<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UROHEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3841, 3842 98-0122944
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBERS) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
GATES PLASTICS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 95-2766979
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
DACOMED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 41-1368855
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
DACOMED INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 41-1777037
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
ALLSTATE MEDICAL PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 41-1335220
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
UROHEALTH OF KENTUCKY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
KENTUCKY 61-1278679
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
MICROSURGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 04-3118465
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
OSBON MEDICAL SYSTEMS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
GEORGIA 58-1546773
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
UROHEALTH, INC. (CALIFORNIA)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 95-3755249
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
================================================================================
<PAGE> 2
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 668-5858
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES A. LAVERTY
UROHEALTH SYSTEMS, INC.
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 668-5858
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
ROBERT M. MATTSON, JR.
MORRISON & FOERSTER LLP
19900 MACARTHUR BOULEVARD
SUITE 1200
IRVINE, CALIFORNIA 92612
(714) 251-7500
APPROXIMATE DATE OF COMMENCEMENT OF SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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===================================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH AMOUNT MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/2% Senior Subordinated Notes
due 2004........................ $110,000,000 100% $110,000,000 $33,334
Guarantees........................ N/A N/A N/A (2)
===================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) No separate fee is payable pursuant to Rule 457(n).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 3
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN THE
PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN FORM S-4
<TABLE>
<CAPTION>
ITEM IN FORM S-4 CAPTION IN PROSPECTUS
- ---------------------------------------------------------- -----------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Facing Page; Cross-Reference Sheet
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Available Information; Table of
Contents; Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.............................. Prospectus Summary; Risk Factors;
Ratio of Earnings to Fixed Charges;
The Exchange Offer; Selected
Consolidated Financial Data
4. Terms of the Transaction........................... Prospectus Summary; Risk Factors;
The Prior Offering; Description of
Notes; Incorporation of Certain
Documents by Reference
5. Pro Forma Financial Information.................... Prospectus Summary; Summary
Unaudited Pro Forma Condensed
Consolidated Financial Data
6. Material Contracts with the Company Being
Acquired........................................... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... Not Applicable
8. Interests of Named Experts and Counsel............. Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Not Applicable
10. Information with Respect to S-3 Registrants........ Prospectus Cover Page; Available
Information; Incorporation of
Certain Documents; Prospectus
Summary; Unaudited Summary Pro
Forma Condensed Consolidated
Financial Data; Selected
Consolidated Financial Data;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Index to
Financial Statements
11. Incorporation of Certain Information by
Reference.......................................... Incorporation of Certain Documents
By Reference
12. Information with Respect to S-2 or S-3
Registrants........................................ Not Applicable
13. Incorporation of Certain Information by
Reference.......................................... Not Applicable
14. Information with Respect to Registrants Other than
S-3 or S-2 Registrants............................. Not Applicable
15. Information with Respect to S-3 Companies.......... Not Applicable
16. Information with Respect to S-2 or S-3 Companies... Not Applicable
17. Information with Respect to Companies other than
S-3 or S-2 Companies............................... Not Applicable
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer.... Incorporation of Certain Documents
By Reference
</TABLE>
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 5, 1997
UROHEALTH SYSTEMS, INC.
OFFER TO EXCHANGE
ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED NOTES DUE 2004
($110,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 12 1/2% SENIOR SUBORDINATED NOTES DUE 2004
------------------------------
The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York
City time, on , 1997 (as such date may be extended, the "Expiration
Date").
Urohealth Systems, Inc., a Delaware corporation ("Urohealth" or the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal
amount of its 12 1/2% Senior Subordinated Notes due 2004 (the "New Notes") for
each $1,000 in principal amount of its outstanding 12 1/2% Senior Subordinated
Notes due 2004 (the "Old Notes") (the Old Notes and the New Notes are
collectively referred to herein as the "Notes"). An aggregate principal amount
of $110,000,000 of Old Notes is outstanding. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Notes where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date (as
defined herein) and ending on the close of business one year after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to the terms and provisions of the Registration
Rights Agreement, dated as of April 10, 1997 (the "Registration Rights
Agreement"), between the Company and Bear, Stearns & Co. Inc. (the "Initial
Purchaser"). The Old Notes may be tendered only in multiples of $1,000. See "The
Exchange Offer."
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
------------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 5
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $110,000,000 principal amount of the
Old Notes to the Initial Purchaser on April 10, 1997 (the "Closing Date")
pursuant to a Purchase Agreement, dated April 3, 1997 (the "Purchase
Agreement"), among the Company, Gates Plastics, a California corporation and
wholly-owned indirect subsidiary of the Company ("Gates"), Dacomed Corporation,
a Minnesota corporation and wholly-owned subsidiary of the Company ("Dacomed"),
Dacomed International, Inc., a Minnesota corporation and wholly-owned indirect
subsidiary of the Company ("Dacomed International"), Allstate Medical Products,
Inc., a Minnesota corporation and wholly-owned subsidiary of the Company
("Allstate"), Urohealth of Kentucky, Inc., a Kentucky corporation and
wholly-owned subsidiary of the Company ("Urohealth Kentucky"), Microsurge, Inc.,
a Delaware corporation and wholly-owned subsidiary of the Company
("Microsurge"), Osbon Medical Systems, Ltd., a Georgia corporation and
wholly-owned subsidiary of the Company ("Osbon"), N.T. Reudt Corporation, a New
Jersey corporation and wholly-owned subsidiary of the Company ("Reudt"),
Intermed Associates, Inc., a Delaware corporation and wholly-owned subsidiary of
the Company ("Intermed"), Laparomed Corporation, a California corporation and
wholly-owned indirect subsidiary of the Company ("Laparomed"), Advanced Urocare,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company
("Advanced") and Urohealth, Inc. (California), a California corporation and
wholly-owned subsidiary of the Company ("Urohealth California," and together
with Gates, Dacomed, Dacomed International, Allstate, Urohealth Kentucky,
Microsurge, Osbon, Reudt, Intermed, Laparomed and Advanced the "Guarantors"),
and the Initial Purchaser. The Initial Purchaser subsequently resold the Old
Notes in reliance on Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"). The Company and the Initial Purchaser also entered into the
Registration Rights Agreement pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer -- Purpose and Effect."
The Old Notes were issued, and the New Notes will be issued, under the
Indenture, dated as of April 10, 1997 among the Company, the Guarantors and The
Bank of New York, as trustee (in such capacity, the "Trustee"). The Indenture,
as supplemented, is hereinafter referred to as the "Indenture."
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of New Notes will not be
entitled to liquidated damages equal to one-half of one percent (0.5%) per annum
of the principal amount of the Notes held by such Holder during the first 90-day
period immediately following the occurrence of a Registration Default (as
defined), increasing by an additional one-half of one percent (0.5%) per annum
of the principal amount of such Notes during each subsequent 90-day period, up
to a maximum amount of Liquidated Damages equal to two percent (2.0%) per annum
of the principal amount of such Notes, during any period in which a Registration
Default is continuing (the "Liquidated Damages") and (iii) holders of New Notes
will not be, and upon the consummation of the Exchange Offer, holders of Old
Notes will no longer be, entitled to certain rights under the Registration
Rights Agreement intended for the holders of unregistered securities. The
Exchange Offer shall be deemed consummated upon the occurrence of the delivery
by the Company to The Bank of New York, as registrar of the Old Notes (in such
capacity, the "Registrar") under the Indenture, of New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are validly tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer -- Termination of Certain Rights" and "Procedures for Tendering
Old Notes" and "Description of Notes."
The New Notes will bear interest at a rate equal to 12 1/2% per annum from
their date of issuance. Interest on the New Notes is payable semiannually on
October 1 and April 1 of each year (each an "Interest Payment Date"). Holders
whose Old Notes are accepted for exchange will have the right to receive
interest accrued thereon from the date of original issuance or the last Interest
Payment Date, as applicable, to, but not including, the date of issuance of the
New Notes, such interest to be payable with the first Interest Payment on the
New Notes. Interest on the Old Notes accepted for exchange will cease to accrue
on the day prior to the issuance of the New Notes. The Notes will mature on
April 1, 2004. See "Description of Notes."
<PAGE> 6
The New Notes will not be redeemable at the Company's option prior to April
1, 2001. Thereafter, the New Notes will be redeemable by the Company at the
redemption price, plus accrued and unpaid interest and Liquidated Damages, if
any, thereon to the applicable redemption date, and subject to the conditions
set forth in "Description of Notes -- Optional Redemption." Upon the occurrence
of a Change of Control (as defined herein), each Holder of a New Note will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's New Notes at 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of purchase. There is no assurance that the Company will have
adequate funds to repurchase the New Notes upon a Change in Control. See
"Description of Notes -- Repurchase of New Notes at the Option of the
Holders -- Change of Control."
The New Notes will be general unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company, including borrowings under the New Credit
Facility (as defined herein). The New Notes will also be effectively
subordinated to all of the indebtedness of the Company's Subsidiaries. See
"Description of Notes." The Indenture permits the Company and its subsidiaries
to incur additional indebtedness, including additional Senior Indebtedness
subject to satisfying certain financial covenants.
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in "no-action"
letters issued to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such holder
(other than a broker-dealer who purchased Old Notes directly from the Company
for resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such holder
is not an affiliate of the Company, is acquiring the New Notes in the ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes. Holders wishing to accept the Exchange Offer must represent to the
Company, as required by the Registration Rights Agreement, that such conditions
have been met. In addition, if such holder is not a broker-dealer, it must
represent that it is not engaged in, and does not intend to engage in, a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes, where such Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "The Exchange Offer -- Resales of the New
Notes" and "Plan of Distribution." This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities.
As of , 1997, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the sole registered holder of the
Old Notes and held the Old Notes for of its participants. The Company
believes that no such participant is an affiliate (as such term is defined in
Rule 405 of the Securities Act) of the Company. There has previously been only a
limited secondary market, and no public market, for the Old Notes. The Old Notes
are eligible for trading in the Private Offering, Resales and Trading through
Automatic Linkages ("PORTAL") market. In addition, the Initial Purchaser has
advised the Company that it currently intends to make a market in the New Notes;
however, the Initial Purchaser is not obligated to do so and any market making
activities may be discontinued by the Initial Purchaser at any time. Therefore,
there can be no assurance that an active market for the New Notes will develop.
If such a trading market develops for the New Notes, future trading prices will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, the New Notes may trade at a discount
from their face value. See "Risk Factors -- Lack of Public Market."
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses.
<PAGE> 7
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
"Depositary"). The Global Old Note is registered in the name of Cede, as nominee
of DTC, and beneficial interests in the Global Old Note are shown on, and
transfers thereof are effected only through, records maintained by the
Depositary and its participants. The use of the Global Old Note to represent
certain of the Old Notes permits the Depositary's participants, and anyone
holding a beneficial interest in an Old Note registered in the name of such a
participant, to transfer interests in the Old Notes electronically in accordance
with the Depositary's established procedures without the need to transfer a
physical certificate. New Notes issued in exchange for the Global Old Note will
also be issued initially as a note in global form (the "Global New Note," and,
together with the Global Old Note, the "Global Notes") and deposited with, or on
behalf of, the Depositary. After the initial issuance of the Global New Note,
New Notes in certificated form will be issued in exchange for a holder's
proportionate interest in the Global New Note only as set forth in the
Indenture.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................................. 1
Incorporation of Certain Documents by Reference....................................... 1
Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 14
The Company........................................................................... 23
The Exchange Offer.................................................................... 23
Use of Proceeds....................................................................... 30
Ratio of Earnings to Fixed Charges.................................................... 30
Capitalization........................................................................ 31
Summary Unaudited Pro Forma Condensed Consolidated Financial Data..................... 32
Selected Consolidated Financial Data.................................................. 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 36
Business.............................................................................. 41
Management............................................................................ 56
Principal Stockholders................................................................ 60
Description of Certain Indebtedness................................................... 62
Description of Notes.................................................................. 63
Description of Capital Stock.......................................................... 88
Certain Federal Income Tax Considerations............................................. 93
Plan of Distribution.................................................................. 95
Legal Matters......................................................................... 95
Experts............................................................................... 95
Index to Financial Statements......................................................... F-1
</TABLE>
<PAGE> 9
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered hereby. This
Prospectus contains summaries of the material terms and provisions of certain
documents and in each instance reference is made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the New Notes offered hereby. This Prospectus contains summaries
of the material terms and provisions of certain documents and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such summary is qualified in its entirety by such
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60061; and New York Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. In addition, certain
of the information regarding the Company is available on the World Wide Web by
accessing the Securities and Exchange Commission web site at http://www.sec.gov.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Company's Common Stock is traded on The Nasdaq
Stock Market National Market under the trading symbol "UROH."
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish to the holders of the Notes and submit to the
Commission (unless the Commission will not accept such materials) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's independent
accountants, and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes in connection
with any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act. In addition, upon registration of the guarantees of the New
Notes in connection with the Exchange Offer, each Guarantor will also become
subject to the reporting requirements of the Exchange Act, subject to obtaining
exemptive relief from the Commission or no-action relief from the Commission
staff.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
following documents, which have been filed with the Commission pursuant to the
Exchange Act: (i) the Company's Annual Report on Form 10-K for the transition
period ended March 31, 1996 (Commission file no. 1-11150), as amended; (ii) the
Company's Current Report on Form 8-K, dated July 1, 1996, as amended on August
12, 1996 and September 26, 1996 (Commission file no. 1-11150); (iii) the
Company's Quarterly Reports on Form 10-Q, as amended, for the quarters ended
June 30, 1996, September 30, 1996 and December 31, 1996 (Commission file no.
1-11150); (iv) the Company's Current Report on Form 8-K, dated March 14, 1997,
as amended on April 15, 1997 (Commission file no. 1-11150); (v) the Company's
Current Report on Form 8-K, dated April 14, 1997, as amended on April 28, 1997
(Commission file no. 1-11150); and (vi) the Company's Current Report on Form
8-K, dated April 28, 1997 (Commission file no. 1-11150).
<PAGE> 10
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Exchange Offer shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents.
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document,
copies of which are available from the Company as described below, each such
statement being qualified in all respects by such reference.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above which have been or may be
incorporated by reference in this Prospectus (excluding exhibits to the
information that is incorporated herein by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Requests for such copies should be directed to Kevin M. Higgins,
Senior Vice President and General Counsel, UROHEALTH Systems, Inc., 5 Civic
Plaza, Suite 100, Newport Beach, 92660; telephone number (714) 668-5858. In
order to ensure timely delivery of the documents, any request should be made by
, 1997.
Any statement contained in a document incorporated by reference shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed
incorporated document or in any accompanying prospectus supplement modifies or
supersedes such statement (but not to the extent that any statement and any such
other filed document is only summarized herein or in any other subsequently
filed document). Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
2
<PAGE> 11
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and the documents referred to herein. Except for
the historical information contained herein, the discussion in this Prospectus
and the documents referred to herein contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Market data used throughout this
Prospectus was obtained or extrapolated from industry publications which the
Company believes to be reliable, but there can be no assurance as to its
accuracy. As used in this Prospectus and the documents referred to herein and
unless otherwise required by the context, the terms "UROHEALTH" and the
"Company" mean UROHEALTH Systems, Inc. and its direct and indirect subsidiaries.
During 1996, the Company changed its fiscal year end from June 30 to March 31.
THE COMPANY
UROHEALTH is a developer, manufacturer and distributor of products for the
urology, minimally invasive and general surgery, and gynecology markets (the
"Target Markets"). The Company has a broad offering of products used by
healthcare professionals for patients suffering from impotence, incontinence and
other gynecological and urological disorders, and other conditions requiring
minimally invasive and general surgery. In October 1994, under the leadership of
new management, the Company adopted and began to implement a strategic plan
which took advantage of consolidation opportunities in the highly fragmented
medical products industry. Management's strategy was to position the Company to
benefit from the competitive advantages and operating efficiencies inherent in
an infrastructure which combines an experienced management team, sophisticated
and efficient manufacturing facilities and a large sales force.
The Company believes that it has developed well-established urology and
integrated minimally invasive and general surgery platforms and that it is
well-positioned further to acquire and develop new product lines, including
products serving the gynecology market, to enable it to become a leader in each
of its Target Markets. The Company has increased sales from $4.3 million for the
year ended June 30, 1994 (prior to giving effect to its acquisitions) to $68.0
million for the nine months ended December 31, 1996. EBITDA (as defined herein)
has increased from $(16.7) million for the year ended June 30, 1994 to $13.3
million for the nine months ended December 31, 1996. Sales and EBITDA for the
quarter ended December 31, 1996 were $29.7 million and $6.3 million,
respectively.
The Company's strategy is to: (i) expand the range of products to its
growing Target Markets; (ii) leverage its 160-person sales force to increase
sales of its existing, newly acquired and recently developed products, including
sales through distributors and group purchasing organizations; (iii) further
capitalize on efficiencies and synergies available by continuing to consolidate
manufacturing of existing and acquired products into the Company's existing
manufacturing operations; (iv) continue to acquire and develop additional
innovative products and product lines, including products to serve the
gynecology market; and (v) develop and expand an international sales and
marketing presence to capitalize on opportunities it identifies in selected
developed countries.
The Company offers a number of products designed for the treatment of
urological disorders, including the leading vacuum erection system, a penile
prosthesis and diagnostic equipment. Vacuum erection devices are low cost
compared with other erectile dysfunction treatment options. Erectile dysfunction
is estimated to affect between 10 and 20 million men in the United States, with
the vast majority of cases remaining untreated. The Company believes that the
market for erectile dysfunction products will increase significantly as patients
and others become more knowledgeable regarding the treatment alternatives
available and as the average age of men in the United States continues to rise.
Urology products represented 57.5% of the Company's sales for the quarter ended
December 31, 1996.
The Company offers a broad line of minimally invasive and general surgery
instruments, which are sold primarily to general surgeons, gynecologists and
urologists. Minimally invasive surgery, or endoscopy, relies on viewing tubes
(endoscopes) that allow surgeons to look into the body and is enabled through
the use of
3
<PAGE> 12
telescopes, light sources, cameras and video viewing, recording and printing
systems. The Company recently introduced its Reflex(R) AEC35(TM) articulating
cutter and stapler, which is the only endoscopic surgical product on the market
to have articulation capabilities. The Company also recently introduced its
EndoView(TM) product, which is an inexpensive, portable video viewing system
that urologists, general surgeons and gynecologists can attach to an endoscope.
The transition from open surgery to minimally invasive surgery has gained
significant momentum in the past few years as studies have shown minimally
invasive surgery to be more economical and beneficial to the patient, including
shortening the hospital stay and reducing post-operative complications,
resulting in faster recovery. In addition to growth prospects for its existing
products, the Company is developing a number of additional products to serve
this market. The Company's products in these areas accounted for 34.5% of sales
for the quarter ended December 31, 1996.
The Company offers a number of products designed for the treatment of
incontinence, including a line of catheters and urinary drainage systems, and
other products such as washable pads, briefs and diapers. Urinary incontinence
is estimated to affect between 15 and 25 million adults in the United States, of
which approximately 85% are female, a vast majority of which do not seek
treatment for their problem. The Company believes that the market for
incontinence products will increase as patients become more knowledgeable about
treatment options and as the number of patients suffering from incontinence
problems rise as the average age in the United States continues to increase. The
Company is actively seeking, and has under development, additional products to
serve this market. Incontinence products represented 8.0% of the Company's sales
for the quarter ended December 31, 1996.
The Company believes that the medical products industry is highly
fragmented and that there are opportunities to acquire additional product lines
or companies in complementary lines of business. The Company is continuously
exploring these opportunities and management believes that future growth will,
in significant part, take place through acquisitions.
RECENT DEVELOPMENTS
IMAGYN MEDICAL, INC. ACQUISITION. On April 19, 1997, the Company entered
into a definitive Agreement and Plan of Merger pursuant to which Urohealth would
acquire Imagyn Medical, Inc. ("Imagyn") in a stock-for-stock merger (the
"Merger"). The merger is expected to be accounted for as a pooling-of-interests
and each share of Imagyn common stock will be exchanged for 1.0358 shares of
Urohealth Common Stock. Urohealth will issue approximately 8.5 million shares of
Common Stock upon consummation of the Merger. The consummation of the Merger is
subject to approval of the Imagyn and Urohealth stockholders, and other
customary closing conditions. No assurances can be given that the Merger will be
successfully consummated.
Imagyn designs, develops and markets micro-invasive devices for diagnosis
and treatment of gynecological and reproductive disorders. Imagyn's technology
platform, based on micro-optics and micro-access devices, provides physicians
with the ability to atraumatically access and visualize the abdominal cavity,
the uterus and the fallopian tubes. Imagyn's micro-optics enable physicians to
visualize a patient's internal anatomy with the resolution and light efficiency
of larger, more invasive devices commonly used today. Imagyn's disposable
micro-access devices enable physicians to perform certain procedures outside the
hospital without the need for general anesthesia. Imagyn's principal product
systems based on these core technologies are the MicroLap microlaparoscopy
system, the MicroSpan microhysteroscopy system and the Ovation systems for
infertility indications. See "Risk Factors -- Management of Growth."
PREMIER AGREEMENT. The Company recently announced that it has entered into
a five-year agreement (the "Premier Agreement") with Premier, Inc. ("Premier")
to supply participating Premier members with certain products of the Company.
Premier is the nation's largest purchasing alliance of hospitals and health
systems with over 1,800 participating acute care hospitals and alternate site
members in the United States. The Company's initial focus will be on offering a
number of its products to Premier's outpatient, physician group and other
alternate site members. Under the Premier Agreement, the Company will issue to
Premier a warrant to purchase shares of Common Stock of the Company at a
purchase price equal to the closing price on the date the parties reached an
agreement in principle. The number of shares is subject to increase or decrease
depending on certain purchasing levels over the five-year term. While there are
no minimum purchase
4
<PAGE> 13
requirements under the agreement, the five-year agreement has purchasing targets
of more than $1.0 billion over its term. This alliance with Premier is an
important step in the Company's strategy of expanding relationships with group
purchasing organizations. No assurances can be made that currently anticipated
purchasing targets under the Premier Agreement, or any other agreement, will be
met. See "Risk Factors -- Management of Growth" and "Business -- Premier
Agreement."
MICROSURGE ACQUISITION. On March 31, 1997, the Company acquired
Microsurge, Inc. ("Microsurge") in a transaction pursuant to which Microsurge
became a wholly-owned subsidiary of the Company (the "Microsurge Merger"). All
of the outstanding Microsurge capital stock was exchanged in the Microsurge
Merger for shares of Common Stock of the Company, and the Company either assumed
or repaid approximately $9 million of outstanding Microsurge indebtedness and
other obligations. The total purchase price, including assumption of debt and
other obligations, was approximately $38 million.
Microsurge designs, develops, manufactures and markets surgical instruments
for use in minimally invasive surgery. Microsurge's minimally invasive surgery
instruments are based on a "multi-use" concept ("reposable") that seeks to fill
the gap between disposable products and traditional reusable products. The
Company expects that the acquisition of Microsurge will expand the Company's
customer base, provide the Company with a relationship with one of the largest
healthcare providers in the United States and expand the number of products
available for sale by the Company's existing minimally invasive surgery sales
force. The Company believes that Microsurge manufacturing operations can be
consolidated with the Company's existing manufacturing operations. The Company
believes that reposable surgical instruments will become increasingly used by
healthcare providers as cost containment initiatives continue.
X-CARDIA ACQUISITION. On February 28, 1997, the Company acquired X-Cardia
Corporation ("X-Cardia") for a combination of cash and stock. The aggregate
purchase price will be up to $33 million depending upon achievement of certain
milestones after the closing. In addition, the Company is obligated to pay a
percentage of sales for a four-year period after commercial introduction of the
first product using the acquired technology. The Company delivered stock with a
value of $12 million at the closing, and is obligated to deliver the balance of
the purchase price, a combination of cash and stock, upon achievement of
clinical and patent approval milestones. There can be no assurances that the
milestones will be achieved. With this acquisition, the Company acquired, among
other things, cardiac output monitoring technology that is currently under
development, which if successfully developed and patented could find widespread
application in surgical procedures and the monitoring of critically ill
patients.
PUBLIC OFFERING. In November 1996, the Company completed an underwritten
public offering of an aggregate of 2,684,000 shares of Common Stock of the
Company, raising net offering proceeds of $19.1 million. The net proceeds of the
offering were used to pay down debt, finance several acquisitions and for
working capital.
THE PRIOR OFFERING
The outstanding $110.0 million principal amount of Old Notes were sold by
the Company to the Initial Purchaser on the Closing Date pursuant to the
Purchase Agreement among the Company, the Guarantors and the Initial Purchaser.
The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act. The Company and the Initial Purchaser also entered
into the Registration Rights Agreement pursuant to which the Company and the
Guarantors granted certain registration rights for the benefit of the holders of
the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer" and "The Exchange Offer -- Purpose and
Effect."
5
<PAGE> 14
THE EXCHANGE OFFER
THE EXCHANGE OFFER............ The Company is offering upon the terms and
subject to the conditions set forth herein and
in the accompanying letter of transmittal (the
"Letter of Transmittal"), to exchange $1,000 in
principal amount of its 12 1/2% Senior
Subordinated Notes due 2004 (the "New Notes,"
with the Old Notes and the New Notes
collectively referred to herein as the "Notes")
for each $1,000 in principal amount of the
outstanding Old Notes (the "Exchange Offer").
As of the date of this Prospectus, $110.0
million in aggregate principal amount of the
Old Notes is outstanding, the maximum amount
authorized by the Indenture for all Notes. As
of , 1997, there was one registered
holder of the Old Notes, Cede & Co. ("Cede"),
which held the Old Notes for of its
participants. See the "Exchange Offer -- Terms
of the Exchange Offer."
EXPIRATION DATE............... 5:00 p.m., New York City time, on ,
1997 as the same may be extended. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
CONDITIONS OF THE EXCHANGE
OFFER......................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. The only condition to
the Exchange Offer is the declaration by the
Commission of the effectiveness of the
Registration Statement of which this Prospectus
constitutes a part. See "The Exchange Offer --
Conditions of the Exchange Offer."
TERMINATION OF CERTAIN
RIGHTS........................ Pursuant to the Registration Rights Agreement,
holders of Old Notes (i) have rights to receive
Liquidated Damages and (ii) have certain rights
intended for the holders of unregistered
securities. "Liquidated Damages" means damages
of 0.5% per annum of the principal amount of
the Old Notes during the first 90 days of a
Registration Default, increasing by an
additional 0.5% per annum for each additional
90-day period (up to a maximum of 2.0% per
annum of the principal amount) for any period
during which a Registration Default is
continuing pursuant to the terms of the
Registration Rights Agreement. Holders of New
Notes will not be, and upon consummation of the
Exchange Offer, holders of Old Notes will no
longer be, entitled to (i) the right to receive
the Liquidated Damages or (ii) certain other
rights under the Registration Rights Agreement
intended for holders of unregistered
securities. See "The Exchange
Offer -- Termination of Certain Rights" and
"Procedures for Tendering Old Notes."
ACCRUED INTEREST.............. The New Notes will bear interest at a rate
equal to 12 1/2% per annum from their date of
issuance. Holders whose Old Notes are accepted
for exchange will have the right to receive
interest accrued thereon from the date of
original issuance or the last Interest Payment
Date, as applicable, to, but not including, the
date of issuance of the New Notes, such
interest to be payable with the first Interest
Payment Date on the New Notes. Interest on the
Old Notes accepted for exchange will cease to
accrue on the day prior to the issuance of the
New Notes. See "Description of Notes
-- Principal, Maturity and Interest."
6
<PAGE> 15
PROCEDURES FOR TENDERING OLD
NOTES......................... Unless a tender of Old Notes is effected
pursuant to the procedures for book-entry
transfer as provided herein, each holder
desiring to accept the Exchange Offer must
complete and sign the Letter of Transmittal,
have the signature thereon guaranteed if
required by the Letter of Transmittal, and mail
or deliver the Letter of Transmittal, together
with the Old Notes or a Notice of Guaranteed
Delivery and any other required documents (such
as evidence of authority to act, if the Letter
of Transmittal is signed by someone acting in a
fiduciary or representative capacity), to the
Exchange Agent (as defined) at the address set
forth on the back cover page of this Prospectus
prior to 5:00 p.m., New York City time, on the
Expiration Date. Any Beneficial Owner (as
defined) of the Old Notes whose Old Notes are
registered in the name of the nominee, such as
a broker, dealer, commercial bank or trust
company and who wishes to tender Old Notes in
the Exchange Offer, should instruct such entity
or person to promptly tender on such Beneficial
Owner's behalf. See "The Exchange Offer --
Procedures for Tendering Old Notes."
GUARANTEED DELIVERY
PROCEDURES.................... Holders of Old Notes who wish to tender their
Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot
deliver their Old Notes or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date (or
complete the procedure for book-entry transfer
on a timely basis), may tender their Old Notes
according to the guaranteed delivery procedures
set forth in the Letter of Transmittal. See
"The Exchange Offer -- Guaranteed Delivery
Procedures."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES......... Upon effectiveness of the Registration
Statement of which this Prospectus constitutes
a part and consummation of the Exchange Offer,
the Company will accept any and all Old Notes
that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time,
on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly after acceptance of the Old
Notes. See "The Exchange Offer --
Acceptance of Old Notes for Exchange; Delivery
of New Notes.
WITHDRAWAL RIGHTS............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange Offer
Withdrawal Rights."
THE EXCHANGE AGENT............ The Bank of New York is the exchange agent (in
such capacity, the "Exchange Agent"). The
address and telephone number of the Exchange
Agent are set forth in "The Exchange
Offer -- The Exchange Agent; Assistance."
FEES AND EXPENSES............. All expenses incident to the Company's
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by the Company. The
Company will also pay certain transfer taxes
applicable to the Exchange Offer. See "The
Exchange Offer -- Fees and Expenses."
RESALES OF THE NEW NOTES...... Based on existing interpretations by the staff
of the Commission set forth in no-action
letters issued to third parties, the Company
7
<PAGE> 16
believes that New Notes issued pursuant to the
Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold and
otherwise transferred by a holder (other than
(i) a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant
to Rule 144A under the Securities Act or any
other available exemption under the Securities
Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405
under the Securities Act), without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that
such holder is acquiring the New Notes in the
ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate,
in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where
such Old Notes were acquired by such broker as
a result of market-making or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. See "The Exchange
Offer -- Resales of the New Notes" and "Plan of
Distribution."
EFFECT OF NOT TENDERING OLD
NOTES FOR EXCHANGE............ Old Notes that are not tendered or that are not
properly tendered will, following the
expiration of the Exchange Offer, continue to
be subject to the existing restrictions upon
transfer thereof. The Company will have no
further obligations to provide for the
registration under the Securities Act of such
Old Notes and such Old Notes will, following
the expiration of the Exchange Offer, bear
interest at the same rate as the New Notes.
8
<PAGE> 17
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of New Notes will not be
entitled to Liquidated Damages, and (iii) holders of New Notes will not be, and
upon the consummation of the Exchange Offer, holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the Indenture of New Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that are validly tendered by holders
thereof pursuant to the Exchange Offer. See "The Exchange Offer -- Termination
of Certain Rights" and "-- Procedures for Tendering Old Notes" and "Description
of Notes." The Warrants issued in connection with the issuance of the Old Notes
are not the subject of the Exchange Offer and will continue to be subject to the
restrictions on transfer set forth therein.
SECURITIES OFFERED............ $110.0 million aggregate principal amount of
12 1/2% Senior Subordinated Notes due 2004.
MATURITY DATE................. April 1, 2004.
INTEREST PAYMENT DATES........ April 1 and October 1, commencing October 1,
1997.
GUARANTEES.................... The Notes are unconditionally guaranteed on an
unsecured senior subordinated basis by the
Company's existing domestic and material
foreign subsidiaries and will be
unconditionally guaranteed by future Restricted
Subsidiaries.
MANDATORY REDEMPTION.......... The Company is not required to make mandatory
redemption or sinking fund payments with
respect to the Notes.
OPTIONAL REDEMPTION........... The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after April 1, 2001 at the redemption prices
set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption,
and Liquidated Damages, if any. In addition, at
any time prior to April 1, 2000, the Company
may, on one or more occasions, redeem up to 35%
of the original aggregate principal amount of
the Notes with any of the net proceeds of one
or more Public Equity Offerings resulting in
net cash proceeds to the Company of at least
$40 million at a redemption price of 112 1/2%
of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of
redemption and Liquidated Damages, if any;
provided, however, that at least 65% of the
original aggregate principal amount of the
Notes remains outstanding following each such
redemption. See "Description of
Notes -- Optional Redemption."
CHANGE OF CONTROL............. In the event of a Change of Control, each
holder of the Notes will have the right to
require the Company to purchase such holder's
Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to
the date of repurchase and Liquidated Damages,
if any. See "Description of Notes -- Certain
Covenants -- Repurchase of Notes at the Option
of the Holder Upon a Change of Control."
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<PAGE> 18
RANKING....................... The Notes and the Guarantees are general
unsecured obligations of the Company and the
Guarantors, as applicable, subordinated in
right of payment to all existing and future
Senior Indebtedness of the Company and the
Guarantors, as applicable, including
indebtedness pursuant to the New Credit
Facility. The Indenture prohibits the Company
and the Guarantors from incurring, assuming or
guaranteeing any Indebtedness that is
subordinated to any Senior Indebtedness and
senior in right of payment to the Notes or the
Guarantees, as applicable. See "Description of
Notes -- Subordination."
CERTAIN COVENANTS............. The Indenture contains certain covenants,
including limitations on the ability of the
Company and the Guarantors to: (i) incur
additional Indebtedness (as defined herein);
(ii) incur certain liens; (iii) engage in
certain transactions with affiliates; (iv) make
certain restricted payments; (v) agree to
payment restrictions affecting Subsidiaries;
(vi) engage in unrelated lines of business; or
(vii) engage in mergers, consolidations or the
transfer of all or substantially all of the
assets of the Company or the Subsidiaries to
another person. In addition, in the event of
certain Asset Sales (as defined herein), the
Company is required to use the proceeds to
reinvest in the Company's business, to repay
certain debt or to offer to purchase Notes at
100% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon,
plus Liquidated Damages, if any, to the date of
purchase. See "Description of Notes -- Certain
Covenants."
SECURITY...................... Approximately $19.2 million of the net proceeds
of the offering of the Old Notes (the
"Offering") was used by the Company to purchase
the Pledged Securities (as defined herein),
scheduled interest and principal payments on
which will be in an amount sufficient to
provide for payment in full when due of the
first three scheduled interest payments on the
Notes. The Pledged Securities have been
pledged, until depleted, as security for
repayment of principal and interest on the
Notes under the Security Agreement (the
"Security Agreement") between the Company and
The Bank of New York, as trustee. The Pledged
Securities will be held by the Initial
Purchaser or the trustee pending disbursement.
See "Description of Notes -- Security."
RISK FACTORS
For a discussion of certain factors that should be considered by investors
in connection with the Exchange Offer, see "Risk Factors."
10
<PAGE> 19
SUMMARY CONDENSED CONSOLIDATED FINANCIAL DATA
The following summary condensed consolidated financial data and other
operating information of the Company have been derived from the financial
statements of UROHEALTH which have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") and include the
statements of operations and balance sheet data for Osbon, Advanced, Dacomed and
Allstate which acquisitions were accounted for as pooling-of-interests
transactions. The summary condensed consolidated financial data for the Company
as of March 31, 1996 and for the nine months ended March 31, 1996 and as of June
30, 1995 and for the year ended June 30, 1995 are derived from the consolidated
financial statements of UROHEALTH which have been audited by Ernst & Young LLP,
independent auditors. The summary condensed consolidated financial data for the
Company for the year ended June 30, 1994 have been derived from financial
statements audited by Cherry, Bekaert & Holland, LLP, independent auditors. The
data should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included or incorporated by
reference herein. The summary condensed consolidated financial data set forth
below as of June 30, 1993 and 1994 and for the year ended June 30, 1993 are
derived from audited financial statements not included herein. The financial
data for the nine months ended December 31, 1995 and 1996 are derived from the
unaudited financial statements of UROHEALTH, which contain all adjustments,
consisting of normal recurring accruals (except for the extraordinary loss on
early extinguishment of debt, the related induced accretion as a result of the
conversion of the convertible notes and redeemable convertible preferred stock,
restructuring charges and the merger and acquisition costs identified in the
accompanying unaudited condensed consolidated statements of operations) which
the Company considers necessary for a fair presentation of the financial
position and results of operations for those periods. The results of operations
for the nine month period ended December 31, 1996 are not necessarily indicative
of the results that may be expected for the entire year. The financial data
presented below includes statement of operations data for Richard-Allan from
August 14, 1996, the date of acquisition. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of
UROHEALTH included elsewhere herein.
The following summary pro forma financial data has been derived from the
Pro Forma Financial Statements included elsewhere herein. The summary pro forma
financial data presented below reflects the acquisition of X-Cardia (which
occurred on February 28, 1997), the acquisition of Microsurge (which occurred on
March 31, 1997 and is expected to be accounted for as a pooling-of-interests)
and the completion of the Offering and the application of the net proceeds
therefrom. See Unaudited Pro Forma Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS
YEAR ENDED JUNE 30, MARCH 31,(1) DECEMBER 31, ENDED
----------------------------- ------------------- ------------------- DECEMBER 31,
1993 1994 1995 1995 1996 1995 1996 1996
------- -------- -------- -------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................ $32,565 $ 37,828 $ 45,453 $ 32,746 $ 39,641 $ 37,810 $ 67,964 $ 72,667
Gross profit..................... 19,960 23,835 29,294 20,863 26,745 24,292 44,771 46,351
Selling, general and
administrative................. 24,539 32,802 35,145 25,547 32,218 32,316 32,537 38,971
Research and development......... 4,393 9,470 8,805 8,258 1,324 1,456 2,149 3,721
Restructuring, direct acquisition
and other costs(2)............. 563 1,000 2,351 1,500 9,688 10,794 29,500 29,500
------- -------- -------- -------- -------- -------- -------- ------------
Income (loss) from operations.... $(9,535) $(19,437) $(17,007) $(14,442) $(16,485) $(20,274) $(19,415) $(25,841)
Interest expense................. 131 267 303 208 1,002 495 4,864 14,561
Income (loss) before
extraordinary items............ $(9,985) $(20,127) $(18,506) $(15,497) $(17,998) $(21,483) $(23,716) $(39,797)
Extraordinary items.............. -- -- -- -- -- -- (2,973) (2,973)
------- -------- -------- -------- -------- -------- -------- ------------
Net loss......................... $(9,985) $(20,127) $(18,506) $(15,497) $(17,998) $(21,483) $(26,689) $(42,770)
Loss per share before
extraordinary items............ $ (0.88) $ (1.77) $ (1.52) $ (1.28) $ (1.50) $ (1.77) $ (1.55) $ (2.04)
</TABLE>
11
<PAGE> 20
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, 1996
------------------------------- MARCH 31, ----------------------
1993 1994 1995 1996 ACTUAL PRO FORMA
------- ------- ------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents...................... $ 6,800 $ 3,009 $ 1,051 $ 1,185 $ 2,272 $ 56,506
Restricted cash........................... $ -- $ -- $ -- $ -- $ -- $ 19,296
Working capital (deficit)................. $14,330 $ 8,346 $ 4,043 $(3,728) $ 18,363 $ 94,560
Total assets.............................. $28,686 $25,075 $26,174 $27,835 $133,753 $228,853
Notes payable, bank term loan, capital
leases and line of credit............... $ 2,663 $ 3,050 $ 3,620 $14,261 $ 36,673 $ 6,871
Senior subordinated notes(3).............. $ -- $ -- $ -- $ -- $ -- $108,278
Convertible subordinated debt............. $ -- $ -- $ 1,077 $ 1,284 $ 50,000 $ 55,503
Long-term liabilities, minority interest,
and redeemable convertible preferred
stock................................... $ 55 $ 2,101 $ 2,742 $ 5,635 $ 2,937 $ 3,162
Common stockholders' equity (deficit)..... $20,390 $14,339 $10,538 $(6,190) $ 27,240 $ 32,157
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED PRO FORMA
YEAR ENDED JUNE 30, MARCH 31, DECEMBER 31, NINE MONTHS ENDED
------------------------------- ------------------- ------------------ DECEMBER 31,
1993 1994 1995 1995 1996 1995 1996 1996
------- -------- -------- -------- ------- ------- ------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)................ $(7,009) $(16,682) $(11,743) $(11,373) $(5,455) $(7,609) $13,346 $7,528
Depreciation and
amortization......... $ 1,445 $ 1,612 $ 2,723 $ 1,347 $ 1,422 $ 1,937 $ 3,079 $3,641
Capital expenditures... $ 2,602 $ 1,935 $ 3,469 $ 2,694 $ 2,596 $ 2,629 $13,404 N/A
Ratio of earnings to
fixed charges(5)....... -- -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) During 1996, the Company changed its fiscal year end from June 30 to March
31.
(2) Includes restructuring charges, write-off of purchased research and
development, direct acquisition costs and settlement of litigation.
(3) Net of debt discount resulting from the issuance of Warrants of $1,722,000.
(4) EBITDA as used herein consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense and excludes
restructuring, direct acquisition and other costs. See note (2) above. While
EBITDA should not be construed as an alternative to operating income or net
income as determined in accordance with generally accepted accounting
principles or as an indicator of operating performance, liquidity or cash
flows, it is a measure that the Company believes is commonly used to
evaluate a company's ability to service debt.
(5) For purposes of computing the ratio of earnings to fixed charges, (i)
earnings represents income (loss) from continuing operations before income
taxes plus fixed charges, and (ii) fixed charges consists of interest
expense, the portion of rent expense representing interest, and dividends on
the preferred stock of a subsidiary. The Company had a deficiency of
earnings compared to its fixed charges for the years ended June 30, 1993,
1994 and 1995 and for the nine months ended March 31, 1995 and 1996 and
December 31, 1995 and 1996 of $9.1 million, $19.6 million, $17.1 million,
$14.4 million, $17.6 million, $20.8 million and $24.1 million, respectively.
On a pro forma basis, the Company had a deficiency of earnings to cover
fixed charges for the nine months ended December 31, 1996 of $40.2 million.
12
<PAGE> 21
RISK FACTORS
In addition to the other information contained in this Prospectus holders
of Notes should carefully consider the risk factors set forth below.
Significant Leverage. Upon consummation of the Offering, the Company has
substantial indebtedness and significant debt service obligations. At December
31, 1996, on a pro forma basis (to reflect the acquisition of Microsurge and
completion of the Offering), the Company would have had approximately $170.7
million of indebtedness outstanding, approximately $228.9 million of total
assets, approximately $157.4 million of total tangible assets and approximately
$32.2 million of stockholder's equity. See "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General" and Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance, which will
be affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control, as well as the availability of
borrowings under the New Credit Facility or successor credit facilities. The
Company will require substantial amounts of cash to fund scheduled payments of
principal and interest on its outstanding indebtedness as well as future capital
expenditures and any increased working capital requirements. The Company
historically and, on a pro forma basis for the nine months ended December 31,
1996, has had negative cash flow from operations. For the nine months ended
December 31, 1996, on a pro forma basis for the Offering and the acquisitions of
X-Cardia and Microsurge, the Company would have had a deficiency of earnings to
fixed charges of $40.2 million and a deficiency of EBITDA to fixed charges of
$7.4 million. While EBITDA should not be construed as an alternative to
operating income or net income as determined in accordance with generally
accepted accounting principles as an indicator of operating performance,
liquidity, or cash flows, it is a measure that the Company believes is commonly
used to evaluate a company's ability to service debt. In order to have positive
cash flow from operations and meet its various financial requirements, including
debt service, the Company must experience substantial growth and improvements in
its results of operations. There can be no assurance that the Company will have
positive cash flow from operations in the future. If the Company is unable to
meet its cash requirements out of cash flow from operations or from available
borrowings, there can be no assurance that it will be able to obtain alternative
financing or that it will be permitted to do so under the terms of the New
Credit Facility, the Indenture, or other debt instruments. In the absence of
such financing, the Company's ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results or to fund capital expenditures or research and development may be
adversely affected. In addition, actions taken by the lending banks under the
New Credit Facility would not be not subject to approval by the holders of the
Securities. Finally, it is anticipated that in order to pay the principal
balance of the Notes due at maturity, the Company will have to obtain
alternative financing.
The Company's high degree of leverage could have important consequences to
the holders of the Notes including, without limitation, the following: (i) a
substantial portion of the Company's net cash provided by operations will be
committed to the payment of the Company's interest expense and principal
repayment obligations and will not be available to the Company for its
operations, capital expenditures, acquisitions or other purposes; (ii) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions may be limited; (iii) the Company
will be more highly leveraged than certain of its competitors, which may place
it at a disadvantage and limit the Company's flexibility in reacting to changes
in its business; and (iv) the Company's borrowings under the New Credit Facility
would bear interest at variable rates, which could result in higher interest
expense if interest rates rise. See "Description of Certain Indebtedness" and
"Description of Notes."
Operating Losses; No Assurance of Profitability; Liquidity. The Company
reported net losses for its fiscal years ended June 30, 1994 and 1995 and for
the nine months ended March 31, 1996 of $20.1 million, $18.5 million, and $18.0
million, respectively. In addition, the Company reported a loss from operations
of $19.4 million for the nine months ended December 31, 1996. The Company
expects to incur a significant restructuring charge in the quarter ended March
31, 1997 in connection with the write-down of purchased incomplete research and
development, elimination of redundant facilities and personnel and other merger
13
<PAGE> 22
related costs, primarily in connection with the acquisition of X-Cardia and
Microsurge. There can be no assurance that the Company will be profitable in any
future period. The Company has historically experienced and, on a pro forma
basis for the nine months ended December 31, 1996, would have experienced
negative cash flow from operations. The net cash used in operating activities by
the Company for its fiscal years ended June 30, 1994 and 1995 and for the nine
months ended March 31, 1996 was $11.7 million, $8.2 million and $12.5 million,
respectively. There can be no assurance that its operating activities will
generate sufficient cash flow to meet the Company's needs in any future period.
As of May 1, 1997, the Company had unused borrowing capacity of up to $50.0
million under the New Credit Facility. The Company's future capital requirements
will depend upon many factors, including the success of the Company's sales and
marketing efforts, new product development, and future acquisitions of companies
and products. The Company believes that the net proceeds from the Offering,
together with borrowings under the New Credit Facility, if any, and funds
expected to be generated from operations will be adequate to fund its operations
for the next 12 months. There can be no assurance, however, that the Company
will not require additional financing during such time. Further, there can be no
assurance that any additional financing will be available to the Company on
acceptable terms, if at all. In addition, other than certain Permitted
Indebtedness (as defined herein), including Indebtedness under the New Credit
Facility, the Company will need improvement in results of operations in order to
incur additional indebtedness under the terms of the Indenture. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate its acquisition and product development efforts, which could have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Consolidated Financial Statements.
Limitations Imposed by Certain Indebtedness. The documents governing the
indebtedness of the Company (including the Indenture and the New Credit
Facility) contain significant covenants that limit the Company's and its
subsidiaries' ability to engage in various transactions and, in the case of the
New Credit Facility, require satisfaction of specified financial performance
criteria. In addition, under each of the foregoing documents, the occurrence of
certain events (including, without limitation, failure to comply with the
foregoing covenants, material inaccuracies of representations and warranties,
certain defaults under or acceleration of other indebtedness and events of
bankruptcy or insolvency) would, in certain cases after notice and grace
periods, constitute an event of default permitting acceleration of the
indebtedness covered by such documents. The limitations imposed by the documents
governing the outstanding indebtedness of the Company and its subsidiaries are
substantial, and failure to comply with them could have a material adverse
effect on the Company and its subsidiaries. See "Description of Certain
Indebtedness" and "Description of Notes."
Subordination; Holding Company Structure. The payment of principal of,
premium, if any, and interest and Liquidated Damages, if any, on the Notes and
the Guarantees will, to the extent set forth in the Indenture, be subordinated
in right of payment to the prior payment in full of all Senior Indebtedness
(including, indebtedness under the New Credit Facility) of the Company and
Guarantors, as applicable. As of the date of this Prospectus, after giving
effect to the anticipated uses of the Offering proceeds, the Company on a
consolidated basis had approximately $6 million of Senior Indebtedness
outstanding.
During the continuance of any default (beyond any applicable grace period)
in the payment of principal, premium, interest or any other payment due on
Senior Indebtedness, and, in certain circumstances, during the continuance of
non-payment defaults, no payment of principal, interest or Liquidated Damages on
the Notes may be made by the Company or the Guarantors. In addition, upon any
reorganization, the payment of the principal, interest and Liquidated Damages on
the Notes or the Guarantees is subordinated to the extent provided in the
Indenture to the prior payment in full of all Senior Indebtedness of the Company
or the Guarantors, as applicable. By reason of this subordination, in the event
of the Company's dissolution, holders of Senior Indebtedness may receive more,
ratably, and holders of the Notes may receive less, ratably, than the other
creditors of the Company. See "Description of Notes -- Subordination."
The Company is a holding company whose material assets consist primarily of
the capital stock of its subsidiaries. Consequently, the Company is dependent
upon dividends paid by its subsidiaries to pay its operating expenses, service
its debt obligations, including the Notes, and satisfy any repurchase
obligations
14
<PAGE> 23
relating to the Notes, as a result of a Change of Control or a sale or other
disposition of certain assets. See "-- Fraudulent Transfer Considerations,"
"Description of Certain Indebtedness" and "Description of Notes."
Future Operating Results Dependent on Products. The future operating
results of the Company will be dependent upon its ability to increase sales of
its existing medical products and their continued acceptance by the medical
community and third-party payors as useful and cost-effective. Historically, the
Company has been highly dependent on the sale of vacuum erection devices for the
treatment of male impotence. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The market for medical products
is characterized by rapid technological change and product obsolescence. The
Company's future operating results will also be dependent, therefore, upon the
Company's ability to develop or acquire new products that are competitive in the
markets it serves. Product acceptance will depend upon many factors, including
the continued demonstration of the utility and cost-effectiveness of the
Company's products, the maintenance of regulatory clearance in the United States
and elsewhere and the continued availability of third-party reimbursement.
Failure of one or more of the Company's products to continue to be accepted by
the medical community or the Company's inability to develop new products could
have a material adverse effect on the Company. Substantially all of the
Company's medical product sales are derived from medical products of companies
that the Company acquired. As the Company has acquired businesses and
technologies, it has acquired a number of related products under development
which will require additional research and development efforts by the Company in
an attempt to bring products to market. While members of management of the
Company have experience in developing products internally, the Company has not
historically developed a significant number of medical products internally.
There can be no assurance that the Company's medical products will be
successfully developed and marketed, that required regulatory approvals from the
Food and Drug Administration ("FDA") or equivalent foreign authorities for any
indication will be obtained or that any products, if produced, will be capable
of being produced in commercial quantities at reasonable costs, that such future
products will be brought to market in a timely manner or that existing products
will generate significant sales, the failure of any of which could have a
material adverse effect on the Company's business, operating results or
financial condition.
Concentration of Credit Risk; Extended Payment Terms. The Company sells
several product lines that are considered "capital equipment" by hospitals and
other purchasers. From time to time, the Company offers certain customers
extended payment terms to facilitate sales of these products. The Company may in
the future grant similar extended payment terms. In addition, the Company may,
in the future, determine to reclassify certain accounts receivable, with payment
terms exceeding 360 days, to long-term receivables. For the three months and
nine months ended December 31, 1996, sales that the Company made pursuant to
extended payment terms were approximately 19% and 11%, respectively, of total
sales. The Company's typical payment terms require payment from 30 to 90 days.
As of December 31, 1996, the Company had a total of $7.3 million of accounts
receivable on extended payment terms, of which approximately $5.0 million were
with Integrated Medical Resources, Inc. ("IMR") for sales of the Company's
Rigiscan product pursuant to terms under which the payments are due over 15-36
months, including $3.0 million of accounts receivable related to such sales
which occurred in the quarter ended December 31, 1996. Over the twelve month
period ended December 31, 1996, the Company sold approximately $6.0 million of
products to IMR. IMR is a public company traded on the NASDAQ stock market under
the symbol "IMRI." For its most recent fiscal year ended December 31, 1996, IMR
reported a loss of $6.5 million. Bruce Hazuka, Executive Vice President-
Operations of the Company, is a member of the board of directors of IMR. As of
December 31, 1996, the Company had approximately $550,000 of accounts receivable
with extended payment terms that arose from the initial release of its EndoView
product, returns of which product resulted in the Company issuing credit memos
in the first calendar quarter of 1997. The Company initiated these returns to
assure customer satisfaction with the product and expects to refurbish and
resell these products with no material loss.
Management of Growth. The Company's growth has placed, and is expected to
continue to place, significant demands on its financial, operational and
management resources. In addition, in order to meet expected growth, the Company
expects to add administrative and other personnel and manufacturing capacity,
and make additional investments in operations and systems. There can be no
assurances that the Company would be able to find and train such personnel, or
do so on a timely basis, or expand its operations and
15
<PAGE> 24
manufacturing capacity to the extent and in the time required. Continued growth
in sales, including sales under new group purchasing organization and
distributor agreements, would require the Company to carefully manage production
capacity and inventory levels, as well as quality controls, to meet increasing
product demand and new product introductions. The Company has already
experienced rapid growth in its inventory levels in anticipation of increased
sales. Inaccuracies in demand forecasts could result in insufficient or
excessive capacity or inventories and disproportionate overhead expenses.
Failure to adequately manage growth, including any unexpected costs, delays,
quality control issues or inefficiencies incurred or encountered in connection
with such management of growth could have a material adverse effect on the
Company's business, operating results or financial condition. See "Recent
Developments."
Integration of Acquired Operations. The Company recently acquired X-Cardia
and Microsurge and has recently entered into an agreement to acquire Imagyn. The
Company currently intends to integrate the operations of those acquired entities
with its own operations. No assurance can be given that the benefits expected
from such integration will be realized. In addition, the Company will be subject
to the risks that such recently acquired operations and future acquisitions will
not perform as expected and that the earnings from such operations will not be
sufficient to support the capital expenditures needed to develop such operations
in conformity with the Company's strategy. Any delays or unexpected costs
incurred in connection with such integration could have a material adverse
effect on the Company's business, operating results or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Future Acquisitions. An important element of the Company's strategy is to
identify and acquire businesses and product lines. The Company actively seeks
acquisition opportunities in the regular course of its business and is engaged
in ongoing evaluations of and discussions with third parties regarding potential
acquisitions certain of which, if consummated, could be material. Since July
1995, the Company has acquired a number of medical product companies and product
lines and has acquired or licensed additional technology. As a result of those
acquisitions, the Company has experienced rapid growth. The Company expects to
continue to acquire additional products and companies in the future. There can
be no assurance that the Company will be able to implement or sustain its
acquisition strategy or that its strategy will ultimately prove profitable to
the Company. The Company will likely be required to issue additional shares of
Common Stock, incur additional debt or to use a portion of its cash balances to
make such future acquisitions. In addition, the terms of the Indenture and the
terms of other indebtedness may restrict the Company's ability to pursue and
consummate future acquisitions.
Reliance on Patents and Proprietary Rights. The commercial success and
future revenue growth of the Company will depend, in part, on its ability to
operate without infringing on the rights of others both in the United States and
abroad and not breaching technology licenses that cover technology used in the
Company's products. The Company owns or has authority to use United States and
foreign patent rights with respect to some of its medical products and has
filed, and expects in the future to file, additional patent applications. It is
uncertain whether any third party patents will require the Company to develop
alternative technology or to alter its products or processes, obtain licenses or
cease certain activities. If such licenses are required, there can be no
assurance that the Company will be able to obtain such licenses on commercially
favorable terms, if at all. Failure by the Company to obtain a license to any
technology that it may require to commercialize its products could have a
material adverse effect on the Company. The Company recently acquired X-Cardia
which has filed patent applications with respect to its cardiac output
monitoring technology. There can be no assurance as to the breadth or degree of
the protection that may be afforded by such patent, or whether such applications
ultimately may be approved. See "Recent Developments." The Company believes that
some measure of patent protection with respect to its products will be required
to allow it to compete with large medical products companies. There can be no
assurance that the Company will continue to develop or acquire products or
processes that are patentable or that patents applied for will be issued or that
any patents issued to or licensed by the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
it with competitive advantages. In addition, the Company could incur substantial
costs in defending its proprietary rights and there can be no assurance that a
competitor's technology or product would be found to infringe such rights.
Although the Company believes that its patents are valid, there can be no
assurance that the validity of any patent will be upheld if asserted by the
Company against any party.
16
<PAGE> 25
Further, there can be no assurances as to the breadth and degree of protection
of these rights or that other companies will not independently develop products
similar to the Company's products that will not infringe on its rights but will
compete directly with its products. In addition, the laws of some foreign
countries may not protect the Company's proprietary rights to the same extent as
the laws of the United States. In addition, there is currently pending before
Congress legislation providing for changes to the patent law which may adversely
affect pharmaceutical, biopharmaceutical and biomedical firms. If such pending
legislation is adopted, the extent to which such changes would affect the
operations of the Company cannot be ascertained.
