<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1997
REGISTRATION NO. 333-26503
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UROHEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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
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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
- ---------------------------------------------------------------------------------------------------
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12 1/2% Senior Subordinated Notes
due 2004........................ $110,000,000 100% $110,000,000 $33,334(2)
Guarantees........................ N/A N/A N/A (3)
===================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid.
(3) 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
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ITEM IN FORM S-4 CAPTION IN PROSPECTUS
- ---------------------------------------------------------- -----------------------------------
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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; Consolidated
Financial Statements
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; 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 SEPTEMBER 11, 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"). The Notes are fully and
unconditionally guaranteed on a senior subordinated basis by the Company's
domestic and material foreign subsidiaries and all future Restricted
Subsidiaries. An aggregate principal amount of $110,000,000 of Old Notes is
outstanding. See "The Exchange Offer." As of June 30, 1997, the Company had
outstanding indebtedness of approximately $171 million and subsequent to June
30, 1997 the Company drew down $5.0 million under its senior credit facility.
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 12 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"), 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 and Osbon, 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."
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
<PAGE> 6
(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
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PAGE
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Available Information................................................................. 1
Incorporation of Certain Documents by Reference....................................... 1
Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 12
The Company........................................................................... 21
The Exchange Offer.................................................................... 21
Use of Proceeds....................................................................... 28
Ratio of Earnings to Fixed Charges.................................................... 28
Capitalization........................................................................ 29
Selected Consolidated Financial Data.................................................. 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 32
Business.............................................................................. 38
Management............................................................................ 52
Principal Stockholders................................................................ 56
Description of Certain Indebtedness................................................... 58
Description of Notes.................................................................. 59
Description of Capital Stock.......................................................... 85
Certain Federal Income Tax Considerations............................................. 90
Plan of Distribution.................................................................. 91
Legal Matters......................................................................... 92
Experts............................................................................... 92
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
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 year ended
March 31, 1997, as amended on July 29, 1997 and September 2, 1997 (Commission
file no. 1-11150); (ii) the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 (Commission file no. 1-11150); and (iii) the
Company's Current Report on Form 8-K, dated April 28, 1997 (Commission file no.
1-11150).
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.
<PAGE> 10
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 contain 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
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 $90.7 million for
the year ended March 31, 1997.
The Company's strategy is to: (i) expand the range of products to its
growing Target Markets; (ii) leverage its 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.
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 telescopes, light sources, cameras and video viewing, recording and
printing systems. During fiscal 1997 the Company introduced its Reflex(R)
AEC35(TM)articulating cutter and stapler, and 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
3
<PAGE> 12
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 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 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
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 1.40 shares of Urohealth Common Stock. Urohealth will
issue approximately 11.4 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 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."
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."
4
<PAGE> 13
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."
5
<PAGE> 14
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
6
<PAGE> 15
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.
7
<PAGE> 16
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."
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
8
<PAGE> 17
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."
9
<PAGE> 18
SUMMARY CONDENSED CONSOLIDATED FINANCIAL DATA
The following summary condensed consolidated financial data of the Company
have been derived from the consolidated financial statements of the Company
which have been prepared in accordance with United States generally accepted
accounting principles and include the statements of operations and balance sheet
data for Osbon Medical Systems, Ltd. ("Osbon"), Advanced Surgical, Inc.
("Advanced"), Dacomed Corporation ("Dacomed"), Allstate Medical Products, Inc.
("Allstate") and Microsurge, Inc. ("Microsurge") which acquisitions were
accounted for as pooling-of-interests transactions. The selected consolidated
financial data presented below have also been derived from the statement of
operations and balance sheet for Richard-Allan, which has been accounted for as
a purchase, from August 14, 1996 and for X-Cardia Corporation, which has been
accounted for as a purchase, from February 28, 1997. For further information on
these and other business combinations, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements contained elsewhere herein. Financial data as
of March 31, 1996 and 1997 and for the year ended June 30, 1995, the nine months
ended March 31, 1996 and the year ended March 31, 1997 are derived from the
consolidated financial statements of the Company included elsewhere herein that
have been audited by Ernst & Young LLP, independent auditors, except for the
financial statements of Microsurge for all periods presented and the financial
statements of Dacomed for the fiscal year ended June 24, 1995, consolidated
subsidiaries which were audited by other 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, 1993 and 1994 and as of June 30, 1993, 1994 and 1995 are derived from
financial statements not included herein. The financial data for the nine months
ended March 31, 1995, for the 12-months ended March 31, 1996 and for the three
months ended June 30, 1996 and 1997 are derived from the unaudited financial
statements of the Company, which contain all adjustments, consisting of normal
recurring accruals (except for the restructuring, direct acquisition and other
costs and extraordinary items identified in the statement of operations data
below) 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 three months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the entire year. 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 the Company included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED 12-MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,(1) ENDED YEAR ENDED JUNE 30,
------------------------------ ------------------- MARCH 31, MARCH 31, ------------------
1993 1994 1995 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- ---------- ---------- ------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $ 32,666 $ 39,376 $ 49,250 $ 34,467 $ 42,953 $ 56,630 $ 90,695 $17,318 $ 25,237
Gross profit............ 20,008 24,341 30,721 22,026 27,989 36,793 49,612 11,198 13,535
Selling, general and
administrative........ 26,298 36,114 41,057 28,839 37,056 47,977 57,691 10,685 16,863
Research and
development........... 6,332 11,480 5,406 4,752 2,777 3,881 4,997 800 1,665
Restructuring, direct
acquisition and other
costs(2).............. 563 1,000 7,663 6,812 9,688 10,539 62,832 -- --
-------- -------- -------- -------- -------- -------- -------- ------- --------
Loss from operations.... (13,185) (24,253) (23,405) (18,377) (21,532) (25,604) (75,908) (287) (4,993)
Interest expense........ 325 406 367 254 1,059 1,165 8,143 1,044 5,433
Loss before
extraordinary item.... (13,441) (24,804) (24,837) (19,299) (23,024) (27,527) (83,510) (1,290) (9,591)
Extraordinary item...... -- -- -- -- -- -- (2,973) (2,973) (1,823)
-------- -------- -------- -------- -------- -------- -------- ------- --------
Net loss................ $(13,441) $(24,804) $(24,837) $ 19,299 $(23,024) $(27,527) $(86,483) $(4,263) $(11,414)
Loss per share before
extraordinary item.... $ (1.04) $ (1.90) $ (1.70) $ (1.39) $ (1.58) $ (1.85) $ (4.31) $ (0.10) $ (0.40)
</TABLE>
10
<PAGE> 19
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- --------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents............................ $10,161 $ 7,065 $ 2,857 $ 3,345 $ 2,591 $ 5,750
Working capital (deficit)....................... 17,307 12,784 5,909 (3,330) 1,714 30,508
Restricted cash................................. 96 96 96 96 48 19,327
Total assets.................................... 32,954 31,473 31,082 33,355 137,159 179,689
Short-term debt................................. -- -- 1,689 9,549 14,518 5,268
Current portion of long-term debt............... 1,568 2,025 822 546 3,328 3,216
Long-term debt.................................. 1,475 1,529 2,674 8,272 98,292 53,269
Senior subordinated notes, net of discount...... -- -- -- -- -- 108,340
Redeemable convertible preferred stock.......... -- -- 1,143 3,554 -- --
Common stockholders' equity (deficiency)........ 23,825 19,537 12,941 (4,575) (14,511) (23,976)
</TABLE>
<TABLE>
<CAPTION>
THREE
NINE MONTHS THREE MONTHS
ENDED 12-MONTHS MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31, ENDED YEAR ENDED ENDED JUNE
-------------------------- ---------------- MARCH 31, MARCH 31, JUNE 30, 30,
1993 1994 1995 1995 1996 1996 1997 1996 1997
------ ------ ------ ------ ------ ---------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Depreciation and
amortization............... $1,528 $1,884 $3,090 $1,581 $1,715 $3,481 $ 5,272 $ 649 $2,535
Capital expenditures......... $2,734 $2,165 $3,645 $2,901 $3,033 $3,942 $ 12,277 $3,642 $3,119
Ratio of earnings to fixed
charges(3)................. -- -- -- -- -- -- -- -- --
</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) 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, twelve
months ended March, 31, 1996 and for the year ended March 31, 1997 of $12.6
million, $24.2 million, $23.5 million, $18.2 million, $22.6 million, $26.8
million and $83.7 million, respectively. For the three months ended June 30,
1996 and 1997, the Company had a deficiency of earnings to cover fixed
charges of $1.3 million and $9.6 million, respectively.
11
<PAGE> 20
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. The Company has substantial indebtedness and
significant debt service obligations. At June 30, 1997, the Company had
approximately $170.1 million of indebtedness outstanding, approximately $179.7
million of total assets, approximately $121.0 million of total tangible assets
and approximately $(24.0) million of stockholder's equity. See "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
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 year ended March 31, 1997, has
had negative cash flow from operations. 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. The Company was not in
compliance with certain financial covenants under its Senior Credit Facility for
the quarter ended June 30, 1997, and has been granted a waiver through September
15, 1997 by its senior lender that permits borrowings equal to the lesser of $15
million and 80% of eligible accounts receivable under the facility. After giving
effect to the waiver, the Company's borrowing eligibility under the Credit
Facility was approximately $13.4 million. Subsequent to June 30, 1997, the
Company borrowed $13.3 million under the Senior Credit Facility. In the absence
of such financing, including financing under the Senior Credit Facility, the
Company's ability to absorb adverse operating results or to fund capital
expenditures or research and development, to respond to changing business and
economic conditions and to make future acquisitions 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 year ended June 30, 1995, for the nine months
ended March 31, 1996 and for the year ended March 31, 1997 of $24.8 million,
$23.0 million, and $86.5 million, respectively, and a net loss of $11.4 million
for the three months ended June 30, 1997. There can be no assurance that the
Company will be profitable in any future period. The net cash used in operating
activities by the Company for its fiscal year ended June 30, 1995, for the nine
months ended March 31, 1996 and for the year ended March 31, 1997 was $12.9
million, $16.9 million and $55.0 million, respectively, and $22.9 million for
the three months ended June 30, 1997. There can be no assurance that the
operating activities of the Company will generate sufficient cash flow to meet
its liquidity needs in any future period. The Company's future capital
requirements will depend upon
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<PAGE> 21
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 (see "Significant Leverage") 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. See "Significant Leverage." 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.
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 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. In
particular, competition in the market for treatment of male impotence is
especially intense and has increased
13
<PAGE> 22
substantially in recent years. Competitors and others may develop and introduce
new products, devices or approaches for treatment of the conditions targeted by
Urohealth that could render one or more of Urohealth's products obsolete or
noncompetitive. 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. Urohealth sells
several product lines that are considered "capital equipment" by hospitals and
other purchasers. From time to time, Urohealth offers certain customers extended
payment terms to facilitate sales of these products. Urohealth may in the future
grant similar extended payment terms. For the year ended March 31, 1997, sales
that Urohealth made pursuant to extended payment terms were approximately 7% of
total sales. Urohealth's typical payment terms require payment from 30 to 90
days. As of June 30, 1997, Urohealth had a total of $4.1 million of accounts
receivable on extended payment terms with Integrated Medical Resources, Inc.
("IMR") for sales of Urohealth's Rigiscan product pursuant to terms under which
the payments are due over 15-36 months. Over the twelve month period ended March
31, 1997, Urohealth sold approximately $5.8 million of products to IMR on
extended terms. IMR is a public company traded on the Nasdaq under the symbol
"IMRI." For its most recent fiscal year ended December 31, 1996, IMR reported a
loss of $6.5 million. Bruce Hazuka, Chief Operating Officer for Urohealth, is a
member of the board of directors of IMR.
Uncertainty Relating to Third-Party Reimbursement. In the United States,
health care providers, such as hospitals and physicians, that purchase
Urohealth's products and other medical devices, generally rely on third-party
payors, including private health insurance plans and federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure in which the
medical device is being used. Reimbursement has traditionally been available in
the United States for vacuum erection devices manufactured by Urohealth and sold
by prescription to patients under a specific reimbursement code. The majority of
the remaining Urohealth products are used in procedures for which reimbursement
is generally available, however, there are no specific reimbursement codes for
Urohealth's products. There can be no assurance that reimbursement will be
available for procedures performed using Urohealth's existing products or future
products. In the event that reimbursement is not available for procedures using
such products, the market acceptance for such products in the United States
could be materially and adversely affected. In addition, certain health care
providers are moving toward a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per covered
individual. Urohealth is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors, and Urohealth
could be adversely affected by changes in reimbursement policies of governmental
or private health care payors, particularly to the extent any such changes
affect reimbursement for procedures in which its products are used. Failure by
physicians, hospitals and other users of Urohealth's products to obtain
sufficient reimbursement from health care payors for procedures in which their
products are used or adverse changes in governmental and private third-party
14
<PAGE> 23
payors' policies toward reimbursement for such procedures would have a material
adverse effect on Urohealth's business, financial condition and results of
operations.
Market acceptance of Urohealth's products in international markets may be
dependent in part upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both government
sponsored and private health insurance. There can be no assurance that any
international reimbursement approvals will be obtained in a timely manner, or at
all. Failure to receive international reimbursement approvals could have a
material adverse effect on market acceptance of Urohealth's products in
international markets and therefore could have a material adverse effect on
Urohealth's business, financial condition and results of operations.
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 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 has integrated 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
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<PAGE> 24
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
and its cardiac output monitoring technology and recently received approval of
its patents filed with respect to the 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. 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
16
<PAGE> 25
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.
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. 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.
Competition and Technological Change. 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
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<PAGE> 26
Officer, could have a material adverse effect on the Company's business if a
suitable replacement could not be found. The Company 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 (solely payable to the Company) on the life of Mr. Laverty in the
amount of $5.0 million; 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."
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 products of the Company enter the market, the Company 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.
Potential Impact of Pending Legal Proceedings. In July 1997, several
complaints were filed against Urohealth, certain its officers and directors and,
in certain complaints, the lead underwriters of Urohealth's November 1996 public
offering, requesting certification of a class action, alleging various
violations of Federal securities laws and seeking unspecified compensatory
damages. The suits were filed in the United States District Court for the
Central District of California. All of the suits are based on substantially the
same facts and have been brought on behalf of purchasers of Common Stock of
Urohealth during various periods between July 18, 1996 and July 1, 1997. No
proceedings have taken place in any of the suits. There can be no assurance that
any of these suits will not result in an outcome unfavorable to Urohealth or
that the outcome of any of these suits will not have a material adverse effect
on Urohealth's business, results of operations or financial conditions.
Limitation on Use of Tax Net Operating Loss Carryovers. As of March 31,
1997, the Company had accumulated net operating loss carryovers for U.S. federal
and state income tax purposes of approximately $92 million and $68 million,
respectively. These loss carryovers would expire, if not previously utilized
against income of the Company, in various years through 2012. 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 acquisition of Microsurge on
March 31, 1997, an additional ownership change may have occurred. Urohealth
believes this additional ownership change will not reduce the December 29, 1995
Section 382 limitation, but will place limitations on the maximum annual
utilization of operating loss carryforwards generated subsequent to such date.
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<PAGE> 27
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 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
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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 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.
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<PAGE> 29
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.
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 National 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 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
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<PAGE> 30
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.
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
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<PAGE> 31
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
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
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<PAGE> 32
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.
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
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<PAGE> 33
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 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.
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<PAGE> 34
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
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<PAGE> 35
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."
27
<PAGE> 36
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 March
31, 1997. 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, 1993, 1994 and 1995 and for the nine months ended March
31, 1995 and 1996 and for the years ended March 31, 1996 and 1997 of $12.6
million, $24.2 million, $23.5 million, $18.2 million, $22.6 million, $26.8
million and $83.7 million, respectively. For the three months ended June 30,
1996 and 1997, the Company had a deficiency of earnings to cover fixed charges
of $1.3 million and $9.6 million, respectively. 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.
28
<PAGE> 37
CAPITALIZATION
The following table sets forth the Company's capitalization at June 30,
1997.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents...................................................... $ 5,750
==========
Restricted cash................................................................ $ 19,327
==========
Short-term debt................................................................ $ 5,268
Current portion of long-term debt.............................................. 3,216
Long-term debt................................................................. 53,269
Senior subordinated notes...................................................... 108,340(1)
----------
Total debt........................................................... $ 170,093
==========
Stockholders' equity:
Common Stock, $.001 par value; 50,000,000 shares authorized;
23,825,000 shares......................................................... 24
Additional paid-in capital................................................... 150,638
Warrants..................................................................... 7,080
Deficit...................................................................... (181,762)
Foreign currency translation................................................. 44
----------
Total common stockholders' equity (deficit)............................... $ (23,976)
==========
Total capitalization........................................................... $ 146,117
==========
</TABLE>
- ---------------
(1) Net of debt discount resulting from the issuance of the Warrants of
$1,660,000.
29
<PAGE> 38
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company have been
derived from the consolidated financial statements of the Company which have
been prepared in accordance with United States generally accepted accounting
principles and include the statements of operations and balance sheet data for
Osbon Medical Systems, Ltd. ("Osbon"), Advanced Surgical, Inc. ("Advanced"),
Dacomed Corporation ("Dacomed"), Allstate Medical Products, Inc. ("Allstate")
and Microsurge, Inc. ("Microsurge") which acquisitions were accounted for as
pooling-of-interests transactions. The selected consolidated financial data
presented below have also been derived from the statement of operations and
balance sheet data for Richard-Allan, which has been accounted for as a
purchase, from August 14, 1996, and X-Cardia, which has been accounted for as a
purchase, from February 28, 1997. For further information on these and other
business combinations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of Notes to Consolidated
Financial Statements contained elsewhere herein. Financial data as of March 31,
1996 and 1997 and for the year ended June 30, 1995, the nine months ended March
31, 1996 and the year ended March 31, 1997 are derived from the consolidated
financial statements of the Company included elsewhere herein that have been
audited by Ernst & Young LLP, independent auditors, except for the financial
statements of Microsurge for all periods presented and the financial statements
of Dacomed for the fiscal year ended June 24, 1995, consolidated subsidiaries
which were audited by other 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, 1993 and 1994 and as
of June 30, 1993, 1994 and 1995 are derived from financial statements not
included herein. The financial data for the nine months ended March 31, 1995,
for the 12-months ended March 31, 1996 and for the three months ended June 30,
1996 and 1997 are derived from the unaudited financial statements of the
Company, which contain all adjustments, consisting of normal recurring accruals
(except for the restructuring, direct acquisition and other costs and
extraordinary items identified in the statement of operations data below) 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 three months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the entire year. 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 the
Company included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED 12-MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,(1) ENDED YEAR ENDED JUNE 30,
------------------------------ ------------------- MARCH 31, MARCH 31, -------------------
1993 1994 1995 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales................ $ 32,666 $ 39,376 $ 49,250 $ 34,467 $ 42,953 $ 56,630 $ 90,695 $ 17,318 $ 25,237
Gross profit............. 20,008 24,341 30,721 22,026 27,989 36,793 49,612 11,198 13,535
Selling, general and
administrative......... 26,298 36,114 41,057 28,839 37,056 47,977 57,691 10,685 16,863
Research and
development............ 6,332 11,480 5,406 4,752 2,777 3,881 4,997 800 1,665
Restructuring, direct
acquisition and other
costs(2)............... 563 1,000 7,663 6,812 9,688 10,539 62,832 -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loss from operations..... (13,185) (24,253) (23,405) (18,377) (21,532) (25,604) (75,908) (287) (4,993)
Interest expense......... 325 406 367 254 1,059 1,165 8,143 1,044 5,433
Loss before extraordinary
item................... (13,441) (24,804) (24,837) (19,299) (23,024) (27,527) (83,510) (1,290) (9,591)
Extraordinary item....... -- -- -- -- -- -- (2,973) (2,973) (1,823)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net loss................. $(13,441) $(24,804) $(24,837) $ 19,299 $(23,024) $(27,527) $(86,483) $ (4,263) $(11,414)
Loss per share before
extraordinary item..... $ (1.04) $ (1.90) $ (1.70) $ (1.39) $ (1.58) $ (1.85) $ (4.31) $ (0.10) $ (0.40)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- -------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents................................ $10,161 $ 7,065 $ 2,857 $ 3,345 $ 2,591 $ 5,750
Working capital (deficit)........................... 17,307 12,784 5,909 (3,330) 1,714 30,508
Restricted cash..................................... 96 96 96 96 48 19,327
Total assets........................................ 32,954 31,473 31,082 33,355 137,159 179,689
Short-term debt..................................... -- -- 1,689 9,549 14,518 5,268
Current portion of long-term debt................... 1,568 2,025 822 546 3,328 3,216
Long-term debt...................................... 1,475 1,529 2,674 8,272 98,292 53,269
Senior subordinated notes, net of discount.......... -- -- -- -- -- 108,340
Redeemable convertible preferred stock.............. -- -- 1,143 3,554 -- --
Common stockholders' equity (deficiency)............ 23,825 19,537 12,941 (4,575) (14,511) (23,976)
</TABLE>
30
<PAGE> 39
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED 12-MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31, ENDED YEAR ENDED JUNE 30,
-------------------------- ---------------- MARCH 31, MARCH 31, ----------------
1993 1994 1995 1995 1996 1996 1997 1996 1997
------ ------ ------ ------ ------ ---------- ---------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Depreciation and
amortization................. $1,528 $1,884 $3,090 $1,581 $1,715 $3,481 $ 5,272 $ 649 $2,535
Capital expenditures........... $2,734 $2,165 $3,645 $2,901 $3,033 $3,942 $ 12,277 $3,642 $3,119
Ratio of earnings to fixed
charges(3)................... -- -- -- -- -- -- -- -- --
</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) 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 for
the years ended March 31, 1996 and 1997 of $12.6 million, $24.2 million,
$23.5 million, $18.2 million, $22.6 million, $26.8 million and $83.7
million, respectively. For the three months ended June 30, 1996 and 1997,
the Company had a deficiency of earnings to cover fixed charges of $1.3
million and $9.6 million, respectively.
