<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(AMENDMENT NO. 1)
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 1-11150
------------------------
UROHEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 98-0122944
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5 CIVIC PLAZA, SUITE 100, NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 668-5858
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 30, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $108,553,635. The number of
shares outstanding of the Registrant's Common Stock as of June 30, 1997 was
23,809,817.
This Amendment No. 1 is being filed to include Part III information which
was previously incorporated by reference.
================================================================================
<PAGE> 2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive
officers, certain key employees and directors of Urohealth as of July 21, 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
Paul Petersen....................... 38 President -- Urology Products
Richard Kindberg.................... 40 President -- Surgical Products
M. Cassandra Hoag................... 42 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 N. 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 Urohealth are elected at annual meetings of stockholders to
serve one-year terms or until their successors are elected and officers of
Urohealth 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 Urohealth,
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 Urohealth, Mr. Hazuka served as Chairman of the
Board, President and Chief Executive Officer of Allscrips
1
<PAGE> 3
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
Urohealth 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.
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 Urohealth.
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 Urohealth 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 Urohealth, Ms. Hoag served
as a Division Vice President of Curaflex Health Services, Inc. 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 Urohealth, serving in that capacity since August 1995. Prior to that he held
several executive sales management positions with Urohealth since October 1994.
MICHAEL SCHULER joined Urohealth in January 1996 as Senior Vice President,
New Business Development. He became President -- Visualization Products in
August 1996. Prior to joining Urohealth, 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 Urohealth 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 ownership 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.
JOHN S. CHAMBERLIN has served as a director of Urohealth 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.
2
<PAGE> 4
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 Urohealth 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 Urohealth 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 Urohealth 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 Urohealth 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 and Acting
Chief Executive Officer of Diedrich's Coffee, Inc. and is Managing Director of
Archway Capital L.L.P.
MICHAEL S. GROSS has served as a director of Urohealth 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.
RICHARD NEWHAUSER became a director of Urohealth 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 Urohealth 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.
3
<PAGE> 5
Election of Directors
Pursuant to the Employment Agreement between Charles A. Laverty and
Urohealth, Urohealth is obligated to use its best efforts to cause Mr. Laverty
to be elected as a voting member of the Urohealth Board of Directors during the
term of his employment. Pursuant to an agreement between Urohealth and Avatax
Corporation (formerly, FoxMeyer Corporation), Urohealth has agreed to use
reasonable efforts to maintain the two Board seats currently held by Avatex
nominees for the next year. Messrs. Butler and Estrin are the Avatex nominees
currently serving on the Urohealth Board of Directors. In connection with the
acquisition of Richard-Allan Medical, Urohealth agreed to use its best efforts
to cause Richard Newhauser to be elected to the Urohealth Board of Director
until August 1999. Mr. Gross is one of the two nominees of the holders of the
Convertible Debentures, and the holders of the Convertible Debentures have
elected not to name a second nominee at this time. There are no other
arrangements or understandings between any director or executive officer and any
other person pursuant to which such director or executive officer was or is to
be elected as a director or executive officer, as applicable.
Directors' Fees
Each Urohealth director who is not a salaried officer is entitled to
receive $10,000 per year and $1,000 for each directors' and committee meeting
attended. Directors are also entitled to reimbursement of expenses incurred in
connection with business of Urohealth. Directors also receive annual grants of
options to purchase 7,500 shares of Urohealth Common Stock after each annual
stockholders meeting pursuant to the Urohealth 1996 Directors' Stock Incentive
Plan.
Committees of the Board
Urohealth currently has three committees of the Board of Directors, the
Executive Committee, the Audit Committee and the Compensation Committee.
The Executive Committee, currently consists of Messrs. Laverty and Goelman,
exercises the power of the Board of Directors (except for certain powers that
may only be exercised by the full Board) in monitoring the management of the
business of Urohealth between meetings of the Urohealth Board of Directors.
The Audit Committee, currently consists of Messrs. Goelman, Butler and
Tedesco, recommends the appointment of Urohealth's independent public
accountants, reviews and approves the scope of the annual audit and reviews the
results thereof with Urohealth's independent accountants. The Audit Committee
also assists the Urohealth Board of Directors in reviewing Urohealth's business
ethics and conflict of interests policies.