The patents or proprietary rights of others may have an adverse effect on
the ability of the Company to do business in the future. The Company may be
required to obtain licenses to patents or proprietary rights of other parties in
order to produce and sell certain of its products. No assurance can be given
that the Company's technology can be developed and commercialized without a
license to such patents or proprietary rights or that any licenses required
under any such patent or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain or maintain
such licenses, it could encounter delays in product introductions while it
attempts to design around or contest the validity of such patents, or the
Company could find that the development, manufacture or sale of products
requiring such licenses could be foreclosed, any of which could have a material
adverse effect on the Company. Furthermore there can be no assurance that
competitors or potential competitors will not independently develop similar or
alternative products to those of the Company, duplicate any of the Company's
products or technologies, or design around the patented technologies developed
by the Company or its licensors, any of which could have a material adverse
effect on the Company's business, results of operations or financial condition.
The Company also relies on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be no assurance that others will not
independently create substantially equivalent proprietary information or
otherwise gain access to or disclose such information of the Company. It is the
Company's policy to require certain of its employees, contractors and
consultants to execute confidentiality agreements to protect its unpatented
proprietary technology and know-how. There can be no assurance that such
confidentiality agreements will not be breached, that the Company would have
adequate remedy for such breach, or that the Company's trade secrets will not
otherwise become known through independent discovery by competitors. Moreover,
in the absence of patent protection, the Company's business may be adversely
affected by competitors who independently develop substantially equivalent
technology. See "Business."
Regulatory Matters. Most of the Company's laboratory and medical products
are subject to regulation for safety and efficacy by, among other governmental
entities, the FDA and corresponding agencies of state and foreign countries in
which the Company sells its products. The process of receiving governmental
approval may take a number of years and the expenditure of substantial
resources. There can be no assurance that even after such time and expenditures,
regulatory approval will be obtained for any of the products developed by the
Company. If regulatory approval of a product is granted, such approval may
entail limitations on the indicated uses for which the product may be marketed.
Further, discovery of previously unknown problems with a product, manufacturer
or its manufacturing facilities may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. The Federal
Food, Drug and Cosmetic Act, the Public Health Services Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, recordkeeping, approval, advertising and promotion of such
products. Product development and approvals within this regulatory framework
take a number of years and involve the expenditure of substantial resources.
Noncompliance with applicable requirements may have a material adverse effect on
the Company and can result in fines, warning letters, recall or seizure of
products, total or partial suspension of production, refusal by the government
to approve product license applications or allow the Company to enter into
supply contracts, and criminal prosecution. The FDA also has the authority to
revoke product licenses and establishment licenses previously granted. Failure
to comply with present or future regulatory requirements, or respond to the new
information reflecting on the safety or effectiveness of an approved product,
can lead the FDA to withdraw its approval to market a product. The Company
incurs substantial costs in complying with regulatory requirements.
17
<PAGE> 26
The FDA requires that a manufacturer introducing a new medical device or a
new indication for use of an existing medical device obtain either a 510(k)
premarket notification clearance or a premarket approval ("PMA") prior to being
introduced into the market. The 510(k) premarket notification clearance process
is significantly quicker and less costly than the PMA process. Substantially all
of the Company's FDA marketing clearances have been obtained through the FDA's
510(k) process; however, certain other products will require PMAs, including the
Company's Relax(TM) product. The PMA process is significantly more complex and
time consuming than the 510(k) notification process. The PMA process may take
several years or longer and requires the submission of extensive supporting data
and clinical information. The Company believes that it is in material compliance
with the FDA's 510(k) requirements for new and modified devices. The FDA has
announced a program to review approvals (510(k)s and PMAs) for certain devices.
There can be no assurance that upon any such review the FDA will agree with the
Company's determination regarding its 510(k)s. If the FDA were to disallow a
510(k) marketing clearance for any device, the Company could be required to file
appropriate applications, either 510(k) or PMA, with the FDA or to take the
products in question off the market. If the FDA were to require suspension of
the sale of one or more of the products pending receipt of 510(k) clearance or
if the FDA were to refuse to grant 510(k) clearance, the Company's business,
results of operations and financial condition could be materially and adversely
affected. There can be no assurance that the Company will obtain timely
regulatory approval for its future products, or that existing approvals will not
be withdrawn. Moreover, regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed.
There have been a number of proposals over the last several years that, if
implemented, could have the effect of eliminating or reducing, or curtailing
increases in, Medicare and Medicaid reimbursement for certain medical products,
and there has been increasing pressure from private payors to limit increases in
healthcare costs. Any of these proposals (including without limitation any such
proposal relating to the Company's Rigiscan product), if adopted, could have a
material adverse effect on the Company's business, results of operations, future
sales or its ability to collect accounts receivable related to such sales and
historical sales. In addition, increased pricing pressure from private payors
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Business -- Government Regulation."
Competition. The markets in which the Company operates are very
competitive and are characterized by rapidly evolving technology and product
obsolescence. The Company believes that its ability to develop and commercialize
new products and product enhancements is and will be critical to its continued
growth. There are a substantial number of medical products companies and such
companies could develop or offer products which would compete with products
which the Company currently markets or intends to market. Some of these
companies have marketing and distribution capabilities, and many of them have
capital resources and research and development staffs, substantially greater
than those of the Company. Moreover, it is reasonable to expect additional
entrants into the field. Any of these companies could introduce competing
products, which could cause a decline in sales or loss of market acceptance of
existing or future products of the Company. There can be no assurances that
technological change will not place one or more of the Company's existing or
future products at a competitive disadvantage. In addition, increased
competitive pressure could lead to intensified price-based competition that
could materially adversely affect the Company's business, results of operations
or financial condition. There can be no assurance that the Company will be able
to compete successfully in the future. See "Business -- Competition."
Dependence on Management. The success of the Company will depend on its
ability to attract and retain highly qualified personnel. In particular, the
loss of Charles A. Laverty, the Company's Chief Executive Officer, could have a
material adverse effect on the Company's business if a suitable replacement
could not be found. UROHEALTH has an employment agreement with Mr. Laverty that
provides for a three-year term expiring on April 1, 1999. The agreement
automatically renews for additional three-year terms if not terminated by either
party by prior notice. The Company has "key person" insurance on the life of Mr.
Laverty, however, there can be no assurance that such insurance would be
sufficient to compensate the Company for his absence. There can be no assurance
that the Company will be successful in attracting or retaining key personnel.
See "Management."
18
<PAGE> 27
Products Liability Exposure. The medical products manufactured by the
Company have from time to time become the subject of products liability
litigation initiated by the patients using the products. In addition, as
additional UROHEALTH products enter the market, UROHEALTH will be subject to an
increased risk of products liability claims. While the Company believes that its
products have been manufactured in accordance with industry standards, and
believes it has maintained adequate products liability insurance coverage, any
adverse claim or series of claims or adverse publicity resulting from a claim
could have a material adverse effect on the Company's business, results of
operations or financial condition.
Potential Tax Liability. In connection with the redomestication of the
Company from Canada to the State of Delaware in July 1995, the Company has filed
a final Canadian tax return reporting the "deemed sale" of assets of Davstar
Industries Ltd. (the Canadian parent company). The Company anticipates that the
Canadian tax authorities will review the tax status of the former entity,
Davstar Industries Ltd., as a result of its redomestication from Canada to the
United States and believes that all or at least a significant amount of any
potential Canadian tax liability arising from the redomestication would be
offset against the Company's Canadian loss carryforwards. However, the Canadian
tax authorities could attempt to assign a greater value to the Company than used
in the Company's estimates, which could result in some amount of Canadian tax
that cannot be presently determined being assessed in a future period. No
provision for any liability that may result from the ultimate resolution of this
tax matter has been included in the accompanying consolidated financial
statements.
Limitation on Use of Tax Net Operating Loss Carryovers. As of March 31,
1996, the Company had accumulated net operating loss carryovers for U.S. federal
and state income tax purposes of approximately $42.0 million and $30.0 million,
respectively. These loss carryovers would expire, if not previously utilized
against income of the Company, in various years through 2011. The future income
tax benefit of these losses has not been given recognition in the Consolidated
Financial Statements. Under Section 382 of the United States Internal Revenue
Code of 1986, as amended (the "Code"), and corresponding provisions of state tax
law, certain "ownership changes" with respect to the stock of a corporation
having unused net operating loss carryovers (a "loss corporation"), or with
respect to the stock of its parent corporation, may result in annual limitations
on utilizations of such loss carryovers against future income of the loss
corporation. In connection with the acquisition of Osbon, an ownership change
occurred for purposes of Section 382 of the Code, thereby subjecting the Company
to annual limitations on its ability to offset its existing loss carryovers
against its future income. In connection with the offering in November 1996 of
Common Stock of the Company an additional ownership change may have occurred.
The Company believes this additional ownership change will not reduce the
December 29, 1995 Section 382 limitation.
Possible Inability to Repurchase Notes upon a Change of Control. The New
Credit Facility prohibits the Company from purchasing any of the Notes and also
provides that certain change of control events with respect to the Company
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Notes, the Company could seek the consent of its lenders to the purchase of the
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing the Notes by the
relevant Senior Indebtedness. In such case, the Company's failure to purchase
the tendered Notes would constitute an event of default under the Indenture
which would, in turn, constitute a default under the New Credit Facility and/or
other Senior Indebtedness. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the holders of the Notes.
Furthermore, no assurance can be given that the Company will have sufficient
resources to satisfy its repurchase obligation with respect to the Notes
following a Change of Control. See "Description of Notes."
Fraudulent Transfer Considerations. The Guarantees of the Notes by the
Guarantors may be subject to review under state or federal fraudulent transfer
laws in the event of the bankruptcy or other financial difficulty of a
Guarantor. Under those laws, if a court in a lawsuit by an unpaid creditor or
representative of creditors of a Guarantor, such as a trustee in bankruptcy or
the Guarantor as debtor in possession, were to find that at the time the
Guarantor incurred its obligations under its Guarantee, it (a) received less
than fair consideration or
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reasonably equivalent value therefor and (b) either (i) was insolvent, (ii) was
rendered insolvent, (iii) was engaged in a business or transaction for which its
remaining unencumbered assets constituted unreasonably small capital, or (iv)
intended to incur or believed that it would incur debts beyond its ability to
pay as such debts matured, the court could avoid such Guarantor's Guarantee and
its obligations thereunder, and direct the return of any amounts paid under its
Guarantee to the Guarantor or to a fund for the benefit of its creditors.
Moreover, regardless of the factors identified in (a) and (b) above, the court
could avoid a Guarantee and direct such repayment if it found that the Guarantee
was entered into with actual intent to hinder, delay or defraud the Guarantor's
creditors.
It is likely that a Guarantor will be deemed not to have received fair
consideration or reasonably equivalent value for its Guarantee to the extent
that its liability thereunder exceeds the amount by which it directly benefits
from the proceeds of the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
Absence of Public Market. The New Notes are a new issue of securities,
have no established trading market and may not be widely distributed. The
Company does not intend to list the New Notes on any national securities
exchange or to seek admission thereof to trading in the National Association of
Securities Dealers Automated Quotation system. The Initial Purchaser has advised
the Company that it currently intends to make a market in the New Notes;
however, the Initial Purchaser is not obligated to do so and any market making
activities may be discontinued at any time without notice. In addition, such
market making activity will be subject to the limitations imposed by the
Securities Act and the Exchange Act, and may be limited during the Exchange
Offer and, if required, the pendency of the shelf registration statement
relating to the Warrants and the underlying shares of Common Stock. No assurance
can be given that an active public or other market will develop for the New
Notes or as to the liquidity of or trading market for the New Notes. If a
trading market does not develop or is not maintained, holders of the New Notes
may experience difficulty in reselling the New Notes or may be unable to sell
them at all. If a market for the New Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the New Notes,
future trading prices of the New Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other facts, including the
financial condition of the Company, the New Notes may trade at a discount from
their principal amount.
Consequences of Failure to Exchange. Holders of Old Notes who do not
exchange their Old Notes for New Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Old Notes as set
forth in the legend thereon as a consequence of the issuance of the Old Notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
does not currently anticipate that it will register the Old Notes under the
Securities Act. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected. The rights of holders of Old Notes to
receive Liquidated Damages and to the rights provided under the Registration
Rights Agreement would also terminate with respect to Old Notes which are not
exchanged for New Notes in the Exchange Offer.
Forward-Looking Statements. Certain statements contained in this
Prospectus, including without limitation, statements containing the words
"believes," "anticipates," "intends," "expects" and words of similar import,
constitute "forward-looking statements." Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company or industry results
to be materially different from any future results, performance or
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<PAGE> 29
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both domestic and foreign; industry capacity; management of growth;
development of products; proprietary rights; demographic changes; existing
government regulations and changes in, or the failure to comply with, government
regulations; legislative proposals for healthcare reform; liability and other
claims asserted against the Company; competition; the loss of any significant
customers; changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company; the availability and terms of capital to fund the expansion of the
Company's business; and other factors referenced in this Prospectus. Certain of
these factors are discussed in more detail elsewhere in this Prospectus,
including, without limitation, under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Given these uncertainties, holders of
Notes are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
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<PAGE> 30
THE COMPANY
The Company is a developer, manufacturer and distributor of products for
the urology, minimally invasive and general surgery, and gynecology markets. The
Company was incorporated in 1985 and operated as a research and development
company attempting to bring proprietary medical products to market until October
1994. In October 1994, under the leadership of new management, the Company
adopted and began to implement a strategic plan which took advantage of
consolidation opportunities in the highly fragmented medical products industry.
In July 1995, the Company acquired Dacomed Corporation ("Dacomed") and
Allstate Medical Products, Inc. ("Allstate") and, in December 1995, acquired
Osbon Medical Systems Ltd. ("Osbon") and Advanced Surgical, Inc. ("Advanced").
Dacomed, Allstate, Osbon and Advanced were each acquired in stock-for-stock
mergers, which were accounted for as pooling of interests. UROHEALTH completed
the acquisitions of Endoscopic Imaging Systems, Inc. (May 1996) (stock-for-stock
merger), The Intermed Group, Inc. ("Intermed") (June 1996) and Richard-Allan
Medical Ltd. ("Richard-Allan") (August 1996) ($60 million purchase price
consisting of 50% cash and 50% stock) and the minimally invasive surgery product
lines of O.R. Concepts (June 1996) and X-Med, Inc. (August 1996). In February
1997, the Company acquired X-Cardia ($33 million purchase price consisting of
50% cash and 50% stock; $21 million of the purchase price contingent upon
achieving certain milestones), and its cardiac output monitoring and blood
oximetry technology. In March 1997, the Company acquired Microsurge
(stock-for-stock merger) and acquired or licensed certain other technology
relating to pivotal minimally invasive surgical instruments and a breast biopsy
system. In April 1997, the Company entered into an agreement to acquire Imagyn
in a stock-for-stock merger.
In May and July 1996, the Company sold a total of $50.0 million of 8.75%
convertible subordinated debentures (the "Debentures") to a group of investors
led by Apollo Advisors and Chase Venture Capital Associates. The Debentures are
convertible into 4,587,156 shares of Common Stock at $10.90 per share, are
subordinate to all future senior borrowings, have voting rights on all matters
on an "as converted" basis and mature in May 2006.
In November 1996, the Company completed an underwritten public offering of
an aggregate of 2,684,000 shares of Common Stock of the Company, raising net
offering proceeds of $19.1 million. The net proceeds of the offering were used
to pay down debt, finance several acquisitions and for working capital.
The Company's principal executive offices are located at 5 Civic Plaza,
Suite 100, Newport Beach, California 92660, and its telephone number is (714)
668-5858. The Common Stock is traded on The Nasdaq Stock Market under the
trading symbol "UROH."
THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available upon
request to the Trustee.
PURPOSE AND EFFECT
The Old Notes were sold by the Company and the Guarantors to the Initial
Purchaser on April 10, 1997, pursuant to the Purchase Agreement. The Initial
Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act. The Company, the Guarantors and the Initial Purchaser also
entered into the Registration Rights Agreement, pursuant to which the Company
and the Guarantors agreed, with respect to the Old Notes and subject to the
Company's determination that the Exchange Offer is permitted under applicable
law, to (i) cause to be filed, on or prior to May 10, 1997, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its best efforts (a) to cause such registration statement to be
declared effective by the Commission on or prior to July 9, 1997, and (b) to
consummate the Exchange Offer on or prior to August 9, 1997. The Company will
keep the Exchange Offer open for a period of not less than 20 business days (or
longer if required by applicable law) after the date the
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<PAGE> 31
notice of the Exchange Offer is mailed to the holders of the Old Notes. This
Exchange Offer is intended to satisfy the Company's and the Guarantor's exchange
offer obligations under the Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered will not have any further registration rights
and such Old Notes will continue to be subject to the existing restrictions on
transfer thereof. Accordingly, the liquidity of the market for a holder's Old
Notes could be adversely affected upon expiration of the Exchange Offer if such
holder elects not to participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to the terms and provisions
of the Registration Rights Agreement. See "The Exchange Offer -- Conditions of
the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this Prospectus, $110 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of , 1997, there was one registered holder
of the Old Notes, Cede, which held the Old Notes for of its
participants. Solely for reasons of administration (and for no other purpose),
the Company has fixed the close of business on , , 1997, as
the record date (the "Record Date") for purposes of determining the persons to
whom this Prospectus and the Letter of Transmittal will be mailed initially.
Only a holder of the Old Notes (or such holder's legal representative or
attorney-in-fact) may participate in the Exchange Offer. There will be no fixed
record date for determining holders the Old Notes entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Prospectus, no
such holder is an affiliate (as defined in Rule 405 under the Securities Act) of
the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be 1997 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
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<PAGE> 32
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, in which event the
term "Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended, and (iii) to amend the terms of the Exchange Offer in any
manner. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendments by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes. Modifications of the Exchange Offer,
including but not limited to extension of the period during which the Exchange
Offer is open, may require that at least five business days remain in the
Exchange Offer. In order to extend the Exchange Offer, the Company will notify
the Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this Prospectus constitutes a part.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), holders
of Old Notes are entitled to receive Liquidated Damages of 0.5% per annum of the
principal amount of the Old Notes during the first 90 days of a Registration
Default, increasing by an additional 0.5% per annum for each additional 90 day
period of a Registration Default (up to a maximum of 2.0% per annum). A
"Registration Default" with respect to the Exchange Offer shall occur if: (i)
the Company fails to consummate the Exchange Offer on or prior to
, 1997, or (ii) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter ceases to be
effective during the period specified in the Registration Rights Agreement.
Holders of New Notes will not be and, upon consummation of the Exchange Offer,
holders of Old Notes will no longer be, entitled to (i) the right to receive the
Liquidated Damages or (ii) certain other rights under the Registration Rights
Agreement intended for holders of Old Notes. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the Indenture of New Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that are tendered by holders thereof
pursuant to the Exchange Offer.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 12 1/2% per annum from
and including their date of issuance. Holders whose Old Notes are accepted for
exchange will have the right to receive interest accrued thereon from the date
of their original issuance or the last Interest Payment Date, as applicable to,
but not including, the date of issuance of the New Notes, such interest to be
payable with the first interest payment on the New Notes. Interest on the Old
Notes accepted for exchange, which interest accrued at the rate of 12 1/2% per
annum, will cease to accrue on the day prior to the issuance of the New Notes.
See "Description of Notes -- Principal, Maturity and Interest."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit such Old Notes, together with a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS
OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY
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<PAGE> 33
MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedures for such transfer. In connection with a
book-entry transfer, a Letter of Transmittal need not be transmitted to the
Exchange Agent, provided that the book-entry transfer procedure must be complied
with prior to 5:00 p.m., New York City time, on the Expiration Date.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined). In the event that a signature on a
Letter of Transmittal or a notice of withdrawal, as the case may be, is required
to be guaranteed, such guarantee must be by a firm which is a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution, or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in it sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
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<PAGE> 34
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of New Notes," (iv) that if the
holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the holder nor any Beneficial
Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company except as otherwise disclosed to the Company in writing. In connection
with a book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the Holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within four (4) business days after the date of delivery of
the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed
Letter of Transmittal and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) such properly completed
and executed documents required by the Letter of Transmittal and the tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC) must be received by
the Exchange Agent within four (4) business days after the Expiration Date. Any
Holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the
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<PAGE> 35
Exchange Offer. If any tendered Old Notes are not accepted for any reason, such
unaccepted Old Notes will be returned without expense to the tendering Holder
thereof as promptly as practicable after the expiration or termination of the
Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by a bond power in the name of the
person withdrawing the tender, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required upon transfer by the Indenture, and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, in its sole discretion. The Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are withdrawn will be returned to the Holder thereof without cost to such Holder
as soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer -- Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
The Bank of New York is the Exchange Agent. All tendered Old Notes,
executed Letters of Transmittal and other related documents should be directed
to the Exchange Agent. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other related
documents should be addressed to the Exchange Agent as follows:
By Hand, or Overnight Courier:
THE BANK OF NEW YORK
101 Barclay Street
New York, New York 10286
Corporate Trust Services Window
Ground Level
Attn: Reorganization Section
Arwen Gibbons
Facsimile Transmissions (Eligible Institutions Only):
(212) 815-6339
To confirm by telephone or for information call:
(212) 815-5920
By Registered or Certified Mail:
The Bank of New York
101 Barclay Street, 7E
New York, New York 10286
Attn: Reorganization Section
Arwen Gibbons
27
<PAGE> 36
FEES AND EXPENSES
All expenses incident to the Company's and the Guarantors' consummation of
the Exchange Offer and compliance with the Registration Rights Agreement will be
borne by the Company, including, without limitation: (i) all registration and
filing fees (including, without limitation, fees and expenses of compliance with
state securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing Prospectuses), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company, (v) fees and disbursements of independent certified public accountants,
(vi) rating agency fees and (vii) internal expenses of the Company (including,
without limitation, all salaries and expenses of officers and employees of the
Company performing legal or accounting duties).
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such holder
(other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such holder is acquiring the New Notes in
the ordinary course of business and is not participating, and has no arrangement
or understanding with any person to participate, in the distribution of the New
Notes. The Company has not requested or obtained an interpretive letter from the
Commission staff with respect to this Exchange Offer, and the Company and the
holders are not entitled to rely on interpretive advice provided by the staff to
other persons, which advice was based on the facts and conditions represented in
such letters. However, the Exchange Offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in such
letters. If any holder acquires New Notes in the Exchange Offer for the purpose
of distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in Morgan
Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings
Corporation (available May 13, 1989), or interpreted in the Commission's letter
to Shearman and Sterling (available July 2, 1993), or similar no-action or
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution."
28
<PAGE> 37
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph. Sales of New Notes acquired in the Exchange Offer by
holders who are "affiliates" of the Company within the meaning of the Securities
Act will be subject to certain limitations on resale under Rule 144 of the
Securities Act. Such persons will only be entitled to sell New Notes in
compliance with the volume limitations set forth in Rule 144, and sales of New
Notes by affiliates will be subject to certain Rule 144 requirements as to the
manner of sale, notice and the availability of current public information
regarding the Company. The foregoing is a summary only of Rule 144 as it may
apply to affiliates of the Company. Any such persons must consult their own
legal counsel for advice as to any restrictions that might apply to the resale
of their Notes.
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the New Notes pursuant to the Exchange Offer. The Company is conducting the
Exchange Offer in order to satisfy certain of the Company's and the Guarantor's
obligations under the Registration Rights Agreement executed in connection with
the issuance of the Old Notes. The proceeds from the issuance of the Old Notes
were used to repay $55.0 million of outstanding indebtedness under its term and
revolving credit facility and pay related fees and expenses. See "Description of
Certain Indebtedness -- New Credit Facility." In addition, the Company currently
intends to use approximately $16.5 million of the net proceeds of the Offering
to fund the cash portion of the milestone payment due the former X-Cardia
shareholders upon issuance of the X-Cardia patent and approximately $9.0 million
to repay assumed Microsurge indebtedness and other obligations. In addition, the
Company used approximately $19.2 million of the net proceeds to purchase a
portfolio of Government Securities (as defined herein) (the "Pledged
Securities"), the scheduled interest and principal payments on which will be in
an amount sufficient to provide for payment in full when due of the first three
scheduled interest payments on the Notes (estimated at approximately $20.6
million). See "Description of the Notes -- Security." The remaining balance of
the net proceeds will be used for general corporate purposes, including the
possible acquisition of companies in the same or complementary lines of
business. The indebtedness of the Company repaid had a final maturity of
September 30, 2001 and had an interest rate of approximately 9.5% as of December
31, 1996. Pending such uses, the net proceeds will be invested in
investment-grade, short-term, interest-bearing securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company actively seeks acquisition opportunities in the regular course
of business and is engaged in ongoing evaluations of and discussions with third
parties regarding potential acquisitions certain of which, if consummated, could
be material.
RATIO OF EARNINGS TO FIXED CHARGES
The Company had a deficiency of earnings compared to its fixed charges for
the years ended June 30, 1992, 1993, 1994 and 1995 and for the nine months ended
March 31, 1995 and 1996 and December 31, 1995 and 1996 of $3.8 million, $9.1
million, $19.6 million, $17.1 million, $14.4 million, $17.6 million, $20.8
million and $24.1 million, respectively. On a pro forma basis to reflect the
acquisition of Microsurge and completion of the Offering, the Company had a
deficiency of earnings to cover fixed charges for the nine months ended December
31, 1996 of $40.2 million. For purposes of computing the ratio of earnings to
fixed charges, (i) earnings represents income (loss) from continuing operations
before income taxes plus fixed charges, and (ii) fixed charges consists of
interest expense, the portion of rent expense representing interest, and
dividends on the preferred stock of a subsidiary.
29
<PAGE> 38
CAPITALIZATION
The following table sets forth the Company's capitalization (i) at December
31, 1996; and (ii) pro forma to reflect the acquisition of X-Cardia and
Microsurge and to reflect the Offering and the application of the net proceeds
thereof. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 2,272 $ 56,506(1)(2)
======== =========
Restricted cash.................................................... $ -- $ 19,296(3)
======== =========
Notes payable, bank term loan, capital leases and line of
credit(4)........................................................ 36,673 6,871
Senior subordinated notes.......................................... -- 108,278(5)
Convertible subordinated debt...................................... 50,000 55,503(2)
-------- ---------
Total debt......................................................... $ 86,673 $ 170,652
Stockholders' equity:
Common Stock, $.001 par value; 50,000,000 shares authorized;
19,352,501 shares of common stock issued and outstanding,
and 23,419,573 shares pro forma............................... 19 23
Additional paid-in capital....................................... 113,204 152,797
Warrants......................................................... 5,217 6,939
Deficit.......................................................... (91,159) (127,561)
Foreign currency translation..................................... (41) (41)
-------- ---------
Total common stockholders' equity............................. $ 27,240 $ 32,157
======== =========
Total capitalization............................................... $113,913 $ 202,809
======== =========
</TABLE>
- ---------------
(1) Cash and cash equivalents has not been adjusted to reflect the $16.5 million
contingent cash payment which will be made to former X-Cardia shareholders
upon satisfaction of the patent milestone.
(2) Has not been adjusted to reflect the principal payment of $5.5 million of
Microsurge convertible subordinated notes due August 1997.
(3) Restricted cash represents a portion of the proceeds of the Offering which
was used to purchase Government Securities which were pledged as security
for the repayment, when due, of the first three scheduled interest payments
on the Notes.
(4) In March 1997, the Company increased its term and revolving credit facility
to $55 million and drew down the additional amounts available under the
facility.
(5) Net of debt discount resulting from the issuance of the Warrants of
$1,722,000.
30
<PAGE> 39
UROHEALTH SYSTEMS, INC.
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
The following summary unaudited pro forma condensed combined financial data
should be read in connection with the Unaudited Pro Forma Condensed Consolidated
Financial Statements and related footnotes found at pages F-63 through F-72.
<TABLE>
<CAPTION>
PRO FORMA FOR THE NINE MONTHS ENDED
------------------------------------
MARCH 31, 1996 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS:
Net sales..................................................... $ 42,954 $ 72,667
Cost of sales................................................. 14,965 26,316
-------- --------
Gross profit.................................................. 27,989 46,351
Operating expenses:
Selling, general and administrative......................... 37,056 38,971
Research and development.................................... 2,776 3,721
Merger and acquisition costs................................ 4,232 --
Write-off of purchased research and development............. -- 25,500
Restructuring charge........................................ 5,456 4,000
-------- --------
Total operating expenses............................ 49,520 72,192
-------- --------
Loss from operations.......................................... (21,531) (25,841)
Other income (expense):
Minority interest........................................... (55) (54)
Interest income............................................. 101 282
Interest expense............................................ (11,047) (14,561)
Other....................................................... (48) --
-------- --------
Loss before taxes and extraordinary item...................... (32,580) (40,174)
Income tax expense (benefit).................................. 431 (377)
-------- --------
Loss before extraordinary item................................ $(33,011) $ (39,797)
======== ========
</TABLE>
31
<PAGE> 40
UROHEALTH SYSTEMS, INC.
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
UNAUDITED PRO FORMA BALANCE SHEET:
ASSETS
Current assets:
Cash and equivalents....................................................... $ 56,506
Restricted cash............................................................ 13,750
Receivables, net........................................................... 25,989
Inventories................................................................ 23,577
Prepaids and deposits...................................................... 3,415
Income tax receivable...................................................... 377
---------
Total current assets............................................... 123,614
Property and equipment, net.................................................. 25,449
Patents and intangibles, net................................................. 7,818
Restricted cash, noncurrent.................................................. 5,546
Deposits and other assets.................................................... 2,783
Deferred debt issuance costs................................................. 9,274
Goodwill..................................................................... 54,369
---------
$ 228,853
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...................................... $ 18,046
Restructuring accrual...................................................... 1,810
Compensation and employee benefits......................................... 3,026
Convertible subordinated notes............................................. 5,503
Current portion of notes payable and capital leases........................ 669
---------
Total current liabilities.......................................... 29,054
Long-term liabilities:
Notes payable.............................................................. 6,000
Capital leases............................................................. 202
Deferred compensation...................................................... 29
Senior subordinated notes.................................................. 108,278
Other liabilities.......................................................... 323
Restructuring accrual, less current portion................................ 1,684
Minority interest in consolidated subsidiary................................. 1,126
Convertible subordinated debentures.......................................... 50,000
Common stockholders' equity:
Common stock............................................................... 23
Warrants................................................................... 6,939
Additional paid-in capital................................................. 152,797
Deficit.................................................................... (127,561)
Foreign currency adjustment................................................ (41)
---------
Total common stockholders' equity.................................. 32,157
---------
$ 228,853
=========
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Financial
Statements.
32
<PAGE> 41
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company have been
derived from the financial statements of UROHEALTH which have been prepared in
accordance with United States generally accepted accounting principles ("GAAP")
and include the statements of operations and balance sheet data for Osbon,
Advanced, Dacomed and Allstate which acquisitions were accounted for as
pooling-of-interests transactions. The selected consolidated financial data for
the Company as of March 31, 1996 and for the nine months ended March 31, 1996
and as of June 30, 1995 and for the year ended June 30, 1995 are derived from
the consolidated financial statements of UROHEALTH which have been audited by
Ernst & Young LLP, independent auditors. The selected consolidated financial
data for the year ended June 30, 1994 have been derived from financial
statements audited by Cherry, Bekaert & Holland, LLP, independent auditors. The
data should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included or referred to herein.
The selected consolidated financial data set forth below for the years ended
June 30, 1992 and 1993 and as of June 30, 1992, 1993 and 1994 are derived from
audited financial statements not included herein. The financial data for the
nine months ended December 31, 1995 and 1996 are derived from the unaudited
financial statements of UROHEALTH, which contain all adjustments, consisting of
normal recurring accruals (except for the extraordinary loss on early
extinguishment of debt, the related induced accretion as a result of the
conversion of the convertible notes and redeemable convertible preferred stock,
restructuring charges and the merger and acquisition costs identified in the
accompanying unaudited condensed consolidated statements of operations) which
the Company considers necessary for a fair presentation of the financial
position and results of operations for those periods. The results of operations
for the nine month period ended December 31, 1996 are not necessarily indicative
of the results that may be expected for the entire year. The financial data
presented below includes statement of operations data for Richard-Allan from
August 14, 1996. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of UROHEALTH included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,(1) DECEMBER 31,
--------------------------------------- ------------------- -------------------
1992 1993 1994 1995 1995 1996 1995 1996
------- ------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................. $26,797 $32,565 $ 37,828 $ 45,453 $ 32,746 $ 39,641 $ 37,810 $ 67,964
Gross profit.............................. 16,642 19,960 23,835 29,294 20,863 26,745 24,292 44,771
Selling, general and administrative....... 16,594 24,539 32,802 35,145 25,547 32,218 32,316 32,537
Research and development.................. 3,132 4,393 9,470 8,805 8,258 1,324 1,456 2,149
Restructuring, direct acquisition and
other costs(2).......................... -- 563 1,000 2,351 1,500 9,688 10,794 29,500
------- ------- -------- -------- -------- -------- -------- --------
Income (loss) from operations............. $(3,533) $(9,535) $(19,437) $(17,007) $(14,442) $(16,485) $(20,274) $(19,415)
Interest expense.......................... -- 131 267 303 208 1,002 495 4,864
Income (loss) before extraordinary
items................................... (4,026) (9,985) (20,127) (18,506) (15,497) (17,998) (21,483) (23,716)
Extraordinary items....................... -- -- -- -- -- -- -- (2,973)
------- ------- -------- -------- -------- -------- -------- --------
Net loss.................................. $(4,026) $(9,985) $(20,127) $(18,506) $(15,497) $(17,998) $(21,483) $(26,689)
Loss per share before extraordinary
item.................................... $ (0.40) $ (0.88) $ (1.77) $ (1.52) $ (1.28) $ (1.50) $ (1.77) $ (1.55)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------- MARCH 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996
------- ------- ------- ------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents............................. $ 7,947 $ 6,800 $ 3,009 $ 1,051 $ 1,185 $ 2,272
Working capital (deficit)........................ $16,974 $14,330 $ 8,346 $ 4,043 $(3,728) $ 18,363
Total assets..................................... $28,177 $28,686 $25,075 $26,174 $27,835 $133,753
Notes payable, bank term loan, capital leases and
line of credit................................. $ 1,972 $ 2,663 $ 3,050 $ 3,620 $14,261 $ 36,673
Convertible subordinated debt.................... $ -- $ -- $ -- $ 1,077 $ 1,284 $ 50,000
Long-term liabilities, minority interest, and
redeemable convertible preferred stock......... $ -- $ 55 $ 2,101 $ 2,742 $ 5,635 $ 2,937
Common stockholders' equity (deficit)............ $22,964(3) $20,390 $14,339 $10,538 $(6,190) $ 27,240
</TABLE>
33
<PAGE> 42
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31, DECEMBER 31,
--------------------------------------------- -------------------- -------------------
1992 1993 1994 1995 1995 1996 1995 1996
------- ------- -------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)...................... $(2,190) $(7,009) $(16,682) $(11,743) $(11,373) $(5,455) $(7,609) $13,346
Depreciation and
amortization............... $ 939 $ 1,445 $ 1,612 $ 2,723 $ 1,347 $ 1,422 $ 1,937 $ 3,079
Capital expenditures......... $ 2,086 $ 2,602 $ 1,935 $ 3,469 $ 2,694 $ 2,596 $ 2,629 $13,404
Ratio of earnings to fixed
charges(5)................... -- -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) During 1996, the Company changed its fiscal year end from June 30 to March
31.
(2) Includes restructuring charges, direct acquisition costs and settlement of
litigation.
(3) Amount shown includes the sale of 1,378,500 units consisting of common stock
and warrants providing net proceeds to the Company of approximately $9.7
million.
(4) EBITDA as used herein consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense and excludes
restructuring, direct acquisition and other costs. See note (2) above. While
EBITDA should not be construed as an alternative to operating income or net
income as determined in accordance with generally accepted accounting
principles as an indicator of operating performance, liquidity or cash
flows, it is a measure that the Company believes is commonly used to
evaluate a company's ability to service debt.
(5) For purposes of computing the ratio of earnings to fixed charges, (i)
earnings represents income (loss) from continuing operations before income
taxes plus fixed charges, and (ii) fixed charges consists of interest
expense, the portion of rent expense representing interest, and dividends on
the preferred stock of a subsidiary. The Company had a deficiency of
earnings compared to its fixed charges for the years ended June 30, 1992,
1993, 1994 and 1995 and for the nine months ended March 31, 1995 and 1996
and December 31, 1995 and 1996 of $3.8 million, $9.1 million, $19.6 million,
$17.1 million, $14.4 million, $17.6 million, $20.8 million and $24.1
million, respectively.
34
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Background. Since October 1994, the Company through new management has been
transformed from a research and development company into a fully-integrated
medical products company.
Historical Growth through Acquisitions; Pooling and Purchase
Accounting. The mergers of Dacomed and Allstate were completed on July 28, 1995
and the acquisitions of Osbon and Advanced closed on December 29, 1995. The
operations of the Company are presented on a combined basis historically, as
these transactions were all accounted for as poolings of interests. On May 22,
1996, the Company acquired Endoscopic Imaging Systems, Inc. and on June 1, 1996
and June 5, 1996 the Company acquired Intermed and the minimally invasive
surgery product lines of O.R. Concepts, respectively. All three of these
transactions were accounted for as purchases and are included in the Company's
financials as of the date of the acquisitions. On August 14, 1996, the Company
acquired Richard-Allan and on February 28, 1997, the Company acquired X-Cardia.
These acquisitions were also accounted for as purchases, therefore, the results
from Richard-Allan have been included commencing August 14, 1996 and the results
of X-Cardia will be included from February 28, 1997, the date each acquisition
closed, respectively.
Integration of Acquisitions; Restructuring Charges. The Company has
recorded significant restructuring charges and direct acquisition costs related
to the acquisitions described above which have adversely impacted operating
results during those periods. The restructuring charges related primarily to
personnel reduction costs and facility reduction costs, as well as write-downs
of acquired assets to their estimated net realizable value. The Company has
included in the financial statements as of and for the period ended December 31,
1996, a charge of approximately $25.5 million to write-down purchased incomplete
research and development costs associated with the acquisition of Richard-Allan.
The Company also included in the financial statements as of and for the period
ended December 31, 1996 approximately $4.0 million in restructuring charges
relating to the closure of certain duplicative manufacturing facilities, and the
elimination of certain duplicative general and administrative costs and other
redundancies relating to the Richard-Allan, Intermed, O.R. Concepts and X-Med
transactions.
Change in Fiscal Year End. In 1996, the Company changed its fiscal year end
from June 30 to March 31, therefore, the following discussion compares the nine
month transition period ending March 31, 1996 to the corresponding period of the
prior year.
Microsurge Merger. On March 31, 1997, the Company acquired Microsurge in a
transaction pursuant to which Microsurge became a wholly owned subsidiary of the
Company. The Company intends to account for the Merger on a pooling of interests
basis and therefore expects to restate its historical audited and interim
financial results. See Unaudited Pro Forma Condensed Consolidated Financial
Statements.
Charges Expected in the Quarter Ending March 31, 1997. The Company intends
to take a significant charge when it reports its financial results for the
quarter ended March 31, 1997. The magnitude of the charge for restructuring has
been estimated to be approximately $7.5 million, of which approximately $1.8
million has been paid in cash to date, and for merger and acquisition costs for
both Microsurge and X-Cardia has been estimated to be approximately $4.0
million. A study is being conducted to determine the proper allocation of the
purchase price of X-Cardia. An independent valuation of X-Cardia's assets is
being performed and will be used as an aid in determining the fair market value
of each identifiable tangible and intangible asset and in allocating the
purchase price among the acquired assets, including the portion of development
projects that should be expensed pursuant to the provisions of Interpretation 4
of SFAS No. 2. Accordingly, it has been preliminarily determined that acquired
in-process research and development costs of approximately $13.0 million of the
amount paid to date should be expensed.
As a result of the foregoing, the Company's historical results are not
necessarily comparable to other historical periods, due to, among other reasons,
the pooling of results of operations of merged entities for periods during which
such entities were operated under a different management team. In addition,
historical
35
<PAGE> 44
results are not necessarily indicative of, nor will they be comparable to, the
financial results the Company will realize in future periods.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995
Net Sales. For the nine months ended December 31, 1996, net sales of $68.0
million were $30.2 million or 80% higher than sales of $37.8 million for the
same period in 1995. This increase was largely due to higher sales of the
Company's impotence products which increased $13.8 million or 48% to $42.7
million. The recent purchase of Richard-Allan, on August 14, 1996 also increased
revenues by approximately $11 million for the nine months ended December 31,
1996.
Gross Profit. For the nine months ended December 31, 1996, gross profit
increased $20.5 million or 84% over the same period in 1995. The gross margin
percentage increased from 64% to 66% for the nine months ended December 31, 1996
largely due to the increase in sales of the Company's higher margin impotence
product lines and operational efficiencies as a result of consolidation of
duplicate facilities.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended December 31, 1996 were at comparable levels
to the same period in 1995. Over the nine months ended December 31, 1996, the
Company was able to reduce duplicate expenses arising from acquisitions through
its implementation of the various restructuring plans. As a percentage of net
sales, selling, general and administrative expenses have decreased to 48% for
the nine months ended December 31, 1996 from 85% for the corresponding period of
1995.
Research and Development. Research and development costs for the nine
months ended December 31, 1996 increased $0.7 million or 48% over the same
period in 1995. The increase was largely due to the Company devoting additional
resources to accelerate the development of new products for its gynecological
and visualization product lines.
Write-off of Purchased Research and Development. Subsequent to the
acquisition, a study was conducted to determine the proper allocation of the
purchase price of Richard-Allan. An independent valuation of Richard-Allan's
assets was performed and used as an aid in determining the fair market value of
each identifiable tangible and intangible asset and in allocating the purchase
price among the acquired assets, including the portion of the purchase price
properly attributed to incomplete research and development projects that should
be expensed pursuant to the provisions of Interpretation 4 of SFAS No. 2,
accordingly, it was determined that acquired in-process research and development
costs of approximately $25.5 million should be expensed.
Restructuring. In September 1996, the Company established a restructuring
plan to eliminate redundant manufacturing facilities resulting from the
Richard-Allan, Intermed and O.R. Concepts acquisitions and their consolidation
with existing manufacturing locations. This restructuring is expected to be
completed within one year except for redundant facilities lease costs and
payments under certain severance agreements that may continue over their terms.
The Company has established a restructuring charge of $4.0 million, of which all
are cash expenditures. This restructuring includes severance costs for
approximately 17 employees, certain facility closures and elimination of other
redundant selling and administrative costs. Although subject to future
adjustment, management of the Company believes that restructuring reserves as of
December 31, 1996 are adequate to complete the restructuring.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH DECEMBER 31,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1996
------------- -------- ------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs...... $ 2,412 $ -- $ 906 $ -- $1,506
Facility reduction costs....... 1,588 -- 269 -- 1,319
------- ---- ------ ---- ------
$ 4,000 $ -- $1,175 $ -- $2,825
======= ==== ====== ==== ======
</TABLE>
Interest Expense. Interest expense for the nine months ended December 31,
1996 increased $4.4 million over the same period in 1995, primarily due to
increased borrowings on term loans, lines of credit and the issuance of the
convertible subordinated debentures.
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<PAGE> 45
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
Net Sales. Net sales during the nine months ended March 31, 1996 ("fiscal
1996" or "1996") increased $6.9 million or 21% over the nine months ended March
31, 1995 ("1995") primarily due to an increase in sales of the Company's
urological products. The Company's vacuum erection devices accounted for 56% and
58% of sales for 1996 and 1995, respectively. The Company continued to increase
its sales force and maintained an aggressive advertising campaign, contributing
to the sales growth.
Gross Profit. Gross profit during 1996 increased $5.9 million or 28% over
the same period in 1995. The gross margin was 67% in 1996 and 64% in 1995. There
were no significant changes in the Company's product mix or product pricing
between periods. The Company closed two facilities in 1996 and improved
operating efficiencies, the effect of which was primarily realized in the last
quarter of fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses during 1996 increased $6.7 million or 26% over the same period in 1995.
This increase was primarily due to increases in sales and marketing expenses as
the Company continued to build a sales organization. Also, general and
administrative costs increased due to the addition of key management personnel
and expenses associated with the integration of its four operating locations.
Research and Development. Research and development expenses during 1996
decreased $6.9 million or 84% in 1996 over the same period in 1995. In
connection with the acquisition of Laparomed Corporation on July 27, 1994, the
Company expensed $5.3 million of purchased research and development. The
Laparomed Corporation acquisition has been accounted for as purchase with a
purchase price of approximately $7 million. Overall, the decline in research and
development costs was a result of the Company's decision to narrow the focus of
such efforts, and to adopt a program of actively acquiring or licensing
developed technology.
Restructuring Charges. In December 1995, the Company implemented a
restructuring plan to consolidate redundant facilities and reduce personnel
resulting from the mergers with Dacomed, Osbon and Advanced. Under the plan, the
Company eliminated approximately 70 manufacturing, engineering and
administrative personnel and closed all operations at two acquired facilities.
The estimated cost associated with each component of this restructuring plan and
the cash and non-cash charges incurred during fiscal 1996 are summarized in the
table below. Non-cash charges consist of the write-down of existing assets to
their estimated net realizable value. The remaining restructuring accrual at
March 31, 1996 relates primarily to terminated employee severance and facility
lease obligations, which are expected to be paid in cash. Although subject to
future adjustment, management of the Company believes that restructuring
reserves as of March 31, 1996 are adequate to complete the restructuring.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH MARCH 31,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1996
-------------- -------- -------- ------------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs... $2,620 $ -- $1,171 $ (730) $ 719
Facility reduction costs.... 2,836 1,187 1,258 730 1,121
------ ------ ------ ------ -------
$5,456 $1,187 $2,429 $ -- $ 1,840
====== ====== ====== ====== =======
</TABLE>
Direct Acquisition Costs. Merger and acquisition costs during 1996
increased $4.2 million over the same period in 1995. The results of operations
in 1996 reflect additional transaction costs of $4.2 million related to the
Company's mergers with Osbon, Advanced and Dacomed. These transaction costs
include expenses related to broker and other professional fees.
Interest Expense. Interest expense during 1996 increased by approximately
$800,000 or 382% over the same period in 1995, primarily due to the issuance of
the Debentures as well as increased borrowings under term loans and lines of
credit.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Net Sales. Net sales during the year ended June 30, 1995 ("fiscal 1995")
increased $7.6 million or 20% over the year ended June 30, 1994 ("fiscal 1994")
primarily due to an increase in sales of the Company's urological products. The
Company's vacuum erection devices accounted for 57% and 55% of sales in fiscal
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<PAGE> 46
1995 and fiscal 1994, respectively. The addition of direct sales people and an
aggressive advertising campaign contributed to the sales growth.
Gross Profit. Gross profit during fiscal 1995 increased $5.5 million or 23%
over fiscal 1994. The gross margin was 64% in fiscal 1995 and 63% in fiscal
1994. There were no significant changes in the Company's product mix or product
pricing between periods.
Selling, General and Administrative. Selling, general and administrative
expenses during fiscal 1995 increased $2.3 million or 7% over fiscal 1994. The
increase was due to the addition of direct sales people and pursuing an
aggressive advertising campaign. A decrease in bad debt expenses of
approximately $294,000 during fiscal 1995 offset this increase.
Research and Development. Research and development expenses during fiscal
1995 decreased $665,000 or 7% over fiscal 1994. The reduction was due to
decreased research and development related to introduction of a new female
incontinence system.
Restructuring Charges. During fiscal 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the "Plan")
under which it refocused the Company's strategic direction. Under the Plan, the
Company terminated or amended certain distribution, consulting and employment
agreements. Accordingly, the consolidated statement of operations reflects a
charge of $1.2 million to terminate or restructure these agreements under the
Plan. The components of the restructuring charges include a provision to
discontinue the distribution of the Adzorbstar(TM) product line of $360,000,
termination agreements which include indemnification costs of former employees
for legal fees associated with an SEC investigation of $250,000, termination of
certain other consulting and distributor agreements of $50,000, and the
amendment and settlement of certain claims under the employment agreement with
the former Chief Executive Officer of $540,000. All significant restructuring
charges were paid in cash during the 1995 calendar year.
Direct Acquisition Costs. Direct acquisition costs during fiscal 1995
totalled approximately $851,000. These costs were directly attributable to the
expenses incurred by the Company in connection with the Dacomed and Allstate
mergers.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Expenses related to minority interest were $78,000 and $55,000 during
fiscal 1995 and 1996, respectively. Such expenses consist of 7% dividends
payable to stockholders of preferred stock of a subsidiary of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996 the Company has continued to have negative cash
flow from operations, primarily due to increases in accounts receivable and
inventories. The Company's accounts receivable balances increased by $17.6
million during the nine months ended December 31, 1996 due to introduction of
the Company's higher-margin visualization products and sales of diagnostic
equipment on extended payment terms. Management anticipates further increases in
accounts receivable in 1997, possibly also on extended payment terms, as sales
volume under a number of distribution agreements increases. The Company's
inventory balances increased by $15.7 million during the nine months ended
December 31, 1996 due to new product introductions, the acquisition of
Richard-Allan and an increase in inventory levels to support increased sales
volume. The Company expects further increases in inventories to support
anticipated sales under group purchasing organization and distribution
agreements. Cash used by operations totaled $30.3 million for the nine months
ended December 31, 1996. During this period, the Company's operations have been
funded primarily from the proceeds of debt and equity offerings, including the
sale of $50 million of convertible subordinated debentures and the sale of
2,684,000 shares of the Company's Common Stock. As of December 31, 1996, the
Company had working capital of $18.4 million.
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<PAGE> 47
In November 1996, the Company completed a public offering of 2,684,000
shares of Common Stock, at a price of $8.00 per share. The net proceeds of $19.1
million were used to reduce $6,500,000 worth of bank debt, to finance the
Company's operations, and for several acquisitions and new product lines.
In July 1996, the Company completed the sale of $50.0 million of 8.75%
convertible subordinated debentures resulting in net proceeds to the Company of
approximately $45.2 million. The debentures are convertible into Common Stock of
the Company at $10.90 per share. Through December 31, 1996, the Company has used
net proceeds for the repayment of previous debt obligations, to complete two
business acquisitions and to finance the Company's operations.
To finance the cash portion of the Richard-Allan acquisition, the Company
obtained a $35.0 million bank credit facility. The facility originally consisted
of a $20.0 million dollar term loan and a $15.0 million revolving line of
credit, which was subsequently increased to $16.5 million in November 1996. A
portion of the proceeds from the public equity offering in November 1996 were
used to reduce the term loan by $6.5 million. The credit facility is secured by
substantially all the assets of the Company with a five-year term and bears
interest at December 31, 1996 at a rate of approximately 9.5%. Additionally, the
Company is required to meet certain financial covenants. As of December 31,
1996, outstanding borrowings were $13.5 million under the term loan and $16.5
million under the revolving credit facility. In March 1997, the Company's term
and revolving credit facility was amended to provide for maximum borrowings of
$55.0 million, consisting of $45.8 million of term loans and $9.2 million of
revolving loans, and the Company drew down the additional amounts available
under this facility in March.
Approximately $1.8 million of the Company's restructuring charges are
projected to be paid over the next 12 months. The long-term portion consists of
redundant facility lease costs to be paid out through 2003 and severance costs
to be paid out over the next two years. The Company currently expects to pay
these restructuring charges from cash flow from operations or from financing
activities. In addition, the Company is obligated to make a cash payment of
$16.5 million to the former X-Cardia shareholders upon achievement of a patent
milestone.
The Company had capital expenditures for the nine months ended March 31,
1996 and December 31, 1996 of $2.6 million and $13.4 million, respectively,
primarily due to the consolidation and expansion of manufacturing and upgrade of
management information systems. The Company anticipates capital expenditures
primarily for increased manufacturing capacity and information systems, for the
next 12 months will exceed $10.0 million, which would be funded from available
cash balances.
In April 1997, the Company completed the sale of the Old Notes raising net
proceeds of approximately $105 million, and at the same time repaid its
outstanding term and revolving credit facility and entered into the $50.0
million revolving New Credit Facility.
The Company believes that the net proceeds from the Offering, its New
Credit Facility and funds generated from operations will provide adequate
liquidity to finance its operations for the next 12 months. See "Description of
Certain Indebtedness -- New Credit Facility." The Company's business strategy
includes efforts to expand business operations through the acquisition of new
products, product lines and businesses. Business acquisitions may continue to be
financed through the issuance of shares of the Company's Common Stock and other
financing activities. However, there can be no assurance that any such
transactions will be consummated. Should the Company not be able to obtain such
financing, the Company will be required to proceed with its planned expansion at
a slower rate. The Company may require additional funds to support its working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity and/or debt financings or from other
sources. No assurance can be given that additional financing will be available
or that, if available, such financing will be obtainable on terms favorable to
the Company.
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<PAGE> 48
BUSINESS
OVERVIEW
UROHEALTH is a developer, manufacturer and distributor of products for the
urology, minimally invasive and general surgery, and gynecology markets (the
"Target Markets"). The Company has a broad offering of products used by health
care professionals for their patients suffering from impotence, incontinence and
other gynecological and urological disorders, and other conditions requiring
minimally invasive and general surgery. The Company was incorporated in August
1985. In October 1994, under the leadership of new management, the Company
adopted and began to implement a strategic plan which took advantage of
consolidation opportunities in the highly fragmented medical products industry.
Management's strategy was to position the Company to benefit from the
competitive advantages and operating efficiencies inherent in an infrastructure
which combines an experienced management team, sophisticated and efficient
manufacturing facilities and a large sales force.
The Company believes that it has developed well-established and integrated
minimally invasive and general surgery and urology platforms and that it is
well-positioned further to acquire and develop new product lines, including
gynecology product lines, to enable it to become a leader in each of its Target
Markets. The Company has increased sales from $4.3 million for the year ended
June 30, 1994 (prior to giving effect to its acquisitions) to $68.0 million for
the nine months ended December 31, 1996. EBITDA has increased from $(16.7)
million for the year ended June 30, 1994 to $13.3 million for the nine months
ended December 31, 1996. Sales and EBITDA for the quarter ended December 31,
1996 were $29.7 million and $6.3 million, respectively.
GROWTH STRATEGY
The Company's strategy is to: (i) expand the range of products to its
growing Target Markets; (ii) leverage its 160-person sales force to increase
sales of its existing, newly acquired and recently developed products, including
sales through distributors and group purchasing organizations; (iii) further
capitalize on efficiencies and synergies available by continuing to consolidate
manufacturing of existing and acquired products into the Company's existing
manufacturing operations; (iv) continue to acquire and develop additional
innovative products and product lines, including products to serve the
gynecology market; and (v) develop and expand an international sales and
marketing presence to capitalize on opportunities it identifies in selected
developed countries.
The Company believes that its acquisition and product development strategy
has been successful in building a broad selection of medical products and
combining companies and product lines that can capitalize on the manufacturing
and distribution capabilities of UROHEALTH. In the urology market, the Company
acquired Dacomed which offered a line of high-quality products designed to
diagnose and treat male impotence, but which lacked manufacturing and marketing
expertise and an effective distribution channel. The Company then acquired Osbon
which was the market leader in vacuum erection devices for the treatment of male
impotence primarily on the strength of Osbon's sales force. The Company
relocated Dacomed manufacturing operations to its Costa Mesa, California
manufacturing facility and began to market and sell the Dacomed products through
the Osbon distribution channel. As a result of the combination, the Dacomed
products were marketed through an established distribution channel and the Osbon
sales force had a broader product line to offer their customers.
To expand its presence in the market for minimally invasive and general
surgery products, the Company acquired Advanced which had a pipeline of
potential products but had limited manufacturing and distribution capabilities
and was experiencing significant liquidity and capital constraints as the result
of its substantial research and development program. Advanced's commercially
viable products were integrated into UROHEALTH's manufacturing and distribution
infrastructure. In June 1996, the Company acquired product lines of O.R.
Concepts. In August 1996, UROHEALTH acquired Richard-Allan, an established
company with a broad array of minimally invasive products including the recently
introduced Reflex(R) AEC35(TM) articulating cutter and stapler. In August 1996,
the Company also acquired a line of minimally invasive
40
<PAGE> 49
surgery products from X-Med. Management believes that operating efficiencies and
synergies similar to those created by combining the acquired urology products
and companies will result from the combination of Advanced, Richard-Allan and
the product lines acquired from O.R. Concepts and X-Med.
In June 1996, the Company introduced its EndoView(TM) video endoscopy
system which is being well-received by physicians because of its ease-of-use and
its small portable nature. The EndoView(TM) system is designed for use in the
hospital and physician's office setting and is priced to make it affordable for
widespread use in the offices of physician's performing endoscopic procedures.
