<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 JUNE 30, 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 July 31, 1997, 8,061,999 shares of the Registrant's Common Stock were
outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
IMAGYN MEDICAL, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated balance sheets at June 30, 1997 and December 31, 1996
b) Consolidated statements of operations for the three month periods ended June 30, 1996 and June
30, 1997 and the six month periods ended June 30, 1996 and June 30, 1997
c) Consolidated statements of cash flows for the six month periods ended June 30, 1996 and June 30,
1997
d) Notes to interim 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, JUNE 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 22,333,227 $ 12,423,732
Short-term cash investments..................................................... 19,019,813 21,223,053
Accounts receivable, net........................................................ 2,002,965 1,622,761
Inventories..................................................................... 2,007,527 4,135,481
Other current assets............................................................ 713,461 621,652
-------------- --------------
Total current assets.......................................................... 46,076,993 40,026,679
Long-term cash investments........................................................ 4,358,478 5,630,671
Furniture, fixtures and equipment, net............................................ 1,412,610 1,463,303
Other assets...................................................................... 107,653 24,318
-------------- --------------
Total assets...................................................................... $ 51,955,734 $ 47,144,971
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 1,094,758 $ 1,346,492
Accrued salaries and benefits................................................... 386,101 353,184
Accrued liabilities............................................................. 585,671 490,829
-------------- --------------
Total current liabilities..................................................... 2,066,530 2,190,505
-------------- --------------
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,
7,934,995 and 8,059,007 issued and outstanding in 1996 and at June 30, 1997,
respectively.................................................................. 7,935 8,059
Additional paid in capital...................................................... 74,655,334 74,702,256
Unearned compensation........................................................... (702,148) (528,555)
Amounts due from stockholders................................................... (120,900) (120,900)
Accumulated deficit............................................................. (24,951,017) (30,106,394)
-------------- --------------
Total stockholders' equity.................................................... 48,889,204 43,954,466
-------------- --------------
Total liabilities and stockholders' equity........................................ $ 51,955,734 $ 47,144,971
-------------- --------------
-------------- --------------
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.............................................. $ 2,505,202 $ 1,107,875 $ 3,972,620 $ 1,925,423
Cost of sales.......................................... 1,589,031 934,165 2,811,292 1,442,831
------------ ------------- ------------- -------------
Gross profit....................................... 916,171 173,710 1,161,328 482,592
------------ ------------- ------------- -------------
Sales and marketing expenses........................... 628,765 1,877,024 1,374,835 3,003,733
Research and development expenses...................... 681,113 1,099,524 1,421,060 2,118,634
General and administrative expenses.................... 433,910 1,169,947 879,934 1,737,220
------------ ------------- ------------- -------------
1,743,788 4,146,495 3,675,829 6,859,587
------------ ------------- ------------- -------------
Loss from operations............................... (827,617) (3,972,785) (2,514,501) (6,376,995)
Other income (expense), net:
Interest income...................................... 219,416 583,272 339,827 1,195,245
Other income......................................... 0 29,960 0 29,960
------------ ------------- ------------- -------------
Other income (expense), net........................ 219,416 613,232 339,827 1,225,205
------------ ------------- ------------- -------------
Loss before provision for income taxes............. (608,201) (3,359,553) (2,174,674) (5,151,790)
Provision for income taxes............................. 1,600 1,987 4,052 3,587
------------ ------------- ------------- -------------
Net loss........................................... $ (609,801) $ (3,361,540) $ (2,178,726) $ (5,155,377)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net loss per common share and common share
equivalent........................................... $ (0.10) $ (0.38) $ (0.38) $ (0.59)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average common shares and common share
equivalents outstanding.............................. 6,225,000 8,808,000 5,804,000 8,782,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</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>
SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $(2,178,726) $(5,155,377)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................... 102,857 206,125
Compensation related to stock options vesting................... 175,543 173,593
Decrease (increase) in accounts receivable...................... (672,429) 380,204
Increase in inventories......................................... (738,599) (2,127,954)
Decrease (increase) in other current assets..................... (277,843) 91,809
Decrease (increase) in other assets............................. (209,767) 82,135
Increase (decrease) in accounts payable......................... (527,557) 251,734
Decrease in accrued salaries and benefits....................... (19,380) (32,917)
Decrease in other accrued liabilities........................... (18,305) (94,842)
----------- -----------
Net cash used by operating activities......................... (3,233,722) (6,225,490)
----------- -----------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment................... (329,645) (255,618)
Purchase of short-term investments.............................. (2,702,207) (16,575,248)
Sale of short-term investments.................................. 5,417,383 13,099,815
Increase in restricted cash..................................... (186,325) 0
----------- -----------
Net cash provided (used) by investing activities.............. 2,199,206 (3,731,051)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock.............................. 47,437,500 0
