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, 1999.
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 55413-2820
(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........$5,308,587....
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 June 24, 1999. 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: 5,923,371 shares on
June 24, 1999
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", the
"Company" 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 and vesicoureteral reflux.
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 the involuntary loss of urine as a result of activities that increase
intra-abdominal pressure, such as coughing, laughing or exercising.
Macroplastique is also 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 the 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").
It is estimated 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. Of the estimated 2.6 million European men who are incontinent,
the Registrant believes about 25% are candidates for treatment with
Macroplastique. VUR is primarily a pediatric concern, with a prevalence
estimated to be as high as 1% of the pediatric population. The Registrant
estimates about half of this population are candidates for Macroplastique
treatments.
Macroplastique consists of soft, flexible, solid, highly textured implants
of heat vulcanized polydimethylsiloxane (solid silicone) suspended in a
water-based biocompatible carrier gel. 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 20,000 patients 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 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 moves an elderly person to nursing home care. The Registrant
expects 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 sphincter muscle. This muscle
surrounds the urethra and provides constrictive pressure to prevent urine from
flowing out of the bladder. Urination occurs when the 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. Incontinence may result when any part of the
urinary 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, resulting 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 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, 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, strong desire to urinate. Urge incontinence
often occurs with neurologic problems, causing the bladder to contract and
empty with little or no warning.
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 symptoms with items such as pads or diapers. The other
approach consists of curative measures attempting to restore continence, such
as surgery or treatment with bulking agents. The Registrant suggests the
treatment of 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
management for urinary incontinence because 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
known as 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 improperly used.
Pelvic Organ Support Devices: A pessary is a doughnut-shaped device made
of flexible materials and are designed to temporarily reduce pelvic prolapse
and alleviate symptoms of pelvic relaxation in females with and without
incontinence. When these devices are misused or neglected, complications such
as ulceration of the vagina and rectovaginal and vesicovaginal fistula can
occur. Persons using pessaries require frequent, regular monitoring.
Occlusion Devices: Urethral occlusion devices, or "plugs," consist of tiny
disposable products. They are intended to be used by younger, more physically
active stress incontinent women, because they are more likely to be 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 (a closed sterile
system inserted through the urethra to allow 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 resembling a condom, 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 to 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 or bulking 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 a 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 and
synthetic 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 body resorbs biologically derived agents over time and
subsequent injections may be required. The two most commonly used synthetic
bulking agents are Macroplastique (polydimethylsiloxane) and Teflon(R) paste
(polytetrafluoroethylene, also known as PTFE).
Macroplastique
Macroplastique 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) implants suspended in a
biocompatible carrier solution. Based on the Registrant's clinical experience
outside the United States, Macroplastique does not cause chronic inflammation,
is not resorbed by the body and does not migrate. Macroplastique is used to
provide bulking of the urethral sphincter. The actual implantation of
Macroplastique is minimally invasive and can be accomplished in less than 30
minutes 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, as well as 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 Registrant believes the advantages of Macroplastique are its
biocompatibility, cost effectiveness and successful use in over 20,000
patients overseas.
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, four persons in the Netherlands and one
in the United States. For the more than 40 countries in which the Registrant
markets Macroplastique, it uses a network of distributors, trained by the
Registrant's technical staff in The Netherlands. The Latin American and
Canadian markets are managed by a technical staff member in the United States.
The Company has written agreements with each of the individual distributors.
None of the distributors sell injectable products which compete directly with
Macroplastique. The Company's technical staff in the Netherlands provides
training for the distributors. No distributor accounted for more than 10% of
the Company's sales. Collectively, the Company's distributors accounted for
approximately 50% and 54% of total sales in fiscal years 1999 and 1998,
respectively.
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.
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.
In order to market its products within the countries consisting 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 called
the Medical Device Directives ("MDD") in Europe. CE mark authorization is
granted by organizations called Notified Bodies who 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 who serve as the auditing and
certifying arm of the Competent Authorities.
Under the European MDD, Macroplastique is considered a Class IIb long-term
implantable device. To obtain the CE mark for Macroplastique, the Registrant
was required to submit extensive information regarding product design,
labeling, safety and 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.
After successfully demonstrating full compliance to the MDD, the Notified Body
issued a Certificate of Authorization to the Registrant in June 1996, allowing
the Registrant to place the CE mark on Macroplastique and the related
accessories. Upon fulfilling any additional national requirements,
Macroplastique can be marketed throughout the European Union. 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"). 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 is a rigorous submission requiring the manufacturer to substantiate
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. 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 the 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 PMA approval, 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 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 the FDA would find the
Registrant's quality system to be in compliance with all relevant aspects of
the requirements. 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 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. These third-party payers consist
of government health programs, private health insurance plans, managed care
organizations and other similar programs. They 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
patients. 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. Components
are manufactured in the United States, and finished products 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
areas 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 Company currently purchases its base silicone solution from Applied
Silicone Corporation and its carrier solution from GAF Corporation, which are
single sources of supply for such products at the moment, and with neither of
whom does it have a supply agreement. Alternative suppliers for these
materials do exist should the current suppliers discontinue production or
distribution. However, the Company would need to complete additional testing
to qualify the materials obtained from any new suppliers. Additionally,
limited notice of the need to switch suppliers for either of these materials
could result in production delays and inventory depletion.
The 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 "Decription of 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, competing manufacturers of commercially available bulking
agents, and from companies developing new or improved treatment methods. The
Registrant believes the principal competitive factors among treatment methods
include physician and patient acceptance of the method in managing or curing
incontinence, cost and 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, as well as 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.; Boston Scientific Corporation, Influence, Inc.
and Johnson & Johnson for sling procedures and artificial sphincter implants.
The Registrant believes some of its current competitors and others who 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 competing 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 worldwide. 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
During fiscal 1999 no customer reached the level of 10% of the Company's
net sales. During fiscal 1998 approximately 12% of the Company's net sales
were to one customer.
Patents, Trademarks, and Licenses
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. The
Company seeks to protect its technology by filing patent applications for
patentable technologies that it considers important to the development of its
business based on an analysis of the cost of obtaining a patent, the likely
scope of protection and the relative benefits of patent protection compared to
trade secret protection, among other considerations. The Company also relies
upon trade secrets, know-how and continuing technological innovation to
develop and maintain its competitive position.
Multiple patents covering the Macroplastique materials, processes and
applications have been issued to the Company by the United States, United
Kingdom, German and Japanese Patent Offices. Such patents will expire in the
United States at various times between 2010 and 2013. Applications are also
currently pending in various other countries, including Canada and other
European countries. There can be no assurance that any of the Company's
pending or future U.S. or foreign patent applications will result in issued
patents, or that any issued patents will be of sufficient scope or strength to
provide meaningful protection of the Company's products. The coverage sought
in a patent application can be denied or significantly reduced before the
patent is issued. In addition, there can be no assurance that any current or
future U.S. or foreign patents of the Company will not be challenged or
circumvented by competitors or others, or that such patents will be found to
be valid or sufficiently broad to protect the Company's technology or provide
the Company with any competitive advantage. Should attempts be made to
challenge, circumvent or invalidate the Company's patents in the U.S. Patent
and Trademark Office or courts of competent jurisdiction, including
administrative boards or tribunals, the Company may have to participate in
legal or quasi-legal proceedings therein to maintain, defend or enforce its
rights in these patents. Any legal proceedings to maintain, defend or enforce
the Company's patent rights could be lengthy and costly, with no guarantee of
success.
The Company also relies heavily upon trade secrets and other proprietary
information. The Company seeks to maintain the confidentiality of such
information by requiring employees, consultants and other parties to sign
confidentiality agreements and by limiting access by parties outside the
Company to such information. There can be no assurance, however, that these
measures will prevent the unauthorized disclosure or use of this information
or that others will not be able to independently develop such information.
Additionally, there can be no assurance that any agreements regarding
confidentiality and non-disclosure will not be breached, or, in the event of
any breach, that adequate remedies would be available to the Company.
In July 1998, the Company announced that the United States Patent and
Trademark Office ("USPTO") had informed the Company that the USPTO will, as
Uroplasty requested, initiate an interference proceeding between Uroplasty and
Advanced UroScience, Inc. ("AUI"), to determine which company was the first to
invent carbon-coated micro beads for use in treating urinary incontinence.
Although the USPTO originally granted the applicable patent to AUI, the
interference proceeding may result in a determination that either Uroplasty or
AUI is the proper holder, or that a patent should not have been granted.
Uroplasty expects that it could take the USPTO twenty-four months or more to
reach a final decision concerning this matter. An interference proceeding,
like other patent litigation, can be complex, time-consuming and expensive.
The interference proceeding does not involve Macroplastique. Subsequently, the
Company brought suit against AUI and certain related defendants alleging a
wrongful taking and misuse of the Company's trade secrets pertaining to the
carbon-coated micro beads.
