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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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
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UROHEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 98-0122944
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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
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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.
Documents incorporated by reference into Part III: Portions of the
definitive Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
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UROHEALTH SYSTEMS, INC.
TABLE OF CONTENTS
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PART I
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 14
Item 3. Legal Proceedings.......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.................................................................... 16
Item 6. Selected Financial Data.................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 18
Item 8. Financial Statements and Supplementary Data................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 29
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 30
Item 11. Executive Compensation..................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 30
Item 13. Certain Relationships and Related Transactions............................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 31
SIGNATURES II-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
Urohealth Systems, Inc. ("Urohealth" or the "Company") 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 conditions requiring minimally invasive and general surgery. The
Company was incorporated in August 1985. In October 1994, under the leadership
of new management, the Company adopted and began to implement a strategic plan
which took advantage of consolidation opportunities in the highly fragmented
medical products industry. Management's strategy was to position the Company to
benefit from the competitive advantages and operating efficiencies inherent in
an infrastructure which combines an experienced management team, sophisticated
and efficient manufacturing facilities and a large sales force.
The Company believes that it has developed well-established and integrated
minimally invasive and general surgery and urology platforms and that it is
well-positioned further to acquire and develop new product lines, including
gynecology product lines, to enable it to become a leader in each of its Target
Markets.
The Company'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.
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. The Company 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, Inc. ("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 Corporation ("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, Inc. ("Microsurge") (stock-for-stock merger) in a transaction
accounted for as a pooling of interests and acquired or licensed certain other
technology relating to pivotal minimally invasive surgical instruments and a
breast biopsy system.
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 shares of Urohealth Common Stock. 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
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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.
MARKETS
Urohealth 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 prosthesis.
Currently available drug therapies include oral prostaglandins, which have
limited effectiveness, an injectable drug, 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 thereby achieving an 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 prosthesis in the corporal body of the penis
which provides rigidity adequate for sexual activity. Penile prostheses can be
either manually or hydraulically operated to achieve an erection.
The Company believes that the market for erectile dysfunction products will
increase as patients and others become more knowledgeable regarding the
treatment alternatives available to deal with the problem. In addition, the
Company believes that the market for erectile dysfunction products could grow as
the average age of men in the United States continues to increase.
Incontinence
Urinary incontinence is estimated to affect between 15 and 25 million
adults in the United States of which approximately 85% are female. A recent
survey revealed that one out of every six adult women in the United States
suffers from some form of urinary incontinence. Women typically experience a
higher incidence of incontinence than men primarily as a result of childbearing
and its impact on the urinary system. There are three basic types of urinary
incontinence: (i) stress incontinence, which involves leakage related to rapid
movement, a sneeze or exercise; (ii) urge incontinence, which involves a sudden
need to empty the bladder; and (iii) overflow incontinence, which results from
an over 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.
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The Company believes that the market for incontinence products could also
increase as patients become more knowledgeable about treatment options. In
addition, the Company believes that 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, the
Company believes that 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 (cytoscopes),
the joints (arthroscopes), the colon (sigmoidoscopes), and other organs and
physiological structures. Physicians can monocularly view the desired anatomy
through an eyepiece on the end of the scope. Generally, bright light must be
introduced to the organ or anatomy, through the scope, to enhance visualization.
Cameras can be coupled to scopes to convert an image to a video monitor for real
time viewing in the operative environment and to a recorder for procedure
documentation purposes. Technological advances in endoscopy include the use of
fiber optics for miniaturization and flexibility, and the development of camera
chips that can be built into the proximal end of the scope. These advances,
combined with product durability and affordability have spurred growth in the
visualization marketplace.
The Company believes that this market is complementary to those for the
treatment of urological and gynecological disorders and to the minimally
invasive surgical instrument market. New and innovative endoscopic visualization
products should fuel the movement of surgical and diagnostic procedures out of
the hospital and into the physician office setting.
MEDICAL PRODUCTS
The Company offers a broad range of products to urologists, general
surgeons and gynecologists. Historically, the Company has been highly dependent
on the sale of vacuum erection devices for the treatment
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of male impotence. However, the Company believes that with the acquisition of
Richard-Allan and other businesses and the introduction of its EndoView 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 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 articulating cutter and stapler, which is an
endoscopic surgical instrument with articulation capabilities. The Company also
recently introduced its EndoView product, which is an inexpensive, portable
video viewing system that urologists, general surgeons, and gynecologists can
attach to an endoscope. The Company believes that there are additional product
opportunities in the "visualization" area and is exploring those opportunities.
The Company offers a number of products designed for the treatment of
urological disorders, including the leading vacuum erection system, a penile
prosthesis and diagnostic equipment. The Company's vacuum erection systems
include Esteem(TM), ErecAid(R), Catalyst(TM), and Impower(TM). The Company's
vacuum erection devices are not subject to patent protection that would prohibit
others from offering competing products. The Company is a leader in the vacuum
erection system market primarily as a result of its high level of customer
service and physician assistance in training patients on the use of the
products. The Company also offers the RigiScan(R) System, a
microprocessor-controlled impotence diagnostic monitor, and its Inform(TM), a
disposable impotence screening device. Many of the minimally invasive surgery
products and medical/surgical products offered by the Company are used in the
treatment of urological disorders.
The Company offers a number of medical/surgical 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. The Company's future success will depend
in part on its ability to commercialize products under development and to
develop new medical products both for its existing markets and for new markets.
The extent and pace at which market acceptance of such products is achieved is a
function of many variables, including price, product performance and attributes,
product reliability, the effectiveness of marketing and sales efforts, the
ability to meet delivery schedules, as well as general economic conditions
affecting customers' purchasing patterns. New product development and
introduction in the medical product market requires considerable time and
capital and is subject to the risks of market acceptance. There can be no
assurance as to the continued market acceptance of the Company's existing
products or the Company's ability to develop or acquire additional products in
the future.
On February 28, 1997, the Company acquired X-Cardia and its cardiac output
monitoring technology. The Company has patent applications pending with respect
to the acquired technology, although approval cannot be assured, and has
prototype products developed. The Company anticipates beginning clinical trials
on a product using the technology during 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
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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.
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. In addition, this sales force offers the
full line of reposable surgical instruments acquired in the Microsurge
acquisition. 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
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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 urology 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), a 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 introduced in June, 1996. The Company
expects to introduce a second generation video endoscopy system during 1997 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 several agreements with large group purchasing organizations.
INTERNATIONAL SALES
International sales (sales outside of North America) were $3.3 million,
$1.7 million and $11.8 million for the year ended June 30, 1995, for the nine
months ended March 31, 1996 and for the year ended March 31, 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
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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.
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 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, the
Company competes with companies such as Mission Pharmacal and Mentor. The
Company's products also compete with those of others designed for alternative
methods of treatment, such as drugs sold by pharmaceutical companies and others
as a treatment for erectile dysfunction. In the incontinence market, the Company
competes with disposable paper adult diapers and briefs manufactured by
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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 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 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 patents, or whether such applications ultimately may be approved. 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
8
<PAGE> 11
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 conditions.
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.
GOVERNMENT REGULATION
Most of the Company's medical products 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 approvals 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.
Noncompliance with applicable requirements may have a material adverse effect on
the Company, and can result in fines, 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
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<PAGE> 12
based on the controls necessary reasonably to ensure the safety and
effectiveness of the medical device. Class I devices are those devices whose
safety and effectiveness can reasonably be ensured through general controls,
such as adequate labeling, premarket notification, and adherence to GMP
regulations. Some Class I devices are further exempted from some of the general
controls. Class II devices are those devices whose safety and effectiveness can
reasonably be ensured through the use of special controls, such as performance
standards, post-market surveillance, patient registries, and FDA guidelines.
Class III devices are devices which must receive premarket approval by the FDA
pursuant to a premarket approval ("PMA") application to ensure their safety and
effectiveness. Generally, Class III devices are limited to life sustaining,
life-supporting or implantable devices.
The FDA requires that a manufacturer introducing a new medical device or a
new indication for use of an existing medical device obtain either a premarket
notification clearance pursuant to Section 510(k) of the FDC Act ("510(k)
Notification") or a PMA prior to being introduced into the market. In general,
clearance of a 510(k) Notification may be obtained if a manufacturer or
distributor of a medical product can establish that a new device is
"substantially equivalent" in terms of safety, effectiveness and intended use to
another legally marketed and approved medical device. The FDA may also require
review by an advisory panel as a condition for 510(k) Notification, which can
further lengthen the process. In addition to requiring clearance for new
products, FDA rules typically require a filing and a waiting period prior to
marketing modified versions of existing products. The Company anticipates that
most of its products will be eligible for the 510(k) Notification procedure. The
process of obtaining a 510(k) Notification typically takes at least three months
from the date of filing of the application and generally requires the submission
of supporting data, which in some cases can be extensive and, as a result, may
extend the process for a considerable length of time. At this time, the FDA
typically responds to a submission of a 510(k) Notification within 180 to 360
days. Market clearance may take three to twelve months or longer. If the FDA
were to require suspension of the sale of one or more of the Company's products
pending receipt of a newly required 510(k) Notification or if the FDA were to
refuse to grant 510(k) Notification, the Company's revenues and operating income
could be materially and adversely affected. Under the Safe Medical Devices Act
of 1990 ("SMDA"), the FDA is directed to adopt new 510(k) notice regulations
which could potentially make the approval process for the Company's products
more time-consuming, difficult and expensive. The SMDA includes new provisions
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.
Through March 31, 1997, 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
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<PAGE> 13
the products in question off the market. Also, the FDA could bring regulatory or
enforcement actions against the Company. The Company has and continues to meet
the requirements for FDA compliance through their good manufacturing practice
guidelines and semi-annual FDA inspections.
International sales of medical devices are subject to regulatory
requirements that vary widely from country to country. The time required to
obtain approvals by foreign countries may be longer or shorter than that
required for FDA approval, and regulatory requirements in foreign countries may
differ significantly from those of the FDA. The receipt or denial of FDA
approval for a particular product may result in the receipt or denial of
regulatory approval for that product in certain other countries. In addition,
international sales of medical devices not cleared by the FDA for distribution
in the United States may be subject to FDA export requirements, which require
the Company to document that the sale of the device is not in violation of that
country's medical device laws. This documentation is then submitted to the FDA
with a request for a permit for export to that country.
There can be no assurance that the Company will obtain timely regulatory
approval for their future products, or that existing approvals will not be
withdrawn. Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulatory requirements can, among other consequences,
result in fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals, product recalls, seizure of products, operating
restrictions, refusal of the government to allow each company to enter into
supply contracts, and criminal prosecution. In addition, governmental
regulations may be established that could prevent or delay regulatory approval
of any of the Company's products. Delays in receipt of, or failure to receive,
approvals, or the loss of previously received approvals, could have a material
adverse affect on the Company's business, financial condition and results of
operations.
FDA and state regulations also govern the manufacturing of the Company's
medical products. The Company is registered as a medical device manufacturer
with the FDA and state health 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 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.
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<PAGE> 14
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, financial
condition and results of operations. Moreover, there can be no assurance that
the required regulatory clearances will be obtained, or that those obtained may
not include significant limitations on the uses of the product in question. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by the Company more difficult in the future.
The Company believes that the FDA has increased its scrutiny of the medical
device market, thus slowing the regulatory review process for medical devices.
This may affect the Company's proposed sale of certain products. The failure to
obtain the required regulatory clearances or to comply with applicable
regulations would result in fines, delays or suspensions of clearances, seizures
or recalls of products, operating restrictions and criminal prosecutions and
could have a material adverse effect on the Company.
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.
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, financial
condition and results of operations 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.
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<PAGE> 15
EMPLOYEES
As of May 31, 1997, the Company employed approximately 936 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.
CORPORATE EXECUTIVE OFFICERS
The following table sets forth the names and ages of executive officers of
the Company as of June 30, 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 51 Chairman of the Board and Chief Executive
Officer
James L. Johnson 48 Executive Vice President and Chief Financial
Officer
Bruce A. Hazuka 50 Executive Vice President and 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
</TABLE>
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 United States, which was formed by the merger of Curaflex
Health Services, Inc., HealthInfusion, Inc., Medisys, Inc., and T2 Medical, Inc.
Mr. Laverty served as the Chairman of the Board, President and Chief Executive
Officer of Curaflex Health Services from February 1989 to July 1994. Prior to
his association with Curaflex, Mr. Laverty served as President and Chief
Executive Officer of InfusionCare, Inc., a home infusion services company, from
October 1988 to February 1989. In addition, he has held several positions,
including Chief Operating Officer, with Foster Medical Corporation, a durable
medical equipment supply company, and worked in both sales and management for
C.R. Bard, a medical device company.
JAMES L. JOHNSON has served as Executive Vice President and Chief Financial
Officer of the Company since September 1995. Prior to that time, Mr. Johnson was
a partner at Ernst & Young LLP. His responsibilities included a regional role as
the Area Managing Director for the Healthcare Industry. Prior to joining Ernst &
Young LLP, Mr. Johnson was a partner of Arthur Andersen LLP. During his 22 years
in public accounting, Mr. Johnson had served as an advisor, strategist and
coordinating partner for many of the firm's most prestigious healthcare clients.
Mr. Johnson is a certified public accountant.
BRUCE A. HAZUKA has served as Executive Vice President -- Operations since
September 1995 and became Chief Operating Officer in March 1997. Mr. Hazuka has
spent his entire 27 years of general management, marketing and operations
experience in the healthcare field, and was founder, President and Chief
Executive Officer of Healthcare Associates, Inc. which was founded in January
1990. Prior to joining the Company, Mr. Hazuka served as Chairman of the Board,
President and Chief Executive Officer of Allscrips Pharmaceuticals, Inc., a
pharmaceutical benefits management company, from September 1990 to June 1994.
Mr. Hazuka is a director of Integrated Medical Resources, Inc., 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
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<PAGE> 16
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 the Company.
RICHARD KINDBERG has served as President -- Surgical Products since July
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. 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 & Johnson
Interventional Systems as Vice President of Product Management.
ITEM 2. PROPERTIES
The following table summarized the leased and owned facilities of the
Company:
<TABLE>
<CAPTION>
SQUARE
FACILITY LOCATION PRIMARY USES 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; Administration 43,500 owned
Augusta, GA Sale Offices; Administration; 31,656 leased
Augusta, GA Warehouse 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
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<PAGE> 17
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 surgical product operations.
The Company leases approximately 31,656 square feet of office and warehouse
space in Augusta, Georgia. 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 and warehouse space in three other
buildings in Augusta, Georgia. These facilities relate to urology operations.
The Company leases 15,700 square feet of space at a plant location in
Watertown, South Dakota. The lease runs from August 1, 1995 through July 31,
2000 and provides for rental payments of $2,171 per month. The lease requires
the Company to pay for utilities and other costs not specifically borne by the
landlord. The Company also leases 1,115 square feet of office space in
Minnetonka, Minnesota. The lease runs from April 1, 1993 through March 31, 1998
and provides for rental payments of $1,218 per month. These leases relate to
medical/surgical product operations.
The Company leases approximately 7,000 square feet of office and warehouse
space in Sparta, New Jersey. The lease runs from August 1996 through March 2000,
and provides for rental payments of $8,500 per month.
ITEM 3. LEGAL PROCEEDINGS
In July 1997, two 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the last
quarter of the fiscal year covered by this report.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "UROH". Prior to November 26, 1996, the Company's Common Stock was
traded on the American Stock Exchange. The following table sets forth the high
and low sales prices per share for the periods indicated. The information in the
table has been adjusted to give effect to the one-for-three reverse stock split
that was effective December 29, 1995.
<TABLE>
<S> <C> <C>
FISCAL 1996:
First quarter..................................................... $13 7/8 $ 9
Second quarter.................................................... $ 9 3/8 $ 6 /16
Third quarter..................................................... $13 1/8 $ 8 1/8
FISCAL 1997:
First quarter..................................................... $16 $11 3/4
Second quarter.................................................... $15 1/4 $ 9 1/2
Third quarter..................................................... $13 1/4 $ 7 1/4
Fourth quarter.................................................... $11 7/8 $ 7 1/4
FISCAL 1998:
First quarter..................................................... $10 1/4 $ 4 3/4
</TABLE>
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain earnings, if any, to finance the anticipated growth of
its business. In addition, Urohealth is restricted from paying cash dividends
under the terms of the outstanding indebtedness.
As of June 30, 1997, there were 1,212 record holders of the Company's
outstanding Common Stock.
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<PAGE> 19
ITEM 6. SELECTED 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 also includes statement of operations and balance sheet data for
Richard-Allan, which has been accounted for as a purchase, from August 14, 1996.
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 in this report. 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. 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 and for the
12-months ended March 31, 1996 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 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 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>
NINE MONTHS ENDED 12-MONTHS
YEAR ENDED JUNE 30, MARCH 31,(1) ENDED YEAR ENDED
-------------------------------- -------------------- MARCH 31, MARCH 31,
1993 1994 1995 1995 1996 1996 1997
-------- -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <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
Gross profit............................ 20,008 24,341 30,721 22,026 27,989 36,793 49,612
Selling, general and administrative..... 26,298 36,114 41,057 28,839 37,056 47,977 57,691
Research and development................ 6,332 11,480 5,406 4,752 2,777 3,881 4,997
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)
Interest expense........................ 325 406 367 254 1,059 1,165 8,143
Loss before extraordinary item.......... (13,441) (24,804) (24,837) (19,299) (23,024) (27,527) (83,510)
Extraordinary item...................... -- -- -- -- -- -- (2,973)
-------- -------- -------- -------- -------- -------- --------
Net loss................................ $(13,441) $(24,804) $(24,837) $ 19,299 $(23,024) $(27,527) $(86,483)
Loss per share before extraordinary
item.................................. $ (1.04) $ (1.90) $ (1.70) $ (1.39) $ (1.58) $ (1.85) $ (4.31)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- -----------------------
1993 1994 1995 1996 1997
------- ------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.......................................... $10,161 $ 7,065 $ 2,857 $ 3,345 $ 2,591
Working capital (deficit)..................................... $17,307 $12,784 $ 5,909 $(3,330) $ 1,714
Total assets.................................................. $32,954 $31,473 $31,082 $33,355 $137,159
Notes payable, bank term loan, capital leases and line of
credit...................................................... $ 3,043 $ 3,554 $ 4,258 $16,091 $ 60,870
Convertible subordinated notes................................ $ -- $ -- $ -- $ 2,276 $ 5,268
Convertible subordinated debentures........................... $ -- $ -- $ 1,077 $ -- $ 50,000
Long-term liabilities, minority interest, and redeemable
convertible preferred stock................................. $ 55 $ 2,101 $ 2,742 $ 5,635 $ 5,208
Common stockholders' equity (deficiency)...................... $23,825 $19,537 $12,941 $(4,575) $(14,511)
</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.
17
<PAGE> 20
ITEM 7. 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.
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.
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/
18
<PAGE> 21
surgical products represented 59.3%, 30.3% and 10.4%, respectively, of net sales
for the year ended March 31, 1997.
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.
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 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
19
<PAGE> 22
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 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.
20
<PAGE> 23
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. As
of March 31, 1997, Urohealth had working capital of approximately $42 million,
adjusted for the sale of the Notes.
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 upon achievement of a patent approval milestone,
the likelihood and timing of which cannot be
21
<PAGE> 24
predicted with certainty at this time. However, it is reasonably possible that
such milestone payment could become payable in fiscal 1998.
Approximately $6.2 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
and the year ended March 31, 1997 of $3.0 million and $12.3 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 March 31, 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 increased by
approximately $9.2 million during the year ended March 31, 1997 primarily due to
the acquisition of Richard-Allan accounts receivable which were not included in
the prior fiscal year. 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 increased by approximately $21 million during the year ended March 31,
1997 due to new product introductions, the acquisition of Richard-Allan and 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.
During this period, Urohealth's operations have been funded primarily from the
proceeds of debt and equity offerings, including the sale of $50 million of
convertible subordinated debentures and the sale of 2,684,000 shares of the
Urohealth's Common Stock.
Urohealth believes that the net proceeds from the 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.
FACTORS AFFECTING FUTURE OPERATING PERFORMANCE
Significant Leverage. Urohealth has substantial indebtedness and
significant debt service obligations. At March 31, 1997, on a pro forma basis
(to reflect the private placement in April 1997 by Urohealth of $110 million of
its 12 1/2% Senior Subordinated Notes (the "Notes") (the "Note Offering"),
Urohealth would have had approximately $171.9 million of indebtedness
outstanding, approximately $192.8 million of total assets, approximately $143.1
million of total tangible assets and approximately $(14.6) million of
stockholders' equity.
22
<PAGE> 25
Urohealth'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 its existing credit facility (the "Credit Facility") or
successor credit facilities. Urohealth 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. Urohealth 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, Urohealth must experience substantial
growth and improvements in its results of operations. There can be no assurance
that Urohealth will have positive cash flow from operations in the future. If
Urohealth 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 Credit Facility, the indenture relating to the Notes (the
"Note Indenture"), or other debt instruments. In the absence of such financing,
Urohealth's ability to respond to changing business and economic conditions, to
make future acquisitions, to absorb adverse operating results or to fund capital
expenditures or research and development may be adversely affected. Finally, it
is anticipated that in order to pay the principal balance of the Notes due at
maturity, Urohealth will have to obtain alternative financing.
Urohealth's high degree of leverage could have important consequences
including, without limitation, the following: (i) a substantial portion of
Urohealth's net cash provided by operations will be committed to the payment of
Urohealth's interest expense and principal repayment obligations and will not be
available to Urohealth for its operations, capital expenditures, acquisitions or
other purposes; (ii) Urohealth's ability to obtain additional financing in the
future for working capital, capital expenditures or acquisitions may be limited;
(iii) Urohealth will be more highly leveraged than certain of its competitors,
which may place it at a disadvantage and limit Urohealth's flexibility in
reacting to changes in its business; and (iv) Urohealth's borrowings under the
Credit Facility bear interest at variable rates, which could result in higher
interest expense if interest rates rise.