The Company recently released its new Reflex(R) AEC35(TM) articulating cutter
and stapler, which greatly increases the types and number of procedures that can
be performed using minimally invasive surgical techniques. The AEC35's
articulating head gives the surgeon greater range and flexibility in performing
minimally invasive surgical procedures. Products such as the EndoView(TM) and
the Reflex(R) AEC35(TM) provide the Company's sales force with increased access
to physicians and surgeons, and, therefore, increased selling opportunities as
physicians and surgeons are anxious to learn about innovations which could have
a material effect on their practices.
The Company also has under development its RelaX(TM) product, which is a
valved catheter system designed to treat female incontinence. The Company is
currently seeking regulatory approval and began expanded clinical trials in
early 1997. In addition, the Company is developing additional products, such as
articulating surgical instruments, a breast biopsy system and a cardiac output
monitoring device.
The Company now has in place a sales force of approximately 160 persons.
The Company plans to expand further its product offerings for its Target Markets
with products currently under development and through the acquisition of
complementary products and product lines. The Company targets urologists,
gynecologists and general surgeons using its sales force, of which 70 sales
representatives call primarily on urologists and 90 sales representatives focus
their selling efforts on gynecologists and general surgeons.
The Company believes that the medical products industry is highly
fragmented and that there are a significant number of opportunities to acquire
additional product lines or companies in complementary lines of business. The
Company is continuously exploring these opportunities and management believes
that future growth, will, in significant part, be through acquisitions.
MARKETS
The Company develops, manufactures and markets products designed for the
diagnosis and treatment of urological and gynecological disorders, including
products designed to treat erectile dysfunction and incontinence. The Company
also offers a comprehensive line of products designed to serve the minimally
invasive and general surgery market and has recently introduced visualization
products which can be used in a number of medical applications.
Erectile Dysfunction
Erectile dysfunction is estimated to affect between 10 and 20 million men
in the United States, with the vast majority of cases remaining untreated. Only
recently have physicians become more knowledgeable regarding treatment
alternatives and most patients suffering from erectile dysfunction fail to seek
medical treatment for their problem. Erectile dysfunction can have either a
psychological or physiological cause. Approximately 85% of erectile dysfunction
cases are attributable to physiological causes, the most common of which are
related to vascular disease.
There are three basic treatments for physiological erectile dysfunction:
(i) drug therapy; (ii) mechanical therapy, involving the use of vacuum erection
devices; and (iii) surgery, involving the implantation of a penile prothesis.
While there are a number of drug and delivery systems under development, the
only currently available drug therapy is an injectable prostaglandin. The
introduction in November 1995 of the injectable prostaglandin has increased
physician and patient interest in the types of treatments available for erectile
dysfunction. Mechanical therapy involves the use of non-invasive vacuum erection
devices which create a vacuum in a plastic cylinder that increases blood flow to
the penis causing erection. Once an erection is achieved a tension band is
placed at the base of the penis to sustain the erection during sexual activity.
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Vacuum erection devices are low cost compared with other treatment options.
Surgical treatment for erectile dysfunction involves the implantation of a
prostheses in the corporal body of the penis which provides rigidity adequate
for sexual activity. Penile protheses can be either manually or hydraulically
operated to achieve an erection.
The Company believes that the market for erectile dysfunction products
could increase significantly as patients and others become more knowledgeable
regarding the treatment alternatives available to deal with the problem. In
addition, the market for erectile dysfunction products could grow as the average
age of men in the United States continues to increase.
Incontinence
Urinary incontinence is estimated to affect between 15 and 25 million
adults in the United States of which approximately 85% are female. A recent
survey revealed that one out of every six adult women in the United States
suffers from some form of urinary incontinence. Women typically experience a
higher incidence of incontinence than men primarily as a result of childbearing
and its impact on the urinary system. There are three basic types of urinary
incontinence: (i) stress incontinence, which involves leakage related to rapid
movement, a sneeze or exercise; (ii) urge incontinence, which involves a sudden
need to empty the bladder; and (iii) overflow incontinence, which results from
an overly distended bladder, typically caused by an obstruction or a weakened
bladder.
The vast majority of patients who suffer from some form of incontinence do
not seek treatment for their problem, with most of the patients utilizing some
form of home treatment to deal with their medical problem. There are a number of
treatments for incontinence, including adult diapers and pads, catheterization
and clamping of the urethra, pelvic muscle repositioning and training,
electrical stimulation therapy, surgery, collagen injections and drug therapy.
The Company believes that the market for incontinence products could also
increase as patients become more knowledgeable about treatment options. In
addition, the number of patients suffering from incontinence problems could
increase as the average age in the United States continues to increase. With
new, less invasive technologies in development, such as urethral inserts for
women, the general interest of both physicians and consumers in treatments for
incontinence should increase.
Minimally Invasive and General Surgery
Minimally invasive surgery, or endoscopy, relies on viewing tubes
(endoscopes) that allow surgeons to look into the body. Such surgeries are
carried out using special instruments that are inserted into one to six small
"keyhole" incision sites. Laparoscopy is the term for minimally invasive surgery
within the abdominal cavity. Laparoscopy was primarily developed by
gynecologists who use minimally invasive surgical techniques to perform
hysterectomies, tubal ligations, infertility procedures and to remove fibroid
tumors and ovarian cysts, as well as for other exploratory and diagnostic
procedures. General surgeons use laparoscopy for such common procedures as gall
bladder removal, hernia repair and appendectomies. Gastroenterologists remove
intestinal tissue laparoscopically, including operations for Crohn's disease,
diverticulitis, non-cancerous polyps and colon tumors. Urologists can perform
nephrectomies (removal of a kidney) and bladder neck suspensions
laparoscopically, as well as remove kidney stones and treat bladder cancer.
Because minimally invasive surgery is far less traumatic than conventional
open surgery techniques, patient recovery time is much faster and the period of
hospitalization is greatly reduced. Typically, patients are back to normal
activity levels within one week of surgery performed using minimally invasive
surgery techniques. While minimally invasive surgery requires surgeons to learn
a new set of skills, it is estimated that 80% of all general surgery will be
done endoscopically by the year 2000. The transition from open surgery to
minimally invasive surgery has gained significant momentum in the past few years
as studies have shown minimally invasive surgery to be more economical and
beneficial to the patient, including shortening the hospital stay and reducing
post-operative complications, resulting in faster recovery.
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The Company believes that successful companies in this marketplace will
develop and market products that make these procedures more cost and time
effective.
Visualization
Endoscopy, meaning "to look within the body," is enabled through the use of
telescopes, light sources, cameras and video viewing, recording and printing
systems. Telescopes (referred to as "endoscopes") differ in size and
functionality relative to specific anatomies, including those to look within the
abdomen (laparoscopes), the uterus (hysteroscopes), the bladder (cystoscopes),
the joints (arthroscopes), the colon (signoidoscopes), and other organs and
physiological structures. Physicians can monocularly view the desired anatomy
through an eyepiece on the end of the scope. Generally, bright light must be
introduced to the organ or anatomy, through the scope, to enhance visualization.
Cameras can be coupled to scopes to convert an image to a video monitor for real
time viewing in the operative environment and to a recorder for procedure
documentation purposes. Technological advances in endoscopy include the use of
fiber optics for miniaturization and flexibility, and the development of camera
chips that can be built into the proximal end of the scope. These advances,
combined with product durability and affordability have spurred growth in the
visualization marketplace.
The Company believes that this market is complementary to those for the
treatment of urological and gynecological disorders and to the minimally
invasive surgical instrument market. New and innovative endoscopic visualization
products should fuel the movement of surgical and diagnostic procedures out of
the hospital and into the physician office setting.
MEDICAL PRODUCTS
The Company offers a broad range of products to urologists, general
surgeons and gynecologists. Historically, the Company has been highly dependent
on the sale of vacuum erection devices for the treatment of male impotence.
However, the Company believes that with the acquisition of Richard-Allan and
other businesses and the introduction of its EndoView(TM) product, the Company's
reliance on vacuum erection devices has and should continue to decrease.
The Company offers a broad line of minimally invasive and general surgery
instruments, which are sold primarily to general surgeons, gynecologists and
urologists. The Company's comprehensive product line includes an antifogger,
pneumo needles, trocars, graspers, scissors, retractors, a kittner, specimen
retrieval bags, wound access and closure devices and electrosurgical and suction
and irrigation probes. The recent acquisition of Richard-Allan expanded the
Company's product offerings of access products, wound closure products and hand
held instruments for both open and minimally invasive surgeries. The Company
recently introduced its Reflex(R) AEC35(TM) articulating cutter and stapler,
which is the only endoscopic surgical product on the market to have articulation
capabilities. The Company also recently introduced its EndoView(TM) product,
which is an inexpensive, portable video viewing system that urologists, general
surgeons, and gynecologists can attach to an endoscope. The Company believes
that there are additional product opportunities in the "visualization" area and
is exploring those opportunities.
The Company offers a number of products designed for the treatment of
urological disorders, including the leading vacuum erection system, a penile
prosthesis and diagnostic equipment. The Company's vacuum erection systems
include Esteem(TM), ErecAid(R), Catalyst(TM) and Impower(TM). The Company's
vacuum erection devices are not subject to patent protection that would prohibit
others from offering competing products. The Company is a leader in the vacuum
erection system market primarily as a result of its high level of customer
service and physician assistance in training patients on the use of the
products. The Company also offers the RigiScan(R) System, a
microprocessor-controlled impotence diagnostic monitor, and its Inform(TM), a
disposable impotence screening device. Many of the minimally invasive surgery
products and medical/surgical products offered by the Company are used in the
treatment of urological disorders.
The Company offers a number of products designed for the treatment of
incontinence, including Femina(TM) cones, a line of catheters and urinary
drainage systems, and other products such as washable pads, briefs and diapers.
The Company is actively seeking additional products to serve this market. The
Company
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also has under development its RelaX(TM) product, which is a valved catheter
system for the management of female stress incontinence. These products are
marketed to both gynecologists and urologists, as are the Company's AccuBar(TM)
and AccuLoop(TM) vaporizing electrodes. Urologists use vaporizing electrodes to
ablate prostate tissue, and gynecologists use them to ablate endometrial tissue.
The Company is developing a number of additional products for its Target
Markets including additional articulating minimally invasive surgical
instruments and a breast biopsy system. UROHEALTH's future success will depend
in part on its ability to commercialize products under development and to
develop new medical products both for its existing markets and for new markets.
The extent and pace at which market acceptance of such products is achieved is a
function of many variables, including price, product performance and attributes,
product reliability, the effectiveness of marketing and sales efforts, the
ability to meet delivery schedules, as well as general economic conditions
affecting customers' purchasing patterns. New product development and
introduction in the medical product market requires considerable time and
capital and is subject to the risks of market acceptance. There can be no
assurance as to the continued market acceptance of the Company's existing
products or the Company's ability to develop or acquire additional products in
the future.
On February 28, 1997, the Company acquired X-Cardia and its cardiac output
monitoring technology. The Company has patent applications pending with respect
to the acquired technology, although approval cannot be assured, and has
prototype products developed. The Company anticipates beginning clinical trials
on a product using the technology during the second calendar quarter of 1997.
Microsurge
On March 31, 1997, the Company acquired Microsurge. Microsurge designs,
develops, manufactures and markets surgical instrumentation for use in minimally
invasive surgery. Microsurge is currently developing families of surgical
instrumentation for use in minimally invasive abdominal procedures, referred to
as laparoscopy, and minimally invasive thoracic procedures, referred to as
thoracoscopy. Microsurge's laparoscopic instrumentation is based on a
"multi-use" design concept which seeks to address the shortcomings of, and
provide an alternative to, currently available single-use disposable and
traditional reusable laparoscopic instrumentation. Microsurge is also exploring
the applicability of its product designs and technologies to other areas of
minimally invasive surgery, such as cardiac and colorectal surgery.
Laparoscopy was initially performed using traditional stainless steel
instrumentation designed to be sterilized and reused many times. The principal
benefit of traditional reusable instrumentation is that its reusable nature
reduces the instrumentation cost per procedure. However, this instrumentation is
often difficult to clean and needs to be repaired periodically in order to
continue to be used effectively. In addition, after a number of repairs, the
precision of traditional reusable instrumentation permanently degrades. In
response to these shortcomings, surgical instrumentation manufacturers
introduced single-use disposable laparoscopic instrumentation in 1989. These
manufacturers facilitated the market acceptance of single-use disposable
products by offering surgeons training programs focusing on the use of this new
instrumentation. Although disposable laparoscopic instrumentation has less
precision than traditional reusable instrumentation it was widely accepted
because it did not need to be cleaned or repaired. However the managed care cost
containment pressures of the 1990s have caused healthcare providers to
reevaluate the use of single-use disposable laparoscopic instrumentation because
of its high cost per surgical procedure.
To address the shortcomings of single-use disposable and traditional
reusable laparoscopic instrumentation, Microsurge is developing a family of
"multi-use" laparoscopic surgical instrumentation. Multi-use laparoscopic
instrumentation is designed to provide a lower instrumentation cost per
procedure than single-use disposable instrumentation and greater convenience and
more consistent performance than traditional reusable instrumentation.
Microsurge's multi-use laparoscopic instrumentation is designed to be easily
cleaned and used multiple times. Most of this instrumentation is comprised of
two components. One component, generally a handle, is designed to be used many,
often hundreds of, times. The other component, generally a tip configuration, is
designed to be used one or more times. When the performance of any component
deteriorates, it is discarded and replaced by a new component, eliminating the
need for repairs.
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Microsurge's principal laparoscopic products include its line of DetachaTip
multi-use hand-held scissors, graspers and dissectors and DetachaPort multi-use
trocars. Microsurge is also developing a DetachaClip multi-use laparoscopic clip
applier for use in ligating vessels and ducts. Microsurge began marketing its
laparoscopic products in July 1993 and has since introduced over 52 products to
the laparoscopic instrumentation market.
In contrast with laparoscopy, thoracoscopy is a relatively new surgical
approach. Surgical instrumentation manufacturers are not yet offering broad
lines of instrumentation specifically designed for use in thoracoscopy. To
address this need, Microsurge is developing a family of surgical instrumentation
for use in thoracoscopic surgery, including DetachaTip multi-use scissors, a
line of dilators and trocars to gain access to the chest cavity, a novel
plication device and an array of accessories.
PENDING ACQUISITION OF IMAGYN
On April 19, 1997, the Company entered into an agreement to acquire Imagyn
in a stock-for-stock merger. Imagyn is a developer of micro-invasive systems to
diagnose and treat gynecological and reproductive disorders. Imagyn's products
enable physicians to atraumatically access and visualize all the organs of the
female reproductive system. Imagyn's primary platform, the MicroLap System, is a
microendoscopy system. MicroLap is a 2 mm microlaparoscope with resolution and
light efficiency characteristics which rival the conventional laparoscopes used
in hospitals, thereby allowing physicians to perform a wide range of
gynecological procedures in all clinical settings, thus reducing time and cost.
Imagyn's MicroSpan microhysteroscopy system, which incorporates the same high
resolution optics found in Imagyn's MicroLap microlaparoscopy system, includes a
1.6 mm hysteroscope and a proprietary MicroSpan Sheath designed to allow
atraumatic access to the uterus without cervical dilation. By eliminating the
requirements for painful dilation, patients can be treated under local, not
general, anesthesia in a physician office setting. Imagyn's third platform is
the Ovation System, which is a system for visual evaluation of the fallopian
tubes. This system was just approved for distribution in the United States. The
Ovation System was recently introduced in Japan and has been marketed in Europe
and Australia since 1992. Clinical data generated by physicians has qualified
the Ovation System for reimbursement in both Australia and Japan.
PREMIER AGREEMENT
The Company recently announced that it has entered into a five-year
agreement (the "Premier Agreement") with Premier, Inc. ("Premier") to supply
participating Premier members with certain products of the Company. Premier is
the nation's largest purchasing alliance of hospitals and health systems with
over 1,800 participating acute care hospitals and alternate site members in the
United States. The Company's initial focus will be on offering a number of its
products to Premier's outpatient, physician group and other alternate site
members. Under the Premier Agreement, the Company will issue to Premier a
warrant to purchase shares of Common Stock of the Company at a purchase price
equal to the closing price on the date the parties reached an agreement in
principle. The number of shares is subject to increase or decrease depending on
purchasing levels over the five-year term. While there are no minimum purchase
requirements under the agreement, the five-year agreement has purchasing targets
of more than $1.0 billion over its term. This alliance with Premier is an
important step in the Company's strategy of expanding relationships with group
purchasing organizations. No assurances can be made that currently anticipated
purchasing targets under the Premier Agreement, or any other agreement, will be
met.
SALES AND MARKETING
The Company believes that its strategy of focusing on products for the
minimally invasive and general surgery, urology and gynecology markets by
utilizing a large sales force has and will continue to afford it competitive
advantages. This distribution channel, in combination with a telemarketing
staff, a national accounts department and a network of international
distributors gives the Company widespread access to the markets it serves.
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Approximately 90 domestic sales representatives call on general surgeons
and gynecologists, primarily in the operating room setting in hospitals and
surgery centers. This sales force offers a full line of minimally invasive and
general surgical instruments, including pneumo needles, trocars, retractors,
scissors, staplers and access and wound closure devices for a wide range of
diagnostic and operative procedures. With proprietary technology, such as that
demonstrated by the new Reflex(R) AEC35(TM) articulating cutter and stapler, an
endoscopic surgical device that simultaneously cuts and staples tissues in
difficult to reach anatomy, this sales force has been welcome in the operating
room. In addition, these sales representatives work with distributor sales
representatives providing training and technical support for the sales efforts
of the Company's distributors for these products.
Another 70 domestic sales representatives call on urologists with the
Company's urological products, including the ErecAid(R) and Esteem(TM) vacuum
erection systems, the RigiScan(R), a microprocessor-controlled impotence
diagnostic monitor, the Dura-II(TM) penile prosthesis and the AccuBar(TM) and
AccuLoop(TM) vaporizing electrodes. The urology sales representative becomes an
extension of the urologist's practice through patient education and in service
training relating to the Company's products. As a value added service to
patients and physicians, the Company staffs a 24 hour, 365 days per year urology
"hot line" to answer questions about erectile dysfunction and product use. The
Company believes that its high level of customer and physician service is
important to its market leadership in vacuum erection systems.
Both the urology and general surgery/gynecology sales forces sell
EndoView(TM), the first self-contained video endoscopy system that can be used
by all medical specialties practicing visualization. This product, which creates
a new segment in the visualization market, was successfully launched in June,
1996. The Company expects to protect its market position with this new product
and to develop follow-on products for distribution through its 160 sales
representatives. The Company believes that the availability of innovative
products, such as EndoView(TM) and the Reflex(R) AEC35(TM) articulating cutter
and stapler, provides the Company's sales force with additional access to
physicians and surgeons, and therefore, increases selling opportunities as
physicians are anxious to learn about innovations which could have a material
effect on their practices.
Telemarketers solicit leads and reorders in support of both the urology and
general surgery/gynecology sales forces. Telemarketing is an important source of
sales for the Company's medical/surgical products as well, including reusable
underpads, briefs and diapers, catheters and urinary drainage systems. These
products are typically sold to stocking distributors, hospitals and nursing home
chains and commercial laundries.
A national accounts staff seeks national and regional contracting
opportunities for the Company's products, prepares competitive proposals, makes
presentations and enters into long term sales relationships with hospital
chains, managed care organizations and medical/surgical distributors. The
Company has recently focused its sales and marketing efforts on establishing
relationships with large healthcare group purchasing organizations, and recently
entered into an agreement with one of the largest group purchasing organizations
in the United States to supply designated products to the organization's
outpatient, physician group and other alternate site members. See "Recent
Developments."
INTERNATIONAL SALES
International sales (sales outside of North America, excluding
Richard-Allan) were $1.8 million, $3.3 million and $1.7 million for the years
ended June 30, 1994 and 1995 and for the nine months ended March 31, 1996,
respectively. International sales (sales outside of North America) of
Richard-Allan were $4.8 million, $5.6 million and $4.2 million for the years
ended June 30, 1994 and 1995 and for the nine months ended March 31, 1996.
Currently, the Company distributes its products through a network of
distributors covering a number of countries outside of North America. With the
number of acquisitions completed by the Company during the last 12 months, the
Company is currently implementing a strategy for combining, coordinating and
further developing the international sales efforts of the entities acquired and
has recently retained an executive to coordinate those efforts.
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MANUFACTURING
The Company's manufacturing operations are conducted primarily at its
facilities in Costa Mesa, California and Richland, Michigan. At its Costa Mesa
facility, the Company conducts injection molding operations, assembles products
and conducts quality assurance procedures. The Company has a Class 100 clean
room at its Costa Mesa facility. Because of the Company's injection molding
capabilities, the Company has been able to manufacture a number of its acquired
products in-house, thereby realizing significant cost savings. The Company has
significant capacity to take on additional medical products molding work related
to its own existing and new products, as well as medical products of third
parties, without additional capital expenditures. The Company's manufacturing
facility in Richland, Michigan is a sophisticated manufacturing facility that
employs many manufacturing techniques designed to lower costs and insure
quality.
The Company manufactures and distributes Class I, II and III medical
devices following "good manufacturing practice" ("GMP") guidelines at its
manufacturing facilities in Costa Mesa, California and Richland, Michigan. The
Company's manufacturing operations consist of the fabrication of certain
specialized components and assembly, inspection, testing and packaging of these
components into a final product. Final assembly and packaging operations for
some of the products are conducted in environmentally controlled rooms. Various
components, subassemblies and certain finished products are manufactured by
suppliers to the Company's specifications. In addition, the Company manufactures
its line of reusable underpads and briefs at its manufacturing facility in
Watertown, South Dakota, and conducts certain assembly operations at its
facilities in Augusta, Georgia.
The Company has not experienced in the past material difficulty in
obtaining equipment, supplies and materials which it may require in connection
with manufacturing its products. Although the Company presently believes that
there are a number of possible vendors for most of the raw materials, components
and subassemblies required for the Company's products, certain components
currently are obtained from a single source. Moreover, substitute raw materials
and components may not be immediately available in quantities needed by the
Company. The disruption or termination of any single source vendor could have a
material adverse effect on the Company's operations. The Company's manufacturing
facilities are subject to periodic inspection by regulatory authorities,
including GMP compliance inspections conducted by the FDA and by state
regulatory authorities.
COMPETITION
While the Company competes with a number of multi-product companies, there
are a number of "single product" companies serving, or developing products for,
some of the Company's Target Markets. The Company believes that it has a
competitive advantage over many "single product" companies. Competition in the
field of medical products is intense and rapidly changing, and the Company
expects that competitive pressures will intensify. The Company competes on the
basis of a number of factors, including product features and price. Some of the
companies producing competing products have greater marketing and distribution
capabilities than the Company, and many of them have substantially greater
financial and other resources with which to pursue development, manufacturing,
marketing and distribution of their products. The Company expects its
competitors to continue to improve the performance of their current products and
to introduce new products with improved features and lower prices. New product
introductions by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's existing or future products.
Increased competitive pressure also could lead to intensified price-based
competition that could materially adversely affect the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will be able to compete successfully in the future.
The Company believes that the primary competitive factors affecting its
business are the safety and effectiveness of the products offered, ease of
product use, product reliability, price, physician familiarity with the
manufacturer and its products, distribution channels and third party
reimbursement policies. For certain of the Company's potential products, an
important factor in competition may be the timing of market introduction of its
or its competitors' products. Accordingly, the Company believes that its ability
to compete successfully will depend on its capability to create and maintain
technology, develop proprietary products,
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attract and retain scientific personnel, obtain patent or other proprietary
protection for its products and technologies, obtain required regulatory
approvals and manufacture, assemble and successfully market products either
alone or through other parties. Rapid technological development by others may
result in the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to those products. Some of the Company's competitors have
long-term or preferential supply arrangements with hospitals. Such arrangements
may act as a barrier to market entry by the Company. There can be no assurance
that the Company will be able to compete successfully with existing or future
competitors.
In the minimally invasive surgery market, the Company competes with medical
products companies, including United States Surgical Corporation and Ethicon,
Inc., a division of Johnson & Johnson. In the erectile dysfunction market,
UROHEALTH competes with companies such as Mission Pharmacal and Mentor. The
Company's products also compete with those of others designed for alternative
methods of treatment, such as drugs sold by pharmaceutical companies as a
treatment for erectile dysfunction. In the incontinence market, the Company
competes with disposable paper adult diapers and briefs manufactured by large
paper companies, such as Kimberly Clark, and with competing products similar to
those offered by the Company.
RESEARCH AND DEVELOPMENT; PRODUCT DEVELOPMENT
The Company recognizes that the sale of medical products requires
continuous development of new products and refinements of established products.
A major component of the Company's research and development strategy, involves
identifying products and companies that have developed products that may be
potential acquisition candidates. The Company believes that there are a number
of opportunities to acquire products and technologies that have already been
developed or partially developed.
The Company had $9.5 million, $8.8 million and $1.3 million in research and
development expenditures (excluding Richard-Allan) in the years ended June 30,
1994 and 1995 and the nine months ended March 31, 1996, respectively. The
research and development expenditures of the Company have decreased
significantly as the Company has decided to narrow the focus of its research and
development efforts, and to adopt a program of actively acquiring or licensing
developed technology. As a result the Company's research and development
expenditures have decreased as the Company has consolidated the research and
development groups of certain acquired companies into a single group and as a
result of the write-down of significant research and development of acquired
entities in 1994 and 1995. In addition, the Company has recorded significant
charges relating to the write-down of incomplete research and development
relating to the Richard-Allan acquisition and anticipates recording an
additional significant charge relating to the write-down of incomplete research
and development and other related acquisition costs in connection with the
acquisitions of X-Cardia and Microsurge. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's current research and development efforts include the
regulatory approval and commercialization of the Company's RelaX(TM) product
which is a valved catheter system for the treatment of stress incontinence in
females, and completion of clinical trials and regulatory approval of the
cardiac output monitoring device acquired from X-Cardia. In addition, the
Company has several product development projects underway which involve
enhancements of, or improvements to, existing products. As the Company has
acquired businesses and technologies, it has acquired a number of products under
development which will require additional research and development efforts by
the Company in an attempt to bring products to market. As a result, the Company
anticipates that research and development expenditures will increase in the
future over historical levels.
The Company employs a product development staff with product design
capabilities and also employs a product quality department to ensure that its
products are acceptable for patient use. The Company has recently received
ISO9001 certification.
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PATENTS, LICENSES AND TRADEMARKS
The Company believes that patents and other proprietary rights are
important to its business. The Company's commercial success and future revenue
growth will depend, in part, on its ability to operate without infringing on the
rights of others both in the United States and abroad and not breaching
technology licenses that cover technology used in the Company's products. The
Company owns or has authority to use United States and foreign patent rights
with respect to some of its medical products and has filed, and expects in the
future to file, additional patent applications. It is uncertain whether any
third party patents will require the Company to develop alternative technology
or to alter its products and processes, obtain licenses or cease certain
activities. If such licenses are required, there can be no assurance that the
Company will be able to obtain such licenses on commercially favorable terms, if
at all. Failure by the Company to obtain a license to any technology that it may
require to commercialize its products could have a material adverse effect on
the Company. The Company recently acquired X-Cardia which has filed patent
applications with respect to its cardiac output monitoring technology, although
no assurance can be given that patent approval will be received. There can be no
assurance as to the breadth or degree of the protection that may be afforded by
such patent, or whether such applications ultimately may be approved. See
"Recent Developments." The Company believes that some measure of patent
protection with respect to its products will be required to allow it to compete
with large medical products companies. There can be no assurance that the
Company will continue to develop or acquire products or processes that are
patentable or that the patents applied for will be issued or that any patents
issued to or licensed by the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide the Company
with competitive advantages. In addition, the Company could incur substantial
costs in defending its proprietary rights and there can be no assurance that a
competitor's technology or product would be found to infringe such rights.
Although the Company believes that its patents are valid, there can be no
assurance that the validity of any patent will be upheld if asserted by the
Company against any party. Further, there can be no assurance as to the breadth
and degree of protection of these rights or that other companies will not
independently develop products similar to the Company's products that will not
infringe on the Company's rights but will compete directly with the Company's
products. In addition, the laws of some foreign countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
The patents or proprietary rights of others may have an adverse effect on
the ability of the Company to do business in the future. The Company may be
required to obtain licenses to patents or proprietary rights of other parties in
order to produce and sell certain of its products. No assurance can be given
that the Company's technology can be developed and commercialized without a
license to such patents or proprietary rights or that any licenses required
under any such patent or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain or maintain
such licenses, it could encounter delays in product introductions while it
attempts to design around or contest the validity of such patents, or it could
find that the development, manufacture or sale of products requiring such
licenses could be foreclosed, any one of which could have a material adverse
effect on the Company. Furthermore there can be no assurance that competitors or
potential competitors will not independently develop similar or alternative
technologies to those of the Company, duplicate any of the Company's products or
technologies, or design around the patented technologies developed by the
Company or its licensors, any of which could have a material adverse effect on
the Company's business, results of operations or financial condition.
The Company also relies on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be no assurance that others will not
independently create substantially equivalent proprietary information or
otherwise gain access to or disclose such information of the Company. It is the
Company's policy to require certain of its employees, contractors and
consultants to execute confidentiality agreements to protect its unpatented
proprietary technology and know-how. There can be no assurance that such
confidentiality agreements will not be breached, that the Company would have
adequate remedy for such breach, or that the Company's trade secrets will not
otherwise become known through independent discovery by competitors. Moreover,
in the absence of patent protection, the Company's business may be adversely
affected by competitors who independently develop substantially equivalent
technology.
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GOVERNMENT REGULATION
Most of the Company's laboratory and medical products and its ongoing
research and development activities are subject to regulation for safety and
efficacy by, among other governmental entities, the FDA and corresponding
agencies of states and foreign countries in which the Company sells its
products. The process of receiving governmental approval may take a number of
years and the expenditure of substantial resources. There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any of the products developed by the Company. If regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which the product may be marketed. Further, discovery of previously unknown
problems with a product, manufacturer or its manufacturing facilities may result
in restrictions on such product or manufacturer, including withdrawal from the
market. The Federal Food, Drug and Cosmetic Act (the "FDC Act"), the Public
Health Services Act and other federal statutes and regulations govern or
influence the testing, manufacture, safety, labeling, storage, recordkeeping,
approval, advertising and promotion of such products. Product development and
approval within this regulatory framework takes a number of years and involves
the expenditure of substantial resources. Noncompliance with applicable
requirements may have a material adverse effect on the Company and can result in
fines, warning letters, recall or seizure of products, total or partial
suspension of production, refusal by the government to approve product license
applications or allow the Company to enter into supply contracts, and criminal
prosecution. The FDA also has the authority to revoke product licenses and
establishment licenses previously granted. Failure to comply with present or
future regulatory requirements, or respond to new information reflecting on the
safety or effectiveness of an approved product, can lead the FDA to withdraw its
approval to market the product. The Company incurs substantial costs in
complying with regulatory requirements.
With the enactment of the Medical Device Amendments in May 1976 to the FDC
Act, the FDA classified medical devices in commercial distribution into three
classes, Class I, II or III. This classification is based on the controls
necessary to reasonably ensure the safety and effectiveness of the medical
device. Class I devices are those devices whose safety and effectiveness can
reasonably be ensured through general controls, such as adequate labeling,
premarket notification, and adherence to GMP regulations. Some Class I devices
are further exempted from some of the general controls. Class II devices are
those devices whose safety and effectiveness can reasonably be ensured through
the use of special controls, such as performance standards, post-market
surveillance, patient registries, and FDA guidelines. Class III devices are
devices which must receive premarket approval by the FDA pursuant to a premarket
approval ("PMA") application to ensure their safety and effectiveness.
Generally, Class III devices are limited to life sustaining, life-supporting or
implantable devices.
The FDA requires that a manufacturer introducing a new medical device or a
new indication for use of an existing medical device obtain either a premarket
notification clearance pursuant to Section 510(k) of the FDC Act ("510(k)
Notification") or a PMA prior to being introduced into the market. In general,
clearance of a 510(k) Notification may be obtained if a manufacturer or
distributor of a medical product can establish that a new device is
"substantially equivalent" in terms of safety, effectiveness and intended use to
another legally marketed and approved medical device. The FDA may also require
review by an advisory panel as a condition for 510(k) Notification, which can
further lengthen the process. In addition to requiring clearance for new
products, FDA rules typically require a filing and a waiting period prior to
marketing modified versions of existing products. The Company anticipates that
most of its products will be eligible for the 510(k) Notification procedure. The
process of obtaining a 510(k) Notification typically takes at least three months
from the date of filing of the application and generally requires the submission
of supporting data, which in some cases can be extensive and, as a result, may
extend the process for a considerable length of time. At this time, the FDA
typically responds to a submission of a 510(k) Notification within 180 to 360
days. Market clearance may take three to twelve months or longer. If the FDA
were to require suspension of the sale of one or more of the Company's products
pending receipt of a newly required 510(k) Notification or if the FDA were to
refuse to grant 510(k) Notification, the Company's revenues and operating income
could be materially and adversely affected. Under the Safe Medical Devices Act
of 1990 ("SMDA"), the FDA is directed to adopt new 510(k) notice regulations
which could potentially make the approval process for the Company's products
more time-consuming, difficult and expensive. The SMDA includes new provisions
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relating to post-market surveillance requirements for certain types of devices
and authorizes the FDA to adopt new controls to be applied to certain devices
such as some being developed by the Company, including the promulgation of a
performance standard, requirements for patient registries and imposition of
guidelines.
In the event that the shorter 510(k) Notification procedure is not
available, or if the Company cannot obtain 510(k) Notification for a product
subject to FDA marketing approval, the Company will be required to seek approval
to market the device through the PMA process. The preparation and processing of
a PMA is significantly more complex and time consuming than the 510(k)
Notification process. The PMA process may take several years or longer and
requires the submission of extensive supporting data and clinical information.
An approved PMA application for a new instrument indicates that the FDA has
determined that a device has been proven, through the submission of preclinical
and clinical data and manufacturing information, to be safe and effective for
its intended uses. Upon receipt, the FDA will conduct a preliminary review of
the PMA to determine whether the submission is sufficiently complete to permit a
substantive review. If sufficiently complete, the submission is declared
fileable by the FDA. By regulation, the FDA has 180 days to review a PMA once it
is determined to be fileable. While the FDA generally has responded to PMAs
within the allotted time period, complete PMA reviews more often occur over a
significantly protracted time period, and generally take approximately two years
or more from the date of filing to approval.
Substantially all of the Company's FDA marketing clearances have been
obtained through the 510(k) process. Certain future applications, however, may
require PMA clearance. The Company believes that it is in material compliance
with the FDA's 510(k) requirements for new and modified devices. The FDA has
announced a program to review approvals (510(k)s and PMAs) for certain devices.
There can be no assurance that upon any such review the FDA will agree with the
Company's determination regarding its 510(k)s. If the FDA were to disallow a
510(k) marketing clearance for any device, the Company could be required to file
appropriate applications, either 510(k) or PMA, with the FDA or be required to
take the products in question off the market. Also, the FDA could bring
regulatory or enforcement actions against the Company. The Company has met and
continues to meet the requirements for FDA compliance through their good
manufacturing practice guidelines and semi-annual FDA inspections. In addition,
changes in regulations could have a material adverse effect on the Company.
International sales of medical devices are subject to regulatory
requirements that vary widely from country to country. For marketing outside the
United States before FDA approval, the Company must submit an export permit
application to the FDA. The time required to obtain approvals by foreign
countries may be longer or shorter than that required for FDA approval, and
regulatory requirements in foreign countries may differ significantly from those
of the FDA. The receipt or denial of FDA approval for a particular product may
result in the receipt or denial of regulatory approval for that product in
certain other countries. In addition, international sales of medical devices not
cleared by the FDA for distribution in the United States may be subject to FDA
export requirements, which require the Company to document that the sale of the
device is not in violation of that country's medical device laws. This
documentation is then submitted to the FDA with a request for a permit for
export to that country.
There can be no assurance that the Company will obtain timely regulatory
approval for their future products, or that existing approvals will not be
withdrawn. Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulatory requirements can, among other consequences,
result in fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals, product recalls, seizure of products, operating
restrictions, refusal of the government to allow each company to enter into
supply contracts, and criminal prosecution. In addition, governmental
regulations may be established that could prevent or delay regulatory approval
of any of the Company's products. Delays in receipt of, or failure to receive,
approvals, or the loss of previously received approvals, could have a material
adverse affect on the Company's business, financial condition and results of
operations.
FDA and state regulations also govern the manufacturing of the Company's
medical products. The Company is registered as a medical device manufacturer
with the FDA and state health service agencies. The FDA and state health service
agencies inspect the Company from time to time to determine whether it is in
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compliance with various regulations relating to medical device manufacturing,
including the Good Manufacturing Practice ("GMP") regulations governing
manufacturing, testing and quality control, and product liability of medical
devices. Although the Company believes that it currently is in material
compliance with these regulations, a determination that the Company is in
material violation of such regulations could lead to the imposition of
injunctions, suspension or loss of regulatory approvals, refusal to approve
future marketing clearances, recalls, cessation of distribution, or product
seizures, and, in the most egregious cases, criminal sanctions or closure of the
Company's manufacturing facilities.
Healthcare is an area of extensive and dynamic regulatory change. In recent
years, an increasing number of legislative proposals have been introduced or
proposed in Congress and in some state legislatures that would effect major
changes in the healthcare system, either nationally or at the state level. Among
the proposals under consideration are cost controls on hospitals, insurance
market reforms to increase the availability of group health insurance to small
businesses, requirements that all businesses offer health insurance coverage to
their employees and the creation of a single government health insurance plan
that would cover all citizens. Key elements in many of the healthcare reform
proposals were various insurance market reforms, the requirement that businesses
provide health insurance coverage for their employees, reductions or smaller
increases in future Medicare and Medicaid reimbursement to providers and more
stringent governmental cost controls. None of these proposals have been adopted.
There continue to be efforts at the federal level to introduce various insurance
market reforms, expanded fraud and abuse and anti-referral legislation and
further reduction in Medicare and Medicaid reimbursement. A broad range of both
similar and more comprehensive healthcare reform initiatives is likely to be
considered at the state level. The costs of certain proposals would be funded in
part by reductions in payments by governmental programs, including Medicare and
Medicaid to healthcare providers. In addition, both public and private payors
are increasing pressures to limit increases in healthcare costs. These changes
could have a material adverse effect on the Company's business, results of
operations and financial condition.
There have been a number of proposals over the last several years that, if
implemented, could have the effect of eliminating or reducing, or curtailing
increases in, Medicare and Medicaid reimbursement for certain medical products,
and there has been increasing pressure from private payors to limit increases in
healthcare costs. Any of these proposals (including without limitation any such
proposal relating to the Company's Rigiscan product), if adopted could have a
material adverse effect on the Company's business, results of operations, future
sales or its ability to collect accounts receivable related to such sales and
historical sales. In addition, increased pricing pressure from private payors
could have a material adverse effect on the Company's business, results of
operations or financial condition.
Healthcare is subject to laws and regulations of federal, state and local
governments and is an area of extensive and dynamic regulatory change. The
process of obtaining required regulatory clearances can be lengthy and
expensive, and compliance with the FDA's GMP regulations and regulatory
requirements can be burdensome. Laws and regulations often are adopted to
regulate new and existing products, services and industries. Changes in the law
or regulations or in the interpretation of existing laws can have a dramatic
effect on permissible activities and the relative costs of doing business. There
can be no assurance that federal, state or local governments will not impose
additional restrictions upon all or a portion of the Company's activities which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Moreover, there can be no assurance that the
required regulatory clearances will be obtained, or that those obtained may not
include significant limitations on the uses of the product in question. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by the Company more difficult in the future.
The Company believes that the FDA has increased its scrutiny of the medical
device market, thus slowing the regulatory review process for medical devices.
This may affect the Company's proposed sale of certain products. The failure to
obtain the required regulatory clearances or to comply with applicable
regulations would result in fines, delays or suspensions of clearances, seizures
or recalls of products, operating restrictions and criminal prosecutions and
could have a material adverse effect on the Company.
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<PAGE> 61
ENVIRONMENTAL MATTERS
The Company also is subject to federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and wastes, some of which are or may become regulated as
hazardous substances. The Company has not incurred any significant expenditures
or liabilities for environmental matters to date. However, no assurance can be
given that the Company will not incur significant expenditures in future periods
with respect to complying with environmental laws.
LITIGATION
The Company is involved in litigation in the normal course of business. The
Company does not anticipate that the outcome of such proceedings would likely
have a material adverse effect on its business, results of operations or
financial condition.
PRODUCT LIABILITY AND INSURANCE
The nature of the Company's present and planned medical products,
particularly surgically implanted products, exposes the Company to product
liability risks. The Company maintains product liability insurance, which it
believes is adequate. There can be no assurance, however, that the amount of
such insurance will be adequate to satisfy claims made against the Company in
the future or that the Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims or product
recalls could have a material adverse effect on the business, results of
operations and financial condition of the Company. In addition, the Company is
required under certain of its licensing agreements to indemnify its licensors
against certain product liability claims by third parties.
EMPLOYEES
As of February 28, 1997, the Company employed approximately 830 persons.
The Company has experienced no work stoppages and is not a party to any
collective bargaining agreement. The Company believes that its relations with
employees are good.
FACILITIES
The following table summarizes the leased and owned facilities of the
Company:
<TABLE>
<CAPTION>
FACILITY LOCATION PRIMARY USES SQUARE FEET LEASED/OWNED
- --------------------------- ------------------------------ ---------------- ----------------
<S> <C> <C> <C>
Newport Beach, CA Corporate Offices 13,000 leased
Costa Mesa, CA Manufacturing; R&D 52,600 leased
Richland, MI Manufacturing; Sales; 43,500 owned
Administration
Augusta, GA Sale Offices; Administration 31,656 leased
Augusta, GA Warehouse and assembly 57,500 owned
Watertown, SD Manufacturing 15,700 leased
Sparta, NJ Office and warehouse 7,000 leased
</TABLE>
During 1996, the Company entered into a five-year lease expiring in April
2001 with respect to approximately 13,000 square feet of office space which is
used for the Company's corporate executive offices. The lease provides for
monthly rental payments of approximately $18,000 per month.
The Company leases approximately 42,400 square feet of space in Costa Mesa,
California for its research and development personnel and manufacturing and
assembly of its medical products. The lease expires on March 31, 1999 and
provides for monthly rental of $19,080 during 1996, $20,352 during 1997 and
$22,048
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<PAGE> 62
during 1998. The Company leased an additional 10,200 square feet at the same
location on August 1, 1996. The lease expires on July 31, 1997 and provides for
monthly payments of $4,080.
The Company owns approximately 30 acres in Richland, Michigan and
approximately 43,500 square feet of office and manufacturing facilities located
on that property related to Richard-Allan operations.
The Company leases approximately 31,656 square feet of office and warehouse
space in Augusta, Georgia, from a partnership controlled by former Osbon
stockholders. The lease runs from February 1, 1995 through December 31, 2003,
and provides for rental payments of $17,500 per month. The lease also requires
the Company to pay insurance, utility, maintenance and other costs. The Company
owns 57,500 square feet of office, warehouse and assembly space in three other
buildings in Augusta, Georgia. These facilities relate to Osbon operations.
The Company leases 15,700 square feet of space at a plant location in
Watertown, South Dakota. The lease runs from August 1, 1995 through July 31,
2000 and provides for rental payments of $2,171 per month. The lease requires
the Company to pay for utilities and other costs not specifically borne by the
landlord. The Company also leases 1,115 square feet of office space in
Minnetonka, Minnesota. The lease runs from April 1, 1993 through March 31, 1998
and provides for rental payments of $1,218 per month. These leases relate to
Allstate operations.
The Company leases approximately 7,000 square feet of office and warehouse
space in Sparta, New Jersey. The lease runs from August 1996 through March 2000,
and provides for rental payments of $8,500 per month.
In connection with the recent acquisition of Microsurge, the Company
acquired a 37,700 square foot office and manufacturing facility in Needham,
Massachusetts. The rent on the facility is $23,000 per month and the Company is
in the process of closing this facility and terminating the lease.
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<PAGE> 63
MANAGEMENT
The following table sets forth the names and ages of all executive
officers, certain key employees and directors of the Company as of April 15,
1997. A summary of the background and experience of each of these individuals is
set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Charles A. Laverty(1)............... 51 Chairman of the Board and Chief Executive Officer
James L. Johnson.................... 48 Executive Vice President and Chief Financial Officer
Bruce A. Hazuka..................... 50 Executive Vice President -- Operations
Kevin M. Higgins.................... 55 Senior Vice President and General Counsel
Paul Petersen....................... 38 President -- Urology Products
Richard Kindberg.................... 39 President -- Surgical Products
M. Cassandra Hoag................... 41 President -- Gynecology Products
Randall L. Condie................... 41 President -- Medical/Surgical Products
Michael Schuler..................... 47 President -- Visualization Products
Mitchell J. Blutt, M.D.............. 40 Director
Abbey J. Butler(2).................. 57 Director
John S. Chamberlin.................. 68 Director
Robert W. Elkins, M.D.(3)........... 51 Director
Melvyn J. Estrin(3)................. 52 Director
C. Sage Givens...................... 40 Director
Lawrence Goelman(1)(2)(3)........... 54 Director
Michael S. Gross.................... 35 Director
Richard Newhauser................... 50 Director
Francis J. Tedesco, M.D.(2)......... 52 Director
Gerald W. Timm...................... 56 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Directors of the Company are elected at annual meetings of stockholders to
serve one-year terms or until their successors are elected and officers of the
Company serve at the discretion of the Board of Directors.
CHARLES A. LAVERTY became Chief Executive Officer in September 1994, and
Chairman of the Board of Directors in December 1994. Mr. Laverty also served as
President of the Company from September 1994 until December 1995. Mr. Laverty
has spent the last 15 years of his 20 years of management and marketing
experience in the healthcare field and currently serves as a director of
Integrated Living Communities, an operator of retirement communities. Prior to
joining the Company, Mr. Laverty was employed as Senior Executive Vice President
and was a director of Coram Healthcare Corporation, the second largest home
infusion therapy company in the U.S., which was formed by the merger of Curaflex
Health Services, Inc., HealthInfusion, Inc., Medisys, Inc., and T2 Medical, Inc.
Mr. Laverty served as the Chairman of the Board, President and Chief Executive
Officer of Curaflex Health Services from February 1989 to July 1994. Prior to
his association with Curaflex, Mr. Laverty served as President and Chief
Executive Officer of InfusionCare, Inc., a home infusion services company, from
October 1988 to February 1989. In addition, he has held several positions,
including Chief Operating Officer, with Foster Medical Corporation, a durable
medical equipment supply company, and worked in both sales and management for
C.R. Bard, a medical device company.
JAMES L. JOHNSON has served as Executive Vice President and Chief Financial
Officer of the Company since September 1995. Prior to that time, Mr. Johnson was
a partner at Ernst & Young LLP. His
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<PAGE> 64
responsibilities included a regional role as the Area Leader for the Healthcare
Industry. Prior to joining Ernst & Young LLP, Mr. Johnson was a partner of
Arthur Andersen LLP. During his 22 years in public accounting, Mr. Johnson had
served as an advisor, strategist and coordinating partner for many of the firm's
most prestigious healthcare clients. Mr. Johnson is a certified public
accountant.
BRUCE A. HAZUKA served as Executive Vice President -- Operations from
September 1995 through August 1996 at which time he became President -- Medical
Surgical Products. Mr. Hazuka served as President -- Medical Surgical Products
until February 1997, at which time he reassumed his position as Executive Vice
President -- Operations. Mr. Hazuka has spent his entire 27 years of general
management, marketing and operations experience in the healthcare field, and was
founder, President and Chief Executive Officer of Healthcare Associates, Inc.
which was founded in January 1990. Prior to joining the Company, Mr. Hazuka
served as Chairman of the Board, President and Chief Executive Officer of
Allscrips Pharmaceuticals, Inc., a pharmaceutical benefits management company,
from September 1990 to June 1994. Mr. Hazuka is a director of Integrated Medical
Resources, Inc.
KEVIN M. HIGGINS became Senior Vice President and General Counsel of the
Company in November 1995. From 1989 to 1995 Mr. Higgins was Vice President and
General Counsel of Curaflex Health Services, Inc. From 1987 to 1989 he was Vice
President and General Counsel of Foster Medical Corporation. Prior to that, Mr.
Higgins was with Avon Products, Inc. for 15 years, serving in a number of
positions, including Corporate Director of Government Affairs.
PAUL PETERSEN became President -- Urology Products in January 1997. From
December 1995 until January 1997, Mr. Petersen served as Senior Vice
President -- Sales and Marketing. Mr. Petersen served in various management
positions at Osbon Medical Systems from October 1988 -- until December 1995 when
Osbon Medical Systems became a subsidiary of the Company.
RICHARD KINDBERG has served as President -- Surgical Products since August
1996. He joined Richard-Allan as Director of Marketing, Sales Development and
International Sales in January 1995 and served in these capacities until August
1996 when the Company acquired Richard-Allan. He was Director of New Product
Development at Focal Interventional during 1994. Prior to that time, he served
as Director of Professional Marketing & Education at the Ethicon Endosurgery
Division of Johnson & Johnson.
M. CASSANDRA HOAG served as Senior Vice President -- Sales and Marketing
from October 1994 through August 1996 at which time she became
President -- Gynecological Products. Prior to joining the Company, Ms. Hoag
served as a Division Vice President of Curaflex Health Services, Inc., a home
infusion company. From April 1989 to December 1992, Ms. Hoag served as
Curaflex's Vice President, Central Operations. Prior to joining Curaflex, Ms.
Hoag held several positions, including Vice President of Central Operations,
with Foster Medical Corporation and Abbey Healthcare Group from February 1985 to
April 1989.
RANDALL CONDIE has served as President -- Medical Surgical Products since
February 1997. Prior to that Mr. Condie was Vice President, National Accounts
for the Company, serving in that capacity since August 1995. Prior to that he
held several sales management positions with the Company since October 1994.
MICHAEL SCHULER joined the Company in January 1996 as Senior Vice
President, New Business Development. He became President -- Visualization
Products in August 1996. Prior to joining the Company, Mr. Schuler was with
Advanced Surgical, Inc. from 1992 until 1995. He was appointed Chief Executive
Officer in 1994. Prior to Advanced, Mr. Schuler was with Johnson and Johnson
Interventional Systems as Vice President of Product Management.
ABBEY J. BUTLER has served as a director of the Company since March 1995.
He is Co-Chairman and Co-Chief Executive Officer of Avatex Corporation, formerly
FoxMeyer Health Corporation, a holding company that is primarily engaged in
owning and operating a medical claims processing company, owning and operating
hotels and office buildings, and investing in other corporations and businesses.
Avatex Corporation was formerly the owner of one of the largest distributors of
pharmaceuticals and health care products in the United States. Mr. Butler became
a director of Avatex in 1990. Mr. Butler also serves as managing partner of
Centaur Partners, L.P., an investment partnership with ownerhip interests in
Avatex, as well as the President and a director of C.B. Equities Corp., a
private investment company. Mr. Butler presently serves as a director
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<PAGE> 65
and a member of the Executive Committee of FWB Bancorporation, the holding
company of Grand Bank, Phar-Mor, Inc., a discount drug store chain, Carson,
Inc., a health and beauty products manufacturer, and Cyclone, Incorporated, a
distributor and installer of chain link fence systems, highway guard rails and
industrial gates and posts. Certain affiliates and subsidiaries of Avatex
Corporation of which Mr. Butler was Co-Chairman, including FoxMeyer Drug Company
and Ben Franklin Retail Stores, Inc., are currently involved in proceedings
under Chapter 11 of the Bankruptcy Code.
MITCHELL J. BLUTT, M.D. has served as a director of the Company since June
1996. Dr. Blutt is the Executive Partner of Chase Capital Partners and an
Adjunct Assistant Professor of Medicine at The New York Hospital-Cornell Medical
Center. He serves as a director of Hanger Orthopedic Group, Collegiate Health
Care, InteCare, Inc., Landec Corporation, Senior Psychology Services
Corporation, UtiliMed, Inc., Medical Arts Press, Inc., and ASC Network
Corporation. Dr. Blutt received a B.A. and M.D. from the University of
Pennsylvania, and an M.B.A. from the Wharton School, University of Pennsylvania.
JOHN S. CHAMBERLIN has served as a director of the Company since June 1996.
Mr. Chamberlin worked for 22 years in various assignments for General Electric
Company, including sales, product planning, marketing, General Manager of Radio
Receiver Department and Vice President and General Manager of the Housewares and
Audio Business Division. From 1976 to 1985 he was the President and Chief
Executive Officer of Lenox, Inc. and in 1985 joined Avon Products, Inc. as
President and Chief Operating Officer, leaving Avon in 1988. Mr. Chamberlin is
presently Chairman of the Board of Life Fitness Company and WNS, Inc., and he
serves on the Boards of Directors of The Scotts Co., Seasons, Inc., the Robbins
Company, Healthsouth Corporation and the Sports Holding Company. Mr. Chamberlin
is a Trustee of the Medical Center of Princeton and the Woodrow Wilson National
Fellowship Foundation.
ROBERT N. ELKINS, M.D. has served as a director of the Company since March
1995. Dr. Elkins is the founder of Integrated Health Services, Inc., a provider
of post acute and subacute care through more than 25,000 beds in 192 facilities
located in 30 states. Dr. Elkins has served as the Chairman and Chief Executive
Officer of Integrated Health Services since 1986. Dr. Elkins, a graduate of the
University of Pennsylvania, received his M.D. degree from the Upstate Medical
Center at the State University of New York and completed his residency at
Harvard University.
MELVYN J. ESTRIN has served as a director of the Company since March 1995.
He is Co-Chairman and Co-Chief Executive Officer of Avatex Corporation, formerly
FoxMeyer Health Corporation, a holding company that is primarily engaged in
owning and operating a medical claims processing company, owning and operating
hotels and office buildings, and investing in other corporations and businesses.
Avatex Corporation was formerly the owner of one of the largest distributors of
pharmaceuticals and health care products in the United States. Mr. Estrin became
a director of Avatex in 1990. Mr. Estrin also serves as managing partner of
Centaur Partners, L.P., an investment partnership with ownership interests in
Avatex, as well as Chairman of Human Service Group, Inc., a privately held
company that provides training, development and technical assistance to
governmental and educational institutions. Mr. Estrin presently serves as a
director and a member of the Executive Committee of FWB Bancorporation, the
holding company of Grand Bank, Phar-Mor, Inc., a discount drug store chain,
Carson, Inc., a health and beauty products manufacturer, and Washington Gas
Light Company. Certain affiliates and subsidiaries of Avatex Corporation of
which Mr. Estrin was Co-Chairman, including FoxMeyer Drug Company and Ben
Franklin Retail Stores, Inc., are currently involved in proceedings under
Chapter 11 of the Bankruptcy Code.
C. SAGE GIVENS has served as a director of the Company since June 1996. Ms.
Givens is the founding Managing Partner of Acacia Venture Partners, located in
San Francisco. Acacia Venture Partners was formed to invest exclusively in all
stages of healthcare service companies. Prior to forming Acacia Venture
Partners, Ms. Givens was a General Partner of First Century Partners, a private,
diversified venture capital and buyout fund, where she launched and managed the
partnership's diversification into healthcare. Ms. Givens was also formerly a
Managing Director at Smith Barney and presently serves as a director of
Healthsouth Corporation and Phycor, and serves on the Boards of Directors of
several other private portfolio companies.
LAWRENCE GOELMAN has served as a director of the Company since March 1995.
From 1981 until 1995, Mr. Goelman served as the Chairman and Chief Executive
Officer of CostCare, a national healthcare cost
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<PAGE> 66
management firm. Since 1995, Mr. Goelman has acted as a consultant, and is
currently the Chairman of the Board and acting Chief Executive Officer of
Diedrich's Coffee.
MICHAEL S. GROSS has served as a director of the Company since June 1996.
Mr. Gross is one of the founding principals of Apollo Advisors, L.P. which,
together with an affiliate, acts as managing general partner of Apollo
Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P.,
private securities investment funds, and of Lion Advisors, L.P., which acts as
financial advisor to and representative for certain institutional investors with
respect to securities investments. Prior to 1990, Mr. Gross was employed with
Drexel Burnham Lambert, Inc. Mr. Gross is a director of Converse, Inc., The
Florsheim Shoe Company, Inc., Furniture Brands International, Inc. and
Proffitts, Inc. and a member of the Supervisory Board of Directors of
Memorex-Telex NV.
RICHARD NEWHAUSER became a director of the Company in August 1996. Prior to
that he served as Chairman and Chief Executive Officer of Richard-Allan from
1974 until the acquisition of Richard-Allan by the Company in August 1996.