31
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Background. Since October 1994, Urohealth 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,
the acquisitions of Osbon and Advanced closed on December 29, 1995 and the
acquisition of Microsurge was completed on March 31, 1997. The operations of
Urohealth are presented on a combined basis historically, as these transactions
were all accounted for as poolings of interests. On May 22, 1996, Urohealth
acquired Endoscopic Imaging Systems, Inc. and on June 1, 1996 and June 5, 1996
Urohealth 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 Urohealth's financials as of the date of the
acquisitions. On August 14, 1996, Urohealth acquired Richard-Allan and on
February 28, 1997, Urohealth 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 have been
included from February 28, 1997, the date each acquisition closed, respectively.
Integration of Acquisitions; Restructuring Charges. The Company has
recorded significant direct acquisition costs, write-off of purchased research
and development and other charges related primarily to the Company's
acquisitions which have adversely impacted operating results during the periods
discussed below. 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. For the year ended March 31,
1997, these charges totaled $65.7 million, consisting of $47.2 million related
to the write-down of purchased incomplete research and development costs, $12
million of restructuring charges, $3.6 million of merger and acquisition costs,
and $2.9 million of extraordinary items. The Company anticipates cost savings in
future periods relating to restructuring plans implemented during the fourth
quarter of fiscal 1997, primarily relating to the elimination of certain
administrative finance and assembly functions in Augusta, Georgia at its Urology
Division and in connection with cost savings relating to utilizing the Company's
in-house molding capabilities for recently acquired products.
As a result of the foregoing, Urohealth's fiscal 1997 results are not
necessarily comparable to prior periods. The fiscal 1997 results also may not be
comparable 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 and the acquisitions completed in fiscal 1997 and
accounted for as purchase transactions. In addition, historical results are not
necessarily indicative of, nor will they be comparable to, the financial results
Urohealth will realize in future periods.
Restatement of Fiscal 1997 Quarters. Urohealth restated the results for
the first three fiscal quarters of 1997 to reflect the delayed recognition of
revenue from distributor initial stocking orders ($2,465,000 in Q3), the delayed
recognition of revenue relating to the shipment of introductory products
($661,000 in Q1, $855,000 in Q2 and $55,000 in Q3), reductions of overhead
capitalized in inventory ($143,000 in Q1, $349,000 in Q2 and $978,000 in Q3) and
increased sales return allowances ($53,000 in Q1, $53,000 in Q2 and $115,000 in
Q3). Those adjustments have been reflected in the discussion set forth below.
For a more complete description of the effect of this restatement see Note 14 of
Notes to Consolidated Financial Statements of Urohealth.
Change in Fiscal Year End. In 1996, Urohealth changed its fiscal year end
from June 30 to March 31, therefore, the following discussion for fiscal 1997
compares the year ended March 31, 1997 with the 12-months ended March 31, 1996
and fiscal 1996 compares the nine month transition period ending March 31, 1996
to the corresponding period of the prior year.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996.
Net sales. For the three months ended June 30, 1997, net sales of $25.2
million were $7.9 million or 46% higher than sales of $17.3 million for the
corresponding period in 1996. This increase was largely due to the
32
<PAGE> 41
acquisition of Richard Allan, recorded as a purchase, on August 19, 1996 which
increased revenues by approximately $9.6 million for the three months ended June
30, 1997 compared to the corresponding period in 1996. Sales for the three
months ended June 30, 1997 include approximately $7.6 million of reorders
received from Urohealth's new surgical products distributors. The increase in
surgical products sales was offset by a decrease of $3.7 million in sales of
urology products for the three months ended June 30, 1997 compared to the
corresponding period of the prior year. Urohealth believes that the introduction
of a new drug-based treatment for impotence adversely affected the sale of
vacuum erection devices during the quarter as patients opted to try the new
treatment modality. While it is impracticable for Urohealth to predict the
long-term effect of the new treatment modality, Urohealth had an increase in
vacuum erection device sales after quarter end. Urohealth's shipments of
approximately $15.1 million of surgical products to certain new surgical product
distributors during fiscal 1997 as part of initial stocking orders are expected
to be recognized as revenue later this fiscal year.
Gross profit. For the three months ended June 30, 1997, gross profit
increased $2.3 million or 21% over the corresponding period in 1996. The gross
profit percentage decreased from 65% for the three months ended June 30, 1996 to
54% for the three months ended June 30, 1997. The decrease in gross profit
percentage was primarily due to the large increase in lower margin surgical
product sales. For the three months ended June 30, 1996, higher margin urology
products accounted for 78% of sales, decreasing to approximately 39% of sales
during the three months ended June 30, 1997.
Selling, general and administrative. Selling, general and administrative
expenses of $16.9 million for the three months ended June 30, 1997 were $6.2
million or 58% higher than selling, general and administrative expenses of $10.7
million for the corresponding period in 1996. The increase was due to the
increased sales levels and selling, general and administrative expenses included
in the quarter ended June 30, 1997 relating to Richard-Allan operations
(approximately $4.7 million) and the infrastructure for Urohealth's
visualization and gynecology divisions (approximately $900,000) which were not
included in the corresponding quarter of the prior year.
Research and development. Research and development costs for the three
months ended June 30, 1997 increased $865,000 over the corresponding period in
1996. During fiscal 1997, Urohealth made significant investments in, and
acquisitions of, technology. The increase in research and development
expenditures is related to the development of new products using the acquired
technologies.
Interest expense. Interest expense for the three months ended June 30, 1997
increased $4.4 million over the corresponding period in 1996. The increase was
primarily due to interest expense associated with Urohealth's sale of $110
million of 12.5% Senior Subordinated Notes in April 1997 as well as a full three
months of interest on the convertible subordinated debentures issued in May
1996.
Extraordinary item. Urohealth used approximately $54 million of the net
proceeds from the offering of the Notes to repay amounts outstanding under its
term and revolving credit facility and recorded an extraordinary loss of $1.8
million, consisting of the write-off of deferred financing costs, related to the
early retirement of this credit facility.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Net Sales. Net sales during the 12-months ended March 31, 1997 ("fiscal
1997" or "1997") increased $34 million, or 60%, over the twelve months ended
March 31, 1996. This increase was primarily due to higher sales of Urohealth's
urology products which increased $11.8 million, or 28%, to $53.7 million, the
purchase of Richard-Allan on August 14, 1996 which increased revenues by
approximately $16.3 million and the acquisition of Microsurge in March 1997
which increased revenues by $3.1 million. In addition, the Company shipped
approximately $15.1 million of surgical products to distributors during fiscal
1997 as part of initial stocking orders. Revenues from these initial stocking
orders are expected to be recognized in fiscal 1998. Net sales of the Company's
urology products, minimally invasive and general surgery products, and medical/
surgical products represented 59.3%, 30.3% and 10.4%, respectively, of net sales
for the year ended March 31, 1997.
33
<PAGE> 42
Gross Profit. Gross profit during 1997 increased $12.8 million, or 35%,
over the 12-months ended March 31, 1996. The gross profit percentage was 55% in
1997 and 65% for the 12-months ended March 31, 1996. The decrease in gross
profit percentage was primarily due to a change in the mix of products sold and
the write off of discontinued product inventory of approximately $1.7 million.
During the 12-months ended March 31, 1996, the Company's higher margin urology
products accounted for 74% of sales, decreasing to 59% of sales in fiscal 1997.
Selling, General and Administrative. Selling, general and administrative
expenses during 1997 increased by $9.7 million, or 20%, compared to the
12-months ended March 31, 1996. The increase in selling, general and
administrative expenses was related to increased sales levels and the selling,
general and administrative expenses of Richard-Allan and Microsurge which were
acquired during fiscal 1997. As a percentage of sales, selling, general and
administrative expenses decreased to 63% for the twelve months ended March 31,
1997 from 85% for the corresponding period in 1996. The Company implemented a
restructuring plan during the fourth quarter of fiscal 1997 at its Augusta,
Georgia urology division to eliminate administrative functions, finance
functions and assembly operations, which should result in a reduction of
selling, general and administration expenses relating to those operations.
Research and Development. Research and development expenses during 1997
increased $1.1 million, or 29%, over the 12-months ended March 31, 1996. The
increase was largely due to the Company devoting additional resources to
accelerate the development of new products for its gynecology and visualization
product lines.
Write-off of Purchased Research and Development. Subsequent to the
acquisition of Richard-Allan and X-Cardia, a study was conducted to determine
the proper allocation of the purchase price for each of these acquisitions. An
independent valuation of assets acquired 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. Additionally, during the fourth
quarter of fiscal 1997 the Company made acquisitions of technologies under
development that were also accounted for or purchased research and development
and written-off. Accordingly, $25.5 million, $11.5 million and $10.2 million
have been expensed in connection with the acquisitions of Richard-Allan,
X-Cardia and other technology purchases, respectively. The acquired in-process
research and development projects to which the write-offs relate include: the
articulating endoscopic cutter and stapler (Richard-Allan) (the "AEC Project"),
the cardiac output endotracheal tube (X-Cardia) (the "ECOM Project"), the
reflexive oximetry sensor (X-Cardia) (the "ROS Project"), the percutaneous
excisional breast biopsy system (PEBB) (the "PEBB Project"), the pivotal
endoscopic technology (Pivotal) (the "Pivotal Project"), the optical aspirating
currette (the "OAC Project") and pHEM alert (the "pHEM Project"). Urohealth
determined on a project by project basis the uncertainties associated with
successfully completing each project, and estimated the amount necessary to
complete each project, which at the time of valuation were as follows: the AEC
Project: $200,000; the ECOM Project: $2.1 million; the ROS Project: $2.7
million; the PEBB Project: $2.8 million; the Pivotal Project: $1.6 million; the
OAC Project: $1.4 million; and the pHEM Project: $700,000. Urohealth then valued
the purchased research and development primarily using the income approach,
which included an analysis of markets, cash flows, and risks associated with
achieving such cash flows for each project. Based on the foregoing analysis a
portion of the purchase price was allocated to each project based on the
appraised fair market value of the project. Due to uncertainties that are an
inherent part of the research and development process, there can be no assurance
that such acquired research and development projects will be successfully
completed, or if successfully completed, the products will find market
acceptance or generate sufficient net cash flows to recover invested funds.
Restructuring Charges. 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 Company's 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
34
<PAGE> 43
approximately 18 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
March 31, 1997 are adequate to complete the restructuring.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH MARCH 31,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1997
------------- -------- ------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs...... $ 2,412 $ -- $ 990 $ -- $1,422
Facility reduction costs....... 1,588 -- 263 -- 1,325
------- ------ ------ ------- ------
$ 4,000 $ -- $1,253 $ -- $2,747
======= ====== ====== ======= ======
</TABLE>
In March 1997, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from the mergers with Osbon
and Microsurge. The plan provides for the elimination of approximately 90
personnel and the closure of all significant operations at Osbon (except for
customer service, sales and a limited accounting support staff) and the closure
of all Microsurge facilities. The estimated cost associated with each component
of this restructuring plan and the cash and non-cash charges incurred during
fiscal 1997 are summarized in the table below. Non-cash charges consist of the
write-down of existing assets to their estimated net realizable value. Although
subject to future adjustment, management of the Company believes that
restructuring reserves as of March 31, 1997 are adequate to complete the
restructuring (in thousands).
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH MARCH 31,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs.................. $ 7,067 $ -- $3,879 $ 3,188
Facility reduction costs................... 933 473 43 417
------- ---- ------ -------
$ 8,000 $473 $3,922 $ 3,605
======= ==== ====== =======
</TABLE>
It is possible that the Company will undertake additional restructuring in
fiscal 1998 or thereafter as it continues to execute its business plan or as a
result of additional acquisitions.
Direct Acquisition Costs. Merger and acquisition costs during 1997
decreased $1.5 million, or 29%, over the 12-months ended March, 31, 1996. The
decrease was primarily due to acquisitions completed in fiscal 1997 being
recorded as purchase transactions which provides for the capitalization of
acquisition costs as opposed to expensing these costs incurred in transactions
accounted for as pooling of interests. These transaction costs include expenses
related to broker and other professional fees.
Interest Expense. Interest expense during 1997 increased by approximately
$7.0 million, or 599%, over the 12-months ended March, 31, 1996. This increase
was primarily due to increased borrowings under term loans and lines of credit
and the issuance of $50 million of convertible subordinated debentures during
the second and third quarters of fiscal 1997.
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 $8.5 million or 25% over the nine months ended March
31, 1995 ("1995") primarily due to an increase in sales of Urohealth's
urological products. Urohealth's vacuum erection devices accounted for 52% and
55% of sales for 1996 and 1995, respectively. Urohealth continued to increase
its sales force and maintained an aggressive advertising campaign, contributing
to the sales growth.
Gross Profit. Gross profit during 1996 increased $6.0 million or 27% over
the same period in 1995. The gross margin was 65% in 1996 and 66% in 1995. There
were no significant changes in Urohealth's product mix or product pricing
between periods. Urohealth 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 $8.2 million or 28% over the same period in 1995.
This increase was primarily due to increases in sales and
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<PAGE> 44
marketing expenses as Urohealth 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 $2.0 million or 42% in 1996 over the same period in 1995. Overall, the
decline in research and development costs was a result of Urohealth's decision
to narrow the focus of such efforts, and to adopt a program of actively
acquiring or licensing developed technology. In connection with the acquisition
of Laparomed Corporation on July 27, 1994, Urohealth 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.
Restructuring Charges. In December 1995, Urohealth implemented a
restructuring plan to consolidate redundant facilities and reduce personnel
resulting from the mergers with Dacomed, Osbon and Advanced. Under the plan,
Urohealth 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 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 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 Urohealth believes that restructuring reserves as of
March 31, 1996 are adequate to complete the restructuring.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH RECLASSI- MARCH 31,
ACCRUAL CHARGES CHARGES FICATIONS 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 $3.4 million over the same period in 1995. The results of operations
in 1996 reflect additional transaction costs of $4.2 million related to
Urohealth'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
$805,000 or 317% 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.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Expenses related to minority interest were $78,000, $55,000 and $25,000
during fiscal 1995, 1996 and 1997, respectively. Such expenses consist of 7%
dividends payable to stockholders of preferred stock of a Urohealth subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
In April 1997, Urohealth completed the sale of $110 million of its 12 1/2%
Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. Urohealth used approximately $54 million of the net
proceeds from the offering to repay amount outstanding under Urohealth's term
and revolving credit facility. Concurrently with the consummation of the sale of
the Notes, Urohealth entered into a new $50 million revolving credit facility
with Urohealth's senior lender (the "Senior Credit Facility"). The Senior Credit
Facility is secured by substantially all of the Company's assets and matures in
March 2002. The Company is required to meet certain financial covenants under
the Senior Credit Facility and available amounts under the revolving credit
facility are based on eligible inventory and accounts receivable. As of June 30,
1997, Urohealth had no amounts outstanding under the Senior Credit Facility. The
Company was not in compliance with certain financial covenants under its Senior
Credit Facility for the quarter ended June 30,
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<PAGE> 45
1997, and has been granted a waiver through September 15, 1997 by its senior
lender that permits borrowings equal to the lesser of $15 million and 80% of
eligible accounts receivable under the facility. As of June 30, 1997 after
giving effect to the waiver, Urohealth's borrowing eligibility under the Senior
Credit Facility was approximately $13.4 million. Subsequent to June 30, 1997,
Urohealth drew down $13.3 million under the Senior Credit Facility. As of June
30, 1997, Urohealth had working capital of approximately $30.5 million.
The Company used $19.2 million of the proceeds from the sale of the Notes
to purchase government securities (the "Pledged Securities") which have been
pledged for the benefit of the holders of the Notes. The scheduled principal and
interest payments on the Pledged Securities is in an amount sufficient to pay
when due the first three semi-annual scheduled interest payments on the Notes.
During fiscal 1998, the Company is obligated to repay at maturity approximately
$5.8 million of notes and accrued interest assumed in the acquisition of
Microsurge. In addition, the Company is obligated to pay $16.5 million to the
former X-Cardia shareholders on or prior to October 3, 1997 relating to the
achievement of the patent approval milestone.
Approximately $5.5 million of Urohealth'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. Urohealth currently expects to pay these
restructuring charges from cash flow from operations or from financing
activities.
Urohealth had capital expenditures for the nine months ended March 31,
1996, the year ended March 31, 1997 and the three months ended June 30, 1997 of
$3.0 million, $12.3 million and $3.1 million, respectively, primarily due to the
consolidation and expansion of manufacturing and upgrade of management
information systems. Urohealth currently has a $2.7 million commitment for a
corporate aircraft and anticipates capital expenditures, primarily for increased
manufacturing capacity and information systems, for the next 12 months will
exceed $10.0 million.
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 the Company's operating expenses
and to service the Company's debt obligations, including its obligations under
the Notes and the Senior Credit Facility. Except for applicable restrictions
under state corporate laws, there are currently no restrictions on any of the
subsidiaries ability to pay dividends to the Company.
Through June 30, 1997 Urohealth has continued to have negative cash flow
from operations, primarily due to increases in operating losses, accounts
receivable and inventories. Operating losses increased for the reasons discussed
previously in this Management's Discussion and Analysis of Financial Condition
and Results of Operations. Urohealth's accounts receivable balances were
approximately $4.8 million higher at June 30, 1997 than at March 31, 1997
primarily due to increased sales during the quarter. 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. Urohealth's inventory balances were approximately $8.8 million higher
at June 30, 1997 than at March 31, 1997 due to an increase in inventory levels
to support increased sales volume. Urohealth expects further increases in
inventories to support anticipated sales under group purchasing organization and
distribution agreements. Cash used in operations totaled approximately $55
million for the year ended March 31, 1997 and approximately $22.9 million for
the three months ended June 30, 1997. During this period, Urohealth's operations
have been funded primarily from the proceeds of debt and equity offerings.