Operating Losses; No Assurance of Profitability; Liquidity. Urohealth
reported net losses for its fiscal year ended June 30, 1995, for the nine months
ended March 31, 1996 and the year ended March 31, 1997 of $24.8 million, $23.0
million and $86.5 million, respectively. There can be no assurance that
Urohealth will be profitable in any future period. The net cash used in
operating activities by Urohealth 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. 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 future capital
requirements of the Company will depend upon many factors, including the success
of its sales and marketing efforts, new product development, and future
acquisitions of companies and products. The Company believes that the net
proceeds from the Note Offering, together with borrowings under the Credit
Facility and funds expected to be generated from operations will be adequate to
fund 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
Urohealth on acceptable terms, if at all. In addition, other than certain
permitted indebtedness (under the Note Indenture), including indebtedness under
the Credit Facility, Urohealth will need improvement in results of operations in
order to incur additional indebtedness under the terms of the Note 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 Urohealth's business, results of operations or
financial condition.
Limitations Imposed by Certain Indebtedness. The documents governing the
indebtedness of Urohealth (including the Note Indenture and the Credit Facility)
contain significant covenants that limit Urohealth's and its subsidiaries'
ability to engage in various transactions and, in the case of the Credit
Facility, require satisfaction of specified financial performance criteria. In
addition, under each of the foregoing documents, the occurrence of certain
events (including, without limitation, failure to comply with the foregoing
covenants,
24
<PAGE> 26
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 Urohealth and its subsidiaries are substantial, and failure to comply with
them could have a material adverse effect on Urohealth and its subsidiaries.
Future Operating Results Dependent on Products. The future operating
results of the Company will be dependent upon its ability to increase sales of
existing medical products and the continued acceptance of such products by the
medical community and third-party payors as useful and cost-effective.
Historically, Urohealth has been highly dependent on the sale of vacuum erection
devices for the treatment of male impotence. 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 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 future operating results
of the Company will also be dependent, therefore, upon its 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 products of the Company, 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
Urohealth's products to continue to be accepted by the medical community or the
inability to develop new products could have a material adverse effect on the
Company. Substantially all of Urohealth's medical product sales are derived from
medical products of companies that Urohealth has acquired. As Urohealth has
acquired businesses and technologies, it has acquired a number of related
products under development which will require additional research and
development efforts by Urohealth in an attempt to bring such products to market.
While members of management of Urohealth have experience in developing products
internally, Urohealth has not historically developed a significant number of
medical products internally. There can be no assurance that Urohealth'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 Urohealth'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 March 31, 1997, Urohealth had a total of $4.3 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, Executive Vice President -- 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
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<PAGE> 27
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
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. Urohealth'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, Urohealth
expects to add administrative and other personnel and manufacturing capacity,
and make additional investments in operations and systems. There can be no
assurance that Urohealth will be able to find and train such personnel, or to do
so on a timely basis, or to 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 Urohealth carefully to manage production capacity and inventory levels,
as well as quality controls, to meet increasing product demand and new product
introductions. Urohealth 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 Urohealth's business, operating results or
financial condition.
Integration of Acquired Operations. Urohealth recently acquired X-Cardia
and Microsurge. Urohealth currently intends to integrate the operations of those
acquired entities with its own operations. No assurance can be given that the
benefits expected from such integration will be realized. In addition, Urohealth
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 Urohealth's strategy. Any delays or
unexpected costs incurred in connection with such integration could have a
material adverse effect on Urohealth's business, operating results or financial
condition.
Future Acquisitions. An important element of Urohealth's strategy is to
identify and acquire businesses and product lines. Urohealth 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, Urohealth has acquired a number of medical product companies and product
lines and has acquired or licensed additional technology. As a result of those
acquisitions, Urohealth has experienced rapid growth. Urohealth expects to
continue to acquire additional products and companies in the future. There can
be no assurance that Urohealth will be able to implement or
25
<PAGE> 28
sustain its acquisition strategy or that its strategy will ultimately prove
profitable to Urohealth. Urohealth 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 Note
Indenture and the terms of other indebtedness may restrict Urohealth's ability
to pursue and consummate future acquisitions.
Reliance on Patents and Proprietary Rights. The commercial success and
future revenue growth of Urohealth 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 its
products. Urohealth owns or has authority to use United States and foreign
patent rights with respect to some of its medical products and have filed, and
expects in the future to file, additional patent applications. It is uncertain
whether any third party patents will require Urohealth 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 Urohealth will be able to obtain such licenses on commercially favorable
terms, if at all. Failure by Urohealth to obtain a license to any technology
that it may require to commercialize its products could have a material adverse
effect on the Company. Urohealth recently acquired X-Cardia which has filed
patent applications with respect to its cardiac output monitoring technology.
There can be no assurance as to the breadth or degree of the protection that may
be afforded by any such patents, or whether any such applications ultimately may
be approved resulting in the issuance of patents. Urohealth 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 Urohealth 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 Urohealth will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
it with competitive advantages. In addition, Urohealth 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 Urohealth believes that its patents are valid, there can be no
assurance that the validity of any patent will be upheld if asserted by
Urohealth against any party. Further, there can be no assurances as to the
breadth and degree of protection that will be afforded Urohealth's patent rights
or that other companies will not independently develop similar but
non-infringing competitive products. Moreover, the laws of some foreign
countries may not protect Urohealth'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 the patent and proprietary rights of 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 Urohealth to do business in the future. Urohealth 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
Urohealth'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
Urohealth, if at all. If Urohealth 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 Urohealth 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 Urohealth.
Furthermore, there can be no assurance that competitors or potential competitors
will not independently develop similar or alternative products to those of
Urohealth, duplicate any of Urohealth's products or technologies, or design
around the patented technologies developed by Urohealth or its licensors, any of
which could have a material adverse effect on Urohealth's business, results of
operations or financial condition.
Urohealth 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 Urohealth. It is Urohealth'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 Urohealth
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<PAGE> 29
would have adequate remedy for such breach, or that Urohealth's trade secrets
will not otherwise become known through independent discovery by competitors.
Moreover, in the absence of patent protection, Urohealth's business may be
adversely affected by competitors who independently develop substantially
equivalent technology.
Regulatory Matters. Most of Urohealth's medical products are subject to
regulation for safety and efficacy by, among other governmental entities, the
United States Food and Drug Administration ("FDA") and corresponding agencies of
state and foreign countries in which Urohealth sell 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 Urohealth. 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 Urohealth 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
Urohealth 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. Urohealth and Imagyn incur 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 Urohealth'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.
Urohealth 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 Urohealth's
determination regarding its 510(k)s. If the FDA were to disallow a 510(k)
marketing clearance for any device, Urohealth 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, Urohealth's business,
results of operations and financial condition could be materially and adversely
affected. There can be no assurance that Urohealth 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. The markets in which Urohealth operates are very competitive
and are characterized by rapidly evolving technology and product obsolescence.
Urohealth 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 Urohealth
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 Urohealth.
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
Urohealth or the
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<PAGE> 30
combined companies. There can be no assurances that technological change will
not place one or more of Urohealth'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
Urohealth's business, results of operations or financial condition. There can be
no assurance that Urohealth will be able to compete successfully in the future.
Dependence on Management. The success of Urohealth will depend on its
ability to attract and retain highly qualified personnel. In particular, the
loss of Charles A. Laverty, Urohealth's Chief Executive Officer, could have a
material adverse effect on Urohealth's business if a suitable replacement could
not be found. Urohealth has an employment agreement with Mr. Laverty that
provides for a three-year term expiring on April 1, 1999. The agreement
automatically renews for additional three-year terms if not terminated by either
party by prior notice. Urohealth has "key person" insurance 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 Urohealth for his absence.
There can be no assurance that Urohealth will be successful in attracting or
retaining key personnel.
Products Liability Exposure. The medical products manufactured by Urohealth
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 Urohealth enter the market, the Company will be subject to an
increased risk of products liability claims. While Urohealth 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,
regardless of whether such claims are covered by insurance, could have a
material adverse effect on Urohealth's business, results of operations or
financial condition.
Potential Tax Liability. In connection with the redomestication of
Urohealth from Canada to the State of Delaware in July 1995, Urohealth has filed
a final Canadian tax return reporting the "deemed sale" of assets of Davstar
Industries Ltd. (the Canadian parent company). Urohealth 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 Urohealth's Canadian loss carryforwards. However, the Canadian
tax authorities could attempt to assign a greater value to Urohealth than used
in Urohealth'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
of Urohealth.
Limitation on Use of Tax Net Operating Loss Carryovers. As of March 31,
1997, Urohealth 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 Urohealth, 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 Medical Systems Ltd. in
December 1995, an ownership change occurred for purposes of Section 382 of the
Code, thereby subjecting Urohealth 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.
Warrants and Options; Potential Dilution and Adverse Impact on Additional
Financing. Urohealth has a significant number of outstanding options and
warrants. In addition, in May and July 1996, Urohealth issued
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<PAGE> 31
$50.0 million of Urohealth's 8.75% Convertible Subordinated Debentures due 2006
(the "Debentures") which are convertible into Urohealth Common Stock at a
conversion price, subject to adjustment, of $10.90 per share. The holders of the
Debentures would be entitled to receive 4,587,156 shares of Common Stock if such
holders elected to convert all of the Debentures into Common Stock. To the
extent that the outstanding options and warrants are exercised, or convertible
securities are converted, dilution of the interests of Urohealth's stockholders
may occur. The existence of such warrants, options and convertible securities
may adversely affect the terms on which Urohealth can obtain additional
financing, and the holders of such warrants, options and convertible securities
can be expected to exercise them at a time when Urohealth would, in all
likelihood, be able to obtain additional capital by an offering of its unissued
capital stock on terms more favorable to Urohealth than those provided by such
warrants, options and convertible securities.
Rights Agreements; Anti-takeover Effects. Urohealth has adopted a
Preferred Share Purchase Rights Plan, pursuant to a Rights Agreement dated as of
May 20, 1993 (the "Rights Agreement"). The Rights Agreement provides for the
type of plan commonly called a "poison pill." The Rights Agreement is intended
to prevent abusive hostile takeover attempts. However, the Rights Agreement
could have the effect of deterring or preventing an acquisition of Urohealth
even if a majority of Urohealth's stockholders would be in favor of such
acquisition, and could also have the effect of making it more difficult for a
person or group to gain control of Urohealth or to change existing management.
Volatility of Stock Price. The market price of Urohealth's Common Stock is
subject to significant fluctuations in response to variations in quarterly
operating results, general trends in the market for healthcare products, and
other factors. In addition, broad market fluctuations as well as general
economic or political conditions such as healthcare reform may adversely affect
the market price of the Urohealth Common Stock, regardless of Urohealth's actual
operating performance. The market price of Urohealth's Common Stock has
historically been very volatile.
Absence of Dividends. Urohealth has never paid any cash dividends and does
not anticipate paying cash dividends in the foreseeable future. In addition,
Urohealth is restricted in its ability to pay dividends under outstanding credit
facilities.
Forward-Looking Statements. Certain statements contained, or incorporated
by reference, herein, 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 Urohealth 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 Urohealth; 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
Urohealth; the availability and terms of capital to fund the expansion of
Urohealth's business; and other factors referenced herein. Given these
uncertainties, Urohealth stockholders are cautioned not to place undue reliance
on such forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth herein. Such information
is listed under Item 14 of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's independent accountants during
the Company's two most recent fiscal periods.
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<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth under the
caption "Election of Directors" and "Executive Compensation and Other
Information -- Compliance with Section 16(a) of the Exchange Act" in the
Company's definitive Proxy Statement to be filed in connection with its 1997
Annual Meeting of Stockholders and is incorporated herein by reference. A list
of executive officers of the Company is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation and Other Information" and "Election of
Directors -- Compensation of Directors" in the Company's definitive Proxy
Statement to be filed in connection with its 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Principal Urohealth Stockholders" in the Company's definitive Proxy Statement
to be filed in connection with its 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Executive Compensation and Other Information -- Certain Relationships and
Related Transactions and Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Stockholders and is incorporated
herein by reference.
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<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following consolidated financial statements of the Company are included
herein:
<TABLE>
<CAPTION>
PAGE OR
METHOD
OF FILING
---------
<S> <C> <C>
(a)(1) Consolidated Financial Statements
(1) Report of Independent Auditors -- Ernst & Young LLP................ F-2
(2) Report of Coopers & Lybrand L.L.P. ................................ F-3
(3) Independent Auditors' Reports of KPMG Peat Marwick LLP............. F-4
(4) Consolidated Balance Sheets at March 31, 1996 and 1997............. F-5
(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
(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
(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
(8) Notes to Consolidated Financial Statements......................... F-9
(2) Financial Statement Schedules
Report of Independent Auditors.......................................... S-1
Schedule II -- Consolidated Valuation Accounts.......................... S-2
All other financial statement schedules have been omitted because they are
inapplicable or the information required thereby is included in the financial
statements.
(3) Exhibits
Reference is made to the Exhibit Index immediately preceding the
exhibits hereto for the exhibits included herein.
(b) Reports on Form 8-K.
</TABLE>
The following Form 8-K was filed by the Company during the last quarter of the
fiscal year ended March 31, 1997: Form 8-K, dated March 14, 1997 (Commission
file no. 1-11150)
31
<PAGE> 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UROHEALTH SYSTEMS, INC.
Independent Auditors Reports.......................................................... 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
</TABLE>
F-1
<PAGE> 35
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 certain wholly-owned subsidiaries, 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> 36
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> 37
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> 38
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 11,027
Goodwill.......................................................... 393 43,417 43,417
-------- --------- ---------
$ 33,355 $ 137,159 $ 192,796
======== ========= =========
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....................................... -- -- 110,000
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 $ 192,796
======== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 39
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 before extraordinary item attributable to common
stockholders....................................... (24,882) (23,603) (83,908)
Extraordinary item.................................... -- -- (2,973)
-------- -------- --------
Net loss attributable to common stockholders.......... $(24,882) $(23,603) $(86,881)
======== ======== ========
Net 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> 40
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> 41
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> 42
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> 43
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> 44
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 allocated to the fair value of the net assets acquired,
including $44.6 million assigned to goodwill 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 effect of these acquisitions is immaterial.
The consolidated results of operations for the fiscal year ended
F-11
<PAGE> 45
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
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 recognized upon the dates of
shipment to customers or, if applicable, acceptance by the customer. With
respect to certain distributor initial stocking orders shipped during fiscal
1997 to new distributors, the Company will recognize revenue on those orders
upon establishment of a sales and payment history by those distributors.
Cash and Equivalents
Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.
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.
F-12
<PAGE> 46
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-13
<PAGE> 47
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 31, MARCH 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 31, MARCH 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>
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.)
F-14
<PAGE> 48
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-15
<PAGE> 49
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
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 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).
F-16
<PAGE> 50
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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), inventory carrying value reductions ($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 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> 60
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
Securities Litigation
In July 1997, two 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> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Newport
Beach, State of California on July 14, 1997.
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty and Kevin M. Higgins, jointly and severally, as
attorneys-in-fact and agents, each acting alone, with full powers of
substitution, to sign on his or her behalf, individually and in the capacities
stated below, and to file any and all amendments, to this report and exhibits
and other documents in connection therewith, with Securities and Exchange
Commission, granting to said attorneys-in-fact and agents full power and
authority to perform any other act on behalf of the undersigned required to be
done in the premises.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
/s/ CHARLES A. LAVERTY Chairman of the Board and July 14, 1997
- --------------------------------------------- Chief Executive Officer
Charles A. Laverty (Principal Executive Officer)
/s/ JOSEPH T. ARTINO Assistant Treasurer (Acting July 14, 1997
- --------------------------------------------- Principal Financial Officer and
Joseph T. Artino Acting Principal Accounting
Officer)
/s/ ABBEY J. BUTLER Director July 14, 1997
- ---------------------------------------------
Abbey J. Butler
/s/ JOHN CHAMBERLIN Director July 14, 1997
- ---------------------------------------------
John Chamberlin
Director , 1997
- ---------------------------------------------
Robert N. Elkins
</TABLE>
II-1
<PAGE> 62
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
/s/ MELVYN J. ESTRIN Director July 14, 1997
- ---------------------------------------------
Melvyn J. Estrin
/s/ C. SAGE GIVENS Director July 14, 1997
- ---------------------------------------------
C. Sage Givens
/s/ LAWRENCE GOELMAN Director July 14, 1997
- ---------------------------------------------
Lawrence Goelman
/s/ MICHAEL S. GROSS Director July 14, 1997
- ---------------------------------------------
Michael S. Gross
/s/ RICHARD R. NEWHAUSER Director July 14, 1997
- ---------------------------------------------
Richard R. Newhauser
/s/ FRANCIS J. TEDESCO Director July 14, 1997
- ---------------------------------------------
Francis J. Tedesco
</TABLE>
II-2
<PAGE> 63
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 elsewhere in this
report). Our audits also included the financial statement schedule listed in
Item 14(a)(2) of this report. 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 certain wholly-owned
subsidiaries, 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> 64
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 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
====== ====== ==== ===== ======
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 June 30, 1995:
Allowance for doubtful accounts........ $ 506 $ 134 $ -- $ (22) $ 618
Reserve for inventory obsolescence..... -- 422 -- (31) 391
------ ------ ---- ----- ------
Total............................. $ 506 $ 556 $ -- $ (53) $1,009
====== ====== ==== ===== ======
</TABLE>
S-2
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated April 19, 1997, among the
Company, Urohealth Acquisition Corporation and Imagyn Medical, Inc.
2.2 Agreement and Plan of Merger, dated March 11, 1997 among Urohealth
Systems, Inc., Urohealth, Inc. (California) and Microsurge, Inc.
Incorporated by reference to Exhibit 2.0 of the Company's Current
Report on Form 8-K dated April 14, 1997.
2.3 Agreement and Plan of Merger, dated February 28, 1997, among
Urohealth Systems, Inc., Urohealth, Inc. (California) and X-Cardia
Corporation. Incorporated by reference to Exhibit 2 of the Company's
Current Report
on Form 8-K dated March 14, 1997.
2.4 Agreement and Plan of Merger, dated July 5, 1996, among Urohealth
Systems, Inc., Urohealth, Inc. (California) and Richard-Allan Medical
Industries, Inc. Incorporated by reference to Exhibit 2.3 of the
Company's Current Report on
Form 8-K dated July 1, 1996.
3.1 Certificate of Incorporation of the Company, as amended. Incorporated
by reference to Exhibit 3.1 of the Company's Form S-3 Registration
Statement No. 333-12723 ("Form S-3 Registration Statement No.
333-12723").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 of
the Company's Annual Report on Form 10-K for the year ended June 30,
1995 (the "1995 Form 10-K").
4.1 Rights Agreement. Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 20, 1993 (the "May 20,
1993
Form 8-K").
4.2 Form of Rights Certificate. Incorporated by reference to Exhibit 4.2
to the May 20, 1993 Form 8-K.
4.3 Form of Certificate for Common Stock of the Company. Incorporated by
reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K
for the transition period ended March 31, 1996 (the "1996 Form
10-K").
4.4 Indenture, dated April 10, 1997, among Urohealth Systems, Inc., the
Guarantors named therein and The Bank of New York, as trustee.
Incorporated by reference to Exhibit 4.1 of the Company's Current
Report on Form 8-K, dated April 28, 1997 (the "April 28, 1997 Form
8-K").
4.5 Registration Rights Agreement, dated April 10, 1997, among Urohealth
Systems, Inc., the Guarantors named therein and the Initial
Purchaser. Incorporated by reference to Exhibit 4.3 of the April 28,
1997 Form 8-K.
4.6 Warrant Agreement, dated April 10, 1997, between Urohealth Systems,
Inc. and The Bank of New York, as warrant agent. Incorporated by
reference to Exhibit 4.4 of the Company's April 28, 1997 Form 8-K.
4.7 Warrant Registration Rights Agreement, dated April 10, 1997, between
Urohealth Systems, Inc. and Bear Stearns & Co., as initial purchaser.
Incorporated by reference to Exhibit 4.5 to the Company's April 28,
1997 Form 8-K.
4.8 Indenture, dated May 13, 1996, between Urohealth Systems, Inc. and
Bankers Trust Company, as trustee. Incorporated by reference to
Exhibit 10.55 of the Company's 1996 Form 10-K.
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
<C> <S> <C>
4.9 Debenture Registration Rights Agreement, dated May 13, 1996, between
Urohealth Systems, Inc. and the Investors identified therein.
Incorporated by reference to Exhibit 10.56 of the Company's 1996 Form
10-K.
4.10 Warrant Agreement, dated May 13, 1996, between Urohealth Systems,
Inc. and Bankers Trust Company, as warrant agent. Incorporated by
reference to Exhibit 10.57 of the Company's 1996 Form 10-K.
10.1 Amended and Restated Credit Agreement, dated April 10, 1997, between
Urohealth Systems, Inc. and Banque Indosuez, as agent for the banks
named therein. Incorporated by reference to Exhibit 10.1 of the
Company's April 28, 1997 Form 8-K.
10.2 Purchase Agreement, dated April 3, 1997, between Urohealth Systems,
Inc. and Bear, Stearns & Co., as initial purchaser of the Company's
12 1/2% Senior Subordinated Notes due 2004. Incorporated by reference
to Exhibit 4.2 of the Company's April 28, 1997 Form 8-K.