FRANCIS J. TEDESCO, M.D. has served as a director of the Company since
December 1995. Dr. Tedesco has served as President of the Medical College of
Georgia since 1988, and prior to that time he held several different positions
at the college, including Professor of Medicine and Chief, Section of
Gastroenterology and Vice President for Clinical Affairs.
GERALD W. TIMM, PH.D. became Vice Chairman of the Board of Directors in
July 1995 and served as Executive Vice President of the Company from July 1995
until April 1996. Dr. Timm was the founder of Dacomed Corporation (which became
a subsidiary of the Company in July 1995) and served as an officer of Dacomed
from its formation in 1980. Dr. Timm served as Chairman of the Board, President,
Chief Executive Officer and Treasurer of Dacomed from April 1992 until its
acquisition by the Company in July 1995.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 15, 1997 of (i) each person
known by the Company to own beneficially 5% or more of the Common Stock, (ii)
each current director of the Company, (iii) each named executive officer, and
(iv) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
----------------------
NAME AND ADDRESS(1) NUMBER PERCENT
- ------------------------------------------------------------------------ ---------- -------
<S> <C> <C>
Avatex Corporation(2)................................................... 2,464,827 9.4%
Apollo Advisors II, L.P.(3)............................................. 2,161,296 8.6
Chase Venture Capital Associates, L.P.(4)............................... 2,161,296 8.6
Gerald W. Timm, Ph.D.(5)................................................ 647,087 2.8
Charles A. Laverty(6)................................................... 1,022,171 4.1
Robert N. Elkins, M.D.(7)............................................... 132,500 *
Lawrence Goelman(8)..................................................... 118,017 *
Melvyn J. Estrin(9)..................................................... 2,472,327 9.8
Abbey J. Butler(9)...................................................... 2,472,327 9.8
Julian W. Osbon......................................................... 2,017,837 8.0
Francis J. Tedesco, M.D.(10)............................................ 7,500 *
Mitchell J. Blutt, M.D.(11)............................................. 2,161,296 8.6
Michael S. Gross(12).................................................... 2,161,296 8.6
John Chamberlin(13)..................................................... 16,667 *
C. Sage Givens(14)...................................................... 16,667 *
Richard Newhauser....................................................... 2,081,916 8.3
James L. Johnson(15).................................................... 200,406 *
Bruce A. Hazuka(16)..................................................... 116,667 *
M. Cassandra Hoag(17)................................................... 123,380 *
All current directors and executive officers as a group (20
persons)(18).......................................................... 11,718,418 41.0
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated in the following footnotes, each person named in
the table has sole voting and investment power with respect to all shares
shown as beneficially owned, subject to applicable community property law.
Unless otherwise noted in the following notes the address of each person
listed is c/o UROHEALTH Systems, Inc., 5 Civic Plaza, Suite 100, Newport
Beach, California 92660. The foregoing table presents voting securities
which include Common Stock and the Debentures which vote with the Common
Stock on an "as converted" basis.
(2) Includes 1,414,827 shares of Common Stock and warrants to purchase
1,050,000 shares of Common Stock which are currently exercisable. The
address of Avatex Corporation is 5910 North Central Expressway, Dallas,
Texas 75206.
(3) Represents Debentures which vote on an "as converted" basis and warrants to
purchase 113,750 shares of Common Stock which are currently exercisable.
The address for Apollo Advisors II, L.P. is 1301 Sixth Avenue, New York,
New York 10019.
(4) Represents Debentures which vote on an "as converted" basis and warrants to
purchase 113,750 shares of Common Stock which are currently exercisable.
The address for Chase Venture Capital Associates, L.P. is 380 Madison
Avenue, New York, New York 10017.
(5) Includes 511,931 shares owned by Dr. Timm. Also includes 135,156 shares
held in trusts for the benefit of the four children of Dr. Timm.
(6) Includes 1,022,171 shares subject to options exercisable on or before June
15, 1997.
(7) Includes 132,500 shares subject to options exercisable on or before June
15, 1997.
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<PAGE> 68
(8) Includes 118,017 shares subject to options exercisable on or before June
15, 1997.
(9) Includes the 2,464,827 shares of Common Stock and Warrants beneficially
owned by Avatex Corporation as shown above and 7,500 shares subject to
options exercisable on or before June 15, 1997. Messrs. Estrin and Butler
are Co-Chairmen of the Board of Directors of Avatex Corporation.
(10) Includes 7,500 shares subject to options exercisable on or before June 15,
1997.
(11) Represents securities held by Chase Venture Capital Association, L.P., of
which Dr. Blutt is the Executive Partner. Dr. Blutt disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(12) Represents securities held by Apollo Advisors II, L.P., of which Mr. Gross
is a Principal. Mr. Gross disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest herein.
(13) Includes 16,667 shares subject to options exercisable on or before June 15,
1997.
(14) Includes 16,667 shares subject to options exercisable on or before June 15,
1997.
(15) Includes 200,406 shares subject to options exercisable on or before June
15, 1997.
(16) Includes 116,667 shares subject to options exercisable on or before June
15, 1997.
(17) Includes 123,380 shares subject to options exercisable on or before June
15, 1997.
(18) Includes 2,060,999 shares subject to options exercisable on or before June
15, 1997, warrants to purchase 1,277,500 shares of Common Stock and
Debentures which vote on an "as converted" basis with respect to 4,587,156
Common Stock equivalents.
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<PAGE> 69
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
Concurrently with the consummation of the Offering, the Company entered
into a $50.0 million revolving credit facility (the "New Credit Facility"). The
proceeds of the New Credit Facility will be used for working capital and general
corporate purposes. Availability under the facility is limited to 80% of
eligible accounts receivable and 50% of eligible inventory.
The New Credit Facility matures March 31, 2002. Amounts outstanding under
the facility bear interest at the agent bank's base rate plus 1.25% or the 30,
60, 90 or 180 day LIBOR rate plus 2.75%. The Company is permitted to prepay the
indebtedness evidenced by the New Credit Facility in whole or in part without
penalty (subject to reimbursement of Lenders' breakage and redeployment costs
actually incurred in the case of prepayment of LIBOR borrowings).
The Company is required to make payments on amounts outstanding under the
New Credit Facility equal to the net proceeds received from (i) the sale or
disposition of all or any part of the assets of the Company or its subsidiaries
other than sales of inventory in the ordinary course of business; (ii) the
incurrence of any indebtedness for borrowed money or the issuance of debt or
equity securities by the Company after the date of the initial draw under the
New Credit Facility; (iii) at the agent's discretion, insurance recoveries other
than recoveries less than a threshold amount to be determined that is promptly
applied toward repair or replacement of the damaged property; and (iv) the
reversion of pension plan assets or tax refunds.
Repayment of the indebtedness evidenced by the New Credit Facility is
secured by a first perfected security interest in all accounts receivable,
inventory, property, plant and equipment, intangibles, contract rights and other
personal, intellectual and real property of the Company and its subsidiaries. In
addition, repayment is guaranteed by all of the Company's subsidiaries.
The loan documents contain representations, indemnification and other
provisions that are usual and customary for transactions of this type and the
Company is required to meet customary financial maintenance and other covenants.
8.75% CONVERTIBLE SUBORDINATED DEBENTURES
The Company currently has outstanding $50 million aggregate principal
amount of its 8.75% Convertible Subordinated Debentures (the "Debentures")
issued pursuant to an Indenture, dated May 13, 1996 (the "Debenture Indenture"),
between the Company and Bankers Trust Company, as trustee (the "Debenture
Indenture Trustee"). The Debentures represent unsecured general obligations of
the Company, subordinate in right of payment to the Notes and other Debenture
Senior Debt (as defined below) of the Company, and are convertible into Common
Stock of the Company. Interest on the indebtedness evidenced by the Debentures
is payable quarterly on March 31, June 30, September 30 and December 31 of each
year. The Debentures were issued in fully registered form, and will mature on
May 30, 2006. The Debenture Indenture does not contain any financial covenants,
nor any limitation on the Company's ability to incur Debenture Senior Debt. The
Debenture Indenture has been filed with the Commission and is also available for
inspection at the offices of the Debenture Indenture Trustee.
The indebtedness evidenced by the Debentures and the payment of principal
and interest thereon, including any redemption price, are subordinate and
subject in right of payment to the prior payment in full of all Debenture Senior
Debt, including the Notes. "Debenture Senior Debt" means all indebtedness of the
Company for borrowed money, other than the Debentures, whether outstanding on
the date of the Debenture Indenture or thereafter created, incurred or assumed;
provided that with respect to indebtedness incurred after the date of the
Debenture Indenture the instruments evidencing such indebtedness provide that
such indebtedness will be Debenture Senior Debt.
The holders of the Debentures are entitled at any time prior to the close
of business on May 30, 2006, subject to prior redemption, to convert any
Debentures or portions thereof into Common Stock of the Company, at the
conversion price (subject to adjustment) of $10.90 per share of Common Stock.
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The Debentures are redeemable at the option of the Company at any time
after May 13, 1999 at a redemption premium of 105% of the principal amount of
the Debentures for any a redemption occurring prior to May 13, 2000, decreasing
to 100% for any redemption occurring after May 13, 2004. In addition, the
Debentures are redeemable after May 13, 1998 but prior to May 13, 1999 if the
average trading price of a share of Common Stock of the Company for the 60
trading days prior to redemption is greater than $22.00.
Upon a Change of Control (as defined in the Debenture Indenture), the
holders of the Debentures can require the Company to repurchase the Debentures
at 105% of the principal amount of the Debentures.
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the New Notes. The
New Notes will be issued pursuant to an indenture (the "Indenture") dated as of
April 10, 1997, by and among the Company, the Guarantors and The Bank of New
York, as trustee (the "Trustee"). The terms of the Indenture are also governed
by certain provisions contained in the Trust Indenture Act of 1939, as amended.
The following summaries of certain provisions of the Indenture are summaries
only, do not purport to be complete and are qualified in their entirety by
reference to all of the provisions of the Indenture. Capitalized terms used
herein and not otherwise defined shall have the meanings assigned to them in the
Indenture. Wherever particular provisions of the Indenture are referred to in
this summary, such provisions are incorporated by reference as a part of the
statements made and such statements are qualified in their entirety by such
reference. A copy of the Indenture is available upon request.
EXCEPT AS OTHERWISE INDICATED BELOW, THE FOLLOWING SUMMARY APPLIES TO BOTH
THE OLD NOTES AND THE NEW NOTES. AS USED HEREIN, THE TERM "NOTES" MEANS THE OLD
NOTES AND THE NEW NOTES, UNLESS OTHERWISE INDICATED.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that (i) the exchange of the New Notes
pursuant to the Exchange Offer will be registered under the Securities Act, (ii)
the New Notes will not provide for payment of penalty interest as Liquidated
Damages, which Liquidated Damages terminate upon consummation of the Exchange
Offer, and (iii) the New Notes will not bear any legends restricting transfer
thereof. The New Notes will be issued solely in exchange for an equal principal
amount of Old Notes. As of the date hereof, $110 million aggregate principal
amount of Old Notes is outstanding. See "The Exchange Offer."
GENERAL
The Notes are senior subordinated, unsecured, general obligations of the
Company, limited in aggregate principal amount to $110 million. The Notes are
subordinate in right of payment to certain other debt obligations of the
Company. The Notes are jointly and severally irrevocably and unconditionally
guaranteed on a senior subordinated basis by each of the Company's present
domestic and material foreign Subsidiaries and future Restricted Subsidiaries
(the "Guarantors"). The obligations of each Guarantor under its guarantee
("Guarantee"), however, will be limited in a manner intended to avoid it being
deemed a fraudulent conveyance under applicable law. See "Certain Bankruptcy
Limitations" below. The Notes will be issued only in fully registered form,
without coupons, in denominations of $1,000 and integral multiples thereof.
The Notes mature on April 1, 2004. The Notes bear interest at the rate per
annum stated on the cover page hereof from the date of issuance or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on April 1 and October 1 of each year, commencing October
1, 1997, to the Persons in whose names such Notes are registered at the close of
business on the March 15 or September 15 immediately preceding such Interest
Payment Date. Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Principal of, premium, if any, and interest and liquidated damages, if any,
on the Notes is payable, and the Notes may be presented for registration of
transfer or exchange, at the office or agency of the Company maintained for such
purpose, which office or agency shall be maintained in the Borough of Manhattan,
The City of New York, except as set forth below. At the option of the Company,
payment of interest may be made
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by check mailed to the Holders of the Notes at the addresses set forth upon the
registry books of the Company. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Until otherwise designated by the Company, the
Company's office or agency will be the corporate trust office of the Trustee
presently located at the office of the Trustee in the Borough of Manhattan, The
City of New York.
SECURITY
The Indenture provides that as soon as practicable after the closing of the
Offering, the Company shall purchase and pledge to the Trustee, for the benefit
of the Holders of the Notes, the Pledged Securities in such amount as will be
sufficient upon receipt of scheduled interest and principal payments of such
securities, in the opinion of a nationally recognized firm of independent public
accountants selected by the Company, to provide for payment in full when due of
the first three scheduled interest payments on the Notes. The Company used
approximately $19.2 million of the net proceeds of the Offering to acquire the
Pledged Securities on April 10, 1997. The Pledged Securities were pledged by the
Company to the Trustee for the benefit of the Holders of the Notes pursuant to
the Security Agreement. Pursuant to the Security Agreement, immediately prior to
an interest payment date on the Notes, the Company may either deposit with the
Trustee from funds otherwise available to the Company cash sufficient to pay the
interest scheduled to be paid on such date or the Company may direct the Trustee
to release proceeds sufficient to pay the interest scheduled to be paid on such
date. In the event that the Company exercises the former option, the Security
Agreement provides that the Company may thereafter direct the Trustee to release
to the Company proceeds or Pledged Securities in a like amount. A failure by the
Company to pay interest on the Notes in a timely manner through October 1, 1998
will constitute an immediate Event of Default under the Indenture, with no grace
or cure period. See "-- Events of Default and Remedies."
Interest earned on the Pledged Securities will be added to the pledged
amount. In the event that the pledged funds or Pledged Securities exceed the
amount sufficient, in the opinion of a nationally recognized firm of independent
public accountants selected by the Company, to provide for payment in full of
the first three scheduled interest payments due on the Notes (or, in the event
an interest payment or interest payments have been made, an amount sufficient to
provide for payment in full of any interest payments remaining, up to and
including the third scheduled interest payment), the Trustee will be permitted
to release to the Company any such excess amount. The Notes will be secured by a
first priority security interest in the Pledged Securities and in the pledged
funds and, accordingly, the Pledged Securities and the pledged funds will also
secure repayment of the principal amount of the Notes to the extent of such
security.
Under the Security Agreement, assuming that the Company makes the first
three scheduled interest payments on the Notes in a timely manner, all of the
Pledged Securities and pledged funds will be released.
SUBORDINATION
The Notes and the Guarantees are general, unsecured obligations of the
Company and the Guarantors, respectively, subordinated in right of payment to
all Senior Indebtedness of the Company and the Guarantors, as applicable. On a
pro forma basis, as of December 31, 1996, after giving effect to the acquisition
of Microsurge, the issuance of the Notes and the application of that portion of
the net proceeds therefrom used to retire Indebtedness, the Company on a
consolidated basis would have had outstanding an aggregate of approximately $6.0
million of Senior Indebtedness.
The Indenture provides that no payment (by set-off or otherwise) may be
made by or on behalf of the Company or a Guarantor, as applicable, on account of
the principal of, premium, if any, or interest or Liquidated Damages on the
Notes (including any repurchases of Notes), or on account of the redemption
provisions of the Notes, for cash or property (other than Junior Securities),
(i) upon the maturity of any Senior Indebtedness of the Company or such
Guarantor by lapse of time, acceleration (unless waived) or otherwise, unless
and until all principal of, premium, if any, and the interest on such Senior
Indebtedness are first paid in full in cash or Cash Equivalents (or such payment
is duly provided for) or otherwise to the extent
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holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents, or (ii) in the event of default in the payment of any
principal of, premium, if any, or interest on Senior Indebtedness of the Company
or such Guarantor when it becomes due and payable, whether at maturity or at a
date fixed for prepayment or by declaration or otherwise (a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist.
Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Indebtedness to declare such Senior
Indebtedness to be due and payable and (ii) written notice of such event of
default given to the Company and the Trustee by the Agent under the New Credit
Facility or the representative of the holders of an aggregate of at least $15
million principal amount outstanding of any other Senior Indebtedness or their
representative (a "Payment Notice"), then, unless and until such event of
default has been cured or waived or otherwise has ceased to exist, no payment
(by set-off or otherwise) may be made by or on behalf of the Company or any
Guarantor which is an obligor under such Senior Indebtedness on account of the
principal of, premium, if any, or interest or Liquidated Damages on the Notes,
(including any repurchases of any of the Notes), or on account of the redemption
provisions of the Notes, in any such case, other than payments made with Junior
Securities. Notwithstanding the foregoing, unless the Senior Indebtedness in
respect of which such event of default exists has been declared due and payable
in its entirety within 179 days after the Payment Notice is delivered as set
forth above (the "Payment Blockage Period") (and such declaration has not been
rescinded or waived), at the end of the Payment Blockage Period, the Company and
the Guarantors shall be required to pay all sums not paid to the Holders of the
Notes during the Payment Blockage Period due to the foregoing prohibitions and
to resume all other payments as and when due on the Notes. Any number of Payment
Notices may be given; provided, however, that (i) not more than one Payment
Notice shall be given within a period of any 360 consecutive days, and (ii) no
default that existed upon the date of such Payment Notice or the commencement of
such Payment Blockage Period (whether or not such event of default is on the
same issue of Senior Indebtedness) shall be made the basis for the commencement
of any other Payment Blockage Period.
Upon any distribution of assets of the Company or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Company or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities, (i) the
holders of all Senior Indebtedness of the Company or such Guarantor, as
applicable, will first be entitled to receive payment in full in cash or Cash
Equivalents (or have such payment duly provided for) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents before the Holders are entitled to receive any payment on
account of principal of, premium, if any, and interest on the Notes (other than
Junior Securities) and (ii) any payment or distribution of assets of the Company
or such Guarantor of any kind or character from any source, whether in cash,
property or securities (other than Junior Securities) to which the Holders or
the Trustee on behalf of the Holders would be entitled (by set-off or
otherwise), except for the subordination provisions contained in the Indenture,
will be paid by the liquidating trustee or agent or other Person making such a
payment or distribution directly to the holders of such Senior Indebtedness or
their representative to the extent necessary to make payment in full in cash or
Cash Equivalents (or have such payment duly provided for) on all such Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Guarantor (other than Junior
Securities) shall be received by the Trustee at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of such
Senior Indebtedness, and shall be paid or delivered by the Trustee, to the
holders of such Senior Indebtedness remaining unpaid or unprovided for or to
their representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably according to the aggregate principal
amounts remaining unpaid on account of such Senior Indebtedness held or
represented by each, for application to the payment of all such Senior
Indebtedness remaining unpaid, to the extent necessary to pay or to provide for
the payment of all such Senior Indebtedness in full in cash or Cash Equivalents
or otherwise to the extent holders accept
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satisfaction of amounts due by settlement in other than cash or Cash Equivalents
after giving effect to any concurrent payment or distribution to the holders of
such Senior Indebtedness.
No provision contained in the Indenture or the Notes will affect the
obligation of the Company and the Guarantors, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest on
the Notes. The subordination provisions of the Indenture and the Notes will not
prevent the occurrence of any Default or Event of Default under the Indenture or
limit the rights of the Trustee or any Holder to pursue any other rights or
remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or a
marshalling of assets or liabilities of the Company, Holders of the Notes may
receive ratably less than other creditors.
CERTAIN BANKRUPTCY LIMITATIONS
The Company is a holding company, conducting substantially all of its
business through Subsidiaries, which have guaranteed the Company's obligations
with respect to the Notes. See "Risk Factors." Holders of the Notes will be
direct creditors of each Guarantor by virtue of its Guarantee. Nonetheless, in
the event of the bankruptcy or financial difficulty of a Guarantor, such
Guarantor's obligations under its Guarantee may be subject to review and
avoidance under state and federal fraudulent transfer laws. Among other things,
such obligations may be avoided if a court concludes that such obligations were
incurred for less than reasonably equivalent value or fair consideration at a
time when the Guarantor was insolvent, was rendered insolvent, or was left with
inadequate capital to conduct its business. A court would likely conclude that a
Guarantor did not receive reasonably equivalent value or fair consideration to
the extent that the aggregate amount of its liability on its guarantee exceeds
the economic benefits it receives in the Offering. The obligations of each
Guarantor under its Guarantee will be limited in a manner intended to cause it
not to be a fraudulent conveyance under applicable law, although no assurance
can be given that a court would give the holder the benefit of such provision.
See "Risk Factors -- Fraudulent Transfer Considerations."
If the obligations of a Guarantor under its Guarantee were avoided, Holders
of Notes would have to look to the assets of any remaining Guarantors for
payment. There can be no assurance in that event that such assets would suffice
to pay the outstanding principal and interest on the Notes.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Notes prior to April 1,
2001, except as provided below. The Notes will be redeemable for cash at the
option of the Company, in whole or in part, at any time on or after April 1,
2001, upon not less than 30 days nor more than 60 days notice to each holder of
Notes, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12-month period commencing April 1 of
the years indicated below, in each case (subject to the right of Holders of
record on a Record Date to receive interest due on an Interest Payment Date that
is on or prior to such Redemption Date) together with accrued and unpaid
interest and Liquidated Damages, if any, thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------- ----------
<S> <C>
2001.............................. 106.250%
2002.............................. 103.125%
2003 and thereafter............... 100.000%
</TABLE>
Until April 1, 2000, upon a Public Equity Offering of Common Stock
resulting in Net Cash Proceeds to the Company of at least $40 million, up to 35%
of the aggregate principal amount of the Notes may be redeemed at the option of
the Company within 120 days of such Public Equity Offering, on not less than 30
days, but not more than 60 days, notice to each Holder of the Notes to be
redeemed, with cash from the Net Cash Proceeds of such Public Equity Offering,
at a redemption price equal to 112 1/2% of principal (subject to the right of
Holders of record on a Record Date to receive interest due on an Interest
Payment Date that is
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on or prior to such Redemption Date), together with accrued and unpaid interest
and Liquidated Damages, if any, to the date of redemption; provided, however,
that immediately following such redemption, not less than 65% of the aggregate
principal amount of the Notes remain outstanding.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part of such
holder's Notes (provided that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control Purchase
Date") that is no later than 45 Business Days after the occurrence of such
Change of Control, at a cash price equal to 101% of the principal amount thereof
(the "Change of Control Purchase Price"), together with accrued and unpaid
interest and Liquidated Damages, if any, to the Change of Control Purchase Date.
The Change of Control Offer shall be made within 20 Business Days following a
Change of Control and shall remain open for at least 20 Business Days following
its commencement (unless a longer period shall be required by law) (the "Change
of Control Offer Period"). Upon expiration of the Change of Control Offer
Period, the Company promptly shall purchase all Notes properly tendered in
response to the Change of Control Offer. See "Risk Factors -- Possible Inability
to Repurchase Notes Upon a Change of Control."
As used herein, a "Change of Control" means (i) any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets, on a consolidated basis, of the Company, in one transaction or a series
of related transactions (in each case other than to a Restricted Subsidiary who
is a Guarantor); (ii) any merger or consolidation of the Company with or into
any Person (other than a Guarantor) if, immediately after giving effect to such
transaction, any "Person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) (other
than a Guarantor) is or becomes the "beneficial owner," directly or indirectly,
of more than 50% of the total voting power in the aggregate normally entitled to
vote in the election of directors, managers, or trustees, as applicable, of the
surviving entity or entities; (iii) any "Person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) (other than a Guarantor) is or becomes the "beneficial owner,"
directly or indirectly, of more than 50% of the total voting power in the
aggregate of all classes of Capital Stock of the Company then outstanding
normally entitled to vote in elections of directors; (iv) during any period of
12 consecutive months after the Issue Date, individuals who at the beginning of
any such 12-month period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or (v) the
adoption of a plan relating to the liquidation or dissolution of the Company.
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On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest and Liquidated Damages, if any,) of all Notes so tendered and (iii)
deliver to the Trustee Notes so accepted together with an Officers' Certificate
listing the Notes or portions thereof being purchased by the Company. The Paying
Agent promptly will pay the Holders of Notes so accepted an amount equal to the
Change of Control Purchase Price (together with accrued and unpaid interest),
and the Trustee promptly will authenticate and deliver to such Holders a new
Note equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted will be delivered promptly by the Company
to the Holder thereof. The Company publicly will announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Notes tendered upon the
occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth in this covenant, the
Company and the Guarantors will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, issue, assume, guarantee, incur, become
directly or indirectly liable with respect to (including as a result of an
Acquisition), or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an "incurrence"),
any Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness), except Permitted Indebtedness. Notwithstanding the foregoing, the
Company and the Guarantors may incur Indebtedness or Disqualified Capital Stock
if (a) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to, such
incurrence of Indebtedness or Disqualified Capital Stock and (b) on the date of
such incurrence (the "Incurrence Date"), the Consolidated Coverage Ratio of the
Company for the Reference Period after giving effect on a pro forma basis to
such incurrence of such Indebtedness or Disqualified Capital Stock and, to the
extent set forth in the definition of Consolidated Coverage Ratio, the use of
proceeds thereof, would be (1) for any Incurrence Date occurring prior to and
including December 31, 1998, at least 2.0 to 1 and (2) thereafter, at least 2.25
to 1 (any such ratio, as applicable, the "Debt Incurrence Ratio").
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Restricted Subsidiary of the
Company (including upon designation of any Unrestricted Subsidiary or other
Person to be a Restricted Subsidiary) or is merged with or into or consolidated
with the Company or a Restricted Subsidiary of the Company shall be deemed to
have been Incurred at the time such Person becomes such a Restricted Subsidiary
of the Company or is merged with or into or consolidated with the Company or a
Restricted Subsidiary of the Company, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Restricted Subsidiaries to, directly or indirectly,
make any Restricted Payment if, after giving effect to such Restricted Payment
on a pro forma basis, (i) a Default or an Event of Default shall have occurred
and be continuing, (ii) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in the
first paragraph of the covenant "Limitation on Incurrence of
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Additional Indebtedness and Disqualified Capital Stock," or (iii) the aggregate
amount of all Restricted Payments made by the Company and its Restricted
Subsidiaries, including after giving effect to such proposed Restricted Payment,
from and after the Issue Date, would exceed the sum of (a) 50% of the aggregate
Consolidated Net Income of the Company for the period (taken as one accounting
period), commencing on the first day of the first full fiscal quarter commencing
after the Issue Date, to and including the last day of the fiscal quarter ended
immediately prior to the date of such Restricted Payment (or, in the event
Consolidated Net Income for such period is a deficit, then minus 100% of such
deficit), plus (b) the aggregate Net Cash Proceeds received by the Company from
the sale of its Qualified Capital Stock (other than (1) to a Restricted
Subsidiary of the Company and (2) to the extent applied in connection with a
Qualified Exchange), after the Issue Date.
The provisions of the immediately preceding paragraph, however, will not
prohibit (i) a Qualified Exchange, (ii) the payment of any dividend (a) on
Qualified Capital Stock within 60 days after the date of its declaration if such
dividend could have been made on the date of such declaration in compliance with
the foregoing provisions or (b) to minority shareholders of any Subsidiary on a
pro rata basis, (iii) the redemption of the Series A Preferred Stock of
Urohealth, Inc. (California), for total consideration of not more than $1.6
million on or before June 30, 1997 or (iv) the redemption of the Microsurge
convertible subordinated notes outstanding on the Issue Date prior to maturity
in an amount not to exceed $6.0 million. The full amount of any Restricted
Payment made pursuant to the foregoing clause (ii) of the immediately preceding
sentence, however, will be deducted (without duplication) in the calculation of
the aggregate amount of Restricted Payments available to be made referred to in
clause (iii) of the immediately preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Restricted Subsidiaries to, directly or indirectly,
create, assume or suffer to exist any consensual restriction on the ability of
any Restricted Subsidiary of the Company to pay dividends or make other
distributions to or on behalf of, or to pay any obligation to or on behalf of,
or otherwise to transfer assets or property to or on behalf of, or make or pay
loans or advances to or on behalf of, the Company or any Restricted Subsidiary
of the Company, except (i) restrictions imposed by the Notes or the Indenture,
(ii) restrictions imposed by applicable law, (iii) existing restrictions under
Indebtedness outstanding on the Issue Date, (iv) restrictions under any Acquired
Indebtedness not incurred in violation of the Indenture or any agreement
relating to any property, asset, or business acquired by the Company or any of
its Restricted Subsidiaries, which restrictions, in each case, existed at the
time of acquisition, were not put in place in connection with or in anticipation
of such acquisition and are not applicable to any Person, other than the Person
acquired, or to any property, asset or business, other than the property, assets
and business so acquired, (v) any such restriction or requirement imposed by
Indebtedness incurred under clause (ii) of the definition of Permitted
Indebtedness, provided such restriction or requirement is no more restrictive
than that imposed by the Credit Agreement as of the Issue Date, (vi)
restrictions with respect solely to a Restricted Subsidiary of the Company
imposed pursuant to a binding agreement which has been entered into for the sale
or disposition of all or substantially all of the Equity Interests or assets of
such Restricted Subsidiary, provided such restrictions apply solely to the
Equity Interests or assets of such Restricted Subsidiary which are being sold,
and (vii) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (i), (iii) or (iv) of
this paragraph that are not more restrictive than those being replaced and do
not apply to any other Person or assets than those that would have been covered
by the restrictions in the Indebtedness so refinanced. Notwithstanding the
foregoing, neither (a) customary provisions restricting subletting or assignment
of any lease entered into in the ordinary course of business, consistent with
industry practice, nor (b) Liens permitted under the terms of the Indenture on
assets securing Senior Indebtedness or Purchase Money Indebtedness incurred in
accordance with the definition of "Permitted Indebtedness" or the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock" shall, in and of themselves, be considered a restriction on the ability
of the Company, the applicable Guarantor or the applicable Restricted Subsidiary
to transfer such agreement or assets, as the case may be.
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LIMITATIONS ON LAYERING INDEBTEDNESS
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Restricted Subsidiaries to, directly or indirectly,
incur, or suffer to exist any Indebtedness that is subordinate in right of
payment to any other Indebtedness of the Company or a Guarantor unless, by its
terms, such Indebtedness is subordinate in right of payment to, or ranks pari
passu with, the Notes or the Guarantee, as applicable.
LIMITATION ON LIENS
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Restricted Subsidiaries to, directly or indirectly,
incur, or suffer to exist any Lien on any of their respective assets, now owned
or hereinafter acquired, securing any Indebtedness that is pari passu with or
subordinated in right of payment to the Notes, except Permitted Liens, unless
the Notes or the Guarantees, as applicable, are secured on an equal and ratable
basis as such other Indebtedness; provided that, if such Indebtedness is by its
terms expressly subordinated to the Notes and the Guarantees, as applicable, the
Lien securing such subordinated or junior Indebtedness shall be subordinated and
junior to the Lien securing the Notes and the Guarantees, as applicable, with
the same relative priority as such subordinated or junior Indebtedness shall
have with respect to the Notes and the Guarantees, as applicable.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Restricted Subsidiaries to, in one or a series of
related transactions, convey, sell, transfer, assign or otherwise dispose of,
directly or indirectly, any of its property, business or assets, including by
merger or consolidation (in the case of a Guarantor or a Restricted Subsidiary
of the Company), and including any sale or other transfer or issuance of any
Equity Interests of any Restricted Subsidiary of the Company, whether by the
Company or a Restricted Subsidiary of either or through the issuance, sale or
transfer of Equity Interests by a Restricted Subsidiary of the Company and
including any sale and leaseback transaction (any of the foregoing, an "Asset
Sale"), unless (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect, on a pro forma
basis, to, such Asset Sale, (ii) the Company determines in good faith (as
relates to any Asset Sale or series of related Asset Sales with respect to which
the aggregate Fair Market Value exceeds $5 million, as evidenced by a resolution
of the Board of Directors of the Company) that the Company or such Restricted
Subsidiary, as applicable, receives Fair Market Value for such Asset Sale, (iii)
at least 75% of the total consideration for such Asset Sale or series of related
Asset Sales consists of cash or Cash Equivalents, and (iv) (a) within 270 days
following such Asset Sale, the Net Cash Proceeds therefrom (the "Asset Sale
Offer Amount") is (1) used to retire Senior Indebtedness and permanently to
reduce the amount of such Indebtedness outstanding on the Issue Date or
permitted pursuant to clause (ii) of the definition of Permitted Indebtedness
(including that in the case of a revolver or similar arrangement that makes
credit available, such commitment is so permanently reduced by such amount) or
(2) (x) committed to be invested pursuant to a definitive agreement subject only
to customary closing conditions and (y) within 365 days following such Asset
Sale, invested, in assets and property (other than notes, bonds, obligations and
securities) which in the good faith reasonable judgment of the Board will
immediately constitute or be a part of a Related Business of the Company or such
Restricted Subsidiary (if it continues to be a Restricted Subsidiary)
immediately following such transaction; provided, however, that upon the
earlier, if any, of any termination of such agreement or the failure to
consummate such transaction within such 365-day period (any such event, an
"Investment Default"), the Company shall immediately make an Asset Sale Offer on
the terms set forth in clause (b) below (except that application of the Asset
Sale Offer Amount shall be made within 30 days of such Investment Default) or
(b) within 270 days after the date of such Asset Sale, the Asset Sale Offer
Amount is applied to the optional redemption of the Notes in accordance with the
terms of the Indenture or to the repurchase of the Notes pursuant to an
irrevocable, unconditional cash offer (the "Asset Sale Offer") to repurchase
Notes at a purchase price of 100% of principal amount (the "Asset Sale Offer
Price") together with accrued and unpaid interest and Liquidated Damages, if
any, to the date of payment, made within 240 days of such Asset Sale.
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The Indenture provides that an acquisition of Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses (and within the times provided) set forth in (iv)
above (the "Excess Proceeds") exceeds $10 million and that each Asset Sale Offer
shall remain open for 20 Business Days following its commencement (the "Asset
Sale Offer Period"). Upon expiration of the Asset Sale Offer Period, the Company
shall apply the Asset Sale Offer Amount, plus an amount equal to accrued and
unpaid interest and Liquidated Damages, if any, to the purchase of all Notes
properly tendered (on a pro rata basis if the Asset Sale Offer Amount is
insufficient to purchase all Notes so tendered) at the Asset Sale Offer Price
(together with accrued interest). To the extent that the aggregate amount of
Notes tendered pursuant to an Asset Sale Offer is less than the Asset Sale Offer
Amount, the Company may use any remaining Net Cash Proceeds for general
corporate purposes as otherwise permitted by the Indenture and following each
Asset Sale Offer the Excess Proceeds amount shall be reset to zero. For purposes
of (iii) above, total consideration received means the total consideration
received for such Asset Sales minus the amount of (i) Senior Indebtedness
assumed by a transferee which assumption permanently reduces the amount of
Indebtedness outstanding on the Issue Date or permitted pursuant to clause (ii)
and (v) of the definition of Permitted Indebtedness (including that in the case
of a revolver or similar arrangement that makes credit available, such
commitment is so reduced by such amount) and (ii) Purchase Money Indebtedness
secured solely by the assets sold and assumed by a transferee.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company and its Restricted Subsidiaries may, in the ordinary
course of business, convey, sell, transfer, assign or otherwise dispose of
inventory acquired and held for resale in the ordinary course of business;
(ii) the Company and its Restricted Subsidiaries may convey, sell,
transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the covenant "Limitation on Merger, Sale or Consolidation";
(iii) the Company and its Restricted Subsidiaries may sell or dispose
of property in the ordinary course of business, in the aggregate amount not
exceeding $3 million during any 12-month period, so long as such property
is no longer necessary for the proper conduct of the business of the
Company or such Restricted Subsidiary, as applicable; and
(iv) the Company and the Guarantors may convey, sell, transfer, assign
or otherwise dispose of assets to the Company or any of the Guarantors.
All Net Cash Proceeds from an Event of Loss shall be invested, used for
prepayment of Senior Indebtedness, or used to repurchase Notes, all within the
period and as otherwise provided above in clauses iv(a) or iv(b) of the first
paragraph of this covenant.
In addition to the foregoing, the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, make any Asset Sale of any of
the Equity Interests of any Restricted Subsidiary, except pursuant to an Asset
Sale of all the Equity Interests of such Restricted Subsidiary.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of its Subsidiaries
will be permitted on or after the Issue Date to enter into any contract,
agreement, arrangement or transaction with any Affiliate (an "Affiliate
Transaction"), or any series of related Affiliate Transactions, other than
Exempt Affiliate Transactions, unless (i) it is determined that the terms of
such Affiliate Transaction are fair and reasonable to the Company, and no less
favorable to the Company, than could have been obtained in an arm's-length
transaction with a non-Affiliate, (ii) if the consideration to any party is in
excess of $500,000, such Affiliate Transaction(s) is evidenced by an Officers'
Certificate addressed and delivered to the Trustee certifying that
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such Affiliate Transaction (or Transactions) has been approved by a majority of
the members of the Board of Directors that are disinterested in such transaction
and (iii) if the consideration to any party is in excess of $5 million, the
Company shall have obtained, prior to the consummation thereof, a written
favorable opinion as to the fairness of such transaction to the Company from a
financial point of view from an independent financial advisor of national
standing.
LIMITATION ON PAYMENTS FOR CONSENT
The Indenture provides that none of the Company or any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for, or
as an inducement to, any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes, unless such consideration is offered
to be paid or is irrevocably pledged to be paid to all Holders of the Notes who
so consent, waive, or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement, which
solicitation documents must be mailed to all Holders of the Notes prior to the
expiration of the solicitation.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not consolidate with or merge
with or into another Person or, directly or indirectly, sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, except for any consolidation or
merger with or into, or sale, lease or transfer to, solely a Guarantor, or adopt
a plan of liquidation, unless (i) either (a) the Company is the continuing
entity or (b) the resulting, surviving or transferee entity or, in the case of a
plan of liquidation, the entity which receives the greatest value from such plan
of liquidation is a corporation organized under the laws of the United States,
any state thereof or the District of Columbia and expressly assumes by
supplemental indenture all of the obligations of the Company in connection with
the Notes and the Indenture; (ii) immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default shall exist or
would occur; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Consolidated Net Worth of the consolidated surviving or
transferee entity or, in the case of a plan of liquidation, the entity which
receives the greatest value from such plan of liquidation is at least equal to
the Consolidated Net Worth of the Company immediately prior to such transaction;
and (iv) immediately after giving effect to such transaction on a pro forma
basis, the consolidated resulting, surviving or transferee entity or, in the
case of a plan of liquidation, the entity which receives the greatest value from
such plan of liquidation would immediately thereafter be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Debt Incurrence Ratio set
forth in the first paragraph of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and the Company shall be released from the
obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
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LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries shall directly or indirectly engage to any substantial extent in
any line or lines of business activity other than that which, in the reasonable
good faith judgment of the Board of Directors of the Company, is a Related
Business.
FUTURE SUBSIDIARY GUARANTORS
The Indenture provides that all present domestic and material foreign
Subsidiaries and future Restricted Subsidiaries of the Company jointly and
severally will guaranty irrevocably and unconditionally all principal, premium,
if any, and interest on the Notes on a senior subordinated basis.
RELEASE OF GUARANTORS
The Indenture provides that no Guarantor shall consolidate or merge with or
into (whether or not such Guarantor is the surviving Person) another Person
unless, subject to the provisions of the following paragraph and certain other
provisions of the Indenture, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such Person shall
unconditionally guarantee, on a senior subordinated basis, all of such
Guarantor's obligations under such Guarantor's guarantee and the Indenture on
the terms set forth in the Indenture. In addition, no Guarantor shall
consolidate or merge with or into another Person which is not a Guarantor
unless, immediately before and immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default shall have
occurred or be continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor or all or substantially all of its
assets to an entity which is not a Guarantor (and a Restricted Subsidiary) or
the designation of a Restricted Subsidiary to become an Unrestricted Subsidiary,
which transaction is otherwise in compliance with the Indenture (including,
without limitation, the provisions of the covenant "Limitations on Sale of
Assets and Subsidiary Stock"), such Guarantor will be deemed released from its
obligations under its Guarantee; provided, however, that any such termination
shall occur only to the extent that all obligations of such Guarantor under all
of its Guarantees of, and under all of its pledges of assets or other security
interests which secure, any Indebtedness of the Company or any other Restricted
Subsidiary shall also terminate upon such release, sale or transfer.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and, to each Holder and to prospective purchasers
of Notes identified to the Company by the Initial Purchaser, within 15 days
after it is or would have been (if it were subject to such reporting
obligations) required to file such with the Commission, annual and quarterly
financial statements substantially equivalent to financial statements that would
have been included in reports filed with the Commission, if the Company were
subject to the requirements of Section 13 or 15(d) of the Exchange Act,
including, with respect to annual information only, a report thereon by the
Company's certified independent public accountants as such would be required in
such reports to the Commission, and, in each case, together with a management's
discussion and analysis of financial condition and results of operations which
would be so required and, to the extent permitted by the Exchange Act or the
Commission (if it were subject to such reporting obligations), file with the
Commission the annual, quarterly and other reports which it is or would have
been required to file with the Commission.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes due
and payable and the continuance of any such failure for 30 days; provided,
however, that any failure by the Company to pay in full any interest on the
Notes in a timely manner through October 1, 1998 or to purchase and deposit the
Pledged Securities as soon as practicable after the closing of the offering as
required by the Security Agreement, will constitute an immediate Event of
Default, (ii) the failure by the Company to pay all or any part of the
principal, or premium, if any, on the Notes when and as the same becomes due and
payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, payment of the Change of Control Purchase Price or the Asset
Sale Offer Price, or otherwise, (iii) the failure by the Company or any of its
Restricted Subsidiaries otherwise to comply with the covenants "Repurchase of
Notes at the Option of the Holder Upon a Change of Control," "Limitation on Sale
of Assets and Subsidiary Stock" and "Limitation on Merger, Sale or
Consolidation," (iv) the failure by the Company or any Restricted Subsidiary to
observe or perform any other covenant or agreement contained in the Notes or the
Indenture (except as provided in clauses (i), (ii) and (iii) above) and the
continuance of such failure for a period of 60 days after written notice is
given to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes outstanding,
(v) certain events of bankruptcy, insolvency or reorganization in respect of the
Company or any of its Significant Subsidiaries, (vi) a default in Indebtedness
for borrowed money of the Company or any of its Restricted Subsidiaries with an
aggregate principal amount in default or accelerated in excess of $5 million,
which default (A) is caused by a failure to pay principal on the maturity date
thereof, or (B) results in the acceleration of such Indebtedness prior to its
express maturity, and (vii) final unsatisfied judgments not covered by insurance
aggregating in excess of $5 million, at any one time rendered against the
Company or any of its Restricted Subsidiaries and not stayed, bonded or
discharged within 60 days. The Indenture provides that if a Default occurs and
is continuing, the Trustee must, within 90 days after the occurrence of such
default, give to the Holders notice of any such default known to the Trustee.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clauses (v) or (vi), above, relating to the Company or any
Significant Subsidiary,) then in every such case, unless the principal of all of
the Notes shall have already become due and payable, either the Trustee or the
Holders of 25% in aggregate principal amount of the Notes then outstanding, by
notice in writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, determined as set forth
below, and accrued interest thereon to be due and payable immediately; provided,
however, that if any Senior Indebtedness is outstanding pursuant to the Credit
Agreement, upon a declaration of such acceleration, such principal and interest
shall be due and payable upon the earlier of (a) the fifth Business Day after
the sending to the Company and the Representative of such written notice, unless
such Event of Default is cured or waived prior to such date and (b) the date of
acceleration of any Senior Indebtedness under the Credit Agreement. If an Event
of Default specified in clauses (v) or (vi), above, relating to the Company or
any of its Significant Subsidiaries occurs, all principal and accrued interest
thereon will be immediately due and payable on all outstanding Notes without any
declaration or other act on the part of Trustee or the Holders. The Holders of a
majority in aggregate principal amount of Notes generally are authorized to
rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal of, premium, if any, and interest on the Notes
which have become due solely by such acceleration and except on default with
respect to any provision requiring a supermajority approval to amend, which
default may only be waived by such a supermajority, and have been cured or
waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except on
default with respect to any provision requiring a supermajority approved to
amend, which default may only be waived by such a supermajority, and except a
default in the payment of principal of or interest on any Note not yet cured or
a default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to
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exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the Holders, unless such Holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the Notes at the time outstanding will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Notes, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented, and the Indenture shall cease to be of further effect as to all
outstanding Notes and Guarantees, except as to (i) rights of Holders to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due from the trust funds referred to below; (ii)
the Company's obligations with respect to such Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes, and the maintenance of an office or agency for payment and money for
security payments held in trust; (iii) the rights, powers, trust, duties, and
immunities of the Trustee, and the Company's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, non-payment of
guarantees, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, U.S. legal tender, U.S. Government Securities or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest on such Notes, and the Holders of
Notes must have a valid, perfected, exclusive security interest in such trust;
(ii) in the case of the Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
Trustee confirming that (A) the Company has received from, or there has been
published by the Internal Revenue Service, a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of such Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that the Holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company shall have delivered to the Trustee an Officers' Certificate stating
that the deposit was not made by the Company with the intent of preferring the
Holders of such Notes over any other creditors of the Company or with the intent
of defeating, hindering, delaying or defrauding any other creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee an
Officers' Certificate and an
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opinion of counsel, each stating that the conditions precedent provided for in,
in the case of the officers' certificate, (i) through (vi) and, in the case of
the opinion of counsel, clauses (i) (with respect to the validity and perfection
of the security interest), (ii), (iii) and (v) of this paragraph have been
complied with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company under
the Indenture will be revived and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Guarantors
and the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
outstanding, the Company, the Guarantors and the Trustee are permitted to amend
or supplement the Indenture or any supplemental indenture or modify the rights
of the Holders; provided that no such modification may without the consent of
holders of at least 66 2/3% in aggregate principal amount of Notes at the time
outstanding, modify the provisions (including the defined terms used therein) of
the covenant "Repurchase of Notes at the Option of the Holder upon a Change of
Control" in a manner adverse to the holders; and provided, that no such
modification may, without the consent of each Holder affected thereby: (i)
change the Stated Maturity on any Note, or reduce the principal amount thereof
or the rate (or extend the time for payment) of interest thereon or any premium
payable upon the redemption thereof, or change the place of payment where, or
the coin or currency in which, any Note or any premium or the interest thereon
is payable, or impair the right to institute suit for the enforcement of any
such payment on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or reduce the Change of Control
Purchase Price or the Asset Sale Offer Price or alter the provisions (including
the defined terms used therein) regarding the right of the Company to redeem the
Notes in a manner adverse to the Holders, or (ii) reduce the percentage in
principal amount of the outstanding Notes, the consent of whose Holders is
required for any such amendment, supplemental indenture or waiver provided for
in the Indenture, or (iii) modify any of the waiver provisions, except to
increase any required percentage or to provide that certain other provisions of
the Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS OR DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or the Guarantors under the Indenture or the
Notes by reason of his or its status as such stockholder, employee, officer or
director, except to the extent such Person is the Company or a Guarantor.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any Person existing at the time such Person (i) becomes a Restricted Subsidiary
of the Company, including by designation, or (ii) is merged or consolidated into
or with the Company or one of its Restricted Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise. Notwithstanding the foregoing, an ownership interest in the
Company and its Subsidiaries by a Beneficial Owner of 10% or more of the total
voting power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
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"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), whether or not
applicable, except that a "Person" shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Capitalized Lease Obligation" means rental obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligations shall
be the capitalized amount of such obligations, as determined in accordance with
GAAP.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits, bankers
acceptances, money market deposit accounts and certificates of deposit and
commercial paper issued by the parent corporation of any domestic commercial
bank of recognized standing having capital and surplus in excess of $500 million
and commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the equivalent
thereof by Moody's Investors Service, Inc., and in the case of each of (i),
(ii), and (iii) maturing within one year after the date of acquisition, and (iv)
any fund investing exclusively in investments of the types described in clauses
(i) or (ii) above.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (i) the
aggregate amount of Consolidated EBITDA of such Person for the Reference Period
to (ii) the aggregate Consolidated Fixed Charges of such Person during the
Reference Period; provided that for purposes of such calculation, (a)
Acquisitions which occurred during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date shall be assumed to
have occurred on the first day of the Reference Period, (b) transactions giving
rise to the need to calculate the Consolidated Coverage Ratio shall be assumed
to have occurred on the first day of the Reference Period, (c) the incurrence of
any Indebtedness or issuance of any Disqualified Capital Stock during the
Reference Period or subsequent to the Reference Period and on or prior to the
Transaction Date (and the application of the proceeds therefrom to the extent
used to refinance or retire other Indebtedness) shall be assumed to have
occurred on the first day of such Reference Period, and (d) the Consolidated
Fixed Charges of such Person attributable to interest on any Indebtedness or
dividends on any Disqualified Capital Stock bearing a floating interest (or
dividend) rate shall be computed on a pro forma basis as if the average rate in
effect from the beginning of the Reference Period to the Transaction Date had
been the applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to an Interest Swap or Hedging Obligation (which shall
remain in effect for the 12-month period immediately following the Transaction
Date) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such Person for such period adjusted to add
thereto (to the extent deducted from net revenues in
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determining Consolidated Net Income), without duplication, the sum of (i)
consolidated income tax expense, (ii) consolidated depreciation and amortization
expense, provided that consolidated depreciation and amortization of a
Consolidated Subsidiary that is a less than wholly owned Consolidated Subsidiary
shall only be added to the extent of the equity interest of the Company in such
Consolidated Subsidiary, (iii) Consolidated Fixed Charges and (iv) non-recurring
restructuring charges, write-off of purchased research and development, and
direct acquisition costs, less the amount of all cash payments made by such
Person or any of its Consolidated Subsidiaries during such period to the extent
such payments relate to non-cash charges that were added back in determining
Consolidated EBITDA for such period or any prior period.
"Consolidated Fixed Charges" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (i) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and its
Consolidated Subsidiaries during such period, including (a) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (b) the
interest portion of all deferred payment obligations, and (c) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptances
and letters of credit financings and currency and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such period and (ii) all
cash dividend payments (and non-cash dividend payments in the case of a Person
that is a Subsidiary) on any series of preferred stock of such Person. For
purposes of this definition, (1) interest on a Capitalized Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined in good
faith by the Company to be the rate of interest implicit in such Capitalized
Lease Obligation in accordance with GAAP and (2) interest expense attributable
to any Indebtedness represented by the guaranty by such Person or a Subsidiary
of such Person of an obligation of another Person shall be deemed to be the
interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (i) all gains (but not losses) which are
either extraordinary (as determined in accordance with GAAP) or are either
one-time or nonrecurring (including any gain from the sale or other disposition
of assets outside the ordinary course of business or from the issuance or sale
of any capital stock), (ii) the net income, if positive, of any Person, other
than a Restricted Subsidiary, in which such Person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such Person or a wholly
owned Consolidated Subsidiary of such Person during such period, but in any case
not in excess of such Person's pro rata share of such Person's net income for
such period, (iii) the net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, (iv)
the net income, if positive, of any of such Person's Consolidated Subsidiaries
to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Consolidated
Subsidiary and (v) all gains (but not losses) attributable to operations and
businesses permanently discontinued or disposed of.
"Consolidated Net Worth" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such Person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity) (i) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such Person and its Consolidated
Subsidiaries, (ii) all upward revaluations and other write-ups in the book value
of any asset of such Person or a Consolidated Subsidiary of such Person
subsequent to the Issue Date, and (iii) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in Persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any Person, each Restricted Subsidiary
of such Person (whether now existing or hereafter created or acquired) the
financial statements of which are consolidated for financial statement reporting
purposes with the financial statements of such Person in accordance with GAAP.
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"Consolidation" or "consolidation" means, with respect to the Company, the
consolidation of the accounts of the Subsidiaries with those of the Company, all
in accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Company. The term "Consolidated" or "consolidated" has a correlative
meaning to the foregoing.
"Credit Agreement" means (i) the Amended and Restated Credit Agreement to
be dated as of April 10, 1997 by and among the Company, certain of its
subsidiaries, certain financial institutions and Banque Indosuez, as agent,
providing for an aggregate $50 million revolving credit facility, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, as such credit agreement and/or related
documents may be amended, restated, supplemented, renewed, replaced or otherwise
modified from time to time whether or not with the same agent, trustee,
representative lenders or holders, and, subject to the proviso to the next
succeeding sentence, irrespective of any changes in the terms and conditions
thereof or (ii) any substantially equivalent senior credit facility in lieu of
the credit facility described in clause (i). Without limiting the generality of
the foregoing, the term "Credit Agreement" shall include agreements in respect
of Interest Swap and Hedging Obligations with lenders party to the Credit
Agreement and shall also include any amendment, amendment and restatement,
renewal, extension, restructuring, supplement or modification to any Credit
Agreement and all refundings, refinancings and replacements of any Credit
Agreement, including any agreement (i) extending the maturity of any
Indebtedness incurred thereunder or contemplated thereby, (ii) adding or
deleting borrowers or guarantors thereunder, so long as borrowers and issuers
include one or more of the Company and its Subsidiaries and their respective
successors and assigns, (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder, provided that on the date
such Indebtedness is incurred it would not exceed the amount permitted to be
incurred by clause (ii) of the definition of Permitted Indebtedness or (iv)
otherwise altering the terms and conditions thereof in a manner not prohibited
by the terms of the Indenture.
"Disqualified Capital Stock" means, with respect to any Person other than
any Restricted Subsidiary of such Person, Equity Interests of such Person that,
by their terms or by the terms of any security into which they are convertible
or exercisable (in either case solely at the option of the holder thereof), are,
or upon the happening of an event or the passage of time would be, required to
be redeemed or repurchased (including at the option of the holder thereof) by
such Person or any of its Restricted Subsidiaries, in whole or in part, on or
prior to the Stated Maturity of the Notes and, with respect to any Restricted
Subsidiary of such Person (including with respect to any Restricted Subsidiary
of the Company), any Equity Interests other than any common equity with no
preference, privileges, or redemption or repayment provisions.
"Equity Interest" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"Event of Loss" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Exempt Affiliate Transactions" means (a) transactions between or among the
Company and/or the Guarantors, (b) reimbursement of or advances to officers of
the Company or any Subsidiary of the Company in the ordinary course of business
to provide for the payment of reasonable expenses incurred by such persons in
the performance of their responsibilities to the Company or such Subsidiary or
in connection with any relocation, (c) fees, compensation, and employee
benefits, including bonuses, retirement plans and stock options, paid to and
indemnity provided on behalf of directors, officers or employees of the Company
or any Subsidiary of the Company in the ordinary course of business, provided
that any such transaction in this clause (c) is approved by a majority of the
independent directors on the board of directors, (d) any employment or
consulting agreement that is in effect on the date of the Indenture and any such
agreement entered into by the Company or a Subsidiary of the Company after the
date of the Indenture in the ordinary course of business of the Company or such
Subsidiary, provided that any such agreement is approved by a majority of the
independent directors on the board of directors, (e) any Restricted Payment
constituting a dividend or distribution pro rata to all holders of the Company's
Common Stock permitted by the Indenture,
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and (f) repayment of Indebtedness owing to any Affiliate, if such Indebtedness
is permitted by the Indenture and such Indebtedness was issued to an Affiliate
by the Company or a Guarantor in compliance with the "Limitations on
Transactions with Affiliates" and "Limitations on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" covenants.
"Existing Assets" means assets of the Company and its Restricted
Subsidiaries existing at the Issue Date (other than cash, Cash Equivalents or
inventory held for resale in the ordinary course of business) and including
proceeds of any sale of such assets and assets acquired in whole or in part with
proceeds from the sale from any such assets.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Government Securities" means direct obligations of, or obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
obligations or guarantee the full faith and credit of the United States of
America is pledged.
"Guarantor" means a Restricted Subsidiary that guarantees the Notes in
accordance with the terms of the Indenture.
