<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE PERIOD ENDED MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER: 0-28244
------------------------
IMAGYN MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0230712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
27651 LA PAZ ROAD
LAGUNA NIGUEL, CA 92677
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 362-2500
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes _X_ No ___
As of May 1, 1997, 8,000,209 shares of the Registrant's Common Stock were
outstanding.
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<PAGE>
IMAGYN MEDICAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated balance sheets at March 31, 1997 and December 31, 1996
b) Consolidated statements of operations for the three month periods ended March 31, 1996 and March
31, 1997
c) Consolidated statements of cash flows for the three month periods ended March 31, 1996 and March
31, 1997
d) Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
</TABLE>
2
<PAGE>
IMAGYN MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 22,333,227 $ 19,982,793
Short-term cash investments..................................................... 19,019,813 18,374,759
Accounts receivable, net........................................................ 2,002,965 830,960
Inventories..................................................................... 2,007,527 3,118,462
Other current assets............................................................ 713,461 771,473
-------------- --------------
Total current assets.......................................................... 46,076,993 43,078,447
Long-term cash investments........................................................ 4,358,478 5,610,634
Furniture, fixtures and equipment, net............................................ 1,412,610 1,497,967
Other assets...................................................................... 107,653 55,573
-------------- --------------
Total assets...................................................................... $ 51,955,734 $ 50,242,621
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 1,094,758 $ 1,388,198
Accrued salaries and benefits................................................... 386,101 131,384
Accrued liabilities............................................................. 585,671 528,611
-------------- --------------
Total current liabilities..................................................... 2,066,530 2,048,193
-------------- --------------
Deferred income................................................................... 1,000,000 1,000,000
-------------- --------------
Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
and outstanding
Common stock, $0.001 par value, 50,000,000 shares authorized, 7,926,990 issued
and 7,981,577 outstanding in 1996 and at March 31, 1997, respectively......... 7,935 7,990
Additional paid in capital...................................................... 74,655,334 74,667,288
Unearned compensation........................................................... (702,148) (615,095)
Amounts due from stockholders................................................... (120,900) (120,900)
Accumulated deficit............................................................. (24,951,017) (26,744,854)
-------------- --------------
Total stockholders' equity.................................................... 48,889,204 47,194,428
-------------- --------------
Total liabilities and stockholders' equity........................................ $ 51,955,734 $ 50,242,621
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales.......................................................... $ 1,467,418 $ 817,548
Cost of sales...................................................... 1,222,261 508,666
----------- -----------
Gross profit................................................... 245,157 308,882
----------- -----------
Sales and marketing expenses....................................... 746,070 1,126,708
Research and development expenses.................................. 739,947 1,019,111
General and administrative expenses................................ 446,024 567,274
----------- -----------
1,932,041 2,713,093
----------- -----------
Loss from operations........................................... (1,686,884) (2,404,211)
Other income (expense), net:
Interest income................................................ 120,411 611,973
----------- -----------
Loss before provision for income taxes......................... (1,566,473) (1,792,238)
Provision for income taxes......................................... 2,452 1,600
----------- -----------
Net loss....................................................... $(1,568,925) $(1,793,838)
----------- -----------
----------- -----------
Net loss per common share and common share equivalent.............. $ (0.29) $ (0.21)
----------- -----------
----------- -----------
Weighted average common shares and common share equivalents
outstanding...................................................... 5,334,000 8,585,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(1,568,925) $(1,793,838)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization.................................... 51,794 102,444
Compensation related to stock options vesting.................... 87,772 87,053
(Increase) decrease in accounts receivable....................... (493,122) 1,172,005
Increase in inventories.......................................... (191,996) (1,110,935)
Increase in other current assets................................. (27,222) (58,012)
(Increase) decrease in other assets.............................. (159,186) 51,480
Increase in accounts payable..................................... 533,425 293,440
Increase (decrease) in accrued salaries and benefits............. 11,233 (254,717)
Increase (decrease) in other accrued liabilities................. 235,182 (57,060)
----------- -----------
Net cash used by operating activities.......................... (1,521,045) (1,568,140)
----------- -----------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment.................... (92,157) (187,201)
Purchase of short and long term cash investments................. (976,133) (4,946,148)
Sale of short-term and long-term cash investments................ 3,461,249 4,339,046
----------- -----------
Net cash provided (used) by investing activities................... 2,392,959 (794,303)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options.......................... 45,368 12,009
----------- -----------
Net cash provided by financing activities...................... 45,368 12,009
----------- -----------
Net increase (decrease) in cash and cash equivalents............... 917,282 (2,350,434)
Cash and cash equivalents, beginning............................... 2,359,773 22,333,227
----------- -----------
Cash and cash equivalents, ending.................................. $ 3,277,055 $19,982,793
----------- -----------
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Income taxes................................................... $ 2,452 $ 1,600
----------- -----------
----------- -----------
Interest....................................................... $ -- $ --
----------- -----------
----------- -----------
Supplemental schedule of noncash investing and financing
activities:
Unearned compensation related to stock options granted............. $ 299,043
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
Imagyn Medical, Inc. (the "Company") was incorporated in 1989. The Company
designs, develops and markets micro-invasive, cost effective devices for the
diagnosis and treatment of gynecological and reproductive disorders.