The Compensation Committee, consisting of Messrs. Goelman, Elkins and
Estrin, reviews and establishes the salary, bonus and stock awards received by
Urohealth's Chief Executive Officer, and, in consultation with the Chief
Executive Officer, reviews the compensation of the other executive officers of
Urohealth. The Compensation Committee is also responsible for administering
Urohealth's 1994 Stock Incentive Plan and other stock-based incentive plans. The
Compensation Committee determines the recipients of awards, sets the exercise
price of shares granted and determines the terms, provisions and conditions of
all rights granted.
Compensation Committee Interlocks and Insider Participation
During fiscal 1997, the Compensation Committee consisted of Messrs.
Goelman, Elkins and Estrin. None of these person is or has been as officer or
employee of Urohealth or any of its subsidiaries. In addition, except as
described below, there are no Board of Directors or Compensation Committee
interlocks between Urohealth and other entities involving Urohealth's executive
officers and Board members who serve as executive officers of such entities.
During fiscal 1997, Charles A. Laverty and Lawrence Goelman (a member of
Urohealth's compensation committee) served on the Board of Directors of Pinnacle
Micro, Inc. During a portion of the year Mr. Goelman served as acting Chief
Executive Officer of Pinnacle Micro, Inc. Neither Mr. Goelman nor Mr. Laverty
has any current relationship with Pinnacle Micro, Inc. During fiscal 1997,
Charles A. Laverty served on the Board of Directors (and compensation committee)
and Robert N. Elkins (a
4
<PAGE> 6
member of Urohealth's compensation committee) served as Chairman of the Board of
Integrated Living Communities, Inc.
Attendance at Board and Committee Meetings
During the fiscal year ended March 31, 1997, the Board of Directors met 16
times. In addition, the Audit Committee met one time and the Compensation
Committee met four times. The Executive Committee did not meet on a formal basis
during the year. Each director, except for Mr. Elkins and Ms. Givens, attended
75% or more of the aggregate number of meetings held by the Board of Directors
and all committees of the Board of Directors on which such directors served.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Urohealth's executive officers and directors to file reports of beneficial
ownership on Form 3 and changes in beneficial ownership on Forms 4 and 5 with
the SEC. Executive officers and directors are also required by the SEC rules to
furnish Urohealth with copies of all Section 16(a) reports which they file.
Based solely on its review of the Forms 3, 4 and 5 provided to or filed on
behalf of its executive officers and directors, as well as written
representations from these individuals regarding Forms 5, Urohealth believes
that, during the fiscal year ended March 31, 1997, all Section 16(a) filing
requirements applicable to its executive officers and directors were complied
with pursuant to the SEC rules, except for Form 5s relating to shares purchased
under Urohealth's Employee Stock Purchase Plan by Messrs. Johnson, Higgins and
Condie which were filed late.
5
<PAGE> 7
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
AND OTHER INFORMATION
Summary of Executive Compensation
The following table sets forth for each of Urohealth's last three completed
fiscal years the compensation of the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION OTHER ANNUAL UNDERLYING
----------------------- COMPENSATION OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) ($) (#)
- ---------------------------------- ------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles A. Laverty................ 1997 $ 450,000 $ -- * --(2)
President and 1996 $ 250,100 $375,900 1,138,833
Chief Executive Officer 1995 $ 159,400 $ 50,000 500,000
Julian W. Osbon................... 1997 $ 327,799(3) $ -- * --
(former executive officer) 1996 $ 101,900 $ 40,000 --
1995 $ -- $ -- --
James L. Johnson.................. 1997 $ 294,733 $ -- *
Executive Vice President 1996 $ 152,000 $ 51,100 336,517
and Chief Financial Officer(4) 1995 $ -- $ -- --
Bruce A. Hazuka................... 1997 $ 220,833 $ -- * --(2)
Executive Vice President 1996 $ 104,700 $ 52,000 200,000
and Chief Operating Officer 1995 $ -- $ -- --
Paul Petersen..................... 1997 $ 259,000(5) $ -- *
President -- Urology Products 1996 $ 191,222(5) $
1995 $ -- $
Michael Schuler................... 1997 $ 225,000 $ *
President -- Visualization 1996 $ 142,879 $
Products
1995 $ -- $ --
</TABLE>
- ---------------
* Other Annual Compensation did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus.
(1) The information for fiscal 1996 covers a nine month transition period ending
March 31, 1996.
(2) In April 1997, Mr. Laverty was granted an option to purchase 1,500,000
shares and Mr. Hazuka was granted an option to purchase 50,000 shares.
(3) Excludes severance payment of $800,000 made during fiscal 1997.