"Indebtedness" of any Person means, without duplication, if and to the
extent any of the following (except as set forth below) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
(a) all liabilities and obligations, contingent or otherwise, of such any
Person, (i) in respect of borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), (ii) evidenced by bonds, notes, debentures or similar instruments,
(iii) representing the balance deferred and unpaid of the purchase price of any
property, except those that would constitute ordinarily an accrued expense or a
trade payable to trade creditors, (iv) evidenced by bankers' acceptances or
similar instruments issued or accepted by banks, (v) relating to any Capitalized
Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit (regardless of
whether they appear as a liability upon a balance sheet of such Person); (b) all
net obligations of such Person under Interest Swap and Hedging Obligations
(regardless of whether they appear as a liability upon a balance sheet of such
Person); (c) all liabilities and obligations of others of the kind described in
the preceding clause (a) or (b) that such Person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property of
such Person and all obligations to purchase, redeem or acquire any Equity
Interests and (d) any and all deferrals, renewals, extensions, refinancing and
refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b) or (c), or this clause (d), whether or not between or among the
same parties, and (e) all Disqualified Capital Stock of such Person (measured at
the greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends). For purposes hereof, the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value to be
determined in good faith by the board of directors of the issuer (or managing
general partner of the issuer) of such Disqualified Capital Stock.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
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"Investment" by any Person in any other Person means (without duplication)
(i) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (ii) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); (iii) the entering into by such Person of any
guarantee of, or other credit support or contingent obligation with respect to,
Indebtedness or other liability of such other Person, other than guarantees of
Indebtedness of the Company or any Guarantor to the extent permitted by the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock;" (iv) the making of any capital contribution by such Person to
such other Person; and (v) the designation by the Board of Directors of the
Company of any Person to be an Unrestricted Subsidiary. The Company shall be
deemed to make an Investment in an amount equal to the Fair Market Value of the
net assets of any subsidiary (or, if neither the Company nor any of its
Subsidiaries has theretofore made an Investment in such subsidiary, in an amount
equal to the Investments being made), at the time that such subsidiary is
designated an Unrestricted Subsidiary, and any property transferred to an
Unrestricted Subsidiary from the Company or a Subsidiary shall be deemed an
Investment valued at its Fair Market Value at the time of such transfer.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Junior Security" means any Qualified Capital Stock and any Indebtedness of
the Company or a Guarantor, as applicable, that is subordinated in right of
payment to Senior Indebtedness at least to the same extent as the Notes or the
Guarantee, as applicable, and has no scheduled installment of principal due, by
redemption, sinking fund payment or otherwise, on or prior to the Stated
Maturity of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Liquidated Damages" means all liquidated damages (as such term is therein
defined) then owing pursuant to the Registration Rights Agreement.
"Net Cash Proceeds" means the aggregate amount of Cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary), expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its respective Subsidiaries in connection with such Asset
Sale.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness evidenced by the Notes and the Guarantees and
represented by the Indenture up to the amounts specified therein as of the
date thereof;
(ii) Indebtedness incurred pursuant to the Credit Agreement (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company or the relevant Guarantor
thereunder) up to an aggregate amount outstanding (including any
Indebtedness issued to refinance, refund or replace such Indebtedness) at
any time of $50 million, minus the amount of any such Indebtedness retired
with Net Cash Proceeds from any Asset Sale or assumed by a transferee in an
Asset Sale;
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(iii) Indebtedness by the Company to any Guarantor, and any Guarantor
may incur Indebtedness to any other Guarantor or to the Company; provided
that, in the case of Indebtedness of the Company, such obligations shall be
unsecured and subordinated in all respects to the Company's obligations
pursuant to the Notes;
(iv) Refinancing Indebtedness with respect to any Indebtedness or
Disqualified Capital Stock, as applicable, described in clause (ii) of this
definition, incurred under the Debt Incurrence Ratio test set forth in the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock." or which was outstanding on the Issue Date;
(v) Indebtedness represented by Capitalized Lease Obligations,
mortgage financings or Purchase Money Indebtedness, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or any Restricted Subsidiary or any permitted
Refinancing Indebtedness thereof (provided that the requirements of clause
(2)(A) of the definition of Refinancing Indebtedness need not be met for
the purposes of this clause (v)), in an aggregate principal amount
(including any Indebtedness issued to refinance, replace, or refund such
Indebtedness) not to exceed $10 million at any time outstanding; and
(vi) Indebtedness incurred in connection with the acquisition of
assets or a new Restricted Subsidiary; provided, that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Restricted
Subsidiaries and was not incurred in connection with, or in contemplation
of, such acquisition by the Company or one of its Restricted Subsidiaries
and all such Indebtedness (including any Indebtedness issued to refinance,
replace, or refund such Indebtedness) does not exceed an aggregate
principal amount of $10 million at any time outstanding;
(vii) Indebtedness of the Company, any Guarantor or any Restricted
Subsidiary outstanding on the date of this Indenture;
(viii) Indebtedness of Microsurge existing on the Issue Date and
disclosed in the financial statements of Microsurge included in this
Offering Memorandum incurred in connection with the acquisition of
Microsurge;
(ix) Indebtedness which represents Interest Swap and Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate indebtedness that is permitted
by the terms of this Indenture to be outstanding and any currency exchange
agreement entered into to protect against fluctuations in currency values;
and
(x) in addition to Indebtedness described in (i) through (ix) above,
Indebtedness in an aggregate amount outstanding at any time (including any
Indebtedness issued to refinance, replace, or refund such Indebtedness) of
up to $7.5 million.
"Permitted Investments" means (i) Investments in the Company or in a
Restricted Subsidiary of the Company (including, without limitation, guarantees
of the Indebtedness and/or other obligations of the Company and/or any
Restricted Subsidiary of the Company, so long as such Indebtedness and/or other
obligations are permitted under the Indenture), (ii) Investments in Cash and
Cash Equivalents, (iii) Investments by the Company or any Restricted Subsidiary
of the Company in, or the purchase of the securities of, a Person if, as a
result of such Investment, (a) such person becomes a Restricted Subsidiary of
the Company or (b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company, (iv)
accounts receivable acquired in the ordinary course of business and notes
receivable acquired in consideration of the transfer to a third party of capital
equipment in the ordinary course of business, (v) any non-cash consideration
received (and any Investment made as a result of the receipt thereof) in
connection with an Asset Sale that complies with the covenant "Limitation on
Sale of Assets and Subsidiary Stock," (vi) any Investment in an Unrestricted
Subsidiary or in an entity in which the Company or any Restricted Subsidiary has
an Equity Interest together with one or more other Persons, and which is formed
after the date of the Indenture for the purpose of engaging in a Related
Business, provided that, at the date any such Investment is made and after
giving effect thereto, such Investment, together with all other such Investments
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by the Company and its Restricted Subsidiaries since the Issue Date, does not
exceed $10 million, (vii) Investments in connection with Interest Swap and
Hedging Obligations permitted to be incurred under the definition "Permitted
Indebtedness," and (viii) loans to employees not to exceed $1 million at any
time outstanding.
"Permitted Lien" means (i) Liens existing on the Issue Date (including,
without limitation, Liens under the New Credit Facility); (ii) Liens securing
the Notes; (iii) Liens securing Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or is merged with or into the Company or a
Restricted Subsidiary or Liens securing Indebtedness incurred in connection with
an Acquisition, provided that such Liens were in existence prior to the date of
such acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets; (iv) Liens securing Refinancing
Indebtedness incurred to refinance any Indebtedness that was previously so
secured in a manner no more adverse to the Holders of the Notes than the terms
of the Liens securing such refinanced Indebtedness, provided that the
Indebtedness secured is not increased and the Lien is not extended to any
additional assets or property, (v) Liens securing Indebtedness permitted by
clause (v) of the definition of "Permitted Indebtedness" covering only the
assets acquired with such Indebtedness, (vi) Liens securing Interest Swap and
Hedging Obligations of the Company and its Restricted Subsidiaries that were
permitted pursuant to the Indenture, (vii) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business, (viii)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, (ix) Liens imposed by law, such as
mechanics', carriers', warehousemen's, materialmen's, and vendors' Liens, (x)
judgment Liens to the extent that such judgments do not cause or constitute a
Default or an Event of Default, and (xi) Liens in favor of the lessee on
instruments which are the subject of leases entered into in the ordinary course
of business; provided that any such Lien shall not extend to or cover any assets
or property of the Company and its Restricted Subsidiaries that is not the
subject of any such lease.
"Public Equity Offering" means an underwritten offering of Common Stock for
cash pursuant to an effective registration statement under the Securities Act as
a consequence of which such Common Stock is listed on a national securities
exchange or quoted on the national market system of the NASDAQ Stock Market.
"Purchase Money Indebtedness" means Indebtedness of the Company or the
Guarantors to the extent that (i) such Indebtedness is incurred in connection
with the acquisition of specified assets and property (the "Subject Assets") for
the business of the Company or the Guarantors, including Indebtedness which
existed at the time of the acquisition of such Subject Asset and was assumed in
connection therewith; and (ii) Liens securing such Indebtedness are limited to
the Subject Asset.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the Company
issued on or after the Issue Date with the Net Cash Proceeds received by the
Company from the substantially concurrent sale of Qualified Capital Stock or any
exchange of Qualified Capital Stock for any Capital Stock or Indebtedness of the
Company issued on or after the Issue Date.
"Reference Period" with regard to any Person means (i) for any Incurrence
Date from and including April 1, 1997 through and including June 30, 1997, the
fiscal quarter ended March 31, 1997, (ii) for any Incurrence Date from and
including July 1, 1997 through and including September 30, 1997, the two fiscal
quarters ended June 30, 1997, (iii) for any Incurrence Date from and including
October 1, 1997 through and including December 31, 1997, the three fiscal
quarters ended September 30, 1997, and (iv) for any Incurrence Date after
December 31, 1997, the four full fiscal quarters for which financial statements
have been completed by the Company ended immediately preceding any date upon
which any determination is to be made pursuant to the terms of the Notes or the
Indenture (or, in each case, such lesser period during which such Person has
been in existence).
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"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(i) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (ii)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((i) and (ii) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (a) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so Refinanced and (b) if such Indebtedness being
Refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such Refinancing;
provided, that (1) such Refinancing Indebtedness of any Subsidiary of the
Company shall only be used to Refinance outstanding Indebtedness or Disqualified
Capital Stock of such Subsidiary, (2) such Refinancing Indebtedness shall (A)
not have an Average Life shorter than the Indebtedness or Disqualified Capital
Stock to be so refinanced at the time of such Refinancing and (B) in all
respects, be no less subordinated or junior, if applicable, to the rights of
Holders of the Notes than was the Indebtedness or Disqualified Capital Stock to
be refinanced and (3) such Refinancing Indebtedness shall have a final stated
maturity or redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or Disqualified
Capital Stock to be so refinanced.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially complementary, incidental, ancillary or related
businesses.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than investments in Cash Equivalents and other Permitted
Investments.
"Restricted Payment" means, with respect to any Person, (i) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such Person or any parent or Restricted Subsidiary of such Person, (ii) any
payment on account of the purchase, redemption or other acquisition or
retirement for value of Equity Interests of such Person or any Subsidiary or
parent of such Person, (iii) any purchase, redemption, or other acquisition or
retirement for value of, any payment in respect of any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such Person or a parent or
Restricted Subsidiary of such Person prior to the scheduled maturity, any
scheduled repayment of principal, or scheduled sinking fund payment, as the case
may be, of such Indebtedness, other than with the proceeds from the
substantially concurrent sale of, or in exchange for, Refinancing Indebtedness
and (iv) any Restricted Investment by such Person; provided, that the term
"Restricted Payment" does not include (i) any dividend, distribution or other
payment on or with respect to Equity Interests to the extent payable solely in
shares of Qualified Capital Stock of such issuer, (ii) any dividend,
distribution or other payment to the Company, or to any of its wholly owned
Restricted Subsidiaries, by the Company or any of its Subsidiaries or (iii) the
purchase, redemption or retirement by the Company of shares of its Common Stock
held by an employee or former employee of the Company or any of its Restricted
Subsidiaries issued pursuant to any employee benefit plan, approved by the
applicable board of directors, of the Company or any of its Restricted
Subsidiaries, up to an aggregate of $1 million during any 12-month period.
"Restricted Subsidiary" means, with respect to any Person, any Subsidiary
that is not an Unrestricted Subsidiary.
"Senior Indebtedness" of the Company or any Guarantor means Indebtedness
(including any monetary obligation in respect of the Credit Agreement, and
interest, whether or not allowable, accruing on Indebtedness incurred pursuant
to the Credit Agreement after the filing of a petition initiating any proceeding
under any bankruptcy, insolvency or similar law) of the Company or such
Guarantor arising under the Credit Agreement or that, by the terms of the
instrument creating or evidencing such Indebtedness, is expressly designated
Senior Indebtedness and made senior in right of payment to the Notes or the
applicable Guarantee; provided, that in no event shall Senior Indebtedness
include (i) Indebtedness to any Subsidiary of the Company or any officer,
director or employee of the Company or any Subsidiary of the Company,
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(ii) Indebtedness incurred in violation of the terms of the Indenture, (iii)
Indebtedness to trade creditors, (iv) Disqualified Capital Stock, (v)
Capitalized Lease Obligations, and (vi) any liability for taxes owed or owing by
the Company or such Guarantor.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"Stated Maturity," when used with respect to any Note, means April 1, 2004.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is subordinated in right of payment to the Notes or such
Guarantee, as applicable, in any respect or has a stated maturity on (except for
the Notes) or after the Stated Maturity.
"Subsidiary," with respect to any Person, means (i) a corporation a
majority of whose Equity Interest with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, (ii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person, or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof has at least majority ownership interest,
or (iii) a partnership in which such Person or a Subsidiary of such Person is,
at the time, a general partner and in which such Person, directly or indirectly,
at the date of determination thereof has at least a majority ownership interest.
Unless the context requires otherwise, Subsidiary means each direct and indirect
Subsidiary of the Company.
"Unrestricted Subsidiary" means any Subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Restricted Subsidiary of the Company and that, at the time
of determination, shall be an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company); provided that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving pro forma effect to such designation would occur or continue to exist a
Default or Event of Default and (iii) immediately after giving pro forma effect
thereto, the Company could incur at least $1.00 of Indebtedness pursuant to the
Debt Incurrence Ratio in the first paragraph of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock." The Board
of Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary, provided that (i) no Default or Event of Default is
existing or will occur as a consequence thereof and (ii) immediately after
giving effect to such designation, on a pro forma basis, the Company could incur
at least $1.00 of Indebtedness pursuant to the Debt Incurrence Ratio in the
first paragraph of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." Each such designation shall be
evidenced by filing with the Trustee a certified copy of the resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will be initially represented by
one or more global notes (the "Global Securities") issued in the form of fully
registered Global Securities, which will be deposited with or on behalf of the
Depository and registered in the name of a nominee of the Depository. Interests
in Global Securities will be available for purchase only by "qualified
institutional buyers" as defined in Rule 144A under the Securities Act.
New Notes that were originally issued to or transferred to institutional
"accredited investors" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act or to any other persons who are not qualified institutional
buyers will be issued as Certificated Securities. Upon the transfer to a
qualified institutional buyer of Securities in registered form ("Certificated
Securities"), such Certificated Securities will be exchanged for an interest in
the Global Securities representing the principal amount of the Securities being
transferred.
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The Depository has advised the Company and the Initial Purchaser that the
Depository intends to follow the procedures described below:
The Depository will act as securities depository for the Global
Securities. The Global Securities will be issued as a fully registered
security registered in the name of Cede & Co. (the Depository's nominee).
The Depository is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. The Depository holds securities that its participants
("Participants") deposit with the Depository. The Depository also
facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Direct Participants include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations ("Direct
Participants"). The Depository is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the Depository's system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The Rules
applicable to the Depository and its Participants are on file with the
Commission.
Purchase of New Notes must be made by or through Direct Participants,
which will receive a credit for the Securities on the Depository's records.
The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn recorded on the Direct and Indirect
Participants' records. Transfers of ownership interests in the New Notes
are to be accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the New Notes,
except in the event that use of the book-entry system for the New Notes is
discontinued.
Conveyance of New Notes and other communications by the Depository to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
New Notes are being redeemed, the Depository's practice is to determine by
lot the amount of the interest of each Direct Participant in such issue to
be redeemed.
Neither the Depository nor Cede & Co. will consent or vote with
respect to the New Notes. Under its usual procedures, the Depository mails
an Omnibus Proxy to the issuer as soon as possible after the record date.
The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Securities are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Principal of, premium and Liquidated Damages, if any, and interest
payments on the Notes will be made to the Depository. The Depository's
practice is to credit Direct Participants' accounts on the payable date in
accordance with their respective holdings shown on the Depository's records
unless the Depository has reason to believe that it will not receive
payment on the payable date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form
or registered in "street name," and will be the responsibility of such
Participant and not of the Depository, the Paying Agent or the Company,
subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment to the Depository of principal of, premium and
Liquidated Damages, if any, and interest on the Notes are the
responsibility of the Company or the Paying Agent, disbursement of such
payments to
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Direct Participants shall be the responsibility of the Depository, and
disbursement of such payments to the Beneficial Owners shall be the
responsibility of Direct and Indirect Participants.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believe to be reliable, but the Company takes no responsibility for the accuracy
thereof.
If the Depository is at any time unwilling, unable or ineligible to
continue as Depository and a successor Depository is not appointed by the
Company within 90 days, the Company will issue Certificated Securities in
exchange for the Global Securities. In addition, the Company may at any time and
in its sole discretion determine not to have any New Notes in registered form
represented by the Global Securities and, in such event, will issue Certificated
Securities in exchange for the Global Notes. In any such instance, an owner of a
beneficial interest in a Global Security will be entitled to physical delivery
of certificated securities registered in its name. Upon the exchange of the
Global Securities for Certificated Securities, the Global Securities will be
cancelled by the Trustee or the Warrant Agent, as applicable.
EXCHANGE OFFER; REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser entered into the
Registration Rights Agreement on the Closing Date pursuant to which the Company
and the Guarantors agreed, for the benefit of the Holders of the Notes, that
they would, at their cost, (i) within 30 days after the Issue Date (as defined
in the Registration Rights Agreement) file a registration statement under the
Securities Act (an "Exchange Offer Registration Statement") with the Commission
with respect to a registered offer to exchange the Old Notes for the New Notes,
which will have terms substantially identical in all material respects to the
Old Notes (except that such New Notes will not contain terms with respect to
transfer restrictions) and (ii) use their best efforts to cause such Exchange
Offer Registration Statement to be declared effective under the Securities Act
within 90 days after the Issue Date. Upon such Exchange Offer Registration
Statement being declared effective, the Company will offer New Notes in exchange
for properly tendered Notes. The Company will keep the Exchange Offer open for
not less than 20 business days (or longer, if required by applicable law) after
the date notice of such Exchange Offer is mailed to the Holders of the Notes.
For each Note surrendered pursuant to such Exchange Offer, the Holder of such
Old Note will receive a New Note having a principal amount equal to that of the
surrendered Old Note. Under existing Commission interpretations, the New Notes
would in general be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided that in the case of
broker-dealers a prospectus meeting the requirements of the Securities Act must
be delivered as required. The Company has agreed for a period of at least 120
days after consummation of the Exchange Offer to make available a prospectus
meeting the requirements of the Securities Act to any broker-dealer for use in
connection with any resale of any such New Notes so acquired. A broker-dealer
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including, without limitation, certain indemnification and
contribution rights and obligations).
Each Holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of either of
the Company, or if it is an affiliate of either of the Company, it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable. In addition, if the Holder is not a broker-dealer, it
will be required to represent that it is not engaged in, and does not intend to
engage in, the distribution of the New Notes. If the Holder is a broker-dealer
that will receive New Notes for its own account in exchange for the Notes that
were acquired as a result of market-making activities or other trading
activities, it will be required to acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes.
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In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 120 days of the Issue Date,
the Company and the Guarantors will, at their own expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the New
Notes (a "Shelf Registration Statement"), (b) use its best efforts to cause such
Shelf Registration Statement to be declared effective under the Securities Act
as promptly as practicable after the filing of such Shelf Registration Statement
and (c) use its best efforts to keep effective such Shelf Registration Statement
until the earlier of 36 months following the Issue Date and such time as all of
the Notes have been sold thereunder, or otherwise cease to be a Transfer
Restricted Security (as defined in the Registration Rights Agreement). The
Company will, in the event a Shelf Registration Statement is required to be
filed, provide to each Holder of the New Notes copies of the prospectus which is
a part of such Shelf Registration Statement, notify each such Holder when such
Shelf Registration Statement for the New Notes has become effective and take
certain other actions that are required to permit unrestricted resales of the
New Notes. A Holder of the New Notes who sells such New Notes pursuant to the
Shelf Registration Statement generally would be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which is applicable to such a
Holder (including certain indemnification and contribution rights and
obligations).
Although the Company has filed this registration statements, there can be
no assurance that such registration statement will become effective. If (a)
neither of such registration statements is declared effective by the Commission
on or prior to the 90th day after the Issue Date (the "Effectiveness Target
Date"), (b) an Exchange Offer Registration Statement becomes effective, and the
Company fails to consummate the Exchange Offer within 30 days of the earlier of
the effectiveness of such registration statement or the Effectiveness Target
Date, or (c) the Shelf Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of Notes
during the period specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (c) above a "Registration Default"),
then the Company will pay to each Holder of the Notes, accruing from the date of
the first such Registration Default (or if such Registration Default has been
cured, from the date of the next Registration Default), liquidated damages
("Liquidated Damages") in an amount equal to one-half of one percent (0.5%) per
annum of the principal amount of the Notes held by such Holder during the first
90-day period immediately following the occurrence of such Registration Default,
increasing by an additional onehalf of one percent (0.5%) per annum of the
principal amount of such Notes during each subsequent 90-day period, up to a
maximum amount of Liquidated Damages equal to two percent (2.0%) per annum of
the principal amount of such Notes, which provision for Liquidated Damages will
continue until such Registration Default has been cured. Liquidated Damages
accrued as of any interest payment date will be payable on such date.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value, and 5,000,000 shares of Preferred Stock, $.001 par value of
which 250,000 shares have been designated as Series A Junior Participating
Preferred Stock (the "Series A Preferred Shares"). As of April 2, 1997, there
were 23,414,824 shares of Common Stock issued and outstanding and no preferred
stock issued or outstanding. As of April 2, 1997, there were options, warrants
and convertible securities to purchase 12,418,020 shares of the Company Common
Stock outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
of Common Stock (and the Debentures described below) entitled to vote in any
election of directors may elect all of the directors standing for election.
Subject to any preferences which may
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be granted to the holders of Preferred Stock, each holder of Common Stock is
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor, as well as any
distributions to the stockholders upon liquidation, dissolution or winding up of
the Company. Each holder of Common Stock is entitled to share ratably in all
assets of the Company remaining after payment of all debts and other liabilities
and subject to the prior rights of any outstanding Preferred Stock. Holders of
Common Stock have no conversion, redemption, subscription or preemptive rights
or other rights to subscribe for additional shares. The outstanding shares of
Common Stock are validly issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to issue the Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series,
without any further vote or action by the stockholders of the Company. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action of the
stockholders of the Company. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of Common
Stock of the Company, including the loss of voting control to others.
The Company has adopted a Preferred Share Purchase Rights Plan (the "Rights
Plan") which is designed to deter coercive or certain takeover tactics, to
prevent a person or group from gaining control of the Company without offering
fair value to all stockholders and to deter other abusive takeover tactics which
are not in the best interest of stockholders. In May 1993, the Company executed
the Rights Plan with its transfer agent and 250,000 Series A Preferred Shares
were designated for potential issuance under the Rights Plan. Under the terms of
the Rights Plan each share of Common Stock is accompanied by one right; each
right entitles the registered stockholder to purchase from the Company
one-hundredth of a share of Series A Junior Participating Preferred Stock, $.001
par value, at an exercise price of $200. The rights only become exercisable ten
days after a public announcement that an acquiring person (as defined in the
Rights Plan) has acquired 20% or more of the outstanding shares of Common Stock
of the Company or a person or group offers to acquire 35% or more of the
outstanding Common Stock or ten days after the Company determines that a person
is an Adverse Person (as defined in the Rights Plan). The Company can redeem the
Rights for $.01 per Right at any time until ten days after the rights become
exercisable (the 10-day period can be extended by the Company). The Rights Plan
will expire on June 30, 2003 unless earlier redeemed by the Company. If,
subsequent to the rights becoming exercisable, the Company is acquired in a
merger or other business combination at any time when there is a 20% or more
holder, the rights will then entitle a holder to buy shares of common stock of
the acquiring company with a market value equal to twice the exercise price of
each right. Alternatively, if the 20% holder acquires the Company by means of a
merger in which the Company and its stock survive, or if any person acquires 35%
or more of the Company's Common Stock, each right now owned by a 20% or more
stockholder, will become exercisable for Common Stock of the Company having a
market value equal to twice the exercise price of the right.
VOTING DEBENTURES
The holders of the Debentures are entitled to vote on all matters submitted
to a vote of the stockholders of the Company, voting together with the holders
of the Common Stock (and any other shares of capital stock of the Company
entitled to vote at a meeting of stockholders) as one class. Each Debenture is
entitled to a number of votes equal to the number of shares of Common Stock into
which the Debenture could then be converted. As of April 2, 1997, there was
$50.0 million aggregate principal amount of Debentures outstanding which would
convert into 4,587,156 shares of Common Stock.
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WARRANTS
General
The Warrants issued with the Old Notes (the "Warrants") were issued under a
Warrant Agreement (the "Warrant Agreement") between the Company and The Bank of
New York, as Warrant Agent (the "Warrant Agent"). The following description of
the Warrants does not purport to be complete and is qualified in its entirety by
the provisions of the Warrant Agreement. The Warrants are not the subject of the
Exchange Offer and will continue to have restrictions on transfer as set forth
therein until registered in accordance with the Warrant Registration Rights
Agreement.
Each Warrant entitles the registered owner thereof to purchase Common Stock
at a per share exercise price of $9.50, subject to adjustment as specified below
(the "Exercise Price"). The Warrants are exercisable on or after June 30, 1998,
and expire at 5:00 p.m., New York City time, on April 1, 2004. The number of
shares of Common Stock into which each Warrant is exercisable shall be (i) 4.44
or (ii) 9.06 if the Company has Consolidated EBITDA of less than $32.5 million
for its fiscal year ended March 31, 1998.
Holders of Warrants are not entitled, by virtue of being such holders, to
any of the rights of holders of shares of Common Stock. The Warrants are not
subject to redemption by the Company.
Exercise of Warrants
Warrants may be exercised by surrendering to the Warrant Agent a signed
Warrant certificate indicating the Warrantholder's election to exercise all or a
portion of the Warrants evidenced by such certificate. Surrendered Warrant
certificates must be accompanied by payment of the aggregate Exercise Price. The
Exercise Price is payable at the holder's option by certified or cashier's check
payable to the order of the Company, or by any combination thereof. No
adjustments as to dividends (other than stock dividends) with respect to the
Common Stock will be made upon any exercise of Warrants.
The Company has reserved for issuance a number of shares of Common Stock
sufficient to provide for the exercise of the rights of purchase represented by
the Warrants. When delivered, such shares will be fully paid and nonassessable.
The Company will bear the cost of any documentary stamp tax payable in
connection with the issuance of shares of Common Stock upon the exercise of the
Warrants, but will not be responsible for the payment of any such taxes upon the
issuance of such shares to any person other than the registered holder of the
Warrants so exercised or upon the transfer of the Warrants.
The Company is not required to issue fractional shares upon the exercise of
Warrants. In lieu of any fractional share to which a holder would otherwise be
entitled upon exercise of any Warrant, the Company will pay to such holder an
amount in cash equal to the value of such fractional interests based upon the
then current market price of a full share of Common Stock.
If the Company, in a single transaction or through a series of related
transactions, consolidates with or merges with or into any other person or
sells, assigns, transfers, leases, conveys or otherwise disposes of all or
substantially all of its properties and assets to another person or group of
affiliated persons or is a party to a merger or binding share exchange which
reclassifies or changes its outstanding Common Stock (any such transaction, an
"Extraordinary Transaction"), as a condition to consummating any such
Extraordinary Transaction, the person formed by or surviving any such
consolidation or merger if other than the Company or the person to whom such
transfer has been made (the "Surviving Person") shall enter into a supplemental
warrant agreement pursuant to which it agrees to assume all of the obligations
of the Company under the Warrants and the Warrant Registration Rights Agreement.
If such Extraordinary Transaction occurs prior to June 30, 1998, then (i) the
Warrants shall become exercisable immediately upon the consummation of such
Extraordinary Transaction for the kind and amount of consideration that the
holder thereof would have received as a result of the Extraordinary Transaction
if such holder had exercised the Warrant for 4.44 shares of Common Stock,
subject to adjustment, immediately prior to the consummation of the
Extraordinary Transaction, and (ii) the Surviving Person shall, upon
consummation of the Extraordinary Transaction, issue to each holder of Warrants
on that date, a new Warrant certificate having the same terms as the Warrants
but
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representing the right to receive the kind and amount of consideration that such
holder would have received as a result of the Extraordinary Transaction if such
holder had exercised the Warrant for 4.62 shares of Common Stock, subject to
adjustment, immediately prior to the consummation of the Extraordinary
Transaction, exercisable on or after June 30, 1998 if the Company's Consolidated
EBITDA for its fiscal year ended March 31, 1998 is less than $32.5 million.
Anti-dilution and Warrant Price Adjustments
The number of shares of Common Stock purchasable upon the exercise of each
Warrant and the Exercise Price are subject to adjustment upon the occurrence of
certain events affecting the Common Stock, including, without limitation, (i)
payment of a dividend or the making of a distribution on the shares of Common
Stock which is paid or made in shares of Common Stock or other securities of the
Company or in certain rights to purchase Common Stock or other securities of the
Company, (ii) subdivision of the outstanding shares of Common Stock into a
greater number of shares, (iii) combination of the outstanding shares of Common
Stock into a smaller number of shares, (iv) issuance of certain rights or
warrants to the holders of the shares of Common Stock, entitling them to
subscribe for or purchase shares of Common Stock, or of securities convertible
into or exchangeable for Common Stock, at a price less than the current market
price, (v) reclassification of the shares of Common Stock, (vi) distribution to
the holders of the shares of Common Stock of evidences of indebtedness or assets
(excluding any dividend or distribution paid in cash out of retained earnings),
and (vii) extraordinary cash dividends on the Common Stock, subject to the
limitation that no adjustment in the number of shares acquirable upon exercise
of the Warrants will be required until cumulative adjustments require an
adjustment of at least 1% thereof. No adjustment will be made on account of any
dividend or interest reinvestment plan or any employee stock purchase plan
providing for the purchase of shares of Common Stock at a discount from market
price.
Registration Rights
The Company is required under the Warrant Registration Rights Agreement to
file a shelf registration statement under the Securities Act covering the resale
of the Warrants by the holders thereof (the "Warrant Shelf Registration
Statement") within 60 days after the Issue Date and to use its reasonable
efforts to cause the Warrant Shelf Registration Statement to be declared
effective under the Securities Act within 150 days after the Issue Date and to
remain effective until the earliest of (i) such time as all the Warrants have
been sold thereunder, (ii) three years after its effective date and (iii) such
time as the Warrants can be sold without restriction under the Securities Act.
Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to the
purchaser, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by certain
provision of the Warrant Registration Rights Agreement which are applicable to
such holder (including certain indemnification obligations). In addition, each
holder of Warrants will be required to deliver information to be used in
connection with the Warrant Shelf Registration Statement in order to have its
Warrants included in the Warrant Shelf Registration Statement.
The Company is required under the Warrant Registration Rights Agreement to
file a shelf registration statement under the Securities Act covering the
issuance of Warrant Shares (the "Common Shelf Registration Statement") and to
use its reasonable efforts to cause the Common Shelf Registration Statement to
be declared effective on or before 365 days after the Issue Date and to remain
effective until the earlier of (i) such time as all Warrants have been exercised
and (ii) the Expiration Date.
During any consecutive 365-day period, the Company shall be entitled to
suspend the availability of each of the Warrant Shelf Registration Statement and
the Common Shelf Registration Statement for up to two 45 consecutive-day periods
(except for the 45 consecutive-day period immediately prior to the Expiration
Date) if the Board of Directors determines in the exercise of its reasonable
judgment that there is a valid business purpose for such suspension and provides
notice that such determination was made to the holders of
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the Warrants; provided, however, that in no event shall the Company be required
to disclose the business purpose for such suspension if the Company determines
in good faith that such business purpose must remain confidential. There can be
no assurance that the Company will be able to file, cause to be declared
effective, or keep a registration statement continuously effective until all of
the Warrants have been exercised or have expired.
Book-Entry, Delivery and Form
Except as set forth below, the Warrants were initially represented by one
or more global warrants (the "Global Warrants") issued in the form of fully
registered Global Warrants, which were deposited with or on behalf of the
Depository and registered in the name of a nominee of the Depository. Interests
in Global Warrants were available for purchase only by "qualified institutional
buyers" as defined in Rule 144A under the Securities Act.
Warrants that were originally issued to or transferred to institutional
"accredited investors" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act or to any other persons who are not qualified institutional
buyers will be issued as Certificated Securities. Upon the transfer to a
qualified institutional buyer of Certificated Securities, such Certificated
Securities will be exchanged for an interest in the Global Warrants representing
the Warrants being transferred. See "Description of Notes -- Book-Entry,
Delivery and Form."
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law ("Section 203")
provides, in general, that a stockholder acquiring more than 15% of the
outstanding voting shares of a corporation subject to the statute (an
"Interested Stockholder") but less than 85% of such shares may not engage in
certain "Business Combinations" with the corporation for a period of three years
subsequent to the date on which the stockholder became an Interested Stockholder
unless (i) prior to such date the corporation's Board of Directors approved
either the Business Combination or the transaction in which the stockholder
became an Interested Stockholder or (ii) the Business Combination is approved by
the corporation's board of directors and authorized by a vote of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder, or transactions in which the Interested Stockholder
receives certain other benefits.
REGISTRATION RIGHTS
The Company has granted registration rights to the holders of the
Debentures with respect to both the Debentures and the shares of Common Stock
into which the Debentures may be converted. Pursuant to such rights, the Company
may, on no more than one occasion and when requested by the holders of not less
than 51% of the aggregate principal amount of the Debentures outstanding at such
time the request is made, be required to register the Debentures for resale
under the Securities Act. In addition, the Company may, on no more than three
occasions, be required to register the shares of Common Stock into which the
Debentures may be converted. Such registration may only be required of the
Company if the registration is requested with respect to not less than 20% of
the shares of Common Stock underlying the Debentures. Finally, shares of Common
Stock into which the Debentures may be converted may also participate in any
other registered offering initiated by the Company for its own account or for
shares of Common Stock owned by other stockholders of the Company.
The Company has granted registration rights to Avatex Corporation
("Avatex") in connection with financing transactions. At any time, the holders
of not less than 20% of the shares of Common Stock received
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<PAGE> 100
or to be received in connection with these transactions may, on two occasions,
require the Company to register such shares of Common Stock for resale under the
Securities Act. In addition, shares of Common Stock issued or to be issued in
connection with these transactions may also participate in any other registered
offering initiated by the Company for its own account or for shares of Common
Stock owned by other stockholders of the Company.
The Company has granted registration rights to certain "affiliates" of
Osbon with respect to shares of Common Stock received by them in the acquisition
of Osbon by the Company. The holders of not less than 20% of the shares of
Common Stock received in the acquisition of Osbon by holders of registration
rights may, on one occasion, require the Company to register such shares of
Common Stock for resale under the Securities Act. In addition, shares of Common
Stock received by "affiliates" of Osbon in the Company's acquisition of Osbon
may also participate in any other registered offering initiated by the Company
for its own account or for shares of Common Stock owned by other stockholders of
the Company.
The Company has granted registration rights to certain "affiliates" of
Dacomed with respect to shares of Common Stock received by them in the
acquisition of Dacomed by the Company. The holders of not less than 20% of the
shares of Common Stock received in the acquisition of Dacomed by the Company by
the holders of registration rights may, on one occasion, require the Company to
register such shares of Common Stock for resale under the Securities Act. In
addition, shares of Common Stock received by "affiliates" of Dacomed in the
Company's acquisition of Dacomed may also participate in any other registered
offering initiated by the Company for its own account or for shares of Common
Stock owned by other stockholders of the Company.
The Company has granted certain piggyback registration rights with respect
to shares of Common Stock to be received upon exercise of warrants issued to a
lender in connection with loans to the Company and granted piggyback and demand
registration rights to another lender with respect to shares issuable upon
exercise of a warrant issued in connection with the Company's former credit
facilities.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company is the transfer agent and
registrar for the Common Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. Federal income tax consequences
associated with the exchange of Old Notes for New Notes pursuant to the Exchange
Offer and the ownership and disposition of New Notes by Holders who acquire the
New Notes pursuant to the Exchange Offer. This summary is based upon current
laws, regulations, rulings and judicial decisions all of which are subject to
change, possibly retroactively. This summary does not discuss all aspects of
U.S. Federal income taxation that may be relevant to particular Holders in the
context of their specific investment circumstances or to certain types of
Holders subject to special treatment under such laws (for example, financial
institutions, insurance companies, tax-exempt organizations, broker-dealers,
foreign corporations, partnerships, trusts and estates, and individuals who are
not citizens or residents of the United States). In addition, the discussion
does not address any aspect of state, local or foreign taxation and assumes that
Holders of the New Notes will hold them as "capital assets" (generally, properly
held for investment) within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code").
PROSPECTIVE HOLDERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE NEW
NOTES AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND OTHER
TAX LAWS.
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THE EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
be treated as a modification of the Old Notes which does not constitute a
significant modification. Accordingly, a New Note will be treated as a
continuation of the corresponding Old Note for U.S. Federal income tax purposes
and an exchanging Holder should not recognize gain or loss as a result of the
exchange. In addition, a Holder's basis in a new Note will be equal to the basis
of the corresponding Old Note and the holding period of the New Note will
include such Holder's holding period for the corresponding Old Note.
The Exchange Offer will not have any U.S. Federal income tax consequences
to a non-exchanging Holder.
STATED INTEREST
The stated interest of the New Notes generally will be taxable to the
Holder as ordinary income at the time that it is paid or accrued, in accordance
with the Holder's method of accounting for U.S. Federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
The Company does not believe that the Old Notes were issued with original
issue discount ("OID"). However, if the Internal Revenue Service were to assert
successfully that the Old Notes were issued with OID, then the New Notes would
inherit OID from the Old Notes. If the New Notes were considered to bear OID, a
Holder would be required to recognize OID as ordinary income as it accrues (in
advance of receipt of any cash payments attributable to such income) regardless
of the Holder's regular method of tax accounting.
DISPOSITION OF NOTES
If a New Note is redeemed, sold or otherwise disposed of, the Holder
generally will recognize gain or loss equal to the difference between the amount
realized on the sale or other disposition of such New Note (to the extent such
amount does not represent accrued but unpaid interest) and the Holder's tax
basis in the New Note. Subject to the market discount rules discussed below,
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if, on the date of the sale, a Holder has a holding period for the
New Notes (which will include the holding period of the Old Notes) of more than
one year.
The character of gain or loss recognized upon the disposition of a New Note
may be affected by the "market discount" rules of the Code. A Holder who
acquired an Old Note at its original issuance generally is not subject to the
market discount rules. Under the market discount rules of the Code, an
exchanging Holder (other than a Holder who made the election described below)
who purchased and Old Note with "market discount" (generally defined as the
amount by which the stated redemption price at maturity of the Old Note exceeds
the purchase price) will be required to treat any gain recognized on the
redemption, sale or other disposition of the New Note received in the exchange
as ordinary income to the extent of the market discount that accrued during the
holding period of such New Note (which would include the holding period of the
Old Note). A Holder who has elected under applicable Code provisions to include
market discount in income annually as such discount accrues will not, however,
be required to treat any gain recognized as ordinary income under these rules.
Holders should consult their tax advisors as to the portion of any gain that
would be taxable as ordinary income under the market discount rules.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business one year after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until such date all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers or others. New Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit from any such resale of New Notes and any
commissions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The legality of the New Notes and the Guarantees will be passed upon for
the Company and the Guarantors by Morrison & Foerster LLP, Irvine, California.
EXPERTS
The consolidated financial statements of the Company as of March 31, 1996
and for the nine months then ended and as of June 30, 1995 and for the year then
ended appearing and incorporated by reference herein, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon included
herein and incorporated herein by reference from the Company's Annual Report on
Form 10-K/A for the transition period ended March 31, 1996, as amended. Such
reports are included or incorporated by reference herein in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of the Company for the year ended
June 30, 1994 have been audited by Cherry, Bekaert & Holland LLP. These
consolidated financial statements included UROHEALTH Systems, Inc., Dacomed
Corporation, Allstate Products, Inc, Osbon Medical Systems, Ltd. and Advanced
Surgical Inc. The consolidated financial statements of the Company for the year
ended June 30, 1994 were audited by Doane Raymond, Chartered Accountants. The
consolidated financial statements of Dacomed Corporation as of June 24, 1995,
and for the fiscal year then ended and for the fiscal
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year ended October 29, 1994, were audited by KPMG Peat Marwick LLP, independent
accountants. The consolidated financial statements of Advanced Surgical Inc. for
the year ended December 31, 1994, have been audited by Coopers & Lybrand L.L.P.,
independent auditors, as set forth in their report, which includes an
explanatory paragraph related to Advanced's ability to continue as a going
concern. The consolidated financial statements of the Company for the year ended
June 30, 1994 are included or incorporated herein by reference in reliance upon
such reports given upon the authority of such firms as experts in accounting and
auditing.
The consolidated financial statements of Richard-Allan Medical Industries,
Inc. as of March 31, 1996 and for the nine months then ended and as of June 30,
1995 and 1994 and for the years then ended, appearing in the Company's Form
8-K/A filed with the Securities and Exchange Commission on September 26, 1996
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Microsurge, Inc. as of December 31, 1995 and
1996, and for each of the three years in the period ended December 31, 1996
appearing herein have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report which includes an explanatory
paragraph related to Microsurge, Inc.'s ability to continue as a going concern.
These financial statements are included and incorporated by reference herein in
reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of X-Cardia Corporation at December
31, 1996, and for the period from inception (February 13, 1996) through December
31, 1996, appearing herein have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. Such
consolidated financial statements are included and incorporated by reference
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UROHEALTH SYSTEMS, INC.
Independent Auditors Reports......................................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and March 31, 1996................... F-8
Consolidated Statements of Operations for the years ended June 30, 1994 and 1995 and
for the nine months ended March 31, 1996........................................... F-9
Consolidated Statements of Common Stockholders' Equity for the years ended June 30,
1994 and 1995 and for the nine months ended March 31, 1996......................... F-10
Consolidated Statements of Cash Flows for the years ended June 30, 1994 and 1995 and
for the nine months ended March 31, 1996........................................... F-11
Notes to Consolidated Financial Statements........................................... F-12
Condensed Consolidated Balance Sheet as of December 31, 1996......................... F-28
Condensed Consolidated Statements of Operations for the three and nine months ended
December 31, 1995 and 1996......................................................... F-29
Condensed Consolidated Statements of Cash Flows for the nine months ended
December 31, 1995 and 1996......................................................... F-30
Notes to Condensed Consolidated Financial Statements................................. F-31
X-CARDIA CORPORATION
Report of Independent Auditors....................................................... F-36
Balance Sheet as of December 31, 1996................................................ F-37
Statement of Operations for the period from inception (2/13/96) through December 31,
1996............................................................................... F-38
Statement of Shareholders' Equity (Deficit) for the period from inception (2/13/96)
through December 31, 1996.......................................................... F-39
Statement of Cash Flows for the period from inception (2/13/96) through December 31,
1996............................................................................... F-40
Notes to Financial Statements........................................................ F-41
MICROSURGE, INC.
Report of Independent Accountants.................................................... F-46
Balance Sheets as of December 31, 1995 and 1996...................................... F-47
Statements of Operations for the years ended December 31, 1994, 1995 and 1996........ F-48
Statements of Stockholders' Deficit for the years ended December 31, 1994, 1995 and
1996............................................................................... F-49
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996........ F-50
Notes to Financial Statements........................................................ F-51
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................... F-63
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1996..... F-64
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended December 31, 1996..................................................... F-65
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended March 31, 1996........................................................ F-66
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended
June 30, 1995...................................................................... F-67
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended
June 30, 1994...................................................................... F-68
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............. F-69
</TABLE>
F-1
<PAGE> 105
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
UroHealth Systems, Inc.
We have audited the accompanying consolidated balance sheets of UroHealth
Systems, Inc. as of March 31, 1996, and June 30, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended March 31, 1996 and the year ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits. We did not audit the fiscal 1995 financial statements of Dacomed
Corporation, a wholly-owned subsidiary, which statements reflect total assets
and total revenues constituting 4% and 10% of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included in the fiscal
1995 consolidated financial statements for Dacomed Corporation, is based solely
on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of UroHealth Systems, Inc. at March 31, 1996
and June 30, 1995, and the consolidated results of its operations and its cash
flows for the nine months ended March 31, 1996 and the year ended June 30, 1995
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Orange County, California
June 4, 1996
F-2
<PAGE> 106
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
UROHEALTH Systems, Inc.
We have audited the consolidated statements of operations, common
stockholders' equity, and cash flows of UroHealth Systems, Inc. for the year
ended June 30, 1994 (restated to reflect the acquisitions of Osbon Medical
Systems, Ltd., Dacomed Corporation, Allstate Medical Products, Inc. and Advanced
Surgical Inc., each accounted for as a pooling-of-interests). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the fiscal 1994 financial statements of Dacomed
Corporation, UroHealth Systems, Inc. (pre-acquisitions), Allstate Medical
Products, Inc., and Advanced Surgical, Inc., (collectively "the Companies")
which statements reflect total net sales (in thousands) of $8,920 (24% of total
net sales), $4,258 (11% of total net sales), $2,215 (6% of total net sales), and
$1,754 (5% of total net sales), respectively, for the year ended June 30, 1994.
Those statements were audited by other auditors, other than the financial
statements of Allstate Medical Products, Inc. which are immaterial and
unaudited, whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for the Companies, is based solely on the
reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of
UroHealth Systems, Inc. for the year ended June 30, 1994, in conformity with
generally accepted accounting principles.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
--------------------------------------
Cherry, Bekaert & Holland, L.L.P.
Augusta, Georgia
January 8, 1997
F-3
<PAGE> 107
REPORT OF INDEPENDENT AUDITORS
To the Directors of
UROHEALTH Systems, Inc.
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of UROHEALTH Systems, Inc. for the year ended June 30,
1994 (not included herein) presented under United States generally accepted
accounting principles. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
Under date of August 22, 1994, we previously reported, without
qualification, on the consolidated statements of operations, shareholders'
equity and cash flows of the company for the year ended June 30, 1994 presented
in accordance with accounting principles generally accepted in Canada.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the results of
operations of the company and its cash flows for the year ended June 30, 1994 in
accordance with accounting principles generally accepted in the United States.
/s/ DOANE RAYMOND
--------------------------------------
Chartered Accountants
Toronto, Canada
August 22, 1994
F-4
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Dacomed Corporation:
We have audited the accompanying consolidated balance sheet of Dacomed
Corporation and subsidiary as of June 24, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the fiscal
year then ended (not included separately herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dacomed
Corporation and subsidiary as of June 24, 1995, and the results of their
operations and their cash flows for the fiscal year then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 10, 1995
F-5
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Dacomed Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Dacomed Corporation and subsidiary for
the fiscal year ended October 29, 1994 (not included separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1994 consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of Dacomed Corporation and subsidiary for the fiscal year ended
October 29, 1994, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 19, 1994
F-6
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advanced Surgical, Inc.:
We have audited the accompanying consolidated balance sheet of Advanced
Surgical, Inc. and subsidiary as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Advanced
Surgical, Inc. and subsidiary as of December 31, 1994, and the results of their
operations and their cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
The consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses and negative cash flows from operations. The Company anticipates that
losses and negative cash flows from operations will continue and that cash
resources currently available may not be sufficient to sustain operations
through 1995. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
February 24, 1995
F-7
<PAGE> 111
UROHEALTH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1996
-------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 1,051 $ 1,185 $ 33,695
Short-term investments................................... 1,026 -- --
Receivables, net of allowance for doubtful accounts of
$538
and $1,644 in 1995 and 1996, respectively............. 6,666 7,337 7,337
Note receivable from officer of subsidiary............... 105 -- --
Inventories.............................................. 4,680 5,705 5,705
Prepaids and deposits.................................... 932 1,685 1,685
Deferred debt issuance costs............................. -- 614 4,731
--------- -------- --------
Total current assets....................................... 14,460 16,526 53,153
Property and equipment, net................................ 8,698 8,132 8,132
Patents and intangibles, net of accumulated amortization of
$1,860
and $2,102 in 1995 and 1996, respectively................ 2,334 2,135 2,135
Deposits and other assets.................................. 273 649 649
Goodwill................................................... 409 393 393
--------- -------- --------
$ 26,174 $ 27,835 $ 64,462
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 6,670 $ 9,455 $ 9,455
Compensation and employee benefits....................... 1,259 2,045 2,045
Restructuring accrual.................................... 268 1,345 1,345
Revolving lines of credit................................ 1,689 7,123 --
Current portion of notes payable and capital leases...... 531 286 286
--------- -------- --------
Total current liabilities.................................. 10,417 20,254 13,131
Long-term liabilities:
Notes payable............................................ 1,077 6,641 641
Capital leases........................................... 323 211 211
Convertible note......................................... 1,077 1,284 --
Other liabilities........................................ 151 185 185
Restructuring, less current portion...................... 218 823 823
Minority interest in consolidated subsidiary............... 1,230 1,073 1,073
Redeemable convertible preferred stock..................... 1,143 3,554 --
Convertible subordinated debentures........................ -- -- 50,000
Commitments and contingencies
Common stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- none................. -- -- --
Common stock, $0.001 par value
Authorized shares -- 20,000,000
Issued and outstanding shares -- 12,287,000 and
12,460,000, respectively (13,266,000 pro forma)..... 12 12 13
Warrants................................................. 1,402 2,922 4,172
Additional paid-in capital............................... 52,820 55,050 59,887
Foreign currency adjustment.............................. 115 (98) (98)
Deficit.................................................. (43,811) (64,076) (65,576)
--------- -------- --------
Total common stockholders' equity.......................... 10,538 (6,190) (1,602)
--------- -------- --------
$ 26,174 $ 27,835 $ 64,462
========= ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 112
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------- MARCH 31,
1994 1995 1996
-------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales.................................................. $ 37,828 $ 45,453 $ 39,641
Cost of sales.............................................. 13,993 16,159 12,896
-------- -------- --------
Gross profit............................................... 23,835 29,294 26,745
Operating expenses:
Selling, general and administrative...................... 32,802 35,145 32,218
Research and development................................. 9,470 8,805 1,324
Restructuring charges.................................... -- 1,200 5,456
Direct acquisition costs................................. -- 851 4,232
Settlement of litigation................................. 1,000 300 --
-------- -------- --------
Total operating expenses................................... 43,272 46,301 43,230
-------- -------- --------
Loss from operations....................................... (19,437) (17,007) (16,485)
Other income (expense):
Minority interest consisting of accrued dividends on
preferred stock of subsidiary......................... (175) (78) (55)
Interest income.......................................... 318 263 23
Interest expense......................................... (267) (303) (1,002)
Other.................................................... -- 5 (48)
-------- -------- --------
Loss before taxes.......................................... (19,561) (17,120) (17,567)
Provision for income taxes................................. 566 1,386 431
-------- -------- --------
Net loss................................................... $(20,127) $(18,506) $(17,998)
======== ======== ========
Net loss per share:
Net loss................................................. $(20,127) $(18,506) $(17,998)
-------- -------- --------
Dividends and accretion on redeemable convertible
preferred stock....................................... -- (45) (579)
-------- -------- --------
Net loss attributable to common stockholders............. $(20,127) $(18,551) $(18,577)
======== ======== ========
Net loss per share....................................... $ (1.77) $ (1.52) $ (1.50)
======== ======== ========
Weighted average number of shares used to compute net loss
per share................................................ 11,384 12,235 12,344
======== ======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE> 113
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL FOREIGN
------------------ PAID-IN CURRENCY
SHARES AMOUNT WARRANTS CAPITAL DEFICIT TRANSLATION TOTAL
------ -------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993............. 11,003 $ 34,238 $ -- $ 3,235 $(17,083) $ -- $ 20,390
Redeemable common stock............ -- -- -- (281) -- -- (281)
Stock compensation................. -- -- -- 926 -- -- 926
Exercise of options and warrants... 56 195 -- 1 -- -- 196
Stockholder distribution........... -- -- -- -- (85) -- (85)
Change in valuation of redeemable
common stock.................... -- -- -- -- 281 -- 281
Foreign currency translation....... -- -- -- -- 8 -- 8
Issue of shares subscribed......... 250 598 -- -- -- -- 598
Cancellation of stock options...... -- -- -- (10) -- -- (10)
Exchange of preferred stock of
subsidiary...................... 323 4,453 -- -- -- -- 4,453
Purchase of Laparomed
Corporation..................... 236 6,990 -- -- -- -- 6,990
Net loss........................... -- -- -- -- (20,127) -- (20,127)
Net unrealized gain/loss on
investments..................... -- -- -- -- -- -- --
Settlement of litigation........... -- -- 1,000 -- -- -- 1,000
------ -------- ------ -------- -------- ----- --------
Balance at June 30, 1994............. 11,868 46,474 1,000 3,871 (37,006) -- 14,339
Exercise of options and warrants... 55 87 -- -- -- -- 87
Issuance of common shares.......... 169 899 -- 95 -- -- 994
Warrants........................... -- -- 402 -- -- -- 402
Exchange of preferred stock of
subsidiary...................... 195 2,720 -- -- -- -- 2,720
Reincorporation in Delaware........ -- (50,168) -- 50,168 -- -- --
Adjustment for pooling of
interest........................ -- -- -- -- 10,432 -- 10,432
Dividends and accretion on
redeemable convertible preferred
stock........................... -- -- -- -- (45) -- (45)
Net loss........................... -- -- -- -- (18,506) -- (18,506)
Foreign currency translation....... -- -- -- -- -- 115 115
------ -------- ------ -------- -------- ----- --------
Balance at June 30, 1995............. 12,287 12 1,402 54,134 (45,125) 115 10,538
Adjustments for pooling of
interests....................... -- -- -- -- (374) -- (374)
Exercise of options and warrants... 170 -- -- 871 -- -- 871
Exchange of preferred stock of
subsidiary...................... 3 -- -- 45 -- -- 45
Dividends and accretion on
redeemable convertible preferred
stock........................... -- -- -- -- (579) -- (579)
Warrants........................... -- -- 1,520 -- -- -- 1,520
Net loss........................... -- -- -- -- (17,998) -- (17,998)
Foreign currency translation....... -- -- -- -- -- (213) (213)
------ -------- ------ -------- -------- ----- --------
Balance at March 31, 1996............ 12,460 $ 12 $2,922 $ 55,050 $(64,076) $ (98) $ (6,190)
====== ======== ====== ======== ======== ===== ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 114
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS ENDED
--------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................ $(20,127) $(18,506) $ (17,998)
Noncash items included in net loss:
Depreciation and amortization......................................... 1,612 2,723 1,422
Loss on retirement/write-off of assets................................ 114 26 629
Deferred income taxes................................................. 160 46 (110)
Amortization of deferred loan costs................................... -- -- 637
Settlement of litigation.............................................. 1,000 -- --
Increase in provision for doubtful accounts........................... 322 54 1,106
Stock compensation.................................................... 936 -- --
Other................................................................. 8 147 49
Equity issued for purchased research and development.................. 5,312 5,312 --
Changes in operating assets and liabilities:
Receivables........................................................... (1,472) (1,563) (1,743)
Inventories........................................................... (399) (604) (1,092)
Prepaids and deposits................................................. 110 (261) (1,044)
Note receivable from related party.................................... (40) (60) --
Other................................................................. (64) 469 --
Accounts payable and accrued expenses................................. 659 2,968 2,909
Compensation and employee benefits.................................... (18) 343 729
Accrued dividends on preferred stock of subsidiary.................... 175 132 --
Accrued restructuring charges......................................... -- 486 2,005
Other................................................................. 24 76 --
-------- -------- ---------
Net cash used in operating activities................................... (11,688) (8,212) (12,501)
INVESTING ACTIVITIES
Purchase of investments................................................. (2,280) (2,280) --
Purchases of property and equipment, net................................ (1,935) (3,469) (2,596)
Proceeds from disposal of property and equipment........................ (163) 5 788
Cash acquired from acquisition of business.............................. 1,008 -- --
Sale of investments..................................................... 5,972 6,361 1,026
Patents/intangibles..................................................... (398) (315) (43)
Deposits and other assets............................................... 324 1,162 --
Other................................................................... (60) (31) --
-------- -------- ---------
Net cash provided by (used in) investing activities..................... 2,468 1,433 (825)
FINANCING ACTIVITIES
Issuance of common shares............................................... 177 748 --
Exercise of employee stock options...................................... 18 1 700
Issuance of preferred stock by subsidiary............................... 6,286 1,831 --
Issuance of redeemable convertible preferred stock...................... -- 1,500 1,830
Issuance of warrants.................................................... -- -- 670
Proceeds from notes payable............................................. 314 738 --
Proceeds from term loan................................................. -- -- 5,579
Proceeds from issuance of convertible debt.............................. -- 1,000 --
Proceeds from revolving lines of credit................................. 11,280 9,278 5,568
Principal payments on notes payable and capital leases.................. (761) (724) (887)
Principal payments on lines of credit................................... (11,021) (9,022) --
Cash paid for shareholder distribution.................................. (85) -- --
-------- -------- ---------
Net cash provided by financing activities............................... 6,208 5,350 13,460
-------- -------- ---------
Net increase (decrease) in cash......................................... (3,012) (1,429) 134
Cash, beginning of year................................................. 6,798 3,994 1,051
-------- -------- ---------
Cash, end of year....................................................... $ 3,786 $ 2,565 $ 1,185
======== ======== =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital leases................................. $ 235 $ 160 $ --
======== ======== =========
Preferred stock of subsidiary exchanged for common shares of the
Company............................................................... $ 4,452 $ 2,721 $ 45
======== ======== =========
Shares subscribed for in 1992 for which common shares were issued in
1994.................................................................. $ 598 $ -- $ --
======== ======== =========
Equity issued in acquisition of a business.............................. -- 6,990 --
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................................. $ 57 $ 195 $ 912
======== ======== =========
Cash paid for taxes, net of refunds..................................... $ 5 $ 1,262 $ 1,010
======== ======== =========
</TABLE>
See accompanying notes.