Imagyn International, Inc. was organized as a wholly-owned subsidiary of the
Company in 1993. Imagyn International, Inc. was created to facilitate the
marketing, sales and distribution of the Company's product in international
markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Sales and related cost of goods sold are recognized when goods are shipped
to customers. The Company's customers include distributors which sell goods to
third-party end-users. The Company is not contractually obligated to repurchase
any inventory from its distributors. The Company records a warranty accrual at
the time of sale for estimated claims.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks, certificates of deposit,
and short-term investments with acquired maturities of three months or less. The
carrying amount of cash and cash equivalents approximates market value.
SHORT-TERM AND LONG-TERM CASH INVESTMENTS
The short-term and long-term cash investments are managed by outside
brokerage firms and consist primarily of commercial paper, certificates of
deposit, and short-term bond instruments. Short-term cash investments have
acquired maturities of one year or less, while long-term cash investments have
maturities of greater than one year. The carrying amount of short-term and
long-term cash investments are the cost plus interest earned as of March 31,
1997, which approximates market value.
6
<PAGE>
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
on the first-in, first-out (FIFO). Inventories consisted of the following:
<TABLE>
<CAPTION>
DEC. 31, 1996 MARCH 31, 1997
------------- --------------
(UNAUDITED)
<S> <C> <C>
Raw materials...................................... $1,141,427 $1,416,939
Work in-process.................................... 352,903 663,896
Finished goods..................................... 513,197 1,037,627
------------- --------------
$2,007,527 $3,118,462
------------- --------------
------------- --------------
</TABLE>
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the term of the related lease or its
estimated useful life.
Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of furniture, fixtures
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in
operations.
3. NET LOSS PER SHARE:
Net loss per common share is based on reported net loss. Such net loss in
each period presented is divided by the weighted average number of outstanding
common shares which, along with shares issuable under other equity securities,
have been computed in accordance with Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") Topic 4-D. The SAB requires that common stock issued
by the Company in the twelve months immediately preceding a proposed public
offering plus the number of common equivalent shares which become issuable
during the same period pursuant to the issuance of warrants or grant of stock
options (using the treasury stock method), and the issuance of convertible
preferred stock, at prices less than the per share initial public offering price
be included in the calculation of common stock and common stock equivalent
shares as if they were outstanding for all periods presented.
4. INTERIM FINANCIAL STATEMENTS:
The financial statements at March 31, 1997 and for the three month periods
ended March 31, 1996 and 1997 are unaudited but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results of the March 31,
1997 period are not necessarily indicative of the results for the entire year or
for any other interim period.
7
<PAGE>
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STATEMENTS OF FINANCIAL STANDARDS NOT YET ADOPTED:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 requires companies to adopt its provisions for fiscal years beginning
after December 15, 1997 and requires restatement of all prior period earnings
per share ("EPS") data presented. Earlier application is not permitted. SFAS No.
128 specifies the computation, presentation and disclosure requirements for EPS.
The implementation of SFAS No. 128 is not expected to have a material effect on
the EPS data presented by the Company.