10.3 Securities Purchase Agreement, dated May 3, 1996, among Urohealth
Systems, Inc. and the Investors identified therein, relating to the
sale of the Company's 8.75% Convertible Subordinated Debentures due
2006. Incorporated by reference to Exhibit 10.52 of the Company's
1996 Form 10-K.
10.4 Registration Rights Agreement, dated May 13, 1996, among Urohealth
Systems, Inc. and the stockholders identified therein. Incorporated
by reference to Exhibit 10.53 of the Company's 1996 Form 10-K.
10.5 Conversion Agreement, dated May 10, 1996, between Urohealth Systems,
Inc. and FoxMeyer Corporation. Incorporated by reference to Exhibit
10.49 of the Company's 1996 Form 10-K.
10.6 Warrant to Purchase Common Stock of Urohealth Systems, Inc. issued to
FoxMeyer Corporation entitling the holder to purchase 800,000 shares
of Common Stock of the Company at $6.875 per share. Incorporated by
reference to Exhibit 10.50 of the Company's 1996 Form 10-K.
10.7 Warrant to Purchase Common Stock of Urohealth Systems, Inc. issued to
FoxMeyer Corporation entitling the holder to purchase 250,000 shares
of Common Stock of the Company at $10.00 per share. Incorporated by
reference to Exhibit 10.51 of the Company's 1996 Form 10-K.
10.8 Warrant issued to Banque Indosuez, New York Branch, on November 12,
1995, to purchase 366,667 shares of Common Stock of the Company at an
exercise price of $9.15 per share, subject to adjustment, expiring
November 22, 2000. Incorporated by reference to Exhibit 10.16 of the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1995.
10.9 Warrant issued to Silicon Valley Bank on October 19, 1995 to purchase
50,000 shares of Common Stock of the Company at an exercise price of
$10.50 per share. Incorporated by reference to Exhibit 10.29 of the
Company's Registration Statement on Form S-4 (No. 33-99976).
10.10 Warrant issued to Silicon Valley Bank on April 25, 1995 to purchase
16,667 shares of Common Stock of the Company at an exercise price of
$6.00 per share. Incorporated by reference to Exhibit 10.7 of the
Company's Quarterly Report on Form 10-Q for the period ended March
31, 1995.
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
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10.11 Registration Rights Agreement, dated October 19, 1995, between
Urohealth Systems, Inc. and Silicon Valley Bank. Incorporated by
reference to Exhibit 10.30 of the Company's Registration Statement on
Form S-4 (No. 33-99976).
10.12 Antidilution Agreement, dated October 19, 1995, between Urohealth
Systems, Inc. and Silicon Valley Bank. Incorporated by reference to
Exhibit 10.31 of the Company's Registration Statement on Form S-4
(No. 33-99976).
10.13 Promissory Note, dated November 27, 1996, from Charles A. Laverty in
favor of Urohealth Systems, Inc.
10.14 Commercial Lease, dated February 1, 1995, between Urohealth Systems,
Inc. and Osbon Partnership relating to urology division operations in
Augusta, Georgia. Incorporated by reference to Exhibit 10.12 of the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1995.
10.15 Office Space Lease, dated January 27, 1996, between Urohealth
Systems, Inc. and The Irvine Company with respect to the corporate
offices of the Company in Newport Beach, California. Incorporated by
reference to Exhibit 10.58 of the Company's 1996 Form 10-K.
10.16 First Amendment to Lease, dated April 25, 1997, between Urohealth
Systems, Inc. and The Irvine Company.
10.17 Standard Industrial/Commercial Single Tenant Lease, dated December 6,
1993 between a wholly-owned subsidiary of the Company and
Redhill-Fischer Business Park relating to Costa Mesa manufacturing
facility. Incorporated by reference to Exhibit 19 of the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1993.
10.18 Urohealth 1994 Stock Incentive Plan, as amended through August 9,
1996.*
10.19 1996 Directors' Stock Incentive Plan*
10.20 Non-Employee Directors Stock Option Plan, as amended on December 29,
1995.* Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1995.
10.21 1992 Employee Stock Option Plan. * Incorporated by reference to
Exhibit 4 of the Company's Registration Statement on Form S-8 (No.
33-59916).
10.22 1992 Stock Plan of Advanced Surgical, Inc.* Incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1995.
10.23 Amended and Restated Employment Agreement, dated April 1, 1996,
between Urohealth Systems, Inc. and Charles A. Laverty.* Incorporated
by reference to Exhibit 10.7 of the Company's 1996 Form 10-K.
10.24 Employment Agreement, dated November 30, 1995, between Urohealth
Systems, Inc. and M. Cassandra Hoag.* Incorporated by reference to
Exhibit 10.8 of the Company's 1996 Form 10-K.
10.25 Employment Agreement, effective as of September 6, 1995, between
Urohealth Systems, Inc. and James L. Johnson.* Incorporated by
reference to Exhibit 10.8 of the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1995.
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10.26 Employment Agreement, effective as of November 30, 1995, between
Urohealth Systems, Inc. and Bruce A. Hazuka.* Incorporated by
reference to Exhibit 10.9 of the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1995.
10.27 Employment Agreement, effective as of November 30, 1995, between
Urohealth Systems, Inc. and Kevin M. Higgins.* Incorporated by
reference to Exhibit 10.10 of the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1995.
10.28 Employment Agreement, dated August 14, 1996, between Urohealth
Systems, Inc. and Richard Kindberg.*
10.29 Employment Agreement, dated January 2, 1996, between Urohealth
Systems, Inc. and Michael Schuler.*
10.30 Employment Agreement, dated September 29, 1995, between Urohealth
Systems, Inc. and Paul E. Petersen, Jr.*
10.31 Employment Agreement, dated August 14, 1996, between Urohealth
Systems, Inc. and Richard Newhauser.
10.32 Consulting Agreement, dated August 14, 1996, between Urohealth
Systems, Inc. and Richard Newhauser.
10.33 Purchase Money Secured Promissory Note, dated August 15, 1996, of
Urohealth Systems, Inc., as amended, in favor of Newhauser
Associates.
10.34 Employment Agreement, dated July 27, 1995 between Urohealth Systems,
Inc. and Gerald W. Timm.
10.35 Promissory Note, dated April 2, 1997, between Charles A. Laverty and
Urohealth Systems, Inc.
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney (included on signature pages)
27.1 Financial Data Schedule
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* Management or compensatory plan
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 19, 1997 by
and among Urohealth Systems, Inc., a Delaware corporation ("UROHEALTH"),
Urohealth Acquisition Corporation, a Delaware corporation and wholly owned
subsidiary of Urohealth ("UROHEALTH SUB"), and Imagyn Medical, Inc., a Delaware
corporation ("IMAGYN"). The parties hereto are sometimes hereinafter referred
to collectively as the "Companies" or the "Constituent Corporations," or
individually as a "Company" or a "Constituent Corporation."
WHEREAS, the respective Boards of Directors of the Companies
deem it advisable and in the best interests of their respective stockholders
that Imagyn be acquired by Urohealth, and, in furtherance thereof, the Boards
of Directors of the Constituent Corporations have approved, as applicable, the
merger of Urohealth Sub with and into Imagyn, upon the terms and subject to the
conditions set forth herein (the "MERGER"); and
WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "CODE") and be
treated as a pooling of interests under Accounting Principles Board Opinion No.
16 ("APB Opinion No. 16");
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of
this Agreement, at the Effective Time (as defined in Section 1.2 hereof) of the
Merger, Urohealth Sub shall be merged with and into Imagyn, with Imagyn being
the surviving corporation in the Merger (the "SURVIVING CORPORATION") and the
separate existence of Urohealth Sub shall thereupon cease. The Merger shall
have the effects set forth in Section 259 of the Delaware General Corporation
Law (the "DGCL"). From and after the Effective Time of the Merger, the
Surviving Corporation shall be a wholly owned subsidiary of Urohealth.
1.2 Effective Time of the Merger. The Merger shall
become effective upon the completion of the filing of a properly executed
Certificate of Merger with the Secretary of State of the State of Delaware with
respect to the Merger of Imagyn and Urohealth Sub, which filing shall be made
on the Closing Date after satisfaction of the conditions set forth in Article
VII. When used in this Agreement, the term "EFFECTIVE TIME" with respect to
the Merger shall mean the date and time at which the Certificate of Merger is
successfully filed.
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ARTICLE II
UROHEALTH AND THE SURVIVING CORPORATION
2.1 Certificate of Incorporation of the Surviving
Corporation. The Certificate of Incorporation of Urohealth Sub shall be the
Certificate of Incorporation of the Surviving Corporation with the name of
Urohealth Sub therein changed to Imagyn.
2.2 Bylaws of the Surviving Corporation. The Bylaws of
Urohealth Sub as in effect at the Effective Time shall be the Bylaws of the
Surviving Corporation of the Merger until thereafter amended in accordance with
applicable law.
2.3 Directors and Officers of the Surviving Corporation.
(a) The directors of Urohealth Sub at the
Effective Time shall be the initial directors of the Surviving Corporation of
the Merger and shall hold office from the Effective Time until their respective
successors are duly elected or appointed and qualified in the manner provided
in the Certificate of Incorporation and Bylaws of the Surviving Corporation, or
as otherwise provided by law.
(b) The officers of Urohealth Sub at the
Effective Time shall be the initial officers of the Surviving Corporation of
the Merger and shall hold office from the Effective Time successors are duly
elected or appointed and qualified in the manner provided in the Certificate of
Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided
by law.
ARTICLE III
CONVERSION OF SHARES
3.1 Exchange Ratio. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder thereof:
(a) Subject to Section 3.5 hereof, each share of
common stock, par value $.001 per share, of Imagyn (an "IMAGYN SHARE") issued
and outstanding immediately prior to the Effective Time (other than the
Excluded Shares as defined in Section 3.7 below and Imagyn Shares held by
Urohealth or any subsidiary of Urohealth, if any), shall be converted at the
Effective Time into the right to receive 1.0358 shares (the "EXCHANGE RATIO")
of common stock, par value $.001 per share, of Urohealth together with the
corresponding preferred share purchase rights associated with such shares of
Urohealth common stock as defined in the Urohealth Rights Agreement ("UROHEALTH
SHARES"). All references herein to Urohealth Shares or Urohealth Common Stock,
including the Urohealth Shares issuable in the Merger, shall be deemed to
include the associated preferred share purchase rights except where the context
otherwise clearly requires.
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(b) At the Effective Time, all Imagyn Shares
(other than the Excluded Shares) shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any Imagyn Shares shall thereafter
represent the right to receive (i) the number of whole Urohealth Shares and
(ii) cash in lieu of fractional shares, into which such Imagyn Shares have been
converted. Certificates representing Imagyn Shares shall be exchanged for (i)
certificates representing whole Urohealth Shares and (ii) cash in lieu of
fractional shares issued in consideration therefor upon the surrender of such
certificate in accordance with the provisions hereof. If prior to the
Effective Time, Urohealth or Imagyn should split or combine the Imagyn Shares
or the Urohealth Shares, or pay a stock dividend or other stock distribution in
Urohealth Shares or Imagyn Shares, then the Exchange Ratio will be
appropriately adjusted to reflect such split, combination, dividend or other
distribution.
(c) Each Imagyn Share held in the treasury of
Imagyn (or a subsidiary of Imagyn) and each such Imagyn Share held by Urohealth
or any subsidiary of Urohealth immediately prior to the Effective Time shall be
canceled and retired and cease to exist, and no Urohealth Shares shall be
issued in exchange therefor. All Urohealth Shares owned by Imagyn or any
subsidiary shall become treasury stock of Urohealth.
(d) Each share of Common Stock of Urohealth Sub
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into and exchangeable for one share of common stock of the Surviving
Corporation of the Merger.
3.2 Exchange of Shares.
(a) Prior to the Effective Time, Urohealth shall
select and enter into an agreement with a bank or trust company to act as
Exchange Agent hereunder (the "EXCHANGE AGENT"). No later than the Effective
Time, Urohealth shall make available, and each holder of Imagyn Shares (other
than Excluded Shares) will be entitled to receive, upon surrender to the
Exchange Agent of one or more certificates representing such Imagyn Shares for
cancellation, certificates representing the number of Urohealth Shares into
which such Imagyn Shares are converted in the Merger. The Urohealth Shares
into which the Imagyn Shares shall be converted in the Merger shall be deemed
to have been issued at the Effective Time.
(b) As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Imagyn Shares (the "CERTIFICATES") whose Imagyn Shares
were converted into Urohealth Shares pursuant to Section 3.1, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the
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<PAGE> 4
Exchange Agent and shall be in such form and have such other provisions as
Urohealth and Imagyn may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing Urohealth Shares. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole Urohealth
Shares which such holder has the right to receive in respect of the
Certificates surrendered pursuant to the provisions of this Article III.
(c) In the event that any stock certificate
representing Imagyn Shares shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such certificate to
be lost, stolen or destroyed, Urohealth will issue or cause to be issued in
exchange for such lost, stolen or destroyed certificate the number of Urohealth
Shares into which such shares are converted in the Merger in accordance with
this Article III. When authorizing such issuance in exchange therefor, the
Board of Directors of Urohealth may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate to give Urohealth a bond in such sum as it may direct as
indemnity, or such other form of indemnity, as it shall direct, against any
claim that may be made against Urohealth with respect to the certificate
alleged to have been lost, stolen or destroyed.
3.3 Stock Options, Warrants, Debentures and Other
Agreements. As of the Effective Time, any stock options, warrants, convertible
securities or other contractual commitments to purchase or issue Imagyn Shares
that are outstanding at the Effective Time (whether or not contingent or
otherwise requiring further stockholder approval) shall be assumed by Urohealth
and converted into an option, warrant, convertible security or other
contractual commitment as the case may be, to purchase or issue, on the same
terms and conditions (including, without limitation, the date and exercise
provisions) as were applicable prior to the Effective Time, the number of
Urohealth Shares equal to the number of Imagyn Shares subject to such stock
option, warrant, convertible security or other contractual commitment
multiplied by the Exchange Ratio, at an exercise price per Urohealth Share
equal to the former exercise price per Imagyn Share under such stock option,
warrant, convertible security or other contractual commitment immediately prior
to the Effective Time (without taking into account any anti-dilution formula)
divided by the Exchange Ratio; provided, however, that in the case of any
employee stock option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the conversion formula shall be
adjusted, if necessary, to comply with Section 424(a) of the Code. No stock
option or warrant shall be converted into an option or warrant to purchase a
partial Urohealth Share. Except as provided above, the converted stock
options, warrants, convertible securities or other contractual commitments
shall be assumed by Urohealth under their same terms and conditions, but shall
not be subject to further stockholder approval.
3.4 Dividends; Transfer Taxes. No dividends that are
declared on Urohealth Shares will be paid to persons entitled to receive
certificates representing Urohealth Shares until
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<PAGE> 5
such persons surrender their certificates representing Imagyn Shares. Upon
such surrender, there shall be paid to the person in whose name the
certificates representing such Urohealth Shares shall be issued any dividends
which shall have become payable with respect to such Urohealth Shares between
the Effective Time and the time of such surrender. In no event shall the
person entitled to receive such dividends be entitled to receive interest on
such dividends. If any certificates for any Urohealth Shares are to be issued
in a name other than that in which the certificate representing Imagyn Shares
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the person requesting such exchange shall pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
certificates for such Urohealth Shares in a name other than that of the
registered holder of the certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of Imagyn Shares for any Urohealth
Shares or dividends thereon or, in accordance with Section 3.4 hereof, the cash
payment for fractional interests, delivered to a public official pursuant to
applicable escheat laws.
3.5 No Fractional Securities. No certificates or scrip
representing fractional Urohealth Shares shall be issued upon the surrender for
exchange of certificates representing Imagyn Shares pursuant to this Article
III and no dividend, stock split-up or other change in the capital structure of
Urohealth shall relate to any fractional security, and such fractional
interests shall not entitle the owner thereof to vote or to any rights of a
security holder. In lieu of any such fractional securities, each holder of
Imagyn Shares who would otherwise have been entitled to a fraction of a
Urohealth Share upon surrender of stock certificates for exchange pursuant to
this Article III shall be paid cash upon such surrender in an amount equal to
the product of such fraction multiplied by the average closing price for a
Urohealth Share on The Nasdaq Stock Market National Market for the five trading
days immediately following the Closing Date (as defined below).
3.6 Closing of Transfer Books. At the Effective Time,
the stock transfer books of Imagyn shall be closed and no transfer of Imagyn
Shares shall thereafter be made. If, after the Effective Time, certificates
representing Imagyn Shares are presented to the Surviving Corporation, they
shall be canceled and exchanged for certificates representing Urohealth Shares
in accordance with the terms hereof. At and after the Effective Time, the
holders of Imagyn Shares to be exchanged for Urohealth Shares pursuant to this
Agreement shall cease to have any rights as stockholders of Imagyn except for
the right to surrender such stock certificates in exchange for Urohealth Shares
as provided hereunder.
3.7 Dissenting Shares. If holders of Imagyn Shares are
entitled to dissent from the Merger and demand appraisal of any such Imagyn
Shares in accordance with the provisions of the DGCL concerning the right of
such holders to dissent from the Merger and demand appraisal of their shares
("DISSENTING HOLDERS"), any Imagyn Shares held by a Dissenting Holder as to
which appraisal has been so demanded ("EXCLUDED SHARES") shall not
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<PAGE> 6
be converted as described in Section 3.1, but shall from and after the
Effective Time represent only the right to receive such consideration as may be
determined to be due to such Dissenting Holder pursuant to the DGCL; provided,
however, that each Imagyn Share held by a Dissenting Holder who shall, after
the Effective Time, withdraw his demand for appraisal or lose his right of
appraisal with respect to such Imagyn Shares, in either case pursuant to the
DGCL, shall not be deemed Excluded Shares but shall be deemed to be converted,
as of the Effective Time, into the right to receive Urohealth Shares in
accordance with the Exchange Ratio.
3.8 Closing. The closing of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
of Morrison & Foerster LLP, 19900 MacArthur Boulevard, 12th Floor, Irvine,
California 92612, at 9:00 a.m., local time, on the first business day (the
"CLOSING DATE") after the later of (a) the day on which the later to occur of
the stockholders' meetings referred to in Section 6.4 hereof shall have
occurred or (b) the day on which all of the conditions set forth in Article VII
hereof are satisfied or waived, or at such other date, time and place as the
Companies shall agree.
3.9 Supplementary Action. If at any time after the
Effective Time, any further assignments or assurances in law or any other
things are necessary or desirable to vest or to perfect or confirm of record in
the Surviving Corporation the title to any property or rights of any
Constituent Corporation, or otherwise to carry out the provisions of this
Agreement, the officers and directors of the Surviving Corporation are hereby
authorized and empowered on behalf of the Constituent Corporations, in the name
of and on behalf of any Constituent Corporation as appropriate, to execute and
deliver any and all things necessary or proper to vest or to perfect or confirm
title to such property or rights in the Surviving Corporation, and otherwise to
carry out the purposes and provisions of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF UROHEALTH AND IMAGYN
As used in this Agreement, (i) the term "Material Adverse
Effect" means, with respect to Urohealth or Imagyn, as the case may be, a
material adverse effect on the business, assets, results of operations or
financial condition of such party and its subsidiaries taken as a whole or on
the ability of such party to perform its obligations hereunder and (ii) the
word "subsidiary" when used with respect to any party means any corporation or
other organization, whether incorporated or unincorporated, of which such party
or any other subsidiary of such party is a general partner (excluding
partnerships the general partnership and limited partnership interests of which
held by such party or any subsidiary of such party do not have a majority of
the voting interests in such partnership) or of which at least a majority of
the securities or other interests having by their terms ordinary voting power
to elect a majority of the Board of Directors or others performing similar
functions with respect to such corporations or other organizations is directly
or indirectly owned or controlled by such party and/or by any one or more of
the subsidiaries.
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<PAGE> 7
Each of Urohealth and Imagyn represents and warrants, with
respect to itself and its subsidiaries, to the other, except as disclosed to
the other in writing by letter dated as of the date hereof, as follows:
4.1 Organization. Such Company is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power to carry on its
business as it is now being conducted or presently proposed to be conducted.
Such Company is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified will not
have a Material Adverse Effect. Each corporate subsidiary of such Company is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization, has the corporate
power to carry on its business as it is now being conducted and is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be
so duly organized, validly existing and in good standing, to have such
corporate power or to be so qualified will not have a Material Adverse Effect.
4.2 Capitalization. As of the date hereof, the
authorized capital stock of such Company is as set forth in Exhibit 4.2 hereto.
As of the date hereof, the number of shares of capital stock of such Company
which are issued and outstanding is as set forth in Exhibit 4.2 hereto. All of
the issued and outstanding shares of capital stock of such Company are validly
issued, fully paid and non- assessable and free of preemptive rights or similar
rights created by statute, the Certificate or Articles of Incorporation or
Bylaws of such Company or any agreement by which such Company or any of its
subsidiaries is a party or by which it is bound. Except (a) as set forth above
or, (b) as disclosed in Exhibit 4.2 hereto, there are not as of the date of
this Agreement any shares of capital stock of such Company issued or
outstanding or any options, warrants, subscriptions, calls, rights, convertible
securities or other agreements or commitments obligating such Company to issue,
transfer or sell any shares of its capital stock. As of the date hereof, no
bonds, debentures, notes or other indebtedness having the right to vote (or
convertible into or exercisable for securities having the right to vote) on any
matters on which stockholders of such Company may vote ("VOTING DEBT") were
issued and outstanding with respect to such Company.
4.3 Authority Relative to this Agreement. Such Company
has the corporate power to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement by such
Company and the consummation by such Company of the transactions contemplated
hereby have been duly authorized by the Board of Directors of such Company,
and, except for approval by the requisite votes cast by such Company's
stockholders at
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<PAGE> 8
the meeting provided for in Section 6.4, no other corporate proceedings on the
part of such Company are necessary to approve this Agreement or the
transactions contemplated hereby.