In 1992, the Company and its then parent, Bioplasty, Inc., were sued by
Collagen Corporation, which alleged that Macroplastique infringed on one of
its U.S. patents for a bulking agent. The parties entered into a license and
settlement agreement in 1993 pursuant to which the Company pays Collagen a
royalty of 5% of net sales of certain products sold in the United States with
a minimum of $50,000 per year. Recently, the Company received several letters
from Collagen's counsel questioning whether additional royalties were payable
as a result of either the manufacture or sale by the Company of Macroplastique
in the United States. The Company's position is that royalties are payable
only on "net sales" in the United States and, there having been none, no
additional royalties are payable. Collagen has not brought any new or renewed
legal action in connection with its allegations. There can be no assurance,
however, that Collagen or any other third party will not pursue legal action
with respect to these matters.
Claims by competitors such as Collagen and other third parties that the
Company's products allegedly infringe the patent or other intellectual
property rights of others could have a material adverse effect on the Company.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry, and intellectual property
litigation may be used against the Company as a means of gaining a competitive
advantage. Intellectual property litigation is complex, time-consuming and
expensive, and the outcome of such litigation is difficult to predict. Any
future litigation, regardless of outcome, could result in substantial expense
to the Company and significant diversion of the efforts of the Company's
technical and management personnel. An adverse outcome in any litigation could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from others, if licenses to such rights could
be obtained, or require the Company to cease making, using or selling certain
products. There can be no assurance that any licenses required under any
patents or proprietary rights would be made available on terms acceptable to
the Company, if at all. In addition to being costly, protracted litigation to
defend or prosecute intellectual property could result in the Company being
unable to commercialize Macroplastique on a timely basis or at all, and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company intends to apply for additional patents and vigorously
defend issued patents, management believes that its success as a business will
depend primarily upon its development and marketing skills, and the quality
and economic value of its products rather than on its ability to obtain and
defend patents.
The Company has a Royalty Agreement with three individuals, two of whom are
former officers and directors. Under such Agreement, the Company pays
royalties, in the aggregate, of three to five percent of net sales of
Macroplastique and Bioplastique, subject to a monthly minimum of $4,500. The
royalties payable under this Agreement will continue until the patent
referenced in the Agreement expires in 2010.
In December 1995, the Company obtained a license from a British surgeon,
Sam M. Henalla, for a urethral guiding device designed to make implantation of
Macroplastique easier and more precise. Under this agreement, the Company made
a cash payment of approximately $30,000 to the licensor and will make royalty
payments at the rate of 10% of the worldwide net sales of this device for a
period of 10 years.
Research and Development
The 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 $1,236,855 and $778,082 for the fiscal years
ended March 31, 1999 and March 31, 1998, respectively. None of these costs
were borne directly by customers.
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 in late fiscal year
2000. The Registrant expects the new device to make implantation easier and
allow it to be performed on an outpatient basis. 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 urethra. The
Registrant intends to introduce this product into the U.S. market, 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, 1999 and 1998 has not had a material
effect upon the capital expenditures, earnings or competitive position.
Employees
As of March 31, 1999, the Registrant had forty-eight employees, of which
forty-three were full-time and five 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 February 4, 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
cancelled 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(TM) 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
RISK FACTORS
Government Regulation - International and United States; Inability to
Market or Sell Macroplastique in United States; Uncertainty of Obtaining FDA
Marketing Approval. The Company's product, manufacturing processes and product
development activities are subject to extensive and rigorous regulation by
governmental and regulatory authorities in foreign countries similar to the
U.S. Food and Drug Administration ("FDA"). In Europe, where the Company has
been marketing Macroplastique since 1991, the Company's introduction of
medical devices as well as its design, manufacturing, labeling, distribution,
sale, marketing, advertising, promotion and recordkeeping procedures for its
products are subject to laws and regulations governing medical devices
contained in the European Medical Device Directives ("MDD"). In June, 1996,
the Company received a Certificate of Authorization for affixing the CE mark
(Conformite Europeene) on Macroplastique based upon compliance with the MDD.
In the United States, the Company cannot market or sell Macroplastique
until Investigational Device Exemption ("IDE") and subsequent Pre-Market
Approval ("PMA") authorization for Macroplastique are received from the FDA.
As of this date, the Company had not submitted an IDE application to the FDA
to request authority to commence human clinical studies in the United States.
There can be no assurance that the requisite approvals or certifications will
be granted for Macroplastique or any other product, on a timely basis, or at
all, or that such regulatory reviews will not involve delays that would
conflict with the Company's ability to commercialize its products in the
United States.
In summary, the Company has received MDD approval to market Macroplastique
and Bioplastique throughout the European Community, but the Company has not
yet applied for regulatory approval from the FDA in the United States for
Macroplastique or any of it other products.
Even if regulatory approval to market a product is obtained from the FDA,
this approval may necessitate limitations on the indicated uses of the
product. Marketing approval can also be withdrawn by the FDA in the United
States (and by regulatory authorities in foreign countries) due to failure to
comply with regulatory requirements or the occurrence of unforeseen problems
following initial approval. The Company may be required to make further
filings with the FDA and other regulatory authorities in foreign countries
under certain circumstances, such as the addition of product claims or product
reformulation. The FDA and other regulatory authorities in foreign countries
could also limit or prevent the manufacture or distribution of the Company's
products and has the power to demand the recall of such products. FDA medical
device regulations depend strongly on administrative interpretation, and there
can be no assurance that future interpretation made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. The FDA and various other authorities either currently inspect
or will inspect the Company and its facilities from time to time to determine
whether the Company is in compliance with regulations relating to medical
device manufacturing, including regulations concerning design, manufacturing,
testing, quality control, product labeling, distribution, promotion and record
keeping practices. A determination that the Company is in material violation
of such regulations could lead to the imposition of civil penalties, including
fines, product recalls, product seizures or, in extreme cases, criminal
sanctions. See "Description of Business - Government Regulations".
Dependence on Single Product. The Company expects to derive substantially
all of its revenues for the next several years from sales of Macroplastique.
The Company's failure to continue its commercialization of Macroplastique in
Europe would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not expect
that commercialization of other new products will be feasible without a
substantial, continuing commitment to research and development for an extended
period of time or acquisitions of new products, or both. Also, new medical
products must typically undergo clinical trials and regulatory clearance or
approval before commercialization. There can be no assurance as to whether or
when commercialization of other products might begin or as to the likelihood
that any such initiative would be successful. The market for medically-related
products changes constantly, and if the market changes, or if new or
strengthened competition emerges, or customer preferences change, or if new
technology causes Macroplastique to be viewed as a less effective treatment,
the Company's business, financial condition and results of operation would be
adversely affected. Unlike larger companies with many products in the
marketplace, the Company is dependent on one product and its fate is,
consequently, much more closely tied to market acceptance of that product.
Dependence on Patents and Proprietary Rights. The Company's success depends
in part on its ability to preserve trade secrets, obtain and maintain patent
protection for its products under United States and international patent laws
and other intellectual property laws and operate without infringing upon the
proprietary rights of third parties. Patents covering the materials, process
and applications have been issued to the Company by the Patent Offices in the
United States, United Kingdom, Japan and Germany. Applications are also
currently pending in various other countries, including Canada and other
European countries. No assurances can be given that the scope of any patent
protection will prevent competitors (most of which have financial and other
resources substantially greater than the Company) from introducing products
competitive with the Company's products, the Company's patents will be held
valid if subsequently challenged, others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company, or the
Company's product and processes will not infringe, or be alleged to infringe,
the proprietary rights of others.
A number of patents have been issued to others in the area of injectable
bulking agents. The validity and breadth of claims covered in medical device
technology patents involve complex legal and factual questions and may
therefore be highly uncertain. The Company also relies upon unpatented trade
secrets to protect its proprietary technology. No assurance can be given that
others will not independently develop or otherwise acquire substantially
equivalent techniques and/or gain access to and disclose the Company's
proprietary technology. Further, no assurance can be given that the Company
can ultimately protect meaningful rights to such unpatented proprietary
technology. There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Companies in the
medical device industry have employed intellectual property litigation to gain
a competitive advantage. Litigation may be necessary to enforce any patents
issued to the Company, protect trade secrets or proprietary information owned
by the Company against claimed infringement of the rights of others or
determine the scope and validity of the proprietary rights of others. The
defense and prosecution of patent litigation or other legal and/or
administrative proceedings related to patents is costly and time-consuming
regardless of the outcome. An adverse outcome in any litigation could subject
the Company to significant liabilities to third parties, require disputed
rights to be licensed from others and/or require the Company to cease making,
using or selling any products. There can be no assurance that any licenses
required under any patents or proprietary rights would be made available on
terms acceptable to the Company, if at all. See "Description of Business -
Patents, Trademarks, and Licenses".