F-11
<PAGE> 115
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Description of the Company
UROHEALTH Systems, Inc. (the "Company") is engaged in the manufacture,
marketing and distribution of products used by urologists and gynecologists. The
Company is focused on developing a broad range of products specific to these two
specialities using a direct sales distribution channel.
Basis of Financial Statement Presentation
In 1996, the Company changed its fiscal year end to March 31. Fiscal 1996
is a nine month transition period ended March 31, 1996.
During the nine month period ended March 31, 1995, the Company's results of
operations included: net sales of $32.7 million; gross profits of $21.7 million;
income taxes of $1.0 million; net loss of $15.5 million; and net loss per share
of $1.28.
Financial information for fiscal years 1994 and 1995 has been restated to
reflect mergers with Osbon Medical Systems Ltd., Dacomed Corporation, Advanced
Surgical, Inc. and Allstate Medical Products, Inc. Significant intercompany
accounts and transactions have been eliminated in consolidation and certain
amounts have been reclassified in prior periods to conform to the current period
presentation.
Unaudited Pro Forma Financial Information
The accompanying pro forma balance sheet as of March 31, 1996 has been
prepared assuming the Company completed a private placement of $50.0 million of
convertible subordinated debentures and converted the convertible note and
redeemable convertible preferred stock into common stock as of that date.
The first and second closings of a private placement of $50.0 million,
8.75% convertible debentures were completed on May 13, 1996 and May 20, 1996,
respectively, and upon consummation of the third closing, is estimated to
provide proceeds of approximately $45.0 million, net of debt issuance costs
(Note 7). The Company used $16.5 million of the private placement proceeds to
repay amounts outstanding under a Credit Agreement. As of March 31, 1996,
approximately $13.1 million was outstanding under the Credit Agreement (Note 6).
In connection with the $50.0 million private placement, a break-up fee
consisting of $500,000 cash and 200,000 warrants, was paid to the lender under
the Credit Agreement. The warrants have an exercise price of $9.15 and expire in
May 2001. The break-up fee and unamortized deferred loan costs related to the
Credit Agreement totaling approximately $2.0 million, net of taxes, will be
recorded as an extraordinary expense in fiscal 1997.
Also on May 13, 1996, obligations under the convertible note and redeemable
convertible preferred stock, totalling approximately $8.5 million, were
exchanged for 1,414,827 shares of the Company's common stock, (Note 8). As of
March 31, 1996, approximately $4.8 million was outstanding under these
securities and were convertible into approximately 806,000 shares.
Business Combinations
In December 1995, the Company acquired all of the outstanding common stock
of Osbon Medical Systems, Ltd. (Osbon), a private healthcare company in the
urological products field and Advanced Surgical, Inc. (Advanced), a publicly
held manufacturer and distributor of minimally invasive surgical products and a
proprietary female incontinence product under development. The acquisitions were
completed in two separate transactions both of which have been accounted for as
pooling of interests and accordingly, the accompanying consolidated financial
statements of the Company include the assets, liabilities and operations of
these companies with those of the Company for all periods presented. The Company
issued 5,937,833 shares of its common stock in connection with these
acquisitions.
F-12
<PAGE> 116
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
In July 1995, the Company acquired all of the outstanding common stock of
Dacomed Corporation (Dacomed), a private healthcare company in the urological
products field and Allstate Medical Products, Inc. (Allstate), a private
manufacturer and distributor of disposable urinary incontinence products. The
acquisitions were completed in two separate transactions both of which have been
accounted for as pooling of interests and accordingly, the accompanying
consolidated financial statements of the Company include the assets, liabilities
and operations of these companies with those of the Company for all periods
presented. The Company issued 1,800,856 shares of its common stock in connection
with these acquisitions.
The results of operations previously reported by Osbon, Advanced, Dacomed
and Allstate included in the accompanying consolidated financial statements are
summarized below (in thousands):
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------- MARCH 31,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Net sales:
Osbon............................................ $ 20,681 $ 25,767 $ 23,653
Advanced......................................... 1,754 2,231 1,223
Dacomed.......................................... 8,920 9,300 8,017
Allstate......................................... 2,215 2,275 1,798
UroHealth........................................ 4,258 5,880 4,950
-------- -------- ---------
Combined................................. $ 37,828 $ 45,453 $ 39,641
======== ======== =========
Net income (loss):
Osbon............................................ $ 813 $ 2,035 $ 528
Advanced......................................... (13,068) (12,283) (2,408)
Dacomed.......................................... (1,389) (692) (1,310)
Allstate......................................... 148 (42) (623)
UroHealth........................................ (6,631) (7,524) (14,185)
-------- -------- ---------
Combined................................. $(20,127) $(18,506) $ (17,998)
======== ======== =========
</TABLE>
Prior to the December 1995 merger, Osbon prepared its financial statements
on the basis of a September 30 fiscal year and Advanced had a December 31 year
end. The consolidated results of operations for the years ended June 30, 1994
and 1995 include the results of operations of Osbon for the years ended
September 30, 1994 and 1995, respectively. Accordingly, revenues of
approximately $6,809,000 and net income from operations of $373,000 were
included in the consolidated results of operations for both fiscal periods ended
June 30, 1995 and March 31, 1996. The consolidated results of operations for the
years ended June 30, 1994 and 1995 include the results of operations of Advanced
for the year ended December 31, 1994 and for the year ended June 30, 1995,
respectively. Accordingly, revenues of approximately $1,111,000 and net loss
from operations of $10,154,000 for Advanced were included in both the June 30,
1994 and 1995 consolidated results of operations.
Prior to the July 1995 merger, Dacomed and Allstate prepared their
financial statements on the basis of an October 31 and December 31 fiscal year
end, respectively. Revenues of approximately $3,500,000 and net loss from
operations of $315,000 of Dacomed for the period from July 1, 1994 to October
31, 1994 were included in both the June 30, 1994 and 1995 consolidated results
of operations. Revenues of approximately $1,100,000 and net income of $74,000 of
Allstate for the period from July 1, 1994 to December 31, 1994 were included in
both the June 30, 1994 and 1995 consolidated results of operations.
F-13
<PAGE> 117
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
No adjustments were required to be made to the net assets of the combining
enterprises to conform accounting practices. There was no effect on net income
previously reported. The individual fiscal years of the merged companies were
not changed.
On March 17, 1995, the Company acquired all of the issued and outstanding
stock of UroHealth of Kentucky, Inc. in exchange for an aggregate of 25,000
shares of the Company's common stock and assumption of debt, aggregating
approximately $137,000 to two principal stockholders of UroHealth of Kentucky,
Inc. The acquisition of UroHealth of Kentucky, Inc. has been accounted for by
the purchase method of accounting and, accordingly, the operations are included
in the accompanying consolidated financial statements from the acquisition date.
The excess of cost over fair value of net assets acquired in this transaction
has been allocated to goodwill in the consolidated balance sheet. In addition,
one principal stockholder entered into an employment agreement, two principal
stockholders entered into consulting arrangements with the Company, and all
three principal stockholders are entitled to receive, in the aggregate, fifty
percent of the Company's net profits generated from future incontinence clinics
operated by the Company if employing the UroHealth of Kentucky, Inc. operating
model.
On July 27, 1994 through its Advanced subsidiary, the Company purchased all
of the outstanding capital stock of Laparomed Corporation, a developer,
manufacturer and marketer of single-use instruments for minimally invasive
surgery, primarily laparoscopic procedures used by gynecologists and general
surgeons, in exchange for 236,000 shares of the Company's common stock. The
acquisition has been accounted for by the purchase method of accounting and the
purchase price of $6,990,000 approximates the fair value of the net assets
acquired. The operating results of this acquisition, including purchased
research and development as a result of this acquisition, are included in the
Company's consolidated results of operations from the date of the Laparomed
acquisition. During the fiscal year ended June 30, 1995, the Company incurred
approximately $1,665,000 related to the relocation of Laparomed's operations and
employee termination costs.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from sales of manufactured products is recognized upon shipment to
customers.
Cash and Equivalents
Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Maintenance and repairs are charged to expense as incurred,
and renewals and betterments are capitalized. Depreciation and amortization are
provided on the straight line method over the assets estimated useful lives.
Estimated useful lives range from five to seven years for office equipment, five
to ten years for equipment and tooling, ten years for molds and three to five
years for vehicles. For leasehold improvements, the useful life is determined to
be the original term of the lease.
Patents, Intangibles and Goodwill
Intangible assets consisting of patents, trademarks and goodwill are
amortized on a straight-line basis over various periods up to twenty years.
Intangible assets are reviewed if the facts and circumstances suggest that they
may be impaired. An intangible asset is deemed to be impaired when the
unamortized balance exceeds the undiscounted estimated future cash flows from
the related assets.
F-14
<PAGE> 118
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Expense
Advertising and promotion costs are expensed when incurred. Such costs in
fiscal 1994, 1995 and 1996 were $952,000, $1,037,000 and $727,000, respectively.
Research and Development Expense
Research and development expenses are charged against income as incurred.
Warranty and Product Liability Costs
Estimated warranty costs, insurance deductible amounts associated with
product liability claims, and an amount for incurred but not reported product
liability incidents are accrued in the period the products are sold. Actual
costs are charged against the accrual when paid.
Per Share Information
Net loss per share is based on net income attributable to common
stockholders and the weighted average number of shares of common stock
outstanding during the periods presented. Common stock equivalents have not been
included in the calculation as they are anti-dilutive.
Recent Accounting Pronouncements
Effective March 1995, the Financial Accounting Standards Board issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long Lived Assets to be Disposed of ("FAS 121), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than assets' carrying amount. FAS 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted FAS 121 during the first quarter of fiscal 1996 and, with no
material effect to its financial statement position or results of operations.
In November 1995, the Financial Accounting Standards Board issued Statement
No. 123 Accounting for Stock Based Compensation ("FAS 123"). The Company has
elected to continue accounting for stock options under APB No. 25 Accounting for
Stock Issued to Employees and adopt the pro forma disclosure provisions of FAS
123. The adoption of FAS 123 would not have a material effect on the Company's
financial position or results of operations for the year ended December 31,
1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. INVESTMENTS
All investments have been classified as available-for-sale, and are carried
at fair value or amortized cost. At June 30, 1995, investments consist of mutual
funds, corporate bonds and certificates of deposits in the amounts of $1.0
million, $20,000 and $6,000, respectively. All debt securities carried as
investments matured in six months or less.
F-15
<PAGE> 119
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
Office equipment................................................ $ 4,027 $ 4,560
Equipment and tooling........................................... 5,582 3,920
Molds........................................................... 2,169 2,177
Leasehold improvements.......................................... 462 1,150
Building........................................................ 1,265 1,718
Land............................................................ 247 247
Other........................................................... 484 962
-------- -------
14,236 14,734
Accumulated depreciation........................................ 5,538 6,602
-------- -------
$ 8,698 $ 8,132
======== =======
Equipment recorded under capital leases included above.......... $ 534 $ 534
Accumulated depreciation thereon................................ 80 124
-------- -------
$ 454 $ 410
======== =======
</TABLE>
5. INVENTORIES
Inventories are carried at the lower of cost, determined on the first-in,
first-out basis, or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ----------
<S> <C> <C>
Raw materials and supplies...................................... $1,783 $1,963
Work in progress................................................ 262 318
Finished goods.................................................. 2,635 3,424
------ ------
$4,680 $5,705
====== ======
</TABLE>
6. NOTES PAYABLE AND LINES OF CREDIT
Notes payable consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH
JUNE 30, 31,
1995 1996
-------- --------
<S> <C> <C>
Term loan under Credit Agreement, repaid May 13, 1996.......... $ -- $6,000
Bank note, interest at prime plus 3%, repaid in November
1995......................................................... 375 --
Bank note, interest at 8.75%, repaid in April 1996............. 338 326
Bank note, interest at 8.75%, repaid in April 1996............. 253 221
Bank note dated December 21, 1992, due in 180 monthly
installments with interest at 8.75% collateralized by a
building..................................................... 180 175
Unsecured bank notes with interest rates of prime plus .5% to
10%, repaid in October 1995.................................. 170 --
Bank note dated April 29, 1994, due in 36 monthly installments
with interest at 8.75%; collateralized by equipment.......... 42 41
Bank note dated February 11, 1994, due in 30 monthly
installments with interest at 8.75%; collateralized by
equipment.................................................... 34 29
Various notes payable with interest from 8.5% to 10%, due dates
through August 1, 1997, secured by equipment................. 43 19
------ ------
1,435 6,811
Less current maturities.............................. 358 170
------ ------
$1,077 $6,641
====== ======
</TABLE>
F-16
<PAGE> 120
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE AND LINES OF CREDIT (CONTINUED)
Revolving lines of credit consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ----------
<S> <C> <C>
Line of credit under Credit Agreement, interest at prime rate
plus 4%, repaid in May 1996................................... $ -- $5,500
Line of credit with a bank in the lesser of $2,000 or 80% of
subsidiaries' qualifying accounts receivable; interest at the
bank's prime minus .25%; guaranteed by a stockholder of the
company; repaid in May 1996................................... 986 1,623
Line of credit with interest at the bank's reference rate plus
2.5%; repaid in April 1996.................................... 378 --
Line of credit, interest at bank prime plus 2%, repaid in
November 1995................................................. 150 --
Line of credit, interest at bank prime plus 2%, repaid in
October 1995.................................................. 175 --
------ ------
$1,689 $7,123
====== ======
</TABLE>
In October 1995, the Company refinanced all lines of credit assumed under
the Dacomed and Allstate mergers under a Credit Facility which provided for
borrowings up to $2.6 million under a revolving line of credit and maintained an
existing $375,000 term loan. In connection with the Credit Facility the Company
also granted 50,000 warrants with a five year term and an exercise price of
$10.50.
In November 22, 1995, the Company refinanced the $2.6 million revolving
line of credit and the $375,000 term loan under the Credit Facility, entering
into a $10.0 million Credit Agreement with a new bank. The Credit Agreement
consisted initially of a $6.0 million term loan and a $4.0 million revolving
line of credit. The revolving line of credit under the Credit Agreement was
increased to $5.5 million in March 1996 and to $10.5 million in April 1996.
Interest on all borrowings under the Credit Agreement was at the bank's prime
rate plus 4.0% (plus 2.0% in the event of default). The Credit Agreement was
repaid with proceeds from the sale of convertible subordinated debentures in May
1996.
In connection with the initial borrowings under the Credit Agreement, the
Company granted a warrant to purchase 366,667 shares of the Company's common
stock at $9.15 per share. The warrant expires on November 22, 2000. In
connection with subsequent increases of amounts available under the line of
credit and significant covenant modifications the Company granted a warrant to
purchase 350,000 shares of the Company's common stock at $9.15 per share. The
warrant expires on April 12, 2001.
7. CONVERTIBLE SUBORDINATED DEBENTURES -- (UNAUDITED)
On May 3, 1996, the Company authorized the issuance of $50.0 million of
8.75% convertible subordinated debentures (the "Debentures") and warrants to
purchase 250,000 shares of the Company's common stock at $13.00. The Debentures
are convertible at any time and are subject to certain registration rights. The
Debentures mature in May 2006 and interest is payable quarterly in arrears. The
warrants expire in five years.
The Debentures are redeemable at the option of the Company after two years,
if the average market price of the Company's common stock is above $22.00 for 60
consecutive days, or after three years without regard to the Company's common
stock price. The redemption price is equal to 105% of the principal amount
decreasing annually to the principal amount in 2004, plus accrued and unpaid
interest.
The Debentures are convertible into common stock at $11.00 per share, are
subordinate to all future senior borrowings and will have voting rights on all
matters on an "as converted" basis. The holders of the Debentures must approve
any dividend, payment or other distribution to stockholders, as well as any
F-17
<PAGE> 121
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CONVERTIBLE SUBORDINATED DEBENTURES -- (UNAUDITED) (CONTINUED)
redemption of shares of common stock, options or warrants of the Company or any
subsidiary other than the preferred stock issued by Urohealth-California.
8. CONVERTIBLE NOTE AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the private placement of convertible subordinated
debentures, the holder of the Company's convertible note and the redeemable
convertible preferred stock exchanged these securities, plus accrued interest,
for 358,617 and 1,056,210 shares of the Company's common stock, respectively.
The exchange price was $6.00 per share. As a result of the conversion, deferred
debt issuance costs totalling approximately $0.9 million were charged to
additional paid-in capital. Warrants previously granted to the holder to
purchase 800,000 shares of the Company's common stock at $6.88 remain
outstanding and expire in 2000 and a warrant to purchase 250,000 shares of the
Company's common stock at $10.00 per share which expires in 2000 was issued to
the holder in connection with the conversion and modification of certain other
rights.
9. CAPITAL AND OPERATING LEASES
The Company has various capital equipment leases and operating lease
agreements for office and production facilities. The Company is required to pay
maintenance and property taxes attributable to the facilities. Rent expense
under all operating leases was approximately $1.0 million, $1.1 million and
$625,000 in 1994, 1995 and 1996, respectively.
Future minimum lease payments at March 31, 1996 are shown in the following
table:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Years ending March 31:
1997............................................................ $150 $ 925
1998............................................................ 140 733
1999............................................................ 66 738
2000............................................................ 36 461
2001............................................................ -- 442
thereafter...................................................... 1 368
---- -------
Net minimum lease payments........................................ 393 $ 3,667
=======
Less imputed interest............................................. 66
----
Present value of net minimum lease payments....................... 327
Less current portion.............................................. 116
----
Long-term portion................................................. $211
====
</TABLE>
10. RESTRUCTURING CHARGES
During the year ended June 30, 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the Plan)
under which it has refocused the Company's strategic direction. Under the Plan,
the Company terminated or amended certain distribution, consulting and
employment agreements. Accordingly, the consolidated statement of operations
reflects a charge of $1,200,000 ($.06 per common share) to terminate or
restructure these agreements under the Plan. The components of the restructuring
charges include a provision to discontinue the distribution of the
Adzorbstar(TM) product line of
F-18
<PAGE> 122
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RESTRUCTURING CHARGES (CONTINUED)
$360,000, termination agreements which include indemnification costs of former
employees for legal fees associated with an SEC investigation of $250,000,
termination of certain other consulting and distributor agreements of $50,000,
and the amendment and settlement of certain claims under the employment
agreement with the former Chief Executive Officer of $540,000. All significant
restructuring charges were paid in cash during the 1995 calendar year. Through
March 31, 1996, cash payments have reduced the components of the restructuring
accrual to $328,000 primarily relating to the settlement of certain claims with
the former Chief Executive Officer.
In December 1995, the Company implemented a restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the mergers
with Dacomed Corporation, Osbon Medical Systems, Ltd. and Advanced Surgical,
Inc. Under the plan the Company has eliminated approximately 70 manufacturing,
engineering and administrative personnel and closed all operations at two
acquired facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred during fiscal 1996
are summarized in the table below. Non-cash charges consist of the write-down of
existing assets to their estimated net realizable value. Reclassifications
during the period relate to decreases in severence amounts payable to officer's
of acquired companies, offset by increases in estimates for facility closure
costs including loss on sale of discontinued product lines and closure costs
related to international operations of acquired companies. The remaining
restructuring accrual at March 31, 1996 relates primarily to terminated employee
severance and facility lease obligations, which are expected to be paid in cash.
Although subject to future adjustment, management of the Company believes that
restructuring reserves as of March 31, 1996 are adequate to complete the
restructuring.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH MARCH 31,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1996
-------------- --------- -------- ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs... $2,620 $ -- $1,171 $ (730) $ 719
Facility reduction costs.... 2,836 1,187 1,258 730 $1,121
------ ------- ------ ------- ------
$5,456 $ 1,187 $2,429 $ -- $1,840
====== ======= ====== ======= ======
</TABLE>
11. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
In September and October 1993, the Company, and its subsidiary, Urohealth,
Inc. (California) ("Urohealth-California"), completed two private placements for
430,000 units at a subscription price of $10.00 per unit for gross proceeds of
$4,300,000. The net proceeds to Urohealth-California were $3,820,000. In the
first private placement, each unit consisted of two shares of Series A
Convertible Preferred Stock of Urohealth-California ("Urohealth-California
Series A Preferred Stock") and one warrant to purchase one third of a share of
common stock of the Company at an exercise price of $5.00 per preferred share.
In the second private placement, each unit consisted of two shares of Junior
Convertible Preferred Stock of Urohealth-California ("Urohealth-California
Junior Preferred Stock") and one warrant to purchase one third of a share of
common stock of the Company at an exercise price of $5.00 per share. The
Urohealth-California Series A Preferred Stock and Urohealth-California Junior
Preferred Stock are hereinafter collectively referred to as the
"Urohealth-California Preferred Stock." Each share of the Urohealth-California
Preferred Stock has a liquidation preference of $5.00 per preferred share,
together with all accrued but unpaid dividends. Cumulative dividends of 7% per
annum accrue on the Urohealth-California Preferred Stock, payable when and if
declared by the Board of Directors of the Company out of legally available
funds, prior to any dividend on the Company's common stock. Unless exchanged or
converted prior to redemption, each share of the Urohealth-California Preferred
Stock is redeemable by the Company upon 30 days' notice, by payment of $5.00 per
preferred share together with any accrued but unpaid dividends and prior to
October 31, 2001, and a
F-19
<PAGE> 123
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY (CONTINUED)
designated redemption premium. The Board of Directors of the Company, subsequent
to year end, has authorized the redemption of all outstanding
Urohealth-California Series A Preferred Stock. The terms of the warrants
included in the units are identical to the terms of the warrants issued as part
of the units sold in the public offering in March 1992 (Note 15).
In May 1994, the Company and Urohealth-California completed an additional
private placement for 178,180 units at a subscription price of $15.50 per unit
for gross proceeds of $2,762,000. The net proceeds to Urohealth-California were
$2,466,000. In fiscal 1995, the Company accepted subscriptions for 130,000 units
(representing 390,000 shares of Urohealth-California Subordinate Preferred
Stock, and 390,000 warrants of the Company) at $15.50 per unit for total
proceeds of $2,015,000. The net proceeds to Urohealth-California was $1,831,000.
Each unit consisted of three shares of Subordinate Convertible Preferred Stock
of Urohealth-California (the "Urohealth-California Subordinate Preferred Stock")
and three warrants identical to the warrants issued as part of the units sold in
the public offering in March 1992 (Note 15). All outstanding shares of
Urohealth-California Subordinate Preferred Stock were exchanged for 177,000
shares of the Company's common stock in fiscal 1995.
Minority interest reflected in the consolidated balance sheets consists of
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 MARCH 31, 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Urohealth-California Series A Preferred
Stock:
Outstanding at beginning of year........... 267,000 $ 1,186 213,000 $ 944
Issued during year......................... -- -- -- --
Exchanged during year...................... (54,000) (242) (10,000) (45)
------- ------- ------- -------
Outstanding at end of year................. 213,000 944 203,000 899
Urohealth-California Subordinate Preferred
Stock:
Outstanding at beginning of year........... 140,568 648 -- --
Issued during year......................... 390,000 1,831 -- --
Exchanged during year...................... (530,568) (2,479) -- --
------- ------- ------- -------
Outstanding at end of year................. -- -- -- --
------- ------- ------- -------
Outstanding at June 30, 1995................. 213,000 $ 944 203,000 $ 899
======= ======= ======= =======
</TABLE>
The redemption value at March 31, 1996 of the outstanding 203,000
Urohealth-California Preferred Stock is $1,239,750.
12. RELATED PARTY TRANSACTIONS
Corporations related through common ownership provide advertising,
publishing management and computer services to the Company. Such services
totaled $1,035,000, $1,977,000 and $1,359,000 for the fiscal periods ended June
30, 1994 and 1995 and March 31, 1996, respectively. At June 30, 1994 and 1995
and March 31, 1996, amounts owed to these related corporations totaled $127,000,
$28,000 and $53,000, respectively. These services are in all cases competitively
priced and of comparable value to services that would have been received from a
third party.
The Company leases certain of its office facilities from a party related to
certain shareholders; rental expense under the lease is approximately $17,000
per month and the lease expires in 2003.
F-20
<PAGE> 124
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. CAPITAL STOCK
Subsequent to March 31, 1996 the Board of Directors approved an increase in
the number of common shares authorized to be issued from 20.0 million shares to
50.0 million shares, which increase is subject to stockholder approval.
Each outstanding share of the Company's common stock carries a stock
purchase right. Under certain circumstances, each right may be exercised to
purchase one-hundredth of a share of the Company's Series B Preferred Stock for
$200. Under certain circumstances, following the acquisition of 20% or more of
the Company's outstanding common stock by an acquiring person, as defined in the
Preferred Share Purchase Rights Plan (Note 16), each right (other than rights
held by an acquiring person) may be exercised to purchase common stock of the
Company or a successor company with a market value of twice the $200 exercise
price. The rights, which are redeemable by the Company at $.01 per right, expire
June 30, 2003.
The Series B Preferred Stock is issuable in series holding rights and
restrictions as designated by the directors before issue. In June 1993, the
directors designated a series of 250,000 Series A Preferred Stock. Subsequent to
March 31, 1996, the Board of Directors created Series C Preferred Stock of the
Company having the rights, preferences and privileges designated by the
directors. The Series C Preferred Stock will be exchanged for convertible
subordinated debentures (Note 7) upon approval by stockholders of voting rights
for the convertible subordinated debentures. Except as described above, no other
series of preference shares has been designated.
In December 1994, the Company completed a private placement of 121,667
common shares for net proceeds of $618,000. At March 31, 1996, the number of
common shares potentially issuable in relation to outstanding stock options,
warrants, the convertible note, redeemable convertible preferred stock and
conversion of preferred stock of Urohealth-California and the Company was
7,925,669 shares, subject to increase under anti-dilution provisions.
14. STOCK OPTION PLANS
In March 1986, the Company established a stock option plan (the "1986
Plan"), which provides for the granting of common stock options to directors,
officers and key employees of the Company and its subsidiaries. The 1986 Plan
was amended in March 1988. Under the 1986 Plan, common stock options for up to
10% of the number of common shares of the Company outstanding from time to time
may be granted, provided that options in favor of any one individual may not
exceed 5% of the issued and outstanding common shares. However, the total number
of common shares under the 1986 Plan and any other option plan maintained by the
Company may not exceed 10% of the common shares of the Company outstanding from
time to time.
The exercise price of all stock options granted under the 1986 Plan must be
at least equal to the fair market value of such shares on the date of grant, and
the maximum term of each option may not exceed five years.
In October 1992, the Company adopted the 1992 Employee Stock Option Plan
(the "1992 Plan"), which provides for the granting of both incentive and
nonstatutory common stock options (as defined) to officers and employees of the
Company and its subsidiaries. Under the 1992 Plan, up to 366,667 options may be
granted; however, the total number of common shares under the 1992 Plan and any
other option plan maintained by the Company may not exceed 10% of the number of
common shares of the Company outstanding from time to time. The 1992 Plan
received stockholder approval at the Company's annual meeting held in December
1992.
The exercise price of all options granted under the 1992 Plan is to be
determined by the Board; however, in the case of incentive stock options, the
exercise price must be at least equal to the fair market value of such shares on
the date of grant, and the maximum term of each option may not exceed ten years.
F-21
<PAGE> 125
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCK OPTION PLANS (CONTINUED)
In October 1994, the Company established a stock option plan (the "1994
Plan") which provides for the granting of both incentive and nonstatutory common
stock options to employees, consultants and independent contractors of the
Company and its affiliates. The 1994 Plan, as amended, authorizes the issuance
of up to the greater of 2,333,333 shares of common stock or 20% of the Company's
outstanding shares in the form of stock options, stock grants, rights to
purchase restricted stock and stock appreciation rights.
The exercise price for any incentive stock option granted under the 1994
Plan shall not be less than the fair market value of the stock on the date of
the grant. However, no incentive option may be granted to a person who, at the
time of grant, owns stock constituting more than 10% of the total combined
voting power of all classes of the Company's stock, unless the exercise price is
at least 110% of the fair market value of the stock on the option grant date.
The exercise price for any nonstatutory stock option granted under the 1994 Plan
may not be less than 85% of the fair market value of the stock on the date the
option is granted; provided, however, that the exercise price of options granted
to covered employees shall not be less than 100% of the fair market value on the
date of the grant.
The term of an incentive stock option granted under the 1994 Plan shall not
exceed ten years; provided that the term of any option granted to a 10%
stockholder shall not exceed five years.
Pursuant to the merger agreement with Dacomed, the Company assumed the
obligation to Dacomed employees for stock options granted under the Dacomed 1989
Stock Option Plan (the "Dacomed Plan"). The Dacomed Plan provides for granting
of both incentive and non-statutory stock options at the fair market value of
such shares at the date granted and the option term may not exceed ten years.
Pursuant to the merger agreement with Advanced, the Company assumed the
obligation to Advanced employees for stock options granted under Advanced's 1992
stock option plan for employees and consultants (the "Advanced Plan"); there are
reserved for issuance 289,300 common shares of the Company. The Advanced Plan
provides for the granting of incentive and non-qualified stock options. The
exercise price of options under this plan may not be less than 85% of the fair
market value of the shares at the time of grant. Options may be exercised for
not more than ten years from the date of grant and vest at various rates.
Options under the 1986 Plan, the 1992 Plan, the 1994 Plan, the Dacomed Plan and
the Advanced Plan expire at various dates through 2005.
The following table summarizes the activity under the 1986 Plan, the 1992
Plan, the 1994 Plan, the Dacomed Plan and the Advanced Plan for the year ended
June 30, 1995 and for the nine months ended March 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------
JUNE 30, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
Outstanding at beginning of year.............................. 458,483 1,526,658
Granted....................................................... 1,141,789 2,682,499
Exercised (1995 -- $1.50 per share,
1996 -- $2.25 to $12.125 per share)......................... (30,360) (159,805)
Expired or cancelled.......................................... (43,254) (38,798)
--------- ---------
Outstanding at end of year.................................... 1,526,658 4,010,554
========= =========
Exercisable at end of year (1995 and 1996 -- $1.86 to
$58.48 per share)........................................... 761,732 969,360
========= =========
</TABLE>
F-22
<PAGE> 126
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCK OPTION PLANS (CONTINUED)
Option Agreements
In November 1992, the Company adopted the Non-Employee Directors Stock
Option Plan (the "Directors Plan"). Under the terms of the Directors Plan, up to
200,000 options may be granted. The Directors Plan received stockholder approval
at the Company's annual meeting held December 1992. The term of each option is
five years, and an option first becomes exercisable one year after the date of
the grant. Under the Plan, each person serving as a director of the Company who,
during the previous fiscal year, has attended 75% of the total number of
meetings of the Board and committees of the Board on which he or she served, and
who is not employed by the Company, will automatically be granted 7,500 options.
At March 31, 1996, 60,000 options were outstanding under the Directors Plan.
In December 1992, the Company adopted a Stock Appreciation Rights Plan (the
"SAR Plan"), which provides for granting of Stock Appreciation Rights ("SARs")
to officers and significant employees of the Company and its subsidiaries. Under
the SAR Plan, up to 500,000 SAR's may be granted and the SAR holder may elect to
receive cash, common stock or a combination of cash and common stock upon
exercise of a SAR. During 1995, of the 300,000 outstanding SAR's, 150,000 SAR's
were cancelled and 150,000 SAR's were converted to options to purchase the
Company's common stock. None of the remaining 200,000 SAR's were granted, and
the plan was terminated in 1995.
15. OTHER STOCK OPTIONS AND WARRANTS
The following table indicates the expiration dates, exercise prices per
share and number of non-employee common stock options and warrants outstanding
at June 30, 1995 and March 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------
JUNE 30, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
Warrants issued in conjunction with public offering
in March 1992 expiring in March 1997........................ 499,415 499,415
Warrants issued to underwriters in conjunction with
public offering expiring in March 1997:
110,000 units............................................... 73,333 73,333
110,000 warrants............................................ 36,667 36,667
Warrants issued in conjunction with private placements........ 451,513 451,513
Other non employee stock options and warrants expiring
between November 1993 and May 2005, exercise price 1995 and
1996 $1.86 to $23.625....................................... 1,330,353 1,980,571
--------- ---------
Outstanding at end of year.................................... 2,391,281 3,041,499
========= =========
Exercisable at end of year (1995 and 1996 $1.86 to $23.625 per
share)...................................................... 1,113,809 1,322,367
========= =========
</TABLE>
Each warrant issued in conjunction with the public offering or private
placements in the table above entitles the holder to purchase a one third share
of common stock of the Company at a price of $5.00 until the warrants expire in
March 1997. The number and kind of securities or other property for which the
options are exercisable are subject to adjustments in certain events, such as
mergers, reorganizations or stock splits, to prevent dilution. The Company may
redeem any unexercised outstanding warrants for $0.25 per warrant (upon 30 days'
written notice) at any time at which the closing price for the Company's common
shares, has exceeded $22.50 per share for any period of 30 consecutive trading
days within the 60 trading days preceding the call notice.
F-23
<PAGE> 127
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. PREFERRED SHARE PURCHASE RIGHTS PLAN
On December 22, 1992, the Board adopted the Preferred Share Purchase Rights
Plan (the "Rights Plan") which is designed to deter coercive or unfair takeover
tactics, to prevent a person or group from gaining control of the Company
without offering fair value to all stockholders and to deter other abusive
takeover tactics which are not in the best interest of stockholders. In May
1993, the Company executed the Rights Plan with its transfer agent.
Under the terms of the Rights Plan each common share is accompanied by one
right; each right entitles the registered stockholder to purchase from the
Company, one-hundredth of a share of, Series A Junior Participating Preferred
Stock, $0.001 par value, at an exercise price of $200.
The rights only become exercisable ten days after a public announcement
that an acquiring person (as defined in the Rights Plan) has acquired 20% or
more of the outstanding common shares of the Company or a person or group offers
to acquire 35% or more of the outstanding common shares of the Company or ten
days after the Company determines that a person is an Adverse Person (as defined
in the Rights Plan). The Company can redeem the Rights for $.01 per Right at any
time until ten days after the rights become exercisable (the 10-day period can
be extended by the Company). The Rights Plan will expire on June 30, 2003 unless
earlier redeemed by the Company.
If, subsequent to the rights becoming exercisable, the Company is acquired
in a merger or other business combination at any time when there is a 20% or
more holder, the rights will then entitle a holder to buy shares of common stock
of the acquiring company with a market value equal to twice the exercise price
of each right. Alternatively, if the 20% holder acquires the Company by means of
a merger in which the Company and its stock survive, or if any person acquires
35% or more of the Company's common stock, each right not owned by a 20% or more
stockholder, will become exercisable for common stock of the Company having a
market value equal to twice the exercise price of the right.
17. SETTLEMENT OF LITIGATION AND WARRANTS TO BE ISSUED
Class action litigation which has been settled, was filed against the
Company and its former management in November 1992, in the United States
District Court in Los Angeles, California alleging federal securities law
claims. The Company negotiated a settlement that was approved by the court in
March, 1995. Under the terms of the settlement, the Company will issue to the
stockholder class and register pursuant to the Securities Act 260,163 warrants
to purchase Common Stock identical to the Company's currently outstanding
publicly traded warrants having an exercise price of $15.00 per share and an
expiration date of March 20, 1997. The Company's insurance carrier will make a
cash payment to the stockholder class in the amount of $2.4 million. The
settlement included a release of class claims.
The Securities and Exchange Commission (the "Commission") also instituted
an investigation relating to the above matters. The Commission has approved a
settlement under which the Company neither admits nor denies the findings of the
Commission and under which the Company is the subject of a cease and desist
order. There were no monetary sanctions sought against the Company as a part of
the settlement.
The Company required Advanced as part of the merger agreement to resolve a
class action complaint filed in the United States District Court for the
Southern District of New York which names Advanced as one of the defendants in
the class action lawsuit titled "In re Blech Securities Litigation." In
September 1995, Advanced and the plaintiffs in the litigation, through their
attorneys, reached an agreement in principle for the settlement of the class
action with respect to Advanced, the terms of which are set forth in a
Stipulation of Settlement between such parties (the "Stipulation of
Settlement"). Pursuant to the terms of the Stipulation of Settlement, Advanced
paid $300,000 in settlement of such lawsuit.
F-24
<PAGE> 128
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Federal, state and foreign net operating loss carryovers..... $ 16,785 $19,132
Restructuring and merger costs............................... -- 2,875
Tax credit carryovers........................................ 715 1,072
Inventory reserve............................................ -- 805
Allowance for doubtful accounts.............................. -- 645
Other........................................................ 816 561
Valuation allowance.......................................... (18,157) (23,365)
-------- -------
Total deferred tax assets, net....................... 159 1,725
Deferred tax liabilities:
Book basis of fixed assets in excess of tax basis............ 159 765
State taxes.................................................. -- 960
-------- -------
Total deferred tax liabilities....................... 159 1,725
-------- -------
Total................................................ $ -- $ --
======== =======
</TABLE>
The Company increased its valuation allowance during the period ended March
31, 1996 by $5,208,000 since the realization of tax benefits of operating loss
carryforwards is not assured. Certain reductions in the valuation allowance
totaling approximately $105,000 will be credited to additional paid-in capital.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $451 $1,199 $ 420
Foreign.............................................. -- -- 14
State................................................ 96 137 149
---- ------ -----
Total current................................ 547 1,336 583
Deferred:
Federal.............................................. 16 42 (128)
Foreign.............................................. -- -- --
State................................................ 3 8 (24)
---- ------ -----
Total deferred............................... 19 50 (152)
---- ------ -----
Provision for income taxes............................. $566 $1,386 $ 431
==== ====== =====
</TABLE>
F-25
<PAGE> 129
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. INCOME TAXES (CONTINUED)
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at the expected statutory rate............ $ (6,626) $ (5,560) $(5,953)
Increases (decreases) in taxes resulting from:
Valuation allowance................................. 7,094 6,486 5,208
Reverse foreign net operating loss not previously
benefited........................................ -- -- 1,994
State income taxes, net............................. 61 137 69
Other............................................... 37 37 188
Non-deductible goodwill............................. -- 286 --
Establishment of deferred tax assets not previously
benefited........................................ -- -- (1,075)
-------- -------- -------
Provision for income taxes.......................... $ 566 $ 1,386 $ 431
======== ======== =======
</TABLE>
The utilization of net operating loss carryovers (NOL's) of the Company is
limited by change in ownership rules under section 382 of the Internal Revenue
Code of 1986. Accordingly, the annual utilization of the Company's NOL's is
limited to a prescribed annual amount equal to 5.75% multiplied by the fair
market value of the Company as of December 29, 1995. Additionally, certain
losses and credits of each individual subsidiary which arose prior to its merger
with the Company can only be used against that subsidiary's future taxable
income.
At March 31, 1996, the Company had net operating loss carryovers for U.S.
federal and state income tax purposes of approximately $42,000,000 and
$30,000,000, respectively, and generally business credit carryovers of
approximately $800,000 and $180,000, respectively. These net operating loss
carryovers and general business credits are available to offset future taxable
income, if any, through the year 2011 and are subject to limitations as well as
separate return limitations for the subsidiaries Urohealth-California, Advanced,
and Laparomed, as described below.
Urohealth-California has a June 30 tax year end. At March 31, 1996,
Urohealth-California had federal and state net operating loss carryovers of
approximately $17,000,000 and $9,000,000, respectively, and general business
credit carryovers of approximately $200,000 and $180,000, respectively,
reflecting the tax return filings through July 24, 1995.
Advanced had a December 31 tax year end prior to its merger with the
Company. As of December 29, 1995, Advanced has federal and state net operating
loss carryovers of approximately $25,000,000 and $21,000,000, respectively and
research and experimental credit carryovers of approximately $600,000.
Advanced's wholly-owned subsidiary, Laparomed, has federal and state net
operating loss carryovers (of approximately $7,000,000 and $3,000,000,
respectively) and research and experimental credits (of approximately $172,000)
included in the amounts above. There is a strong likelihood that a portion of
these attributes will expire before utilization.
On July 24, 1995, the Company redomesticated from Canada to the United
States. As of this date, the Company had loss carryovers for Canadian income tax
purposes of approximately $15,000,000, of which $4,000,000 would expire in
various years through 2003 and $11,000,000 would carryforward indefinitely.
These losses will not be carried forward due to the redomestication. Any
potential Canadian tax liability arising from the redomestication will be offset
against the Company's Canadian loss carryovers. Accordingly, no provision for
any such potential liability has been included in the accompanying consolidated
financial statements.
F-26
<PAGE> 130
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES
Dacomed is a defendant in approximately five lawsuits seeking damages
against Dacomed in products liability and related theories. Dacomed has also
been notified of certain other products liability claims that may become the
subject of lawsuits in the future. Dacomed is being defended in such lawsuits by
law firms selected by Dacomed's products liability insurer(s).
The Company has employment agreements with 14 officers providing for annual
aggregate salaries of approximately $3.0 million per annum.
The Company has various product licensing arrangements which require the
payment of certain of the licensor's patent costs and royalties on sales of
products which incorporate the licensed technology.
In addition, the Company is involved from time to time in various claims
and legal actions in the ordinary course of business. No provision for any
liability that may result from the ultimate resolution of such matters has been
included in the accompanying consolidated financial statements.
F-27
<PAGE> 131
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
DECEMBER
31,
1996
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and equivalents........................................................... $ 2,272
Receivables, net of allowance for doubtful accounts............................ 24,958
Inventories.................................................................... 21,373
Prepaids and deposits.......................................................... 3,307
Income tax receivable.......................................................... 377
---------
Total current assets............................................................. 52,287
Property and equipment, net...................................................... 24,785
Patents and intangibles, net of accumulated amortization......................... 6,264
Deposits and other assets........................................................ 2,609
Deferred debt issuance costs..................................................... 5,727
Goodwill......................................................................... 42,081
---------
$ 133,753
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 12,067
Restructuring accrual.......................................................... 1,810
Compensation and employee benefits............................................. 3,026
Revolving lines of credit...................................................... 16,500
Current portion of notes payable and capital leases............................ 521
---------
Total current liabilities........................................................ 33,924
Long-term liabilities:
Notes payable.................................................................. 6,000
Bank term loan................................................................. 13,500
Capital leases................................................................. 152
Convertible subordinated debentures............................................ 50,000
Deferred compensation.......................................................... 29
Other liabilities.............................................................. 98
Restructuring accrual, less current portion.................................... 1,684
Minority interest in consolidated subsidiary..................................... 1,126
Common Stockholders' Equity :
Preferred stock, $.001 par value
Authorized shares -- 5,000,000, issued and outstanding shares -- none....... --
Common stock -- $0.001 par value
Authorized -- 50,000,000, issued and outstanding -- 19,352,501.............. 19
Warrants....................................................................... 5,217
Additional paid-in capital..................................................... 113,204
Deficit........................................................................ (91,159)
Foreign currency adjustment.................................................... (41)
---------
Total common stockholders' equity...................................... 27,240
---------
$ 133,753
=========
</TABLE>
See accompanying notes.
F-28
<PAGE> 132
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales...................... $29,684 $ 11,592 $ 67,964 $ 37,810
Cost of sales.................. 10,911 4,417 23,193 13,518
------- --------- --------- ---------
Gross profit................... 18,773 7,175 44,771 24,292
Operating expenses:
Selling, general and
administrative............ 12,742 12,712 32,537 32,316
Research and development..... 1,195 455 2,149 1,456
Merger and acquisition
costs..................... -- 3,429 -- 5,338
Write-off of purchased
research and
development............... -- -- 25,500 --
Restructuring charge......... -- 5,456 4,000 5,456
------- --------- --------- ---------
Total operating expenses....... 13,937 22,052 64,186 44,566
------- --------- --------- ---------
Income (loss) from
operations................... 4,836 (14,877) (19,415) (20,274)
Other income (expense):
Minority interest consisting
of accrued dividends on
preferred stock of
subsidiary................ (18) (18) (54) (54)
Interest income.............. 93 12 240 86
Interest expense............. (2,179) (268) (4,864) (495)
Other........................ -- 10 -- (98)
------- --------- --------- ---------
Income (loss) before tax and
extraordinary item........... 2,732 (15,141) (24,093) (20,835)
Provision for income tax
(benefit).................... -- 14 (377) 648
------- --------- --------- ---------
Income (loss) before
extraordinary item........... 2,732 (15,155) (23,716) (21,483)
Extraordinary item (early
extinguishment of debt)...... -- -- (2,973) --
------- --------- --------- ---------
Net income (loss).............. $ 2,732 $ (15,155) $ (26,689) $ (21,483)
======= ========= ========= =========
Net income (loss) per share:
Net income (loss)............ $ 2,732 $ (15,155) $ (26,689) $ (21,483)
Dividends and accretion on
redeemable convertible
preferred stock........... -- 119 398 327
------- --------- --------- ---------
Net income (loss)
attributable to common
stockholders.............. $ 2,732 $ (15,274) $ (27,087) $ (21,810)
======= ========= ========= =========
Income (loss) per share
before extraordinary
item...................... $ 0.15 $ (1.24) $ (1.55) $ (1.77)
Net income (loss) per
share..................... $ 0.15 $ (1.24) $ (1.74) $ (1.77)
======= ========= ========= =========
Weighted average number of
common shares used to compute
loss per share............... 18,782 12,316 15,595 12,306
======= ========= ========= =========
</TABLE>
See accompanying notes.
F-29
<PAGE> 133
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (26,689) $ (21,483)
Non cash items included in net loss:
Extraordinary expense............................................ 2,433 --
Write-off of incomplete research and development................. 25,500 --
Depreciation and amortization.................................... 3,079 1,937
Deferred debt issue costs........................................ 569 212
Accretion and accrued interest on convertible note............... 42 22
Accrued dividend on preferred stock in subsidiary................ 54 81
Inventory reserve allowance...................................... -- 692
Deferred income taxes............................................ -- 124
Provision for doubtful accounts.................................. (300) 1,184
Retired assets due to restructuring.............................. -- 133
Other............................................................ 54 (151)
Changes in operating assets:
Receivables...................................................... (13,523) (1,068)
Income tax receivable............................................ (377) --
Inventories...................................................... (13,768) (880)
Prepaids and deposits............................................ (3,353) 517
Changes in operating liabilities:
Accounts payable and accrued expenses............................ (6,174) 3,488
Compensation and employee benefits............................... 981 542
Other liabilities................................................ (184) 180
Accrued restructuring charges.................................... 1,326 3,670
--------- ---------
Net cash used in operating activities....................... (30,330) (10,800)
Cash flows from investing activities:
Purchase of property and equipment, net............................ (13,404) (2,629)
Purchase of patents, net........................................... (1,150) (40)
Payments for acquisitions of businesses, net of cash acquired...... (33,880) --
Proceeds from sale of investments.................................. -- 1,599
--------- ---------
Net cash used in investing activities....................... (48,434) (1,070)
Cash flows from financing activities:
Deferred financing fees paid....................................... (5,913) --
Issuance of common stock........................................... 1,129 263
Secondary offering of common stock, net of issuance costs.......... 19,131 --
Proceeds from note payable......................................... 2,977 --
Proceeds from revolving line of credit............................. 15,000 1,640
Proceeds from bank term loan....................................... 13,500 6,000
Proceeds from redeemable convertible debentures.................... 50,000 0
Repayment of revolving line of credit.............................. (5,823) (257)
Repayment of bank term loan........................................ (6,000) --
Principal payments on capital leases and notes payable............. (4,150) (577)
Issuance of redeemable convertible preferred stock................. -- 4,000
--------- ---------
Net cash provided by financing activities................... 79,851 11,069
--------- ---------
Net increase (decrease) in cash...................................... 1,087 (801)
Cash, beginning of period............................................ 1,185 1,331
--------- ---------
Cash, end of period.................................................. $ 2,272 $ 530
========= =========
Supplemental cash flow information:
Cash paid for interest............................................. $ 3,923 $ 545
========= =========
</TABLE>
See accompanying notes.
F-30
<PAGE> 134
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1. INTERIM REPORTING
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles (GAAP) and
include the accounts of Urohealth Systems, Inc. (the "Company") and its
subsidiaries. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements have been restated
to reflect business combinations accounted for using the pooling of interests
method.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's condensed consolidated financial position as of December
31, 1996, its condensed consolidated results of operations for the three month
and nine month periods ended December 31, 1996 and December 31, 1995, and its
condensed consolidated cash flows for the nine month periods ended December 31,
1996 and December 31, 1995. Adjustments consist of normal recurring accruals
except for the extraordinary loss on early extinguishment of debt, and the
related induced accretion as a result of the conversion of the convertible notes
and redeemable convertible preferred stock, restructuring charges and the merger
and acquisition costs identified in the accompanying unaudited condensed
consolidated statements of operations. The results of operations for the interim
periods are not necessarily indicative of those to be expected for the entire
year. Certain 1995 financial statement amounts have been reclassified to conform
with the December 31, 1996 presentation.
These consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements as of June 30, 1995 and March
31, 1996 and for the years ended June 30, 1994 and 1995 and the nine months
ended March 31, 1996, included elsewhere herein.
BUSINESS COMBINATIONS
On June 5, 1996, Urohealth Systems, Inc. ("Urohealth") acquired certain
assets of O.R. Concepts, Inc. pursuant to an Asset Purchase Agreement dated June
5, 1996 among Urohealth, O.R. Concepts, Inc., a Texas Corporation, and Vital
Signs, Inc., a New Jersey Corporation. The purchase price for the acquired
assets was $2.8 million, payable in cash upon the closing of the transaction.
The acquired assets are used in the development, manufacture, and marketing of
laparoscopic surgery products and accessories.
On July 1, 1996, Urohealth acquired The Intermed Group, Inc., a Delaware
Corporation ("Intermed"), pursuant to the terms of the Agreement and Plan of
Merger dated as of June 1, 1996 between Urohealth, Urohealth, Inc. (California),
and Intermed. Under the terms of the agreement, Intermed was merged into
Urohealth, Inc. (California), and each outstanding share of common stock of
Intermed was converted into the right to receive 0.1242575 shares of Urohealth
common stock plus cash. The aggregate amount of cash paid for all of the
outstanding Intermed common stock was $1.5 million and the aggregate number of
shares of Urohealth common stock issued was 149,306. Intermed is engaged in the
development, manufacture, and marketing of disposable medical products.
On July 5, 1996, Urohealth entered into an agreement to acquire all of the
outstanding capital stock of Richard-Allan Medical Industries, Inc.
("Richard-Allan"), an Illinois corporation, in exchange for $27.5 million in
cash and 2,081,916 shares of Urohealth common stock. Richard-Allan manufactures
and markets surgical operating room supplies. In addition, the Company agreed to
acquire the real estate on which the Richard-Allan facility is located from a
partnership for $1.5 million of cash and a $3.0 million note for the balance of
the purchase price. The acquisition was completed on August 14, 1996.
F-31
<PAGE> 135
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
1. INTERIM REPORTING -- (CONTINUED)
The total purchase price of the Richard-Allan acquisition, including direct
acquisition costs and the cost of the related real estate, of $60.0 million was
determined as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Issuance of 2,081,916 shares of Urohealth Common Stock at $13.21 per
share.................................................................. $27.5
Cash..................................................................... 29.0
Note payable............................................................. 3.0
Direct acquisition costs................................................. 0.5
-----
$60.0
=====
</TABLE>
Subsequent to the acquisition, a study was conducted to determine the
proper allocation of the purchase price of Richard-Allan. An independent
valuation of Richard-Allan's assets was performed and used as an aid in
determining the fair market value of each identifiable tangible and intangible
asset and in allocating the purchase price among the acquired assets, including
the portion of development projects that should be expensed pursuant to the
provisions of Interpretation 4 of SFAS No. 2. Accordingly, it was determined
that acquired in-process research and development costs of approximately $25.5
million should be expensed.
All of these transactions have been accounted for as purchases whereby the
results of operations from each separate entity or group of assets have been
included in the results of operations of the Company from the date of purchase.
The following summarized, unaudited pro forma results of operations for the
nine months ended December 31, 1996 and 1995, reflects the acquisitions as
though they had occurred as of the beginning of the respective periods (dollars
in thousands except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Net sales........................................................ $77,267 $46,293
Net loss......................................................... (28,314) (9,797)
Net loss per common share........................................ $ (1.95) $ (0.59)
</TABLE>
2. PER SHARE INFORMATION
The computations of earnings per share in each of the periods presented is
based on weighted average number of common shares outstanding. When dilutive,
stock options and warrants are included as share equivalents using the treasury
stock method. Primary and fully dilutive earnings per share are the same for
each of the periods presented as the Company's convertible debentures and
convertible redeemable preferred stock are anti-dilutive.
F-32
<PAGE> 136
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
3. INVENTORIES
Inventories are carried at the lower of cost or net realizable value. Cost
is determined on the first-in, first-out basis (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
Finished goods..................................... $ 12,216 $ 3,424
Raw materials and supplies......................... 7,545 1,963
Work in progress................................... 1,612 318
-------- -------
$ 21,373 $ 5,705
======== =======
</TABLE>
4. DEBT
During the nine month period ended December 31, 1996, the Company issued
$50.0 million of 8.75% convertible subordinated debentures (the "Debentures")
and warrants to purchase 250,000 shares of the Company's common stock at $12.88
per share, subject to anti-dilution adjustments. The Debentures mature May 2006
and interest is payable quarterly in arrears. The warrants expire in five years.
The Debentures are redeemable at the option of the Company after two years,
if the average market price of the Company's common stock is above $22.00 per
share for 60 consecutive days, or after three years without regard to the
Company's common stock price. The redemption price is initially equal to 103% of
the principal amount decreasing annually to the principal amount in 2004, plus
accrued and unpaid interest.
The Debentures are convertible into common stock at $10.90 per share,
subject to anti-dilution adjustments, are subordinate to all future senior
borrowings and have voting rights on all matters on an "as converted" basis. The
holders of the Debentures must approve any dividend, payment or other
distribution to stockholders, as well as any redemption of shares of common
stock, options or warrants of the Company or any subsidiary other than the
preferred stock issued by Urohealth-California.
To finance the cash portion of the Richard-Allan acquisition, the Company
obtained a $35.0 million bank credit facility. The facility consists of a $20.0
million dollar term loan and a $15.0 million revolving line of credit, which was
subsequently increased to $16.5 million in November 1996. A portion of the
proceeds from the secondary offering in November 1996 were used to reduce the
term loan by $6.5 million. The credit facility is secured by substantially all
the assets of the Company with a five year term and bears interest at December
31, 1996 at a rate of approximately 8.75%. Additionally, the Company is required
to meet certain financial covenants. As of December 31, 1996, the Company had
repaid approximately $5.0 million of the $35.0 million outstanding under the
bank credit facility and the revolving portion of the credit facility was fully
utilized.
In connection with the financing, the Company incurred an extraordinary
loss of $2.9 million in connection with the early retirement of bank debt of
$16.5 million on May 13, 1996.
5. RESTRUCTURING
During the year ended June 30, 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the Plan)
under which it has refocused the Company's strategic direction. Under the Plan,
the Company terminated or amended certain distribution, consulting and
employment agreements. All significant restructuring charges were paid in cash
during the 1995 calendar year. Through December 31, 1996, cash payments have
reduced the components of the restructuring accrual to $96,000 primarily
relating the settlement of certain claims with the former Chief Executive
Officer.