4.4 Consents and Approvals; No Violations. Except for
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR ACT"), the Securities Act of 1933, as amended (the "SECURITIES
ACT"), the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
state or foreign laws relating to takeovers, if applicable, state securities or
blue sky laws, and, as applicable, filing and recordation of a Certificate of
Merger as required by the DGCL, no filing with, and no permit, authorization,
consent or approval of, any public body or authority is necessary for the
consummation by such Company of the transactions contemplated by this
Agreement. Neither the execution and delivery of this Agreement by such
Company, nor the consummation by such Company of the transactions contemplated
hereby, nor compliance by such Company with any of the provisions hereof, will
(a) result in any breach of the Certificate of Incorporation or Bylaws of such
Company, (b) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, license, contract,
agreement or other instrument or obligation to which such Company or any of its
subsidiaries is a party or by which any of them or any of their properties or
assets may be bound or (c) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to such Company, any of its subsidiaries
or any of their properties or assets, except in the case of clauses (b) and (c)
for violations, breaches or defaults that would not have a Material Adverse
Effect.
4.5 Reports and Financial Statements. Such Company has
filed all reports required to be filed by it with the Securities and Exchange
Commission (the "SEC") pursuant to the Exchange Act since January 1, 1994, in
the case of Urohealth, and since May 30, 1996 in the case of Imagyn, including,
without limitation, audited financial statements for the year ended December
31, 1996 (in the case of Imagyn) and for the year ended March 31, 1996 (in the
case of Urohealth) (collectively, the "SEC REPORTS"), and has previously
furnished or made available to the other Company true and complete copies of
all such SEC Reports. None of such SEC Reports, as of their respective dates
(as amended through the date hereof), contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Each of the balance sheets
(including the related notes) included in the SEC Reports fairly presents in
all material respects the consolidated financial position of such Company and
its subsidiaries as of the respective dates thereof, and the other related
statements (including the related notes) included therein fairly present in all
material respects the results of operations and cash flows of such Company and
its subsidiaries for the respective periods or as of the respective dates set
forth therein, all in conformity with generally accepted accounting principles
consistently applied during the periods involved, except as otherwise noted
therein and
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subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein and the
absence of any notes thereto.
4.6 Absence of Certain Changes or Events. Except as
disclosed in the SEC Reports filed prior to the date of this Agreement, since
December 31, 1996, neither such Company nor any of its subsidiaries has: (a)
taken any of the actions set forth in Sections 5.1(b), 5.1(c) or 5.1(e) hereof;
(b) incurred any liability material to the Company and its subsidiaries on a
consolidated basis, except in the ordinary course of its business, consistent
with past practices; (c) suffered a change in the business, assets, financial
condition or results of operation of such Company or any of its subsidiaries
which has had, or is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect; or (d) subsequent to the date hereof,
except as permitted by Section 5.1 hereof, conducted its business and
operations other than in the ordinary course of business and consistent with
past practices.
4.7 Information in Disclosure Documents and Registration
Statement. None of the information to be supplied by such Company to be
included in (a) the Registration Statement on Form S-4 (or S-1 or such other
form required or deemed appropriate by the SEC) to be filed with the SEC by
Urohealth under the Securities Act for the purpose of registering the Urohealth
Shares to be issued in the Merger pursuant to this Agreement (the "REGISTRATION
STATEMENT") and (b) the joint proxy statement to be distributed in connection
with the meetings of stockholders of the Companies to vote upon this Agreement
(the "PROXY STATEMENT"), will, in the case of the Registration Statement, at
the time it becomes effective and at the Effective Time, or, in the case of the
Proxy Statement or any amendments thereof or supplements thereto, at the time
of the mailing of the Proxy Statement and any amendments or supplements
thereto, and at the time of each of the meetings of stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Registration Statement insofar as it
pertains to such Company will comply as to form in all material respects with
the provisions of the Securities Act, and the rules and regulations promulgated
thereunder. The Proxy Statement insofar as it pertains to such Company will
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations promulgated thereunder.
4.8 Litigation. As of the date of this Agreement, except
as disclosed in the SEC Reports filed prior to the date of this Agreement and
except to the extent that individually and in the aggregate they would not
reasonably be expected to have a Material Adverse Effect: (i) there is no
action, suit, judicial or administrative proceeding, arbitration or
investigation pending or, to the best knowledge of such Company, threatened
against or involving such Company or any of its subsidiaries, or any of their
properties or rights, before any court, arbitrator, or administrative or
governmental body; (ii) there is no judgment, decree, injunction, rule or order
of any court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against such Company or any of its subsidiaries; and
(iii) such Company
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and its subsidiaries are not in violation of any term of any judgments,
decrees, injunctions or orders outstanding against them. Such Company has
furnished to the other Companies in writing, a description of all litigations,
actions, suits, proceedings, arbitrations, investigations known to it,
judgments, decrees, injunctions or orders pending, or to its best knowledge,
threatened against or involving such Company or any of its subsidiaries, or any
of their properties or rights as of the date hereof.
4.9 Contracts.
(a) Each of the material contracts, instruments,
mortgages, notes, security agreements, leases, agreements or understandings,
whether written or oral, to which such Company or any of its subsidiaries is a
party that relates to or affects the assets or operations of such Company or
any of its subsidiaries or to which such Company or any of its subsidiaries or
their respective assets or operations may be bound or subject is a valid and
binding obligation of such Company and in full force and effect (with respect
to such Company or such subsidiary), except for where the failure to be in full
force and effect would not individually or in the aggregate, have a Material
Adverse Effect. Except to the extent that the consummation of the transactions
contemplated by this Agreement may require the consent of third parties, as
disclosed in writing to the other Companies pursuant hereto, there are no
existing defaults by such Company or any of its subsidiaries thereunder or, to
the knowledge of such Company, by any other party thereto, which defaults,
individually or in the aggregate, would have a Material Adverse Effect; and no
event of default has occurred, and no event, condition or occurrence exists,
that (whether with or without notice, lapse of time or the happening or
occurrence of any other event) would constitute a default by such Company or
any of its subsidiaries thereunder which default would, individually or in the
aggregate, have a Material Adverse Effect.
(b) Except as set forth in such Company's SEC
Reports (including the exhibits thereto) filed prior to the date of this
Agreement and except for this Agreement, as of the date of this Agreement
neither such Company nor any of its subsidiaries is a party to any oral or
written (i) consulting agreement not terminable on 60 days or less notice
involving the payment of more than $50,000 per annum ($200,000 per annum in the
case of Urohealth), in the case of any such agreement with an individual, (ii)
joint venture agreement, (iii) non-competition or similar agreements that
restricts such Company or its subsidiaries from engaging in a line of business,
(iv) agreement with any executive officer or other employee of such Company or
any subsidiary the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving such Company
of the nature contemplated by this Agreement and which provides for the payment
of in excess of $10,000 ($200,000 in the case of Urohealth), (v) agreement with
respect to any executive officer of such Company or any subsidiary providing
any term of employment beyond one year or compensation guaranty in excess of
$75,000 per annum ($200,000 per annum in the case of Urohealth), or (vi)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits
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of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement.
4.10 Employee Benefit Plans.
(a) Such Company has previously delivered to
the other Company a true and complete list of each written or formal employee
benefit plan (including, without limitation, any "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), policy or agreement that is maintained (all of the
foregoing, the "BENEFIT PLANS"), or is or was contributed to by such Company or
pursuant to which such Company or any trade or business, whether or not
incorporated (an "ERISA AFFILIATE"), which together with such Company would be
deemed a "single employer" within the meaning of Section 4001 of ERISA, is
still potentially liable for payments, benefits or claims. A copy of each
Benefit Plan as currently in effect and, if applicable, the most recent Annual
Report, Actuarial Report or Valuation, Summary Plan Description, Trust
Agreement and a Determination Letter issued by the IRS for each Benefit Plan
have heretofore been delivered to the other Company. No Benefit Plan was or is
subject to Title IV of ERISA or Section 412 of the Code (including any
"multiemployer plan," as defined in Section 3(37) of ERISA).
(b) Each of the Benefit Plans that is subject
to ERISA is in substantial compliance with ERISA; each of the Benefit Plans
intended to be "qualified" within the meaning of Section 401(a) of the Code is
so qualified; and no event has occurred, and to such Company's knowledge, there
exists no condition or set of circumstances, in connection with which such
Company or any ERISA Affiliate is or could be subject to liability (except
liability for benefit claims and funding obligations payable in the ordinary
course) under ERISA, the Code, or any other applicable law with respect to any
Benefit Plan.
(c) All contributions or other amounts payable
by such Company or its subsidiaries through December 31, 1996 with respect to
each Benefit Plan in respect of current or prior plan years have been either
paid or accrued on the most recent financial statements of such Company made
available to the other Company. Any contributions or other amounts payable by
such Company or its subsidiaries for periods between December 31, 1996 and the
Effective Time with respect to each Benefit Plan in respect of current or prior
plan years have been or will be either paid or accrued in the normal course of
business on the books and records of such Company at or prior to the Effective
Time. There are no pending, or, to the best knowledge of such Company,
threatened or anticipated claims (other than routine claims for benefits) by or
on behalf of or against any of the Benefit Plans or any trusts or other funding
vehicles related thereto.
(d) No Benefit Plan provides benefits,
including without limitation death or medical benefits (whether or not
insured), with respect to current or former employees
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for periods extending beyond their retirement or other termination of service
other than (i) coverage mandated by Part 6 of Subtitle B of Title I of ERISA,
Section 4980B of the Code or any comparable state law, (ii) death benefits or
retirement benefits under any "employee pension plan," as that term is defined
in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as
liabilities on the books of such Company or the ERISA Affiliates, or (iv)
benefits the full cost of which is borne by the current or former employee or
his or her beneficiary.
4.11 Taxes. For the purposes of this section, the term
"TAX" shall include all taxes, charges, withholdings, fees, levies, penalties,
additions, interest or other assessments imposed by any United States federal,
state or local authority or any other taxing authority on such Company or any
of its Tax Affiliates as to their respective income, profit, franchise, gross
receipts, payroll, sales, employment, worker's compensation, use, property,
withholding, excise, occupancy, environmental, and other taxes, duties or
assessments of any nature, whatsoever. Such Company has filed or caused to be
filed timely all material federal, state, local and foreign tax returns
required to be filed by each of its and any member of its consolidated,
combined, unitary or similar group (each such member a "TAX AFFILIATE"). Such
returns, reports and other information are accurate and complete in all
material respects. Such Company has paid or caused to be paid or has made
adequate provision or set up an adequate accrual or reserve for the payment of,
all taxes shown to be due in respect of the periods for which returns are due,
and has established (or will establish at least quarterly) an adequate accrual
or reserve for the payment of all taxes payable in respect of the period
subsequent to the last of said periods required to be so accrued or reserved.
Neither such Company nor any of its Tax Affiliates has any material liability
for taxes in excess of the amount so paid or accruals or reserves so
established. Neither such Company nor any of its Tax Affiliates is delinquent
in the payment of any tax in excess of the amount reserved or provided
therefor, and no deficiencies for any tax, assessment or governmental charge in
excess of the amount reserved or provided therefor have been threatened,
claimed, proposed or assessed. No waiver or extension of time to assess any
taxes has been given or requested. Neither such Company nor any of its Tax
Affiliates has been a member of an affiliated group of corporations filing a
consolidated federal income tax return, except for an affiliate group as to
which such Company was the common parent. Neither such Company nor any of its
Tax Affiliates has ever been a party to any tax sharing agreement. Neither
such Company nor any of its Tax Affiliates has entered into any compensatory
agreements with respect to the performance of services which payment thereunder
would result in a non-deductible expense pursuant to Section 280G of the Code
or an excise tax pursuant to Section 4999 of the Code. Neither such Company
nor any of its Tax Affiliates' federal and state income tax returns have been
audited by the Internal Revenue Service or comparable state agencies.
4.12 Compliance With Applicable Law. Except as
disclosed in the SEC Reports filed prior to the date of this Agreement, such
Company and each of its subsidiaries holds all licenses, franchises, permits,
variances, exemptions, orders, approvals and authorizations necessary for the
lawful conduct of its business under and pursuant to, and the
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business of each of such Company and its subsidiaries is not being conducted in
violation of, any provision of any federal, state, local or foreign statute,
law, ordinance, rule, regulation, judgment, decree, order, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to such Company or any of its subsidiaries, except to the extent
that the failure to hold any such licenses, franchises, permits or
authorizations, or any such violation, would not, individually or in the
aggregate, have a Material Adverse Effect.
4.13 Subsidiaries. Exhibit 21.1 to the most recent Form
10-K included in the SEC Reports of such Company lists all the subsidiaries of
such Company as of the date of this Agreement and indicates for each such
corporate subsidiary as of such date the jurisdiction of incorporation or
organization. All of the outstanding shares of capital stock or other equity
interests of each of the subsidiaries are (i) held by such Company or one of
such wholly-owned subsidiaries, (ii) fully paid and non-assessable, and (iii)
owned by such Company or one of such wholly-owned subsidiaries free and clear
of any claim, lien or encumbrance.
4.14 Labor and Employment Matters. (a) Such Company and
its subsidiaries are and have been in compliance in all material respects with
all applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including, without limitation,
the Immigration Reform and Control Act ("IRCA"), the Worker Adjustment and
Retraining Notification Act ("WARN"), and such laws respecting employment
discrimination, equal opportunity, affirmative action, worker's compensation,
occupational safety and health requirements and unemployment insurance and
related matters, and are not engaged in and have not engaged in any unfair
labor practice; (b) to the knowledge of such Company, no investigation or
review by or before any governmental entity concerning any violations of any
such applicable laws is pending nor, to the knowledge of such Company is any
such investigation threatened or has any such investigation occurred during the
last three years, and no governmental entity has provided any notice to such
Company or any of its subsidiaries or otherwise asserted an intention to
conduct any such investigation; (c) there is no labor strike, dispute, slowdown
or stoppage actually pending or threatened against such Company or any of its
subsidiaries; (d) no union representation question or union organizational
activity exists respecting the employees of such Company or any of its
subsidiaries; (e) no collective bargaining agreement exists which is binding on
such Company or any of its subsidiaries; (f) neither such Company nor any of
its subsidiaries has experienced any material work stoppage or other material
labor difficulty; and (g) in the event of termination of the employment of any
of the current officers, employees or agents (or, in the case of directors,
termination of service as a director) of such Company or any of its
subsidiaries, neither such Company, any of its subsidiaries, any other company,
the Surviving Corporation, nor Urohealth nor any other subsidiaries of such
Company, will pursuant to any agreement or by reason of anything done prior to
the Effective Time by such Company or any of its subsidiaries be liable to any
of said officers, directors, employees or agents for so-called "severance pay"
or any other similar payments or benefits, including, without limitation,
post-employment health (other than pursuant to COBRA) or insurance benefits.
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4.15 Insurance. As of the date hereof, such Company and
each of its subsidiaries are insured by insurers reasonably believed by such
Company to be of recognized financial responsibility against such losses and
risks and in such amounts as are customary in the businesses in which they are
engaged. All material policies of insurance and fidelity or surety bonds
insuring such Company or any of its subsidiaries or their respective
businesses, assets, employees, officers and directors are in full force and
effect. As of the date hereof, there are no material claims by such Company or
any of its subsidiaries under any such policy or instrument as to which any
insurance company is denying liability or defending under a reservation of
rights clause.
4.16 Contracts with Physicians, Hospitals, HMOs and
Third Party Providers. Such Company has made available to representatives of
the other Company copies (or in the case where no written documentation exists,
a summary) of all outstanding contracts, partnerships, joint ventures and other
arrangements or understandings (written or oral) between (a) such Company or
any of its subsidiaries and (b) any physician, hospital, HMO, other managed
care organization, or other third-party provider relating to the provision of
medical or consulting services, treatments, patient referrals or similar
activities.
4.17 Section 203 of the DGCL. The provisions of Section
203 of the DGCL will not, prior to the termination of this Agreement, assuming
the accuracy of the representations contained in Section 4.18 (without giving
effect to the knowledge qualification thereof), apply to this Agreement, the
Merger or the transactions contemplated hereby and thereby.
4.18 Ownership of Shares. As of the date hereof,
neither such Company nor, to its knowledge, any of its affiliates or associates
(as such terms are defined under the Exchange Act) (i) beneficially owns,
directly or indirectly, or (ii) are parties to any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of, in
each case, shares of capital stock of another Company which in the aggregate
represent 10% or more of the outstanding shares of capital stock of any other
Company.
4.19 FDA Matters.
(a) Such Company and each of its subsidiaries
is, and the products sold by such Company and each of its subsidiaries are, in
compliance in all material respects with all current applicable laws, statutes,
rules, regulations, standards, guides or orders administered or issued by the
Federal Food and Drug Administration or any other federal, foreign, state or
local agency or governmental body ("GOVERNMENTAL AUTHORITY") having regulatory
authority over the products of such Company and its subsidiaries (the "FDA").
(b) The manufacturing operations of such
Company and each of its subsidiaries is in compliance in all material respects
with all applicable laws, statutes, rules,
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regulations, standards, guides or orders administered or issued by the FDA or
Governmental Authority relating to the methods and materials used in, and the
facilities and controls used for, the manufacture, processing, packaging,
labeling, storage and distribution of the products manufactured by such
Company, including current Good Manufacturing Practice requirements. Further,
no governmental action has been taken or is in the process of being taken that
could halt or enjoin the manufacturing operations of such Company or subject
the manufacturing operations of such Company to regulatory enforcement action.
(c) Such Company or its subsidiaries have not
received from the FDA, and none of them has knowledge of any facts which would
furnish any reasonable basis for, any notice of adverse findings, Form 483
inspectional observations, regulatory letters, warning letters, Section 305
notices or other similar communications from the FDA or other Governmental
Authority, and there have been no seizures conducted or threatened by the FDA
or other Governmental Authority, and no recalls, market withdraws, field
notifications, notifications of misbranding or adulteration, or alerts
conducted, requested or threatened by the FDA or other Governmental Authority
relating to the products sold by such Company or any of its subsidiaries.
(d) Each premarket approval ("PMA") and
premarket notification ("510(K)") submission and related documents and
information for each of the products of such Company and its subsidiaries is in
compliance in all material respects with the applicable federal statutes,
rules, regulations, standards, guides or orders administered or promulgated by
the FDA or other Governmental Authority and all preclinical and clinical
studies have been conducted with current Good Clinical and Good Laboratory
Practices in all material respects. Such Company has disclosed in writing to
the other Company a complete and accurate list of all products of such Company
and its subsidiaries indicating (i) which products are marketed under an
approved or cleared FDA authority (e.g., PMA, PMA supplement, 510(k) or IDE)
and identifying such authority, and (ii) which products are not marketed under
an approved or cleared FDA authority, and indicating why such products are
being marketed without such authority. Such listing also contains a complete
and accurate list of all PMA applications, PMA supplements, 510(k) submissions
and IDE submissions of such Company or any of its subsidiaries currently
pending with the FDA.
(e) Such Company and its subsidiaries are not
aware of any facts which are reasonably likely to cause (i) the denial,
withdrawal, recall or suspension of any products sold or intended to be sold by
such Company or any of its subsidiaries, or (ii) a change in the marketing
classification or labeling of any such products, or (iii) a termination or
suspension of marketing of any such products.
(f) None of the products manufactured, marketed
or sold by such Company or any of its subsidiaries has been recalled or subject
to a field notification (whether voluntarily or otherwise), and such Company
and its subsidiaries have not received notice
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(whether completed or pending) of any proceeding seeking recall, suspension or
seizure of any products sold or proposed to be sold by such Company or any of
its subsidiaries.
4.20 Proprietary Rights.
(a) Such Company has previously disclosed in
writing to the other Company a listing of all of such Company's domestic or
foreign federal, state and foreign registrations of trademarks and of other
marks, trade names or other trade rights, and all pending applications for any
such registrations and all of such Company's patents and copyrights and all
pending applications therefor, all other trademarks and other marks, trade
names and other trade rights or in which such Company has any interest
whatsoever, and all other trade secrets, designs, plans, specifications,
technical information and other proprietary rights of such Company, whether or
not registered, created or used by or on behalf of such Company (collectively
"PROPRIETARY RIGHTS"). Such listing (the "PROPRIETARY RIGHTS LIST") also sets
forth: (i) for each patent and registered design, the number, normal expiration
date and subject matter for each country in which such patent or registered
design has been issued, (ii) for each patent application and registered design
application, the application number, date of filing and subject matter for each
country, (iii) for each trademark, the trademark application serial number or
the trademark registration number, the trademark class of goods covered and the
trademark expiration date for each country in which a trademark has been
registered, (iv) for each service mark, the service mark serial number or the
service mark registration number, the service mark class of goods covered and
the service mark expiration date for each country in which a service mark has
been registered and (v) for each copyright, the copyright number and date of
filing for each country in which a copyright has been filed. The Proprietary
Rights listed in the Proprietary Rights List of such Company are all those used
by such Company in connection with its business. True and correct copies of
all patents, and all pending applications for patents, owned, controlled,
created or used by or on behalf of such Company or in which such Company has
any interest whatsoever have been provided to the other Company. All
references in this Section 4.20, to "such Company" shall mean "such Company and
each of its subsidiaries."
(b) (i) No person has a right to receive a
royalty or similar payment in respect of any Proprietary Rights of such Company
whether or not pursuant to any contractual arrangements entered into by such
Company. Such Company has no licenses granted, sold or otherwise transferred
by or to it nor other agreements to which it is a party relating in whole or in
part to any of the Proprietary Rights.