Uncertainty Relating to Third-Party Reimbursement. The success of the
Company will depend, in part, upon satisfactory reimbursement for
Macroplastique procedures from third party health care payers. In the United
States and many foreign countries, third-party reimbursement is currently
generally available for surgical procedures for urinary incontinence, but
there is no uniform policy for such reimbursements. The Company sells
Macroplastique to physicians, hospitals and other users which bill various
third-party payers, such as government health programs, private health
insurance plans, managed care organizations and other similar programs for the
health care products and services provided to their patients. Payers may deny
reimbursement if they determine that a product used in a procedure was not
used in accordance with established payer protocols regarding cost-efficient
treatment methods, was used for an unapproved indication or was not otherwise
covered. Third-party payers are increasingly challenging the prices charged
for medical products and services and, in some instances, have pressured
medical suppliers to lower their prices. The availability of third-party
reimbursement for Macroplastique or competitors' products and continuing
efforts to reduce the costs of health care by decreasing reimbursement rates
may reduce the price received by the Company for Macroplastique or increase
the relative expense to the consumer. The Company believes a material amount
of its Macroplastique revenues are received from third party payers, therefore
failure to receive sufficient reimbursement from health care payers for
procedures using Macroplastique or adverse changes in governmental and
third-party payers' policies toward reimbursement for such procedures would
materially adversely affect the Company's business, financial condition and
results of operations. See "Description of 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. In
the 1990's the United States breast implant industry 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 Company uses only solid silicone
material, and not semi-liquid silicone gel (as was used in breast implants),
in its Macroplastique product. However, since the controversies in the United
States surrounding the use of silicone in breast implants have been so
widespread and resulted in such extensive litigation, there can be no
assurance that the use by the Company and others of solid silicone in medical
devices implanted in the human body will not result in controversies, or even
litigation. There can be no assurance that studies or research unknown to date
will not some day cast doubt in the mind of the public on the safety of the
Company's products and the appropriateness of their intended use.
The Company expects its competitors will attempt to portray silicone as an
undesirable feature of Macroplastique, and the effects of such efforts cannot
be predicted at this time. The earlier silicone controversies may adversely
affect the Company's ability to market Macroplastique in the United States if
and when the Company receives PMA approval from the FDA.
Research and Development Expenses in Fiscal Year 2000; Expected Losses.
The Company's future success will depend upon, among other factors, its
ability to introduce and market Macroplastique on a timely basis in the United
States to that end, it has committed the largest portion of the proceeds
resulting from its private placement of Common Stock in May and June of 1998.
Although the Company has been profitable since fiscal year 1997, the Company
expects to incur significant operating losses in its fiscal year 2000 due
largely to the significant costs associated with clinical trials and other
aspects of the FDA approval process. The development and commercialization by
the Company of Macroplastique and other products in the United States will
require substantial additional product development, clinical, regulatory and
other expenditures for the foreseeable future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Description
of Business," "Financial Statements", and "Risk Factors - Need for Additional
Capital".
Need for Additional Capital. The Company anticipates the net proceeds
received from its private placement in May and June 1998, together with cash
flow from operations, will be sufficient to fund its IDE submission, clinical
studies and the completion of its PMA application to the FDA for
Macroplastique. However, if expenses or operating profits differ from
expected levels, the Company will require additional financing to complete its
PMA application to the FDA for Macroplastique. Further, the Company will need
additional funds in order to introduce Macroplastique to the U.S.
vesicoureteral reflux and male incontinence markets because separate
regulatory approval is needed for each of these conditions. There can be no
assurance that additional capital will be available to the Company when needed
or on terms acceptable to the Company. The net proceeds of the Company's
private placement of the shares in May and June 1998, together with the
Company's existing capital resources and any funds provided by future
operations, will not be sufficient to fund new product development, and funds
for such purpose may not be available, on reasonable terms, and there can be
no assurance that other sources of funding will be available. If equity
capital is needed by the Company in the future, the Company would attempt to
obtain it on terms it considers favorable, but the demands of the business and
the nature of financial markets at the time may be such that any resulting
issuance of equity securities would result in dilution to then existing
shareholders. See "Management's Discussion and Analysis".
Lack of Marketability and Registration in All States. The Company is not
required, and does not intend, to register the shares in two states in which
holders of the shares presently reside, namely California and Arizona.
Highly Competitive Industry. Competition in the urinary incontinence
management and treatment products market is fierce. The medical condition
treated by using the Company's product also may be managed or treated using a
variety of alternative products or techniques, including adult diapers,
absorbent pads, behavior therapy, pelvic muscle exercises, drugs, surgery,
implantable devices, other injectable bulking agents and other medical
devices. There is no assurance the Company's products will be a substitute
for such alternative products or techniques or that advancements in these
alternative products or techniques will not make the Company's products
obsolete. In addition, the Company believes some of its competitors who do
not currently have injectable bulking agents are attempting to develop
injectable bulking agents which will directly compete with Macroplastique.
Many of the Company's existing as well as potential competitors have
substantially greater capital resources, name recognition, distribution
capabilities, well-known and well-established product lines and larger
marketing, research and development staffs and facilities than the Company.
These competitors may also have greater expertise than the Company in research
and development, manufacturing, marketing and sales and regulatory affairs.
There can be no assurance that the Company and Macroplastique will be able to
compete effectively with such alternative products or techniques or with such
competitors and potential competitors.
In addition, the Company's ability to compete in the urinary incontinence
treatment market will depend primarily upon physician, patient and healthcare
payer acceptance of Macroplastique as a safe, effective and cost-effective
treatment for urinary incontinence. The Company's ability to compete in this
market will also depend upon product pricing and the consistency of its
product quality and delivery. Other factors within or outside the Company's
control include its product development and innovation capabilities, ability
to obtain required regulatory approvals, ability to protect its proprietary
technology, manufacturing and marketing capabilities and ability to attract
and retain skilled employees. See "Description of Business - Competition".
Risks and Effects of Technological Developments. The Company competes in a
market characterized by technological innovation, extensive research efforts
and significant competition. Improvements in existing treatment options or
developments of new treatment methods may have a material adverse effect on
the Company's ability to increase sales of Macroplastique and successfully
commercialize any future products and may render such products noncompetitive
or obsolete. Other companies are currently engaged in the development of
products and innovative methods for treating stress urinary incontinence that
are similar to, or compete with, Macroplastique. Significant developments by
any of these companies or advances by medical researchers at universities,
government research facilities or private research laboratories could
eliminate the market for Macroplastique or otherwise render Macroplastique
obsolete. Although technological change has not had a direct material impact
on the Company in recent years, the potential that such a change might occur
is a continuing risk for the Company. See "Description of Business -
Competition."
Risk of Product Liability; No Assurance Insurance is Adequate. The medical
products industry is subject to substantial litigation. As a manufacturer of
an implantable medical product, the Company faces an inherent business risk of
exposure to product liability claims in the event that the use of its product
is alleged to have resulted in adverse effects to a patient. The Company
maintains product liability insurance in the amount of $2,000,000, aggregate
and per occurrence, but there can be no assurance that such coverage limits
are adequate to protect the Company from any liabilities which it might incur
in connection with the clinical trials and commercialization of Macroplastique
or any other product. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. Furthermore, the Company does not
expect to be able to obtain insurance covering its costs and losses as a
result of any recall of its products due to alleged defects, whether such a
recall is instituted by the Company or required by a regulatory agency.
Consequently, a product liability claim, recall or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Description of Business - Product Liability".
Uncertainty of Future Market Acceptance. The Company currently sells
Macroplastique in Europe and other foreign countries. Acceptance of
Macroplastique by physicians in preference to other treatment options,
including other bulking agents, will depend upon the demonstration of its
safety and effectiveness, relative performance of Macroplastique compared to
other market approved products, ease of use and relative cost compared to
other bulking agents and treatment alternatives. Physicians may elect not to
prescribe treatment using Macroplastique unless adequate reimbursement from
health care payers is available. Health care payer acceptance of a treatment
utilizing Macroplastique will require, among other things, evidence of the
cost effectiveness of this treatment as compared to other treatment options.
There can be no assurance that the acceptance of Macroplastique by urological
and gynecological health care providers will continue to grow in Europe and
other areas where Macroplastique is already used.
The Company does not sell Macroplastique in the United States. There can be
no assurance that Macroplastique will achieve any significant degree of market
acceptance in the United States among physicians, health care payers or
patients, even if the safety and effectiveness of Macroplastique is
established in the United States and the necessary regulatory approvals are
obtained. Even if those approvals were granted, the Company's future success
in the United States market would be entirely dependent on the successful
commercialization and market acceptance of Macroplastique. Accordingly, any
delay or failure by the Company in demonstrating that Macroplastique is safe
and effective, receiving required regulatory approvals to market
Macroplastique or achieving significant market acceptance of Macroplastique in
the United States among physicians, health care payers and/or patients would
have a material adverse effect on the Company's business, financial condition
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 "Description of Business".
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of its key management
personnel. The Company believes that its future success will depend in large
part on its ability to attract and retain highly skilled managerial,
engineering, operations and marketing personnel who are in great demand.
Failure to attract and retain key personnel could have a material adverse
effect on the Company's results of operations. The Company does not have an
employment agreement or non-compete agreement with Daniel G. Holman, its
Chairman, President, CEO and CFO, or Susan Hartjes-Doherty, its Vice President
of Operations and Regulatory Affairs and Secretary. The Company does not
maintain key person life insurance for any of its employees.