(4) Mr. Johnson resigned in July 1997.
(5) Includes commissions provided for in Mr. Petersen's employment agreement.
Summary of Option Grants
The following table sets forth the individual grants of stock options made
by Urohealth during the year ended March 31, 1997 to each of the named executive
officers of Urohealth.
6
<PAGE> 8
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------- ASSUMED RATE
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------- ------------ ------------ ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Charles A. Laverty.......... -- -- -- -- -- --
Julian W. Osbon............. -- -- -- -- -- --
James L. Johnson............ -- -- -- -- -- --
Bruce A. Hazuka............. -- -- -- -- -- --
Paul Petersen............... -- -- -- -- -- --
Michael Schuler............. -- -- -- -- -- --
</TABLE>
Summary of Options Exercised
The following table sets forth information concerning exercise of stock
options during the year ended March 31, 1997 by each of the named executive
officers of Urohealth and the value of unexercised options at March 31, 1997.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FY-END (#) FY-END ($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Charles A. Laverty........... -- -- 1,110,100/528,728 $1,241,607/$350,061
Julian Osbon................. -- -- 0/0 0/0
James L. Johnson............. -- -- 217,073/119,444 $125,348/$112,152
Bruce A. Hazuka.............. -- -- 127,778/72,222 $55,903/$31,597
Paul Petersen................ -- -- 52,778/47,222 $125,348/$112,152
Michael Schuler.............. 3,104 $20,739 61,006/47,222 $142,482/$112,152
</TABLE>
1996 Directors' Stock Incentive Plan
In July 1996, Urohealth approved the 1996 Directors' Stock Incentive Plan
(the "Directors' Plan") which authorizes the issuance of up to 300,000 shares of
Common Stock in the form of stock options to non-employee directors of
Urohealth. The Directors' Plan was approved by Urohealth stockholders in August
1996. Under the Directors' Plan, each non-employee director of Urohealth
automatically receives an option to purchase 7,500 shares of Urohealth Common
Stock upon joining the Urohealth Board of Directors and an additional 7,500
share option immediately following each annual meeting of stockholders. Options
are granted at fair market value on the date of grant and have a ten-year term.
Options vest on the first anniversary of the date of grant; provided, that the
options become immediately exercisable upon a "change of control."
Retirement Savings Plan
In January 1995, Urohealth adopted the Urohealth Retirement Savings Plan
(the "401(k) Plan") under Section 401(k) of the Internal Revenue Code. The
401(k) Plan generally covers all full-time employees of Urohealth who are over
age 21 and have completed one year of service with at least 1,000 hours of
service. Employees may elect to defer, in the form of contributions to the
401(k) Plan, from 1% up to 12% of their annual compensation, subject to the
federal maximum limit. No matching contributions are expected to be made by
Urohealth relating to fiscal 1997. Employees are fully vested in contributions
made by them to the
7
<PAGE> 9
401(k) Plan. Employees become vested in contributions made by Urohealth after
completion of two years of service.
Employment Agreements
CHARLES A. LAVERTY. Urohealth and Mr. Laverty are parties to an Amended and
Restated Employment Agreement, dated April 1, 1996, pursuant to which Mr.
Laverty serves as Urohealth's Chief Executive Officer. The initial term of the
agreement is through April 1, 1999, after which date the agreement automatically
renews for successive three-year terms unless either party exercises their
option to terminate the agreement. Mr. Laverty's salary under the agreement was
$450,000 for fiscal 1997, adjusted annually, plus bonuses. Mr. Laverty's base
salary under the agreement was increased to $500,000 beginning in fiscal 1998.
Urohealth may terminate the agreement for "cause" which is defined as (a)
Mr. Laverty's final conviction of a felony related to his duties under the
agreement or (b) Mr. Laverty's willful failure to perform his reasonable
responsibilities and duties under the agreement after 30 days notice from the
Board. In the event that Mr. Laverty terminates the agreement without cause at
any time during the last two quarters of any fiscal year any options scheduled
to vest during such fiscal year shall automatically vest as of the date of
termination. If Urohealth terminates the agreement for any reason other than for
cause, or if Mr. Laverty terminates the agreement due a material breach by
Urohealth of its obligations under the agreement, then Urohealth will be
obligated to (A) pay to Mr. Laverty severance pay equal to three years of his
salary and earned bonus as of the date of such termination and (B) provide and
pay for all benefits to which Mr. Laverty is entitled under the agreement for a
period of three years after termination. In addition, if Urohealth terminates
the agreement for any reason other than for cause, or if Mr. Laverty terminates
the agreement due to a material breach by Urohealth, all options then granted to
Mr. Laverty will become immediately vested and exercisable.