6. SUBSEQUENT EVENT:
On April 19, 1997 the Company and Urohealth Systems, Inc. ("Urohealth")
entered into an Agreement and Plan of Merger pursuant to which a wholly-owned
subsidiary of Urohealth would be merged with and into the Company, with the
Company surviving the merger and becoming a wholly-owned subsidiary of
Urohealth. Pursuant to the Agreement and Plan of Merger, the Company's
stockholders will receive 1.0358 shares of Urohealth common stock for each share
of Company common stock. The merger is anticipated to be tax-free to Company
stockholders and to be accounted for as a pooling of interests. The consummation
of the merger is subject to the approval of the stockholders of each company,
the expiration of the applicable Hart-Scott-Rodino waiting periods and certain
other conditions. The consolidated financial statements as of March 31, 1997 do
not reflect any adjustments that may be necessary as a result of the completion
of the proposed merger.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included herein. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors set forth under "Factors Affecting Operating Results" below.
BACKGROUND
Imagyn was formed in 1989 to advance the development of gynecological
applications of novel catheter technology licensed by the Company from Baxter
Healthcare Corporation ("Baxter") and Thomas J. Fogarty, M.D. ("Fogarty"). In
1992, the Company commenced commercial shipments of its Ovation systems, based
on this technology, to international distributors for resale to physicians and
hospitals.
In November 1992, the Company entered into an agreement with Terumo
Corporation ("Terumo") for the sale and licensed manufacture of the Ovation
systems in Japan. In connection with the granting of the distribution and
license rights under this agreement, Terumo paid the Company distribution and
license fees aggregating $2.1 million. Based on the Company's continuing
obligations under the agreement to transfer manufacturing know-how for the
Ovation systems to Terumo, the license fees of $1.0 million have been treated as
deferred income until such time as the Company completes the transfer of the
manufacturing know-how pursuant to the agreement. Upon completion of such
transfer, the Company will receive royalties on product sales by Terumo. During
1993 and 1994, Terumo conducted clinical trials in Japan for the purpose of
supporting regulatory and reimbursement approvals for the Ovation system. In
August 1996, the Company's agreement with Terumo was amended to grant Terumo
with additional distribution rights for the Ovation system in certain Asian
markets.
On January 31, 1997, the Company received 510(k) marketing clearance for its
Ovation falloposcopy system.
In August 1994, the Company commenced international commercial shipments of
its MicroLap microlaparoscopy system. By February 1995, the Company had received
three FDA 510(k) clearances for the MicroLap system, after which the Company
commenced marketing the system in the United States. The Company engaged the
services of non-stocking sales representative organizations to promote sales of
the MicroLap system.
In August 1995, Terumo received Japanese regulatory approval for marketing
of the Ovation tubal recanalization system. Following this approval, Terumo
commenced planning for the 1996 commercial introduction of the Ovation tubal
recanalization system in Japan. Terumo has applied for, but has not yet
obtained, full Japanese reimbursement approval.
In September 1995, the Company completed an equity recapitalization which
included a reverse 1-for-5 stock split of all outstanding stock, the conversion
of all Preferred Stock into Common Stock, and the sale of $9.9 million of new
Preferred Stock.
In October 1995, the Company entered into a distribution agreement with
United States Surgical Corporation ("USSC") pursuant to which USSC was granted
exclusive international marketing rights for the MicroLap system in all
international markets (excluding China and India). USSC was also granted, on a
co-exclusive basis with the Company, marketing rights to the MicroLap system in
the United States. As a result of the agreement with USSC, the Company
terminated all of its domestic sales representative organizations and
international distributors for the MicroLap system and, in connection with these
terminations, the Company made certain payments to these distributors. Following
execution of the
9
<PAGE>
agreement with USSC, the Company increased its manufacturing capacity to support
USSC's introduction of the MicroLap system and, in January 1996, the Company
completed training of certain USSC sales personnel and commenced commercial
shipments of the MicroLap system to USSC.
In September 1996, the Company received 510(k) clearance from the FDA to
market its single use MicroSpan hysteroscope sheath in the United States.
Following receipt of the 510(k) clearance, the Company commenced the recruitment
of direct sales representatives and launched the MicroSpan microhysteroscopy
system in the United States on a limited basis.
On April 19, 1997 the Company and Urohealth Systems, Inc. entered into an
Agreement and Plan of Merger whereby the Company would be merged into Urohealth
Systems in an exchange of common stock. The boards of directors of both
companies have unanimously approved the merger, and subject to the approval of
the stockholders of each company and certain other closing conditions, as well
as clearance under the Hart-Scott-Rodino Antitrust Improvements Act, the
transaction is expected to close in July, 1997.