Risks Associated with International Operations; Currency Risks. At this
time, the Company only sells Macroplastique outside the United States through
its wholly-owned foreign subsidiaries. Sales and operations outside of the
United States are subject to certain inherent risks, including, without
limitation, fluctuations in the value of the U.S. dollar relative to foreign
currencies, tariffs, quotas, taxes and other market barriers, political and
economic instability, restrictions on the import and export of technology,
difficulties in staffing and managing international operations, difficulties
in obtaining work permits for employees, difficulties in collecting
receivables, potentially adverse tax consequences, potential language
barriers, and difficulties in operating in a different culture and legal
system. There can be no assurance that any of these factors will not have a
materially adverse effect on the Company's financial condition or results of
operations. In particular, because the Company's international sales are
denominated primarily in Dutch guilders, currency fluctuations in countries
where the Company does business may render the Company's products less price
competitive than those of foreign companies whose sales are denominated in
weaker currencies. The Company reports its financial results in U.S. dollars,
and fluctuations in the value, of either the dollar or the currencies in which
the Company transacts business, can have a negative impact on its financial
results. Consequently, the Company does have exposure to foreign currency
exchange risks. The Company attempts to lessen that exposure by keeping to a
minimum the amount of time that trade payables and receivables are
outstanding.
Dependence on Suppliers. The Company currently purchases all raw materials
from single sources. Alternative suppliers for these materials exist should
the current suppliers discontinue production or distribution. However, the
Company would need to complete additional testing to qualify the materials
obtained from any new suppliers. Additionally, limited notice of the need to
switch suppliers for either of these materials could result in production
delays and inventory depletion. The Company has not experienced any shortage
of these materials to date; however, no assurance can be given that shortages
of these materials will not be experienced in the future.
Limited Public Market for Common Stock; Possible Stock Price Volatility.
Announcements of new products and services by the Company or its competitors,
technological innovations, disputes regarding patents or other proprietary
rights, regulatory developments and economic and other external factors, as
well as period-to-period fluctuations in the Company's financial results,
could cause the market price of the Common Stock to fluctuate significantly.
In addition, the stock market in general and, in particular the market prices
for medical technology companies, have historically experienced significant
volatility which has affected the market price of securities of many companies
and which has sometimes been unrelated to the operating performance of such
companies. Such volatility may adversely affect the market price of the Common
Stock.
Absence of Long-Term Human Clinical Studies. Although the Company believes
that Macroplastique is safe when used as recommended by the Company, there are
no long-term, well-controlled human clinical studies of this product.
Accordingly, no assurance can be given that Macroplastique, even when used as
recommended, will have the effects intended or will not have adverse effects
over a patient's lifetime. For example, there can be no assurance as to
whether or how frequently patients will require additional injections of
Macroplastique and whether any such additional injections will be effective or
will have a negative effect on physician, payer or patient acceptance.
Fluctuations In Quarterly Operating Profit and Net Income. The Company may
experience variability in its net sales and operating profit on a quarterly
basis as a result of many factors, including, among others, buying habits of
European health care providers, size and timing of orders by certain
customers, shifts in demand for types of products, technological changes and
industry announcements of new products. If revenues do not meet expectations
in any given quarter, operating results may be materially adversely affected.
The Company may, in addition, experience variability in its net income on a
quarterly basis as a result of many factors, including currency fluctuations.
As a result of these potential fluctuations in quarterly results, period-to-
period comparisons of the Company's financial results should be approached
cautiously.
Potential Control of Company by a Small Number of Persons. The Company's
officers and directors combined own 12% of the Company's outstanding shares
(if they exercise all their options) and one shareholder owns 9% of the
Company's outstanding shares. If all of such persons cooperated, they could
potentially have the ability to elect the Company's Board of Directors and
affect control of the Company. See "Security Ownership of Certain Beneficial
Owners and Management."
Possible Adverse Market Effect of Shares Eligible for Future Sale. Sales
of substantial amounts of Common Stock (including shares issued upon the
exercise of outstanding options and warrants) in the public market could have
an adverse effect on the price of the Company's common stock. Such sales may
also make it more difficult for the Company to sell equity or equity-related
securities in the future at a time and price that the Company would deem
appropriate.
Possible Adverse Effect of Anti-Takeover Provisions and Staggered Board. As
a Minnesota corporation, the Company is subject to certain anti- takeover
provisions of the Minnesota Business Corporation Act. The authority of the
Board with regard to the anti-takeover provisions of such Act could have the
effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's common ctock at a premium over
the then prevailing market price of the Common Stock, and may adversely affect
the market price of, and the voting and other rights of the holders of, Common
Stock. Should the Company issue additional shares, whether for purposes of
raising additional capital or otherwise, it could have the effect of making a
takeover more difficult.
The Company's Articles of Incorporation and Bylaws include certain
provisions (the "Staggered Board Provisions") for staggering the election of
the members of the Board of Directors. The Board is divided into three classes
with each class serving for an independent term. The classification of
directors is intended to make it more difficult to change the composition of
the Board. At least two shareholders' meetings, instead of one, will generally
be required for shareholders to effect a change in control of the Board. The
Staggered Board Provisions will apply to every election of directors, whether
or not a change in the Board, in the opinion of some or a majority of the
Company's shareholders, would be desirable. The Staggered Board Provisions
relating to the removal of directors and the filling of vacancies are designed
to protect the staggered Board structure in the event a third party gains
control of a majority of the Company's voting power and could discourage an
attempt to gain control of the Company.
Applicability of "Penny Stock Rules"; Possible Impact on Liquidity of
Stock. The Company's Common Stock is presently considered a "penny stock"
under applicable rules and is not traded on the NASDAQ Small Cap market. If
the Company fails to become listed on NASDAQ or, after such listing, fails to
satisfy the NASDAQ requirements to maintain listing on NASDAQ in the future,
the Common Stock will likely continue to be quoted only in the local
over-the-counter "pink sheets" market (which may include, as it presently
does, the NASDAQ Bulletin Board market). The public trading market for the
Common Stock could be adversely affected by such limited quotation, and there
would likely be fewer market makers for the Company's stock, less interest by
potential institutional investors and less coverage by analysts and the
financial media.
In order to be listed in the NASDAQ Small Cap Market, the Company would
need $4,000,000 in net tangible assets, a minimum bid price of $4.00 per share
for at least 30 calendar days and three market makers, as well as meet certain
other requirements. As of March 31, 1999, the Company had over $5,000,000 in
net tangible assets, the recent bid prices per share for its Common Stock have
been in the range of $2.00 to $3.00 per share and it had only one market
maker. The Company intends to apply for listing on the NASDAQ Small Cap
Market when it meets the share price and market maker requirements, and it
will continue its efforts to expand its business in a prudent manner so that
its chances of reaching those goals are increased.
In addition, as long as the Company's Common Stock continues not to be
listed in the NASDAQ Small Cap Market, it will be subject, as it presently is,
to SEC rules under the Securities Exchange Act of 1934 relating to "penny
stocks." The "penny stock rules", which apply to companies whose Common Stock
trades at less than $5.00 per share, require brokers who sell securities
subject to such rules to persons other than established customers and
"institutional accredited investors" to complete certain documentation, make
suitability inquiries of investors and provide investors with certain
information concerning the risks of trading in the security. The application
of these rules may restrict the ability of brokers to sell the Company's
Common Stock, may adversely affect the liquidity of the shares, and may affect
the ability of purchasers to sell the shares in the secondary market.
No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying such dividends for the foreseeable
future.
Net Operating Loss Carryforwards; Effect of International Operations on Tax
Position. The Company has net operating loss carryforwards for U.S. income
tax reporting purposes of approximately $2,043,000, which can be used to
offset U.S. taxable income in future years. Sales of the Company's voting
common shares during the prior three years, combined with the equity offering
in 1998 will most likely cause a change in ownership under Section 382 of the
Internal Revenue Code of 1996. Section 382 limits the annual use of the
Company's U.S. net operating loss carryforwards existing as of the date of the
ownership change. Notwithstanding the application of Section 382, it is not
anticipated that any limitation would have a material adverse effect on the
Company.
The Company has significant operations in the United States and
internationally. United States net operating loss carryforwards cannot be
used to offset taxable income in foreign jurisdictions. Furthermore,
repatriation of dividends to the U.S. parent may result in additional foreign
or U.S. taxes.
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
On July 21, 1998, the Company announced that the United States Patent and
Trademark Office ("USPTO") had informed the Company that the USPTO will, as
requested by the Company, initiate an interference proceeding between the
Company and Advanced UroScience, Inc. ("AUI"), White Bear Lake, Minnesota, to
determine which company was the first to invent carbon-coated micro beads for
use in treating urinary incontinence. The USPTO had not, as of May 20, 1999,
formally declared the interference proceeding.
At such time as the interference proceeding is formally declared, it could
take the USPTO twenty-four months or more to reach a final decision concerning
this matter. Although the USPTO originally granted the applicable patent to
AUI, the interference proceeding may result in a determination that either
Uroplasty, Inc. or AUI is the proper holder, or that a patent should not have
been granted. An interference proceeding, like other patent litigation, can be
complex, time consuming and expensive.
In addition, during the third quarter of fiscal 1999, the Company commenced
a related lawsuit against AUI for misappropriation of trade secrets. AUI,
subsequent to December 31, 1998, brought a counterclaim against the Company
with respect to such matter.
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.
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 April 1998 through March 1999,
and for the period April 1, 1999 through May 11, 1999. Such quotations
represent interdealer prices, without retail markup, markdown or commission,
and do not necessarily represent actual transactions.