(ii) Such Company owns and has the sole
right to use each of the Proprietary Rights of such Company. Except for
applications pending, all of the patents, registered designs and trademarks
listed in the Proprietary Rights List of such Company have been duly issued and
all of the other Proprietary Rights of such Company exist, are registered and
are subsisting. All of the pending patent applications have been duly filed.
None of the Proprietary Rights of such Company is involved in any pending or
threatened litigation. Such
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Company has not received any notice of invalidity or infringement of any rights
of others with respect to such trademarks. Such Company has taken all
reasonable and prudent steps to protect the Proprietary Rights of such Company
from infringement by any other person. No other person (x) has the right to
use any such trademarks on the goods on which they are now being used either in
identical form or in such near resemblance thereto as to be likely, when
applied to the goods of any such person, to cause confusion with the trademarks
or to cause a mistake or to deceive, (y) has notified such Company that it is
claiming any ownership of or right to use such Proprietary Rights, or (z) to
the best of such Company's knowledge, is infringing upon any such Proprietary
Rights in any way. To the best of such Company's knowledge, such Company's use
of the Proprietary Rights of such Company is not infringing upon or otherwise
violating the rights of any third party in or to such Proprietary Rights, and
no proceedings have been instituted against or notices received by such Company
that are presently outstanding alleging that such Company's use of the
Proprietary Rights infringes upon or otherwise violates any rights of a third
party in or to such Proprietary Rights. All of the Proprietary Rights of such
Company are valid and enforceable rights of such Company and will not cease to
be valid and in full force and effect by reason of the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated by this Agreement. There are not, and it is reasonably expected
that after the Effective Time there will not be, any restrictions on such
Company's right to sell products manufactured by or for such Company which
relate to the Proprietary Rights of such Company.
(c) No employee of such Company or any of its
subsidiaries is, or is now expected to be, in default under any term of any
employment contract, agreement or arrangement relating to any Proprietary
Rights of such Company or non-competition agreement, or any other contract or
any restrictive covenant relating to the right of any such officer or employee
to be employed by such Company or any of its subsidiaries because of the nature
of the business conducted or to be conducted by such Company or any of its
subsidiaries or relating to the use of any intellectual property of others, and
the continued employment of such Company's and its subsidiaries' officers and
employees does not subject such Company or any of its subsidiaries to any
liability resulting from such a violation.
4.21 Owned Property; Facilities. Exhibit 4.21 lists all
of such Company's and its subsidiaries' plants, offices, manufacturing
facilities, warehouses, improvements, administration buildings and real
property (the "FACILITIES") owned or leased by such Company, indicating whether
such property is owned or leased.
4.22 Compliance With Legislation Regulating
Environmental Quality.
(a) For the purposes of this Agreement, the
term "ENVIRONMENTAL LAWS" shall mean all federal, foreign, state and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses, rules, regulations and permit conditions,
including but not limited to the Federal Water Pollution Control Act, Resource
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Conservation & Recovery Act, Safe Drinking Water Act, Toxic Substances Control
Act, Clean Air Act, Comprehensive Environmental Response, Compensation and
Liability Act, Emergency Planning and Community Right to Know or other U.S. or
foreign federal, state, province, or local laws of similar effect, each as
amended as of the Effective Time, and the term "HAZARDOUS MATERIALS" shall mean
any hazardous or toxic substances, wastes or materials, including without
limitation petroleum or petroleum products, defined as such by any applicable
Environmental Law or governmental agencies.
(b) Throughout the period of its ownership or
operation of the Facilities of such Company, (i) neither such Company nor any
of its subsidiaries has received any written notices, directives, violation
reports, actions or claims from or by (A) any local, state, federal or foreign
governmental agency concerning any violation by such Company of Environmental
Laws or (B) any person alleging that, in connection with Hazardous Materials,
conditions at any of the Facilities of such Company or such Company's acts or
omissions have resulted in or caused or threatened to result in or cause injury
or death to any person or damage to any property, including without limitation,
damage to natural resources, and to such Company's knowledge, no such notices,
directives, violation reports, actions, claims or allegations exist; (ii) the
Facilities of such Company and the business operated by such Company and its
subsidiaries are in compliance with all applicable state, federal, foreign and
local Environmental Laws, except where any noncompliance with Environmental
Laws would not have a Material Adverse Effect on such Company; (iii) no
underground storage tanks either are or, to such Company's knowledge, have been
located at any of the Facilities of such Company; and (iv) to such Company's
knowledge, no friable asbestos or PCBs have been located at any of the
Facilities of such Company.
(c) There has been no spill, discharge or
release of Hazardous Materials by such Company or any of its subsidiaries at
any of the Facilities of such Company; (ii) neither such Company nor any of its
subsidiaries has treated, stored, disposed of, released or transported any
Hazardous Material in a manner which would give rise to any material liability
under any Environmental Laws; and (iii) such Company and its subsidiaries hold
all necessary permits, licenses, approvals and consents to conduct their
business as currently being conducted and are not in violation of any condition
of any such permit, license or consent.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1 Conduct of Business Pending the Merger. Each Company
agrees on its own behalf and on behalf of its subsidiaries that, except as
contemplated by this Agreement, during the period from the date of this
Agreement and continuing until the Effective Time:
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(a) the respective businesses of each Company and
its subsidiaries shall be conducted only in the ordinary and usual course of
business and consistent with past practices;
(b) such Company and its subsidiaries shall not
(i) sell or pledge or agree to sell or pledge any stock owned by it in any of
its subsidiaries; (ii) amend its Certificate of Incorporation or Bylaws; or
(iii) split, combine or reclassify any shares of its outstanding capital stock
or declare, set aside or pay any dividend or other distribution payable in
cash, stock or property in respect of its capital stock, or directly or
indirectly redeem, purchase or otherwise acquire any shares of its capital
stock or other securities or shares of the capital stock or other securities of
any of its subsidiaries;
(c) such Company and its subsidiaries shall not
(i) authorize for issuance, issue, sell, pledge, dispose of, encumber, deliver
or agree or commit to issue, sell, pledge, or deliver any additional shares of,
or rights of any kind to acquire any shares of, its capital stock of any class
or exchangeable into shares of stock of any class or any Voting Debt (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), except that such Company may
in the ordinary course of business consistent with past practice grant stock
options and stock purchase rights (in the case of Imagyn, with respect to up to
25,000 shares under Imagyn's 1995 Stock Plan only for previous commitments to
prospective employees and with respect to 5,000 shares under Imagyn's 1996
Employee Stock Purchase Plan) under existing equity compensation plans of such
Company that have been disclosed to the other Company in writing so long as
such options are granted at fair market value on the date of grant, or, in the
case of shares issued under employee stock purchase plans at the prices
specified in such plans as disclosed to the other Company and the independent
public accountants of both Companies have reviewed such grants and determined
that such grants will not effect the proposed accounting treatment as a pooling
of interests for the Merger and such Company may issue shares required to be
issued upon exercise of existing stock options, warrants or similar plans, or
under other contractual commitments previously made, which options, warrants,
plans or commitments have been disclosed in writing to the other Company
pursuant hereto; (ii) acquire, dispose of, transfer, lease, license, mortgage,
pledge or encumber any fixed or other substantial assets other than in the
ordinary course of business and consistent with past practices; (iii) incur,
assume or prepay any material indebtedness, liability or obligation or any
other material liabilities or issue any debt securities other than in the
ordinary course of business and consistent with past practices; (iv) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person (other than
a subsidiary) in a material amount other than in the ordinary course of
business and consistent with past practices; (v) make any material loans,
advances or capital contributions to, or investments in, any other person,
other than to subsidiaries, other than in the ordinary course of business and
consistent with past practices; (vi) fail to maintain adequate insurance
consistent with past practices for their
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businesses and properties; or (vii) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing.
(d) such Company shall use its best efforts to
preserve intact the business organization of such Company and its subsidiaries,
to keep available the services of its and their present officers and key
employees, and to preserve the goodwill of those having business relationships
with it and their respective subsidiaries; provided, however, that no breach of
this covenant shall be deemed to have occurred if a failure to comply with this
Section 5.1(d) occurs as a result of any matter arising out of the transactions
contemplated by this Agreement or any acquisition proposals made to such
Company or the public announcement thereof;
(e) such Company and its subsidiaries shall not
(i) knowingly take or allow to be taken any action which would jeopardize the
treatment of the transactions contemplated hereby as a pooling of interests for
accounting purposes or (ii) knowingly take or allow to be taken or fail to take
any action which act or omission would jeopardize qualification of the Merger
as a "reorganization" within the meaning of Section 368(a) of the Code; and
(f) such Company and its subsidiaries shall use
all reasonable efforts to prevent any representation or warranty of such
Company herein from becoming untrue or incorrect in any material respect.
5.2 Compensation Plans. During the period from the date
of this Agreement and continuing until the Effective Time, each Company agrees
as to itself and its subsidiaries that it will not, without the prior written
consent of the other Company (except as required by applicable law or pursuant
to existing contractual arrangements or other plans or commitments as otherwise
disclosed to the other Company in writing pursuant hereto or as set forth in
this Agreement) (a) enter into, adopt or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment, severance or other employee benefit plan, agreement, trust, plan,
fund or other arrangement between such Company and one or more of its officers,
directors or employees, in each case so as to materially increase the benefits
thereunder (collectively, "COMPENSATION PLANS"), (b) grant or become obligated
to grant any increase in the compensation or fringe benefits of directors,
officers or employees (including any such increase pursuant to any Compensation
Plan) or any increase in the compensation payable or to become payable to any
officer, except, with respect to employees other than officers, for increases
in compensation in the ordinary course of business consistent with past
practice, or enter into any contract, commitment or arrangement to do any of
the foregoing, except for normal increases and non-stock benefit changes in the
ordinary course of business consistent with past practice, (c) institute any
new employee benefit, welfare program or Compensation Plan, (d) make any change
in any Compensation Plan or other employee welfare or benefit arrangement or
enter into any employment or similar agreement or arrangement with any
employee, or (e) enter into or renew any contract, agreement, commitment or
arrangement providing for the payment to any director, officer or employee of
such Company of
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compensation or benefits contingent, or the terms of which are materially
altered in favor of such individual, upon the occurrence of any of the
transactions contemplated by this Agreement.
5.3 Current Information. From the date of this Agreement
to the Effective Time, each Company will cause one or more of its designated
representatives to confer on a regular and frequent basis (not less than
semi-monthly) with representatives of the other Company and to report the
general status of its ongoing operations and to deliver to the other Company
(not less than quarterly) unaudited consolidated balance sheets and related
consolidated statements of income, stockholders equity and cash flows for the
period since the last such report. Each Company will promptly notify the
others of any material change in the normal course of business or in its or its
subsidiaries' properties.
5.4 Letters of Company's Accountants. Each of Urohealth
and Imagyn shall use all reasonable efforts to cause to be delivered to itself
and to the other Company a so-called "comfort" letter of such Company's
independent auditors with respect to the financial statements and other
financial information of such Company included in the Registration Statement,
each such letter dated a date within two business days before the date on which
the Registration Statement shall become effective and addressed to each of
Urohealth and Imagyn, and in a form reasonably approved by the recipients prior
to delivery thereof.
5.5 Legal Conditions to Merger. Each Company shall, and
shall cause its subsidiaries to, use all reasonable efforts (a) to take, or
cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party or its subsidiaries with
respect to the Merger and to consummate the transactions contemplated by this
Agreement, subject to the appropriate vote or consent of stockholders and (b)
to obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any governmental
entity and or any other public or private third party which is required to be
obtained or made by such party or any of its subsidiaries in connection with
the Merger and the transactions contemplated by this Agreement; provided,
however, that a party shall not be obligated to take any action pursuant to the
foregoing if the taking of such action or such compliance or the obtaining of
such consent, authorization, order, approval or exemption would, in such
party's reasonable opinion, (i) be materially burdensome to such party and its
subsidiaries taken as a whole or impact in such a materially adverse manner the
economic or business benefits of the transactions contemplated by this
Agreement as to render inadvisable the consummation of the Merger or (ii)
result in the imposition of a condition or restriction on such party or on the
Surviving Corporation of the type referred to in Section 5.1(e). Each Company
will promptly cooperate with and furnish information to the others in
connection with any such burden suffered by, or requirement imposed upon, any
of them or any of their subsidiaries in connection with the foregoing.
5.6 Affiliates. Prior to the mailing to the stockholders
of each Company of the Proxy Statement, each Company shall deliver to the other
a letter identifying all persons who are,
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at the time this Agreement is submitted for approval to the stockholders of
such Company, "affiliates" of such Company, for purposes of Rule 145 under the
Securities Act. Each Company shall use all reasonable efforts to cause each
person named in the letter delivered by it to deliver to the other Companies at
least 10 days prior to the Closing Date a written "affiliates" agreement, in
customary form, restricting the disposition by such person of the Urohealth
Shares to be received by such person in the Merger, as contemplated by Rule 145
under the Securities Act and as required to qualify the Merger for pooling of
interest accounting treatment and tax-free reorganization treatment under the
Code. Certificates surrendered for exchange by any person constituting an
"affiliate" of a Company within the meaning of Rule 145 under the Securities
Act shall not be exchanged by the Exchange Agent for Urohealth Shares pursuant
to Section 3.2 until Urohealth has received such agreement described in the
preceding sentence.
5.7 Advice of Changes; Government Filings. Each party
shall confer on a regular and frequent basis with the other, report on
operational matters and promptly advise the other orally and in writing of any
change or event having, or which, insofar as can reasonably be foreseen, could
have, a Material Adverse Effect on such party or which would cause or
constitute a material breach of any of the representations, warranties or
covenants of such party contained herein. Each Company shall file all reports
required by regulation to be filed by it with the SEC between the date of this
Agreement and the Effective Time and shall deliver to the other party copies of
all such reports promptly after the same are filed. Except where prohibited by
applicable statutes and regulations, each party shall promptly provide the
other (or its counsel) with copies of all other filings made by such party with
any state or federal government entity in connection with this Agreement or the
transactions contemplated hereby.
5.8 Accounting Methods. No Company shall change its
methods of accounting in effect at December 31, 1996, except as required by
changes in generally accepted accounting principles as concurred in by such
party's independent auditors or except as required under Section 6.12 hereof.
No Company will change its fiscal year.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Access and Information.
(a) Each Company and their respective
subsidiaries shall each afford to the other and to the other's financial
advisors, legal counsel, accountants, consultants and other representatives
access during normal business hours throughout the period from the date hereof
to the Effective Time to all of its books, records, properties, facilities,
personnel commitments and records (including but not limited to Tax Returns)
and, during such period, each shall furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request.
(b) All information furnished by any Company to
another Company pursuant hereto shall be treated as the sole property of the
party furnishing the information until consummation of the Merger contemplated
hereby. The parties will hold any such information that is nonpublic in
confidence to the extent required by, and in accordance with the Mutual
Nondisclosure Agreement dated as of January 24, 1997 between Urohealth and
Imagyn (the "CONFIDENTIALITY AGREEMENT") and such Confidentiality Agreement
shall survive the termination of this Agreement.
6.2 Acquisition Proposals. Each Company and their
respective subsidiaries will not, and will use their best efforts to cause
their respective directors, officers, employees, financial advisors, legal
counsel, accountants and other agents and representatives (for purposes of this
Section 6.2 only, being referred to as "affiliates") not to, initiate, solicit
or encourage, directly or indirectly, or, except to the extent required in the
exercise of the fiduciary duties of its Board of Directors under applicable law
as advised by outside legal counsel, engage or participate in negotiations
concerning, provide any nonpublic information or data to or have any
discussions with any person other than a party hereto or their affiliates
relating to, any acquisition, tender offer (including a self-tender offer),
exchange offer, merger, consolidation, acquisition of beneficial ownership of
or the right to vote securities representing 10% or more of the total voting
power of such entity or any of its subsidiaries, dissolution, business
combination, purchase of all or any significant portion of the assets or any
division of, or any equity interest in, such entity or any subsidiary, or
similar transaction other than the Merger (such proposals, announcements, or
transactions being referred to as "ACQUISITION PROPOSALS"). Each Company will
promptly notify the others orally and in writing if any such Acquisition
Proposal (including the terms thereof and identity of the persons making such
proposals) is received and furnish to the other parties hereto a copy of any
written proposal.
6.3 Registration Statement. As promptly as practicable,
the Companies shall prepare and file with the SEC the Registration Statement
with respect to the Urohealth Shares to be issued in the Merger hereunder and
use their best efforts to have the Registration Statement
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declared effective. Each Company shall furnish all information concerning such
Company and the holders of its capital stock and shall take such other action
as may be reasonably requested in connection with such Registration Statement
and issuance of Urohealth Shares.
6.4 Proxy Statements; Stockholder Approvals.
(a) Urohealth and Imagyn acting through their
respective Boards of Directors, shall, in accordance with applicable law and
their Certificates of Incorporation and Bylaws:
(i) promptly and duly call, give
notice of, convene and hold as soon as practicable following the date upon
which the Registration Statement becomes effective a meeting of their
respective stockholders for the purpose of voting to approve and adopt this
Agreement and shall use their respective best efforts, except to the extent the
Board of Directors reasonably believe is otherwise required by its fiduciary
duty, to obtain such stockholders approval;
(ii) except to the extent the Board
of Directors reasonably believes is otherwise required by its fiduciary duty,
recommend approval and adoption of this Agreement by the stockholders of such
Company, and include in the Proxy Statement such recommendations, and take all
lawful action to solicit such approvals; and
(iii) as promptly as practicable,
prepare and file with the SEC a preliminary Proxy Statement and, after
consultation with each other, respond to any comments of the SEC with respect
to the preliminary Proxy Statement and cause the definitive Proxy Statement to
be mailed to their respective stockholders. Whenever any event occurs which
should be set forth in an amendment or a supplement to the Proxy Statement or
any filing required to be made with the SEC, each party will promptly inform
the other and will cooperate in filing with the SEC and/or mailing to
stockholders such amendment or supplement. The Proxy Statement, and all
amendments and supplements thereto, shall comply with applicable law and be in
form and substance reasonably satisfactory to each such Company.
(b) Urohealth as the sole shareholder of
Urohealth Sub, in accordance with applicable law and its Certificate of
Incorporation and Bylaws will on or prior to the date of the stockholder
meeting referred to in Section 6.4(a)(i), approve the Merger.
6.5 Stock Exchange Listing. The Companies shall take
such action as may be necessary or desirable to include the Urohealth Shares to
be issued pursuant to the Merger on The Nasdaq Stock Market National Market.
6.6 Antitrust Laws. As promptly as practicable, each
Company shall make all filings and submissions under the HSR Act as may be
reasonably required to be made in
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connection with this Agreement and the transactions contemplated hereby.
Subject to Section 6.1 hereof, each Company will furnish to the others such
information and assistance as the other may reasonably request in connection
with the preparation of any such filings or submissions. Subject to Section
6.1 hereof, each Company will provide the others with copies of all
correspondence, filings or communications (or memoranda setting forth the
substance thereof) between such party or any of its representatives, on the one
hand, and any governmental agency or authority or members of their respective
staffs, on the other hand, with respect to this Agreement and the transactions
contemplated hereby.
6.7 S-8 Registration Statement. Urohealth agrees that as
soon as reasonably practicable after the Effective Time it will cause to be
filed one or more Registration Statements on Form S-8 under the Securities Act,
or amendments to any existing Registration Statements on Form S-8 covering
stock options and warrants, to register the Urohealth Shares issuable upon
exercise of the Imagyn converted options or warrants, and at or prior to the
Effective Time, Urohealth shall take all corporate action necessary to reserve
for issuance a sufficient number of Urohealth Shares for delivery upon exercise
of the options and warrants, conversion of convertible securities or otherwise
pursuant to other contractual commitments assumed pursuant to Section 3.3
hereof. The consummation of the Merger shall not be treated as a termination
of employment for purposes of any Imagyn option plan.
6.8 Public Announcements. So long as this Agreement is
in effect, each Company agrees that it will obtain the approval of the other
parties prior to issuing any press release and will use its best efforts to
consult with the others before otherwise making any public statement or
responding to any press inquiry with respect to this Agreement or the
transactions contemplated hereby, except as may be required by law or any
governmental agency if required by such agency or the rules of the National
Association of Securities Dealers, Inc.
6.9 Expenses. Except as provided in Section 8.3(d)
below, whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby and thereby shall be paid by the party incurring such expenses.
6.10 Additional Agreements.
(a) Subject to the terms and conditions herein
provided, including without limitation those set forth in the proviso to
Section 5.5 hereof, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals, and to effect all necessary registrations and
filings. In case at any time after the Effective Time any further
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action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and/or directors of the Companies shall take all such
necessary action.
(b) Subject to the terms and conditions herein
provided, including without limitation those set forth in the proviso to
Section 5.5 hereof, each Company will cooperate with the others and use all
reasonable efforts to prepare all necessary documentation to effect promptly
all necessary filings and to obtain all necessary permits, consents, approvals,
orders and authorizations of or any exemptions by, all third parties and
governmental bodies necessary to consummate the transactions contemplated by
this Agreement.
(c) Each party will keep the other party
apprised of the status of any inquiries made of such party by the Federal Trade
Commission, the Department of Justice, the SEC, or any other governmental
agency or authority or members of their respective staffs with respect to this
Agreement or the transactions contemplated herein.