The Company manufactures the Ovation systems and certain of its MicroLap and
MicroSpan system products, including its proprietary microlaparoscope,
microhysteroscope and micro-access devices, at its manufacturing facilities. The
Company has limited manufacturing capacity and may be required to increase both
its in-house manufacturing capability and the size of its manufacturing
facilities. Although the Company expanded its manufacturing facilities in 1996,
there can be no assurance that such facilities will be adequate or that the
Company will be able to attract, train and retain the required personnel,
including personnel skilled in micro-optics assembly processes. The Company may
need to obtain alternative manufacturing facilities or to establish contract
manufacturing for its products. Delays associated with, or inability to
establish, such capacity could have a material adverse affect on the Company's
business, financial condition and results of operations. The Company currently
obtains certain components of its product systems from single source suppliers.
These components include the optic image fiber used in the MicroLap, a similar
version of which is also being used in the MicroSpan, and the medical video
camera and light source used in connection with the Ovation tubal recanalization
system. There can be no assurance that the Company will not encounter future
component shortages or other disruptions in supply of materials. Delays
associated with any future raw materials or component shortages could have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly as the Company scales up its manufacturing
activities.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, the extent to
which the Company's products gain market acceptance, the timing and volume of
orders from USSC, Terumo, other international distributors and the Company's
other customers, actions relating to regulatory and reimbursement matters,
progress of clinical trials, introduction of alternative means for
microlaparoscopy, microhysteroscopy and fallopian tube visualization by
competitors of the Company, pricing of competitive products, the cost and effect
of promotional discounts and marketing programs in which the Company may be
required to engage and the absence of a backlog of orders. Results of operations
will also depend upon the amount of royalties payable under the license from
Baxter and Fogarty relating to the linear everting catheter technology used in
the Ovation systems. The Company has a limited history of operations and has
experienced significant operating losses since inception. Operating losses are
expected to continue for at least the next twelve months as the Company
continues to expend substantial resources to expand its marketing and sales
activities in the United States and fund research and development and the
introduction of new products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NET SALES. Net sales for the three months ended March 31, 1997 decreased to
$818,000 from $1.5 million for the three months ended March 31, 1996. The
decrease was primarily attributable to the
10
<PAGE>
Company's planned introduction and commencement of shipments of its new model
microlaparoscope in the second quarter of 1997. As a direct result of this
planned new model microlaparoscope introduction, sales of MicroLap products to
USSC during the three months ended March 31, 1997 were $1.0 million less than
sales of these products to USSC during the three months ended March 31, 1996.
For the three months ended March 31, 1997, 41% of the Company's sales were to
international customers; for the three months ended March 31, 1996, 7% of the
Company's sales were to international customers. The increase in the percentage
of the Company's sales to international customers is primarily the result of the
decrease in sales to USSC and the introduction of the Company's MicroSpan
products in selected European markets. The Company records all sales to USSC as
domestic sales; however, sales of the Company's products by USSC are expected to
include sales to international customers made through Autosuture, Inc., a
subsidiary of USSC.
COST OF SALES. Cost of sales for the three months ended March 31, 1997
decreased to $509,000 from $1.2 million for the three months ended March 31,
1996. The decrease in cost of sales was attributable to the decrease in the
level of sales for the period.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended March 31, 1997 increased to $1.1 million from $746,000 for the three
months ended March 31, 1996. The increase was primarily associated with a
increase in promotional expenditures and the expenses associated with direct
sales personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended March 31, 1997 increased to $1.0 million from $740,000 for the
three months ended March 31, 1996. This increase was attributable to increased
expenditures for product development and enhancements, including costs and
expenses associated with initial production of the Company's new model
microlaparoscope.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended March 31, 1997 increased to $567,000 from $446,000 for the
three months ended March 31, 1996. The increase was primarily the result of the
amortization of non-cash deferred compensation charges associated with grants of
stock options to employees, the hiring of additional personnel and other ongoing
expenses associated with the Company's public reporting requirements.
