhjell is a public accountant and financial consultant. Ms. Bruhjell
was from 1996 through January 1998, the Controller of Integrated Network
Technologies, Inc., Mendota Heights, Minnesota, a computer integration and
networking Registrant. From 1994 to 1996, Ms. Bruhjell was a Senior Audit
Manager for Graves, McKenna, Lundeen and Almquist, PLLP, public
accountants, as well as Treasurer for Minn Shares Inc., a closed-end
management investment Registrant. From 1979 to 1994, she was Co-Owner and
Accountant for First Commercial Leasing, Inc., an equipment leasing firm.
Ms. Bruhjell received her B.S. in Accounting from the University of
Wisconsin. She is a Certified Public Accountant and a Certified Management
Accountant.
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 Registrant 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
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 Registrant'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.
Item 10. 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 Registrant's
Chairman, President, CEO and CFO and to Susan Hartjes-Doherty, the
Registrant'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:
<TABLE>
<CAPTION>
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(#)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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-Doherty 1998 102,160 5,000 -- -- 40,000
Vice President
Total Compensation for All Executive Officers
For Fiscal Year 1998:
(Four Persons) 475,617
</TABLE>
(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
members who do not receive any other form of compensation from the
Registrant receive $500 per board meeting attended. In addition,
directors participate in the Registrant's option plan.
Option/SAR Grants Table
<TABLE>
<CAPTION>
Option Grants in Fiscal Year Ended March 31, 1998
- -----------------------------------------------------------------------------
Number of Percent of
Securities Total Op-
Underlying tions/SARS
Options Granted to Exercise or Securities
/SARS Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Share) Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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% $3.25 February 2003
</TABLE>
(1) Options for 250,000 shares were granted to officers and directors
during the fiscal year ended March 31, 1998.
The Registrant adopted an Incentive Stock Option Plan (the "1995 Plan")
in May 1995 which provided for the granting of options to purchase 350,000
shares of stock. At March 31, 1998 there were 177,200 options outstanding
under the 1995 Plan. In April 1997, the Board of Directors adopted and in
August 1997, the Registrant's shareholders approved the 1997 Stock Option
Plan (the "1997 Plan") pursuant to which 500,000 shares of common stock
have been reserved. At March 31, 1998 there were 313,000 options
outstanding under the 1997 Plan. (In addition, the Registrant had 15,000
options outstanding not issued pursuant to either Plan.) Both Plans
required that options be granted at exercise prices equal to or greater
than the fair market value of the stock at the time of the grant.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Option/SARs Options/SARs
Shares acquired Value At FY-End (#) at FY-End ($)
Name on Exercise Realized ($) Exercisable Exercisable
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel G. 10,000 27,000 95,000 181,250
Holman, CEO
Susan Hartjes- -- -- 65,000 125,000
Doherty, V.P.
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
At March 31, 1998, the Registrant had 4,191,525 shares of common stock
outstanding and had granted options to employees and directors to purchase
505,200 shares of the Registrant's common stock.
The following table sets forth the number of shares of the Registrant's
common stock beneficially owned, as of March 31, 1998, and as adjusted to
reflect the sale of the minimum and maximum number of Shares offered
hereby, by (i) each person known to the Registrant to be the beneficial
owner of more than five percent of the Registrant's Common Stock, (ii)
each director, (iii) each executive officer of the Registrant who is named
above, and by (iv) all directors and executive officers as a group:
<TABLE>
<CAPTION>
Percent of Class
----------------------------------
Name and Address of Number of Shares As Adjusted
Beneficial Owner Beneficially Owned Presently Minimum Maximum
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bruce P. Mindich
555 White Plains Road
Tarrytown, NY 10591 1,100,000 26.2% 21.2% 19.3%
Daniel G. Holman
2718 Summer Street NE
Minneapolis, MN 55413-2820 299,981 (1) 7.0% 5.7% 5.2%
Robert A. Ersek, M.D.
Continental Intervest
630 West 34th Street, Suite 200
Austin, TX 78205 227,988 5.4% 4.4% 4.0%
Susan Hartjes-Doherty
2718 Summer Street NE
Minneapolis, MN 55413-2820 122,203 (2) 2.9% 2.3% 2.1%
Joel R. Pitlor
19 Chalk Street
Cambridge, MA 02139 145,000 (3) 3.4% 2.8% 2.5%
R. Patrick Maxwell
Templeton & Associates
10 South Fifth Street, Suite #990
Minneapolis, MN 55402 45,307 (3) 1.1% 0.9% 0.8%
Carolyn A. Bruhjell
CAB Consulting
703 Bartosh Lane
River Falls, WI 55402 57,488 (4) 1.4% 1.1% 1.0%
Directors and Executive
Officers as a Group (7 persons) 751,979 (5)(6) 16.5% 13.5% 12.4%
</TABLE>
(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 362,000 shares held under options to purchase common stock.