Fiscal Quarters Low Bid High Bid
First Quarter (1) $3 $7
Second Quarter 2 3/8 3 3/4
Third Quarter 1 1/2 2 7/8
Fourth Quarter 2 15 3
(1)
Dropped on April 29, 1998
Restarted on June 19, 1998 3 3 3/4
As of May 11, 1999, the Company's Common Stock was held of record by
approximately 630 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 Company was incorporated in Minnesota in 1992 as a wholly-owned
subsidiary of Bioplasty, Inc. ("Bioplasty"). Since February 1994, the Company
is a separate and distinct entity from Bioplasty.
The Company sells Macroplastique(R) and the related ancillary products for
use in augmenting soft tissues for the purpose of treating urinary
incontinence. At this time, sales are only made outside the United States
because the Company does not have regulatory approval to market its product in
the United States.
The Company's current objectives are to focus on growth in sales and market
penetration of Macroplastique in the European market for urinary incontinence
and vesicoureteral reflux treatment, and to begin the U.S. regulatory process
for Macroplastique as a treatment for female stress urinary incontinence.
The Company also sells the Macroplastique product in a different
configuration for plastic surgery applications under the name Bioplastique(tm),
in limited markets. In addition, the Company has been selling specialized
wound care products in the Netherlands and Great Britain as a distributor for
Derma Sciences, Inc., pursuant to a written arrangement which provides for a
schedule of prices and involves the submission by the Company of purchase
orders to meet product demand.
Set forth below is management's discussion and analysis of financial
condition and results of operations for the year ended March 31, 1999 and 1998.
See note 7 to the Consolidated Financial Statements for business segment
information.
Results of Operations
Sales were $5,308,587 for the year ended March 31, 1999 as compared to
$4,335,908 for the year ended March 31, 1998. This increase of $972,679, or
22%, is the result of increased sales of the Macroplastique product due to
increased overseas marketing activities. The Macroplastique product line
accounts for 93% of total sales.
It is expected that Macroplastique sales will continue to grow through
further market awareness, expansion of the distribution network and the
introduction of innovations in Macroplastique implantation.
The gross profit percentage decreased from 78% in fiscal 1998 to 76% in
fiscal 1999. This decrease is due to increased import duties on components
shipped from the United States to The Netherlands and unusual costs associated
with manufacturing changes and new equipment installations.
General and administrative expenses increased 25% from $994,068 in fiscal
1998 to $1,246,997 in fiscal 1999. The increase is primarily due to increased
costs of professional fees related to the legal proceeding, shareholder
expenses for increased communication and depreciation as a result of investing
activities.
Research and development costs increased 59% from $778,082 in fiscal 1998 to
$1,236,855 in fiscal 1999. The majority of this increase relates to the FDA
approval costs, which were $509,390 in fiscal 1999 compared to $0 in fiscal
1998. Other R&D expenses decreased 7% from $778,082 in fiscal 1998 to $727,465
in fiscal 1999. Increased spending for research and development projects is
anticipated, along with expenditures for the United States regulatory approval
process.
Selling and marketing costs increased 50% from $964,138 in fiscal 1998 to
$1,445,877 in fiscal 1999. This increase is due to the addition of four sales
personnel and expanded presence at international and domestic medical
conferences to increase market awareness of Macroplastique.
The operating profit for the year ended March 31, 1999 was $121,801,
compared to $661,642 for the same period last year. The decrease is primarily
due to increased operating expenses, of which $509,390 relates to FDA approval
costs for the year ended March 31, 1999.
Increases in other income in fiscal 1999 compared to fiscal 1998 are
primarily attributable to increased interest income as a result of greater
average cash balances throughout the year related to the proceeds of the
private placement, gain on the liquidation of a wholly owned subsidiary and a
reduction in foreign currency exchange losses.
Included in the income tax expense is a non-recurring income tax refund of
$60,503. The remaining balance on the income tax benefit account of $24,081 in
fiscal 1999 relates to foreign tax carry-back benefits of foreign subsidiaries.
For the year ended March 31, 1999, net income totaled $331,906 compared to
net income of $407,841 for the year ended March 31, 1998.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $1,588,984 in cash and cash
equivalents and $2,264,925 in marketable securities. The Company's marketable
securities are classified as available-for-sale and are carried at amortized
cost, which approximates fair value. The capital resources were derived from
the private placement of common stock and existing sales of the Registrant's
products.
On March 31, 1999 the inventory balance was $754,813, compared to a balance
of $294,424 on March 31, 1998. This is a result of management's intention to
increase inventory levels in anticipation of increased sales.
There is currently no financing arrangement in place for Uroplasty's working
capital needs, and the Registrant has no material unused sources of liquidity
other than its cash reserves, securities and accounts receivable balances. The
Company expects it can satisfy its cash requirements and does not expect it
will have to raise additional funds in the next twelve months.
The company expanded its manufacturing facility in The Netherlands with the
addition of new cleanrooms to increase manufacturing capacity. In July 1998, a
$58,242 Note Payable was issued to partially finance the additional cleanrooms.
This Note Payable has a fixed interest rate until August 2003 of 5.6% per
annum. After August 2003, the interest rate can be adjusted by the bank.
Monthly payments consist of $474 of principal plus interest through August
2008.
The proceeds from the private placement in May and June, 1998 are being used
to pursue submissions, clinical studies and marketing approvals with the U.S.
Food and Drug Administration. The Company estimates that fiscal year 2000
funding for such purposes will be approximately $1,500,000. If such proceeds
are not sufficient to complete the PMA, additional cash from internal or other
sources will be needed in fiscal year 2001.
The Company has significant operations in the United States and
internationally. United States net operating loss carryforwards cannot be used
to offset taxable income in foreign jurisdictions. Furthermore, repatriation of
dividends to the U.S. parent may result in additional foreign or U.S. taxes.
Conversion to Euro Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") adopted the euro as their common legal
currency and established fixed conversion rates between their existing
sovereign currencies and the euro. The euro trades on currency exchanges and
is available for non-cash transactions. The participating countries will issue
sovereign debt exclusively in euro, and will redenominate outstanding sovereign
debt in euro.
With respect to presently known trends and uncertainties related to the euro
conversion, the Company does not expect there will be any long-term competitive
implications of the conversion (such as effects on product or service pricing
due to increased transparency), nor does it anticipate any material costs in
connection with the conversion nor a lack of ability to pass any costs that
might result along to customers.
Year 2000 Compliance
The 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 impact the Company's operations. The
Company could be adversely affected by the year 2000 problem if it or unrelated
parties fail to successfully address this problem. The Company has
communicated with unrelated parties, including suppliers and regulatory
consultants with whom it deals, to coordinate year 2000 compliance. Based on
the information obtained, the Company developed a contingency plan which
identifies where the greatest risks of non-compliance exist and what steps the
Company might take in order to deal with the most reasonably likely worst case
scenario. Inventory levels of the Company's products are high enough to meet
product demands for a couple of months in case the Company would not be able to
manufacture products due to a worst case scenario. The costs incurred in
addressing year 2000 compliance are expensed as incurred in compliance with
GAAP. The costs were not material.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company plans to adopt the new standard in
fiscal 2001. The Company is currently evaluating SFAS No. 133, but does not
expect it will have a material effect on its financial statements.
In 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use and does not
require additional disclosures. The Company intends to adopt SOP 98-1 in fiscal
2000. Costs incurred prior to the initial application of the SOP will not be
adjusted to conform with SOP 98-1. The adoption is not expected to have a
material impact on the Company's financial position or results of operations.
Forward-Looking Statements
The Registrant may from time to time make written or oral "forward-looking
statements", including statements contained in this filing by the Company with
the Securities and Exchange Commission and in its reports to stockholders, as
well as elsewhere. "Forward-looking statements" are statements such as those
contained in projections, plans, objectives, estimates, statements of future
economic performance, and assumptions related to any of the foregoing, and may
be identified by the use of forward-looking terminology, such as "may,
"expect," "anticipate," "estimate, "goal," "continue," or other comparable
terminology. By their very nature, forward- looking statements are subject to
known and unknown risks and uncertainties relating to the Company's future
performance that may cause the actual results, performance or achievements of
the Company, or industry results, to differ materially from those expressed or
implied in any such "forward-looking statements". Any such statement is
qualified by reference to the following cautionary statements.
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 filing, the following sections contain "forward- looking
statements": "Description of Business"; Risk Factors"; and "Management's
Discussion and Analysis of Financial Condition and Results of Operation".
Various factors and risks (not all of which are identifiable at this time)
could cause the Company's results, performance or achievements to differ
materially from that contained in the Company's forward-looking statements, and
investors are cautioned that any forward-looking statement contained herein or
elsewhere is qualified by and subject to the warnings and cautionary statements
contained above and in the Risk Factors section of this filing.
The Company does not undertake and assumes no obligation to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
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, 1999
were as follows:
Name Age Position Director Since Term Expires
Daniel G. Holman 53 Chairman, President, 1994 2000
CEO, CFO
Joel R. Pitlor 60 Director 1994 1999
R. Patrick Maxwell 54 Director 1994 1999
Alex Gerwer 44 Director 1998 1999
Susan Hartjes-Doherty 45 Vice President of Operations
and Regulatory Affairs, Secretary
Germain E. Willem 52 Vice President of Sales
and Marketing
Christopher Harris 40 Vice President of Corporate
Development
All directors are members of the Nominating Committee; all directors except
Mr. Holman are members of the Compensation Committee; and Mr. Maxwell and Mr.