Mr. Laverty may terminate the agreement upon 30 days notice upon or within
one year after a "Change of Control" as such term is defined in the agreement.
If Mr. Laverty terminates the agreement for any reason (including with or
without cause) upon or within one year after a Change of Control, Urohealth is
obligated to (A) pay to Mr. Laverty severance equal to $2,500,000 and (B)
provide and pay for all benefits to which he is entitled under the agreement for
a period of three years after termination. In addition, all options then held by
Mr. Laverty will become immediately vested and exercisable. If, however, an
event giving rise to a Change of Control is initiated by Urohealth, then prior
to the Urohealth Board approving the Change of Control, Mr. Laverty must inform
the Board whether he intends to terminate the agreement. If Mr. Laverty informs
the Board that he does not intend to terminate the agreement as a result of the
Change of Control, he will forfeit all termination and payment rights in the
agreement based on that particular Change of Control.
Mr. Laverty agreed that during his employment and for a period of 18 months
after he ceases to be employed by Urohealth, regardless of the manner of
termination and except as limited by the agreement, he will not compete with
Urohealth.
BRUCE A. HAZUKA. Urohealth and Mr. Hazuka are parties to an employment
agreement dated November 30, 1995 pursuant to which Mr. Hazuka serves as a
member of senior management of Urohealth. The agreement provides for an initial
one-year term with two automatic one-year renewals thereafter. Mr. Hazuka's
annual salary under the agreement is $200,000, adjusted annually (currently at
$300,000), plus bonuses. Urohealth can terminate Mr. Hazuka's employment for
cause (as defined in the agreement). Urohealth can terminate Mr. Hazuka's
employment without cause upon at least 90 days' prior notice, in which case all
of the options then held by Mr. Hazuka shall become immediately vested and
exercisable, and Mr. Hazuka shall be entitled to severance equal to the amount
of his salary for the remaining term of the agreement (including extensions
thereof).
Following a "change of control" (as defined in the agreement), Mr. Hazuka
may terminate the agreement with or without "good reason" (as defined in the
agreement), upon 30 days' notice given at any time during the one-year period
after the change of control. If Mr. Hazuka terminates his employment during the
one-year period after the change of control for good reason, or if his
employment is terminated without cause during such period, then he shall be
entitled to receive a lump sum severance payment equal to the
8
<PAGE> 10
greater of (i) one times his salary and bonus for the 12 months preceding the
change of control and (ii) the remaining amount of salary payable for the term
of the agreement.
PAUL PETERSEN. Urohealth and Mr. Petersen are parties to an employment
agreement dated December 29, 1995 pursuant to which Mr. Petersen serves as a
member of senior management of Urohealth. The agreement provides for an initial
one-year term, with two automatic one-year renewals thereafter. Mr. Petersen's
annual salary under the agreement is $125,000, adjusted annually (currently
$214,000, with minimum guaranteed bonuses), plus bonuses. Urohealth can
terminate Mr. Petersen's employment for cause (as defined in the agreement).
Urohealth can terminate Mr. Petersen's employment without cause upon at least 90
days' prior notice, in which case Mr. Petersen shall be entitled to severance
equal to the amount of his salary and bonus for the remaining term of the
agreement (including extensions thereof).
Following a "change of control" (as defined in the agreement), Mr. Petersen
may terminate the agreement with or without "good reason" (as defined in the
agreement), upon 30 days' notice given at any time during the one-year period
after the change of control. If Mr. Petersen terminates his employment during
the one-year period after the change of control for good reason then he shall be
entitled to receive a lump sum severance payment equal to one times his salary
and bonus for the 12 months preceding the change of control.
MICHAEL SCHULER. Urohealth and Mr. Schuler are parties to an employment
agreement dated January 2, 1996 pursuant to which Mr. Schuler serves as a member
of senior management of Urohealth. The agreement provides for an initial
one-year term, with two automatic one-year renewals thereafter. Mr. Schuler's
annual salary under the agreement is $225,000 plus bonuses. Urohealth can
terminate Mr. Schuler's employment for cause (as defined in the agreement).