INTEREST INCOME (EXPENSE), NET. Net interest income for the three months
ended March 31, 1997 increased to $612,000 from $120,000 for the three months
ended March 31,1996. This increase was attributable to interest earned on higher
cash balances held by the Company during the three months ended March 31, 1997.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since its inception. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109 ("FAS
109"). Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, valuation
allowances, in amounts equal to the net deferred tax assets as of December 31,
1996 have been established in each period to reflect these uncertainties.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of $16.5 million and $8.0 million, respectively, and federal and
state research and experimentation credit carryforwards of $387,000 and
$276,000, respectively, that will expire at various dates beginning in 1997
through 2010, if not utilized. Utilization of net operating loss and tax credit
carryforwards will be subject to a substantial annual limitation due to the
ownership change limitations of the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation is likely to result in the
expiration of most of the Company's net operating loss and tax credit
carryforwards before full utilization as a result of the ownership change
brought about by the September 1995 recapitalization.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $26.7 million as of March 31,
1997. The Company has funded its operations since incorporation primarily
through the private placement of equity securities, the net proceeds of the June
1996 initial public offering and other operating income. Through March 31, 1997,
the Company had raised $30.3 million from the private placement of equity
securities. Through March 31, 1997, the Company had received $5.6 million in
fees relating to two distribution agreements. In June, 1996, the Company
completed an initial public offering of 3,162,500 shares of Common Stock raising
net proceeds of approximately $43 million.
At March 31, 1997, the Company's principal source of liquidity consisted of
cash, cash equivalents and short-term investments of $38.3 million. Cash used in
the Company's operations was $1.6 million for the three months ended March 31,
1997 and $1.5 million for the three months ended March 31, 1996. The Company's
capital expenditures during the three months ended March 31, 1997 and the three
months ended March 31, 1996 were $187,000 and $92,000, respectively. The Company
intends to finance its capital needs principally by its existing capital
resources. The Company has not sought to obtain any credit facilities to provide
additional working capital.
If the merger with Urohealth is not consummated, the Company believes that
existing capital resources will be sufficient to fund its operations through
1998. However, the Company's future liquidity and capital requirements will
depend on numerous factors, including the extent to which the Company's products
gain market acceptance, actions relating to regulatory and reimbursement
matters, progress of clinical trials, introduction of alternative means for
microlaparoscopy, microhysteroscopy and fallopian tube visualization by
competitors of the Company, pricing of competitive products, the cost and effect
of promotional discounts and marketing programs in which the Company may be
required to engage and the resources that the Company devotes to marketing,
manufacturing and developing its products. The Company's capital requirements
will also depend on, among other things, the resources required to hire and
develop a direct sales force in the United States and the resources required to
expand manufacturing capacity and facilities requirements. Accordingly, there
can be no assurance that the Company will not require additional financing
within this time frame. There can be no assurance that additional funding, if
needed, will be available on terms satisfactory to the Company, or at all. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Failure to raise capital when
needed could have a material adverse effect on the business, financial condition
and results of operations of the Company.
FACTORS AFFECTING OPERATING RESULTS
This report on Form 10-Q contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended. The Company's future results of operations could vary
significantly from the results anticipated by such forward looking statements as
a result of various factors, including the following.
The Company is substantially dependent upon the success and market
acceptance of its MicroLap microlaparoscopy system, MicroSpan microhysteroscopy
system and Ovation systems. The Company's MicroSpan and Ovation systems have
generated limited revenue to date and the Ovation system has not been
commercially introduced in the United States. The Company believes that
physicians will not use the Company's product systems unless they determine that
such product systems and the procedures in which they are intended to be used
are safe and effective alternatives to current hospital-based procedures and
demonstrate clinical utility, and can be used in a cost-effective manner. There
can be no assurance that any of the Company's existing or future products will
gain any significant degree of market acceptance among physicians, patients and
health care payors, even if necessary international and United States regulatory
and reimbursement approvals are obtained.
12
<PAGE>
The Company believes that market acceptance of the MicroLap system will
depend on the Company's and USSC's ability to provide evidence to the medical
community of the effectiveness of micro-invasive laparoscopic procedures and of
the benefits to patients, physicians and payors of such micro-invasive surgery
performed outside the hospital. Market acceptance will also be dependent upon
the durability and performance of the MicroLap. The Company believes that market
acceptance of its MicroSpan system will depend on the Company's ability to
demonstrate the utility of diagnostic and operative hysteroscopy. In particular,
market acceptance of diagnostic microhysteroscopy may be limited because some
physicians and payors view hysterectomy, the surgical removal of the uterus, as
the appropriate therapy for a variety of uterine disorders as a hysterectomy
precludes the recurrence of the uterine disorders it was performed to treat.