Pitlor are members of the Audit Committee.
The 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 "Description of 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).
Alex Gerwer was elected a Director of Uroplasty in August 1998. Mr. Gerwer
has been a Principal and Consultant for AKN in San Diego, California, a
management consulting firm to medical companies since 1990. From 1988 to 1990,
he was the Manager of New Business Development for Nihon Kohden America, a
medical electronics company in Irvine, California. Mr. Gerwer was a research
Scientist for Diatek, Inc. in San Diego, California from 1986 to 1988. Mr.
Gerwer received a B.S. in Chemistry and Physics from the University of
Michigan, and a master of Science in Chemical Physics from the California
Institute of Technology.
Susan Hartjes-Doherty joined Bioplasty, Inc. in September 1991 as Director
of Operations and served as Vice President of Operations from April 1993 until
May 1996. In November 1994, Ms. Doherty was appointed Vice-President of
Operations for Uroplasty, Inc. and was elected Secretary in September, 1996.
Prior to 1991, Ms. Doherty was Director of Operations at Bio-Vascular, Inc. in
St. Paul, Minnesota from November 1989 to September 1991. Prior to that time,
she served at various other pharmaceutical and medical device companies in
management-oriented positions in production, quality assurance and research.
Ms. Doherty has Bachelor of Arts degrees in Biology-Microbiology and BioMedical
Science from St. Cloud State University, and has done graduate work in the
biological sciences. Ms. Doherty is a senior member and a Certified Quality
Auditor of the American Society for Quality and served several years on its
Executive Committee and is a member of the American Society of Microbiology,
and the Henrici Society for Microbiologists. She has served on several
national and international standards committees.
Germain E. Willem joined the 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.
There is no family relationship between or among the officers and directors,
except that Mr. Holman and Mrs. Hartjes-Doherty will be married in June 1999.
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 Corporate 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 1999 171,089 -- 34,140 (2) -- 0
CEO 1998 161,919 -- 25,632 (2) -- 70,000
1997 154,162 -- 28,818 (2) -- 0
Susan Hartjes-Doherty 1999 112,158 -- -- -- 0
Vice President 1998 102,160 5,000 -- -- 40,000
Total Compensation for All Executive Officers
For Fiscal Year 1999:
(Four Persons) 536,978
</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. Mr. Gerwer receives a $2,500 per month
consulting fee from the Registrant under a month to month agreement. All
non-employee Board members receive $500 per board meeting attended. In
addition, directors participate in the Registrant's stock option plan.
Option/SAR Grants Table
<TABLE>
<CAPTION>
Option Grants in Fiscal Year Ended March 31, 1999
- -----------------------------------------------------------------------------
Number of Percent of
Securities Total Op-
Underlying tions/SARS
Options Granted to Exercise or Securities
/SARS Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Share) Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel G. 0 -- -- --
Holman, CEO
Susan Hartjes- 0 -- -- --
Doherty, V.P.
</TABLE>
(1) Options for 30,000 shares were granted to officers and directors
during the fiscal year ended March 31, 1999.
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, 1999 there were 148,200 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, 1999 there were 401,000 options outstanding under the 1997 Plan. (In
addition, the Registrant had 15,000 options outstanding not issued pursuant to
either Plan.) Both Plans required 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. -- -- 95,000 125,000
Holman, CEO
Susan Hartjes- -- -- 65,000 87,500
Doherty, V.P.
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
At March 31, 1999, the Registrant had 5,923,371 shares of Common Stock
outstanding and had granted options to employees and directors to purchase
549,200 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, 1999, 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 (iv) all directors
and executive officers as a group:
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percent of
Beneficial Owner Beneficially Owned Class
- ----------------------------------------------------------------------
<S> <C> <C>
Mindich Family Limited Liability Co.
Attn. Bruce Mindich
c/o Paddington Management Corporation
555 White Plains Road
Tarrytown, NY 10591 650,000 9.1%
Bruce P. Mindich
c/o Paddington Management Corporation
555 White Plains Road
Tarrytown, NY 10591 450,000 7.6%
Daniel G. Holman
2718 Summer Street NE
Minneapolis, MN 55413-2820 299,981 (1) 5.0%
Susan Hartjes-Doherty
2718 Summer Street NE
Minneapolis, MN 55413-2820 122,203 (2) 2.0%
Joel R. Pitlor
19 Chalk Street
Cambridge, MA 02139 145,000 (3) 2.4%
R. Patrick Maxwell
Templeton & Associates
10 South Fifth Street, Suite #990
Minneapolis, MN 55402 65,307 (3) 1.1%
Alex Gerwer
3957 Gaffney Court
San Diego, CA 92130 43,800 (4) 0.7%
Directors and Executive
Officers as a Group (7 persons) 758,291 (5)(6) 12.1%
</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 340,000 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 (collectively
the "Licensors"), namely Arthur A. Beisang, Robert A. Ersek, M.D., and Arthur
A. Beisang, III M.D. Mr. Beisang and Dr. Ersek are former officers and
directors of the Company (see "Description of Business - Patents, Trademarks,
and Licenses"), and each previously owned more than 5% of the Company's
outstanding stock. Under the terms of such Royalty Agreement, the Company is
obligated until 2010 to pay the Licensors 3 to 5% of net sales of
Macroplastique (see Note 4(e) of Notes to Financial Statements). The aggregate
amount of royalty expense recognized by the Company pursuant to such Royalty
Agreement during each of the past three fiscal years was as follows.
Fiscal Year ended 3/31/99 Uroplasty, Inc. $ 195,355
Fiscal Year ended 3/31/98 Uroplasty, Inc. $ 147,860
Fiscal Year ended 3/31/97 Uroplasty, Inc. $ 110,495
On July 11, 1997, the Company's then second largest shareholder, the
Bioplasty Product Claimants Trust (the "Trust"), which prior to such date owned
640,000 shares or 17.5% of the Company's then outstanding shares of Common
Stock, sold such shares to a group of investors (the "Investors"). In
connection with such transaction, the Trust sold to the Investors its interest
in that certain Promissory Note, dated March 30, 1994 (the "Note") which, at
March 31, 1997, had a principal balance outstanding of $496,000. Although the
Note did not by its terms have a convertibility feature, concurrently with the
sale by the Trust of the 640,000 shares to the Investors, the Company agreed to
and did convert the Note into 496,000 shares of Common Stock at a conversion
ratio of $1.00 per share. The market prices for the Company's Common Stock
during the period June 1 to July 11, 1997 were $.50 bid and $1.50 asked on a
workout basis. The Company and the Investors used such market prices in arm's
length negotiations in determining the conversion ratio. The Investors, who
included certain registered representatives (or their customers) employed by RJ
Steichen & Co., consisted of 33 individuals, retirement accounts and
corporations located primarily in the Minneapolis/St. Paul, Minnesota area.
The aforementioned transaction was facilitated by certain registered
representatives of RJ Steichen & Co., but they were not directly compensated
for their efforts by either the Trust or the Company, and the Investors did not
pay a commission on the transaction. There was no involvement whatsoever by
R.J. Steichen & Co. as an entity.