Urohealth believes that currently available cash balances, amounts
available under the Senior Credit Facility, and funds generated from operations
will provide adequate liquidity to finance its operations for the next 12
months. Urohealth'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 Urohealth's Common Stock and other financing activities.
However, there can be no assurance that any such transactions will be
consummated. Should Urohealth not be able to obtain such financing, Urohealth
will be required to proceed with its planned expansion at a slower rate.
Urohealth 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 Urohealth.
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<PAGE> 46
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.
GROWTH STRATEGY
The Company's strategy is to: (i) expand the range of products to its
growing Target Markets; (ii) leverage its 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 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. The EndoView(TM) system is designed for use in the hospital and
physician's office setting and is priced to make it affordable for
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<PAGE> 47
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 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. Currently
available drug therapies include oral prostaglandins, which have a limited
effectiveness, an injectable prostaglandin and urethral suppositories.
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. 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.
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<PAGE> 48
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.
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
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<PAGE> 49
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,
which are available by prescription, 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 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. 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
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<PAGE> 50
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 prototype products developed and
anticipates beginning clinical trials on a product using the technology during
1997.
Reposable Products
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.
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.
The manufacturing, product development, and sales and marketing for the
Microsurge reposable product line has been integrated with the Company's
existing operations.
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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.
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 agreements with several group purchasing organizations in the
United States.
While Urohealth is not required to maintain significant amounts of
inventory to address customer's demands or to maintain favorable supply
arrangements for raw materials, particularly since implementation of Urohealth's
decision to sell its surgical products through distributors, Urohealth's current
inventory levels are significant. Those inventory levels reflect inventory held
by distributors for which revenue has not been recognized and inventory built in
anticipation of a significant group purchasing organization order. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Urohealth generally permits distributors to balance inventory
periodically by returning inventory purchased by the
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distributor for other medical products of Urohealth. In addition, the ultimate
customers for Urohealth's products generally have a right to return products
that they find unsatisfactory within 30 days after the date of purchase.
Urohealth sells several product lines that are considered "capital equipment" by
hospitals and other purchasers. From time to time, Urohealth offers certain
customers extended payment terms to facilitate sales of these products. See
"Risk Factors -- Concentration of Credit Risk; Extended Payment Terms."
INTERNATIONAL SALES
International sales (sales outside of North America) were $3.3 million,
$1.7 million, $11.8 million and $3.6 million for the year ended June 30, 1995,
for the nine months ended March 31, 1996, for the year ended March 31, 1997 and
for the three months ended June 30, 1997, respectively. The Company distributes
its products through a network of distributors covering a number of countries
outside of North America.
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.
The Company's Costa Mesa manufacturing facility has recently received
ISO9001 certification.
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
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<PAGE> 53
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, 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, which
together with Urohealth control a significant portion of the market for vacuum
erection devices. 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. Because many
of the competing drug-based treatments have only recently been introduced, or
are still being developed, it is impracticable for Urohealth to assess the
competitive impact of these treatments on Urohealth's vacuum erection business.
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 $5.4 million, $2.8 million and $5.0 million in research and
development expenditures in the year ended June 30, 1995, for the nine months
ended March 31, 1996 and for the year ended March 31, 1997, respectively. The
research and development expenditures of the Company as a percentage of net
sales 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 1995 and 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's current research and development efforts include completion
of clinical trials and regulatory approval of the cardiac output monitoring
device acquired from X-Cardia. In addition, the
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<PAGE> 54
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.
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
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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.
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
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<PAGE> 56
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
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
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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
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
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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.
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
In July 1997, several complaints were filed against the Company, certain of
its officers and directors and, in certain complaints, the lead underwriters of
the Company's November 1996 public offering requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages. The suits were filed in the United States
District Court for the Central District of California. All of the suits are
based on substantially the same facts and have been brought on behalf of
purchasers of Common Stock of the Company during various periods between July
18, 1996 and July 1, 1997. No proceedings have taken place in any of the suits.
In addition, the Company is involved in litigation in the normal course of
business. In management's opinion, the ultimate resolution of the claims
currently pending will not have a material adverse effect on the Company's
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 July 31, 1997, the Company employed approximately 973 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.
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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 16,500 leased
Costa Mesa, CA Manufacturing; R&D 52,600 leased
Irvine, CA Warehouse 42,000 leased
Richland, MI Manufacturing; Sales; 43,500 owned
Administration
Augusta, GA Sale Offices; Administration 31,656 leased
Augusta, GA Office, warehouse and assembly 57,500 owned
Watertown, SD Manufacturing 15,700 leased
Sparta, NJ Office and warehouse 7,000 leased
</TABLE>
The Company has entered into a five-year lease expiring in April 2001 with
respect to approximately 16,500 square feet of office space which is used for
the Company's corporate executive offices. The lease provides for monthly rental
payments of approximately $24,000 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 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 leased an additional 10,212 square
feet of space at another location in Costa Mesa on June 1, 1996. The lease
expired on May 31, 1997 and is continuing on a month to month basis thereafter
at a monthly rent of $10,212.
The Company leases approximately 42,000 square feet of warehouse space in
Irvine, California which is used as a warehouse facility. The lease expires in
June 1998 and provides for monthly rental payments of $24,700 per month.
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.
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.
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.
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MANAGEMENT
The following table sets forth the names and ages of all executive
officers, certain key employees and directors of the Company as of July 31,
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
Bruce A. Hazuka..................... 50 Chief Operating Officer
Kevin M. Higgins.................... 55 Senior Vice President and General Counsel
Joseph T. Artino.................... 47 Vice President -- Finance
Paul Petersen....................... 38 President -- Urology Products
Richard Kindberg.................... 39 President -- Surgical Products
M. Cassandra Hoag................... 41 President -- Gynecology Products
Randall L. Condie................... 42 President -- Medical/Surgical Products
Michael Schuler..................... 47 President -- Visualization Products
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)........... 56 Director
Michael S. Gross.................... 35 Director
Richard Newhauser................... 50 Director
Francis J. Tedesco, M.D.(2)......... 52 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 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.
BRUCE A. HAZUKA served as Executive Vice President -- Operations from
September 1995 until March 1997 when he became Chief Operating Officer. 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
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<PAGE> 61
Allscrips Pharmaceuticals, Inc., a pharmaceutical benefits management company,
from September 1990 to June 1994. Mr. Hazuka is a director of Integrated Medical
Resources, Inc., a provider of disease management services for men suffering
from erectile dysfunction.
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.
JOSEPH T. ARTINO became Vice President -- Finance of Urohealth in September
1996. From July 1995 to September 1996, Mr. Artino was Chief Financial Officer
of Children's Homecare, Inc. From April 1992 to July 1995, Mr. Artino was
Corporate Controller of Curaflex Health Services, Inc. Mr. Artino was appointed
Assistant Treasurer and Acting Chief Financial Officer of Urohealth in July
1997.
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 executive 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 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, are currently
involved in proceedings under the Bankruptcy Code.
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<PAGE> 62
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
member of the Board of Directors 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, are currently involved in proceedings under 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 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 and is Managing Director
of Archway Capital LLP.
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. Mr. Gross is a director of Allied Waste
Industries, Inc., Converse, Inc., The Florsheim Group, Inc., Furniture Brands
International, Inc. and Proffitts, Inc.
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<PAGE> 63
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.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1997 by (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>
Appaloosa Management L.P.(2)............................................ 2,836,500 10.0%
Avatex Corporation(3)................................................... 2,464,827 8.4
Apollo Investors Fund III, L.P.
Apollo Overseas Partners III, L.P.
Apollo (U/K) Partners, L.P.(4).......................................... 2,200,906 7.7
Chase Venture Capital Associates, L.P.(5)............................... 2,196,069 7.7
Charles A. Laverty(6)................................................... 1,322,816 4.5
Robert N. Elkins, M.D.(7)............................................... 153,889 *
Lawrence Goelman(8)..................................................... 128,295 *
Melvyn J. Estrin(9)..................................................... 2,479,827 9.8
Abbey J. Butler(9)...................................................... 2,479,827 9.8
Francis J. Tedesco, M.D.(10)............................................ 15,000 *
Michael S. Gross(11).................................................... 2,200,906 7.7
John Chamberlin(12)..................................................... 28,333 *
C. Sage Givens(13)...................................................... 28,333 *
Richard Newhauser....................................................... 2,040,281 7.2
Bruce A. Hazuka(14)..................................................... 138,889 *
Paul Petersen(15)....................................................... 122,809 *
Michael Schuler(16)..................................................... 77,890 *
All current directors and executive officers as a group (16
persons)(17).......................................................... 9,167,890 28.8
</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) Information obtained from filings made with the Securities and Exchange
Commission. The address for Appaloosa Management L.P. is 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078. David A. Tepper is deemed to
beneficially own the shares beneficially owned by Appaloosa Management L.P.
Mr. Tepper is the President and sole stockholder of Appaloosa Partners,
Inc., the general partner of Appaloosa Management L.P.
(3) 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.
(4) Represents Debentures which vote on an "as converted" basis representing
2,087,156 shares and warrants to purchase 113,750 shares of Common Stock
which are currently exercisable. The general partner of each of the Apollo
entities listed is Apollo Advisors II, L.P. ("Advisors") whose general
partner is Apollo Capital Management II, Inc. ("ACMI"). Messrs. Leon Black
and John Hannan, directors of ACMI and founding principals of Advisors,
disclaim beneficial ownership of the shares shown above. The address for
Apollo Advisors II, L.P. is 1301 Sixth Avenue, New York, New York 10019.
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<PAGE> 65
(5) Represents Debentures which vote on an "as converted" basis representing
2,082,569 shares and warrants to purchase 113,500 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.
(6) Includes 1,322,816 shares subject to options exercisable on or before
September 30, 1997.
(7) Includes 153,889 shares subject to options exercisable on or before
September 30, 1997.
(8) Includes 128,295 shares subject to options exercisable on or before
September 30, 1997.
(9) Includes the 2,464,827 shares of Common Stock and Warrants beneficially
owned by Avatex Corporation as shown above and 15,000 shares subject to
options exercisable on or before September 30, 1997. Messrs. Estrin and
Butler are Co-Chairmen of the Board of Directors of Avatex Corporation.
(10) Includes 15,000 shares subject to options exercisable on or before
September 30, 1997.
(11) 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 therein.
(12) Includes 28,333 shares subject to options exercisable on or before
September 30, 1997.
(13) Includes 28,333 shares subject to options exercisable on or before
September 30, 1997.
(14) Includes 138,889 shares subject to options exercisable on or before
September 30, 1997.
(15) Includes 55,556 shares subject to options exercisable on or before
September 30, 1997.
(16) Includes 63,784 shares subject to options exercisable on or before
September 30, 1997.
(17) Includes 2,236,794 shares subject to options exercisable on or before
September 30, 1997, warrants to purchase 1,163,750 shares of Common Stock
and Debentures which vote on an "as converted" basis with respect to
2,087,156 Common Stock equivalents.
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<PAGE> 66
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.
The Company was not in compliance with certain financial covenants under its
Senior Credit Facility for the quarter ended June 30, 1997, and has been granted
a waiver through September 15, 1997 by its senior lender that permits borrowings
equal to the lesser of $15 million and 80% of eligible accounts receivable under
the facility. As of June 30, after giving effect to the waiver, Urohealth's
borrowing eligibility under the Senior Credit Facility was approximately $13.4
million. Subsequent to June 30, 1997, Urohealth drew down $13.3 million under
the Senior Credit Facility.
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.
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<PAGE> 67
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.
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 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
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<PAGE> 68
City of New York, except as set forth below. At the option of the Company,
payment of interest may be made 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.
Restrictions in the Indenture on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to make asset sales,
to enter into transactions with affiliates and to enter into mergers,
consolidations or sales of all or substantially all of its assets, may make more
difficult or discourage a takeover of the Company, whether favored or opposed by
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford holders of Notes protection against
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction. See "Description
of Notes -- Certain Covenants." Holders of a majority in aggregate principal
amount of the Notes at the time outstanding typically have the ability to waive
on behalf of all Holders any default under, or to amend, the Indenture. See
"Description of Notes -- Events of Default" and "-- Amendments and Supplements."
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, to
require the Company to repurchase all or any part of such Holder's Notes. See
"Description of Notes -- Certain Covenants -- Repurchase of Notes at the Option
of the Holder Upon a Change of Control." The Company is prohibited under the
terms of its New Credit Facility from repurchasing the Notes in the event of a
Change of Control and, even if permitted in the future under another senior
credit facility, no assurances can be given that the Company would have
sufficient resources to satisfy its repurchase obligation with respect to the
Notes under such circumstances. See "Risk Factors -- Possible Inability to
Repurchase Notes Upon a Change of Control." The failure of the Company to
repurchase properly tendered Notes upon the occurrence of a Change of Control
would constitute an Event of Default under the Indenture; however, such Event of
Default under the Notes would constitute an event of default under the New
Credit Facility and no payments could be made by the Company with respect to the
repurchase of Notes upon a Change of Control. See "Risk
Factors -- Subordination; Holding Company Structure," and "Description of
Notes -- Subordination." The existence of the Change of Control provision in the
Indenture may make it more difficult for the Company to obtain additional
financing in the future. See "Risk Factors -- Significant Leverage."
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
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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.
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 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.
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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 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
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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 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
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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.
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. In addition, the Company has in place a shareholder rights plan that
is commonly referred to as a "poison pill" that may have the effect of
preventing or delaying an unsolicited takeover offer for the Company. The Change
of Control repurchase obligation in the Notes together with the shareholder
rights plan, would, in general, tend to discourage an unsolicited takeover offer
for the Company.
The Change of Control provisions described above will be applicable whether
any other provisions of the Indenture are applicable to a specified transaction.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit Holders to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
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
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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 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
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$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.
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
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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.
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
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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 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.
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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.
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
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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.
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
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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 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
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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 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
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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.
"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,
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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 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
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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.
"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
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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, 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.
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"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.
"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
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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;
(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
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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
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
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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).
"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
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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, (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.
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"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.
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
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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 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.
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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.
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
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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 June 30, 1997, there
were 23,825,000 shares of Common Stock issued and outstanding and no preferred
stock issued or 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 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
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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 June 30, 1997, there was
$50.0 million aggregate principal amount of Debentures outstanding which would
convert into 4,587,156 shares of Common Stock.
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 is (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.
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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 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
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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 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
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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 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
89
<PAGE> 98
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.
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
90
<PAGE> 99
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.
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
91
<PAGE> 100
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 Urohealth as of March, 31, 1996
and 1997, and for the year ended June 30, 1995, for the nine months ended March
31, 1996 and for the year ended March 31, 1997, included in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included elsewhere herein. Such
report is based in part on the report included elsewhere herein of Coopers &
Lybrand L.L.P., independent accountants, with respect to the consolidated
financial statements of Microsurge, Inc., as of March 31, 1996 and 1997 and for
the year ended December 31, 1995, the nine months ended March 31, 1996 and the
year ended March 31, 1997 (not separately included or incorporated herein), and
the report included elsewhere herein of KPMG Peat Marwick LLP, independent
auditors, with respect to the consolidated financial statements of Dacomed
Corporation for the year ended June 24, 1995 (not separately included or
incorporated by reference herein). The consolidated financial statements
referred to above are included herein in reliance upon such reports given upon
the authority of such firms as experts in accounting and auditing.
The financial statements of X-Cardia Corporation as of December 31, 1996
and for the period from inception (February 13, 1996) to December 31, 1996,
included in the Joint Proxy Statement of Urohealth and Imagyn, which is referred
to and made a part of this Prospectus and Registration Statement, 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 herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Richard-Allan Medical Industries,
Inc. as of June 30, 1995 and March 31, 1996, and for the years ended June 30,
1994 and 1995 and for the nine months ended March 31, 1996, included in the
Joint Proxy Statement of Urohealth and Imagyn, which is referred to and made a
part of this Prospectus and Registration Statement, 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 herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
92
<PAGE> 101
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UROHEALTH SYSTEMS, INC.
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997............................. F-5
Consolidated Statements of Operations for the year ended June 30, 1995, for the nine
months ended March 31, 1996 and for the year ended March 31, 1997................... F-6
Consolidated Statements of Common Stockholders' Equity (Deficiency) for the year ended
June 30, 1995, for the nine months ended March 31, 1996 and for the year ended March
31, 1997............................................................................ F-7
Consolidated Statements of Cash Flows for the year ended June 30, 1995, for the nine
months ended March 31, 1996 and for the year ended March 31, 1997................... F-8
Notes to Consolidated Financial Statements............................................ F-9
Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30, 1997
(unaudited)......................................................................... F-28
Condensed Consolidated Statements of Operations for the three months ended June 30,
1996 and 1997 (unaudited)........................................................... F-29
Condensed Consolidated Statements of Cash Flows for the three months ended June 30,
1996 and 1997 (unaudited)........................................................... F-30
Notes to Condensed Consolidated Financial Statements (unaudited)...................... 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
RICHARD-ALLAN MEDICAL INDUSTRIES, INC.
Report of Independent Auditors........................................................ F-46
Consolidated Balance Sheets as of June 30, 1995 and March 31, 1996.................... F-47
Consolidated Statements of Operations for the years ended June 30, 1994 and 1995 and
for the nine months ended March 31, 1996............................................ F-48
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1994 and
1995 and for the nine months ended March 31, 1996................................... F-49
Consolidated Statements of Cash Flows for the years ended June 30, 1994 and 1995 and
for the nine months ended March 31, 1996............................................ F-50
Notes to Consolidated Financial Statements............................................ F-51
Condensed Consolidated Balance Sheets as of March 31, 1996 and June 30 1996........... F-58
Condensed Consolidated Statements of Operations for the three months ended June 30,
1995 and 1996....................................................................... F-59
Condensed Consolidated Statements of Cash Flows for the three months ended June 30,
1995 and 1996....................................................................... F-60
Notes to Condensed Consolidated Financial Statements.................................. F-61
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................... F-62
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended
March 31, 1997...................................................................... F-63
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.............. F-64
</TABLE>
F-1
<PAGE> 102
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 1997, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the year ended June 30, 1995, the nine months ended March 31, 1996 and the year
ended March 31, 1997. 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 financial
statements of Microsurge, Inc., a wholly-owned subsidiary, as of March 31, 1996
and 1997 and for the year ended December 31, 1995, the nine months ended March
31, 1996 and the year ended March 31, 1997 and of Dacomed Corporation, a
wholly-owned subsidiary, for the year ended June 24, 1995, which statements
reflect total assets constituting 16.5% and 3.9% of consolidated total assets as
of March 31, 1996 and 1997, respectively, and net sales constituting 27%, 8%,
and 8% of consolidated net sales for the year ended June 30, 1995, the nine
months ended March 31, 1996 and the year ended March 31, 1997, respectively.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included in the
consolidated financial statements for such entities, is based solely on the
reports 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 reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports 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 1997, and the consolidated results of its operations and its
cash flows for the year ended June 30, 1995, the nine months ended March 31,
1996 and the year ended March 31, 1997 in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
July 8, 1997
F-2
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
UROHEALTH Systems, Inc.:
We have audited the accompanying balance sheets of Microsurge, Inc. as of
March 31, 1997 and 1996, and the related statements of operations, stockholders'
deficit and cash flows for the year ended March 31, 1997, the nine months ended
March 31, 1996 and the year ended December 31, 1995 (not included separately
herein). 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.