Urohealth can terminate Mr. Schuler's employment without cause upon at least 90
days' prior notice, in which case Mr. Schuler is entitled to severance equal to
the amount of his salary for the remaining term of the agreement (including
extensions thereof).
Following a "change of control" (as defined in the agreement), Mr. Schuler
may terminate the agreement with or without "good reason" (as defined in the
agreement), upon 30 days' notice given at any time during the one-year period
after the change of control. If Mr. Schuler terminates his employment during the
one-year period after the change of control for good reason, or if his
employment is terminated by Urohealth without cause, then he shall be entitled
to receive a severance payment equal to the greater of (i) one times his salary
and bonus for the 12 months preceding the change of control and (ii) the
remaining amount of salary payable for the term of the agreement.
9
<PAGE> 11
Notwithstanding anything to the contrary set forth in Urohealth's previous
public filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including this proxy
statement/prospectus, in whole or in part, the following report and Stock
Performance Graph which follows shall not be deemed to be incorporated in any
such filings.
Report of the Compensation Committee on Executive Compensation
GENERAL
The Urohealth Board of Directors has a Compensation Committee (the
"Committee"), consisting of Dr. Elkins, Mr. Estrin, and Mr. Goelman. The
Committee is charged by the Board of Directors with establishing a compensation
plan which will enable Urohealth to compete effectively for the services of
qualified officers and key employees, to give such employees appropriate
incentive to pursue the maximization of long-term stockholder value and to
recognize such employees' success in achieving both qualitative and quantitative
goals for the benefit of Urohealth. The Committee establishes appropriate levels
of compensation for specific individuals, as well as compensation and benefit
programs for Urohealth as a whole.
COMPENSATION PHILOSOPHY AND POLICIES FOR EXECUTIVE OFFICERS
As its first principle, the Committee believes that executives of Urohealth
should be rewarded based upon their success in meeting Urohealth's operational
goals, improving its earnings, maintaining its leadership role in the
urological, gynecological and minimally invasive surgical instrument business,
and generating consistent and superior returns for its stockholders. The
Committee strives to establish levels of compensation that take such factors
into account and provide appropriate recognition for past achievement and
incentives for future success. The Committee recognizes that the demand for
executives with expertise and experience in the areas of medical devices and
services within the healthcare services fields is intense. In order to attract
and retain qualified persons, the Committee believes that Urohealth must offer
current compensation at levels consistent with those of other publicly-traded
healthcare companies. In addition, the Committee believes that it is in the best
interests of Urohealth's stockholders to offer its executives meaningful equity
participation in Urohealth, in order that those executives' interests will be
aligned with those of Urohealth's stockholders. The Committee feels that the
historic mix of cash compensation and equity participation has proven to be
effective in stimulating Urohealth's executives to meet both long-term and
short-term goals and has been a major factor in limiting turnover among senior
executives.
Urohealth's compensation program has three distinct elements: base salary;
incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below:
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, Urohealth has been very successful in attracting and
retaining key executives. Urohealth believes that its compensation package is
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly-traded healthcare companies,
taking into account each executive's areas and level of responsibility,
historical performance and tenure with Urohealth. In establishing such levels,
Urohealth considers compensation for executives of other publicly-traded
providers of healthcare services, as well as other publicly-traded companies of
similar size and with a similar growth rate. Compensation decisions are not
targeted to specific levels in the range of compensation paid by such companies,
nor does Urohealth maintain a record of where its compensation stands with
respect to such other companies. However, the Committee takes such levels of
compensation into account in determining appropriate levels of compensation for
Urohealth's executives.
Incentive Compensation: In addition to base salary, the Committee
establishes cash incentive compensation for executives of Urohealth, based upon
each such executive's success in meeting qualitative and quantitative
performance goals on an annual basis. Individual incentive bonuses are
determined on a basis that takes into account each executive's success in
achieving standards of performance, which may or may not be quantitative,
established by the Committee and such executive's superiors. Bonus
determinations are made on
10
<PAGE> 12
a case-by-case basis, taking into account appropriate quantitative and
qualitative factors, and there is no fixed relationship between any particular
performance factor and the amount of a given executive's bonus. Incentive
compensation can be a major component of Urohealth's executive compensation, and
the Committee believes that placing executives at risk for such a component is
effective in motivating such executives to achieve such goals.
In addition to cash incentive compensation, as a growth company, Urohealth
utilizes equity-based compensation, in the form of stock options, as a tool to
encourage its executives to work to meet its operational goals and maximize
long-term stockholder value. Because the value of stock options granted to an
executive is directly related to Urohealth's success in enhancing its market
value over time, the Committee feels that its stock option program is a very
effective tool in aligning the interests of management and stockholders.