Costs of equity issuances....................................... (4,017,348) 0
Proceeds from exercise of stock options......................... 45,368 26,392
Proceeds from shares issued under employee stock purchase
plan.......................................................... 0 20,654
----------- -----------
Net cash provided by financing activities..................... 43,465,520 47,046
----------- -----------
Net increase (decrease) in cash and cash equivalents.............. 42,431,004 (9,909,495)
Cash and cash equivalents, beginning.............................. 2,359,773 22,333,227
----------- -----------
Cash and cash equivalents, ending................................. $44,790,777 $12,423,732
----------- -----------
----------- -----------
Supplemental schedule of noncash investing and financing
activities:
Exchange of convertible redeemable preferred stock for common
stock........................................................... $ 9,935,981
Unearned compensation related to stock options granted............ 299,043
Settlement of amounts due from stockholder........................ 83,435
Costs of equity issuances not yet paid............................ 331,002
</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 products 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 June 30,
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) basis. Inventories consisted of the following:
<TABLE>
<CAPTION>
DEC. 31, 1996 JUNE 30, 1997
------------- --------------
(UNAUDITED)
<S> <C> <C>
Raw materials....................................... $1,141,427 $1,908,812
Work in-process..................................... 352,903 1,036,795
Finished goods...................................... 513,197 1,189,874
------------- --------------
$2,007,527 $4,135,481
------------- --------------
------------- --------------
</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 June 30, 1997 and for the three and six month
periods ended June 30, 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 June 30, 1997
period are not necessarily indicative of the results for the entire year.
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 ("FASB") 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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The implementation of SFAS No. 130 is not expected to have a
material effect on the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented, established standards for the way that a public
enterprise reports information about key revenue-producing segments in the
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The implementation of SFAS
No. 131 is not expected to have a material effect on the Company's current
reporting and disclosures.
6. PENDING MERGER AND 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 as executed on April 19, 1997, the Company's
shareholders were to receive 1.0358 shares of Urohealth common stock for each
share of Company common stock. On July 17, 1997, the Company and Urohealth
amended the Agreement and Plan of Merger to provide that the Company's
stockholders will receive 1.40 shares of Urohealth common stock for each share
of Company common stock. The merger is anticipated to be tax-free to Company
shareholders 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 and
certain other conditions. The consolidated financial statements as of June 30,
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 microhysteroscope 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. On July 17, 1997 the Company and
Urohealth Systems amended the Agreement and Plan of Merger. Under the amended
Agreement and Plan of Merger, the Company's stockholders will receive 1.4 shares
of Urohealth common stock for each share of the Company's common stock. The
boards of directors of both companies have unanimously approved the merger and
the amended terms of the Agreement and Plan of Merger, and subject to the
approval of the stockholders of each company and certain other closing
conditions, the transaction is expected to close in September, 1997. The merger
is anticipated to be tax free to the Company's stockholders and to be accounted
for as a pooling of interests.
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,
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. In addition, sales to USSC for the first six months were, and
for the remainder of 1997, are expected to be below those for comparable periods
of 1996 due primarily to Imagyn's introduction of its new model microlaparoscope
in the second quarter of 1997 and USSC's decision not to purchase
non-proprietary MicroLap instrumentation and disposable products from Imagyn in
1997. 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
10
<PAGE>
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 JUNE 30, 1997 AND 1996
NET SALES. Net sales for the three months ended June 30, 1997 decreased to
$1.1 million from $2.5 million for the three months ended June 30, 1996. The
decrease was primarily attributable to the Company's introduction and
commencement of shipments of its new model microlaparoscope during the second
quarter of 1997 and USSC's decision not to purchase non-proprietary MicroLap
instrumentation and disposable products from the Company in 1997. As a result,
sales of MicroLap products to USSC during the three months ended June 30, 1997
were $2.0 million less than sales of these products to USSC during the three
months ended June 30, 1996. For the three months ended June 30, 1997, 47% of the
Company's sales were to international customers; for the three months ended June
30, 1996, 41% of the Company's sales were to international customers. 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 June 30, 1997
decreased to $934,000 from $1.6 million for the three months ended June 30,
1996. The decrease in cost of sales was attributable to the decrease in the
level of sales for the period. Cost of sales for the three months ended June 30,
1997 also included non-recurring production costs associated with the Company's
start-up manufacture of its new model microlaparoscope.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended June 30, 1997 increased to $1.8 million from $629,000 for the three months
ended June 30, 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 June 30, 1997 increased to $1.1 million from $681,000 for the three
months ended June 30, 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 June 30, 1997 increased to $1.2 million from $434,000 for the
three months ended June 30, 1996. The increase was primarily the result of
non-recurring expenses associated with the pending merger with Urohealth
Systems, 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.