F-33
<PAGE> 137
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
5. RESTRUCTURING -- (CONTINUED)
In December 1995, the Company implemented a restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the mergers
with Dacomed Corporation, Osbon Medical Systems, Ltd. and Advanced Surgical,
Inc. Under the Plan, the Company has eliminated approximately 70 manufacturing,
engineering, and administrative personnel, and closed all operations at two
acquired facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred during the nine
months ended December 31, 1996 are summarized in the table below. Non-cash
charges consist of the write-down of existing assets to their estimated net
realizable value. Reclassifications during the period relate to decreases in
severance amounts payable to officers of acquired companies, offset by increases
in estimates for facility closure costs including loss on sale of discontinued
product lines and closure costs related to international operations of acquired
companies. The remaining restructuring accrual at December 31, 1996 relates
primarily to terminated employee severance and facility lease obligations, which
are expected to be paid in cash.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH DECEMBER 31,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1996
------------- -------------- ------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs... $ 2,620 $ -- $1,819 $(730) $ 71
Facility reduction costs.... 2,836 1,199 1,865 730 502
------- ------ ------ ----- ----
$ 5,456 $1,199 $3,684 $ -- $573
======= ====== ====== ===== ====
</TABLE>
In September 1996, the Company established a restructuring plan to
eliminate redundant manufacturing facilities resulting from the Richard-Allan,
Intermed and O.R. Concepts acquisitions and their consolidation with some of the
existing manufacturing locations. This restructuring is expected to be completed
within one year except for redundant facilities, lease costs and payments under
certain severance agreements that may continue over their terms. The Company has
provided a restructuring charge of $4.0 million, of which all are cash
expenditures. This restructuring includes severance costs for approximately 17
employees, certain facility closures and elimination of other redundant selling
and administrative costs. Although subject to future adjustment, management of
the Company believes that restructuring reserves as of December 31, 1996 are
adequate to complete the restructuring. However, with the recent acquisitions
and those noted in subsequent events, it is possible the Company will incur
additional restructuring charges in the future.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH DECEMBER 31,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1996
------------- -------------- ------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs... $ 2,412 $ -- $ 906 $ -- $1,506
Facility reduction costs.... 1,588 -- 269 -- 1,319
------- ------ ------ ----- ------
$ 4,000 $ -- $1,175 $ -- $2,825
======= ====== ====== ===== ======
</TABLE>
6. MINORITY INTEREST REDEMPTION
The Company has approved the redemption of the Series A Preferred Stock
issued by Urohealth, Inc. (California), a wholly owned subsidiary. The Board
authorized the Company to redeem the remaining 203,000 shares of the Series A
Preferred Stock at $5.00 per share plus a $0.25 premium and accrued interest,
for total consideration of $6.20 per share. The share repurchase will eliminate
the accumulation of dividends which accrue at 7% per annum.
F-34
<PAGE> 138
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
7. INCOME TAXES
The Company recorded an income tax benefit in the amount of $0.4 million
for the nine months ended September 30, 1996. The income tax benefit is
recognized due to the availability of separate company operating losses which
can be carried back to Osbon Medical Systems Ltd.'s separate return years'
taxable income resulting in refundable taxes. The Company did not record an
income tax provision or benefit for the quarter ended December 31, 1996 due to
the availability of operating losses to offset any taxable income generated.
8. CONTINGENCIES
The Company is involved from time to time in various claims and legal
actions in the ordinary course of business. No provision for any liability that
may result from the ultimate resolution of such matters has been included in the
accompanying consolidated financial statements.
F-35
<PAGE> 139
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
X-Cardia Corporation
We have audited the accompanying balance sheet of X-Cardia Corporation (a
development stage company) as of December 31, 1996 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the period from
inception (February 13, 1996) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of X-Cardia Corporation (a
development stage company) at December 31, 1996 and the results of its
operations and its cash flows for the period from inception (February 13, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
PALO ALTO, CALIFORNIA
FEBRUARY 5, 1997
F-36
<PAGE> 140
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets -- cash and cash equivalents...................................... $ 830,979
Property and equipment, net...................................................... 30,035
Advances to Cybro Medical, Ltd................................................... 150,000
----------
$1,011,014
==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable................................................................. $ 11,926
Accrued liabilities.............................................................. 136,765
----------
Total current liabilities.............................................. 148,691
Convertible notes and accrued interest........................................... 1,017,100
Commitments
Shareholders' equity (deficit):
Preferred stock, 15,000,000 shares authorized, issuable in series:
Series A preferred stock; 13,000,000 shares authorized; 5,344,500 shares
issued and outstanding; aggregate liquidation preference of $5,344,500 as of
December 31, 1996........................................................... 460,751
Common stock, 25,000,000 shares authorized; none issued and outstanding........ --
Notes receivable from shareholders............................................. (751)
Deficit accumulated during the development stage............................... (614,777)
----------
Total shareholders' equity (deficit)............................................. (154,777)
----------
$1,011,014
==========
</TABLE>
See accompanying notes.
F-37
<PAGE> 141
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Operating expenses:
Research and development....................................................... $ 353,856
General and administrative..................................................... 255,131
---------
Total operating expenses......................................................... 608,987
---------
Loss from operations............................................................. (608,987)
Interest expense................................................................. (17,100)
Interest income.................................................................. 11,310
---------
Net loss......................................................................... $(614,777)
=========
</TABLE>
See accompanying notes.
F-38
<PAGE> 142
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
NOTES ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE SHAREHOLDERS'
---------------------- ----------------------- FROM DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS STAGE (DEFICIT)
---------- -------- ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at inception
(February 13, 1996)....... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock to
founders in February
1996...................... -- -- 4,504,500 751 (751) -- --
Issuance of common stock to
investors at $0.50 per
share in March 1996....... -- -- 360,000 180,000 -- -- 180,000
Issuance of common stock to
investors at $0.583 per
share in August 1996...... -- -- 420,000 245,000 -- -- 245,000
Issuance of common stock to
investors at $0.583 per
share in October 1996..... -- -- 60,000 35,000 -- -- 35,000
Exchange of one share of
Series A preferred stock
for one share of common
stock in December 1996.... 5,344,500 460,751 (5,344,500) (460,751) -- -- --
Net loss.................... -- -- -- -- -- (614,777) (614,777)
--------- -------- ---------- --------- ----- --------- ---------
Balances at December 31,
1996...................... 5,344,500 $460,751 -- $ -- $ (751) $(614,777) $(154,777)
========= ======== ========== ========= ===== ========= =========
</TABLE>
See accompanying notes.
F-39
<PAGE> 143
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................................... $ (614,777)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation expense........................................................... 2,618
Changes in operating assets and liabilities:
Accounts payable............................................................ 11,926
Accrued interest on convertible note........................................ 17,100
Accrued liabilities......................................................... 136,765
----------
Cash used in operating activities................................................ (446,368)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances on investment........................................................... (150,000)
Expenditures for property and equipment.......................................... (32,653)
----------
Cash used in investing activities................................................ (182,653)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of common stock, net..................................... 460,000
Proceeds from issuance of convertible note....................................... 1,000,000
----------
Cash provided by financing activities............................................ 1,460,000
----------
Net increase (decrease) in cash and cash equivalents............................. 830,979
Cash and cash equivalents at beginning of period................................. --
----------
Cash and cash equivalents at end of period....................................... $ 830,979
==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 144
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Basis of Presentation
X-Cardia Corporation (the "Company") is a development stage company and was
incorporated on February 13, 1996 in the state of California. The Company is
engaged in development of noninvasive cardiac output monitoring devices. The
Company's primary activities since incorporation have been establishing offices
and research facilities, recruiting personnel, conducting research and
development activities, performing business and financial planning and raising
capital.
The Company has sustained operating losses since its inception and would
expect such losses would have continued, however, on February 4, 1997, the
Company entered into the Agreement and Plan of Merger with Urohealth Systems,
Inc. ("Urohealth"). Subject to the terms of the Merger, the Company is to be
merged with a wholly owned subsidiary of Urohealth, with Urohealth to be the
surviving corporation in the Merger (see Note 7). If the merger contemplated by
management is not consummated, management will have to seek other sources of
capital or reevaluate its operating plans to attempt to provide the Company the
means to continue as a going concern.
In September 1996, the board of directors of the Company authorized a stock
split, in which one share of common stock was exchanged for six shares of common
stock. Following shareholder approval, the stock split was effected on November
19, 1996. All share and per share amounts included in the financial statements
have been retroactively adjusted to reflect the stock split.
On December 27, 1996, the board of directors and the shareholders approved
the exchange of one share of common stock for one share of Series A preferred
stock. The exchange was effected on December 31, 1996.
Cash, Cash Equivalents and Short-Term Investments
The Company's cash and cash equivalents are maintained in demand deposit
and money market accounts with a commercial bank. The Company considers all
highly liquid investments with a maturity of three months or less from the date
of purchase to be cash equivalents.
Depreciation and Amortization
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, which is generally three
to five years.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, stock-based compensation is measured
using either the intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25") or the fair-value method described in SFAS 123.
Beginning in 1996, the Company implemented SFAS 123 using the intrinsic value
method. Accordingly, adoption of the SFAS 123 had no material effect on the
Company's financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-41
<PAGE> 145
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Furniture............................................... $ 29,211
Office equipment........................................ 3,442
--------
32,653
Less accumulated depreciation and amortization.......... (2,618)
--------
$ 30,035
========
</TABLE>
3. CONVERTIBLE NOTE AND COMMON STOCK PURCHASE AGREEMENT
On September 30, 1996, the Company entered into a convertible note and
common stock purchase agreement for the sale of 2,000,000 shares of its common
stock to be completed in two closings. The first closing, which took place on
September 30, 1996, involved the issuance of a convertible note for $1,000,000,
which note is automatically converted into 1,000,000 shares upon the completion
of the second closing initially scheduled to occur on March 31, 1997. If the
second closing is not consummated, the principal is repayable on or before
September 30, 2001. Interest accrues on the unpaid principal amount at a rate of
6.84% per annum and is payable beginning March 31, 1997 (see Note 7).
4. RELATED PARTY TRANSACTIONS
Consulting Agreement
The Company has engaged a shareholder and director to provide consulting
services related to its proprietary technology. For these services and for the
contribution of related patents, the Company has incurred fees totaling $43,750
for the period from inception (February 13, 1996) to December 31, 1996.
Facilities Sublease
The Company subleases its facilities from a company owned by the Company's
president and chief executive officer under a noncancelable operating sublease.
The facilities lease expires on September 14, 2001. Future minimum lease
payments under the operating leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
1997..................................... $13,266
1998..................................... 13,266
1999..................................... 13,266
2000..................................... 13,266
2001..................................... 9,397
-------
Total...................................... $62,461
=======
</TABLE>
Rent expense for the period from inception (February 13, 1996) to December
31, 1996 was approximately $7,829.
F-42
<PAGE> 146
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. SHAREHOLDERS' EQUITY
Preferred Stock
The board of directors has the authority to issue 15,000,000 shares of
preferred stock, currently designated as Series A. Each share of Series A
preferred stock outstanding is convertible at the option of the holder into one
share of common stock, subject to adjustment, upon the occurrence of certain
specified events, and automatically converts upon the consummation of a public
offering of common stock.
Each share of Series A preferred stock entitles its holder to one vote for
each common share into which such shares would convert. Dividends at the rate of
$0.10 per share if and as declared by the board of directors are payable to the
preferred shareholders in preference to any dividends for common stock declared
by the board of directors. Dividends are non-cumulative. No dividends have been
declared as of December 31, 1996.
The holders of the Company's Series A preferred stock are entitled to an
amount per share equal to the original issue price, in liquidation, plus an
amount equal to all declared but unpaid dividends, prior and in preference to
any distribution of the holders of common stock. As of December 31, 1996, the
aggregate liquidation value of the Series A preferred stock is $5,344,500.
In the event of a merger, consolidation or sale of the Company's assets, as
defined, the holders of preferred stock are entitled to receive the liquidation
preference for such shares plus any declared but unpaid dividends in preference
to the holders of common stock.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") was adopted by the board
of directors in November 1996, approved by the shareholders in December 1996. As
of December 31, 1996, a total of 1,000,000 shares of common stock have been
reserved for issuance under the Plan. The Plan provides for the granting to
employees, directors and consultants of the Company, incentive stock options and
nonstatutory stock options.
The exercise price of all stock options granted under the Stock Plan must
be at least 100% of the fair value of the common stock of the Company on the
grant date. The term of an incentive stock option may not exceed 10 years from
the date of grant. An option shall be exercisable on or after each vesting date
in accordance with the terms set forth in the option agreement. No options were
granted out of the Plan in 1996.
Stock Option Grants Outside the Plan
In March, August and September 1996, the Company granted options to
purchase 184,500 shares of Series A preferred stock to employees and
consultants. The exercise price for all such options was $0.50, which price
represented the fair value of the underlying stock on the respective grant
dates. The stock option terms vary between the individual grants, and the terms
were approved by the board of directors.
Stock Compensation
During 1996, the Company adopted SFAS 123. In accordance with the
Statement, the Company applies APB 25 in accounting for option grants to
employees and, accordingly, does not recognize compensation expense for options
granted to employees with an exercise price equal to the fair value of the
underlying stock on the grant date.
F-43
<PAGE> 147
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. SHAREHOLDERS' EQUITY (CONTINUED)
Under SFAS 123, options granted to nonemployees must be accounted for at
fair value. The fair value of stock options granted to nonemployees was
immaterial and, therefore, no value was recorded in the financial statements.
For disclosure purposes, the Company used the minimum value method to
determine the fair value of stock options granted in 1996 using the following
weighted average assumptions: risk free interest rate of 5.91% and a weighted
average expected option life of 3.19 years. The effect of applying the minimum
value method of SFAS 123 in determining the fair values of stock options granted
in 1996 did not result in pro forma net loss that is materially different from
the amount reported. Therefore, such pro forma information is not presented
herein. Future pro forma results of operations may be materially different from
actual amounts reported.
A summary of the Company's stock option activity related to options granted
outside of the Plan and related information for the period from inception
(February 13, 1996) to December 31, 1996 follows. No options were granted under
the Plan in 1996:
<TABLE>
<CAPTION>
SERIES A WEIGHTED
PREFERRED STOCK AVERAGE
OPTIONS EXERCISE PRICE
--------------- --------------
<S> <C> <C>
Outstanding at beginning of period............... -- $ --
Options granted.................................. 184,500 $ 0.50
Options exercised................................ -- $ --
Options forfeited................................ -- $ --
------- ------
Outstanding at December 31, 1996................. 184,500 $ 0.50
======= ======
</TABLE>
The weighted-average remaining contractual life of those options is
approximately 9.5 years. As of December 31, 1996, 40,000 options were
exercisable.
6. INCOME TAXES
At December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $600,000. The net operating loss carryforward will
expire beginning in 2011, if not utilized.
Utilization of net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization.
As of December 31, 1996, the Company had a deferred tax asset of
approximately $200,000 which relates primarily to net operating loss
carryforwards and capitalized research and development costs. The net deferred
tax asset has been fully offset by a valuation allowance.
7. SUBSEQUENT EVENTS
On January 2, 1997, the Company entered into a share purchase agreement
with Cybro Medical, Ltd. ("Cybro") in which the Company purchased 80% of the
outstanding stock of Cybro, an Israeli research and development company engaged
in the development of blood oxygen saturation monitors. The purchase price was
$125,000. Concurrently, the Company entered into an option agreement under which
the Company may purchase the remaining (20%) of the outstanding stock of Cybro
upon the occurrence of specific events. The Company wired $150,000 to an escrow
account on December 30, 1996 in contemplation of the closing of the
F-44
<PAGE> 148
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
7. SUBSEQUENT EVENTS (CONTINUED)
transaction and to advance to Cybro cash to fund operating expenses after the
transaction. This amount is included under the caption "Advances to Cybro
Medical, Ltd." in the balance sheet as of December 31, 1996. Upon the completion
of the acquisition in 1997, the entire $150,000 was charged to in-process
research and development expense.
In January and February 1997, the Company granted employees options to
purchase 30,500 shares of the Company's common stock and consultants options to
purchase 125,000 shares of the Company's common stock at an exercise price of
$0.25. The deemed fair value of the underlying shares on the grant date was
$4.00, therefore, the aggregate value of the options to employees was deemed to
be approximately $114,000, based on the intrinsic-value method. The valuation
related to stock options granted to nonemployees was deemed to be approximately
$469,000. The Company used the minimum-value method to determine the fair value
of stock options to nonemployees at the grant date using the following weighted
average assumptions: risk-free interest rate of 6.0% and a weighted average
expected option life of 0.25 years. The Company will recognize as expense the
aggregate valuation for these employee and nonemployee option grants over the
option life.
Also in January 1997, the Company issued 16,780 shares of common stock to
consultants for services rendered. The Company used the minimum value method to
determine the valuation and recorded $67,000 on the grant date.
In February 1997, the Company accelerated the vesting of certain
outstanding stock options in contemplation of the proposed merger with Urohealth
Systems, Inc. (see below). This change in the options terms resulted in the
establishment of a new measurement date for accounting purposes, and, therefore,
a value of $372,000 was expensed on the new measurement date based on the deemed
fair value of the underlying securities at that date.
On February 4, 1997, the Company entered into a Merger Agreement ("Merger")
with Urohealth Systems, Inc. ("Urohealth"), a Delaware corporation, Urohealth,
Inc. (California) ("Urohealth Sub"), a California corporation and a wholly owned
subsidiary of Urohealth Systems, Inc. Subject to terms of the Merger, the
Company was merged with Urohealth Sub, with Urohealth Sub being the surviving
corporation in the Merger. The Company's common and preferred shareholders
received an aggregate of 1,295,700 shares of Urohealth common stock. In
addition, the shareholders have the right to receive milestone payments totaling
$21 million dependent upon the successful achievement of specified milestones.
The shareholders also have the right to receive additional payments termed
"Earn-Out Consideration" based on the sales of X-Cardia products (as defined in
the agreement) for the four-year period after the first commercial release of an
X-Cardia product. There can be no assurance that Urohealth will have sufficient
funds to make these payments.
In connection with the Merger, the Company amended the Convertible Note and
Common Stock Purchase Agreement of September 30, 1996 to complete the second
closing of the agreement concurrent with the closing of the Merger. In addition,
the Company exercised its call option with respect to the remaining 20% interest
in Cybro.
F-45
<PAGE> 149
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Microsurge, Inc.:
We have audited the accompanying balance sheets of Microsurge, Inc. as of
December 31, 1995 and 1996 and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Microsurge, Inc. as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, cash used
in operating activities, deficiency in working capital and debt due currently
which must be refinanced raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are described
in Notes 1, 8 and 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 14, 1997
F-46
<PAGE> 150
MICROSURGE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 264,889 $ 1,152,666
Marketable securities......................................... 1,540,700 --
Accounts receivable, net of allowance for doubtful accounts of
$80,000 in 1995 and $113,025 at December 31, 1996.......... 711,691 1,030,718
Inventories................................................... 984,755 2,204,417
Other current assets.......................................... 44,358 107,889
------------ ------------
Total current assets.................................. 3,546,393 4,495,690
Property and equipment, net..................................... 936,940 634,115
Restricted cash................................................. 96,000 96,000
Purchased technology............................................ 290,000 1,553,833
Other assets.................................................... 38,835 24,694
------------ ------------
Total assets.......................................... $ 4,908,168 $ 6,804,332
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses......................... $ 1,238,974 $ 2,205,236
Notes payable................................................. 150,000 2,800,000
Current portion of capital lease obligation................... 291,145 147,523
Convertible subordinated notes and accrued interest, net of
discount................................................... -- 5,503,343
------------ ------------
Total current liabilities............................. 1,680,119 10,656,102
Capital lease obligation........................................ 197,090 50,075
Other long term liability....................................... -- 225,000
Commitments (Notes 5, 8, 9 and 14)
Redeemable convertible preferred stock, $.001 par value;
12,000,000 shares authorized; 8,580,587 shares issued and
outstanding at December 31, 1995 and 1996; (liquidation
preference of $27,455,986 at December 31, 1996)............... 25,300,934 27,597,327
Stockholders' deficit:
Common stock, $.001 par value; 50,000,000 shares authorized;
405,330 and 417,259 shares issued and outstanding at
December 31, 1995 and 1996, respectively................... 405 417
Accumulated deficit........................................... (22,270,380) (31,724,589)
------------ ------------
Total stockholders' deficit........................... (22,269,975) (31,724,172)
------------ ------------
Total liabilities and stockholders' deficit........... $ 4,908,168 $ 6,804,332
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE> 151
MICROSURGE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Product sales....................................... $ 1,547,545 $ 3,796,645 $ 5,875,696
Cost of goods sold.................................. 1,041,498 2,369,825 3,847,031
----------- ----------- -----------
506,047 1,426,820 2,028,665
----------- ----------- -----------
Operating expenses:
Research and development.......................... 2,010,427 1,913,006 1,713,732
Selling, general and administrative............... 3,311,777 5,911,955 7,216,882
----------- ----------- -----------
Total operating expenses....................... 5,322,204 7,824,961 8,930,614
----------- ----------- -----------
Other (income) expense:
Interest income................................... (172,660) (131,212) (50,654)
Interest expense.................................. 33,394 63,912 475,732
----------- ----------- -----------
Net loss....................................... $(4,676,891) $(6,330,841) $(7,327,027)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE> 152
MICROSURGE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............ 240,497 $241 $ -- $ (8,374,234) $ (8,373,993)
Issuance of common stock under license
agreements.......................... 23,184 23 12,577 -- 12,600
Issuance of common stock upon exercise
of stock options and warrants....... 108,966 108 456,043 -- 456,151
Accretion of redeemable convertible
preferred stock..................... -- -- (468,620) (982,270) (1,450,890)
Net loss.............................. -- -- -- (4,676,891) (4,676,891)
------- ---- --------- ------------ ------------
Balance, December 31, 1994............ 372,647 372 -- (14,033,395) (14,033,023)
Issuance of common stock upon exercise
of stock options.................... 32,683 33 15,192 -- 15,225
Accretion of redeemable convertible
preferred stock..................... -- -- (15,192) (1,906,144) (1,921,336)
Net loss.............................. -- -- -- (6,330,841) (6,330,841)
------- ---- --------- ------------ ------------
Balance, December 31, 1995............ 405,330 405 -- (22,270,380) (22,269,975)
Issuance of common stock upon exercise
of stock options.................... 8,065 8 4,033 -- 4,041
Issuance of warrants.................. -- -- 142,000 -- 142,000
Issuance of common stock.............. 3,864 4 23,178 -- 23,182
Accretion of redeemable convertible
preferred stock..................... -- -- (169,211) (2,127,182) (2,296,393)
Net loss.............................. -- -- -- (7,327,027) (7,327,027)
------- ---- --------- ------------ ------------
Balance, December 31, 1996............ 417,259 $417 $ -- $(31,724,589) $(31,724,172)
======= ==== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-49
<PAGE> 153
MICROSURGE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(4,676,891) $(6,330,841) $(7,327,027)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 272,388 366,934 750,892
Provision for doubtful accounts................ 28,000 80,000 73,294
Loss on disposal of property and equipment..... -- 35,261 --
Issuance of common stock....................... 12,600 -- 23,182
Changes in operating assets and liabilities:
Accounts receivable.......................... (526,968) (236,998) (392,321)
Inventories.................................. (636,685) (205,230) (1,219,662)
Other current assets......................... 7,032 (40,485) (63,531)
Accounts payable and accrued expenses........ 244,715 542,084 786,262
Accrued interest on convertible subordinated
notes..................................... -- -- 296,426
----------- ----------- -----------
Net cash used in operating activities........ (5,275,809) (5,789,275) (7,072,485)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable securities................. (5,477,482) (2,082,639) --
Proceeds from sale or maturity of marketable
securities..................................... 5,057,967 4,072,307 1,540,700
Purchase of property and equipment................ (230,211) (226,341) (226,163)
Purchase of technology............................ -- (290,000) (1,000,000)
Decrease (increase) in other assets............... (13,883) 83 14,141
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................... (663,609) 1,473,410 328,678
----------- ----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations............. (163,544) (259,760) (290,637)
Proceeds from exercise of stock options and sale
of common stock................................ 1,151 15,225 4,041
Proceeds from exercise of warrants................ 455,000 -- --
Proceeds from note payable, net................... -- 150,000 2,650,000
Additions to restricted cash...................... (48,000) -- --
Proceeds from convertible subordinated notes and
related warrants............................... -- -- 5,268,180
Proceeds from redeemable convertible preferred
stock, net..................................... 5,970,350 4,149,391 --
----------- ----------- -----------
Net cash provided by financing activities...... 6,214,957 4,054,856 7,631,584
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 275,539 (261,009) 887,777
Cash and cash equivalents, beginning of period...... 250,359 525,898 264,889
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 525,898 $ 264,889 $ 1,152,666
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE> 154
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
Microsurge, Inc. (the "Company") was incorporated in Delaware on February
27, 1991. The Company utilizes proprietary and licensed technology to develop
and manufacture devices for sale to hospitals and other healthcare institutions
for use in minimally invasive surgery.
The Company is subject to a number of risks similar to other companies in
the industry, including rapid technological change, uncertainty of market
acceptance of products, competition from substitute products and larger
companies, customer's reliance on third party reimbursement, the need to obtain
additional financing, compliance with government regulations, protection of
proprietary technology, dependence on international distributors, third party
manufacturers and key suppliers, product liability, and dependence on key
individuals. In addition, a significant portion of the Company's sales relate to
two product lines.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and the satisfaction of liabilities in the
normal course of business. However, as a result of recurring losses from
operations, cash used in operating activities, the deficiency in working capital
and debt due currently which must be refinanced, there is uncertainty as to the
Company's ability to continue as a going concern. The Company anticipates that
it will continue to incur losses from operations and use cash for operating
purposes. Management's plans in regard to these matters include consummation of
the planned merger with Urohealth Systems, Inc. and additional debt financing
(see Notes 8 and 14). If the Company does not consummate this merger, the
Company will need to undertake other actions to continue operations, refinance
its existing debt which is currently due and obtain additional sources of
financing. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market.
The Company considers highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. At December 31, 1996
approximately 70% of cash and cash equivalents were held in a money market
account that was readily convertible to cash.
Marketable Securities
The Company has classified its marketable securities as "available for
sale". Marketable securities were reported at fair value, which was not
materially different from cost plus accrued interest. All marketable securities
held by the Company mature in less than a year. The effect of realized gains and
losses on the financial statements for the years 1994, 1995 and 1996 was
immaterial.
Marketable securities consist of Corporate debt securities at December 31,
1995.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
F-51
<PAGE> 155
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, typically three to five years, or, in the case of leasehold
improvements over the lesser of the useful life or the lease term. Equipment
under capital lease is amortized over the life of the lease.
Upon retirement or sale, the cost of the assets disposed of and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of net income or loss.
Purchased Technology
Purchased technology is amortized on a straight line basis over three to
five years, the estimated useful life.
The Company evaluates the possible impairment in the value of intangible
assets by assessing the carrying value of the asset against the anticipated
future cash flows from related operating activities. Factors considered in
performing this assessment include current operating results, trends and
prospects, and, in addition, demand, competition, and other economic factors.
Revenue Recognition
The Company recognizes revenue upon the later of shipment of the product
or, if applicable, acceptance by the customer.
Research and Development Expenses
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the liability method. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is required
to offset any net deferred tax assets if, based upon the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
Industry Segments
The Company's operations are located solely within the United States and
relate to one industry segment. Operations consist of designing, manufacturing
and marketing medical instruments for use in minimally invasive surgery.
Export sales in 1994, 1995 and 1996 were $505,000, $1,160,000 and
$1,140,000, respectively .
Concentration of Credit Risk
The Company sells its products principally through a direct sales force
domestically and through distributors outside of the United States to hospitals
and other healthcare institutions. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company provides
F-52
<PAGE> 156
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reserves for customer receivable balances which are considered potentially
uncollectible. One customer accounted for approximately 10% of 1994 product
sales. No customer accounted for more than 10% of product sales in 1995 or 1996.
3. INVENTORIES:
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Purchased parts and subassemblies.................... $388,384 $1,042,480
Work in process...................................... 63,558 3,957
Finished goods....................................... 532,813 1,157,980
-------- ----------
$984,755 $2,204,417
======== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Machinery and equipment............................. $ 570,131 $ 796,294
Leasehold improvements.............................. 73,226 73,226
Furniture and fixtures.............................. 14,672 14,672
Equipment under capital leases...................... 900,151 900,151
---------- ----------
1,558,180 1,784,343
Less accumulated depreciation and amortization...... 621,240 1,150,228
---------- ----------
$ 936,940 $ 634,115
========== ==========
</TABLE>
Accumulated depreciation and amortization amounted to $444,226 and $712,617 on
equipment under capital leases at December 31, 1995 and 1996, respectively.
Depreciation expense for all property and equipment was $268,188, $361,996 and
$528,988 for the years ended December 31, 1994, 1995 and 1996, respectively.
5. PURCHASED TECHNOLOGY:
In August 1995, the Company entered into an agreement to purchase certain
technology for $290,000 and pay royalties on related product sales for five
years.
In April 1996, the Company entered into a license agreement with a company
to license exclusive worldwide rights to certain technology for a 10 year term,
expiring in April 2006. In connection with this agreement, the Company agreed to
pay $1,000,000 in upfront license payments as well as royalties based on future
net sales, subject to minimum royalties of $540,000 which are creditable against
actual royalties. At December 31, 1996, future minimum royalty requirements are
$405,000, of which $180,000, $180,000, and $45,000 are due in 1997, 1998, and
1999, respectively. In October 1996, as consideration for the deferral of
certain payments, the Company issued warrants to the licensor for the purchase
of a number of shares of common stock determined by dividing $187,500 by the
price per share paid for the next purchase of capital stock in the Company in a
sale where the Company receives aggregate gross proceeds in excess of
$5,000,000, or if earlier, an underwritten public offering (the "Investor
Sale"). The warrants are exercisable at any time after the Investor Sale and
prior to August 12, 1999 at a price determined based on the terms of the
Investor Sale. The fair value of the warrants on the date of grant, which was
not material, is included in the cost of purchased technology.
F-53
<PAGE> 157
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PURCHASED TECHNOLOGY: (CONTINUED)
Accumulated amortization of purchased technology amounted to $147,167 as of
December 31, 1996. Amortization commenced in 1996 when sales of the related
products began.
6. INCOME TAXES:
No provision for income taxes was recorded in 1994, 1995 and 1996 as the
Company incurred net losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred income taxes were as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Gross deferred tax assets:
Net operating losses............................ $ 6,463,000 $ 8,888,000
Research and development credits................ 174,000 381,000
Start-up costs.................................. 555,000 319,000
Depreciation.................................... -- 41,000
Other........................................... 184,000 339,000
----------- -----------
Total................................... 7,376,000 9,968,000
Gross deferred tax liabilities:
Depreciation.................................... (19,000) --
Other........................................... (5,000) --
----------- -----------
Total................................... (24,000) --
Valuation allowance............................. (7,352,000) (9,968,000)
----------- -----------
Net deferred tax asset (liability).............. -- --
=========== ===========
</TABLE>
Management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets which are comprised
principally of net operating losses. Management has considered the Company's
history of losses and concluded that it is more likely than not that the Company
will not generate future taxable income prior to the expiration of these net
operating losses. Accordingly, the deferred tax assets have been fully reserved.
At December 31, 1996, the Company had approximately $23.3 million of net
operating losses and $216,000 of federal tax credit carryforwards available for
income tax purposes. These net operating losses and credits will expire in the
years 2006 through 2011. During 1992, in conjunction with the Series C
redeemable preferred stock offering a change in ownership, as defined in the
Internal Revenue Code, occurred. As a result of this change in ownership, the
use of approximately $1,638,000 of the net operating loss carryforward is
limited to approximately $187,000 per year beginning in 1992. The issuance of
stock subsequent to the 1992 change in ownership has not constituted an
additional change in ownership. However, ownership changes in future periods may
further limit the Company's ability to utilize net operating losses and tax
credit carryforwards.
F-54
<PAGE> 158
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Trade accounts payable.............................. $ 834,686 $1,497,448
Payroll and payroll related items................... 190,840 252,211
Royalty payable..................................... -- 180,000
Deferred rent....................................... 87,711 112,583
Other............................................... 125,737 162,994
---------- ----------
$1,238,974 $2,205,236
========== ==========
</TABLE>
8. DEBT:
Capital Lease Obligation
Pursuant to a capital lease agreement entered into during 1993 and as
amended in 1994, the Company maintains $96,000 in restricted cash at December
31, 1995 and 1996 to collateralize a $96,000 standby letter of credit.
Additionally, the Company issued to the lessor in 1993 and 1994 certain warrants
for the purchase of preferred stock (see Note 11).
Future minimum lease payments under these capital lease obligations as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1997.............................................................. $159,560
1998.............................................................. 51,490
--------
Total minimum lease payments...................................... 211,050
Less -- amount representing interest.............................. 13,452
--------
Capital lease obligation.......................................... 197,598
Less -- current portion........................................... 147,523
--------
$ 50,075
========
</TABLE>
Notes Payable
In October 1996, the Company entered into an agreement with a bank to
provide for a $3,000,000 credit facility consisting of a $1,000,000 secured line
of credit, the availability of which is subject to borrowing base requirements,
and a note payable for a maximum amount of $2,000,000. Borrowings under the line
of credit bear interest at the bank's prime rate plus one-half percent (8.75% at
December 31, 1996), and mature on September 30, 1997. The note payable bears
interest at the bank's prime rate plus one percent on the first $1,000,000 in
borrowings, and at the bank's prime rate plus one and one-half percent on
borrowings exceeding $1,000,000 (9.25% and 9.75% at December 31, 1996,
respectively.) The note is due 90 days after issuance but in no event later than
March 31, 1997. At December 31, 1996, $2,800,000 was outstanding under this
credit agreement, with a weighted average interest rate of 9.3%.
The credit facility is collateralized by substantially all of the assets of
the Company and provides for the Company to maintain certain covenants as
amended, including minimum working capital ratios and limitations on losses. The
agreement also prohibits the payment of cash dividends, repurchase of stock by
the Company and the incurrence of additional indebtedness.
This agreement was amended in January 1997 to increase the maximum amount
of borrowings under the note payable from $2,000,000 to $3,000,000, to extend
the due date of the note to the earlier of April 30, 1997
F-55
<PAGE> 159
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DEBT: (CONTINUED)
or the final maturity date as defined in the agreement, and to modify the
covenants under the agreement. The final maturity date is defined in the
agreement and includes a change in control transaction or sale of debt or equity
securities resulting in aggregate gross proceeds of $5,000,000 or more.
Additionally, the amendment provides for a supplemental fee to be paid to the
bank upon maturity Equal to the difference between the amount of interest
accrued and paid on the unpaid principal of all advances under the credit
facility and the amount of interest that would have been required with an annual
interest rate of 26%.
In connection with this agreement, the Company issued warrants to the bank
for the purchase of a number of shares of common stock determined by dividing
$200,000 by the price per share paid for the next purchase of capital stock in
the Company in a sale subsequent to October 1996, where the Company receives
aggregate gross proceeds in excess of $5,000,000 (the "Investor Sale"). The
warrants are exercisable any time after the Investor Sale and prior to October
28, 1999 at a price determined based on terms of the Investor Sale. The fair
value of the warrants at date of grant was not material.
Prior to October 1996, the Company had a line of credit agreement with a
bank, established in 1994 and amended in 1995 and 1996, to allow for borrowings
not to exceed the lesser of $1,000,000 or a specified percentage of eligible
accounts receivable. At December 31, 1995, $150,000 was outstanding under this
line of credit. Borrowings under the line of credit were collateralized by
substantially all of the assets of the Company and bore interest at the bank's
prime rate plus two percent (10.5% at December 31, 1995.)
This agreement was canceled and amounts outstanding repaid upon the signing
of the new agreement in October 1996.
Convertible Subordinated Notes
In February 1996, the Company entered into a credit agreement with a group
of lenders ("Purchasers") who agreed to purchase a series of convertible
subordinated notes ("the Notes") up to $3,268,180 upon the request of the
Company. In August 1996, the agreement was amended to provide for total advances
of $5,268,180. The Company received advances of $2,334,414 in February and March
1996, $933,766 in June 1996 and $2,000,000 in August 1996. The Notes bear
interest at 9.25%, and mature on August 28, 1997. The Company may prepay amounts
outstanding on the Notes without penalty at any time after the Investor Sale (as
defined below) and prior to maturity date.
Upon the closing, or series of closings, in which the Company sells capital
stock of the Company for gross proceeds of $10,000,000 or more (the "Investor
Sale"), the Notes will be convertible, at the option of the Purchasers, into the
same type and class of stock issued in connection with the Investor Sale. Any
outstanding principal amount of the Notes plus accrued interest may convert at a
conversion price equal to 60% of the price per share paid by the purchasers of
capital stock in connection with the Investor Sale (the "Investor Sale Price").
Warrants for the purchase of common stock in the Company will be issued
under two circumstances in accordance with the credit agreements. All warrants
issued pursuant to these credit agreements will be exercisable at any time after
the Investor Sale and prior to February 28, 1999 for a purchase price equal to
the Investor Sale Price.
The first set of warrants were issued to the Purchasers upon the execution
of the credit agreement and amendment. Each Purchaser received a warrant,
subject to the terms above, for the purchase of a number of shares of common
stock determined by dividing (i) the maximum principal amount of the Notes that
could be purchased by such purchaser under the credit agreement, by (ii) the
Investor Sale Price, and the multiplying such number by 10%.
F-56
<PAGE> 160
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DEBT: (CONTINUED)
The second set of warrants are issuable to the Purchasers upon each
advance. At such time each Purchaser will receive a warrant, subject to the
terms above, for the purchase of a number of shares of common stock determined
by dividing (i) the principal amount of the Note purchased on such date by such
Purchaser, by (ii) the Investor Sale Price, and then multiplying such number by
40%. The Company has issued warrants in connection with each advance on the
Notes.
The warrants are valued at $122,000 and the Notes are carried net of
original issue debt discount of $122,000 resulting in an effective annual
interest rate of 10.5%. Amortization of the discount, which is recorded as
interest expense, totaled $60,737 for the year ended December 31, 1996.
9. COMMITMENTS:
Operating Leases
The Company leases its facility and certain equipment under operating
leases. Rent expense for the leased facility and equipment was approximately
$155,000, $308,000 and $304,000 during the years ended December 31, 1994, 1995
and 1996, respectively. As of December 31, 1996, the minimum future rental
payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------- --------
<S> <C>
1997.............................. 258,402
1998.............................. 309,677
1999.............................. 239,510
--------
$807,589
========
</TABLE>
License Agreements
The Company has entered into agreements under which the Company has been
granted exclusive license and distribution rights for certain thoracic products,
technologies and procedures being developed. Under the agreements, the Company
is obligated to make royalty payments based on eventual net product sales of
licensed products. No sales or royalty amounts have been recorded to date.
In connection with these agreements, the Company issued 20,286 shares of
its common stock in 1994 and recorded a related charge to expense for the fair
value of the stock on the date of grant. The Company also issued nonqualified
options to purchase 117,852 shares of its common stock for $5.05 per share which
vest upon attainment of certain performance criteria (see Note 11). The fair
value of the options will be recorded as expense as the performance criteria are
attained.
F-57
<PAGE> 161
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized the issuance of up to 12,000,000 shares of
redeemable convertible preferred stock, $.001 par value (collectively, the
Preferred Stock). As of December 31, 1995 and 1996, the Preferred Stock
consisted of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Series A --
Authorized -- 750,000 shares
Issued and outstanding -- 750,000 shares at December 31,
1995 and 1996 (liquidation preference of $1,125,000 at
December 31, 1996)...................................... $ 1,050,000 $ 1,125,000
Series B --
Authorized -- 300,000 shares
Issued and outstanding -- 300,000 shares at December 31,
1995 and 1996 (liquidation preference of $1,350,000
at December 31, 1996)................................ 1,260,000 1,350,000
Series C --
Authorized -- 3,920,659 shares
Issued and outstanding -- 3,836,834 shares at December
31, 1995 and 1996 (liquidation preference of
$12,799,412 at December 31, 1996).................... 11,693,809 12,626,229
Series D --
Authorized -- 2,213,613 shares
Issued and outstanding -- 2,181,818 shares at December
31, 1995 and 1996 (liquidation preference of
$7,504,025 at December 31, 1996)..................... 7,022,706 7,721,587
Series E --
Authorized -- 1,511,935 shares
Issued and outstanding -- 1,511,935 shares at December
31, 1995 and 1996 (liquidation preference of
$4,677,549 at December 31, 1996)..................... 4,274,419 4,774,511
----------- -----------
$25,300,934 $27,597,327
=========== ===========
</TABLE>
In connection with the issuance of Series C and Series D redeemable
preferred stock the Company also issued warrants to purchase preferred stock
(see Note 11).
The rights and preferences of the Preferred Stock are described below.
Conversion
Preferred Stock is convertible, at the option of the holder, into shares of
common stock, at a rate of .644 shares for each share of preferred stock subject
to adjustment based on certain defined events.
All outstanding shares of the Preferred Stock shall automatically convert
into shares of the Company's common stock upon the closing of a public offering
of the Company's common stock if certain criteria are met.
Voting
The Preferred Stock has voting rights equal to the number of shares of
common stock into which the Preferred Stock is convertible.
F-58
<PAGE> 162
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
Dividends
Holders of the Preferred Stock are entitled to receive dividends if and
when declared by the Company's Board of Directors. The preferred stockholders'
rights to dividends are preferential to those of common stockholders. In
addition to the declared dividends rights, the Series C, Series D and Series E
preferred stockholders are entitled to cumulative dividends in preference to all
other classes of stock. These cumulative dividends accrue at an annual rate of
$0.237, $0.275 and $0.275 per share, respectively, subject to change, as
defined, commencing on the date of issuance. At December 31, 1996, cumulative
dividends of $3,706,115, $1,504,025 and $519,728 had accrued on the Series C,
Series D and Series E redeemable convertible preferred stock, respectively.
Following conversion, unpaid accrued dividends on the redeemable convertible
preferred stock will not be payable.
Liquidation
Upon liquidation or dissolution of the Company, the holders of the
Preferred Stock shall each be entitled to receive a preference in liquidation.
The holders of the Series E and Series D redeemable convertible preferred stock
are entitled to a preference, collectively prior to all other stockholders, of
$2.75 per share plus any accrued dividends ($519,728 and $1,504,025 at December
31, 1996, respectively). The holders of the Series C redeemable convertible
preferred stock are entitled to a preference of $2.37 per share plus any accrued
dividends ($3,706,115 at December 31, 1996). The holders of the Series A and
Series B redeemable convertible preferred stock are entitled to a preference of
$1.00 and $3.00 per share, plus an additional $.10 and $.30 per share upon each
anniversary of the issuance date, respectively, plus any accrued dividends.
After distribution of any preferential payments to the preferred stockholders,
the Series C, Series D and Series E preferred stockholders and the common
stockholders shall share equally in the remaining assets based on a pro rata
basis. If, after distribution to the Series E and Series D preferred
stockholders there are insufficient funds to pay the Series A, Series B and
Series C preferred stockholders their full preferential amount, the three
classes will share ratably the remaining assets in proportion to what would have
been due to them in full.
Redemption
The holders of the Preferred Stock have a redemption right that requires
the Company to repurchase outstanding shares of the Preferred Stock. The Series
C, Series D and Series E preferred stockholders may require the Company to
repurchase up to 25% of the shares outstanding, per year, for each of four
consecutive years beginning on June 29, 1999. The redemption value of the Series
E and Series D redeemable convertible preferred stock is 110% of $2.75 ($3.025)
per share plus accrued dividends and the redemption value of the Series C
redeemable convertible preferred stock is $2.37 per share plus accrued
dividends. The Series A and Series B preferred stockholders may require the
Company to repurchase up to 25% of the shares outstanding, per year, for each of
four consecutive years beginning on June 29 of the year that is the later of the
first year in which no shares of Series C, Series D and Series E redeemable
convertible preferred stock are outstanding or 1999. The redemption value per
share for the Series A and Series B redeemable convertible preferred stock is
$1.00 and $3.00 per share, plus $.10 and $.30 per share for every year
outstanding since issuance, respectively, plus accrued dividends. To the extent
that the repurchase right on any of the Preferred Stock is not exercised in one
year, the cumulative right may be exercised in future years, through the end of
the four-year redemption period.
F-59
<PAGE> 163
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY:
Common Stock
In April 1996 the Company announced a 0.644 for 1 reverse stock split of
the Company's common stock which was effected in June of 1996. All share data in
these financial statements have been retroactively restated to give effect to
the stock split.
The Company has authorized 50,000,000 shares of common stock, $.001 par
value. The Company has reserved 6,601,942 shares of common stock for issuance
upon the conversion of Preferred Stock and exercise of warrants and options at
December 31, 1996. The Company has also reserved shares for the exercise of
warrants pursuant to which the number of shares is determined by future
financings.
In connection with a license agreement, the Company issued 11,592 shares of
its common stock over a three year period commencing in 1992. The Company
recorded expense for the fair value of the stock on the dates of grant.
Stock Option Plan
In 1994, the Company's Board of Directors and stockholders approved an
amendment to its 1992 Stock Option Plan (the "Plan"). The Plan allows the Board
of Directors to grant either incentive stock options or nonstatutory stock
options to employees, directors and consultants. The Company has authorized the
granting of options to purchase 913,010 shares of common stock under the Plan,
as amended. As of December 31, 1996, 19,795 options are available for future
grants under the Plan. Options issued under the Plan to employees are generally
incentive stock options that vest in equal annual increments over a four-year
period beginning on the effective date of issuance and expire no later than 10
years from the date of grant, and are granted at not less than fair value of the
common stock, as determined by the Board of Directors at the date of grant. In
October 1996, certain options were amended to allow for accelerated vesting upon
a change of control in the Company which meets defined criteria.
Options have been issued outside of the Plan to certain directors and
consultants. These options vest according to varying terms and were granted at
$5.05 per share, which was in excess of the fair value of the common stock, as
determined by the Board of Directors on the dates of grant (see Note 9). No
options were granted outside of the plan in 1996 or 1995.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, which is effective for the Company's financial
statements for fiscal year 1996. SFAS 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, but requires pro forma disclosure in the notes to
the financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company has continued to account for its stock-based compensation
in accordance with the provisions of APB 25. The application of SFAS 123 would
not result in a significant difference from the reported net loss.
F-60
<PAGE> 164
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY: (CONTINUED)
Stock option activity for 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding, December 31, 1993...................... 346,484 $ .47
Granted............................................. 402,435 1.98
Canceled............................................ (16,100) .47
Exercised........................................... (2,415) .47
------- ------
Outstanding, December 31, 1994...................... 730,404 1.30
Granted............................................. 171,032 .57
Canceled............................................ (36,963) .47
Exercised........................................... (32,683) .47
------- ------
Outstanding, December 30, 1995...................... 831,790 1.22
Granted............................................. 195,230 1.00
Canceled............................................ (35,499) .51
Exercised........................................... (8,065) .50
------- ------
Outstanding, December 31, 1996...................... 983,456 $ 1.21
======= ======
</TABLE>
Summarized information about stock options outstanding at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGES OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- -------------- ----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.47 - .54 655,949 7 $ .50 407,631 $ .49
$1.00 195,230 10 $ 1.00 -- --
$4.27 - 5.05 132,277 12 $ 5.02 11,849 $ 4.92
</TABLE>
Common Stock Warrants
During 1994, the Company received $455,026 from the sale of common stock
and the exercise of warrants for 106,551 shares of common stock. During 1994,
the Company also entered into a consulting agreement in which the Company
committed to issue a maximum of 19,320 shares of common stock to a consultant
upon achievement of certain performance criteria. During 1996 3,864 shares were
granted and the Company recorded a charge for their fair value as determined on
the date of grant. This agreement expired in July 1996.
Preferred Stock Warrants
In connection with the Series C redeemable convertible preferred stock
offering in 1992, the Company issued a warrant to purchase 52,320 shares of
Series C redeemable convertible preferred stock. The warrant is exercisable at
$2.37 per share and expires August 3, 1997. The Company has reserved 52,320
shares of Series C redeemable convertible preferred stock for issuance upon
exercise of this warrant.
In connection with the Series D redeemable convertible preferred stock
offering in 1994, the Company issued a warrant to purchase 17,250 shares of
Series D redeemable convertible preferred stock. The warrant is exercisable at
$2.75 per share and expires June 29, 1999. The Company has reserved 17,250
shares of Series D redeemable convertible preferred stock for issuance upon
exercise of this warrant.
F-61
<PAGE> 165
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY: (CONTINUED)
In connection with equipment lease financing transactions (see Note 8), the
Company issued warrants for the purchase of 28,977 shares of Series C redeemable
convertible preferred stock at an exercise price of $2.37 per share and 14,545
shares of Series D redeemable convertible preferred stock at an exercise price
of $2.75 per share. The warrant to purchase Series C redeemable convertible
preferred stock, and the warrant to purchase Series D redeemable convertible
preferred stock, expire on June 17, 2000 and September 12, 2001, respectively,
or on the second anniversary of the closing of an initial public offering of the
Company's common stock, whichever is earlier. The Company has reserved 28,977
shares of Series C redeemable convertible preferred stock and 14,545 shares of
Series D redeemable convertible preferred stock for issuance upon exercise of
the warrants.
Upon the closing of an initial public offering of the Company's common
stock, all preferred stock warrants convert into common stock warrants at the
applicable conversion rate for preferred stock then in effect (see Note 10).
12. EMPLOYEE BENEFIT PLAN:
On January 1, 1993, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan allows all employees to
make contributions up to a specified percentage of their compensation. Under the
plan, the Company may, but is not obligated to, match a portion of the
employees' contribution up to a defined maximum. The Company did not make a
matching contribution in 1994, 1995 or 1996.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company incurred capital lease obligations to obtain certain equipment
in amounts of $286,371 and $244,398 in 1994 and 1995, respectively. There were
no additions to leased equipment in 1996.
Cash paid for interest was $33,394, $63,912 and $104,067 in 1994, 1995 and
1996, respectively.
14. SUBSEQUENT EVENT:
In March of 1997 the Company signed a definitive merger agreement with
Urohealth Systems, Inc. ("Urohealth"). The merger is expected to become
effective after shareholder approval is received and certain other conditions
are met.
F-62
<PAGE> 166
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired X-Cardia on February 28, 1997 by merger of X-Cardia
into a wholly-owned subsidiary of the Company and acquired Microsurge, Inc.
("Microsurge") on March 31, 1997 by merger of a wholly-owned subsidiary of the
Company into Microsurge (the "MSI Merger").
The following unaudited pro forma condensed consolidated balance sheet at
December 31, 1996 reflects the historical consolidated balance sheets of
Urohealth, X-Cardia and Microsurge, adjusted to give effect to the acquisitions,
as if such acquisitions had occurred at December 31, 1996 and the Offering as if
it had occurred at December 31, 1996.
The following unaudited pro forma condensed consolidated statements of
operations are presented to reflect the acquisition of X-Cardia and Microsurge
and the Offering as if such acquisitions and Offering had occurred on July 1,
1995 for the nine month period ended March 31, 1996; and on April 1, 1996 for
the nine months ended December 31, 1996. The X-Cardia acquisition has been
reflected as a purchase and the MSI Merger is proposed to be accounted for as a
pooling of interests, however, as discussed below in Notes to Unaudited
Condensed Consolidated Financial Statements, the Company may be required, in
accordance with generally accepted accounting principles, to account for the
transaction as a purchase. Additionally, unaudited pro forma condensed
consolidated statements of operations are presented for the years ended June 30,
1994 and 1995 to reflect the results of operations of Urohealth combined with
the results of operations of Microsurge for its fiscal years ended December 31,
1994 and 1995, respectively.
The unaudited pro forma condensed consolidated balance sheet and statements
of operations and accompanying notes should be read in conjunction with the
respective historical audited consolidated financial statements of UROHEALTH,
X-Cardia and Microsurge contained herein.
The unaudited pro forma condensed consolidated financial information is
based on the consolidated financial statements of UROHEALTH, X-Cardia and
Microsurge giving effect to the transactions under the assumptions and
adjustments outlined in the accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
The pro forma adjustments are based upon available information and upon
certain assumptions that UROHEALTH management believes are reasonable given the
circumstances. The unaudited pro forma condensed consolidated balance sheet and
statements of operations are provided for comparative purposes only and are not
necessarily indicative of the results that would have been obtained had the
acquisitions occurred on the date indicated or that may be achieved in the
future.
F-63
<PAGE> 167
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA TOTAL
UROHEALTH X-CARDIA ADJUSTMENTS ADJUSTMENTS SUB-TOTAL MICROSURGE ADJUSTMENTS PRO FORMA
--------- -------- ----------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and
equivalents...... $ 2,272 $ 831 $ (1,150)(d) $ 56,200(a) $ 58,153 $ 1,153 $(2,800)(h) $ 56,506
Restricted cash.... -- -- -- 13,750(a) 13,750 -- -- 13,750
Receivables, net... 24,958 -- -- -- 24,958 1,031 -- 25,989
Inventories 21,373 -- -- -- 21,373 2,204 -- 23,577
Prepaids and
deposits......... 3,307 -- -- -- 3,307 108 -- 3,415
Income tax
receivable....... 377 -- -- -- 377 -- -- 377
-------- ------ -------- -------- --------- -------- ------- ---------
Total current
assets............. 52,287 831 (1,150) 69,950 121,918 4,496 (2,800) 123,614
Property and
equipment, net..... 24,785 30 -- -- 24,815 634 -- 25,449
Patents and
intangibles, net... 6,264 -- -- -- 6,264 1,554 -- 7,818
Restricted cash,
noncurrent......... -- -- -- 5,450 5,450 96 -- 5,546
Deposits and other
assets............. 2,609 150 -- -- 2,759 24 -- 2,783
Deferred debt
issuance costs..... 5,727 -- -- 4,600(a) 9,274 -- -- 9,274
(1,053)(b)
Goodwill............. 42,081 -- 12,288(e) -- 54,369 -- -- 54,369
-------- ------ -------- -------- --------- -------- ------- ---------
$133,753 $1,011 $ 11,138 $ 78,947 $ 224,849 $ 6,804 $(2,800) $ 228,853
======== ====== ======== ======== ========= ======== ======= =========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable
and accrued
expenses......... $ 12,067 $ 149 $ -- $ -- 12,216 $ 2,205 $ 3,625(i) $ 18,046
Restructuring
accrual.......... 1,810 -- -- -- 1,810 -- -- 1,810
Compensation and
employee
benefits......... 3,026 -- -- -- 3,026 -- -- 3,026
Revolving lines of
credit........... 16,500 -- -- (16,500)(a) -- -- -- --
Convertible
subordinated
notes............ -- -- -- -- -- 5,503 -- 5,503
Current portion of
notes payable and
capital leases... 521 -- -- -- 521 2,948 (2,800)(h) 669
-------- ------ -------- -------- --------- -------- ------- ---------
Total current
liabilities........ 33,924 149 -- (16,500) 17,573 10,656 825 29,054
Long-term
liabilities:
Notes payable...... 6,000 -- -- -- 6,000 -- -- 6,000
Bank term loan..... 13,500 -- -- (13,500)(a) -- -- -- --
Capital leases..... 152 -- -- -- 152 50 -- 202
Deferred
compensation..... 29 -- -- -- 29 -- -- 29
Convertible
notes............ -- 1,017 (1,017)(f) -- -- -- -- --
Senior subordinated
notes............ -- -- -- 108,278(a) 108,278 -- -- 108,278
Other
liabilities...... 98 -- -- -- 98 225 -- 323
Restructuring
accrual, less
current
portion.......... 1,684 -- -- -- 1,684 -- -- 1,684
Minority interest in
consolidated
subsidiary......... 1,126 -- -- -- 1,126 -- -- 1,126
Convertible
subordinate
debentures......... 50,000 -- -- -- 50,000 -- -- 50,000
Redeemable
convertible
preferred stock.... -- -- -- -- -- 27,597 (27,597)(j) --
Common Stockholders'
Equity:
Common stock....... 19 -- 1(d) -- 20 -- 3(i) 23
Preferred stock -- 461 (461)(e) -- -- -- -- --
Warrants........... 5,217 -- -- 1,722(a) 6,939 -- -- 6,939
Additional paid-in
capital.......... 113,204 -- 11,999(d) -- 125,203 -- 27,594(j) 152,797
Deficit............ (91,159) (615) 615(e) (1,053)(b) (92,212) (31,724) (3,625)(i) (127,561)
Note receivable
from
shareholders..... -- (1) 1(e) -- -- -- -- --
Foreign currency
adjustment....... (41) -- -- -- (41) -- -- (41)
-------- ------ -------- -------- --------- -------- ------- ---------
Total common
stockholders'
(deficit)
equity......... 27,240 (155) 12,155 669 39,909 (31,724) 23,972 32,157
-------- ------ -------- -------- --------- -------- ------- ---------
$133,753 $1,011 $ 11,138 $ 78,947 $ 224,849 $ 6,804 $(2,800) $ 228,853
======== ====== ======== ======== ========= ======== ======= =========
</TABLE>
See accompanying notes.