The Committee determines stock option grants under Urohealth's stock option
plans. Specific grants are determined taking into account an executive's current
responsibilities and historical performance, as well as the executive's
perceived contribution to Urohealth's results of operations. Options are also
used to give incentive to newly-promoted officers at the time that they are
asked to assume greater responsibilities, and, in some cases, to executives who
have joined Urohealth through acquisitions and have assumed significant
leadership roles within Urohealth. In evaluating option grants, the Committee
considers prior grants and shares currently held, as well as the recipient's
success in meeting operational goals and the recipient's level of
responsibility. However, no fixed formula is utilized to determine particular
grants. The Committee believes that the opportunity to acquire a significant
equity interest in Urohealth has been a strong motivation for Urohealth's
executives to pursue the long-term interests of Urohealth and its stockholders,
and has promoted longevity and retention of key executives. Information relating
to stock options granted to the five most highly-compensated executive officers
of Urohealth is set forth elsewhere in this Proxy Statement/Prospectus.
Retirement Compensation: As described elsewhere herein, in 1991 the Company
adopted a 401(k) retirement plan in order to give all full-time employees an
opportunity to provide for their retirement on a tax-advantaged basis.
CHIEF EXECUTIVE OFFICER COMPENSATION
Urohealth is a party to an Employment Agreement with Charles Laverty,
pursuant to which Mr. Laverty is employed as Chairman of the Board, Chief
Executive Officer and President of Urohealth for a three-year term which ends
March 31, 1999. In addition, the Company has agreed to use its best efforts to
cause Mr. Laverty to be elected as a Director of Urohealth during the term of
the Agreement. Under the Agreement, Mr. Laverty received a base salary of
$450,000 in fiscal 1997 (increased to $500,000 for fiscal 1998 and each year
thereafter), with incentive compensation of up to $2,000,000, subject to annual
review by the Board of Directors, and is entitled to participate in any bonus
plan approved by the Board of Directors for Urohealth's management. Mr. Laverty
was granted an additional 1,500,000 stock options vesting over 36 months at the
closing price of a share of Urohealth Common Stock on May 21, 1997. Such
additional option grant was based on the Committee's assessment of Mr. Laverty's
contribution to Urohealth as the builder of the urological, gynecological and
minimally invasive surgical platforms for Urohealth, including his role in the
consummation of eight acquisitions during 1996 and 1997,
as well as Urohealth's success in achieving annual budgeted net income targets
and other factors described below. Mr. Laverty is also provided with a car
allowance and with life and disability insurance. Under the Agreement, Mr.
Laverty's employment may be terminated for cause or if he should become
disabled. Termination of Mr. Laverty's employment under the Agreement will
result in certain severance pay arrangements. In the event that Urohealth were
to be acquired, merged or reorganized in such a manner as to result in a change
of control of the Company, Mr. Laverty has the right to terminate his employment
under the Agreement, in which case he will receive a lump sum payment equal to
five years' annual base salary (including the gross incentive portion thereof)
under the Agreement. Mr. Laverty has agreed not to compete with Urohealth for an
eighteen month period after any such termination. The Committee approved an
amendment to the Agreement that provides for Mr. Laverty to receive certain
payments in the event that Urohealth is merged or combined with another
corporation in a transaction in which Urohealth is not the
11
<PAGE> 13
surviving or continuing entity. The amount of the fee would be equal to the
greater of: (i) 1% of value of such transaction in excess of $20 per share; and
(ii) 1% of the capitalization of Urohealth in excess of $640 million.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Laverty and recommends to the Board of Directors the level
of incentive compensation, both cash and equity-based, which is appropriate for
Mr. Laverty with respect to each fiscal year of Urohealth. In making such
recommendation, the Committee takes into account Urohealth's performance in the
marketplace, its success in meeting strategic goals and its success in meeting
budgets. Again, ultimate compensation decisions are not made in a formulary
manner, but in a manner which takes into account Urohealth's competitive
position, its position in the financial markets, and the significant
contributions made by Mr. Laverty to the success of Urohealth. In making its
decisions with respect to Mr. Laverty's compensation, the Committee believes
that it is appropriate to recognize the significant role Mr. Laverty has played
in building Urohealth to its current position and that under his leadership
Urohealth has significantly enhanced stockholder value over a period of years
and continues to grow in assets, net revenues, net income and market value.