As described in Note 1 to the financial statements, on March 31, 1997,
Microsurge, Inc. was acquired by and became a wholly-owned subsidiary of
UROHEALTH Systems, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microsurge, Inc. as of March
31, 1997 and 1996, and the results of its operations and its cash flows for the
year ended March 31, 1997, the nine months ended March 31, 1996, and the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 9, 1997
F-3
<PAGE> 104
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 for the fiscal year
ended June 24, 1995 (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 results of operations and cash
flows of Dacomed Corporation and subsidiary for the fiscal year ended June 24,
1995, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
October 10, 1995
F-4
<PAGE> 105
UROHEALTH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, PRO FORMA
---------------------- MARCH 31,
1996 1997 1997
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS (NOTE 5)
Current assets:
Cash and equivalents............................................ $ 3,345 $ 2,591 $ 34,007
Short-term investments.......................................... 243 -- --
Receivables, net of allowance for doubtful accounts of $1,744
and $1,896 in 1996 and 1997, respectively..................... 8,074 17,272 17,272
Income tax receivable........................................... -- 377 377
Advances to officers............................................ -- 114 114
Inventories..................................................... 6,702 20,945 20,945
Distributor inventories......................................... -- 6,307 6,307
Prepaid expenses................................................ 1,715 2,278 2,278
Deferred debt issuance costs.................................... 614 -- --
-------- --------- ---------
Total current assets.............................................. 20,693 49,884 81,300
Restricted cash................................................... 96 48 19,228
Receivables -- long term.......................................... -- 2,722 2,722
Property and equipment, net....................................... 9,084 26,035 26,035
Patents and intangibles, net of accumulated amortization of $2,102
and $2,646 in 1996 and 1997, respectively....................... 2,401 6,285 6,285
Loans to officers................................................. -- 550 550
Deposits and other assets......................................... 688 2,232 2,232
Deferred debt issuance costs...................................... -- 5,986 9,305
Goodwill.......................................................... 393 43,417 43,417
-------- --------- ---------
$ 33,355 $ 137,159 $ 191,074
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities........................ $ 10,541 $ 20,882 $ 20,882
Compensation and employee benefits.............................. 2,042 3,250 3,250
Restructuring liabilities....................................... 1,345 6,192 6,192
Short-term debt................................................. 9,549 14,518 5,268
Current portion of long-term debt............................... 546 3,328 3,328
-------- --------- ---------
Total current liabilities......................................... 24,023 48,170 38,920
Long-term liabilities:
Long-term debt.................................................. 8,272 98,292 53,292
Senior subordinated notes, net of discount...................... -- -- 108,278
Restructuring liabilities, less current portion................. 823 822 822
Other liabilities............................................... 185 4,149 4,149
Commitments and contingencies (Notes 1, 7 and 15)
Minority interest in consolidated subsidiary...................... 1,073 237 237
Redeemable convertible preferred stock............................ 3,554 -- --
Common stockholders' equity (deficiency):
Preferred stock, $0.001 par value Authorized shares -- 5,000,000
Issued and outstanding shares -- none......................... -- -- --
Common stock, $0.001 par value
Authorized shares -- 50,000,000
Issued and outstanding shares -- 15,230,000 and 23,807,000, at
March 31, 1996 and 1997, respectively....................... 15 24 24
Warrants........................................................ 3,000 5,359 7,080
Additional paid-in capital...................................... 75,975 150,468 150,468
Foreign currency translation adjustment......................... (98) (14) (14)
Deficit......................................................... (83,467) (170,348) (172,182)
-------- --------- ---------
Total common stockholders' equity (deficiency).................... (4,575) (14,511) (14,624)
-------- --------- ---------
$ 33,355 $ 137,159 $ 191,074
======== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 106
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................... $ 49,250 $ 42,953 $ 90,695
Cost of sales........................................... 18,529 14,964 41,083
-------- --------- --------
Gross profit............................................ 30,721 27,989 49,612
Operating expenses:
Selling, general and administrative................... 41,057 37,056 57,691
Research and development.............................. 5,406 2,777 4,997
Restructuring charges................................. 1,200 5,456 12,000
Write-off of purchased research and development....... 5,312 -- 47,232
Direct acquisition costs.............................. 851 4,232 3,600
Settlement of litigation.............................. 300 -- --
-------- --------- --------
Total operating expenses................................ 54,126 49,521 125,520
-------- --------- --------
Loss from operations.................................... (23,405) (21,532) (75,908)
Other income (expense):
Minority interest consisting of accrued dividends on
preferred stock of subsidiary...................... (78) (55) (25)
Interest income....................................... 394 101 339
Interest expense...................................... (367) (1,059) (8,143)
Other................................................. 5 (48) --
-------- --------- --------
Loss before taxes and extraordinary item................ (23,451) (22,593) (83,737)
Provision (benefit) for income taxes.................... 1,386 431 (227)
-------- --------- --------
Loss before extraordinary item.......................... (24,837) (23,024) (83,510)
Extraordinary item (early extinguishment of debt)....... -- -- (2,973)
-------- --------- --------
Net loss................................................ $(24,837) $ (23,024) $(86,483)
======== ========= ========
Net loss per share:
Loss before extraordinary item........................ $(24,837) $ (23,024) $(83,510)
Dividends and accretion on redeemable convertible
preferred stock.................................... (45) (579) (398)
-------- --------- --------
Loss attributable to common stockholders before
extraordinary item................................. (24,882) (23,603) (83,908)
Extraordinary item.................................... -- -- (2,973)
-------- --------- --------
Net loss attributable to common stockholders.......... $(24,882) $ (23,603) $(86,881)
======== ========= ========
Loss per share before extraordinary item.............. $ (1.70) $ (1.58) $ (4.31)
======== ========= ========
Net loss per share.................................... $ (1.70) $ (1.58) $ (4.47)
======== ========= ========
Weighted average number of shares used to compute net
loss per share........................................ 14,672 14,980 19,453
======== ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 107
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
(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, 1994................. 14,171 $ 46,476 $1,000 $ 20,623 $ (48,562) $ -- $ 19,537
Exercise of options and warrants....... 55 87 -- 15 -- -- 102
Issuance of common stock............... 169 899 -- 95 -- -- 994
Warrants............................... -- -- 402 -- -- -- 402
Issuance of common stock for preferred
stock of subsidiary................. 195 2,720 -- -- -- -- 2,720
Reincorporation in Delaware............ -- (50,168) -- 50,168 -- -- --
Adjustment for pooling of interests.... -- -- -- -- 13,953 -- 13,953
Dividends and accretion on redeemable
convertible preferred stock......... -- -- -- -- (45) -- (45)
Net loss............................... -- -- -- -- (24,837) -- (24,837)
Foreign currency translation........... -- -- -- -- -- 115 115
------ -------- ------ --------- --------- ----- --------
Balance at June 30, 1995................. 14,590 14 1,402 70,901 (59,491) 115 12,941
Adjustments for pooling of interests... -- -- -- -- (373) -- (373)
Exercise of options and warrants....... 170 -- -- 880 -- -- 880
Issuance of equity securities by pooled
company............................. 467 -- -- 4,149 -- -- 4,149
Issuance of common stock for preferred
stock of subsidiary................. 3 1 -- 45 -- -- 46
Dividends and accretion on redeemable
convertible preferred stock......... -- -- -- -- (579) -- (579)
Warrants............................... -- -- 1,598 -- -- -- 1,598
Net loss............................... -- -- -- -- (23,024) -- (23,024)
Foreign currency translation........... -- -- -- -- -- (213) (213)
------ -------- ------ --------- --------- ----- --------
Balance at March 31, 1996................ 15,230 15 3,000 75,975 (83,467) (98) (4,575)
Exercise of options and warrants....... 295 -- -- 1,436 -- -- 1,436
Issuance of common stock for preferred
stock of subsidiary................. 54 -- -- 860 -- -- 860
Issuance of common shares relating to
secondary offering.................. 2,684 3 -- 18,814 -- -- 18,817
Issuance of common shares related to
acquisitions........................ 4,088 4 -- 48,042 -- -- 48,046
Issuance of common shares on conversion
of convertible preferred stock...... 1,056 1 -- 3,656 -- -- 3,657
Issuance of common shares on conversion
of convertible note................. 359 1 -- 1,326 -- -- 1,327
Issuance of common shares under stock
purchase plan....................... 41 -- -- 359 -- -- 359
Warrants............................... -- -- 2,359 -- -- -- 2,359
Dividends and accretion on redeemable
convertible preferred stock......... -- -- -- -- (398) -- (398)
Net loss............................... -- -- -- -- (86,483) -- (86,483)
Foreign currency translation........... -- -- -- -- -- 84 84
------ -------- ------ --------- --------- ----- --------
Balance at March 31, 1997................ 23,807 $ 24 $5,359 $ 150,468 $(170,348) $ (14) $(14,511)
====== ======== ====== ========= ========= ===== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 108
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997
---------- ----------------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $(24,837) $ (23,024) $(86,483)
Noncash items included in net loss:
Extraordinary item.................................... -- -- 2,433
Write-off of purchased research and development....... 5,312 -- 40,982
Depreciation and amortization......................... 3,090 1,715 5,272
Loss on retirement/write-off of assets................ 61 664 347
Deferred income taxes................................. 50 (152) --
Amortization of deferred debt issuance costs.......... -- 637 813
Provision for doubtful accounts....................... 134 1,126 (39)
Accretion and accrued interest on convertible notes... -- 15 445
Accrued dividends on preferred stock of subsidiary.... 78 55 25
Changes in operating assets and liabilities............. 3,252 2,070 (18,801)
-------- --------- --------
Net cash used in operating activities................... (12,860) (16,894) (55,006)
INVESTING ACTIVITIES
Purchases of investments................................ (4,363) (1,502) --
Sale of investments..................................... 10,433 2,282 243
Purchases of property and equipment, net................ (3,645) (3,033) (12,277)
Payments for acquisition of businesses, net of cash
acquired.............................................. -- -- (38,161)
Proceeds from disposal of property and equipment........ 5 788 --
Purchases of technology................................. (605) (333) (1,207)
Decrease in restricted cash............................. -- -- 48
Note receivable from related party...................... (60) -- --
Loans and advances to officers.......................... -- -- (664)
-------- --------- --------
Net cash provided by (used in) investing activities..... 1,765 (1,798) (52,018)
FINANCING ACTIVITIES
Issuance of common shares............................... 748 -- 359
Secondary offering of common stock...................... -- -- 18,817
Exercise of stock options and warrants.................. 16 709 1,436
Issuance of preferred stock by subsidiary............... 3,331 1,831 --
Issuance of equity securities by pooled company......... 4,149 4,149 --
Issuance of warrants.................................... -- 670 --
Proceeds from long-term debt............................ 1,888 7,913 110,184
Revolving lines of credit, net.......................... 256 5,433 1,977
Principal payments on long-term debt.................... (984) (868) (19,888)
Deferred debt issuance costs............................ -- (130) (6,615)
-------- --------- --------
Net cash provided by financing activities............... 9,404 19,707 106,270
-------- --------- --------
Net increase (decrease) in cash and equivalents......... (1,691) 1,015 (754)
Cash and equivalents, beginning of year................. 4,520 2,330 3,345
-------- --------- --------
Cash and equivalents, end of year....................... $ 2,829 $ 3,345 $ 2,591
======== ========= ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 109
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. ("Urohealth" or the "Company") is engaged in the
manufacture, marketing and distribution of products used by surgeons, urologists
and gynecologists. The Company is focused on developing a broad range of
products specific to these three specialities using a direct sales and
distributor distribution channel.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned except for
Urohealth, Inc. (California). All significant intercompany accounts and
transactions are eliminated in consolidation.
In 1996, the Company changed its fiscal year 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 unaudited consolidated results of operations
included net sales of $34.5 million; gross profit of $22.0 million; net loss of
$19.3 million; and net loss per share of $1.39.
Financial information for 1995 and 1996 has been restated to reflect the
fiscal 1997 merger with Microsurge, Inc., which has been accounted for as a
pooling of interests. Additionally, certain amounts in the fiscal 1995 and 1996
consolidated financial statements have been reclassified to conform with the
fiscal 1997 presentation.
The minority interest in Urohealth, Inc. (California) at March 31, 1997
consists of 42,000 shares of its Series A preferred stock, which were redeemed
or exchanged for shares of common stock subsequent to March 31, 1997. The
redemption price was $6.41 per share, consisting of the redemption price of
$5.00 per share plus accrued and unpaid dividends and a $.20 per share
redemption premium.
Unaudited Pro Forma Financial Information
The unaudited pro forma balance sheet as of March 31, 1997 gives effect to
a private placement of $110 million of senior subordinated notes, which the
Company completed on April 10, 1997, as if such debt had been issued at March
31, 1997 and a portion of proceeds had been used to retire other outstanding
debt and to establish a restricted cash fund to be used solely for payment of
interest. (See Note 5).
Business Combinations
On March 31, 1997, the Company acquired all of the outstanding voting
securities of Microsurge, Inc. (Microsurge), a designer and manufacturer of
products for use in minimally invasive surgery, in a transaction accounted for
as a pooling of interests. Additionally, during the nine months ended March 31,
1996 the Company acquired four other companies in separate transactions
accounted for as pooling of interests. Dacomed Corporation (Dacomed), a
manufacturer of urological products, and Allstate Medical Products, Inc.
(Allstate), a manufacturer and distributor of disposable urinary incontinence
products, were acquired in July 1995. Osbon Medical Systems, Ltd. (Osbon), a
manufacturer of urological products, and Advanced Surgical, Inc. (Advanced), a
manufacturer and distributor of minimally invasive surgical products, were
acquired in December 1995. The accompanying consolidated financial statements
include the accounts of these entities for all periods presented. The following
number of shares of the Company's common stock were issued in the transactions:
Microsurge -- 2,771,366; Dacomed -- 1,610,367; Allstate -- 190,488; Osbon --
5,000,000; and Advanced -- 937,833.
F-9
<PAGE> 110
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
The results of operations previously reported by the Company, including
Osbon, Advanced, Dacomed, and Allstate, and those of Microsurge included in the
accompanying consolidated financial statements are summarized below (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Net sales:
Osbon....................................... $ 25,767 $ 23,653 $
Advanced.................................... 2,231 1,223
Dacomed..................................... 9,300 8,017
Allstate.................................... 2,275 1,798
Urohealth................................... 5,880 4,950 83,679
-------------------------
As previously reported................... 45,453 39,641
Microsurge.................................. 3,797 3,312 7,584
Consolidation adjustment.................... -- -- (568)
-------- --------- --------
Combined................................. $ 49,250 $ 42,953 $ 90,695
======== ========= ========
Net income (loss):
Osbon....................................... $ 2,035 $ 530 $
Advanced.................................... (12,283) (2,408)
Dacomed..................................... (692) (1,310)
Allstate.................................... (42) (623)
Urohealth................................... (7,524) (14,185) (79,146)
-------------------------
As previously reported................... (18,506) (17,996)
Microsurge.................................. (6,331) (5,028) (7,337)
-------- --------- --------
Combined................................. $(24,837) $ (23,024) $(86,483)
======== ========= ========
</TABLE>
Prior to the March 31, 1997 merger, Microsurge prepared its financial
statements on the basis of a December 31 fiscal year end. The consolidated
results of operations for the year ended June 30, 1995, include the results of
operations of Microsurge for the year ended December 31, 1995. The reporting
periods for Microsurge's results of operations have been conformed to those of
the Company for the nine months ended March 31, 1996 and the fiscal year ended
March 31, 1997. Accordingly, net sales of approximately $2,155,000 and net loss
of $3,521,000 were included in the consolidated results of operations for both
the fiscal periods ended June 30, 1995 and March 31, 1996.
Prior to the December 1995 mergers, Osbon prepared its financial statements
on the basis of a September 30 fiscal year and Advanced on the basis of a
December 31 fiscal year. The consolidated results of operations for the year
ended June 30, 1995 includes the results of operations of Osbon for the year
ended September 30, 1995. Accordingly, net sales of approximately $6,809,000 and
net income of $373,000 were included in the consolidated results of operations
for both the 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, net sales
of approximately $1,111,000 and net loss 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 mergers, Dacomed and Allstate prepared their
financial statements on the basis of an October 31 and December 31 fiscal
year-end, respectively. Net sales of approximately $3,500,000 and net
F-10
<PAGE> 111
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
loss 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. Net sales 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.
No adjustments were required to be made to the net assets of the combining
enterprises to conform accounting practices and there was no effect on net
income previously reported.
During the year ended March 31, 1997, in transactions accounted for as
purchases, the Company acquired: Richard-Allan Medical Industries, Inc.
(Richard-Allan); X-Cardia Corporation (X-Cardia); The Intermed Group (Intermed);
certain assets from O.R. Concepts, Inc. (O.R. Concepts) and three other
immaterial businesses. Richard-Allan and the O.R. Concepts assets; are engaged
in the development, manufacture and marketing of surgical products and supplies;
X-Cardia is developing cardiac monitoring products; and Intermed develops,
manufactures and markets disposable medical products. The aggregate initial
purchase price for these entities, including direct acquisition costs, was $39.7
million in cash, $3.0 million in debt, and 3,622,000 shares of the Company's
common stock valued at $44.0 million. In allocating the total purchase price for
these acquisitions, it was determined that acquired in-process research and
development costs aggregating $37.0 million related to the Richard-Allan and
X-Cardia acquisitions should be immediately expensed and the balance of the
total purchase price for all of the transactions allocated to the fair value of
the net assets acquired, including $44.6 million which was assigned to goodwill
and relates to all transactions, except X-Cardia, that is being amortized over a
period of 25 years. Independent valuations were obtained in connection with the
Richard-Allan and X-Cardia acquisitions and were used as aids in the allocation
of the purchase price for these entities. The Company agreed to make additional
payments in connection with the X-Cardia acquisition of up to $21 million upon
achievement of clinical and patent approval milestones. There can be no
assurance that the milestones will be achieved. 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 X-Cardia technology.
These entities have been included in the Company's consolidated operating
results from their respective dates of acquisition. Unaudited pro forma
operating results assuming the acquisition of Richard-Allan had taken place as
of July 1, 1995 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
MARCH 31, MARCH 31,
1996 1997
----------- ----------
<S> <C> <C>
Net sales........................................... $ 58,658 $ 99,122
Loss before extraordinary item...................... (26,444) (88,045)
Net loss............................................ (26,444) (91,018)
Net loss per share.................................. (1.58) (4.52)
</TABLE>
The unaudited pro forma results including the other business acquisitions
accounted for as purchases do not differ materially from those presented above.
Additionally, during the year ended March 31, 1997, the Company purchased
five in-process research and development projects that did not constitute
businesses, and expensed the aggregate purchase price of $10.2 million as
acquired in-process research and development costs.
Prior year business combinations accounted for as purchases include
Laparomed Corporation, which was acquired by Advanced on July 27, 1994 in
exchange for 236,000 shares of the Advanced common stock and Urohealth of
Kentucky, Inc., which was acquired by the Company on March 17, 1995 in exchange
for 25,000 shares of the Company's common stock and assumption of debt
aggregating $137,000. The pro forma
F-11
<PAGE> 112
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
effect of these acquisitions is immaterial. The consolidated results of
operations for the fiscal year ended June 30, 1995, included approximately
$1,665,000 of expenses related to the relocation of Laparomed's operations and
employee termination costs.
Liquidity Requirements
During the year ended March 31, 1997, the Company relied primarily upon a
net increase in borrowings of $92 million and net proceeds of $19 million from
the sale of its common stock to finance its fiscal 1997 operating cash
requirements of $55 million and cash expenditures aggregating $52 million in
fiscal 1997 in connection with capital improvements and business and technology
acquisitions. In addition, in April 1997 the Company completed a $110 million
offering of its 12 1/2% Senior Subordinated Notes and entered into an amended
and restated $50 million revolving credit facility. As a result, the Company is
highly leveraged with approximately $172 million of debt outstanding at March
31, 1997 after giving effect to issuance of the Senior Subordinated Notes and
the simultaneous repayment of all amounts outstanding under its revolving credit
agreement as well as certain other debt items. While the Company believes it has
adequate sources of liquidity to finance its operations for the next 12 months,
such sources primarily consist of: available cash balances; borrowings under the
April 1997 revolving credit agreement; and funds generated from operations.