F-64
<PAGE> 168
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA TOTAL
UROHEALTH X-CARDIA(1) ADJUSTMENTS ADJUSTMENTS SUB-TOTAL MICROSURGE ADJUSTMENTS PRO FORMA
--------- ----------- ----------- ----------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... $ 67,964 $ -- $ -- $ -- $ 67,964 $ 4,703 $ -- $ 72,667
Cost of sales....... 23,193 -- -- -- 23,193 3,123 -- 26,316
-------- ----- ------- ------- -------- -------- ----- ---------
Gross profit........ 44,771 -- -- -- 44,771 1,580 -- 46,351
Operating expenses:
Selling, general
and
administrative... 32,537 255 399(g) -- 33,191 5,780 -- 38,971
Research and
development..... 2,149 354 -- -- 2,503 1,218 -- 3,721
Write-off
incomplete
research and
development..... 25,500 -- -- -- 25,500 -- -- 25,500
Restructuring
charges......... 4,000 -- -- -- 4,000 -- -- 4,000
-------- ----- ------- ------- -------- -------- ----- ---------
Total operating
expenses.......... 64,186 609 399 -- 65,194 6,998 -- 72,192
-------- ----- ------- ------- -------- -------- ----- ---------
Profit (loss) from
operations........ (19,415) (609) (399) -- (20,423) (5,418) -- (25,841)
Other income
(expense):
Minority interest
consisting of
accrued
dividends on
preferred stock
of subsidiary... (54) -- -- -- (54) -- -- (54)
Interest income... 240 11 -- -- 251 31 -- 282
Interest
expense......... (4,864) (17) -- (10,990)(b)(c) (14,338) (444) 221(h) (14,561)
Other............. -- -- -- 1,533(c) -- -- -- --
-------- ----- ------- ------- -------- -------- ----- ---------
Net loss before tax
and extraordinary
loss.............. (24,093) (615) (399) (9,457) (34,564) (5,831) 221 (40,174)
Provision (benefit)
for income tax.... (377) -- -- -- (377) -- --(k) (377)
-------- ----- ------- ------- -------- -------- ----- ---------
Net loss before
extraordinary
loss.............. (23,716) (615) (399) (9,457) (34,187) (5,831) 221 (39,797)
Extraordinary loss
(early
extinguishment of
debt)............. (2,973) -- -- -- (2,973) -- -- (2,973)
-------- ----- ------- ------- -------- -------- ----- ---------
Net loss............ $(26,689) $(615) $ (399) $ (9,457) $(37,160) $ (5,831) $ 221 $ (42,770)
======== ===== ======= ======= ======== ======== ===== =========
</TABLE>
- ---------------
(1) X-Cardia results of operations reflect activity from the company's inception
February 13, 1996 through December 31, 1996. Activity from February 13, 1996
through March 31, 1996 is immaterial.
See accompanying notes.
F-65
<PAGE> 169
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING PRO FORMA TOTAL
UROHEALTH ADJUSTMENTS SUB-TOTAL MICROSURGE ADJUSTMENTS PRO FORMA
--------- ----------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 39,641 $ -- $ 39,641 $ 3,313 $ -- $ 42,954
Cost of sales.......................... 12,896 -- 12,896 2,069 -- 14,965
-------- ------- -------- -------- ---- ---------
Gross profit........................... 26,745 -- 26,745 1,244 -- 27,989
Operating expenses:
Selling, general and
administrative.................... 32,218 -- 32,218 4,838 -- 37,056
Research and development............. 1,324 -- 1,324 1,452 -- 2,776
Merger and acquisition costs......... 4,232 -- 4,232 -- -- 4,232
Restructuring charges................ 5,456 -- 5,456 -- -- 5,456
-------- ------- -------- -------- ---- ---------
Total operating expenses............... 43,230 -- 43,230 6,290 -- 49,520
-------- ------- -------- -------- ---- ---------
Loss from operations................... (16,485) -- (16,485) (5,046) -- (21,531)
Other income (expense):
Minority interest consisting of accrued
dividends on preferred stock of
subsidiary........................... (55) -- (55) -- -- (55)
Interest income...................... 23 -- 23 78 -- 101
Interest expense..................... (1,002) (10,990)(c)(b) (10,990) (57) -- (11,047)
1,002(c)
Other................................ (48) -- (48) -- -- (48)
-------- ------- -------- -------- ---- ---------
Net loss before tax.................... (17,567) (9,988) (27,555) (5,025) -- (32,580)
Provision for income tax............... 431 -- 431 -- --(k) 431
-------- ------- -------- -------- ---- ---------
Net loss............................... $(17,998) $ (9,988) $(27,986) $ (5,025) $ -- $ (33,011)
======== ======= ======== ======== ==== =========
</TABLE>
See accompanying notes
F-66
<PAGE> 170
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales........................................ $ 45,453 $ 3,797 $ -- $ 49,250
Cost of sales.................................... 16,159 2,370 -- 18,529
-------- -------- ----- ---------
Gross profit..................................... 29,294 1,427 -- 30,721
Operating expenses:
Selling, general and administrative............ 35,145 5,912 -- 41,057
Research and development....................... 8,805 1,913 -- 10,718
Merger and acquisition costs................... 851 -- -- 851
Settlement of litigation....................... 300 -- -- 300
Restructuring charges.......................... 1,200 -- -- 1,200
-------- -------- ----- ---------
Total operating expenses......................... 46,301 7,825 -- 54,126
-------- -------- ----- ---------
Loss from operations............................. (17,007) (6,398) -- (23,405)
Other income (expense):
Minority interest consisting of accrued
dividends on preferred stock of
subsidiary.................................. (78) -- -- (78)
Interest income................................ 263 131 -- 394
Interest expense............................... (303) (64) -- (367)
Other.......................................... 5 -- -- 5
-------- -------- ----- ---------
Net loss before tax and extraordinary loss....... (17,120) (6,331) -- (23,451)
Provision for income tax......................... 1,386 -- -- 1,386
-------- -------- ----- ---------
Net loss......................................... $(18,506) $ (6,331) $ -- $ (24,837)
======== ======== ===== =========
</TABLE>
See accompanying notes
F-67
<PAGE> 171
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales........................................ $ 37,828 $ 1,548 $ -- $ 39,376
Cost of sales.................................... 13,993 1,041 -- 15,034
-------- -------- ----- ---------
Gross profit..................................... 23,835 507 -- 24,342
Operating expenses:
Selling, general and administrative............ 32,802 3,312 -- 36,114
Research and development....................... 9,470 2,010 -- 11,480
Settlement of litigation....................... 1,000 -- -- 1,000
-------- -------- ----- ---------
Total operating expenses......................... 43,272 5,322 -- 48,594
-------- -------- ----- ---------
Loss from operations............................. (19,437) (4,815) -- (24,252)
Other income (expense):
Minority interest consisting of accrued
dividends on preferred stock of
subsidiary.................................. (175) -- -- (175)
Interest income................................ 318 173 -- 491
Interest expense............................... (267) (34) -- (301)
-------- -------- ----- ---------
Net loss before tax.............................. (19,561) (4,676) -- (24,237)
Provision for income tax......................... 566 -- -- 566
-------- -------- ----- ---------
Net loss......................................... $(20,127) $ (4,676) $ -- $ (24,803)
======== ======== ===== =========
</TABLE>
See accompanying notes
F-68
<PAGE> 172
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Pro Forma Adjustments
OFFERING
(a) Reflects the use of the Offering proceeds to repay outstanding bank
debt at December 31, 1996 of approximately $30.0 million. The Offering is
expected to result in an aggregate net proceeds of approximately $105.4 million,
net of $4.6 million in debt issuance costs. Debt issuance costs will be deferred
and amortized over the term of the Notes. The amount of the Senior Subordinated
Notes is presented net of discount of $1,722,000, representing the Company's
estimate of the value of the Warrants issued. Of the net proceeds, approximately
$19.2 million will be used to purchase Government Securities that will be
pledged as security for the repayment, when due, of the first three scheduled
interest payments on the Notes.
(b) Amortization of deferred debt issuance costs related to the Offering,
amortization of debt discount resulting from the issuance of the warrants, and
the write-off of $1.1 million in associated deferred loan costs related to the
extinguishment of the revolving credit facility and term loan. Deferred debt
issuance costs and debt discount are amortized on an effective interest method
over the life of the Notes.
(c) Reflects the incremental interest attributed to the Notes and reduction
in interest associated with the repayment of the revolving credit facility, term
loan and notes payable.
BUSINESS ACQUISITIONS
Acquisition of X-Cardia
On February 28, 1997, the Company completed the acquisition of X-Cardia
Corporation through a merger of X-Cardia into a wholly owned subsidiary of the
Company. The total purchase price, contingent on certain requirements, is
approximately $33.0 million. The Company issued 1,295,700 shares of UROHEALTH
Common Stock with a value equal to $12 million. The additional $21.0 million is
contingent upon validation of the product in human clinical trials and obtaining
patent approval, which is not assured. Once clinical trials are completed, $3.0
million in UROHEALTH Common Stock will be issued, and upon receipt of patent
approval payment of $16.5 million in cash and $1.5 million in UROHEALTH Common
Stock will be made. Because the $16.5 million cash payment and $4.5 million in
additional Common Stock issuance are contingent upon product validation and
patent approval, they have not been reflected in the accompanying unaudited pro
forma condensed consolidated balance sheets.
(d) The initial payment for the X-Cardia acquisition, including direct
acquisition costs of $14,150,000 was determined as follows:
<TABLE>
<S> <C>
Issuance of 1,295,700 shares of UROHEALTH Common
Stock at $9.26 per share....................... $12,000,000
Direct acquisition costs......................... 2,150,000
-----------
$14,150,000
===========
</TABLE>
(e) Allocation of the purchase price of $14,150,000 based on the Company's
estimate of the fair market value of asset acquired and liabilities assumed
results in the following:
<TABLE>
<S> <C>
Net assets at historical amounts................. $ 862,000
Common Stock proceeds............................ 1,000,000
Costs in excess of net assets acquired........... 12,288,000
-----------
$14,150,000
===========
</TABLE>
F-69
<PAGE> 173
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
Common Stock proceeds represent $1,000,000 of cash received by X-Cardia (in
exchange for the issuance of 1,000,000 shares of X-Cardia Common Stock) just
prior to UROHEALTH's acquisition of X-Cardia pursuant to the terms of the
Convertible Note and Common Stock Purchase Agreement (see Note 3 to the X-Cardia
financial statements).
(f) Subsequent to December 31, 1996 and prior to the acquisition of
X-Cardia Corporation, by UROHEALTH, the convertible notes were converted to
common stock.
(g) Amortization of costs in excess of book value of assets acquired in the
X-Cardia transaction, $12,288,000. Costs in excess of net assets acquired are
amortized over 25 years.
The Company plans to evaluate the value of acquired incomplete research and
development incident to this acquisition. The evaluation will include, among
other factors, the stage of development of each product, the time and resources
needed to complete each product, expected income and associated risks (including
the inherent difficulties and uncertainties in developing and manufacturing new
products and potential alternative procedures in future target markets). The
Company expects to record a one-time non-cash charge to earning which is
estimated to be approximately $13.0 million for incomplete research and
development related to the acquired company. This amount has not been reflected
in the pro forma adjustments.
Acquisition of Microsurge
On March 11, 1997, the Company entered into a merger agreement to acquire
Microsurge. The agreement provides for the issuance of shares of UROHEALTH
Common Stock, the payment of notes payable and accrued interest of $3.2 million
and the assumption of $5.5 million in convertible Microsurge notes. The
agreement also provides for the repayment of notes payable of $2.8 million. The
value of this transaction is approximately $38.0 million. The Microsurge merger
is proposed to be accounted for as a pooling of interests, however, the Company
may be required in accordance with generally accepted accounting principles to
record the transaction as a purchase. The acquisition of Microsurge was
completed on March 31, 1997.
(h) Repayment of Microsurge Notes Payable upon consummation of the
transaction and the elimination of the associated interest.
(i) Under the pooling of interests accounting method, direct transaction
costs are deferred and expensed upon completion of the merger. Such costs are
estimated to be $3.6 million and include investment banking, legal, accounting,
printing, solicitation, filing fees and similar expenses. The accrual of these
expenses has been reflected in the unaudited pro forma condensed combined
balance sheet at December 31, 1996, but not in the unaudited pro forma condensed
combined statements of operations. Direct transaction costs reflected in the
unaudited pro forma condensed combined statements of operations relate to
previous mergers.
In the event the proposed merger should fail to qualify as a pooling of
interests, it will be accounted for as a purchase. If the transaction is
accounted for as a purchase, goodwill on the unaudited pro forma condensed
consolidated balance sheet would be increased by $46 million, as of December 31,
1996, and amortization expense on the unaudited pro forma condensed consolidated
statement of operations would be increased by $1.4 million in each of the nine
months ended December 31, 1996 and March 31, 1996. Direct acquisition costs of
$3.6 million would be added to goodwill, with a corresponding increase in
retained earnings on the unaudited pro forma condensed consolidated balance
sheet at December 31, 1996 (direct transaction costs are capitalized in the
purchase price for the purchase method versus expensed for a pooling of
interests transaction).
F-70
<PAGE> 174
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(j) Common stock and additional paid-in capital have been adjusted to
reflect the issuance of UROHEALTH Common Stock in exchange for the issued and
outstanding shares of Microsurge Common Stock and Convertible Preferred Stock.
(k) No income tax provision or benefit has been recorded in the pro forma
adjustments. Since the combined historical operations of the companies' would
not result in the recognition of additional income tax provision or benefit.
Estimated Cost Savings
In connection with the proposed merger with Microsurge, management has
performed a review of operating activities of Microsurge and identified
duplicative costs that it intends to eliminate after the proposed merger. The
most significant of these eliminations would be achieved through head count
reductions and closure of redundant manufacturing and headquarters facilities.
Total estimated cost savings resulting from head count reductions and the
consolidation of Microsurge headquarters, assuming such reductions and
consolidation had occurred at the beginning of each respective pro forma period,
would have been $3.3 million for the nine months ended December 31, 1996 and
$2.8 million for the nine months ended March 31, 1996, and would have been
reflected as reductions in he following expense categories:
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
---------------------------------
DEC. 31, 1996 MAR. 31, 1996
-------------- --------------
<S> <C> <C>
Selling, general and administrative................ $2,874 $2,345
Research and development........................... $ 390 $ 465
</TABLE>
Additionally, to improve operating efficiency and to utilize current
capacity at the Company's manufacturing facilities, management's plan of
restructuring is to consolidate Microsurge's manufacturing operations into the
Michigan facility (Richard-Allan). Total cost savings resulting from this
facility consolidation could be significant, because of available capacity and
manufacturing inefficiencies, but was not estimatable for the periods involved.
Management has identified potential additional cost savings related to
volume discounts expected to be received in connection with the consolidation of
suppliers and vendors, as well as planned cost savings related to the
consolidation of research and development programs. However, the amount of such
potential savings is not determinable at this time.
None of these estimated cost savings are reflected in the accompanying
unaudited pro forma condensed consolidated financial statements.
Charges Expected in the Quarter Ending March 31, 1997
The Company intends to take a significant charge when it reports its
financial results for the quarter ended March 31, 1997. The magnitude of the
charge for restructuring has been estimated to be approximately $7.5 million and
for merger and acquisition costs for both Microsurge and X-Cardia has been
estimated to be approximately $6.0 million. The write-down of purchased
incomplete research and development costs has been estimated by the Company to
be approximately $13.0 million for the amounts paid to date.
F-71
<PAGE> 175
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS EXCHANGE OFFER)
ALL DEALERS EFFECTING TRANSACTIONS IN NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
BY HAND OR OVERNIGHT DELIVERY
THE BANK OF NEW YORK
101 BARCLAY STREET
NEW YORK, NEW YORK 10286
ATTN: CORPORATE TRUST SERVICES WINDOW
GROUND LEVEL
ATTN: REORGANIZATION SECTION
ARWEN GIBBONS
FACISIMILE TRANSMISSIONS (ELIGIBLE INSTITUTIONS ONLY):
(212) 815-6339
TO CONFIRM BY TELEPHONE OR FOR INFORMATION CALL:
(212) 815-5920
BY REGISTERED OR CERTIFIED MAIL
THE BANK OF NEW YORK
101 BARCLAY STREET
NEW YORK, NEW YORK 10286
ATTN: REORGANIZATION SECTION
ARWEN GIBBONS
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL).
OFFER TO EXCHANGE ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED
NOTES DUE 2004
($110,000,000 PRINCIPAL AMOUNT)
FOR
12 1/2% SENIOR SUBORDINATED
NOTES DUE 2004
UROHEALTH SYSTEMS, INC.
-----------------------
PROSPECTUS
-----------------------
, 1997
================================================================================
<PAGE> 176
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 145 ("Section 145") of the General Corporation
Law of the State of Delaware (the "DGCL") which provides for indemnification of
directors and officers in certain circumstances.
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director of the Company
except for liability (i) for any breach of such director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the DGCL (unlawful payment of dividends), or (iv) for any
transaction from which such director derived an improper personal benefit.
The Company is empowered by Section 145 of the DGCL, subject to the
procedures and limitations stated therein, to indemnify any person against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in the defense of any
threatened, pending or completed action, suit or proceeding in which such person
is made a party by reason of his or her being or having been a director or
officer of the Company. The statute provides that indemnification pursuant to
its provisions is not exclusive of other rights of indemnification to which a
person may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
The Company's Bylaws provide that the Company shall indemnify its
directors, and may indemnify its officers, to the full extent permitted by law.
The Registrant has entered into agreements with certain directors and
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts to the fullest extent permitted
by law incurred in connection with any proceeding to which any such person may
be made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted honestly and in good faith with a view to the best interests of the
corporation.
There are directors' and officers' liability insurance policies presently
in force insuring directors and officers of the Registrant and its subsidiaries.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ ----------------------------------------------------------------------------------
<S> <C>
4.1 Indenture, dated April 10, 1997, by and among Urohealth Systems, Inc., the
Guarantors named therein and The Bank of New York, as trustee. (Incorporated by
reference from Exhibit 4.1 to Urohealth's Form 8-K, dated April 28, 1997, as filed
with the Commission on April 28, 1997).
4.2 Registration Rights Agreement, dated April 10, 1997, between Urohealth Systems,
Inc., the Guarantors named therein and the Initial Purchaser. (Incorporated by
reference from Exhibit 4.3 to Urohealth's Form 8-K, dated April 28, 1997, as filed
with the Commission on April 28, 1997).
5.1 Opinion of Morrison & Foerster LLP.
10.1 Amended and Restated Credit Agreement, dated April 10, 1997, between Urohealth
Systems, Inc. and Banque Indosuez, as agent. (Incorporated by reference from
Exhibit 10.1 to Urohealth's Form 8-K, dated April 28, 1997, as filed with the
Commission on April 28, 1997).
12.1 Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Cherry, Bekaert & Holland LLP.
</TABLE>
II-1
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ ----------------------------------------------------------------------------------
<S> <C>
23.3 Consent of Doane Raymond.
23.4 Consent of Coopers & Lybrand L.L.P.
23.5 Consent of KPMG Peat Marwick LLP.
23.6 Consent of Ernst & Young LLP.
23.7 Consent of BDO Seidman LLP.
23.8 Consent of Ernst & Young LLP.
23.9 Consent of Coopers & Lybrand L.L.P.
23.10 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
24.1 Power of Attorney of certain officers and directors (included in Part II to the
Registration Statement).
25.1 Statement regarding eligibility of Trustee.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
(b) Financial Statement Schedules.
Schedule II Consolidated Valuation Accounts and Accountant's Reports
thereon S-1
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933 (the "Act"), each
filing of the registrants' annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 20 above, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(d) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other
II-2
<PAGE> 178
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(e) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE> 179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY Chairman of the Board and May 5, 1997
- --------------------------------------------- Chief Executive Officer
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
- --------------------------------------------- Director May , 1997
Mitchell J. Blutt, M.D.
/s/ ABBEY J. BUTLER Director May 5, 1997
- ---------------------------------------------
Abbey J. Butler
/s/ JOHN CHAMBERLIN Director May 5, 1997
- ---------------------------------------------
John Chamberlin
/s/ ROBERT N. ELKINS Director May 5, 1997
- ---------------------------------------------
Robert N. Elkins
/s/ MELVYN J. ESTRIN Director May 5, 1997
- ---------------------------------------------
Melvyn J. Estrin
</TABLE>
II-4
<PAGE> 180
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ C. SAGE GIVENS Director May 5, 1997
- ---------------------------------------------
C. Sage Givens
/s/ LAWRENCE GOELMAN Director May 5, 1997
- ---------------------------------------------
Lawrence Goelman
/s/ MICHAEL S. GROSS Director May 5, 1997
- ---------------------------------------------
Michael S. Gross
/s/ RICHARD R. NEWHAUSER Director May 5, 1997
- ---------------------------------------------
Richard R. Newhauser
/s/ FRANCIS J. TEDESCO Director May 5, 1997
- ---------------------------------------------
Francis J. Tedesco
/s/ GERALD W. TIMM Director May 5, 1997
- ---------------------------------------------
Gerald W. Timm
</TABLE>
II-5
<PAGE> 181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
GATES PLASTICS
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-6
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
DACOMED CORPORATION
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-7
<PAGE> 183
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
DACOMED INTERNATIONAL, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-8
<PAGE> 184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
ALLSTATE MEDICAL PRODUCTS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-9
<PAGE> 185
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
UROHEALTH OF KENTUCKY, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
/s/ KEVIN M. HIGGINS Director May 5, 1997
- ---------------------------------------------
Kevin M. Higgins
</TABLE>
II-10
<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
MICROSURGE, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-11
<PAGE> 187
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
OSBON MEDICAL SYSTEMS, LTD.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-12
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Newport Beach, State of
California, on May 5, 1997.
UROHEALTH, INC. (CALIFORNIA)
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, James L. Johnson and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorneys-in-fact and agents full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY President and Chief Executive May 5, 1997
- --------------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JAMES L. JOHNSON Executive Vice President and May 5, 1997
- --------------------------------------------- Chief Financial Officer
James L. Johnson (Principal Financial Officer and
Principal Accounting Officer)
/s/ KEVIN M. HIGGINS Director May 5, 1997
- ---------------------------------------------
Kevin M. Higgins
</TABLE>
II-13
<PAGE> 189
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of UroHealth Systems,
Inc. as of March 31, 1996 and June 30, 1995, and for the nine months ended March
31, 1996 and the year ended June 30, 1995, and have issued our report thereon
dated June 4, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. We have not audited the fiscal 1995 financial
statements of Dacomed Corporation, a wholly-owned subsidiary, which statements
reflect total assets and total revenues constituting 4% and 10% of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included in the fiscal 1995 consolidated financial statements for Dacomed
Corporation, is based solely on the report of other auditors.
In our opinion, based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
ORANGE COUNTY, CALIFORNIA
JUNE 4, 1996
S-1
<PAGE> 190
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated statements of operations, common
stockholders' equity, and cash flows of UroHealth Systems, Inc. for the year
ended June 30, 1994 (restated to reflect the acquisitions of Osbon Medical
Systems, Ltd., Dacomed Corporation, Allstate Medical Products, Inc., and
Advanced Surgical Inc., each accounted for as a pooling-of-interest), and have
issued our report thereon dated January 8, 1997 (included elsewhere herein). Our
audit also included the information for the year ended June 30, 1994 that is
included in the financial statement schedule. This statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. We did not audit the fiscal 1994 financial
statements of Dacomed Corporation, UroHealth Systems, Inc. (pre-acquisitions),
Allstate Medical Products, Inc., and Advanced Surgical, Inc., (collectively "the
Companies") which statements reflect total net sales (in thousands) of $8,920
(24% of total net sales), $4,258 (11% of total net sales), $2,215 (6% of total
net sales), and $1,754 (5% of total net sales), respectively, for the year ended
June 30, 1994. Those statements were audited by other auditors, other than the
financial statements of Allstate Medical Products, Inc. which are immaterial and
unaudited, whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for the Companies, is based solely on the
reports of the other auditors.
In our opinion, based on our audit and the reports of other auditors, the
information for the year ended June 30, 1994 that is included in the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
--------------------------------------
CHERRY, BEKAERT & HOLLAND, L.L.P.
Augusta, Georgia
January 8, 1997
S-2
<PAGE> 191
UROHEALTH SYSTEMS, INC.
SCHEDULE II
CONSOLIDATED VALUATION ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT END
DESCRIPTION OF PERIOD ADDITIONS WRITE OFFS OF PERIOD
- ---------------------------------------------- ---------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Nine month period ended March 31, 1996:
Allowance for doubtful accounts.......... $538 $ 1,106 $ -- $1,644
Reserve for inventory obsolescences...... 241 1,140 -- 1,381
----- ------- ---- ------
Total............................... $779 $ 2,246 $ -- $3,025
===== ======= ==== ======
Year ended June 30, 1995:
Allowance for doubtful accounts.......... $506 $ 54 $(22) $ 538
Reserve for inventory obsolescences...... -- 272 (31) 241
----- ------- ---- ------
Total............................... $506 $ 326 $(53) $ 779
===== ======= ==== ======
Year ended June 30, 1994:
Allowance for doubtful accounts.......... $167 $ 348 $ (9) $ 506
Reserve for inventory obsolescences...... -- -- -- --
----- ------- ---- ------
Total............................... $167 $ 348 $ (9) $ 506
===== ======= ==== ======
</TABLE>
S-3
<PAGE> 192
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ------------------------------------------------------------------- -------------
<S> <C> <C>
4.1 Indenture, dated April 10, 1997, by and among Urohealth Systems,
Inc., the Guarantors named therein and The Bank of New York, as
trustee. (Incorporated by reference from Exhibit 4.1 to Urohealth's
Form 8-K, dated April 28, 1997, as filed with the Commission on
April 28, 1997)....................................................
4.2 Registration Rights Agreement, dated April 10, 1997, between
Urohealth Systems, Inc. and the Initial Purchaser. (Incorporated by
reference from Exhibit 4.3 to Urohealth's Form 8-K, dated April 28,
1997, as filed with the Commission on April 28, 1997)..............
5.1 Opinion of Morrison & Foerster LLP.................................
10.1 Amended and Restated Credit Agreement, dated April 10, 1997,
between Urohealth Systems, Inc. and Banque Indosuez, as agent.
(Incorporated by reference from Exhibit 10.1 to Urohealth's Form
8-K, dated April 28, 1997, as filed with the Commission on April
28, 1997)..........................................................
12.1 Ratio of Earnings to Fixed Charges.................................
23.1 Consent of Ernst & Young LLP.......................................
23.2 Consent of Cherry, Bekaert & Holland LLP...........................
23.3 Consent of Doane Raymond...........................................
23.4 Consent of Coopers & Lybrand L.L.P. ...............................
23.5 Consent of KPMG Peat Marwick LLP...................................
23.6 Consent of Ernst & Young LLP.......................................
23.7 Consent of BDO Seidman LLP.........................................
23.8 Consent of Ernst & Young LLP.......................................
23.9 Consent of Coopers & Lybrand L.L.P. ...............................
23.10 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).......
24.1 Power of Attorney of certain officers and directors (included in
Part II to the Registration Statement).............................
25.1 Statement regarding eligibility of Trustee.........................
99.1 Form of Letter of Transmittal......................................
99.2 Form of Notice of Guaranteed Delivery..............................
</TABLE>
<PAGE> 1
EXHIBIT 5.1
May 2, 1997
UROHEALTH Systems, Inc.
5 Civic Plaza, Suite 100
Newport Beach, California 92660
Re: 12 1/2% Senior Notes Due 2004;
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel for UROHEALTH Systems, Inc., a Delaware
corporation (the "Company") and certain of its wholly-owned subsidiaries,
Allstate Medical Products, Inc., Dacomed Corporation, Dacomed International,
Inc., Gates Plastics, Microsurge, Inc., Osbon Medical Systems, Ltd., Urohealth
of Kentucky, Inc. and Urohealth, Inc. (California) (the "Co-Registrants"), in
connection with the Registration Statement (the "Registration Statement") on
Form S-4 under the Securities Act of 1933, as amended, for the registration and
sale of an aggregate of $110,000,000 principal amount of 12 1/2% Senior
Subordinated Notes Due 2004 (the "Notes") by the Company, which will be
unconditionally guaranteed as to principal, premium, if any, and interest on a
senior unsecured basis (the "Guaranties") by all material existing, and certain
future, subsidiaries of the Company, including Co-Registrants, in connection
with the exchange offer (the "Exchange Offer") of $110,000,000 in previously
issued 12 1/2% Senior Subordinated Notes due 2004 (the "Old Notes") for the
Notes. The Old Notes and the Guaranties have been and the Notes will be issued
pursuant to the terms and conditions of, and in the forms set forth in, an
indenture (the "Indenture") among the Company, the Co-Registrants and The Bank
of New York, a New York corporation, as trustee (the "Trustee"), the form of
which is filed as an exhibit to the Registration Statement. The Notes and the
Guaranties are referred to collectively hereinafter as the "Securities."
We have examined originals or copies of the Indenture and the Securities.
In addition, we have examined such records, documents, certificates of public
officials and of the Company, made such inquiries of officials of the Company,
and considered such questions of law as we have deemed necessary for the purpose
of rendering the opinions set forth herein.
We have assumed the genuineness of all signatures, the authenticity of all
items submitted to us as originals and the conformity with originals of all
items submitted to us as copies. We have also assumed that each party to the
Indenture and the Securities, other than the Company, has the power and
authority to execute and deliver, and to perform and observe the provisions of,
the Indenture and the Securities, and has duly authorized, executed and
delivered the Indenture and the Securities, that the Indenture constitutes the
legal, valid and binding obligations of the Trustee, and that the Indenture has
been duly authenticated by the Trustee and will be duly qualified under the
Trust Indenture Act of 1939, as amended. We have also assumed compliance with
all applicable state securities and "Blue Sky" laws.
The opinions hereinafter expressed are subject to the following further
qualifications and exceptions:
(i) The effect of bankruptcy, insolvency, reorganization,
arrangement, moratorium and or other similar laws relating to or affecting
the rights of creditors generally, including, without limitation, laws
relating to fraudulent transfers or conveyances, preferences and equitable
subordination;
(ii) Limitations imposed by general principles of equity upon the
availability of equitable remedies or the enforcement of provisions of the
Securities and the Indenture; and the effect of judicial decisions which
have held that certain provisions are unenforceable where their enforcement
would violate the implied covenants of good faith and fair dealing, or
would be commercially unreasonable, or where their breach is not material;
(iii) We express no opinion as to the effect on the opinions expressed
herein of (a) the compliance or non-compliance of any party to the
Indenture or the Securities (other than the Company and the
<PAGE> 2
Co-Registrants) with any laws or regulations applicable to it, or (b) the
legal or regulatory status or the nature of the business of any such party;
(iv) The effect of judicial decisions which may permit the
introduction of extrinsic evidence to supplement the terms of the Indenture
or the Securities or to aid in the interpretation of the Indenture or the
Securities;
(v) We express no opinion as to the enforceability of provisions of
the Indenture or the Securities imposing, or which are construed as
effectively imposing, penalties;
(vi) The enforceability of provisions of the documents which purport
to establish evidentiary standards or to make determinations conclusive;
(vii) We express no opinion as to the enforceability of any choice of
law provisions contained in the documents or the enforceability of any
provisions which purport to establish a particular court as the forum for
adjudication of any controversy relating to the documents or which purport
to cause any party to waive or alter any right to a trial by jury or which
waive objection to jurisdiction; and
(viii) We express no opinion as to the enforecability of certain
waivers and other provisions in the Guaranties which purport to waive or
alter rights provided by a guarantor by statute or judicial decision. Such
provisions include, without limitation, those which permit a creditor to
alter materially the original obligation of the principal, elect remedies
on default that impair the subrogation rights of the guarantor against the
principal, or otherwise take action that materially prejudices the
guarantor. In this connection, we advise you that, if such a provision is
unenforceable, action on the part of the creditor as permitted by that
provision may operate to exonerate the guarantor in whole or in part from
obligations under the guarantee.
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Notes, upon valid tender of the Old Notes to the Bank of New
York, as exchange agent for the Exchange Offer and issuance of the Notes in
exchange for such tendered Old Notes in accordance with the terms of the
Registration Statement, will be legally issued and will constitute binding
obligations of the Company.
(2) The Guaranties, when issued in accordance with the terms of the
Indenture, will constitute binding obligations of the Co-Registrants.
We express no opinion as to matters governed by laws of any jurisdiction
other than the following as in effect on the date hereof: the substantive laws
of the States oif New York and California (without reference to their respective
choice of law rules), the general corporation laws of the State of Delaware and
the federal laws of the United States of America.
We hereby consent to the use of this opinion in connection with the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" therein.
Yours very truly,
/s/ MORRISON & FOERSTER L.L.P.
2
<PAGE> 1
EXHIBIT 12.1
UROHEALTH SYSTEMS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED
NINE MONTHS NINE MONTHS ENDED DECEMBER
YEAR ENDED JUNE 30, ENDED ENDED DECEMBER 31,
----------------------------------- MARCH 31, MARCH 31, 31, 1996
1992 1993 1994 1995 1995 1996 1995 (UNAUDITED)
------ ------ ------- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss).... (4,026) (9,985) (20,127) (18,506) (15,497) (17,998) (21,483) (23,716)
Add:
Extraordinary
item........... -- -- -- -- -- -- -- 2,973
Taxes............ 258 837 566 1,386 1,069 431 648 (377)
Fixed charges.... 886 461 817 794 580 1,291 809 5,128
------ ------ ------- ------- ------- ------- ------- -------
Earnings....... (2,882) (8,688) (18,744) (16,327) (13,848) (16,276) (20,027) (18,965)
Fixed Charges
Interest........... 639 126 267 303 208 1,002 495 4,864
Interest portion of
rent expense..... 247 335 375 413 309 234 260 210
Preferred stock
dividends........ -- -- 175 78 63 55 54 54
------ ------ ------- ------- ------- ------- ------- -------
Total fixed
charges..... 886 461 817 794 580 1,291 809 5,128
Ratio of earnings to
fixed charges(1)... -- -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) For purposes of computing the ratio of earnings to fixed charges, (i)
earnings represents income (loss) from continuing operations before income
taxes plus fixed charges, and (ii) fixed charges consists of interest
expense, the portion of rent expense representing interest, and dividends on
the preferred stock of a subsidiary. The Company had a deficiency of
earnings compared to its fixed charges for the years ended June 30, 1992,
1993, 1994 and 1995 and for the nine months ended March 31, 1995 and 1996
and December 31, 1995 and 1996 of $3.8 million, $9.1 million, $19.6 million,
$17.1 million, $14.4 million, $17.6 million, $20.8 million and $24.1
million, respectively.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts," "Summary
Condensed Consolidated Financial Data" and "Selected Consolidated Financial
Data" and to the use of our reports dated June 4, 1996 in the Registration
Statement (Form S-4 No. 333- ) and related Prospectus of Urohealth Systems,
Inc. for the registration of $110,000,000 principal amount of 12 1/2% Senior
Subordinated Notes due 2004 of Urohealth Systems, Inc. and to the incorporation
by reference therein of our reports dated June 4, 1996, with respect to the
consolidated financial statements and schedule of Urohealth Systems, Inc.
included in its Transition Report (Form 10-K/A) for the nine months ended March
31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
Orange County, California
April 30, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333- ) and the related Prospectus of
Urohealth System, Inc. for the registration of $110,000,000 principal amount of
12 1/2% Senior Subordinated Notes due 2004 of Urohealth and to the incorporation
by reference therein of our report dated January 8, 1997, with respect to the
financial statements of Urohealth Systems, Inc. for the year ended June 30,
1994, included in its Transition Report (Form 10-K/A) for the nine months ended
March 31, 1996, filed with the Securities and Exchange Commission.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
---------------------------------------
CHERRY, BEKAERT & HOLLAND, L.L.P.
Augusta, Georgia
May 2, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333- ) and the related Prospectus of
UROHEALTH Systems, Inc. for the registration of $110,000,000 principal amount of
12 1/2% Senior Subordinated Notes due 2004 of Urohealth and to the incorporation
by reference therein of our report dated August 22, 1994, with respect to the
consolidated statements of operations, stockholders' equity and cash flows of
UROHEALTH Systems, Inc. for the year ended June 30, 1994, included in its
Transition Report (Form 10-K/A) for the nine months ended March 31, 1996, filed
with the Securities and Exchange Commission.
/s/ DOANE RAYMOND
--------------------------------------
Doane Raymond
Chartered Accountants
Toronto, Canada
May 1, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-4 and the related Prospectus of Urohealth Systems, Inc. of our report,
which included an explanatory paragraph related to the Company's ability to
continue as a going concern, dated February 24, 1994 on our audit of the
consolidated financial statements of Advanced Surgical, Inc. as of and for the
year ended December 31, 1994, of which the results are included in the June 30,
1994 consolidated results of operations of Urohealth Systems, Inc. included in
its Transition Report on Form 10-K/A for the nine months ended March 31, 1996.
We also consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
- ---------------------------------------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 2, 1997
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
UROHEALTH Systems, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333- ) on Form S-4 of our report dated October 10, 1995, relating to the
consolidated balance sheet of Dacomed Corporation as of June 24, 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the fiscal year then ended, and our report dated December 19, 1994,
relating to the consolidated statements of operations, stockholders' equity and
cash flows for Dacomed Corporation for the fiscal year ended October 29, 1994
and to the reference to our Firm under the heading "Experts" in the Registration
Statement.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 1, 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333- ) and the related Prospectus of
Urohealth Systems, Inc. (the Company) for the registration of $110,000,000
principal amount of 12 1/2% Senior Subordinated Notes due 2004 of Urohealth
Systems, Inc. and to the incorporation by reference therein of our report dated
August 8, 1996, except Note K, as to which the date is August 14, 1996, with
respect to the consolidated financial statements of Richard-Allen Medical
Industries, Inc. included in the Company's Form 8-K/A, dated July 1, 1996, as
amended, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
Kalamazoo, Michigan
April 30, 1997
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333- ) and the related Prospectus of
Urohealth System, Inc. for the registration of $110,000,000 principal amount of
12 1/2% Senior Subordinated Notes due 2004 of Urohealth and to the incorporation
by reference therein of our report dated August 23, 1993, relating to the
consolidated statement of operations, stockholders' equity, and cash flows for
Richard-Allan Medical Industries for the fiscal year ended June 30, 1993.
/s/ BDO SEIDMAN, LLP
- ---------------------------------------------------------
BDO SEIDMAN, LLP
Kalamazoo, Michigan
May 1, 1997
<PAGE> 1
EXHIBIT 23.8
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 5, 1997 in the Registration Statement (Form
S-4 No. 333- ) and related Prospectus of UROHEALTH Systems, Inc. (Company)
for the registration of $110,000,000 principal amount of 12 1/2% Senior
Subordinated Notes due 2004 of Urohealth Systems, Inc. and to the incorporation
by reference therein of our report dated February 5, 1997, with respect to the
financial statements of X-Cardia Corporation included in the Company's Form
8-K/A, dated March 14, 1997, as amended, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
Palo Alto, California
April 30, 1997
<PAGE> 1
EXHIBIT 23.9
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in this Registration
Statement of Urohealth Systems, Inc. on Form S-4 of our report on Microsurge,
Inc., which includes an explanatory paragraph related to the Company's ability
to continue as a going concern, dated March 14, 1997 on our audits of the
financial statements of Microsurge, Inc. as of December 31, 1996 and 1995 and
for the three years in the period ended December 31, 1996, which report is
included in the Current Report on Form 8-K/A as amended on April 28, 1997 of
Urohealth Systems, Inc. We also consent to the reference to our firm under the
caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 30, 1997
<PAGE> 1
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
------------------------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
------------------------------------------
UROHEALTH SYSTEMS, INC.
(Exact name of obligor as specified in its charter)
Delaware 98-0122944
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5 Civic Plaza, Suite 100
Newport Beach, California 92660
(Address of principal executive offices) (Zip code)
------------------------------------------
12 1/2% Senior Subordinated Notes due 2004
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Address
- --------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 3
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
- 3 -
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 28th day of April, 1997.
THE BANK OF NEW YORK
By: /s/ VIVIAN GEORGES
--------------------------------
Name: VIVIAN GEORGES
Title: ASSISTANT VICE PRESIDENT
-4-
<PAGE> 5
EXHIBIT 7
__________________________________________________________________
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1996, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
in Thousands
<S> <C>
ASSETS
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 4,404,522
Interest-bearing balances .......... 732,833
Securities:
Held-to-maturity securities ........ 789,964
Available-for-sale securities ...... 2,005,509
Federal funds sold in domestic offices
of the bank:
Federal funds sold ................... 3,364,838
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................28,728,602
LESS: Allowance for loan and
lease losses ..............584,525
LESS: Allocated transfer risk
reserve........................429
Loans and leases, net of unearned
income, allowance, and reserve 28,143,648
Assets held in trading accounts ...... 1,004,242
Premises and fixed assets (including
capitalized leases) ................ 605,668
Other real estate owned .............. 41,238
Investments in unconsolidated
subsidiaries and associated
companies .......................... 205,031
Customers' liability to this bank on
acceptances outstanding ............ 949,154
Intangible assets .................... 490,524
Other assets ......................... 1,305,839
-----------
Total assets ......................... $44,043,010
===========
LIABILITIES
Deposits:
In domestic offices ................ $20,441,318
Noninterest-bearing .......8,158,472
Interest-bearing .........12,282,846
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 11,710,903
Noninterest-bearing ..........46,182
Interest-bearing .........11,664,721
Federal funds purchased in
domestic offices of the
bank:
Federal funds purchased ............ 1,565,288
Demand notes issued to the U.S.
Treasury ........................... 293,186
Trading liabilities .................. 826,856
Other borrowed money:
With original maturity of one year
or less .......................... 2,103,443
With original maturity of more than
one year ......................... 20,766
Bank's liability on acceptances exe-
cuted and outstanding .............. 951,116
Subordinated notes and debentures .... 1,020,400
Other liabilities .................... 1,522,884
-----------
Total liabilities .................... 40,456,160
-----------
EQUITY CAPITAL
Common stock ........................ 942,284
Surplus ............................. 525,666
Undivided profits and capital
reserves .......................... 2,129,376
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ ( 2,073)
Cumulative foreign currency transla-
tion adjustments .................. ( 8,403)
-----------
Total equity capital ................ 3,586,850
-----------
Total liabilities and equity
capital ........................... $44,043,010
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot
Thomas A. Renyi Directors
Alan R. Griffith
__________________________________________________________________
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
UROHEALTH SYSTEMS, INC.
OFFER TO EXCHANGE
12 1/2% SENIOR SUBORDINATED NOTES DUE 2004 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
FOR ANY AND ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED NOTES DUE 2004
PURSUANT TO THE PROSPECTUS DATED MAY , 1997.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME ON , 1997.
The Exchange Agent for the Exchange Offer is:
THE BANK OF NEW YORK
BY HAND OR OVERNIGHT DELIVERY:
The Bank of New York
101 Barclay Street
New York, New York 10286
Corporate Trust Services Window
Ground Level
Attn: Reorganization Section
Arwen Gibbons
FACSIMILE TRANSMISSION (Eligible Institutions Only):
(212) 815-6339
To confirm by telephone or for information call:
(212) 815-5920
BY REGISTERED OR CERTIFIED MAIL:
The Bank of New York
101 Barclay Street, 7E
New York, New York 10286
Attn: Reorganization Section
Arwen Gibbons
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus, dated
, 1997 (the "Prospectus"), of Urohealth Systems, Inc., a Delaware
corporation (the "Company") and this Letter of Transmittal (this "Letter"),
which together constitute the offer (the "Exchange Offer") to exchange an
aggregate principal amount of up to $110,000,000 12 1/2% Senior Subordinated
Notes Due 2004 (the "New Notes") for an equal principal amount of the
outstanding 12 1/2% Senior Subordinated Notes Due 2004 (the "Old Notes").
<PAGE> 2
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. The New Notes will bear interest at a rate equal to
12 1/2% per annum from and including their date of issuance. Holders whose Old
Notes are accepted for exchange will have the right to receive interest accrued
thereon from the date of their original issuance or the last Interest Payment
Date, as applicable, to, but not including, the date of issuance of the New
Notes, such interest to be payable with the first interest payment on the New
Notes. Interest on the Old Notes accepted for exchange, which interest accrued
at the rate of 12 1/2% per annum, will cease to accrue on the day prior to the
issuance of the New Notes. The New Notes will mature on April 1, 2004.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, in which event the
term "Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended, and (iii) to amend the terms of the Exchange Offer in any
manner. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendments by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes. Modifications of the Exchange Offer,
including but not limited to extension of the period during which the Exchange
Offer is open, may require that at least five business days remain in the
Exchange Offer. In order to extend the Exchange Offer, the Company will notify
the Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
This Letter is to be completed by a holder of Old Notes either if Old Notes
are to be forwarded herewith or if a tender of Old Notes, if available, is to be
made by book-entry transfer to the account maintained by the Exchange Agent at
The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to
the procedure set forth in "The Exchange Offer" section of the Prospectus.
Holders of Old Notes whose Notes are not immediately available, or who are
unable to deliver their Notes or confirmation of the book-entry tender of their
Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility
(a "Book-Entry Confirmation") and all other documents required by this Letter to
the Exchange Agent on or prior to the Expiration Date, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1. Delivery of documents to the Book Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space
provided below is inadequate, the Note numbers and principal amount of Old Notes
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- -------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN, IF BLANK)
------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
NOTE PRINCIPAL AMOUNT PRINCIPAL
NUMBER(S)* OF OLD NOTE(S) TENDERED**
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Total
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have
tendered the entire principal amount represented by the Old Note indicated
in column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
- --------------------------------------------------------------------------------
<PAGE> 3
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
-----------------------------------------------------------------------------
Account Number
-----------------------------------------------------------------------------
Transaction Code Number
-----------------------------------------------------------------------------
[ ] CHECK HERE IF OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holder(s)
------------------------------------------------------------------------------
Window Ticket Number (if any)
------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
--------------------------------------------------------------------
Name of Institution which guaranteed delivery
--------------------------------------------------------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number
------------------------------------------------------------------------------
Transaction Code Number
------------------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
-----------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person is engaged in, or intends to engage in, a distribution of such New Notes,
or has an arrangement or understanding with any person to participate in the
distribution of such New Notes, and that neither the holder of such Old Notes
nor any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
<PAGE> 4
The undersigned also acknowledges that this Exchange Offer is being made
based upon the Company's understanding of an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings Corporation,
SEC No-Action Letter (available April 13, 1989) (the "Exxon Capital Letter"),
Morgan Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991)
(the "Morgan Stanley Letter") and Shearman & Sterling, SEC No-Action Letter
(available July 2, 1993) (the "Shearman & Sterling Letter"), that the New Notes
issued in exchange for the Old Notes pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by holders thereof (other
than a broker-dealer who acquires such New Notes directly from the Company for
resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act or any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and have no arrangement with any
person to participate in the distribution of such New Notes. If a holder of Old
Notes is engaged in or intends to engage in a distribution of the New Notes or
has any arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such holder could not rely
on the applicable interpretations of the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any secondary resale transaction. If the undersigned is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, it represents that the Old Notes to be exchanged for the New Notes
were acquired by it as a result of market-making activities or other trading
activities and acknowledges that it will deliver a prospectus in connection with
any resale of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal Rights"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute Notes representing the remaining principal balance of any Old Note
exchanged only in part) in the name of the undersigned or, in the case of a
book-entry delivery of Old Notes, please credit the account indicated above
maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise
indicated under the box entitled "Special Delivery Instructions" below, please
send the New Notes (and, if applicable, substitute Notes representing the
remaining principal balance of any Old Note exchanged only in part) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
<PAGE> 5
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Notes for Old Notes not exchanged and/or New Notes are
to be issued in the name of and sent to someone other than the person(s) whose
signature(s) appear(s) on this Letter above, or if Old Notes delivered by book-
entry transfer which are not accepted for exchange are to be returned by credit
to an account maintained at the Book-Entry Transfer Facility other than the
account indicated above.
Issue New Notes and/or Old Notes to:
Name(s):
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDING ZIP CODE)
(Complete accompanying Substitute Form W-9)
Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry
Transfer Facility account set forth below.
- --------------------------------------------------------------------------------
(BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Notes for Old Notes not exchanged and/or New Notes are
to be sent to someone other than the person(s) whose signature(s) appear(s) on
this Letter above or to such person(s) at an address other than shown in the box
entitled "Description of Old Notes" on this Letter above.
Mail New Notes and/or Old Notes to:
Name(s):
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDING ZIP CODE)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE OLD NOTES OR A
BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE
NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT
PRIOR TO 5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE
<PAGE> 6
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
Dated:
- ------------------------------------------------------------------------- , 1997
- -------------------------------------------------------------------------x
- -------------------------------------------------------------------------x
(SIGNATURE(S) OF OWNER) (DATE)
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the Note(s) for the Old Notes
or by any person(s) authorized to become registered holder(s) by endorsements
and documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, please set forth full title. See Instruction 3.
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
- --------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
- --------------------------------------------------------------------------------
(TITLE)
- --------------------------------------------------------------------------------
(NAME AND FIRM)
Dated:
- --------------------------------------------------------------------------------
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE 12 1/2%
SENIOR SUBORDINATED NOTES DUE 2004, WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OUTSTANDING 12 1/2%
SENIOR SUBORDINATED NOTES DUE 2004
UROHEALTH SYSTEMS, INC.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter is to be completed by holders of Old Notes either if Notes are
to be forwarded herewith or if tenders are to be made pursuant to the procedures
for delivery by book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Old Notes" section of the Prospectus.
Physically tendered Old Notes, or Book-Entry Confirmation, as the case may be,
as well as a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and any other documents required by this Letter, must be
received by the Exchange Agent at the address set forth herein on or prior to
the Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures set forth below. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 or any integral multiple thereof.
Holders whose Old Notes are not immediately available or who cannot deliver
their Notes and all other required documents to the Exchange Agent on or prior
to the Expiration Date, or who cannot complete the procedure for book-entry
transfer on a timely basis, may tender their Old Notes pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus. Pursuant to such procedures: (i)
such tender must be made by or through an Eligible Institution and a Notice of
Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by
such holder, (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within four (4) business days after the date of delivery of
the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed
Letter of Transmittal and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) such properly completed
and executed documents required by the Letter of Transmittal and the tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC) must be received by
the Exchange Agent within four (4) business days after the Expiration Date. Any
holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Old Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than the entire principal amount of any submitted Old Note is to be
tendered, the tendering holder(s) should fill in the aggregate principal amount
to be tendered in the box above entitled "Description of Old Notes -- Principal
Amount Tendered." A reissued Old Note representing the balance of nontendered
principal of any submitted Old Notes will be sent to such tendering holder,
unless otherwise provided in the appropriate box on this Letter, promptly after
the Expiration Date. THE ENTIRE PRINCIPAL AMOUNT OF ANY OLD NOTES DELIVERED TO
THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE
INDICATED.
<PAGE> 8
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS AND ENDORSEMENT; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the Notes without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several Old
Notes, it will be necessary to complete, sign and submit as many separate copies
of this Letter as there are different registrations of Old Notes.
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of the submitted Old Notes
or separate instruments of assignment are required. If, however, the New Notes
are to be issued, or any untendered Old Notes are to be reissued, to a person
other than the registered holder, then endorsements of any Old Notes transmitted
hereby or separate instruments of assignment are required. Signatures on such
Old Notes must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of
any Old Notes specified herein, such Old Notes must be endorsed or accompanied
by appropriate instruments of assignment, in either case signed exactly as the
name of the registered holder appears on the Old Notes and the signatures on
such Old Notes must be guaranteed by an Eligible Institution.
If this Letter or any Old Notes or instruments of assignment are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on Old Notes or signatures on instruments of assignment
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., by a commercial bank or trust company
having an office or correspondent in the United States or by an "eligible
guarantor" institution within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934 (an "Eligible Institution").
Signatures on this letter need not be guaranteed by an Eligible
Institution, provided the Old Notes are tendered: (i) by a registered holder of
Old Notes (which term, for purposes of the Exchange Offer, includes any
participant in the Book-Entry Transfer Facility system whose name appears on a
security position listing as the holder of such Old Notes) tendered who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter, or (ii) for the account of an Eligible
Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute Notes evidencing Old Notes not exchanged are to be issued or sent, if
different from the name or address of the person signing this Letter. In the
case of issuance in a different name, the employer identification or social
security number of the person named must also be indicated. A holder of Old
Notes tendering Old Notes by book-entry transfer may request that Old Notes not
exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder of Old Notes may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
Holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which, in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery of
New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
<PAGE> 9
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Notice of
Foreign Status. These forms may be obtained from the Exchange Agent. If the Old
Notes are in more than one name or are not in the name of the actual owner, such
holder should consult the W-9 Guidelines for information on which TIN to report.
If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT IS NOT NECESSARY FOR TRANSFER
TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
<PAGE> 10
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
<TABLE>
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: UROHEALTH SYSTEMS, INC.
===================================================================================================================
SUBSTITUTE PART 1 -- Please provide your TIN in the TIN:
FORM W-9 box at right and certify by signing and -----------------------------------------
dating below. Social Security Number
or Employer Identification Number
----------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY PART 2 -- TIN Applied For [ ]
INTERNAL REVENUE SERVICE
----------------------------------------------------------------------------------------
Certification: Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (the
"IRS") that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding, and
(3) any other information provided on this form is true and correct
You must cross out item (2) of the above certification if you have been notified by the
IRS that you are subject to backup withholding because of under reporting of interest
or dividends on your tax return and you have not been notified by the IRS that you are
no longer subject to backup withholding.
Signature Date: ________________
PAYOR'S REQUEST FOR
TAXPAYER IDENTIFICATION
NUMBER ("TIN")
AND CERTIFICATION
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</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of the exchange, 31 percent of all reportable payments made to me
thereafter will be withheld until I provide a number.
================================================================================
Signature Date
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<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY FOR
UROHEALTH SYSTEMS, INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Urohealth Systems, Inc. (the "Company") made pursuant to the
Prospectus, dated , 1997 (the "Prospectus"), and the enclosed Letter
of Transmittal (the "Letter of Transmittal") if Old Notes are not immediately
available or if the procedure for book-entry transfer cannot be completed on a
timely basis or time will not permit all required documents to reach the Company
prior to 5:00 P.M., New York City time, on the Expiration Date of the Exchange
Offer. Such form may be delivered or transmitted by facsimile transmission, mail
or hand delivery to The Bank of New York (the "Exchange Agent") as set forth
below. In addition, in order to utilize the guaranteed delivery procedure to
tender Old Notes pursuant to the Exchange Offer, a completed, signed and dated
Letter of Transmittal (or facsimile thereof) must also be received by the
Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration Date.
Capitalized terms not defined herein are defined in the Prospectus.
DELIVERY TO: THE BANK OF NEW YORK, EXCHANGE AGENT
BY HAND OR OVERNIGHT DELIVERY:
The Bank of New York
101 Barclay Street
New York, New York 10286
Corporate Trust Services Window
Ground Level
Attn: Reorganization Section
Arwen Gibbons
FACSIMILE TRANSMISSION (Eligible Institutions Only):
(212) 815-6339
To confirm by telephone or for information call:
(212) 815-5920
BY REGISTERED OR CERTIFIED MAIL:
The Bank of New York
101 Barclay Street, 7E
New York, New York 10286
Attn: Reorganization Section
Arwen Gibbons
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus.
<PAGE> 2
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT OF OLD NOTES TENDERED
$
- --------------------------------------------------------------------------------
Note Nos. (if available)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If Old Notes will be delivered by book-entry transfer to The Depositary
Trust Company, provide account number.
Account Number
- --------------------------------------------------------------------------------
================================================================================
NAME(S) OF RECORD HOLDERS(S):
------------------------------------------------------------
------------------------------------------------------------
Addresses:
------------------------------------------------------------
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Area Code and Telephone Numbers(s):
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Signature(s):
------------------------------------------------------------
------------------------------------------------------------
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THE ACCOMPANYING GUARANTEE MUST BE COMPLETED.
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office correspondent in the United
States or any "eligible guarantor" institution within the meaning of Rule
17Ad-15 of the Securities Exchange Act of 1934, as amended, hereby guarantees to
deliver to the Exchange Agent, at its address set forth above, the Old Notes
described above, in proper form for transfer, or a Book-Entry Confirmation,
together with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees, and any other
documents required by the Letter of Transmittal within three New York Stock
Exchange, Inc. trading days after the date of execution of this Notice of
Guaranteed Delivery.
<TABLE>
<S> <C>
Name of Firm:
-----------------------------------------------
- ---------------------------------------------- (AUTHORIZED SIGNATURE)
Address: Title:
- ---------------------------------------------- ------------------------------------------------
Name:
- ---------------------------------------------- -----------------------------------------------
Area code and
Telephone Number: Date:
- ----------------------------------- -----------------------------------------------
</TABLE>