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:
13.0 Financial Statements
21.0 Subsidiaries of the Registrant
27.0 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: June 24, 1999 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 June 24, 1999
Daniel G. Holman Chief Financial Officer,
Director (Principal Executive Officer,
Principal Financial Officer, Principal
Accounting Officer)
/s/ JOEL R. PITLOR Director June 24, 1999
Joel R. Pitlor
/s/ R. PATRICK MAXWELL Director June 24, 1999
R. Patrick Maxwell
/s/ ALEX GERWER Director June 24, 1999
Alex Gerwer
Exhibit 13
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1999 and 1998
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
and Comprehensive Income 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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
April 23, 1999
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1999 and 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
1999 1998
__________ __________
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,588,984 889,541
Marketable securities 1,503,600 0
Accounts receivable trade,
less allowance for doubtful
accounts of $3,682 in 1999
and $64,930 in 1998 825,905 766,835
Inventories 754,813 294,424
Prepaid expenses 187,697 184,628
Other current assets 103,439 0
__________ __________
Total current assets 4,964,438 2,135,428
---------- ----------
Property, plant, and equipment, net 1,228,255 1,044,530
Marketable securities-long term 761,325 0
Intangible assets, net of accumulated
amortization of $91,251 in 1999
and $64,252 in 1998 111,625 101,586
__________ __________
Total assets $ 7,065,643 3,281,544
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 295,267 358,782
Accrued liabilities:
Compensation and payroll taxes 96,379 81,526
Foreign sales tax 78,214 17,137
Royalties 34,400 16,900
Other 166,342 99,618
Capital lease obligations-current
maturities 9,424 16,463
Note payable-current maturities 37,040 30,756
__________ __________
Total current liabilities 717,066 621,182
---------- ----------
Capital lease obligations, less current
maturities 26,486 31,893
Note payable, less current maturities 605,362 577,713
__________ __________
Total liabilities 1,348,914 1,230,788
---------- ----------
Shareholders' equity
Common stock $.01 par value; 20,000,000
shares autorized, 5,923,371 and
4,191,525 shares issued and
outstanding at March 31, 1999 and
1998, respectively 59,234 41,915
Additional paid-in capital 5,784,045 2,432,599
Retained Earnings (deficit) 75,277 (256,629)
Accumulated other comprehensive loss (196,827) (162,129)
Note receivable-shareholder (5,000) (5,000)
__________ __________
Total shareholders' equity 5,716,729 2,050,756
---------- ----------
Commitments and contingencies (note 5)
Total liabilities and __________ __________
shareholders' equity $ 7,065,643 3,281,544
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1999 and 1998
<CAPTION>
1999 1998
__________ __________
<S> <C> <C>
Net sales $ 5,308,587 4,335,908
Cost of goods sold 1,257,057 937,978
__________ __________
Gross profit 4,051,530 3,397,930
---------- ----------
Operating expenses:
General and administrative 1,246,997 994,068
Research and development 1,236,855 778,082
Selling and marketing 1,445,877 964,138
__________ __________
3,929,729 2,736,288
---------- ----------
Operating profit 121,801 661,642
Other income (expense)
Interest income 150,077 8,294
Interest expense (37,994) (20,732)
Liquidation gain on foreign subsidiary 39,565 0
Foreign currency exchange loss (19,937) (129,503)
Other (6,190) 0
__________ __________
125,521 (141,941)
---------- ----------
Net income before income taxes 247,322 519,701
Income tax expense (benefit) (84,584) 111,860
__________ __________
Net income $ 331,906 407,841
========== ==========
</TABLE>
Net income per common share $ 0.06 0.10
Net income per common and potential
common share 0.06 0.09
Weighted average common shares outstanding:
Basic 5,624,625 4,026,571
Diluted 5,934,037 4,321,132
[FN]
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended March 31, 1999 and 1998
Common Stock Additional Retained Accumulated Total
Paid-in Earnings other Note share-
Shares Amount Capital (Deficit) comprehensive receivable holders'
loss shareholder equity
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
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
Comprehensive income
Net income 0 0 0 407,841 0 0 407,841
Translation adjustment 0 0 0 0 (61,960) 0 (61,960)
_______
Total comprehensive income 345,881
________________________________________________________________________________________________________
Balance at March 31, 1998 4,191,525 $ 41,915 2,432,599 (256,629) (162,129) (5,000) 2,050,756
Shares cancelled (104) (1) 1 0 0 0 0
Issuance of 29,000 shares of
Common Stock pursuant to
stock option exercise 29,000 290 14,210 0 0 0 14,500
Issuance of 1,702,950 shares of
Common Stock pursuant to
private placement, net of
$690,241 of issuance
costs 1,702,950 17,030 3,337,235 0 0 0 3,354,265
Comprehensive income
Net income 0 0 0 331,906 0 0 331,906
Unrealized loss on marketable
securities 0 0 0 0 (4,664) 0 (4,664)
Translation adjustment 0 0 0 0 (30,034) 0 (30,034)
_______
Total comprehensive income 297,208
________________________________________________________________________________________________________
Balance at March 31, 1999 5,923,371 $ 59,234 5,784,045 75,277 (196,827) (5,000) 5,716,729
========= ====== ========= ====== ========= ======= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
UROPLASTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
__________ __________
<S> <C> <C>
Cash flows from operating activities:
Net income $ 331,906 407,841
Adjustments to reconcile net income
to net cash provided by (used in)
operations:
Depreciation and amortization 198,789 121,640
Amortization of premium and discounts
on marketable securities, net (6,328) 0
Loss on disposal of assets 2,666 0
Gain on liquidation of foreign
subsidiary (39,565) 0
Stock options issued in lieu
of cash compensation 0 9,000
Changes in operating assets and
liabilities:
Accounts receivable (59,070) (264,091)
Inventories (460,389) 92,949
Other current assets (103,439) 0
Prepaid expenses (3,069) (79,003)
Accounts payable (63,515) 197,971
Accrued liabilities 160,154 44,842
______________________________________________________________________
Net cash provided by (used in)
operating activities (41,860) 531,149
______________________________________________________________________
Cash flows from investing activities:
Payments for property, plant,
and equipment (351,486) (1,045,386)
Purchase of marketable securities (2,263,261) 0
Payments relating to intangible assets (37,038) (41,308)
______________________________________________________________________
Net cash used in investing activities (2,651,785) (1,086,694)
______________________________________________________________________
Cash flows from financing activities:
Repayment of long-term obligations (65,291) (63,404)
Proceeds from issuance of notes payable 75,007 684,549
Net proceeds from issuance of stock 3,368,765 24,000
______________________________________________________________________
Net cash provided by financing activities 3,378,481 645,145
______________________________________________________________________
Effect of exchange rates on
cash and cash equivalents 14,607 (14,662)
______________________________________________________________________
Net increase in cash and cash equivalents 699,443 74,938
Cash and cash equivalents
at beginning of year 889,541 814,603
______________________________________________________________________
Cash and cash equivalents
at end of year $ 1,588,984 889,541
========== ==========
Supplemental disclosure of
Cash Flow information:
Cash paid during the year
for interest $ 37,948 20,732
Cash paid during the year
for income taxes 81,652 87,522
Supplemental disclosure of non-cash financing
and investing activities:
During the year ended March 31, 1998, $441,459 in notes payable
were converted into Common Stock.
During the year ended March 31, 1999 the Company entered into
new capital lease obligations for equipment for a total value
of $16,807.
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
UROPLASTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Uroplasty, Inc. and subsidiairies (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 treatment 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) Marketable Securities
The Company accounts for its marketable debt securities in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company's marketable debt securities are classified as available-for-sale and
are carried at fair value.
(f) Patents
Patents are stated at cost and are amortized over six years using the
straight-line method.
(g) 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.
(h) 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.
(i) 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, 1999
and 1998:
1999 1998
__________ __________
Raw materials $ 126,364 47,891
Work-in-process 354,521 118,973
Finished goods 273,928 127,560
__________ __________
$ 754,813 294,424
========== ==========
(j) Property, Plant, and Equipment
Property, plant, and equipment are carried at cost and consist of the
following at March 31, 1999 and 1998:
1999 1998
__________ __________
Land $ 131,949 129,465
Building 575,310 526,639
Equipment 903,549 604,955
__________ __________
1,610,808 1,261,059
__________ __________
Less accumulated depreciation (382,553) (216,529)
__________ __________
$ 1,228,255 1,044,530
========== ==========
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.
(k) Research and Development
Research and development costs are expensed as incurred and consist
of the following for the years ended March 31, 1999 and 1998:
1999 1998
__________ __________
FDA approval costs $ 509,390 0
Other research and development costs 727,465 778,082
__________ __________
$ 1,236,855 778,082
========== ==========
(l) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries were
translated in accordance with the provisions of SFAS No. 52 "Foreign Currency
Translation". 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.
(m) Stock Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense is recorded on the
date of grant if the current market price of the underlying stock exceeds the
exercise price.
(n) Net Income Per Common Share
SFAS No. 128, "Earnings per Share", simplifies the computation of
earnings per share ("EPS") previously required by replacing primary and fully
diluted EPS with basic and diluted EPS. Under SFAS No. 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 financial instruments, to common shares using the treasury stock
method based upon the weighted-average fair value of the Company's common
shares during the year. Reconciliations of basic and diluted average common
shares outstanding are as follows:
1999 1998
__________ __________
Average common shares outstanding 5,624,625 4,026,571
Potential common shares 309,412 294,561
__________ __________
Average common and potential
common shares 5,934,037 4,321,132
========== ==========
Options to purchase 10,000 and 55,000 shares of Common Stock at $3.19 and
$3.25 per share, respectively, were outstanding during 1999 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 2005.
(o) Comprehensive Income
SFAS No. 130 , "Reporting Comprehensive Income", establishes standards
for reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and is presented in the
consolidated statements of stockholders' equity and comprehensive income. The
statement requires only additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position or results of
operations. The Company adopted SFAS No. 130 in fiscal 1999. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
(2) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for available-for-sale securities by major
security type and class of security at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
__________ __________ __________ __________
<S> <C> <C> <C> <C>
Available-for-sale:
Corporate bonds 2,269,589 0 4,664 2,264,925
Maturities of debt securities classified as available-for-sale were as
follows at March 31, 1999:
Amortized Fair
Cost Value
__________ __________
<S> <C> <C>
Available-for-sale:
Due within one year 1,504,580 1,503,600
Due after one year through five
years 765,009 761,325
__________ __________
2,269,589 2,264,925
========== ==========
</TABLE>
There were sales of marketable securities in fiscal 1999.
(3) Long-term Debt
Long-term debt consists of the following at March 31, 1999 and 1998:
1999 1998
__________ __________
Mortgage note, monthly payments of $2,607
plus variable rate interest through
November 2017
(rate at March 31, 1999 - 4.3%) $ 588,791 608,469
Note payable, monthly payments of $474 plus
fixed rate interest through August 2008
(rate until August 2003 - 5.6%) 53,611 0
__________ __________
642,402 608,469
Less current maturities 37,040 30,756
__________ __________
$ 605,362 577,713
========== ==========
Future payments of long-term debt are as follows:
2000 $ 37,040
2001 37,040
2002 37,040
2003 37,040
2004 37,040
Thereafter 457,202
__________
$ 642,402
==========
(4) Shareholders' Equity
(a) Common Stock
On June 18, 1998, the Company completed a private placement of 1,702,950
shares of Common Stock at $2.38 per share, which resulted in net proceeds to
the Company of $3,354,265.