6.11 Company Accruals and Reserves. Prior to the
Closing Date, each Company shall review and, to the extent determined necessary
or advisable, consistent with generally accepted accounting principles and the
accounting rules, regulations and interpretations of the SEC and its staff,
modify and change its accrual, reserve and provision policies and practices to
(a) reflect the Surviving Corporation's plans with respect to the conduct of
the Company's business following the Merger and (b) make adequate provision
(for the costs and expenses relating thereto) so as to be applied consistently
on a mutually satisfactory basis with those of the other Company. The parties
agree to cooperate in preparing for the implementation of the adjustments
contemplated by this Section 6.11. Notwithstanding the foregoing, (i) no
Company shall be obligated to take in any respect any such action pursuant to
this Section 6.11 (other than pursuant to the preceding sentence) unless and
until the other Company acknowledges that all conditions to their obligations
to consummate the Merger have been satisfied and (ii) no adjustments made
solely as a result of this Section 6.11 shall change the Exchange Ratio.
6.12 Director and Officer Indemnification. All rights to
indemnification existing in favor of the directors, officers and agents of
Imagyn (the "INDEMNIFIED PARTIES") under the provisions existing on the date
hereof of any of Imagyn's Certificate of Incorporation, Bylaws and
indemnification agreements shall survive the Effective Time for at least three
years thereafter (including any directors' and officers' liability insurance
heretofore maintained by Imagyn) and Urohealth agrees to indemnify the
Indemnified Parties to the full extent required or permitted by Imagyn under
the provisions existing on the date hereof of the Certificate of Incorporation,
Bylaws and indemnification agreements of Imagyn.
6.13 Voting Agreements. Concurrently with the execution
and delivery of this Agreement, each of the Companies shall have delivered to
the other voting agreements to vote in
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favor of the Merger executed by the five officers and/or directors of such
Company holding or representing the largest number of voting shares of such
Company.
6.14 Certain Employment Arrangements.
(a) At or prior to the Effective Time, Franklin D. Brown ("BROWN")
shall receive a lump-sum severance payment in an amount equal to his annual
salary, such payment to be in cancellation of Executive's existing rights with
respect to severance under his employment agreement. At the Effective Time,
Imagyn and Brown shall have executed a Non-competition Agreement in the form
attached hereto as Exhibit 6.14(a). Such Non-competition Agreement shall
restrict Brown from engaging in a business that is competitive with Imagyn's
current business for a 12 month term after the Effective Time and provide for a
payment of $120,000 on January 2, 1998 and $120,000 on June 30, 1998.
(b) At or prior to the Effective Time, Urohealth and each of
Christopher Bova, Susan Dube, Manuel Garcia-Jurado, Kristine Lahman, J.C.
MacRae, and Keith Tholin shall have executed an employment agreement
substantially in the form of Exhibit 6.14(b) hereto. Such agreement shall
provide for the employment of such person for a 12-month term at such person's
current salary with severance for the balance of such 12-month period in the
event of termination of such person's employment by Urohealth without cause, or
termination of employment by such person for "good reason." Any of the
foregoing individuals employed by Imagyn at the Effective Time who are not
offered, or do not accept, employment with Imagyn or Urohealth following the
Effective Time shall at the Effective Time receive a severance payment in an
amount equal to his or her annual salary.
(c) Urohealth shall assume the agreements between Imagyn and each
of Imagyn's two regional managers and one director of national accounts.
(d) Urohealth shall assume the employment agreement, dated
December 12, 1996, as modified by a letter dated February 26, 1997, by and
between Imagyn and Gary Woker. Urohealth shall assume the employment agreement
dated January 10, 1997 between Imagyn and Thomas Hazen.
(e) Each individual listed in the disclosure letter and
referencing this Section 6.14 (e) who remains employed by Imagyn through and
including the Effective Time shall receive under a retention program both (i)
as soon as practicable after the Effective Time, an amount equal to two times
such person's current monthly salary and (ii) in the event that such person's
employment is terminated without cause within 120 days after the Effective
Time, such person shall be entitled to receive an amount equal to three times
such person's current monthly salary.
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(f) Urohealth shall satisfy Imagyn's obligations under the Special
Incentive Program for Sales Representatives, U.S. Sales Managers and
International Sales Managers, which program shall terminate at the Effective
Time.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1 Conditions to All Companies' Obligation to Effect the
Merger. The respective obligations of all Companies to effect the transactions
contemplated herein shall be subject to the satisfaction at or prior to the
Effective Time of the following conditions, any one of which may be waived by
all, but not less than all, Companies:
(a) Any waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(b) The Registration Statement shall have become
effective in accordance with the provisions of the Securities Act.
(c) This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite vote
of the stockholders of each Company in accordance with applicable law.
(d) No preliminary or permanent injunction or
other order by any federal, state or foreign court of competent jurisdiction
which prohibits the consummation of the Merger shall have been issued and
remain in effect. No statute, rule, regulation, executive order, stay, decree,
or judgment shall have been enacted, entered, issued, promulgated or enforced
by any court or governmental authority which prohibits or restricts the
consummation of the Merger. Other than the filing of a Certificate of Merger
with the Secretary of State of Delaware, all authorizations, consents, orders
or approvals of, or declarations or filings with, and all expirations of
waiting periods imposed by, any governmental entity (all of the foregoing,
"CONSENTS") which are necessary for the consummation of the Merger, other than
Consents the failure to obtain which would have no material adverse effect on
the consummation of the Merger or on the Surviving Corporation and its
subsidiaries, taken as a whole, shall have been filed, occurred or been
obtained (all such permits, approvals, filings and consents and the lapse of
all such waiting periods being referred to as the "REQUISITE REGULATORY
APPROVALS") and all such Requisite Regulatory Approvals shall be in full force
and effect. All state securities or blue sky permits and other authorizations
necessary to issue the Urohealth Shares in exchange for the Imagyn Shares and
to consummate the Merger shall have been received.
(e) There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any federal or state governmental entity which, in
connection with the grant of a Requisite Regulatory Approval,
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imposes any condition or restriction upon the Surviving Corporation or its
subsidiaries (or, in the case of any disposition of assets required in
connection with such Requisite Regulatory Approval, upon any Company or its
subsidiaries), including, without limitation, requirements relating to the
disposition of assets, which in any such case would so materially adversely
impact the economic or business benefits of the transactions contemplated by
this Agreement as to render inadvisable the consummation of the Merger.
(f) The aggregate amount of cash required to be
paid on account of all Excluded Shares and with respect to any cash payments
for fractional Urohealth Shares pursuant to Section 3.4, shall not exceed ten
percent (10%) of the value (determined in accordance with APB Opinion No. 16)
of the Urohealth Shares issuable in exchange for Imagyn Shares at the Effective
Time.
(g) Each Company shall have received a letter,
dated the Closing Date, of its regularly retained independent auditors, and in
form and substance reasonably satisfactory to it to the effect that the Merger
qualifies for "pooling of interests" treatment for financial reporting purposes
and that such accounting treatment is in accordance with generally accepted
accounting principles.
7.2 Conditions to Obligation of Each Company to Effect
the Merger. The obligation of each Company to effect the Merger shall be
further subject to the satisfaction at or prior to the Effective Time of the
following additional conditions, which may be waived by such Company:
(a) Each of the other Companies shall have
performed in all material respects its obligations under this Agreement
required to be performed by it at or prior to the Effective Time and the
representations and warranties of the other Companies contained in this
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time, except as contemplated by
this Agreement, and each Company shall have received a certificate of the
Chairman of the Board, the President or an Executive Vice President or a Senior
Vice President of each of the other Companies as to the satisfaction of this
condition.
(b) Each Company shall have received an opinion
of its outside counsel, dated as of the Effective Time, substantially to the
effect that, on the basis of facts, representations, and assumptions set forth
in such opinion which are consistent with the state of facts existing at the
Effective Time, the Merger applicable to such Company will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that such Company will be a party to the reorganization
within the meaning of Section 368(b) of the Code. In rendering any such
opinion, such counsel may require and, to the extent they deem necessary and
appropriate, may rely upon representations made in certificates of each
Company, their affiliates and principal shareholders. In addition, each
Company shall
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have received the opinion of its, and the other Companies' respective, outside
counsel dated the Closing Date and addressed to itself and all other Companies
covering the additional matters set forth in Exhibit 7.2(b).
(c) Each Company shall have obtained the consent
or approval of each person whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or credit
agreement, note, mortgage, indenture, lease, license or other agreement or
instrument, except those for which failure to obtain such consents and
approvals would not, individually or in the aggregate, have a material adverse
effect on the Surviving Corporation and its subsidiaries taken as a whole or
upon the consummation of the transactions contemplated hereby.
7.3 Conditions to the Obligations of Urohealth and Urohealth Sub
to Effect the Merger. The obligation of Urohealth and Urohealth Sub to effect
the Merger shall be subject to the resolution of the matter described in the
second paragraph of page eight of the disclosure letter dated the date hereof
of Imagyn, such resolution to be to the satisfaction of Urohealth and with the
prior approval of Urohealth.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated and
the Merger contemplated hereby abandoned at any time prior to the Effective
Time, whether before or after approval by the stockholders of the Companies:
(a) By mutual written consent of all of the
Companies.
(b) By any Company if the Merger shall not have
been consummated on or before September 30, 1997.
(c) By any Company if there shall have been any
material breach of a material obligation of another Company hereunder and, if
such breach is curable, such default shall have not been remedied within 10
days after receipt by the other Company, as the case may be, of notice in
writing from such Company specifying such breach and requesting that it be
remedied; provided, that such 10-day period shall be extended for so long as
the other Company shall be making diligent attempts to cure such default.
(d) By any Company if any court of competent
jurisdiction in the United States or other United States governmental body
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or any other action shall have become final and non-appealable.
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(e) By any Company upon written notice to the
others if any approval of the stockholders of a Company required for the
consummation of the Merger submitted for their approval shall not have been
obtained by reason of the failure to obtain the required vote at a duly held
meeting of stockholders or at any adjournment thereof.
(f) By Imagyn, if it shall receive any
Acquisition Proposal after the date hereof from a third party or parties and
the Board of Directors of Imagyn shall have determined in good faith that in
the exercise of its fiduciary duties to the stockholders of Imagyn that Imagyn
must pursue such Acquisition Proposal.
8.2 Effect of Termination.
In the event of termination of this Agreement as
provided above, this Agreement shall forthwith become of no further effect and,
except for a termination resulting from a breach by a party of this Agreement,
there shall be no liability or obligation on the part of any Company or their
respective officers or directors (except as set forth in Section 6.1(b) hereof
and except for Sections 6.10, 8.3, 9.2 and 9.6 hereof which shall survive the
termination). Nothing contained in this Section 8.2 shall relieve any party
from liability for willful breach of this Agreement that results in termination
of this Agreement. Upon request therefor, each party will redeliver all
documents, work papers and other material of any other party relating to the
transactions contemplated hereby, whether obtained before or after the
execution hereof, to the party furnishing same.
8.3 Cancellation Fee.
(a) If at any time (i) Imagyn shall have entered
into an agreement, including without limitation an agreement in principle, with
respect to an Acquisition Proposal other than the Merger contemplated by this
Agreement; (ii) Imagyn shall breach any of the provisions of Section 6.2 above
or shall recommend or approve an Acquisition Proposal pursuant to Section 6.2;
or (iii) any person, entity or group of persons or entities acting in concert
shall acquire beneficial ownership of more than fifty percent (50%) of the
voting securities of Imagyn as a result of an Acquisition Proposal and, in the
case of (i) or (ii), this Agreement is terminated by Imagyn pursuant to Section
8.1(c), Section 8.1(e), or Section 8.1(f); then Urohealth shall be entitled to
be paid by Imagyn a fee in cash or immediately available funds of Three Million
Five Hundred Thousand U.S. Dollars ($3,500,000) (the "CANCELLATION FEE").
(b) Imagyn shall pay to Urohealth the
Cancellation Fee provided in Section 8.3(a) above within ten (10) days of
written demand therefor by Urohealth. The payment of the Cancellation Fee
shall be conditioned on there being no material breach of the obligations of
Urohealth and Urohealth Sub hereunder. If Imagyn fails to pay any amount due
Urohealth pursuant to this Section 8.3 when due, Imagyn shall pay interest
thereon, from the date due until the date paid in full, at the Prime Rate as
announced from time to time by Bank of America or
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any successor thereto (the "PRIME RATE") and shall reimburse Urohealth for all
reasonable attorneys' fees and other costs and expenses incurred by Urohealth
in collecting such amount from Imagyn.
(c) Notwithstanding anything herein to the
contrary, payment of the Cancellation Fee as provided in subsections (a) and
(b) of this Section 8.3 shall constitute full settlement of any and all
liabilities and obligations of Imagyn under this Agreement, except for
liabilities arising from fraud or intentional misrepresentation with respect to
this Agreement by Imagyn and except as provided in subsection (d).
(d) In the event that either Imagyn or Urohealth
terminates this Agreement pursuant to Section 8.1(c) hereof, then the
non-terminating party shall pay to the terminating party One Million U.S.
Dollars ($1,000,000) representing full payment of the terminating party's
reasonable out-of-pocket expenses incurred in connection with the negotiation,
execution and performance of this Agreement ("EXPENSE REIMBURSEMENT PAYMENT");
provided, however, that the terminating party shall not be entitled to any
Expense Reimbursement Payment pursuant to this Section 8.3(d) if at the time of
termination the non-terminating party also would have been entitled to
terminate this Agreement pursuant to Section 8.1(c). In addition, if the
stockholders of Urohealth or Imagyn fail to approve the Merger and this
Agreement is terminated by Imagyn or Urohealth pursuant to Section 8.1(e), then
the party whose stockholders have so failed to approve the Merger shall pay to
the other party thereto the Expense Reimbursement Payment; provided, however,
that no such Expense Reimbursement Payment shall be due under this sentence if
the stockholders of the party which would have otherwise been entitled to such
Expense Reimbursement Payment have previously failed to approve the Merger at
the stockholders meeting called for that purpose; and provided, further that
the Expense Reimbursement Payment shall not be payable in the event that the
Cancellation Fee is payable.
8.4 Amendment. This Agreement may be amended by action
taken at any time before or after approval hereof by the stockholders of the
Companies, but, after any such approval, no amendment shall be made which
alters the Exchange Ratio or which in any way materially adversely affects the
rights of such stockholders, without the further approval of such stockholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
8.5 Waiver. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such
32
<PAGE> 33
party. Such waiver shall not operate as a waiver of, or estoppel with respect
to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1 Survival of Representations, Warranties and
Agreements. No representations, warranties or agreements contained herein
shall survive beyond the Effective Time except that the agreements contained in
Sections 3.1, 3.2, 3.3, 3.4, 3.5, 6.7, 6.9, 6.13, 9.1, 9.6 and 9.7 hereof, and
all other agreements of Urohealth, shall survive beyond the Effective Time.
9.2 Brokers. Urohealth represents and warrants to Imagyn
that, except for its financial advisor Piper Jaffray Inc., no broker, finder or
financial advisor is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Urohealth.
Imagyn represents and warrants to Urohealth that, except for its financial
advisor Dillon, Read & Co. Inc., no broker, finder or financial advisor is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Imagyn.
9.3 Notices. All notices, claims, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or by telex or telecopy or mailed by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Urohealth, to:
Urohealth Systems, Inc.
5 Civic Plaza, Suite 100
Newport Beach, California 92660
Attention: President and Chief
Executive Officer
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with a copy to:
Morrison & Foerster LLP
19900 MacArthur Boulevard, Suite 1200
Irvine, California 92612
Attention: Robert M. Mattson, Jr., Esq.
(b) If to Imagyn, to:
Imagyn Medical, Inc.
27651 La Paz Road
Laguna Niguel, California 92677
Attention: President and Chief
Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Christopher D. Mitchell, Esq.
(c) If to Urohealth Sub to:
Morrison & Foerster LLP
19900 MacArthur Boulevard, Suite 1200
Irvine, California 92612
Attention: Robert M. Mattson, Jr.
and with a copy to all other Companies as aforesaid.
9.4 Descriptive Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.5 Entire Agreement; Assignment. This Agreement
(including the Exhibits, and other documents and instruments referred to
herein) and the Confidentiality Agreement (a) constitute the entire agreement
and supersede all other prior agreements and understandings, both written and
oral, among the parties or any of them, with respect to the subject matter
hereof; (b) are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise.
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<PAGE> 35
9.6 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware without
giving effect to the provisions thereof relating to conflicts of law.
9.7 Parties in Interest. Nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
rights, benefit or remedies of any nature whatsoever or by reason of this
Agreement.
9.8 Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed to be an original but all
of which shall constitute one and the same agreement.
9.9 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not effect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
9.10 Jurisdiction and Venue. Each party hereto hereby
agrees that any proceeding relating to this Agreement and the Merger shall be
brought in a state court of Delaware. Each party hereto hereby consents to
personal jurisdiction in any such action brought in any such Delaware court,
consents to service of process by registered mail made upon such party and such
party's agent and waives any objection to venue in any such Delaware court or
to any claim that such Delaware court is an inconvenient forum.
9.11 Investigation. The respective representations and
warranties of each Company contained herein or in the certificates or other
documents delivered prior to the Closing shall not be deemed waived or
otherwise affected by any investigation made by any party hereto.
9.12 Consents. For purposes of any provision of this
Agreement requiring, permitting or providing for the consent of any or Company,
the written consent of the Chief Executive Officer of a Company shall be
sufficient to constitute such consent.
35
<PAGE> 36
IN WITNESS WHEREOF, each Company has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
------------------------------------
Name: Charles A. Laverty
Title: President and
Chief Executive Officer
Attest
/s/ KEVIN M. HIGGINS
- -----------------------------
Kevin M. Higgins
Secretary
UROHEALTH ACQUISITION CORPORATION
By: /s/ CHARLES A. LAVERTY
------------------------------------
Name: Charles A. Laverty
Title: President and
Chief Executive Officer
Attest
/s/ KEVIN M. HIGGINS
- -----------------------------
Kevin M. Higgins
Secretary
36
<PAGE> 37
IMAGYN MEDICAL, INC.
By: /s/ FRANKLIN D. BROWN
------------------------------------
Name: Franklin D. Brown
Title: President and
Chief Executive Officer
Attest
/s/ J. Casey McGlynn
- ---------------------------
Secretary
37
<PAGE> 1
EXHIBIT 10.13
PROMISSORY NOTE BY AND BETWEEN
CHARLES A. LAVERTY
AND
UROHEALTH SYSTEMS, INC.
Principal Amount: $550,000 DATED: NOVEMBER 27, 1996
FOR VALUE RECEIVED, Charles A. Laverty ("MAKER"), does hereby promise
to pay to UROHEALTH Systems, Inc. ("HOLDER"), in lawful money of the United
States and in immediately available funds, the principal amount of five hundred
fifty thousand dollars ($550,000), with interest compounding annually thereon.
Interest shall accrue at a per annum rate equal to six and two one-hundredths
percent (6.02%).
The balance of the principal amount of the Note outstanding and all
accrued and unpaid interest thereof shall be due and payable in full upon the
earlier of (a) November 25, 1999 or (b) within thirty (30) days of the
termination for any reason of that certain Employment Agreement by and between
Maker and Holder in effect as of the date hereof.
Payment shall be delivered to Holder at the address as set forth below,
or at such other address as designated by Holder.
The following shall constitute an Event of Default:
(i) A default in payment by Maker to Holder of any payment due
hereunder, when due and payable which continues for five (5) days
after any such payment is due; or
(ii) Maker shall be adjudicated a bankrupt, or a decree or order
approving as properly filed a petition or answer asking
reorganization of Maker under the federal bankruptcy laws, as now
or hereafter amended, or under the laws of any state, shall be
entered, and any such decree, judgment, or order shall not have
been vacated, stayed, or set aside within ninety (90) days from
the date of its entry or granting; or
(iii) Maker shall file, or admit the jurisdiction of the court and the
material allegations contained in, any petition in bankruptcy or
any petition pursuant to, or purporting to be pursuant to, any
current or future acts of Congress on the subject of bankruptcies
or any amendments to such acts, or Maker shall institute any
proceedings, or Maker shall give its consent to the institution
of any proceedings, for any relief of Maker under any bankruptcy
or insolvency laws, or any laws relating to the relief of
debtors, readjustment of indebtedness, reorganizations,
arrangements, compositions, or extensions; or
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<PAGE> 2
(iv) Maker shall make any assignment for the benefit of creditors or
shall apply for a consent to the appointment of a receiver for
Maker or any of the property of Maker; or
(v) A decree or order appointing a receiver of the property of Maker
shall be made and the decree or order has not been vacated,
stayed, or set aside within ninety (90) days from the date of its
entry or granting.
Upon the occurrence of an Event of Default, the entire outstanding
principal balance together with accrued interest hereunder shall, at the option
of Holder, become immediately due and payable and Holder shall thereupon have
all rights and remedies provided hereunder, in any other agreement between Maker
and Holder, or otherwise available at law or in equity.
Maker waives presentment, demand for payment, notice of dishonor, and
all other notices or demands in connection with the delivery, acceptance,
performance, or default of this Note.
Nothing herein contained, nor any transaction related hereto, shall be
construed or so operate as to require Maker, or any other person liable for
repayment of same, to pay interest at a greater rate than is now lawful in such
case to contract for, or to make any payment, or to do any act contract to law.
Should any interest or other charges paid by Maker, or parties liable for the
payment of this Note, result in the computation or earning of interest in excess
of the maximum rate of interest which is legally permitted under the laws of the
applicable jurisdiction, then any and all excess shall be and the same is hereby
waived by the Holder, and any and all such excess shall be automatically
credited against and in reduction of the balance due under this indebtedness,
and the portion of said excess which exceeds the balance due under this
indebtedness shall be paid by the Holder here for the Maker and parties liable
for the payment of this Note.