However, through June 30, 1997 the Company has continued to experience negative
cash flows from operations, and it will be necessary for the Company to improve
its operating results to generate cash from operations and qualify for
borrowings under the April 1997 revolving credit agreement's financial covenant
requirements. Additionally, the Company's business strategy includes efforts to
expand its business through the acquisition of new products, product lines and
businesses. Therefore, the Company may need to obtain additional capital from
other debt or equity financing transactions. 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. In such event, the Company
may be required to restructure its operations and/or proceed with its planned
expansion at a slower rate.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from sales of manufactured products is generally recognized upon
the dates of shipment to customers. Revenue from sales of certain introductory
products containing return privileges where the amount of future returns cannot
be reasonably estimated is recognized upon acceptance by the customer after the
date of shipment. With respect to certain distributor initial stocking orders
shipped during 1997 to new distributors, the Company will recognize revenue on
those orders upon establishment of a sales and payment history by those
distributors, thereby establishing that collection of the sales price is
reasonable assured.
The Company grants its distributors limited stock balancing rights whereby
inventory previously purchased may be returned for credit against purchases of
other Company products. It also generally provides the ultimate customers for
its products with a right to return products they find unsatisfactory within 30
days after purchase. Sales revenue and cost of sales reported in the
consolidated statements of operations are net of estimated provisions,
determined based on experience, for costs or losses that may be incurred in
connection with sales returns.
Cash and Equivalents
Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.
F-12
<PAGE> 113
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
All investments have been classified as available-for-sale, and are carried
at amortized cost which approximates fair value. At March 31, 1996, investments
consisted of corporate bonds and certificates of deposits which matured not more
than one month after the balance sheet date.
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-five 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.
Asset Impairment
Following adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of" by the Company in the first quarter of fiscal 1996, the Company
tests for and records impairment losses 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.
Asset impairment is recognized on long-lived assets held for sale when the
estimated fair value less costs to sell is less than the assets carrying amount.
As a result of the Company's decision to deemphasize its participation in
incontinence clinics, the Company recorded in the fourth quarter of fiscal 1997
a $347,000 charge relating to the impairment of the goodwill recorded on the
acquisition of Urohealth of Kentucky.
Advertising Expense
Advertising and promotion costs are expensed when incurred. Such costs in
fiscal 1995, 1996 and 1997 were $1,261,000, $895,000 and $1,612,000,
respectively.
Research and Development Expense
Research and development expenses are charged to operations 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 revenue is recognized from the
sale of products. Actual costs are charged against the accrual when paid.
Per Share Information
Net loss per share is based on net loss attributable to common stockholders
and the weighted average number of shares of common stock outstanding during the
periods presented. Common stock equivalents and other potentially dilutive
securities have not been included in the calculation as they are anti-dilutive.
F-13
<PAGE> 114
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
128 redefines the standards for computing earnings per share and is effective
for the Company on March 31, 1998. The Company has not yet determined the impact
that the adoption of SFAS No. 128 will have on future earnings per share
calculations.
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. Such estimates primarily relate to the collectibility of
accounts receivable, inventory obsolescence and estimates of future cash flows
used to evaluate whether conditions are present that would require asset
impairment charges to be recognized. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH MARCH
31, 31,
1996 1997
-------- --------
<S> <C> <C>
Office equipment........................................ $ 4,574 $10,887
Equipment and tooling................................... 5,504 15,229
Molds................................................... 2,177 1,336
Leasehold improvements.................................. 1,223 2,204
Building................................................ 1,718 6,179
Land.................................................... 247 334
Other................................................... 962 665
------- -------
16,405 36,834
Accumulated depreciation................................ 7,321 10,799
------- -------
$ 9,084 $26,035
======= =======
Equipment recorded under capital leases included
above................................................. $ 1,434 $ 1,475
Accumulated depreciation................................ 639 937
------- -------
$ 795 $ 538
======= =======
</TABLE>
4. 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>
MARCH MARCH
31, 31,
1996 1997
-------- --------
<S> <C> <C>
Raw materials and supplies.............................. $ 2,339 $ 8,731
Work in progress........................................ 395 2,942
Finished goods.......................................... 3,968 9,272
------- -------
$ 6,702 $20,945
======= =======
Distributor inventories................................. $ -- $ 6,307
======= =======
</TABLE>
F-14
<PAGE> 115
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES (CONTINUED)
Distributor inventories are comprised of initial stocking orders shipped
during fiscal 1997 to new distributors for which revenue recognition has been
deferred. (See Note 2 -- Revenue Recognition.)
5. DEBT
Short-term debt
Short-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
--------- ---------
<S> <C> <C>
Line of credit under Credit Agreement, interest at 9.75%....... $ -- $ 9,250
Line of credit under Credit Agreement, repaid in May 1996...... 5,500 --
Convertible subordinated notes at 9.25%, due August 1997....... 2,276 5,268
Line of credit with a bank, repaid in May 1996................. 1,623 --
Line of credit with a bank, repaid October 1996................ 150 --
------- -------
$ 9,549 $14,518
======= =======
</TABLE>
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 has a five-year term and bears
interest at a rate of approximately 9.75% at March 31, 1997. Additionally, the
Company is required to meet certain financial covenants. 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. As of March 31, 1997, the Company had outstanding
borrowings of $54.3 million under this facility.
In February 1996, Microsurge 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 an Investor Sale (as
defined below) and prior to maturity date. Upon the closing, or series of
closings, in which Microsurge sells capital stock of Microsurge for gross
proceeds of $10,000,000 or more (an "Investor Sale"), the Notes will become
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"). The Company has
no plans to undertake any action that would constitute an Investor Sale and
expects to retire the notes for cash at maturity.
On November 22, 1995, the Company entered into a $10.0 million Credit
Agreement consisting 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 this repayment, the Company incurred
an extraordinary loss of $2.9 million resulting from the early repayment of this
debt.
F-15
<PAGE> 116
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
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.
On April 10, 1997, the Company used proceeds from the sale of the Senior
Subordinated Notes (see below) to repay all amounts outstanding under the
Company's term and revolving credit facility. Concurrently with the repayment of
the existing credit facility, the Company entered into an amended and restated
$50 million revolving credit facility with its senior lender. The new credit
facility is secured by substantially all of the Company's assets and contains
the same basic covenants as in the prior facility.
Long-term debt
Long-term debt consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
--------- ---------
<S> <C> <C>
Convertible subordinated debentures............................ $ -- $ 50,000
Term loan under Credit Agreement, repaid April 10, 1997........ -- 45,000
Term loan under Credit Agreement, repaid May 13, 1996.......... 6,000 --
Bank note, interest at 8.75%, repaid in April 1996............. 326 --
Bank note, interest at 8.75%, repaid in April 1996............. 221 --
Bank note dated December 21, 1992, due in 180 monthly
installments with interest at 8.75% collateralized by a
building..................................................... 175 167
Bank note dated August 15, 1996, interest at 8.25%. Note is
collateralized by a building and matures on August 15, 2006.
The entire balance is due on maturity........................ -- 3,000
Bank note dated August 15, 1996, interest at 6.25%. Note
matures on April 17, 1997. The entire balance is due on
maturity..................................................... -- 3,000
Bank note dated April 29, 1994, due in 36 monthly installments
with interest at 8.75%; collateralized by equipment.......... 41 14
Bank note dated February 11, 1994, repaid May 1996............. 29 --
Various notes payable with interest from 8.5% to 10%, due dates
through August 1, 1997, secured by equipment................. 19 40
Convertible subordinated notes................................. 1,284 --
Capital leases................................................. 723 399
------- ---------
8,818 101,620
Less current maturities........................................ 546 3,328
------- ---------
$ 8,272 $ 98,292
======= =========
</TABLE>
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 $12.88 per warrant,
subject to anti-dilution adjustments. 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
F-16
<PAGE> 117
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
2004, plus accrued and unpaid interest. The Debentures are convertible into
common stock at $10.90 per share, subject to further anti-dilution adjustments,
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 redemption of shares of common stock, options or warrants of the Company or
any subsidiary other than the preferred stock issued by Urohealth (California).
The Company has various capital equipment leases with future minimum lease
payments for years ending March 31, 1998, 1999, 2000, and 2001 of $301,000;
$102,000; $43,000; and $2,000, respectively. Pursuant to a capital lease
agreement entered into during 1993 and as amended in 1994, the Company
maintained $96,000 and $48,000 in restricted cash at March 31, 1996 and 1997.
Senior Subordinated Notes
On April 10, 1997, the Company completed the sale of $110 million of its
12 1/2% Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. The Notes bear interest, payable semi-annually, at
12 1/2% per annum, subject to increase if certain obligations are not satisfied,
and mature on April 1, 2004. There are no mandatory redemption or sinking fund
payments required on the Notes. The Company is entitled to redeem the Notes on
or after April 1, 2001 for an amount equal to the principal amount of the Note,
accrued but unpaid interest through the redemption date, the redemption premium
and liquidated damages, if any. In the event of a Change of Control (as defined
in the Indenture), each holder of a Note is entitled to require the Company to
purchase such holder's Notes at 101% of the principal amount of the Notes, plus
accrued but unpaid interest to the date of repurchase and liquidated damages, if
any.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The Indenture governing the Notes contains certain covenants, including among
other matters limitations on the ability of the Company to: (i) incur additional
indebtedness; (ii) incur certain liens; (iii) engage in certain transactions
with affiliates; (iv) engage in unrelated lines of business; or (v) engage in
mergers, consolidations or similar transactions. The Company used $19.2 million
of the proceeds from the sales of the Notes to purchase government securities
(the "Pledged Securities") which that have been pledged for the benefit of the
holders of the Notes. The scheduled interest and principal payments on the
Pledged Securities is in an amount sufficient to pay when due the first three
scheduled interest payments on the Notes.
The Company is a holding company with no material assets or operations
other than its investments in its subsidiaries. The Notes are guaranteed by all
of the Company's domestic and material foreign subsidiaries. The guarantees are
full, unconditional, and joint and several. All of the guarantor subsidiaries
are wholly-owned by the Company. Assets, equity, income and cash flows of all
other subsidiaries of the Company that have not guaranteed the Notes are less
than two percent of the respective consolidated amounts and are inconsequential,
individually and in the aggregate to the Company. The Company has not included
separate financial information for the guarantors, since the Company believes
that such information is not material to investors.
In connection with the issuance of the Notes, the Company issued with each
$1,000 principal amount of Notes, a warrant entitling the holder to purchase
4.44 shares of Common Stock of the Company (or 9.06 shares, if a certain level
of EBITDA for fiscal 1998 is not achieved) at an exercise price of $9.50 per
share. The warrants are exercisable on or after June 30, 1998 and expire April
1, 2004.
F-17
<PAGE> 118
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
Debt Maturities
The contractual maturities of all debt securities of the Company at March
31, 1997 and on a pro forma basis to reflect the sale of the Notes and the
repayment of the term and revolving credit facility with a portion of the
proceeds after March 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, PRO FORMA
------------------------------------------------------------- ---------
<S> <C> <C>
1998.................................................... $ 17,846 $ 8,596
1999.................................................... 4,612 112
2000.................................................... 5,554 54
2001.................................................... 6,014 14
2002.................................................... 6,513 13
Thereafter.............................................. 75,599 163,099
-------- --------
Total.............................................. $116,138 $ 171,888
======== ========
</TABLE>
6. RESTRUCTURING CHARGES
During the year ended June 30, 1995, the Company hired a new senior
management team which adopted and implemented a restructuring 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 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. Through March 31, 1997,
cash payments have reduced the balance of this restructuring accrual to $49,000,
which primarily relates 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 through March 31,
1997 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 March 31, 1997 relates primarily to facility
lease obligations, which are expected to be paid in cash.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH RECLASSI- MARCH 31,
ACCRUAL CHARGES CHARGES FICATIONS 1997
------------- -------- ------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs............. $ 2,620 $ -- $1,822 $ (730) $ 68
Facility reduction costs.............. 2,836 1,199 1,822 730 545
------- ------ ------ ------- ------
$ 5,456 $1,199 $3,644 $ -- $ 613
======= ====== ====== ======= ======
</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
F-18
<PAGE> 119
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RESTRUCTURING CHARGES (CONTINUED)
with some of the existing manufacturing locations. This restructuring is
expected to be completed within one year except for redundant facility, 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 18 employees, certain facility closures and elimination of other
redundant selling and administrative costs.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH MARCH 31,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs................... $ 2,412 $ -- $ 990 $1,422
Facility reduction costs.................... 1,588 -- 263 1,325
------- ------ ------ ------
$ 4,000 $ -- $1,253 $2,747
======= ====== ====== ======
</TABLE>
In March 1997, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from the mergers with Osbon
and Microsurge. The plan provides for the elimination of approximately 90
personnel and the closure of all operations at Osbon except for customer
service, sales and a limited accounting support staff, and the closure of all
Microsurge facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through March 31,
1997 are summarized in the table below. Non-cash charges consist of the
write-down of existing assets to their estimated net realizable value.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH MARCH 31,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs...................... $ 7,067 $ -- $3,879 $3,188
Facility reduction costs....................... 933 473 43 417
------- ------ ------ ------
$ 8,000 $ 473 $3,922 $3,605
======= ====== ====== ======
</TABLE>
Although subject to future adjustment, management of the Company believes
that restructuring liabilities as of March 31, 1997 are adequate to complete the
actions contemplated by the restructuring plans.
7. 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). 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.
The Company has various operating lease agreements for office and
production facilities. Minimum future lease payments for years ending March 31,
1998, 1999, 2000, 2001, 2002 and thereafter are $1,200,000, $1,210,000,
$705,000, $439,000, $210,000 and $368,000 respectively. In addition, the Company
is required to pay maintenance and property taxes attributable to the
facilities. Rent expense under all operating leases was approximately
$1,408,000, $859,000, and $1,237,000 in 1995, 1996 and 1997, respectively.
The Company has employment agreements with 9 officers providing for annual
aggregate salaries of approximately $2.2 million per annum.
F-19
<PAGE> 120
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
8. CAPITAL STOCK
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, 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.
At March 31, 1997, the Company had reserved 12,313,142 shares of authorized
common stock, subject to increase under anti-dilution provisions, pursuant to
outstanding stock options and warrants and for conversion of debt and the
preferred stock of Urohealth (California).
Subsequent to March 31, 1997, the Board of Directors approved an increase
in the number of common shares authorized to be issued from 50 million shares to
100 million shares, which increase is subject to stockholder approval.
9. STOCK OPTIONS AND WARRANTS
The Company has outstanding, under various stock option plans, options
granted to current and former employees, management personnel and directors for
up to 5,123,376 shares of the Company's common stock. Additionally, in
connection with the acquisitions of Dacomed, Advanced, X-Cardia and Microsurge,
the Company assumed the obligations of those corporations to their employees and
consultants with respect to 129,449 stock options granted under the respective
plans and currently outstanding. Options granted generally have five to ten-year
terms and generally vest and become exercisable over periods of one to five
years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1996 and 1997, respectively: risk-free interest rates of
5.6% and 6.6%; no dividend yield; volatility factors of the expected market
price of the Company's common stock of 63% and 57%; and a weighted-average
expected life of the option of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
F-20
<PAGE> 121
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Pro forma net loss..................................... $(24,554) $(93,325)
Pro forma net loss per share........................... $ (1.68) $ (4.82)
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
June 30, 1995, its pro forma effect will not be fully reflected until fiscal
2000.
A summary of the Company's stock option activity, and related information
for the years ended June 30, 1995, March 31, 1996 and March 31, 1997 follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year... 464 $14.87 1,532 $10.23 4,017 $10.66
Granted............................ 1,143 9.43 2,684 8.51 1,758 7.63
Assumed in acquisitions............ -- -- -- -- 52 2.22
Exercised.......................... (31) 9.43 (160) 5.20 (327) 5.20
Forfeited.......................... (44) 9.01 (39) 9.62 (246) 8.61
----- ------ ------ ------ ------ ------
Outstanding end of year............ 1,532 $10.23 4,017 $10.66 5,254 $ 9.97
Exercisable at end of year......... -- -- 975 $ 9.14 2,557 $ 9.74
Weighted-average fair value of
options granted during year...... $ 5.35 $ 7.74
</TABLE>
Exercise prices for options outstanding as of March 31, 1997 ranged from
$1.86 to $54.50. The weighted average remaining contractual life of those
options is 7.09 years.
Additionally, at March 31, 1997, the Company has non-employee stock options
and warrants for 2,458,986 shares of common stock outstanding with exercise
prices ranging from $3.81 to $58.48 per share, of which options and warrants for
2,449,186 are currently exercisable. These options and warrants were assigned
values at issuance generally using a Black-Scholes option pricing model and
expire at various dates through May 2005. The outstanding non-employee options
and warrants are exercisable for the following per share prices: less than $5
per share -- 0; $5 to $10 per share -- 2,034,167; $10 to $20 per
share -- 408,909; and the remainder have exercise prices in excess of $20 per
share. In March 1997 approximately 1,321,991 warrants issued in connection with
various securities offerings expired unexercised.
10. SETTLEMENT OF LITIGATION
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 issued to the
stockholder class 260,163 warrants to purchase Common Stock identical to the
Company's then outstanding publicly traded warrants at an exercise price of
$15.00 per
F-21
<PAGE> 122
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SETTLEMENT OF LITIGATION (CONTINUED)
share. The warrants expired on March 20, 1997. The Company's insurance carrier
made 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 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.
11. 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>
MARCH 31, MARCH 31,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Federal, state and foreign net operating loss
carryovers........................................ $ 25,838 $ 35,826
Restructuring and merger costs....................... 2,875 1,305
Tax credit carryovers................................ 1,394 1,656
Accrued compensation................................. -- 2,179
Inventory reserve.................................... 805 1,754
Allowance for doubtful accounts...................... 645 1,134
Other................................................ 788 1,475
Valuation allowance.................................. (31,115) (43,698)
--------- ---------
Total deferred tax assets, net............... 1,230 1,631
Deferred tax liabilities:
Book basis of fixed assets in excess of tax basis.... 270 78
State taxes.......................................... 960 1,553
--------- ---------
Total deferred tax liabilities............... 1,230 1,631
--------- ---------
Total........................................ $ -- $ --
========= =========
</TABLE>
The Company increased its valuation allowance during the period ended March
31, 1997 by $12,583,000 due to uncertainties as to the ultimate realization of
the Company's deferred tax assets. Certain reductions in the valuation allowance
totaling approximately $1,078,000 will be credited to additional paid-in
capital.
F-22
<PAGE> 123
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................... $1,199 $ 420 $(262)
Foreign..................................... -- 14 --
State....................................... 137 149 35
------ ------- -----
Total current....................... 1,336 583 (227)
Deferred:
Federal..................................... 42 (128) --
Foreign..................................... -- -- --
State....................................... 8 (24)
------ ------- -----
Total deferred...................... 50 (152) --
------ ------- -----
Provision for income taxes.................... $1,386 $ 431 $(227)
====== ======= =====
</TABLE>
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, MARCH 31, MARCH 31,
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at the expected statutory rate... $ (7,713) $(7,662) $ (29,339)
Increases (decreases) in taxes resulting
from:
Non-deductible goodwill.................... 286 -- 16,150
Valuation allowance........................ 8,639 6,917 10,839
Reverse foreign net operating loss not
previously benefited.................... -- 1,994 --
State income taxes, net.................... 137 69 593
Other...................................... 37 188 1,530
Establishment of deferred tax assets not
previously benefited.................... -- (1,075) --
-------- ------- ---------
Provision for income taxes................. $ 1,386 $ 431 $ (227)
======== ======= =========
</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. The issuance of stock at
March 31, 1997 in connection with the Company's merger with Microsurge caused an
ownership change which may further limit the Company's annual utilization of a
portion of its NOL's. However, the Company does not believe this limitation will
exceed the previous limitation resulting from the December 29, 1995 change in
ownership. 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, 1997, the Company had NOL's for U.S. federal and state income
tax purposes of approximately $92,000,000 and $68,000,000, respectively, and
general business credit carryovers of approximately $1,000,000 and $650,000,
respectively. These NOL's and general business credits are available to offset
future taxable income, if any, through the year 2012 and are subject to
limitations as well as separate return
F-23
<PAGE> 124
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
limitations for the subsidiaries Urohealth (California), Advanced, Laparomed and
Microsurge, as described below.