SECTION 162(M) OF THE INTERNAL REVENUE CODE
The Omnibus Budget Reconciliation Act of 1993 contained a provision under
which a publicly-traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
Urohealth believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans; however, the
Committee does from time to time grant options outside the employee stock option
plans. The Committee and the Board of Directors have currently made a decision
not to amend Urohealth's cash compensation programs to meet all requirements of
Section 162(m) because such a decision would not be in the best interests of
Urohealth's stockholders. The Committee believes that, in establishing bonus and
incentive awards, certain subjective factors must be taken into account in
particular cases, based upon the experienced judgment of the Committee members
as well as on factors which may be objectively quantified. The preservation of
tax deductibility of all compensation is an important consideration. However,
the Committee believes that it is important that Urohealth retain the
flexibility to reward superior effort and accomplishment even where all cash
compensation may not be fully deductible. The Committee will continue to review
the requirements for deductibility under Section 162(m) and will take such
requirements into account in the future as it deems appropriate and in the best
interests of Urohealth's stockholders.
CONCLUSIONS
The Committee believes that the levels and mix of compensation provided to
Urohealth's executives during fiscal 1997 were appropriate and were instrumental
in the achievement of Urohealth's goals for fiscal 1997. It is the intent of the
Committee to ensure that Urohealth's compensation programs continue to motivate
its executives and reward them for being responsive to the long-term interests
of Urohealth and its stockholders.
The foregoing report is submitted by the following Directors of Urohealth,
constituting all of the members of the Compensation Committee of the Board of
Directors:
Robert Elkins, M.D.
Melvyn Estrin
Lawrence Goelman, Chairman
12
<PAGE> 14
Urohealth Stock Price Performance
The following performance graph assumes an investment of $100 on August 30,
1991 (the date that Urohealth became subject to Section 12 of the Exchange Act)
and compares the change to March 31, 1997 in the market price of the Urohealth
Common Stock with a broad market index (Dow Jones Equity Market Index) and
industry index (S&P Healthcare (Medical Products and Supplies)). Urohealth paid
no dividends during the periods shown; the performance of the indices is shown
on a total return (dividend reinvestment) basis. The graph lines merely connect
the prices on the dates indicated and do not reflect fluctuations between those
dates.
COMPARISON OF 67 MONTH CUMULATIVE TOTAL RETURN*
AMONG UROHEALTH SYSTEMS, INC., THE DOW JONES EQUITY MARKET INDEX
AND THE DOW JONES MEDICAL SUPPLIES INDEX
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------------------------------
8/30/91 6/30/92 6/30/93 6/30/94 6/30/95 3/31/96 3/31/97
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Urohealth Systems, Inc. UROH 100 243 222 109 113 152 112
DOW JONES EQUITY MARKET IDOW 100 106 122 123 155 188 225
S&P HEALTHCARE** IMDP 100 103 84 81 125 166 182
(Medical Products and Supplies)
- ---------------
</TABLE>
* $100 invested on 8/30/91 in stock or index including reinvestment of
dividends.
** During 1997, Urohealth changed the industry index used in the above
comparison from the Dow Jones Medical Supplies Index to the S&P Healthcare
(Medical Products and Supplies) Index because Urohealth believes that the S&P
Healthcare (Medical Products and Supplies) Index contains companies whose
operations more closely parallel the operations of Urohealth. The Dow Jones
Medical Supplies Index would have had a cumulative total return of 222 for
the period ended March 31, 1997.
13
<PAGE> 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Urohealth Common Stock as of June 30, 1997 of (i) each person known
by Urohealth to own beneficially 5% or more of the Common Stock, (ii) each
current director of Urohealth and each person nominated to be a director of
Urohealth, (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 Advisors II, L.P.(4)........................................... 2,200,906 7.7
Chase Venture Capital Associates, L.P.(5)............................. 2,196,069 7.7
Charles A. Laverty(6)................................................. 1,110,106 3.8
Robert N. Elkins, M.D.(7)............................................. 149,260 *
Lawrence Goelman(8)................................................... 127,369 *
Melvyn J. Estrin(9)................................................... 2,479,827 8.4
Abbey J. Butler(9).................................................... 2,479,827 8.4
Francis J. Tedesco(10)................................................ 15,000 *
Michael S. Gross(11).................................................. 2,208,406 7.7
John Chamberlin(12)................................................... 26,944 *
C. Sage Givens(13).................................................... 26,944 *
Richard Newhauser..................................................... 2,081,916 7.3
Bruce A. Hazuka(14)................................................... 127,778 *
Paul Petersen(15)..................................................... 120,031
Michael Schuler(16)................................................... 75,112
All current directors and executive officers as a group (16
persons)(17)........................................................ 8,924,964 31.4
</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 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 of Voting Stock and warrants to purchase 113,750 shares of
Common Stock which are currently exercisable. The address for Apollo
Advisors II, L.P. is 1301 Sixth Avenue, New York, New York 10019.