All notices, requests, demands, and other communications provided for
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered in person; (ii) given by prepaid telex or telegram, or by facsimile or
other instantaneous electronic transmission device; (iii) sent by Federal
Express or other nationally recognized overnight delivery service, charges paid
by the sender, or (iv) deposited in the United States mail, first class,
registered or certified, return receipt requested, with proper postage prepaid,
as follows:
If to Maker:
2230 North Euclid Avenue
Upland, CA 91784
Attn: President
2
<PAGE> 3
If to Holder:
Suite 100
5 Civic Plaza
Newport Beach, CA 92660
Attn: President
Notices given pursuant to (I), (II), and (III) above shall be deemed
received and effective upon receipt by the addressee thereof. Notices given
pursuant to Section (iv) above shall be deemed received and effective three (3)
days after the date deposited in the mail.
In the event of a dispute between the parties arising from this Note,
the prevailing party shall be entitled to recover reasonable attorney's fees and
cost of the suit.
This note shall be governed by the laws of the State of California.
CHARLES A. LAVERTY
/s/ CHARLES A. LAVERTY
----------------------------
Signature
3
<PAGE> 1
EXHIBIT 10.16
FIRST AMENDMENT TO LEASE
I. PARTIES AND DATE.
This First Amendment to Lease (the "First Amendment") dated April 25,
1997, is by and between THE IRVINE COMPANY, a Michigan corporation ("Landlord"),
and UROHEALTH SYSTEMS,INC., a Delaware corporation ("Tenant").
II. RECITALS.
On January 22, 1996, Landlord and Tenant entered into an office space
lease ("Lease") for space in a building located at 5 Civic Plaza, Suite 100,
Newport Beach, California ("Premises").
Landlord and Tenant each desire to modify the Lease to add 3,883
rentable square feet ("Suite 350"), adjust the Basic Rent, and make such other
modifications as are set forth in "III. MODIFICATIONS" next below.
III. MODIFICATIONS.
A. Basic Lease Provisions. The Basic Lease Provisions are hereby amended
as follows:
1. Effective as of the Commencement Date for Suite 350 (as hereinafter
defined), Item 2 shall be amended by adding "Suite 350."
2. Effective as of the Commencement Date for Suite 350, Item 6 shall be
amended by adding the following:
"Basic Rent for Suite 350: Six Thousand Two Hundred Thirteen Dollars
($6,213.00) per month.
Rental Adjustments for Suite 350: Commencing twelve (12) months
following the Commencement Date for Suite 350, the Basic Rent for
Suite 350 shall be Six Thousand Four Hundred Seven Dollars
($6,407.00) per month.
Commencing twenty-four (24) months following the Commencement Date
for Suite 350, the Basic Rent for Suite 350 shall be Six Thousand Six
Hundred One Dollars ($6,601.00) per month.
1
<PAGE> 2
Commencing thirty-six (36) months following the Commencement date for
Suite 350, the Basic Rent for Suite 350 shall be Six Thousand Seven
Hundred Ninety-Five Dollars ($6,795.00) per month."
3. Effective as of the Commencement Date for Suite 350, Item 7 shall be
amended by adding the following:
"Property Tax Base for Suite 350: The Property Tax per rentable
square foot actually incurred by Landlord during its fiscal year
ending June 30, 1997.
Building Cost Base for Suite 350: The Building Costs per rentable
square foot actually incurred by Landlord during its fiscal year
ending June 30, 1997, as reasonably extrapolated to 95% Building
occupancy."
4. Effective as of the Commencement Date for Suite 350, Item 8 shall be
amended by adding "and an additional 3,883 rentable square feet
(Suite 350)."
5. Item 9 is hereby deleted in its entirety and the following shall be
substituted in lieu thereof:
"9. Security Deposit: $27,472.00"
B. Security Deposit. Concurrently with Tenant's delivery of this First
Amendment, Tenant shall deliver the sum of Seven Thousand Two Hundred
Sixty-One Dollars ($7,261.00) to Landlord, which sum shall be added to
the Security Deposit presently being held by Landlord in accordance
with Section 4.3 of the Lease.
C. Operating Expenses for Suite 350. Notwithstanding any contrary provision
in the Lease, Landlord hereby agrees that Tenant shall not be obligated
to reimburse Landlord for Operating Expenses for Suite 350 accruing
during the initial twelve (12) months following the Commencement Date
for Suite 350.
D. Floor Plan of Premises. Effective as of the Commencement Date for Suite
350, Exhibit A attached to this First Amendment shall be added to the
Lease.
E. Parking. Effective as of the Commencement Date for Suite 350, Landlord
shall provide Tenant with fourteen (14) additional unreserved employee
parking spaces. Provided Tenant is not in default under the Lease, the
stall charge for such spaces shall be waived until April 30, 2001.
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<PAGE> 3
F. Tenant Improvements. Landlord hereby agrees to complete the Tenant
Improvements for Suite 350 in accordance with the provisions of Exhibit
X, Work Letter, attached to the Lease except that: (i) the "Plan
Appoval Date" for Suite 350 (as described in Paragraph II.A) shall be
April 15, 1997; (ii) the "Landlord's Contribution" for Suite 350 (as
described in Paragraph III.A) shall be Twenty-Six Thousand Seven Hundred
Ninety-Three Dollars ($26,793.00), based on $8.00 per usable square foot
of Suite 350; (iii) the provisions of Paragraph III.D shall not apply to
Tenant's move into Suite 350; and (iv) in addition to the aforementioned
Landlord's Contribution for Suite 350, Landlord shall advance to Tenant
the cost of other tenant improvement work in Suite 350, but exclusive of
furniture, furnishings and removable personal property, up to a maximum
of Thirteen Thousand Three Hundred Ninety-Six Dollars ($13,396.00),
based on $4.00 per usable square foot of Suite 350 (the "Advance"). The
Advance shall be deemed a loan to Tenant and shall bear interest at the
rate of ten percent (10%) per annum and shall be repaid by Tenant as
additional rent in equal fully-amortized monthly installments on the
first day of each month during the initial Term of this Lease. Upon
request by Landlord, the amount of such installments shall be
memorialized on a form provided by Landlord. Should this Lease terminate
prior to the date the Advance is repaid in full, all unpaid principal
and interest shall be immediately due and payable.
G. Intentionally omitted.
H. Commencement Date. As used herein, the "Commencement Date for Suite 350"
shall be June 1, 1997, as extended on a day-for-day basis by the period
of any delays reasonably attributable to Landlord in substantially
completing the Tenant Improvements for Suite 350. Unless otherwise
agreed in writing by Landlord, Tenant shall commence its rental payments
for Suite 350 as of June 1, 1997, subject to the right to submit any
claim of Landlord delays to be resolved by arbitration in accordance
with Section 14.7(b) of the Lease; should such arbitration be resolved
in Tenant's favor, then Tenant shall be afforded an appropriate rent
credit, based on the arbitrator's determination, against the sums next
due under the Lease.
V. GENERAL.
A. Effect of Amendments. The Lease shall remain in full force and effect
except to the extent that it is modified by this Amendment.
B. Entire Agreement. This Amendment embodies the entire understanding
between Landlord and Tenant with respect to the modifications set forth
in "III. MODIFICATIONS" above and can be changed only by a writing
signed by Landlord and Tenant.
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<PAGE> 4
C. Counterparts. If this Amendment is executed in counterparts, each is
hereby declared to be an original; all, however, shall constitute but one
and the same amendment. In any action or proceeding, any photographic,
photostatic, or other copy of this Amendment may be introduced into
evidence without foundation.
D. Defined Terms. All words commencing with initial capital letters in this
Amendment and defined in the Lease shall have the same meaning in this
Amendment as in the Lease, unless they are otherwise defined in this
Amendment.
E. Corporate and Partnership Authority. If Tenant is a corporation or
partnership, or is comprised of either or both of them, each individual
executing this Amendment for the corporation or partnership represents
that he or she is duly authorized to execute and deliver this Amendment
on behalf of the corporation or partnership and that this Amendment is
binding upon the corporation or partnership in accordance with its terms.
F. Attorneys' Fees. The provisions of the Lease respecting payment of
attorneys' fees shall also apply to this Amendment.
V. EXECUTION.
Landlord and Tenant executed this Amendment on the date as set forth in
"I. PARTIES AND DATE." above.
LANDLORD: TENANT:
THE IRVINE COMPANY UROHEALTH SYSTEMS,INC.
a Michigan corporation a Delaware corporation
By: /s/ WILLIAM R. HALFORD By: /s/ JAMES L. JOHNSON
----------------------------------- ---------------------------
William R. Halford, Vice President, James L. Johnson
and General Manager, Irvine Office Title: Executive V.P. & CFO
Company, a division of The Irvine
Company
By: /s/ JOHN C. TSU By: /s/ KEVIN M. HIGGINS
---------------------------------- ------------------------------
John C. Tsu Kevin M. Higgins
Assistant Secretary Title: Senior V.P. & Secretary
4
<PAGE> 1
EXHIBIT 10.18
UROHEALTH SYSTEMS, INC.
1994 STOCK INCENTIVE PLAN
(AS AMENDED THROUGH AUGUST 9, 1996)
1. Establishment, Purpose, and Definitions.
(a) UroHealth Systems, Inc. (the "Company") hereby adopts
the UroHealth Systems, Inc. 1994 Stock Incentive Plan (the "Plan").
(b) The purpose of the Plan is to facilitate the
Company's restructuring and allow it to attract and provide incentives to
eligible individuals (as defined in Section 4, below) for employment, increased
efforts and successful achievements on behalf of or in the interests of the
Company and its Affiliates and to maximize the rewards due them for those
efforts and achievements. The Plan provides employees (including officers and
directors who are employees) of the Company and of its Affiliates an
opportunity to purchase shares of common stock of the Company ("Stock")
pursuant to options which may qualify as incentive stock options (referred to
as "incentive stock options") under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and employees, officers, independent
contractors, and consultants of the Company and of its Affiliates an
opportunity to purchase shares of Stock pursuant to options which are not
described in Sections 422 or 423 of the Code (referred to as "nonqualified
stock options"). The Plan also provides for the sale or bonus of Stock to
eligible individuals in connection with the performance of services for the
Company or its Affiliates. Finally, the Plan authorizes the grant of stock
appreciation rights ("SARs"), either separately or in tandem with stock
options, entitling holders to cash compensation measured by appreciation in the
value of the Stock.
(c) The term "Affiliate" as used in the Plan means parent
or subsidiary corporations of the Company, as defined in Sections 424(e) and
(f) of the Code (but substituting "the Company" for "employer corporation"),
including parents or subsidiaries of the Company that become such after
adoption of the Plan.
2. Administration of the Plan.
(a) The Plan shall be administered by the Board of
Directors of the Company (the "Board"). Subject to Section 2(f) below, the
Board may delegate the responsibility for administering the Plan to a
committee, under such terms and conditions as the Board shall determine (the
"Committee"). The Committee shall consist of two or more members of the Board
or such lesser number of members of the Board as permitted by Rule 16b-3 (or
any successor thereto) promulgated under the Securities Exchange Act of 1934,
as amended ("Rule 16b-3"). None of the members of the Committee shall receive,
while serving on the Committee, or during the one-year period preceding
appointment to the Committee, a grant or award of equity securities under (i)
the Plan or (ii) any other plan of the Company or its Affiliates under which
the participants are entitled to acquire Stock (including restricted stock),
stock
<PAGE> 2
options, stock bonuses, related rights or stock appreciation rights of the
Company or any of its Affiliates, other than pursuant to transactions in any
such other plan which do not disqualify a director from being a disinterested
person under Rule 16b-3. Members of the Committee shall serve at the pleasure
of the Board. The Committee shall select one of its members as chair of the
Committee and shall hold meetings at such times and places as it may determine.
A majority of the Committee shall constitute a quorum, and acts of the
Committee at which a quorum is present, or acts reduced to or approved in
writing by all the members of the Committee, shall be the valid acts of the
Committee. If the Board does not delegate administration of the Plan to the
Committee, then each reference in this Plan to the "Committee" shall be
construed to refer to the Board.
(b) The Committee shall determine which eligible
individuals (as defined in Section 4 below) shall be granted options under the
Plan, the timing of such grants, the terms thereof (including any restrictions
on the Stock), and the number of shares subject to such options.
(c) The Committee shall also determine which eligible
individuals (as defined in Section 4 below) shall be granted or issued SARs or
Stock (other than pursuant to the exercise of options) under the Plan, the
timing of such grants or issuances, the terms thereof (including any
restrictions and the consideration, if any, to be paid therefor) and the number
of shares or SARs to be granted.
(d) The Committee may amend the terms of any outstanding
option or SAR granted under this Plan, but any amendment that would adversely
affect the holder's rights under an outstanding option or SAR shall not be made
without the holder's written consent. The Committee may, with the holder's
written consent, cancel any outstanding option or SAR or accept any outstanding
option or SAR in exchange for a new option or SAR. The Committee also may
amend any stock purchase agreement or stock bonus agreement relating to sales
or bonuses of Stock under the Plan, but any amendment that would adversely
affect the individual's rights to the Stock shall not be made without his or
her written consent.
(e) The Committee shall have the sole authority, in its
absolute discretion to adopt, amend, and rescind such rules and regulations as,
in its opinion, may be advisable in the administration of the Plan, to construe
and interpret the Plan, the rules and the regulations, and the instruments
evidencing options, SARs or Stock granted or issued under the Plan and to make
all other determinations deemed necessary or advisable for the administration
of the Plan. All decisions, determinations, and interpretations of the
Committee shall be binding on all participants.
(f) Notwithstanding the foregoing provisions of this
Section 2, grants of options, SARs stock bonuses or stock sales to any "Covered
Employee," as such term is defined by Section 162(m) of the Code shall be made
only by a subcommittee of the Committee which, in addition to meeting other
applicable requirements of this Section 2, is composed solely of two or more
outside directors (the "Subcommittee"). In the case of grants to Covered
Employees, references to the "Committee" shall be deemed to be references to
the Subcommittee as specified
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<PAGE> 3
above. For this purpose, outside director shall have the meaning assigned to
that term by Proposed Treasury Regulation Section 1.162-27(e)(3) or any
successor provision thereto, including final regulations. Notwithstanding the
preceding provisions of this Section 2(f), a director who qualifies as a
disinterested person under Rule 16b-3 shall be treated as satisfying the
requirements of an outside director until the first meeting of shareholders of
the Company at which directors are to be elected that occurs after January 1,
1996, or until such other date as shall be specified in proposed or final
treasury regulations issued under Section 162(m) of the Code or other guidance
issued by the Internal Revenue Service which may be relied upon by taxpayers
generally.
3. Stock Subject to the Plan.
(a) The maximum aggregate number of shares of Stock
available for issuance under the Plan and during the life of the Plan shall
equal the greater of (i) two million three hundred thirty-three thousand three
hundred thirty-three (2,333,333) (after adjusting such amounts for any stock
splits or reverse stock splits) or (ii) 20% of the then outstanding shares of
the Stock of the Company; provided, that for purposes of calculating the 20%
maximum, the term Stock shall include securities issued by the Company that
have voting rights on an "as converted" basis equivalent to the voting rights
associated with the underlying Common Stock. Notwithstanding the preceding
provisions of this Section 3(a), the maximum aggregate number of shares
available for issuance under the Plan during the life of the Plan with respect
to the exercise of incentive stock options shall equal 2,333,333.
(b) If an option is surrendered or for any other reason
ceases to be exercisable in whole or in part, the shares of Stock that were
subject to such option, but as to which the option had not been exercised,
shall continue to be available under the Plan. Any shares of Stock forfeited
to the Company pursuant to the terms of agreements evidencing sales or bonuses
of Stock under the Plan shall continue to be available under the Plan.
(c) If there is any change in the Stock through merger,
consolidation, reorganization, recapitalization, reincorporation, stock split,
stock dividend (in excess of 2%), or other change in the corporate structure of
the Company, appropriate adjustments shall be made by the Committee, in order
to preserve but not to increase the benefits to the outstanding options, SARs
and stock purchase or stock bonus awards under the Plan, including adjustments
to the aggregate number and kind of shares subject to the Plan, or to
outstanding stock purchase or stock bonus agreements, or SAR agreements, and
the number and kind of shares and the price per share subject to outstanding
options.
4. Eligible Individuals. Individuals who shall be eligible to
have granted to them options, SARs or Stock under the Plan shall be such
employees, officers, independent contractors, and consultants of the Company or
an Affiliate as the Committee, in its discretion, shall designate from time to
time. Notwithstanding the foregoing, only employees of the Company or an
Affiliate (including officers and directors who are bona fide employees) shall
be eligible to receive incentive stock options.
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<PAGE> 4
5. The Option Price. The exercise price of the each incentive
stock option shall be not less than the per share fair market value of the
Stock subject to such option on the date the option is granted. The exercise
price of each nonqualified stock option shall be as determined by the
Committee. Notwithstanding the foregoing, (i) in the case of an incentive
stock option granted to a person possessing more than 10% of the combined
voting power of the Company or an Affiliate, the exercise price shall be not
less than 110% of the fair market value of the Stock on the date the option is
granted, and (ii) in the case of an option granted to a Covered Employee, the
exercise price shall be not less than the per share fair market value of the
Stock subject to such option on the date the option is granted. The exercise
price of an option shall be subject to adjustment to the extent provided in
Section 3(c), above.
6. Terms and Conditions of Options.
(a) Each option granted pursuant to the Plan will be
evidenced by a written stock option agreement executed by the Company and the
person to whom such option is granted.
(b) The Committee shall determine the term of each option
granted under the Plan; provided, however, that the term of an incentive stock
option shall not be for more than ten years and that, in the case of an
incentive stock option granted to a person possessing more than 10% of the
combined voting power of the Company or an Affiliate, the term of each
incentive stock option shall be no more than five years.
(c) In the case of incentive stock options, the aggregate
fair market value (determined as of the time such option is granted) of the
Stock with respect to which incentive stock options are exercisable for the
first time by an eligible employee in any calendar year (under this Plan and
any other plans of the Company or its Affiliates) shall not exceed $100,000.
(d) The stock option agreement may contain such other
terms, provisions, and conditions consistent with this Plan as may be
determined by the Committee. If an option, or any part thereof is intended to
qualify as an incentive stock option, the stock option agreement shall contain
those terms and conditions which are necessary to so qualify it.
(e) The maximum number of shares of Stock with respect to
which SARs or options to acquire Stock may be granted to any individual per
calendar year under this Plan shall not exceed 400,000 shares (which number may
be increased without shareholder approval to reflect adjustments under Section
3(c), above, to the extent such increase does not cause the grant to fail to
qualify as remuneration payable solely on account of one or more performance
goals within the meaning of Section 162(m) of the Code). This limit shall also
apply to any restricted stock purchase made by an individual which such
purchase was at the fair market value of the stock on the date of purchase or
to any restricted stock when the vesting of such stock is subject to the
satisfaction of performance goals. Unless otherwise provided in final Treasury
Regulations (or other guidance issued by the Internal Revenue Service which may
be relied upon by taxpayers generally), in applying the foregoing limitation
with respect to any employee, if any option is cancelled, the cancelled option
shall continue to count against the maximum number of
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<PAGE> 5
shares for which options may be grant to the employee. For this purpose, the
repricing of an option shall be treated as a cancellation of the existing
option and the grant of a new option.
7. Terms and Conditions of Stock Purchases and Bonuses
(a) Each sale (other than upon exercise of options) or
bonus grant of Stock pursuant to the Plan will be evidenced by a written stock
purchase or stock bonus agreement, as applicable, executed by the Company and
the person to whom such stock is sold or granted.
(b) The stock purchase agreement or stock bonus agreement
may contain such other terms, provisions, and conditions consistent with this
Plan as may be determined by the Committee, including not by way of limitation,
restrictions on transfer, forfeiture provisions, repurchase provisions, and
vesting provisions.
(c) In the event of the sale or grant of such stock at
less than the fair market value of the stock on the date of sale or grant,
which sale or grant is conditioned on the satisfaction of performance goals
(which may be measured in one year periods or multiple year periods), the
aggregate excess of the fair market value of such stock over the purchase price
thereof may not exceed a per individual aggregate of $500,000 per year.
(d) The performance goals to be used in connection with
stock purchases and bonuses shall be the revenues and operating profit of the
Company, as determined in the sole discretion of the Board.
8. Terms and Conditions of SARs. The Committee may, under such
terms and conditions as it deems appropriate, authorize the issuance of SARs
evidenced by a written SAR agreement (which, in the case of tandem options, may
be part of the option agreement to which the SAR relates) executed by the
Company and the person to whom the SARs are granted. The SAR agreement shall
specify the term for the SARs covered thereby and contain such other terms,
provisions and conditions consistent with this Plan as may be determined by the
Committee.
9. Use of Proceeds. Cash proceeds realized from the exercise of
options granted under the Plan or from other sales of Stock under the Plan
shall constitute general funds of the Company.
10. Amendment, Suspension, or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate
the Plan as it deems advisable; provided that such amendment, suspension or
termination complies with all applicable requirements of state and federal law,
including any applicable requirement that the Plan or an amendment to the Plan
be approved by the shareholders, and provided further that, except as provided
in Section 3(c) above, the Board shall in no event amend the Plan in the
following respects without the consent of shareholders then sufficient to
approve the Plan in the first instance:
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<PAGE> 6
(i) To materially increase the benefits accruing
to participants under the Plan;
(ii) To increase the maximum number of shares of
Stock with respect to which restricted stock described in Section 6(e) may be
purchased or SARs or options to acquire Stock may be granted to any individual
per calendar year under the Plan;
(iii) To materially increase the number of shares
of Stock available under the Plan or to increase the number of shares of Stock
available for grant of incentive stock options under the Plan; or
(iv) To materially modify the eligibility
requirements for participation in the Plan or the class of employees eligible
to receive options under the Plan or to change the designation or class of
persons eligible to receive incentive stock options under the Plan.