Urohealth (California) has a June 30 tax year end. At March 31, 1997,
Urohealth (California) had federal and state NOL's of approximately $30,000,000
and $20,000,000, respectively, and general business credit carryovers of
approximately $200,000 and $250,000, respectively, reflecting the tax return
filings through June 30, 1996.
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 NOL's 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 NOL's (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.
Microsurge had a December 31 tax year end prior to its merger with the
Company on March 31, 1997. As of March 31, 1997, Microsurge has federal and
state NOL's of approximately $23,000,000 and $16,000,000, respectively and
general business credit carryovers of approximately $200,000 and $174,000,
respectively. During 1992, in conjunction with Microsurge's Series C redeemable
preferred stock offering, a change in ownership under Section 382 of the
Internal Revenue Code of 1986 occurred. As a result of this change in ownership,
the use of approximately $1,638,000 of the Microsurge NOL carryforward is
limited to approximately $187,000 per year beginning in 1992. On March 31, 1997
a subsequent change in ownership occurred as a result of the acquisition of
Microsurge by the Company. Further limitations will be placed on remaining NOL's
equal to 5.50% multiplied by the fair market value of the Company as of March
31, 1997.
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.
12. RELATED PARTY TRANSACTIONS
Corporations related through common ownership by a former director provide
advertising, publishing management and computer services to the Company. Such
services totaled $1,977,000, $1,359,000 and $2,710,000 for the fiscal periods
ended June 30, 1995 and March 31, 1996 and 1997, respectively. At March 31, 1996
and 1997, amounts owed to these related corporations totaled $53,000 and $0,
respectively. In the opinion of management, 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
a former director; rental expense under the lease is $17,500 per month and the
lease expires in 2003.
A member of the board of directors is affiliated with the holder of $25
million of the 8.75% convertible debentures described in Note 5. Interest
expense for the $25 million of debentures aggregated $1.9 for the year ended
March 31, 1997.
An officer of the Company is a member of the board of directors of a
customer to which the Company made net sales aggregating approximately $5.8
million in the year ended March 31, 1997. These sales were made under terms that
provide for payment over 15-36 month periods. At March 31, 1997 accounts
receivable aggregating approximately $4.3 million are due from this customer.
F-24
<PAGE> 125
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
Subsequent to March 31, 1997, the Company advanced its Chairman and Chief
Executive Officer $1.5 million pursuant to an unsecured loan accruing interest
at 6.02%, and maturing on November 25, 1999.
13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Receivables.................................................. $ (1,800) $(1,853) $ (8,019)
Income tax receivable........................................ -- -- (377)
Inventories.................................................. (809) (963) (12,342)
Distributor inventories...................................... -- -- (6,307)
Prepaid expenses............................................. (261) (1,044) (447)
Deposits and other assets.................................... 1,162 -- (1,333)
Accounts payable and accrued liabilities..................... 3,510 3,014 272
Compensation and employee benefits........................... 343 729 1,205
Restructuring liabilities.................................... 486 2,005 5,319
Other liabilities............................................ 76 -- 3,116
Other........................................................ 545 182 112
-------- ------- ---------
$ 3,252 $ 2,070 $ (18,801)
======== ======= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital leases........................ $ 160 $ -- $ 41
======== ======= =========
Preferred stock of subsidiary exchanged for common shares of
the Company.................................................. $ 2,720 $ 45 $ 860
======== ======= =========
Equity issued in acquisitions of businesses.................... $ 6,990 -- $ 48,046
======== ======= =========
Warrants issued in early extinguishment of debt................ $ -- $ $ 1,794
======== ======= =========
Warrants issued in connection with financings.................. $ -- $ 1,520 $ 501
======== ======= =========
Issuance of common stock on debt and preferred stock
conversions.................................................. $ -- $ -- $ 4,984
======== ======= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................................... $ 259 $ 950 $ 7,529
======== ======= =========
Cash paid for taxes, net of refunds............................ $ 1,262 $ 1,010 $ 18
======== ======= =========
</TABLE>
F-25
<PAGE> 126
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is summary operating results on a quarterly basis for
fiscal 1997. These results for the first three quarters have been restated to
reflect the delayed recognition of revenue from distributor initial stocking
orders and introductory products and manufacturing variance adjustments. The
information presented in the first table below excludes the results of
operations of Microsurge, which was acquired on March 31, 1997 in a transaction
accounted for as a pooling-of-interests, while the information in the second
table includes Microsurge.
<TABLE>
<CAPTION>
QUARTERS
---------------------------------------------
FISCAL 1997 -- WITHOUT MICROSURGE FIRST SECOND THIRD FOURTH
------------------------------------------ ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................... $16,027 $ 20,064 $26,995 $ 20,593
Gross profit............................ 10,778 13,106 16,207 6,953
Income (loss) from operations........... 1,329 (27,694) 2,270 (45,277)
Net income (loss)....................... (2,572) (28,986) 119 (47,707)
Income (loss) per share................. (0.22) (1.88) .01 (2.39)
</TABLE>
The results of operations for the first three quarters of fiscal 1997 were
restated primarily to reflect the delayed recognition of revenues relating to
distributor initial stocking orders ($2,465,000 in Q3), the delayed recognition
of revenue relating to the shipment of introductory products ($661,000 in Q1,
$855,000 in Q2 and $55,000 in Q3), reductions of overhead capitalized in
inventory ($143,000 in Q1, $349,000 in Q2 and $978,000 in Q3) and increased
sales return allowances ($53,000 in Q1, $53,000 in Q2 and $115,000 in Q3).
<TABLE>
<CAPTION>
QUARTERS
---------------------------------------------
FISCAL 1997 -- INCLUDING MICROSURGE FIRST SECOND THIRD FOURTH
------------------------------------------ ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................... $17,318 $ 21,581 $28,891 $ 22,905
Gross profit............................ 11,198 13,575 16,898 7,941
Loss from operations.................... (287) (29,168) (57) (46,396)
Net loss................................ (4,263) (30,555) (2,452) (49,213)
Loss per share.......................... (0.29) (1.68) (0.11) (2.17)
</TABLE>
The operating results for the fourth quarter of fiscal 1997 include the
writeoff of acquired in-process research and development of $21,732,000, costs
of restructuring certain operations of $8,000,000, costs associated with the
Microsurge merger of $3,600,000, the writeoff of $1,916,000 in discontinued
product inventory, $197,000 in cost associated with the abandoned Relax project,
and $347,000 relating to the impairment of goodwill on the Company's Urohealth
of Kentucky subsidiary.
15. SUBSEQUENT EVENTS
Pending Acquisition
On April 19, 1997, the Company entered into a definitive agreement pursuant
to which the Company 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 (subsequently increased to 1.40 shares) of Common
Stock of the Company. The consummation of the Merger is subject to approval by
the Company's and Imagyn's stockholders, and other customary closing conditions.
No assurances can be given that the Merger will be successfully consummated.
F-26
<PAGE> 127
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
Securities Litigation
In July 1997, several complaints were filed against the Company, certain of
its officers and directors and, in certain complaints, the lead underwriters of
the Company's November 1996 public offering requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages. The suits were filed in the United States
District Court for the Central District of California. All of the suits are
based on substantially the same facts and have been brought on behalf of
purchasers of Common Stock of the Company during various periods between July
18, 1996 and July 1, 1997. No proceedings have taken place in any of the suits,
and no provision for any liability that may result from the ultimate resolution
of this matter has been included in the accompanying consolidated financial
statements.
F-27
<PAGE> 128
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents.................................................. $ 2,591 $ 5,750
Receivables, net of allowance for doubtful accounts of $1,684 and
$1,695 on March 31, 1997 and June 30, 1997, respectively........... 17,272 22,044
Income tax receivable................................................. 377 377
Advances to officers.................................................. 114 9
Inventories........................................................... 20,945 29,728
Distributor inventories............................................... 6,307 6,307
Prepaid expenses...................................................... 2,278 3,849
--------- --------
Total current assets.................................................... 49,884 68,064
Restricted cash......................................................... 48 19,327
Receivables -- long term................................................ 2,722 2,383
Property and equipment, net............................................. 26,035 27,421
Patents and intangibles, net of accumulated amortization of $2,646 and
$3,573 on March 31, 1997, and June 30, 1997, respectively............. 6,285 6,099
Loans to officers....................................................... 550 2,041
Deposits and other assets............................................... 2,232 1,753
Deferred debt issuance costs............................................ 5,986 9,734
Goodwill................................................................ 43,417 42,867
--------- --------
$ 137,159 $ 179,689
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 20,882 $ 20,679
Compensation and employee benefits.................................... 3,250 2,911
Restructuring liabilities............................................. 6,192 5,482
Short-term debt....................................................... 14,518 5,268
Current portion of long-term debt..................................... 3,328 3,216
--------- --------
Total current liabilities..................................... 48,170 37,556
Long-term liabilities:
Long-term debt........................................................ 98,292 53,269
Senior subordinated notes, net of discount............................ -- 108,340
Restructuring liabilities, less current portion....................... 822 678
Other liabilities..................................................... 4,149 3,822
Minority interest in consolidated subsidiary............................ 237 --
Common Stockholders' Equity:
Common stock -- $0.001 par value
Authorized shares -- 50,000,000
Issued and outstanding shares -- 23,807,000 and 23,825,000 at March
31, 1997 and June 30, 1997, respectively.......................... 24 24
Warrants.............................................................. 5,359 7,080
Additional paid-in capital............................................ 150,468 150,638
Foreign currency translation adjustment............................... (14) 44
Deficit............................................................... (170,348) (181,762)
--------- --------
Total common stockholders' equity (deficiency)................ (14,511) (23,976)
--------- --------
$ 137,159 $ 179,689
========= ========
</TABLE>
See accompanying notes.
F-28
<PAGE> 129
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JUNE
JUNE 30, 30,
1996 1997
-------- -------
<S> <C> <C>
Net sales............................................................. $ 17,318 $25,237
Cost of sales......................................................... 6,120 11,702
-------- -------
Gross profit.......................................................... 11,198 13,535
Operating expenses:
Selling, general and administrative................................. 10,685 16,863
Research and development............................................ 800 1,665
-------- -------
Total operating expenses.............................................. 11,485 18,528
Loss from operations.................................................. (287) (4,993)
Other income (expense):
Minority interest consisting of accrued dividends on preferred stock
of subsidiary.................................................... (18) (4)
Interest income..................................................... 59 389
Interest expense.................................................... (1,044) (5,433)
Other............................................................... -- 450
-------- -------
Loss before taxes and extraordinary item.............................. (1,290) (9,591)
Provision (benefit) for income taxes.................................. -- --
-------- -------
Loss before extraordinary item........................................ (1,290) (9,591)
Extraordinary item (early extinguishment of debt)..................... (2,973) (1,823)
-------- -------
Net loss.............................................................. $ (4,263) $(11,414)
======== =======
Net loss per share:
Loss before extraordinary item...................................... $ (1,290) $(9,591)
Dividends and accretion on redeemable convertible preferred stock... 398 --
-------- -------
Loss attributable to common stockholders before extraordinary
item............................................................. (1,688) (9,591)
Extraordinary item.................................................. (2,973) (1,823)
-------- -------
Net loss attributable to common stockholders........................ $ (4,661) $(11,414)
======== =======
Loss per share before extraordinary item............................ $ (0.10) $ (0.40)
======== =======
Net loss per share.................................................. $ (0.29) $ (0.48)
======== =======
Weighted average number of common shares used to compute loss per
share............................................................... 16,210 23,822
======== =======
</TABLE>
See accompanying notes.
F-29
<PAGE> 130
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (4,263) $ (11,414)
Non cash items included in net loss:
Extraordinary expense......................................... 2,433 1,823
Depreciation and amortization................................. 649 2,535
Amortization of deferred debt issuance costs.................. 271 414
Accretion and accrued interest on convertible notes........... 42 --
Loss on retirement/write-off of assets........................ -- 37
Accrued dividend on preferred stock in subsidiary............. 17 4
Deferred income taxes......................................... -- --
Provision for doubtful accounts............................... (180) 27
Other......................................................... 10 (91)
Changes in operating assets and liabilities...................... (7,789) (16,225)
-------- --------
Net cash used in operating activities.................... (8,810) (22,890)
Cash flows from investing activities:
Purchase of property and equipment, net.......................... (3,642) (3,119)
Purchase of patents.............................................. (56) (170)
Payments for acquisition of businesses, net of cash acquired..... (2,784) --
Proceeds from sale or maturity of marketable securities.......... 243 --
Restricted cash.................................................. -- (19,178)
Purchase of technology........................................... (250) --
Loans and advances to officers................................... -- (1,345)
-------- --------
Net cash used in investing activities.................... (6,489) (23,812)
Cash flows from financing activities:
Deferred financing fees paid..................................... (4,911) (5,924)
Issuance of common stock......................................... 814 170
Proceeds from Senior Subordinated Notes.......................... -- 110,000
Proceeds from long-term debt..................................... 35,234 --
Principal payments of long-term debt............................. (14,047) (54,385)
-------- --------
Net cash provided by financing activities................ 17,090 49,861
-------- --------
Net increase in cash............................................... 1,791 3,159
Cash, beginning of period.......................................... 3,345 2,591
-------- --------
Cash, end of period................................................ $ 5,136 $ 5,750
======== ========
Cash paid for interest........................................... $ 396 $ 5,389
======== ========
Cash paid for taxes.............................................. $ -- $ --
======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE> 131
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 June 30,
1997, its condensed consolidated results of operations for the three month
period ended June 30, 1997 and June 30, 1996, and its condensed consolidated
cash flows for the three month period ended June 30, 1997 and June 30, 1996.
Adjustments consist of normal recurring accruals except for the extraordinary
loss on early extinguishment of debt in the accompanying unaudited condensed
consolidated statements of operations. The results of operations for the three
month period ended June 30, 1997 are not necessarily indicative of those to be
expected for the entire year.
These condensed consolidated financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K, as amended, for the year ended March 31, 1997, as filed
with the Securities and Exchange Commission.
Significant intercompany accounts and transactions have been eliminated in
consolidation and certain amounts have been reclassified in prior periods to
conform to the current presentation.
In interim periods the Company defers and amortizes over the fiscal year
certain administrative costs to more appropriately reflect the benefits realized
during the course of the fiscal year.
Financial information presented reflects the March 31, 1997 merger with
Microsurge, Inc., which has been accounted for as a pooling of interests.
The results of operations previously reported by the Company and those of
Microsurge included in the accompanying interim consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1996
------------------
(IN THOUSANDS)
<S> <C>
Net sales:
Urohealth........................................ $ 16,027
Microsurge....................................... 1,291
-------
$ 17,318
-------
Net loss:
Urohealth........................................ $ (2,572)
Microsurge....................................... (1,691)
-------
$ (4,263)
=======
</TABLE>
F-31
<PAGE> 132
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
2. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding during the periods presented. Common stock equivalents
have not been included in the calculation because they are anti-dilutive. Net
loss per common share for the three months ended June 30, 1996 reflects $295,000
of warrants issued to induce the conversion of the redeemable convertible
preferred stock.
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>
MARCH 31, JUNE 30,
1997 1997
---------- ---------
<S> <C> <C>
Raw materials and supplies..................... $ 8,731 $12,157
Work in progress............................... 2,942 3,146
Finished goods................................. 9,272 14,425
------- -------
$ 20,945 $29,728
======= =======
Distributor inventories........................ $ 6,307 $ 6,307
======= =======
</TABLE>
4. DEBT
On April 10, 1997, the Company completed the sale of $110 million of its
12.5% Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. The notes bear interest, payable semi-annually, at
12.5% per annum, subject to increase if certain obligations are not satisfied,
and mature on April 1, 2004. There are no mandatory redemption or sinking fund
payments required on the Notes.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The indenture governing the Notes contains certain covenants which limit some of
the Company's ability to engage in certain transactions.
The Company used $19.2 million of the proceeds from the sale of the Notes
to purchase government securities (the "Pledged Securities") which that have
been pledged for the benefit of the holders of the Notes. The scheduled interest
and principal payments on the Pledged Securities is an amount sufficient to pay
when due the first three scheduled interest payments on the Notes.
The Company is a holding company with no material assets or operations
other than its investments in its subsidiaries. The Notes are guaranteed by all
of the Company's domestic and material foreign subsidiaries. The guarantees are
full, unconditional, and joint and several. All of the guarantor subsidiaries
are wholly-owned by the Company. In connection with the Notes, the Company
issued with each $1,000 principal amount of Notes, a warrant entitling the
holder to purchase 4.44 shares of Common Stock of the Company (or 9.06 shares,
if a certain EBITDA for fiscal 1998 is not achieved) at an exercise price of
$9.50 per share. The warrants are exercisable on or after June 30, 1998 and
expire April 1, 2004.
The Company used $54.2 million of the net proceeds from the offering to
repay amounts outstanding under the Company's term and revolving credit
facility. Concurrently with the consummation of the sale of the Notes, the
Company entered into a new $50 million revolving credit facility with the
Company's senior lender (the "Senior Credit Facility"). The Senior Credit
Facility is secured by substantially all of the Company's assets and matures in
March 2002. The Company is required to meet certain financial covenants under
the Senior Credit Facility and available amounts under the revolving credit
facility are based on eligible
F-32
<PAGE> 133
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
4. DEBT (CONTINUED)
inventory and accounts receivable. The Company was not in compliance with
certain financial covenants under its Senior Credit Facility for the quarter
ended June 30, 1997, but was granted a waiver through September 15, 1997 by its
senior lender that permits borrowings equal to the lesser of the $15.0 million
and 80% of eligible accounts receivable under the facility. As of June 30, 1997,
the Company's borrowing eligibility was approximately $13.4 million of which
$5.0 million was borrowed subsequent to June 30, 1997. As of June 30, 1997, the
Company had working capital of approximately $30.5 million.
The Company recorded during the quarter an extraordinary loss of $1.8
million in connection with the early retirement of bank debt of $54.2 million on
April 10, 1997 from its previous bank credit facility.
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. Through June 30,
1997, cash payments have reduced the components of the restructuring accrual to
$5,000.
The Company's restructuring plan to consolidate redundant facilities and
reduce personnel resulting from the mergers with Dacomed Corporation, Osbon
Medical Systems, Ltd. and Advanced Surgical, Inc. was initiated in December
1995. The remaining restructuring accrual at June 30, 1997 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 JUNE 30,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1997
------------- -------- ------- ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs........ $ 2,620 $ -- $1,822 $(730) $ 68
Facility reduction costs......... 2,836 1,199 1,865 730 502
------ ------ ------ ----- ----
$ 5,456 $1,199 $3,687 $ -- $570
====== ====== ====== ===== ====
</TABLE>
In September 1996, the Company established a restructuring plan to
eliminate redundant manufacturing facilities resulting from Richard-Allan,
Intermed and O.R. Concepts acquisitions and their consolidation with some of the
existing manufacturing locations.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH JUNE 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction cost....................... $ 2,412 $ -- $1,196 $1,216
Facility reduction costs....................... 1,588 -- 263 1,325
------ --- ------ ------
$ 4,000 $ -- $1,459 $2,541
====== === ====== ======
</TABLE>
F-33
<PAGE> 134
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
5. RESTRUCTURING (CONTINUED)
In March 1997, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from mergers with Osbon and
Microsurge. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through June 30,
1997 are summarized in the table below. Non-cash charges consist of the
write-down of existing assets to their estimated net realizable value.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH JUNE 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs...................... $ 7,067 $ -- $4,405 $2,662
Facility reduction costs....................... 933 473 78 382
------- ---- ------ ------
$ 8,000 $473 $4,483 $3,044
======= ==== ====== ======
</TABLE>
Although subject to future adjustment, management of the Company believes
that restructuring liabilities as of June 30, 1997 are adequate to complete the
various restructuring plans.