Such physicians or payors may be reluctant to perform or pay for diagnostic
microhysteroscopy to visualize the uterus if the ultimate treatment outcome is
likely to be a hysterectomy. In addition, several less-invasive alternatives to
operative hysteroscopy are either under development, in clinical trials or have
recently been introduced. Market acceptance of diagnostic use of the MicroSpan
system may also therefore be dependent upon acceptance of these less invasive
alternatives to hysterectomy. Market acceptance of the MicroLap and MicroSpan
systems will also be dependent upon the willingness of physicians to perform
laparoscopic and hysteroscopic procedures, which have traditionally been
performed in the hospital under general anesthesia, in an office or clinic. Such
market acceptance may also be dependent upon the ability of MicroLap
laparoscopes and MicroSpan microhysteroscopes to be used with a broad variety of
sterilization methods. Addition of other sterilization methods to the MicroLap
microlaparoscope and MicroSpan Microhysteroscope labeling may require submission
of a new 510(k) clearance application to the FDA. Preferred sterilization
methods may differ among users of the Company's products with, for example,
physician's offices preferring different methods than hospitals or surgery
centers. The MicroLap microlaparoscope is not currently labeled for use with all
sterilization methods, and the Company is aware that certain users of its
products are using, and prefer to use, other sterilization methods. In addition,
physician acceptance of microlaparoscopy and microhysteroscopy may be affected
by the unwillingness of physicians to perform these procedures under conscious
sedation rather than under general anesthesia, availability in the physician's
office of necessary ancillary capital equipment such as medical video cameras
and light sources, and availability of a sufficiently large patient base to
support an office-based microsurgery practice.
The Company believes that market acceptance of the Ovation systems will
depend on the Company's ability to demonstrate the utility of falloposcopy and
recanalization in diagnosing and managing infertility and generate an interest
on the part of physicians to be trained to perform such procedures using the
Company's Ovation systems. There can be no assurance that physicians and other
potential users of the Company's products will be willing to learn to perform
microlaparoscopy, microhysteroscopy or falloposcopy with the Company's products
or that the Company will be able to train such users to learn these techniques.
Market acceptance will also be dependent upon the availability of third-party
reimbursement for procedures performed using the Company's products.
Because the success of each of the Company's product systems depends upon
acceptance by physicians and health care payors of such product systems and the
procedures in which they are intended to be used, the Company believes that
recommendations and endorsements by influential physicians will be essential for
market acceptance of the Company's products. There can be no assurance that any
such recommendations or endorsements will be obtained. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has experienced significant operating losses since inception
and, as of March 31, 1997, had an accumulated deficit of $26.7 million. The
Company expects to incur substantial additional losses due to increased
operating expenditures primarily attributable to the expansion of marketing,
sales, manufacturing and research and development activities. Results of
operations may fluctuate significantly from quarter to quarter and will depend
upon numerous factors, including the extent to which the
13
<PAGE>
Company's products gain market acceptance, the timing and volume of orders from
USSC, Terumo, other international distributors and the Company's other
customers, actions relating to regulatory and reimbursement matters,
introduction of alternative means for microlaparoscopy, microhysteroscopy and
fallopian tube visualization by competitors of the Company, pricing of
competitive products, the cost and effect of promotional discounts and marketing
programs in which the Company may be required to engage and the absence of a
backlog of orders. Results of operations will also depend upon the amount of
royalties payable under the license from Baxter and Fogarty relating to the
linear everting catheter technology used in the Ovation systems. There can be no
assurance that the Company will successfully commercialize any of its current
products or any future products or achieve significant revenues or
profitability. Profitability, if achieved, may not be sustained.
The Company has a limited history of commercial operations. Since its
inception in August 1989, the Company has been engaged primarily in research and
development of its Ovation systems, MicroLap microlaparoscopy system and
MicroSpan microhysteroscopy system. The Company has sustained substantial
operating losses since inception and there can be no assurance that the Company
will achieve or sustain profitability. To date, the Company has not generated
sufficient revenues to achieve profitability. The Company does not have
experience in manufacturing, marketing or selling its products in the quantities
that will be necessary for the Company to achieve significant product revenues
or profitability. There can be no assurance that any of the Company's products
will be successfully commercialized or that the Company will achieve significant
revenues. Whether the Company can successfully manage the transition to a
larger-scale commercial enterprise will depend upon a number of factors,
including the Company's ability to increase its commercial manufacturing
capability and establish marketing and sales capabilities and its ability to
develop additional distribution relationships in targeted international markets.