(5) Represents Debentures which vote on an "as converted" basis representing
2,082,569 shares of Voting Stock 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.
Chase Venture Capital Associates is an affiliate of Chase Manhattan
Corporation.
14
<PAGE> 16
(6) Includes 1,110,106 shares subject to options exercisable on or before
August 30, 1997.
(7) Includes 149,260 shares subject to options exercisable on or before August
30, 1997.
(8) Includes 127,369 shares subject to options exercisable on or before August
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 August 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 August
30, 1997.
(11) Includes 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. Includes 7,500 shares
subject to options exercisable on or before August 30, 1997.
(12) Includes 26,944 shares subject to options exercisable on or before August
30, 1997.
(13) Includes 26,944 shares subject to options exercisable on or before August
30, 1997.
(14) Includes 127,778 shares subject to options exercisable on or before August
30, 1997.
(15) Includes 52,778 shares subject to options exercisable on or before August
30, 1997.
(16) Includes 61,006 shares subject to options exercisable on or before August
30, 1997.
(17) Includes 1,981,313 shares subject to options exercisable on or before
August 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, Urohealth sold $50 million of its 8.75% Convertible
Subordinated Debentures due May 30, 2006 (the "Convertible Debentures") to a
group of investors in a private placement transaction. The Convertible
Debentures are convertible into Urohealth Common Stock at a conversion price,
subject to adjustment, of $10.90 per share, and the holders of the Convertible
Debentures vote with the holders of the Urohealth Common Stock on an "as
converted" basis. In connection with the placement of the Convertible
Debentures, Urohealth also issued warrants to purchase a total of 250,000 shares
of Urohealth Common Stock at an exercise price, subject to adjustment, of
$10.90. An entity affiliated with Dr. Blutt, a director of the Urohealth,
purchased $22.7 million of the Convertible Debentures and the warrants, and
entities affiliated with Mr. Gross, a director of Urohealth, purchased $22.7
million of Convertible Debentures and warrants.
In connection with the acquisition of Richard-Allan by Urohealth, Urohealth
entered into a three-year employment agreement with Richard R. Newhauser for an
annual salary of $350,000, and into a consulting agreement pursuant to which Mr.
Newhauser will provide consulting services to Urohealth for a five-year period
after expiration of the employment agreement for $200,000 per year. In addition,
Urohealth has agreed to provide Mr. Newhauser health insurance benefits during
the terms of the employment and consulting agreements and during his retirement
thereafter.
In connection with the acquisition of Richard-Allan, Urohealth purchased
from a partnership of which Mr. Newhauser was a general partner, the real
property on which the Richard-Allan operations were conducted for a purchase
price of $4.5 million, of which $1.5 million was paid in cash at the closing and
the balance of which is represented by a $3.0 million promissory note which
bears interest at 8 1/4% per annum. The interest on the note paid periodically
throughout the term of the note and the principal is due and payable on the
tenth anniversary of the closing.
During fiscal 1997, Urohealth loaned $550,000 to Charles A. Laverty,
Urohealth's Chairman and Chief Executive Officer. The loan bears interest at a
rate of 6.02% per annum and all principal and interest under the note is due and
payable on the earlier of (a) November 25, 1999 and (b) 30 days after
termination of Mr. Laverty's employment agreement. Subsequent to March 31, 1997,
Urohealth loaned $1,500,000 to Mr. Laverty on the same terms and conditions as
the earlier loan.
During fiscal 1997, Urohealth made payments of $81,667 to HCA, Inc. in
payment for consulting services provided to Urohealth in prior fiscal years.
Bruce A. Hazuka, Executive Vice President and Chief Operating Officer of
Urohealth, is an executive officer and controlling stockholder of HCA, Inc..
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Newport Beach, State of California on July 29, 1997.
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
Chairman and Chief Executive Officer
16