(b) Stock Options
Pursuant to the Uroplasty, Inc. Qualified Incentive Stock Option Plans,
the Company has reserved 720,200 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
exercise
Shares price
outstanding per share
__________ __________
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
Granted 108,200 2.50
Exercised (29,000) 0.50
Cancelled (20,200) 3.18
______________________________________________________________________
Balance at March 31, 1999 564,200 $ 1.42
========== ==========
The following table summarizes information concerning currently
outstanding and exercisable options by price.
<TABLE>
<CAPTION>
Outstanding Exercisable
__________________________________________ ___________
Price Number of Shares Weighted Average Number
Outstanding Remaining Life Exercisable
in Years
______ ________________ ________________ ___________
<S> <C> <C> <C>
$ 0.50 145,200 1.7 145,200
1.00 246,000 3.5 246,000
2.50 108,000 4.7 88,000
3.19 10,000 3.2 10,000
3.25 55,000 3.9 55,000
_______ _______
564,200 544,200
======= =======
</TABLE>
(c) Warrants
In connection with the June 18, 1998 private placement, warrants to
purchase 150,000 shares of Common Stock were issued at an exercise price of
$2.38 per share. At March 31, 1999 all of these warrants were outstanding and
scheduled to expire on June 18, 2003.
(d) 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:
1999 1998
__________ __________
Net income:
As reported $ 331,906 407,841
Pro forma 159,864 167,695
Net income per common share - basic:
As reported 0.06 0.10
Pro forma 0.03 0.04
Pro forma net income only reflects options granted in 1996 and
thereafter. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 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
1999 and 1998 was $1.49 and $0.97, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1999 1998
__________ __________
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Expected volatility 156.0% 156.0%
Expected life, in years 3.0 3.0
(5) 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. There was no
royalty expense related to this license in either fiscal 1999 or 1998.
(b) Savings and Retirement Plans
The Company sponsors various plans for eligible employees in the United
States, the United Kingdom and the Netherlands. The total contibution expense
associated with these plans was $44,908 and $43,782 for the years ended March
31, 1999 and 1998, 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
term in excess of one year for the ensuing years ending March 31 are as
follows:
2000 $ 258,071
2001 170,102
2002 94,531
2003 8,110
__________
$ 530,814
==========
Total rent expense paid for operating leases was $307,180 and
$241,732 in 1999 and 1998, respectively.
(d) Capital Lease Obligations
UPI leases various equipment under noncancelable capital leases. The
leases call for aggregate monthly payments of $1,307 with various expiration
dates through July 2002. Equipment includes $62,629 and $85,854 of cost and
$22,502 and $22,070 of accumulated amortization as of March 31, 1999 and 1998,
respectively, related to these leases.
Future minimum capital lease payments are as follows as of March 31,
1999:
2000 $ 13,399
2001 12,943
2002 12,943
2003 6,855
__________
46,140
Amount representing interest (10,230)
__________
Present value of capital lease payments 35,910
Current maturities 9,424
__________
Obligations under capital leases
less current maturities $ 26,486
==========
(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 until the
patent referenced in the Agreement expires in 2010. Total expense recognized
under the agreement was $195,355 and $147,860 for the years ended March 31,
1999 and 1998, 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, 1999 and 1998.
(f) Legal Proceedings
On July 21, 1998, the Company announced that the United States Patent and
Trademark Office ("USPTO") had informed the Company that the USPTO will, as
requested by the Company, initiate an interference proceeding between the
Company and Advanced UroScience, Inc. ("AUI"), White Bear Lake, Minnesota, to
determine which company was the first to invent carbon-coated micro beads for
use in treating urinary incontinence. The USPTO had not, as of May 20, 1999,
formally declared the interference proceeding.
At such time as the interference proceeding is formally declared, it
could take the USPTO twenty-four months or more to reach a final decision
concerning this matter. Although the USPTO originally granted the applicable
patent to AUI, the interference proceeding may result in a determination that
either Uroplasty, Inc. or AUI is the proper holder, or that a patent should not
have been granted. An interference proceeding, like other patent litigation,
can be complex, time consuming and expensive.
In addition, during the third quarter of fiscal 1999, the Company
commenced a related lawsuit against AUI for misappropriation of trade secrets,
and AUI, subsequent to December 31, 1998, brought a counterclaim against the
Company with respect to such matter.
(6) Income Taxes
The components of income tax expense (benefit) for each of the years in
the two-year period ended March 31, 1999 consist of the following:
1999 1998
__________ __________
Income tax provision:
Current:
U.S. and state $ (61,000) 1,000
Foreign (24,000) 111,000
__________ __________
Total income tax expense
(benefit) $ (85,000) 112,000
========== ==========
Effective tax rates differ from statutory federal income tax rates for
the year ended March 31, 1999 and 1998 as follows:
1999 1998
__________ __________
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit (13.3) (1.2)
Valuation allowance increase 71.5 (22.6)
Other permanent differences (116.5) 2.0
Impact of foreign operations 16.1 9.6
Tax refund (26.0) 0
__________ __________
(34.2)% 21.8%
========== ==========
Deferred taxes as of March 31, 1999 and 1998 consist of the following:
1999 1998
__________ __________
Deferred tax assets:
Other reserves and accruals $ 70,000 14,000
Deferred profit on intercompany sales 364,000 208,000
Net operating loss carryforwards 984,000 1,001,000
__________ __________
1,418,000 1,223,000
Less valuation allowance (1,418,000) (1,223,000)
__________ __________
$ 0 0
========== ==========
At March 31, 1999 the Company had U.S. net operating loss carryforwards
(NOL) of approximately $2,414,000 for U.S. income tax purposes, which begin to
expire in 2012, and a foreign NOL of approximately $168,000 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.
A valuation allowance is provided when it is more likely than not a
portion of the deferred tax assets will not be realized. The Company has
established a valuation allowance for U.S. and foreign deferred tax assets due
to the uncertainty that enough income will be generated in those taxing
jurisdictions to utilize the assets. Therefore, the Company has not reflected
any benefit of such net operating loss carryforwards in the accompanying
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes". The deferred tax assets and related valuation allowance increased by
$195,000 from 1998 to 1999. The majority of the increase in the valuation
allowance consists of approximately $155,000 of intercompany profit
eliminations, $180,000 of net operating losses generated by operations in the
United States, offset by the use of approximately $160,000 of net operating
losses by foreign subsidiaries as a result of current year net income.
(7) Business Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for disclosure about operating segments, products, geography and major
customers.
The Company sells Macroplastique and the related ancillary products for
use in augmenting soft tissues for the purpose of treating urinary incontinence
and vesicoureteral reflux. At this time, sales are only made outside the United
States because the Company does not have regulatory approval to market its
product in the United States. The Company's current objectives are to focus on
sales growth and market penetration of Macroplastique in the European market
for urinary incontinence and vesicoureteral reflux treatment, and to continue
the U.S. regulatory process for submission of Macroplastique as a treatment for
female stress urinary incontinence. The Company also sells the Macroplastique
product in a different configuration for plastic surgery applications under the
name Bioplastique in limited markets. In addition, the Company has been
selling some specialized wound care products in the Netherlands and Great
Britain as a distributor. The Macroplastique product line accounts for 93% of
total sales.
Based upon the above, the Company has identified one reportable operating
segment consisting of medical products primarily for the urology market.
During fiscal 1999 no customer reached the level of 10% of the Company's
net sales. During fiscal 1998 approximately 12% of the Company's net sales were
to one customer.
Information regarding operations in different geographies for the years
ended March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
United Netherlands United Adjustments
States Kingdom and eliminations Consolidated
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Sales to unaffiliated customers $ - 5,670,347 2,336,981 (2,698,741) 5,308,587
Long-Lived assets
at March 31, 1999 $ 271,190 1,043,006 25,684 0 1,339,880
========= ========= ========= ========= =========
Fiscal 1998
Sales to unaffiliated customers $ - 4,611,804 1,723,198 (1,999,094) 4,335,908
Long-Lived assets
at March 31, 1998 $ 210,705 900,064 35,347 0 1,146,116
========= ========= ========= ========= =========
</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
<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, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Mar-31-1999
<CASH> 1,588,984
<SECURITIES> 1,503,600
<RECEIVABLES> 829,587
<ALLOWANCES> (3,682)
<INVENTORY> 754,813
<CURRENT-ASSETS> 4,964,438
<PP&E> 1,610,808
<DEPRECIATION> (382,553)
<TOTAL-ASSETS> 7,065,643
<CURRENT-LIABILITIES> 717,066
<BONDS> 0
<COMMON> 59,234
0
0
<OTHER-SE> 5,657,495
<TOTAL-LIABILITY-AND-EQUITY> 7,065,643
<SALES> 5,308,587
<TOTAL-REVENUES> 5,308,587
<CGS> 1,257,057
<TOTAL-COSTS> 3,929,729
<OTHER-EXPENSES> (26,127)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,994)
<INCOME-PRETAX> 247,322
<INCOME-TAX> (84,584)
<INCOME-CONTINUING> 331,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331,906
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