(6) To the Registrant's knowledge, the persons named have both voting and
investment power over the shares listed.
Item 12. Certain Relationships and Related Transactions
The Registrant has a Royalty Agreement with three individuals, 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
Registrant (see "Business Patents, Trademarks, and Licenses"), and, as
far as the Registrant knows, each holds, or did hold, more than 5% of the
Registrant's outstanding stock. The aggregate amount of royalty expense
recognized by the Registrant 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 Registrant'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 Registrant'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, which, at
March 31, 1997, had a principal balance outstanding of $496,000.
Concurrently with the sale by the Trust of the 640,000 shares to the
Investors, the Registrant 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 Investors, who included certain registered representatives (or their
customers) employed by RJ Steichen & Co., the Agent, 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 Registrant, and the Investors did not pay a commission on the
transaction. There was no involvement whatsoever by the Agent as an
entity.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits incorporated by reference (Rule 12b-23).
The following Exhibits are incorporated by reference to the Registrant's
Registration Statement on Form 10SB, filed July 10, 1996:
Number Description
2.1 First Amended Joint Plan of Reorganization (Modified), of the
Registrant, dated January 31, 1994. (Filed as Exhibit 8.1 to Form
10SB)
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)
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 are filed as part of this report:
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
UROPLASTY, INC.
Dated: May 28, 1998 By /s/ DANIEL G. HOLMAN
Daniel G. Holman
Chairman, President and CEO
In accordance with the Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Name Title/Capacity Date
/s/ DANIEL G. HOLMAN President, Chief Executive Officer May 28, 1998
Daniel G. Holman Chief Financial Officer,
Director (Principal Executive Officer,
Principal Financial Officer, Principal
Accounting Officer)
/s/ JOEL R. PITLOR Director May 28, 1998
Joel R. Pitlor
/s/ R. PATRICK MAXWELL Director May 28, 1998
R. Patrick Maxwell
/s/ CAROLYN A. BRUHJELL Director May 28, 1998
Carolyn A. Bruhjell
Exhibit 13
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 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-16
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
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1998 and 1997
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, 1998 AND 1997
1998 1997
<S> <C> <C>
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
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
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended March 31, 1998 and 1997
Common Stock Additional Accu- Cumulative Total
Paid in mulated translation Note shareholders'
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 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
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
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:
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.
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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.
(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
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:
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
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.
(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.
(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 contibution 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 noncancelable 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 noncancelable 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
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
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:
<TABLE>
<CAPTION>
United Adjustments
States Europe and eliminations Consolidated
Fiscal 1998
<S> <C> <C> <C> <C>
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)
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, 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 and increases the accumulated deficit, which
increase is offset within shareholders' equity by an equivalent reduction
in the cumulative translation adjustment.
</TABLE>
Uroplasty BV
Hofkamp 2
6161 DC Geleen
The Netherlands
Bioplasty BV
Hofkamp 2
6161 DC Geleen
The Netherlands
Uroplasty LTD
Unit 3, Woodside Business Park
Whitley Wood Lane, Reading
Berkshire, RG2 8LW
United Kingdom
Bioplasty BVBA
p/a Amerikalei 35
2000 Antwerpen
Belgium
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Uroplasty, Inc. and subsidiaries as of
and for the year ended March 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-START> Apr-01-1997
<PERIOD-END> Mar-31-1998
<CASH> 889,541
<SECURITIES> 0
<RECEIVABLES> 766,835
<ALLOWANCES> 64,930
<INVENTORY> 294,424
<CURRENT-ASSETS> 2,135,428
<PP&E> 1,261,059
<DEPRECIATION> 216,529
<TOTAL-ASSETS> 3,281,544
<CURRENT-LIABILITIES> 621,182
<BONDS> 0
<COMMON> 41,915
0
0
<OTHER-SE> 2,008,841
<TOTAL-LIABILITY-AND-EQUITY> 2,050,756
<SALES> 4,335,908
<TOTAL-REVENUES> 4,335,908
<CGS> 937,978
<TOTAL-COSTS> 2,736,288
<OTHER-EXPENSES> (129,503)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20,732)
<INCOME-PRETAX> 519,701
<INCOME-TAX> 111,860
<INCOME-CONTINUING> 407,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407,841
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
</TABLE>