6. CAPITAL STOCK
The minority interest in Urohealth, Inc. (California) consisted of 42,000
shares of its Series A preferred stock. As of June 20, 1997, these shares were
redeemed or exchanged for shares of common stock. The redemption price was $6.41
per share, consisting of the redemption price of $5.00 per share plus accrued
and unpaid dividends and a $.20 per share redemption premium.
In April 1997, the Company granted its Chief Executive Officer and its
Chief Operating Officer options to purchase 1,500,000 and 50,000 shares,
respectively, exercisable at $8.50 per share, the market price of the Company's
common stock on the grant date. The options vest over a three year period.
7. INCOME TAXES
The Company did not record an income tax provision or benefit for the
quarter ended June 30, 1997 since the realization of tax benefits of operating
losses is not assured.
8. CONTINGENCIES
In July 1997, several complaints were filed against the Company, certain of
its officers and directors and, in certain complaints, the lead underwriters of
the Company's November 1996 public offering, requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages.
The suits were filed in the United States District Court for the Central
District of California. All the suits are based on substantially the same facts
and have been brought on behalf of purchasers of Common Stock of the Company
during various periods between July 18, 1996 and July 1, 1997. No proceedings
have taken place in any of the suits, and no provision for any liability that
may result from the ultimate resolution of this matter has been included in the
accompanying consolidated financial statements.
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-34
<PAGE> 135
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
9. PENDING ACQUISITION
On April 19, 1997, the Company entered into a definitive agreement pursuant
to which the Company 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 exchanged for
1.4 shares of Common Stock of the Company. The consummation of the Merger is
subject to approval by the Company's and Imagyn's stockholders, and other
customary closing conditions. No assurances can be given that the Merger will be
successfully consummated.
10. SUBSEQUENT EVENTS
On August 5, 1997, the Company received United States Patent Office
approval covering its Endotracheal Cardiac Output Monitoring technology. This
technology was acquired in the X-Cardia acquisition completed in February 1997.
The devices under development incorporate this patented technology into a
standard endotracheal tube allowing for continuous cardiac output monitoring of
patients undergoing surgery or on respiratory support.
Based upon the issuance of the patent, the Company is obligated to pay the
former X-Cardia shareholders on or prior to October 3, 1997, $16.5 million in
cash and $1.5 million in Urohealth Common Stock.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
-------- --------
<S> <C> <C>
Receivables............................................. $ (2,289) $ (4,460)
Inventories............................................. (2,995) (8,692)
Prepaid expenses........................................ (597) (1,092)
Accounts payable and accrued liabilities................ (1,193) (468)
Compensation and employee benefits...................... 96 (339)
Restructuring liabilities............................... (726) (854)
Deposit and other assets................................ (60) --
Other liabilities....................................... (25) (320)
-------- --------
$ (7,789) $(16,225)
======== ========
</TABLE>
F-35
<PAGE> 136
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
Palo Alto, California
February 5, 1997
F-36
<PAGE> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Richard-Allan Medical Industries, Inc.
We have audited the accompanying consolidated balance sheets of
Richard-Allan Medical Industries, Inc. and Subsidiary 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 years ended June 30, 1995 and 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 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 consolidated financial position of Richard-Allan
Medical Industries, Inc. and Subsidiary at March 31, 1996 and June 30, 1995 and
the consolidated results of their operations and their cash flows for the nine
months ended March 31, 1996 and the years ended June 30, 1995 and 1994 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Kalamazoo, Michigan
August 8, 1996, except Note K as to
which the date is August 14, 1996
F-46
<PAGE> 147
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE
30, MARCH 31,
1995 1996
------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS (NOTE F)
Current assets:
Cash and cash equivalents............................................. $ 3,003 $ 20
Accounts receivable, less allowance for doubtful accounts of $8....... 2,993 3,116
Refundable income taxes............................................... -- 376
Inventories (Note D).................................................. 1,722 1,251
Prepaid expenses...................................................... 131 --
Current assets of discontinued operations (Note B).................... 168 --
------- ------
Total current assets.......................................... 8,017 4,763
Property and equipment:
Land.................................................................. 86 86
Building.............................................................. 67 41
Machinery and equipment............................................... 5,870 6,492
Furniture and fixtures................................................ 1,112 1,208
Property under capital lease (Note E)................................. 509 509
Leasehold improvements................................................ 329 311
Computer software..................................................... 319 336
------- ------
8,292 8,983
Less accumulated depreciation and amortization........................ 4,034 4,575
------- ------
4,258 4,408
Other assets............................................................ 27 64
------- ------
$12,302 $ 9,235
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits................................. $ -- $ 340
Accounts payable...................................................... 3,182 2,315
Compensation and commissions.......................................... 578 578
Income taxes payable.................................................. 2,100 --
Other current liabilities............................................. 549 376
Current maturities of long-term debt.................................. 136 160
------- ------
Total current liabilities..................................... 6,545 3,769
Long-term debt, less current maturities (Note F)........................ 2,157 2,347
Commitments and Contingencies (Note J)
Stockholders' equity (Note F):
Preferred stock $5 par value:
authorized -- 150,000 shares; issued -- 7,534 shares
(1995 -- 9,634).................................................... 48 38
Common stock $1 par value:
authorized -- 50,000 shares; issued -- 4,645 shares
(1995 -- 4,660).................................................... 5 5
Retained earnings..................................................... 3,604 3,118
Treasury stock, at cost:
7,534 shares preferred stock and 113 shares common stock
(1995 -- 9,634 and 128, respectively).............................. (80) (63)
Foreign currency translation adjustments.............................. 23 21
------- ------
Total stockholders' equity.................................... 3,600 3,119
------- ------
$12,302 $ 9,235
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 148
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
---------------------- MARCH 31,
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Net sales................................................ $ 16,852 $ 19,598 $15,705
Cost of sales............................................ 9,566 11,515 8,195
------- --------- -------
Gross profit............................................. 7,286 8,083 7,510
Operating expenses (income):
Selling, general and administrative (Note J):.......... 8,953 12,756 7,450
Research and development............................... 2,421 1,694 765
Distribution fees...................................... (28) -- --
Loss on disposition of property........................ 112 340 --
Interest income........................................ (16) (38) (42)
Interest expense....................................... 602 794 183
Other.................................................. 51 41 9
------- --------- -------
12,095 15,587 8,365
------- --------- -------
Loss from continuing operations before income taxes...... (4,809) (7,504) (855)
Income taxes (credits) (Note I).......................... (742) (3,266) (376)
------- --------- -------
Loss from continuing operations.......................... (4,067) (4,238) (479)
Discontinued operations (Note B):
Income from operations, less applicable income taxes of
$524
and $734 in 1995 and 1994, respectively............. 1,427 1,008 --
Gain on sale, less applicable income taxes of $4,845... -- 9,405 --
------- --------- -------
1,427 10,413 --
------- --------- -------
Net income (loss)........................................ $ (2,640) $ 6,175 $ (479)
======= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 149
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
PREFERRED STOCK COMMON STOCK COMMON RETAINED CURRENCY TOTAL
--------------- --------------- PAID-IN STOCK EARNINGS TREASURY TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIPTIONS (DEFICIT) STOCK ADJUSTMENTS EQUITY
------ ------ ------ ------ -------- ------------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
June 30,
1993.......... 14 $ 68 5 $ 5 $ -- $ -- $ 1,083 $ (114) $ (15) $ 1,027
Net loss........ -- -- -- -- -- -- (2,640) -- -- (2,640)
Issuance of
common
stock......... -- -- 1 1 999 -- -- -- -- 1,000
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Common stock
subscription
by officer
(Note C)...... -- -- -- -- -- 660 -- -- -- 660
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- 30 30
--- ---- --- ---- ------- ----- ------- ----- ----- ------
Balance as of
June 30,
1994.......... 12 58 6 6 999 660 (1,564) (97) 15 77
Net income...... -- -- -- -- -- -- 6,175 -- -- 6,175
Issuance of
common
stock......... -- -- -- -- 1,000 (660) -- -- -- 340
Purchase of
common
stock......... -- -- (1) (1) (1,999) -- (1,000) -- -- (3,000)
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- 8 8
--- ---- --- ---- ------- ----- ------- ----- ----- ------
Balance as of
June 30,
1995.......... 10 48 5 5 -- -- 3,604 (80) 23 3,600
Net loss........ (479) (479)
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- (2) (2)
--- ---- --- ---- ------- ----- ------- ----- ----- ------
Balance as of
March 31,
1996.......... 8 $ 38 5 $ 5 $ -- $ -- $ 3,118 $ (63) $ 21 $ 3,119
=== ==== === ==== ======= ===== ======= ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE> 150
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
-------------------- MARCH 31,
1994 1995 1996
------- -------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $(2,640) $ 6,175 $ (479)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization......................... 492 810 597
Gain on sale of discontinued operations............... -- (14,250) --
Loss on disposition of property....................... 112 340 --
Changes in operating assets and liabilities:
Receivables......................................... (281) 579 46
Income taxes........................................ 2,107 (2,476)
Inventories......................................... (285) (430) 470
Other operating assets.............................. -- (19) 94
Accounts payable.................................... (227) 1,160 (867)
Other operating liabilities......................... 680 (594) 166
------- -------- -------
Net cash used in operating activities...................... (2,149) (4,122) (2,449)
INVESTING ACTIVITIES
Capital expenditures....................................... (1,638) (1,045) (747)
Proceeds from sale of discontinued operations, net of
expenses................................................. -- 14,745 --
------- -------- -------
Net cash provided by (used in) investing activities........ (1,638) 13,700 (747)
FINANCING ACTIVITIES
Principal payments under capital lease obligations......... (62) (75) (56)
Principal payments under long-term debt.................... (118) (4,025) (16)
Net borrowings (repayment) under revolving line-of-credit
agreement................................................ 1,132 (3,632) 278
Proceeds from issuance of long-term debt................... 2,360 3,102 7
Proceeds from issuance of common stock..................... 1,000 1,000 --
Repurchase of common stock................................. (513) (3,000) --
------- -------- -------
Net cash provided by (used in) financing activities........ 3,799 (6,630) 213
Effect of exchange rate changes on cash and cash
equivalents.............................................. 52 (28) --
------- -------- -------
Increase (decrease) in cash and cash equivalents........... 64 2,920 (2,983)
Cash and cash equivalents at beginning of period........... 19 83 3,003
------- -------- -------
Cash and cash equivalents at end of period................. $ 83 $ 3,003 $ 20
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE> 151
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A -- BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Richard-Allan Medical Industries, Inc. and Subsidiary (the Company)
manufactures and markets surgical operating room supplies. The Company markets
these products both domestically and abroad through the use of a direct sales
force and foreign distributors. A division that manufactures and markets
diagnostic reagents used primarily in hospital laboratories was sold in 1995
(see Note B).
Basis of Financial Statement Presentation
The Company has elected to change 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 unaudited results of operations
included: net sales of $14.4 million; gross profit of $5.9 million; income tax
credits of $352,000; and a net loss of $4.8 million.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Richard-Allan Medical Industries (U.K.) Ltd.
(subsidiary). All material intercompany balances and transactions are
eliminated.
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.
Cash Equivalents
The Company considers all liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash and cash equivalents reported in the balance sheets equal their fair value.
Accounts Receivable and Concentration of Credit Risk
The Company sells to a large number of domestic and foreign customers. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. An allowance for doubtful accounts is maintained at a
level that management believes is sufficient to cover potential credit losses.
Foreign Currency Translation
The financial statements of the subsidiary have been translated into U.S.
dollars in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 52, Foreign Currency Translation. All balance sheet accounts have
been translated using the exchange rates in effect at the balance sheet dates,
and operations statement accounts have been translated using the average
exchange rates for the respective periods. The gains and losses resulting from
the changes in exchange rates from period to period have been reported as a
separate component of stockholders' equity. The effect on the statements of
operations of transaction gains and losses is insignificant for all periods
presented.
F-51
<PAGE> 152
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for U.S. inventories which approximate
93% and 92% of total inventories at March 31, 1996 and June 30, 1995,
respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
Income Taxes
Deferred income taxes are provided on the difference in earnings determined
for tax and financial reporting purposes. Deferred income taxes have been
calculated under the liability method in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
Income taxes have not been provided on the undistributed earnings of
Richard-Allan Medical Industries (U.K.) Ltd. as it is the Company's intention to
indefinitely reinvest such earnings in the subsidiary's operations and not to
transfer them in the form of a taxable transaction.
Research and Development Expenses
Research and development expenses are charged against income as incurred.
Revenue Recognition
Revenue from sales of manufactured products is recognized upon shipment to
customers (see Note H).
Advertising Expense
Advertising and promotion costs are expensed as incurred.
Reclassification
Certain amounts for 1995 and 1994 have been reclassified to conform with
the 1996 presentation.
NOTE B -- DISCONTINUED OPERATIONS
In May 1995, the Company sold substantially all of the assets and
operations of its laboratory products division. The proceeds from the sale, net
of expenses, were approximately $14.7 million. The 1995 consolidated statement
of operations excludes sales and expenses of the laboratory products division
from continuing operations, and fiscal 1994 results have been restated to
conform with this presentation. Net sales of the laboratory products division
totaled $7,829,000 from July 1994 through May 1995, and $9,014,000 for the year
ended June 30, 1994. The remaining assets of the laboratory products division
have been segregated in the consolidated balance sheet as of June 30, 1995.
NOTE C -- STOCK SUBSCRIPTION
During fiscal 1994 a stockholder made a commitment to purchase common stock
in an amount sufficient to maintain compliance with debt covenants. The amount
of the stock purchase was determined after June 30, 1994 based on financial
statement amounts, and the stock purchase occurred on August 30, 1994. The
purchase has been recorded as a 1994 increase in stockholders' equity, and is a
noncash financing activity for purposes of the 1994 consolidated statement of
cash flows.
F-52
<PAGE> 153
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- INVENTORIES
Inventories from continuing operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Raw materials and work in process................................ $ 695 $ 604
Finished goods................................................... 1,027 647
------ ------
$1,722 $ 1,251
====== ======
</TABLE>
If the first-in, first-out method of valuation had been used for all
inventories by the Company, inventories would have been approximately $237,000
higher than reported at both March 31, 1996 and June 30, 1995.
NOTE E -- LEASES
The Company leases certain land, manufacturing and office facilities and
equipment under noncancelable leases. As of March 31, 1996, future net minimum
lease payments under the capital leases and future minimum rental payments
required under operating leases that have initial or remaining noncancelable
terms in excess of one year were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
TWELVE MONTHS ENDED MARCH 31, CAPITAL LEASES LEASES
------------------------------------------------------------- -------------- ---------
<S> <C> <C>
1997......................................................... $ 47 $ 7
1998......................................................... -- 3
---------- -------
Total minimum lease payments................................. 47 --
Less amount representing interest............................ 2 $10
---------- =========
Present value of net minimum lease payments.................. $ 45
==========
</TABLE>
The Company pays property taxes, insurance and maintenance expenses for the
building and land, which are leased from Newhauser Associates, a related party.
Future minimum lease payments are subject to annual adjustments based on cost of
living indices. Additional lease payments resulting from such adjustments
totaled approximately $91,000 in 1994, $93,000 in 1995 and $71,000 for the nine
months ended March 31, 1996.
Total lease expense was approximately $299,000 and $254,000 in 1994 and
1995, respectively and $107,000 for the nine month period ended March 31, 1996.
F-53
<PAGE> 154
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to bank under revolving credit agreement........... $1,679 $ 1,956
Subordinated 12% unsecured note payable to the estate of a former
stockholder for redemption of stock, maturing in annual
installments of $41,963 through July 1997...................... 84 84
12% and 10% unsecured notes payable, maturing at various dates
through July 2000.............................................. 352 359
Non-interest-bearing note (discounted to present value at a rate
of 10%), secured by pledged shares of treasury stock held in
escrow, to a former stockholder for redemption of stock,
maturing in monthly installments varying from $3,000 to $3,500
through October 1, 1999........................................ 79 63
Present value of lease payments under capitalized leases (see
Note E)........................................................ 99 45
------ ------
2,293 2,507
Less current maturities.......................................... 136 160
------ ------
Total long-term debt................................... $2,157 $ 2,347
====== ======
</TABLE>
Effective May 1, 1996, the Company renegotiated the terms of its bank
financing agreement. Under the terms of the amended agreement, the Company has a
$3.1 million revolving line of credit, with interest payable monthly at the
bank's prime rate (8.25% at March 31, 1996) plus 1.5%. Approximately $1.4
million of additional borrowings were available under the line at March 31,
1996, subject to an asset-based lending formula.
All borrowings under the amended bank financing agreement are required to
be paid in full on September 1, 1996, and the bank has stated its intention to
call the debt on that date. This arrangement provides a grace period until that
date for the Company to achieve compliance with certain financial covenants
included in the agreement. The Company is currently in violation of financial
covenants related to, among others, minimum working capital requirements. The
bank financing agreement also restricts the payment of any dividends, other than
dividends payable in Company-owned stock, on any shares of its capital stock.
The bank borrowings are collateralized by substantially all assets of the
Company, a personal guarantee of and life insurance policy on the principal
stockholder, a $1 million guarantee by a former officer and stockholder of the
Company, and a co-guarantee by Newhauser Associates, a related party. The
Company is a co-guarantor of a $1.4 million bank construction loan held by
Newhauser Associates that also expires on September 1, 1996.
As described in Note K, the Company was acquired and became a division of
Urohealth Systems, Inc. in August, 1996. In connection with this transaction,
all of the Company's debt is being refinanced on a long-term basis. Accordingly,
the Company's debt at March 31, 1996 has been classified as long-term, except
for amounts which were expected to be repaid prior to the refinancing.
Interest paid totaled $792,000 in 1994 and $608,000 in 1995, and $185,000
for the nine months ended March 31, 1996. The carrying amount of the Company's
long-term debt approximates its fair value.
F-54
<PAGE> 155
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- EMPLOYEE BENEFIT PLAN
The Company has a qualified profit-sharing plan covering employees with
more than one year of service, who may elect to defer up to 15% of their
compensation. The Company contributes 35% of the participant's deferred salary
to the plan, up to 6% of compensation, and makes additional contributions to the
plan at its discretion. The amount of Company contributions to the plan was
approximately $16,500 in 1994, $88,000 in 1995 and $61,000 for the nine months
ended March 31, 1996.
NOTE H -- DISTRIBUTION AGREEMENTS
Certain international sales of the Company are transacted under the terms
of international distribution agreements with foreign companies which the
Company entered into in 1992, 1993 and 1994. The agreements appoint the
distributor to sell and service all existing and future product lines of the
Company in a particular territory. In exchange for these exclusive distribution
rights, which range from six to twenty years, and for initial services provided
by the Company for the distributor at the time the agreements were entered into,
the distributors paid fees to the Company totaling $28,800 in 1994 and agreed to
market no competing products in the territory during the term of the agreement.
Income recognized by the Company from these distribution agreements was not
significant for the periods presented.
NOTE I -- INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Operating expense accruals..................................... $ 200 $ 205
Financial statement over tax depreciation...................... 61 73
Inventory capitalization for tax purposes...................... 51 20
Other.......................................................... 15 3
----- -----
$ 327 $ 301
===== =====
Valuation allowance for deferred tax assets...................... $ (327) $(301)
===== =====
</TABLE>
The Company had no deferred income tax liabilities at March 31, 1996 or
June 30, 1995.