OTHER INCOME (EXPENSE), NET. Net other income for the three months ended
June 30, 1997 increased to $613,000 from $219,000 for the three months ended
June 30, 1996. This increase was attributable to interest income earned on
higher cash balances held by the Company during the three months ended June 30,
1997.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NET SALES. Net sales for the six months ended June 30, 1997 decreased to
$1.9 million from $4.0 million for the six months ended June 30, 1996. The
decrease was primarily attributable to the Company's introduction and
commencement of shipments of its new model microlaparoscope during the second
quarter of 1997 and USSC's decision not to purchase non-proprietary MicroLap
instrumentation and disposable products from the Company in 1997. As a result,
sales of MicroLap products to USSC
11
<PAGE>
during the six months ended June 30, 1997 were $3.0 million less than sales of
these products to USSC during the six months ended June 30, 1996. For the six
months ended June 30, 1997, 45% of the Company's sales were to international
customers; for the six months ended June 30, 1996, 8% 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, the increase in sales to Terumo and the introduction of the
Company's MicroSpan products in Europe. 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 six months ended June 30, 1997
decreased to $1.4 million from $2.8 million for the six months ended June 30,
1996. The decrease in cost of sales was attributable to the decrease in the
level of sales for the period. Cost of sales for the six months ended June 30,
1997 also included non-recurring production costs associated with the Company's
start-up manufacture of its new model microlaparoscope.
SALES AND MARKETING. Sales and marketing expenses for the six months ended
June 30, 1997 increased to $3.0 million from $1.4 million for the six months
ended June 30, 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 six
months ended June 30, 1997 increased to $2.1 million from $1.4 million for the
six months ended June 30, 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 six
months ended June 30, 1997 increased to $1.7 million from $880,000 for the six
months ended June 30, 1996. The increase was primarily the result of
non-recurring expenses associated with the pending merger with Urohealth
Systems, 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.
OTHER INCOME (EXPENSE), NET. Net other income for the six months ended June
30, 1997 increased to $1.2 million from $340,000 for the six months ended June
30, 1996. This increase was attributable to interest income earned on higher
cash balances held by the Company during the six months ended June 30, 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.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $30.1 million as of June 30, 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 June 30, 1997, the
Company had raised $30.3 million from the private placement of equity
securities. Through June 30, 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 June 30, 1997, the Company's principal source of liquidity consisted of
cash, cash equivalents and short-term investments of $33.6 million. Cash used in
the Company's operations was $6.2 million for the six months ended June 30, 1997
and $3.2 million for the six months ended June 30, 1996. The Company's capital
expenditures during the six months ended June 30, 1997 and the six months ended
June 30, 1996 were $256,000 and $330,000, 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.
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
13
<PAGE>
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
microhysterscopes 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 June 30, 1997, had an accumulated deficit of $30.1 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 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
14
<PAGE>
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 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.
15
<PAGE>
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 June 30, 1997,
the Company had received seventeen 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 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.
16
<PAGE>
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.
17
<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 June 30, 1997.
18
<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>
19
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,423,732
<SECURITIES> 21,223,053
<RECEIVABLES> 1,722,761
<ALLOWANCES> 100,000
<INVENTORY> 4,135,481
<CURRENT-ASSETS> 40,026,679
<PP&E> 2,573,993
<DEPRECIATION> 1,110,691
<TOTAL-ASSETS> 47,144,971
<CURRENT-LIABILITIES> 2,190,505
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0
0
<COMMON> 8,059
<OTHER-SE> 43,946,407
<TOTAL-LIABILITY-AND-EQUITY> 43,954,466
<SALES> 1,925,423
<TOTAL-REVENUES> 1,925,423
<CGS> 1,442,831
<TOTAL-COSTS> 6,859,587
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