There can be no assurance that the Company will not experience future
difficulties related to the Company's transition to a larger-scale commercial
enterprise, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has limited manufacturing capacity and may be required to
increase both its in-house manufacturing capability and the size of its
manufacturing facilities. Although the Company expanded its manufacturing
facilities in 1996, there can be no assurance that such facilities will be
adequate or that the Company may be able to attract, train and retain the
required personnel, including personnel skilled in micro-optics assembly
processes. The Company may need to obtain alternative manufacturing facilities
or to establish contract manufacturing for its products. Delays associated with,
or inability to establish, such capacity could have a material adverse affect on
the Company's business, financial condition and results of operations.
Since inception, a significant amount of the Company's sales have been
outside the United States. USSC has distribution rights for the MicroLap system
in all international markets other than China and India and Terumo has
distribution rights for the Ovation systems in Japan. The Company has a limited
number of international distributors for its Ovation systems in certain
countries. The Company's international sales of these products in these
countries are dependent upon the marketing efforts of, and sales by, its
distributors. The Company relies on these distributors to assist it in obtaining
product registration and reimbursement approvals in certain international
markets. The Company has limited sell-through experience with certain of its
distributors and has in the past experienced situations in which distributors
placed initial stocking orders for quantities that were in excess of their end
user requirements. In addition, if a distributor were to fail to invest adequate
capital promoting the Company's products and training physicians in the proper
techniques for utilizing the Company's products, or were to experience financial
difficulty or cease operations, the Company would likely be unable to achieve
significant sales in the subject territory. Management of international
distributors can be time-consuming and can be complicated by dissimilarities
among international markets. Furthermore, the Company currently does not have
distributors in a number of international markets that it has targeted and
anticipates that it will need to establish additional international distribution
relationships. There can be no assurance that the Company
14
<PAGE>
will engage qualified distributors in these markets in a timely manner, if at
all, or that distributors will adequately market the Company's products. The
failure of distributors to adequately promote the Company's products or the
failure of the Company to engage additional distributors would have a material
adverse effect on the Company's business, financial condition and results of
operations.
A number of risks are inherent in international operations and transactions.
International sales and operations may be limited or disrupted by the imposition
of government controls, changes in regulatory requirements or interpretations
thereof, export license requirements, political instability, trade restrictions,
changes in tariffs, financial instability of distributors, differences in
purchasing systems for medical products, and difficulties in staffing,
coordinating and managing international operations. Additionally, the Company's
business, financial condition and results of operations may be adversely
affected by fluctuations in international currency exchange rates as well as
constraints on the Company's ability to maintain or increase prices. There can
be no assurance that the Company will be able to successfully commercialize its
current or future products in any international market.
The Company has only limited experience marketing and selling its products,
and does not have experience marketing and selling its products in commercial
quantities. Establishing marketing and sales capability sufficient to support
sales in commercial quantities will require significant resources and will be
time-consuming, and there can be no assurance that the Company will be able to
recruit and retain qualified marketing personnel, direct sales personnel or
contract sales representatives in a timely manner or that future sales and
marketing efforts of the Company will be successful. There can be no assurance
that the Company will be successful in establishing marketing, sales and
distribution channels in the United States or internationally. The failure to
establish and maintain effective distribution channels for the Company's
products, or to retain qualified sales personnel to support commercial sales of
the Company's products, would have a material adverse effect on the Company's
business, financial condition and results of operations.