F-55
<PAGE> 156
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the income tax provision (credit) from continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE NINE MONTHS
30, ENDED
----------------- MARCH 31,
1994 1995 1996
----- ------- -----------
<S> <C> <C> <C>
Current:
Federal............................................ $(734) $(3,266) $(376)
State.............................................. -- -- --
Foreign............................................ (8) -- --
----- ------ -----
$(742) $(3,266) $(376)
===== ====== =====
Deferred:
Federal............................................ $ -- $ -- $ --
State.............................................. -- -- --
Foreign............................................ -- -- --
----- ------ -----
$ -- $ -- $ --
===== ====== =====
</TABLE>
The Company's income tax provision (credit) from continuing operations
differed from the income tax provision (credit) from continuing operations at
the federal statutory rate of 34%, as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------- MARCH 31,
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
Income tax provision (credit) at the statutory
rate.............................................. $(1,635) $(2,551) $(291)
Adjustments:
Increase (decrease) in valuation allowance........ 901 (855) (26)
Effect of favorable tax determinations............ -- -- (82)
Other............................................. (8) 140 23
------- ------- -----
Tax provision (credit).............................. $ (742) $(3,266) $(376)
======= ======= =====
</TABLE>
In 1995, the Company utilized approximately $938,000 and $228,000 of net
operating loss tax benefit and research and development credit carryforwards,
respectively.
Cash paid for purposes of federal income taxes during the nine month period
ended March 31, 1996, was approximately $2.1 million. No cash was paid for
purposes of federal income taxes during the years ended June 30, 1995 and 1994.
F-56
<PAGE> 157
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits and claims in the ordinary course of
business. Management believes that the ultimate resolution of such lawsuits and
claims will not have a material adverse effect on the Company's consolidated
financial position or results of operations. During fiscal 1995 the Company
incurred approximately $2,000,000 in legal fees in successful defense of a
patent infringement suit initiated by a large surgical equipment manufacturer,
which has been included in selling, general and administrative expenses. The
Company is party to a negotiated payment plan for these legal fees. If the
Company maintains payments in accordance with the plan, the law firm has agreed
to reduce the legal fees charged to the Company by $350,000. This expense
reduction will be recognized only after completion of the payment plan and the
forgiveness of fees is realized.
As of March 31, 1996, the Company had entered into various purchase
commitments for tooling equipment of approximately $1 million.
NOTE K -- SUBSEQUENT EVENT
On July 5, 1996, the Company entered into a definitive agreement to be
acquired by Urohealth Systems, Inc. (Urohealth). The sale was consummated on
August 14, 1996, at which time the Company became a division of Urohealth.
Urohealth has made commitments to the Company to provide funding for the
Company's operations for a minimum of twelve months beginning on July 5, 1996.
In addition, Urohealth has entered into a financing arrangement which will be
used to refinance all of the Company's debt with debt having maturities greater
than one year.
F-57
<PAGE> 158
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996
MARCH 31, -----------
1996
--------- (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 20 $ 18
Accounts receivable, less allowance for doubtful accounts of $8..... 3,116 3,472
Refundable income taxes............................................. 376 510
Inventories......................................................... 1,251 1,141
Prepaid expenses.................................................... -- 115
------ ------
Total current assets........................................ 4,763 5,256
Property and equipment, net........................................... 4,408 4,452
Other assets.......................................................... 64 80
------ ------
$ 9,235 $ 9,788
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits............................... $ 340 $ 525
Accounts payable.................................................... 2,315 2,140
Compensation and commissions........................................ 578 879
Other current liabilities........................................... 376 780
Current maturities of long-term debt................................ 160 220
------ ------
Total current liabilities................................... 3,769 4,544
Long-term debt, less current maturities............................... 2,347 2,648
Commitments and Contingencies
Stockholders' equity:
Preferred stock $5 par value:
authorized -- 150,000 shares; issued -- 7,534 shares............. 38 38
Common stock $1 par value:
authorized -- 50,000 shares; issued -- 4,645 shares.............. 5 5
Retained earnings................................................... 3,118 2,597
Treasury stock, at cost:
7,534 shares preferred stock and 113 shares common stock......... (63) (63)
Foreign currency translation adjustments............................ 21 19
------ ------
Total stockholders' equity.................................. 3,119 2,596
------ ------
$ 9,235 $ 9,788
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-58
<PAGE> 159
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1995 1996
--------- --------
<S> <C> <C>
Net sales........................................................... $ 5,190 $ 5,766
Cost of sales....................................................... 2,984 3,122
---------- ----------
- -
Gross profit........................................................ 2,206 2,644
Operating expenses:
Selling, general and administrative............................... 3,425 2,860
Research and development.......................................... 300 360
Interest expense, net............................................. 142 80
---------- ----------
- -
3,867 3,300
---------- ----------
- -
Loss from continuing operations before income taxes................. (1,661) (656)
Income taxes (credits).............................................. (2,914) (134)
---------- ----------
- -
Income (loss) from continuing operations............................ 1,253 (522)
Discontinued operations:
Income from operations, less applicable income taxes of $172...... 323 --
Gain on sale, less applicable income taxes of $4,845.............. 9,405 --
---------- ----------
- -
9,728 --
---------- ----------
- -
Net income (loss)................................................... $ 10,981 $ (522)
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-59
<PAGE> 160
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1995 1996
-------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ 10,981 $(522)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization....................................... 155 276
Gain on sale of discontinued operations............................. (14,250) --
Loss on disposition of property..................................... 5 --
Changes in operating assets and liabilities:
Receivables....................................................... 1,844 (357)
Income taxes...................................................... 2,107 (134)
Inventories....................................................... 315 112
Other operating assets............................................ (253) (132)
Accounts payable.................................................. (1,993) 9
Other operating liabilities....................................... 373 704
-------- -----
Net cash used in operating activities.................................... (716) (44)
INVESTING ACTIVITIES
Capital expenditures..................................................... (265) (319)
Proceeds from sale of discontinued operations, net of expenses........... 14,746 --
-------- -----
Net cash provided by (used in) investing activities...................... 14,481 (319)
FINANCING ACTIVITIES
Principal payments under capital lease obligations....................... (33) (19)
Principal payments under long-term debt.................................. (3,751) (11)
Net borrowings (repayment) under revolving line-of-credit agreement...... (4,000) 391
Repurchase of common stock............................................... (3,000) --
-------- -----
Net cash provided by (used in) financing activities...................... (10,784) 361
-------- -----
Increase (decrease) in cash and cash equivalents......................... 2,981 (2)
Cash and cash equivalents at beginning of period......................... 22 20
-------- -----
Cash and cash equivalents at end of period............................... $ 3,003 $ 18
======== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-60
<PAGE> 161
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
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 Richard-Allan Medical Industries, Inc. (the "Company")
and its subsidiary. 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.
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 June 30,
1996 and March 31, 1996, its condensed consolidated results of operations for
the three month periods ended June 30, 1996 and June 30, 1995, and its condensed
consolidated cash flows for the three month periods ended June 30, 1996 and June
30, 1995. The results of operations for the three month period ended June 30,
1996 are not necessarily indicative of those to be expected for the entire year.
2. DISCONTINUED OPERATION
In May 1995, the Company sold the assets and operations of its laboratory
products division. The proceeds from the sale, net of expenses, were
approximately $14.7 million. The condensed consolidated statement of operations
for the three months ended June 30, 1995 excludes sales and expenses of the
laboratory products division from continuing operations.
3. INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on last-in, first-out (LIFO) method (IN THOUSANDS).
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
Finished Goods................................................ $ 647 $ 612
Raw Materials................................................. 604 529
------ ------
$1,251 $ 1,141
====== ======
</TABLE>
4. LITIGATION
The Company is subject to lawsuits and claims in the ordinary course of
business. Management believes that the ultimate resolution of such lawsuits and
claims should not have a material adverse effect on the Company's condensed
consolidated financial position or results of operations.
5. SUBSEQUENT EVENT
On July 5, 1996, the Company entered into a definitive agreement to be
acquired by Urohealth Systems, Inc. (Urohealth). The sale was completed August
14, 1996, at which time the operations of the Company were merged with the
operations of Urohealth Systems, Inc.
The unaudited pro forma condensed consolidated statement of operations for
the year ended March 31, 1997 reflects the Urohealth acquisitions of X-Cardia, a
purchase effective February 28, 1997, and
Richard-Allan, a purchase effective August 14, 1996, as if these purchase
transactions had taken place on April 1, 1996.
F-61
<PAGE> 162
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statement of
operations is presented to reflect the Urohealth acquisitions of X-Cardia, a
purchase effective February 28, 1997 and Richard-Allan, a purchase effective
August 14, 1996, as if these purchase transactions had taken place on April 1,
1996.
The unaudited pro forma statement of operations and accompanying notes
should be read in conjunction with the respective historical audited
consolidated financial statements of Urohealth, X-Cardia and
Richard-Allan contained herein.
The unaudited pro forma condensed consolidated financial information is
based on the consolidated financial statements of Urohealth, X-Cardia and
Richard-Allan, 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 statement of
operations is provided for comparative purposes only and is not necessarily
indicative of the results that would have been obtained had the acquisitions
occurred on the dates indicated or that may be achieved in the future.
F-62
<PAGE> 163
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO
RICHARD- PRO FORMA FORMA
UROHEALTH X-CARDIA(1) ALLAN ADJUSTMENTS TOTAL
--------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 90,695 $ -- $ 8,427 $ $ 99,122
Cost of sales................................... 41,083 -- 4,320 45,403
-------- ------- -------- ------- --------
Gross profit.................................... 49,612 -- 4,107 53,719
Operating expenses:
Selling, general and administrative........... 57,691 255 4,950 431(a) 63,327
Research and development...................... 4,997 354 594 5,945
Merger and acquisitions costs................. 3,600 -- -- 3,600
Write-off incomplete research and
development................................ 47,232 -- -- 47,232
Restructuring charges......................... 12,000 -- -- 12,000
-------- ------- -------- ------- --------
Total operating expenses........................ 125,520 609 5,544 431 132,104
-------- ------- -------- ------- --------
Loss from operations............................ (75,908) (609) (1,437) (431) (78,385)
Other income (expense):
Minority interest consisting of accrued
dividends on preferred stock of
subsidiary................................. (25) -- -- (25)
Interest income............................... 339 11 -- 350
Interest expense.............................. (8,143) (17) (136) (1,116)(b) (9,412)
-------- ------- -------- ------- --------
Loss before tax and extraordinary item.......... (83,737) (615) (1,573) (1,547) (87,472)
Provision (benefit) for income tax.............. (227) -- (134) -- (361)
-------- ------- -------- ------- --------
Loss before extraordinary item.................. $(83,510) $ (615) $ (1,439) $(1,547) $(87,111)
======== ======= ======== ======= ========
Loss per share:
Loss before extraordinary item................ $(83,510) $(87,111)
Dividends and accretion on redeemable
convertible preferred stock................ (398) (398)
-------- --------
Loss before extraordinary item attributable to
common stockholders........................ $(83,908) $(87,509)
======== ========
Loss per share before extraordinary item...... $ (4.31) $ (4.09)
======== ========
Weighted average number of shares used to
compute net loss per share................. 19,453 21,417
======== ========
</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-63
<PAGE> 164
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Pro Forma Adjustments
Acquisition of X-Cardia
On February 28, 1997, the Company acquired X-Cardia Corporation through a
merger of X-Cardia into a wholly owned subsidiary of the Company. This
transaction was accounted for as a purchase. The results of operations of
X-Cardia are included in the results of operations of Urohealth from the date of
acquisition. The unaudited pro forma condensed consolidated statement of
operations for the year ended March 31, 1997 reflects the results of operations
for X-Cardia as if the acquisition had occurred as of April 1, 1996.
Acquisition of Richard-Allan
On August 14, 1996, the Company acquired Richard-Allan Medical Industries,
Inc. in a transaction accounted for as a purchase. The results of operations of
Richard-Allan are included in the results of operations of Urohealth from the
date of acquisition. The unaudited pro forma condensed consolidated statement of
operations for the year ended March 31, 1997 reflects the results of operations
for Richard-Allan as if the acquisition had occurred as of April 1, 1996.
(a) Goodwill, net of write-off of purchased research and development
related to Richard-Allan, is $32.3 million. Goodwill is amortized over 25 years.
(b) Interest on funds used and additional debt assumed to effect the
acquisition of Richard-Allan including the new bank credit facility ($30.0
million) assumed note payable ($3.0 million), and internal funds (approximately
$1.0 million) at an estimated composite interest rate of 8.75%.
F-64
<PAGE> 165
======================================================
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> 166
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 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.**
12.1 Ratio of Earnings to Fixed Charges.**
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of KPMG Peat Marwick LLP.
</TABLE>
II-1
<PAGE> 167
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ ----------------------------------------------------------------------------------
<S> <C>
23.5 Consent of Coopers & Lybrand L.L.P.
23.6 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>
- ---------------
** Previously filed.
(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 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-2
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Chief Executive Officer
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Assistant Treasurer (Acting September 10, 1997
- ---------------------------------------- Principal Financial Officer and
Joseph T. Artino Acting Principal Accounting
Officer)
* Director September 10, 1997
- ----------------------------------------
Abbey J. Butler
* Director September 10, 1997
- ----------------------------------------
John Chamberlin
* Director September 10, 1997
- ----------------------------------------
Robert N. Elkins
* Director September 10, 1997
- ----------------------------------------
Melvyn J. Estrin
* Director September 10, 1997
- ----------------------------------------
C. Sage Givens
* Director September 10, 1997
- ----------------------------------------
Lawrence Goelman
* Director September 10, 1997
- ----------------------------------------
Michael S. Gross
* Director September 10, 1997
- ----------------------------------------
Richard R. Newhauser
* Director September 10, 1997
- ----------------------------------------
Francis J. Tedesco
</TABLE>
*By: /s/ CHARLES A. LAVERTY
-------------------------------
Charles A. Laverty
Attorney-in-Fact
II-3
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
GATES PLASTICS
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
</TABLE>
II-4
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
DACOMED CORPORATION
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
</TABLE>
II-5
<PAGE> 171
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
DACOMED INTERNATIONAL, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
</TABLE>
II-6
<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
ALLSTATE MEDICAL PRODUCTS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
</TABLE>
II-7
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
UROHEALTH OF KENTUCKY, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
/s/ KEVIN M. HIGGINS Director September 10, 1997
- ----------------------------------------
Kevin M. Higgins
</TABLE>
II-8
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
MICROSURGE, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
</TABLE>
II-9
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
OSBON MEDICAL SYSTEMS, LTD.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
</TABLE>
II-10
<PAGE> 176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California, on September 10, 1997.
UROHEALTH, INC. (CALIFORNIA)
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 10, 1997
- ---------------------------------------- Officer and Director
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Vice President -- Finance September 10, 1997
- ---------------------------------------- (Principal Financial Officer and
Joseph T. Artino Principal Accounting Officer)
/s/ KEVIN M. HIGGINS Director September 10, 1997
- ----------------------------------------
Kevin M. Higgins
</TABLE>
II-11
<PAGE> 177
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Urohealth Systems,
Inc. as of March 31, 1996 and 1997, and for the year ended June 30, 1995, the
nine months ended March 31, 1996 and the year ended March 31, 1997, and have
issued our report thereon dated July 8, 1997 (included in the Joint Proxy
Statement of Urohealth Systems, Inc. and Imagyn Medical Inc., which is referred
to and made a part of this Prospectus and Registration Statement). Our audits
also included the financial statement schedule listed in Item 21(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. We
did not audit the financial statements of Microsurge, Inc., a wholly owned
subsidiary, as of March 31, 1996 and 1997 and for the year ended December 31,
1995, the nine months ended March 31, 1996 and the year ended March 31, 1997 and
of Dacomed Corporation, a wholly owned subsidiary, for the year ended June 24,
1995, which statements reflect total assets constituting 16.5% and 3.9% of
consolidated total assets as of March 31, 1996 and 1997, respectively, and net
sales constituting 27% and 8% and 8% of consolidated net sales for the year
ended June 30, 1995, the nine months ended March 31, 1996 and the year ended
March 31, 1997, respectively. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included in the consolidated financial statements for such entities, is
based solely on the reports of other auditors.
In our opinion, based on our audits and the reports of other auditors, 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/ ERNST & YOUNG LLP
Orange County, California
July 8, 1997
S-1
<PAGE> 178
UROHEALTH SYSTEMS, INC.
SCHEDULE II
CONSOLIDATED VALUATION ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
DESCRIPTION OF PERIOD ADDITIONS ACQUISITION WRITE OFFS END OF PERIOD
- -------------------------------------------- ---------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995:
Allowance for doubtful accounts........ $ 506 $ 134 $ -- $ (22) $ 618
Reserve for inventory obsolescence..... -- 422 -- (31) 391
------ ------ ---- ----- ------
Total............................. $ 506 $ 556 $ -- $ (53) $ 1,009
====== ====== ==== ===== ======
Nine month period ended March 31, 1996:
Allowance for doubtful accounts........ $ 618 $ 1,126 $ -- $ -- $ 1,744
Reserve for inventory obsolescence..... 391 1,320 -- (46) 1,665
------ ------ ---- ----- ------
Total............................. $1,009 $ 2,446 $ -- $ (46) $ 3,409
====== ====== ==== ===== ======
Year ended March 31, 1997:
Allowance for doubtful accounts........ $1,744 $ 82 $232 $ (162) $ 1,896
Reserve for inventory obsolescence..... 1,665 157 451 (679) 1,594
------ ------ ---- ----- ------
Total............................. $3,409 $ 239 $683 $ (841) $ 3,490
====== ====== ==== ===== ======
</TABLE>
S-2
<PAGE> 179
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**
12.1 Ratio of Earnings to Fixed Charges**
23.1 Consent of Ernst & Young LLP.......................................
23.2 Consent of Ernst & Young LLP.......................................
23.3 Consent of Ernst & Young LLP.......................................
23.4 Consent of KPMG Peat Marwick LLP...................................
23.5 Consent of Coopers & Lybrand L.L.P. ...............................
23.6 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>
- ---------------
** Previously filed.
<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 July 8, 1997 in the Registration
Statement (Form S-4, No. 333-26503) and related Prospectus of Urohealth Systems,
Inc. for the registration of $110,000,000 principal amount of its 12 1/2% Senior
Subordinated Notes due 2004.
/s/ ERNST & YOUNG LLP
Orange County, California
September 9, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and to the
use of our report dated February 5, 1997 with respect to the financial
statements of X-Cardia Corporation contained in the Registration Statement (Form
S-4, No. 333-26503) and related Prospectus of Urohealth Systems, Inc. for the
registration of $110,000,000 principal amount of its 12 1/2% Senior Subordinated
Notes due 2004.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 9, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts," and to the
use of our report dated August 8, 1996, except Note K as to which the date is
August 14, 1996, with respect to the financial statements of Richard-Allan
Medical Industries, Inc. contained in the Registration Statement (Form S-4, No.
333-26503) and related Prospectus of Urohealth Systems, Inc. for the
registration of $110,000,000 principal amount of its 12 1/2% Senior Subordinated
Notes due 2004.
/s/ ERNST & YOUNG LLP
Kalamazoo, Michigan
September 9, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
UROHEALTH Systems, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-26503) on Form S-4 of our report dated October 10, 1995, relating to the
consolidated statements of operations, stockholders' equity and cash flows for
the fiscal year ended June 24, 1995 of Dacomed Corporation 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
September 9, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in this Amendment No.
3 to the Registration Statement of Urohealth Systems, Inc. on Form S-4 of our
report dated May 9, 1997 included in Urohealth Systems, Inc.'s Annual Report on
Form 10-K on our audits of the financial statements of Microsurge, Inc. as of
March 31, 1997 and 1996 and for the year ended March 31, 1997, the nine months
ended March 31, 1996 and the year ended December 31, 1995 (not separately
included therein). We also consent to the reference to our firm under the
caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
September 9, 1997