The manufacture and sale of medical devices, such as the Company's MicroLap
system, MicroSpan microhysteroscopy system and Ovation linear everting catheter
systems, are subject to extensive regulation by numerous government authorities,
both in the United States and internationally. In the United States, the
principal regulatory authority is the FDA. The process of obtaining and
maintaining required regulatory clearances and approvals is lengthy, expensive
and uncertain. The FDA requires companies desiring to market a new medical
device or an existing medical device for a change in intended use to obtain
either a premarket notification clearance under Section 510(k) of the Federal
Food, Drug, and Cosmetic Act ("510(k)") or a premarket approval ("PMA") prior to
the introduction of such medical device into the market. As of March 31, 1997,
the Company had received fourteen 510(k) clearances for certain diagnostic
and/or therapeutic indications of its microlaparoscopy, microhysteroscopy and
linear everting catheter product systems. The Company anticipates that it will
be required to file 510(k) premarket notifications and PMA applications for
future products and for new indications for, and changes to, existing products.
There can be no assurance that the Company will be able to obtain any such
510(k) clearances or PMA approvals in a timely fashion or at all. Moreover,
regulatory approvals and clearances, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Delays in
receipt of or failure to receive such approvals or clearances, the loss of
previously obtained approvals or clearances, or failure to comply with existing
or future regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's ability to compete effectively will depend substantially on
its ability to develop and maintain proprietary aspects of its technology. No
assurance can be given that any patents held by or licensed to the Company or
issued from pending or future patent applications will be issued, that the scope
of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Furthermore,
there
15
<PAGE>
can be no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around the Company's
patents. In addition, others may hold or receive patents or file patent
applications which contain claims having a scope that covers products developed
by the Company.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
industry have employed intellectual property litigation to gain a competitive
advantage. Any litigation or interference proceedings involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
In the United States, hospitals, physicians and other health care providers
that purchase medical devices, such as Company's products, generally rely on
third-party payors, principally private health insurance plans and, to a lesser
extent, federal Medicare and state Medicaid, to reimburse all or part of the
cost of the procedure in which the medical device is being used.
Reimbursement in the United States for procedures performed in hospitals,
ambulatory care centers or physicians' offices using the Company's
microlaparoscopy products is currently available from most third-party payors,
including most major private health care insurance plans and Medicaid, under
existing procedure codes. However, there is currently no specific reimbursement
code for office-based microlaparoscopy procedures. Third-party reimbursement for
the Company's products will be dependent upon decisions by individual health
maintenance organizations, private insurers and other payors. The Company
believes that procedures performed using Company's MicroSpan system could be
reimbursed in the United States under existing procedure codes for diagnostic
and therapeutic hysteroscopy procedures. However, there can be no assurance that
such procedure codes will be available with respect to the Company's products or
that the reimbursement under these codes will be adequate. To the extent cost
containment measures imposed by third party payors adversely affect the hospital
and private practice markets, demand for and pricing of the Company's products
could be adversely affected as well.
The medical device industry and the market for treatment of gynecological
disorders and infertility, in particular, are intensely competitive and
characterized by rapidly evolving technology. The Company expects competition
for devices to diagnose and treat gynecological and female reproductive
disorders to increase. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
or less costly than any which have been or are being developed by the Company or
that would render the Company's technologies or products obsolete or not
competitive, or that such competitors will not succeed in obtaining regulatory
approval for, introducing or commercializing any such products prior to the
Company. There can be no assurance that the Company will be able to compete
successfully or that competition will not have a material adverse effect on the
Company's business, financial condition or results of operations.
There can be no assurance that the pending merger with Urohealth will be
consummated or that, if consummated, it will result in any operating or
strategic benefits. In addition, in connection with the definitive agreement
entered into with Urohealth and the pending merger, the Company has incurred and
expects to incur substantial direct transaction costs including investment
banking, legal, accounting and other fees. These transactions costs will have a
short-term adverse effect upon the financial results of the Company.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
none
ITEM 2. CHANGES IN SECURITIES
none
ITEM 3. DEFAULTS IN SENIOR SECURITIES
none
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
none
ITEM 5. OTHER INFORMATION
none
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the registrant during the quarter
ended March 31, 1997.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Imagyn Medical, Inc.
<TABLE>
<S> <C>
By: /s/ J. C. MACRAE
-------------------------------------------
J. C. MacRae
Vice President, Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
</TABLE>
18
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<SECURITIES> 18,374,759
<RECEIVABLES> 890,960
<ALLOWANCES> 60,000
<INVENTORY> 3,118,462
<CURRENT-ASSETS> 43,078,447
<PP&E> 2,505,576
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0
0
<COMMON> 7,990
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<TOTAL-LIABILITY-AND-EQUITY> 50,242,621
<SALES> 817,548
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