(b) No option or SAR may be granted nor may any Stock be
issued (other than upon exercise of outstanding options) under the Plan during
any suspension or after the termination of the Plan, and no amendment,
suspension, or termination of the Plan shall, without the affected individual's
consent, alter or impair any rights or obligations under any option or SAR
previously granted under the Plan. The Plan shall terminate with respect to
the grant of incentive stock options on the tenth anniversary of the date of
adoption of the Plan, unless previously terminated by the Board pursuant to
this Section 10.
11. Assignability. To the extent required by Rule 16b-3, no
option or SAR granted pursuant to this Plan shall be transferable by the holder
except by operation of law or by will or the laws of descent and distribution;
provided that, if Rule 16b-3 is amended after the date of the Board's adoption
the Plan to permit broader transferability of options or SARs under that Rule,
(i) an option or SAR shall be transferable to the extent provided in the option
agreement or SAR agreement covering the option or SAR, and (ii) outstanding
options and SARs may, in the Committee's discretion, be amended to provide for
broader transferability of those options and SARs as the Committee may
authorize within the limitations of Rule 16b-3. Stock subject to a stock
purchase agreement or a stock bonus agreement shall be transferable only as
provided in such agreement. Notwithstanding the foregoing, each incentive
stock option under the Plan shall be transferable by the optionee only by will
or the laws of descent and distribution, and, during the optionee's lifetime,
be exercisable only by the optionee unless the Code or Regulations permit
otherwise.
12. Payment Upon Exercise of Options.
(a) Payment of the purchase price upon exercise of any
option granted under this Plan shall be made in cash, by optionee's personal
check, a certified check, bank draft, or postal or express money order payable
to the order of the Company in lawful money of the United States; provided,
however, that the Committee, in its sole discretion, may permit an optionee to
pay the option price in whole or in part (i) with shares of Stock owned by the
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<PAGE> 7
optionee or with shares of Stock withheld from the shares otherwise deliverable
to the optionee upon exercise of an option; (ii) by delivery on a form
prescribed by the Committee of an irrevocable direction to a securities broker
approved by the Committee to sell shares of Stock and deliver all or a portion
of the proceeds to the Company in payment for the Stock; (iii) by delivery of
the optionee's promissory note with such recourse, interest, security, and
redemption provisions as the Committee in its discretion determines
appropriate; or (iv) in any combination of the foregoing. Any Stock used to
exercise options shall be valued at its fair market value on the date of the
exercise of the option. In addition, the Committee, in its sole discretion,
may authorize the surrender by an optionee of all or part of an unexercised
option and authorize a payment in consideration thereof an an amount equal to
the difference between the aggregate fair market value of the Stock subject to
such option and the aggregate option price of such Stock. In the Committee's
discretion, such payment may be made in cash, shares of Stock with a fair
market value on the date of surrender equal to the payment amount, or some
combination thereof.
(b) In the event that the exercise price is satisfied by
shares withheld from the shares of Stock otherwise deliverable to the optionee,
the Committee may issue the optionee an additional option, with terms identical
to the option agreement under which the option was exercised, entitling the
optionee to purchase additional shares of Stock equal to the number of shares
so withheld but at an exercise price equal to the fair market value of the
Stock on the grant date of the new option. Such additional option shall be
subject to the provisions of Section 6(e) above.
13. Withholding Taxes.
(a) No Stock shall be granted or sold under the Plan to
any individual, and no SAR may be exercised, until the individual has made
arrangements acceptable to the Committee for the satisfaction of federal,
state, and local income and employment tax withholding obligations, including
without limitation obligations incident to the receipt of Stock under the Plan,
the lapsing of restrictions applicable to such Stock, the failure to satisfy
the conditions for treatment as incentive stock options under applicable tax
law, or the receipt of cash payments. Upon the exercise of a stock option or
the lapsing of a restriction on Stock issued under the Plan, the Company (or
the optionee's or shareholder's employer) may withhold from the shares
otherwise deliverable to the optionee upon such exercise, or require the
shareholder to surrender shares of Stock as to which the restriction has
lapsed, such number of shares having a fair market value sufficient to satisfy
federal, state and local income and employment tax withholding obligations.
(b) In the event that such tax withholding is satisfied
by the Company or the optionee's employer withholding shares of Stock otherwise
deliverable to the optionee, the Committee may issue the optionee an additional
option, with terms identical to the option agreement under which the option was
exercised, entitling the optionee to purchase additional shares of Stock equal
to the number of shares so withheld but at an exercise price equal to the fair
market value of the Stock on the grant date of the new option. Such additional
option shall be subject to the provisions of Section 6(e) above.
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<PAGE> 8
14. Restrictions on Transfer of Shares. The Committee may require
that the Stock acquired pursuant to the Plan be subject to such restrictions
and agreements regarding sale, assignment, encumbrances, or other transfer as
are in effect among the shareholders of the Company at the time such Stock is
acquired, as well as to such other restrictions as the Committee shall deem
appropriate.
15. Change in Control.
(a) For purposes of this Section 15, a "Change in
Control" shall be deemed to occur upon:
(i) the direct or indirect acquisition by any
person or related group of persons (other than an acquisition from or by the
Company or by a Company-sponsored employee benefit plan or by a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Company's
outstanding Stock;
(ii) a change in the composition of the Board over
a period of thirty-six (36) months or less such that a majority of the Board
members cease, by reason of one or more contested elections for Board
membership or by one or more actions by written consent of shareholders, to be
comprised of individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (A) who were still in office at the time such
election or nomination was approved by the Board;
(iii) approval by the Company's shareholders of a
merger or consolidation in which the Company is not the surviving entity,
except for a transaction the principal purpose of which is to change the state
in which the Company is incorporated;
(iv) approval by the Company's shareholders of (A)
the sale, transfer or other disposition of all or substantially all of the
assets of the Company (including the capital stock of the Company's subsidiary
corporations) or (B) the complete liquidation or dissolution of the Company; or
(v) approval by the Company's shareholders of any
reverse merger in which the Company survives as an entity but in which
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred to a
person or persons different from those who held such securities immediately
prior to such merger.
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<PAGE> 9
(b) In its discretion, the Committee may provide in any
stock option, SAR, Stock bonus or Stock purchase agreement (or in an amendment
thereto) evidencing an option, SAR, Stock bonus or Stock purchase hereunder
that, in the event of any Change in Control any outstanding options or SARs
covered by such an agreement shall be fully vested, nonforfeitable and become
exercisable, and that any restricted Stock covered by such an agreement shall
be released from restrictions on transfer and repurchase or forfeiture rights,
as of the date of the Change in Control. However, an outstanding option may
not be accelerated under this Section 15 if and to the extent (i) such option
is, in connection with the transaction giving rise to a Change of Control,
either to be assumed by the successor or parent thereof or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation or parent thereof, or (ii) such option is to be replaced with a
cash incentive program of the successor corporation that preserves the option
spread existing at the time of the corporate transaction giving rise to the
Change of Control and provides for subsequent payment in accordance with the
same vesting schedule applicable to such option.
(c) If the Committee determines to incorporate a Change
in Control provision in any option or SAR agreement hereunder, the agreement
shall provide that, (i) in the event of a Change in Control described in
clauses (i), (ii) and (v) of Section 15(a) above, the Option or SAR shall
remain exercisable for the remaining term of the option or SAR and (ii) in the
event of a Change in Control described in clauses (iii) or (iv) of Section
15(a) above, the option or SAR shall terminate as of the effective date of the
merger, disposition of assets, liquidation or dissolution described therein.
In no event shall any option or SAR under the Plan be exercised after the
expiration of the term provided for in the related stock option or SAR
agreement pursuant to Section 6(b) or Section 8.
16. Shareholder Approval. The Plan and any incentive stock
options and options granted to Covered Employees hereunder shall become
effective only upon approval by the holders of a majority of the Company's
shares voting (in person or by proxy) at a shareholders' meeting held within 12
months of the Board's adoption of the Plan. The Committee may grant such stock
options under the Plan prior to the stockholders' meeting, but until
stockholder approval of the Plan is obtained, no such option shall be
exercisable. In the event that stockholder approval is not obtained within the
period provided above, all incentive stock options and options granted to
Covered Employees previously granted above, shall terminate.
17. Rule 16b-3 Compliance. With respect to persons subject to
Section 16 of the Securities Exchange Act of 1934, transactions under the Plan
are intended to comply with all applicable conditions of Rule 16b-3. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. Moreover, in the event the Plan does not include a
provision required by Rule 16b-3 to be stated therein, such provision (other
than one relating to eligibility requirements or the price and amount of
awards) shall be deemed automatically to be incorporated by reference into the
Plan insofar as persons subject to Section 16 are concerned.
*Includes 12/29/95 amendments and 8/9/96 amendments
9
<PAGE> 1
EXHIBIT 10.19
UROHEALTH SYSTEMS, INC.
1996 DIRECTORS' NON-QUALIFIED STOCK INCENTIVE PLAN
1. Establishment and Purpose.
(a) UROHEALTH Systems, Inc., a Delaware corporation (the
"Company"), hereby adopts its 1996 Directors' Stock Incentive Plan. The Plan
is intended to provide a means whereby eligible members of the Board may be
given an opportunity to purchase shares of Stock pursuant to options which are
not intended to qualify as incentive stock options under Section 422 of the
Code.
(b) The purpose of the Plan is to enable the Company to
attract qualified individuals to serve as members of the Board, to provide
additional performance incentives to such individuals while serving as
directors, and to encourage their continued service on the Board.
2. Definitions.
As used herein, the following definitions shall apply:
(a) "Affiliate" shall mean any parent or subsidiary
corporations of the Company, as defined in Sections 424(e) and (f) of the Code
(but substituting "the Company" for "employer corporation"), including parents
or subsidiaries of the Company that become such after adoption of the Plan.
(b) "Board" shall mean the Board of Directors of the
Company.
(c) "Change in Control" shall mean a change in ownership
or control of the Company effected through either of the following
transactions:
o the direct or indirect acquisition by any
Person or related group of Persons (other than an acquisition from or
by the Company or by a Company-sponsored employee benefit plan or by a
Person or related group of Persons that directly or indirectly
controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of
the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities, or
o a change in the composition of the Board over
a period of thirty-six (36) months or less such that a majority of the
Board members (rounded up to the next whole number) ceases, by reason
of one or more contested elections for Board
<PAGE> 2
membership, to be comprised of individuals who either (a) have been
Board members continuously since the beginning of such period or
(b) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (a) who were still in office at the time such election or
nomination was approved by the Board.
(d) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(e) "Company" shall mean UROHEALTH Systems, Inc., a
Delaware corporation.
(f) "Continuous Status as a Director" shall mean the
absence of any interruption or termination of service as a Director.
(g) "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
o a merger or consolidation in which the
Company is not the surviving entity, except for a transaction the
principal purpose of which is to change the state in which the Company
is incorporated,
o the sale, transfer or other disposition of
all or substantially all of the assets of the Company (including the
capital stock of the Company's subsidiary corporations) in complete
liquidation or dissolution of the Company, or
o any reverse merger in which the Company is
the surviving entity but in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a Person or
Persons different from those who held such securities immediately
prior to such merger.
(h) "Director" shall mean a member of the Board.
(i) "Effective Date" shall mean the date this Plan is
adopted by the Board.
(j) "Employee" shall mean any person who is an employee
of the Company, or any Affiliate of the Company, for purposes of tax
withholding under the Code. The payment of a director's fee by the Company
shall not be sufficient to render the recipient of such fee an Employee.
(k) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(l) "Fair Market Value" shall mean the price which the
Board acting in good faith determines through any reasonable valuation method
that a share of Stock might change
2
<PAGE> 3
hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or to sell and both having reasonable knowledge of the
relevant facts; provided, however, that where there exists a public market for
the Stock at the time of such determination, the Fair Market Value shall be the
average of the closing bid and asked prices of a share of Stock quoted in the
Over-The-Counter Market Summary or the last reported sale price of a share of
Stock or the closing price of a share of Stock quoted on The American Stock
Exchange, The Nasdaq National Market or on any exchange on which the Stock is
then listed, whichever is applicable, as published in the Western Edition of
The Wall Street Journal on the trading day prior to the date of determination
of Fair Market Value.
(m) "Option" shall mean an option to purchase shares of
Stock granted pursuant to the Plan.
(n) Option Certificate" shall mean the written
certificate setting forth the terms of an Option in the form attached as
Exhibit A hereto.
(o) "Optionee" shall mean an Outside Director who
receives an Option.
(p) "Outside Director" shall mean a Director who is not
an Employee.
(q) "Person" shall mean a natural person, corporation,
partnership, limited liability company, joint venture, trust, or any other
entity and any government or instrumentality of a government.
(r) "Plan" shall mean this UROHEALTH Systems, Inc. 1996
Directors' Stock Incentive Plan.
(s) "Securities Act" shall mean the Securities Act of
1933, as amended.
(t) "Stock" shall mean the Common Stock, $.001 par value
per share, of the Company.
3. Stock Subject to the Plan.
Subject to the provisions of Section 12 of the Plan, the
maximum number of shares of Stock which may be made subject to Options and sold
under the Plan is 300,000 shares of Stock. If an Option expires or becomes
unexercisable for any reason and has not been exercised in full, the Stock
subject to such Option shall be available for future grant under the Plan. If
Stock which was acquired upon exercise of an Option is subsequently repurchased
by the Company, such Stock shall not be available for future grants under the
Plan.
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<PAGE> 4
4. Interpretation and Administration of the Plan.
(a) The Plan shall be administered (the
"Adminstrator") by (i) the Board or (ii) a committee designated by the Board,
which committee shall be constituted in such a manner as to satisfy the
applicable laws and to permit such grants and related transactions under the
Plan to be exempt from Section 16(b) of the Exchange Act in accordance with
Rule 16b-3. Once appointed, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board.
(b) Subject to applicable laws, the provisions of the
Plan (including any other powers given to the Administrator hereunder) and
except as otherwise provided by the Board, the Administrator shall have the
authority, in its discretion:
to select the directorsd to whom Options may from
time to time be granted hereunder;
to determine whether and to what extent Options are
granted hereunder;
to determine the number of shares of Common Stock to
be covered by each Option granted hereunder;
to approve forms of Option Agreements for use under
the Plan;
to determine the terms and conditions of any Option
granted hereunder;
to amend the terms of any outstanding Option granted
under the Plan including a reduction in the exercise price (or base amount on
which appreciation is measured) of any Award to reflect a reduction in the Fair
Market Value of the Common Stock since the grant date of the Award, provided
that any amendment that would adversely affect the Grantee's rights under an
outstanding Award shall not be made without the Grantee's written consent;
to construe and interpret the terms of the Plan and
Options granted pursuant to the Plan; and
to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) All decisions, determinations and interpretations of
the Administrator shall be final and binding on the Optionees and any other
holders of Options intended by the Administrator to be affected thereby.
5. Option Grants.
(a) All grants of Options hereunder shall be made in
accordance with the provisions of this Section 5.
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<PAGE> 5
(b) An option to purchase 7,500 shares of Stock shall be
granted ("Initial Grant") to each Outside Director, such Initial Grant to be
made (i) to the then existing Outside Directors on August 15, 1996, and (ii) to
other Outside Directors elected or appointed to the Board after the Approval
Date on the date each such Outside Director first becomes an Outside Director
of the Company. Beginning with the 1997 annual meeting of the Company's
stockholders and thereafter at each subsequent annual meeting of the Company's
stockholders, each Outside Director who continues as an Outside Director
immediately following each such annual meeting shall be granted an option to
purchase 7,500 shares of Stock ("Subsequent Grant"); provided that no
Subsequent Grant shall be made to any Outside Director who has not served as an
Outside Director of the Company, as of the time of such annual meeting, for at
least one year. Each Subsequent Grant shall be made on the date of the annual
stockholders' meeting in question. If any Option ceases to be exercisable in
whole or in part, the shares which were subject to such Option, but as to which
the Option had not been exercised, shall continue to be available under the
Plan.
6. Terms and Conditions of Options.
(a) Each Option granted pursuant to the Plan shall be
evidenced by an Option Certificate executed by the Company and the Optionee.
(b) The exercise price per share of Options granted under
the Plan shall be 100% of the Fair Market Value per share of Stock on the date
of grant of the Option, subject to adjustment to the extent provided in Section
12 hereof.
(c) Subject to the provisions in the Option Certificate
and Sections 10(e) and 10(f) hereof, each Option shall vest and become
exercisable twelve (12) months after the date of grant.
(d) The term of each Option shall be ten (10) years from
the date of grant, unless a shorter period is required to comply with any
applicable law, in which case such shorter period shall apply.
7. Eligibility.
Options may be granted only to Outside Directors. No Optionee
shall have any rights as a stockholder of the Company as a result of the grant
of an Option under the Plan or his or her exercise of such Option pending the
actual issuance by the Company of the Stock subject to such Option. The Plan
shall not confer upon any Outside Director any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights that the Director or the Company
may have to terminate his or her directorship at any time.
8. Term of Plan; Effective Date.
5
<PAGE> 6
The Plan shall become effective on the Effective Date, subject
to approval of the Plan by the stockholders of the Company. If the Effective
Date precedes such stockholder approval any Option granted under the Plan prior
to such approval shall be conditioned upon approval by stockholders of the
Plan. Options may be granted under the Plan at any time on or before the tenth
anniversary of the date of adoption of the Plan.
9. Payment Upon Exercise.
Payment of the exercise price upon exercise of any Option may
be made (i) in cash, (ii) by delivery on a form prescribed by the Board of an
irrevocable direction to a securities broker approved by the Board to sell
shares and deliver all or a portion of the proceeds to the Company in payment
for the Stock; (iii) with shares of Stock owned by the Optionee or withholding
of shares otherwise deliverable to the Optionee upon exercise of the Option; or
(iv) any combination of the foregoing. Any stock used to exercise an Option
shall be valued at its Fair Market Value on the date of the exercise of the
Option.
10. Exercise of Option.
(a) An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance
with the terms of the Option Certificate by the person entitled to exercise the
Option and full payment for the Stock has been received by the Company in
accordance with Section 9 hereof. An Option may not be exercised for a
fraction of a share of Stock.
(b) If an Optionee ceases to serve as a Director (other
than as a result of disability, death or following a Change in Control), he or
she may, but only within three (3) months after the date he or she ceases to be
a Director, exercise his or her then outstanding Options to the extent that he
or she was entitled to exercise them at the date of such termination.
Notwithstanding the foregoing, in no event may any Option be exercised after
the expiration of its term set forth in Section 6. To the extent that the
Optionee was not entitled to exercise an Option at the date of such
termination, or does not exercise such Option (that he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Notwithstanding the provisions of Section 9(b) above,
in the event an Optionee is unable to continue his or her service as a Director
as a result of his or her total and permanent disability (as defined in Section
22(e)(3) of the Code), he or she may, within twelve (12) months from the date
of such termination, exercise his or her then outstanding Options to the extent
he or she was entitled to exercise them at the date of such termination.
Notwithstanding the foregoing, in no event may any Option be exercised after
the expiration of its term set forth in Section 6. To the extent that the
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option (that he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) If during the term of his or her Option, an Optionee
(A) dies and had been in Continuous Status as a Director at the time of his or
her death, or (B) dies within three (3)
6
<PAGE> 7
months after termination of Continuous Status as a Director, the Option may be
exercised at any time within twelve (12) months following the date of the
Optionee's death by the Optionee's personal representative or by a person who
acquired the right to exercise the Option by bequest or intestate succession,
but only to the extent the Optionee was entitled to exercise the Option at the
time of his or her termination of Continuous Status as a Director.
Notwithstanding the foregoing, in no event may the Option be exercised after
the expiration of the term set forth in Section 6.
(e) Should any Corporate Transaction occur while an
Optionee remains in Continuous Status as a Director, then each outstanding
Option held by such Optionee shall become fully exercisable, immediately prior
to the specified effective date of such Corporate Transaction, for all or any
portion of the shares at the time represented by such Option and may be
exercised with respect to any or all of such shares represented by the Option
prior to the specified effective date of such Corporate Transaction.
Immediately following the consummation of the Corporate Transaction, each such
option shall terminate unless assumed by the successor company or its parent.
(f) Should a Change in Control occur while an Optionee
remains in Continuous Status as a Director, then each outstanding Option held
by such Optionee shall become fully exercisable, immediately prior to the
effective date of such Change in Control, for all of the shares at the time
subject to such Option and may be exercised with respect to any or all of such
shares represented by the Option. The Option shall remain so exercisable until
the expiration or sooner termination of the Option term.
11. Nontransferability of Options.
Options hereunder shall be transferable to the extent
permitted under the Option Agreement.
12. Adjustment Upon Changes in Capitalization.
In the event that the number of outstanding shares of Stock of
the Company is changed through merger, consolidation, reorganization,
recapitalization, reincorporation, stock split, stock dividend (in excess of
two percent) or other change in the capital structure of the Company without
consideration, the number of shares of Stock available under the Plan, the
number of shares of Stock deliverable in connection with any Option and the
exercise price per share of such Option shall be proportionately adjusted;
provided however, that no certificate or scrip representing fractional shares
shall be issued and any resulting fractions of a share shall be ignored.
13. Amendment and Termination of the Plan.
(a) The Board may amend the Plan from time to time in
such respects as the Board may deem advisable; provided, however, that to the
extent necessary to comply with any other applicable law or regulation, the
Company shall obtain approval by the Company's
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stockholders to amend the Plan to the extent and in the manner required by such
law or regulation. Notwithstanding the foregoing, the provisions set forth in
Sections 5 and 6 of the Plan shall not be amended periodically and in no event
more than once every six (6) months, other than to comport with changes in the
Code, the Employee Retirement Income Security Act of 1974, as amended, or any
applicable rules and regulations thereunder.
(b) The Board, without further approval of the
stockholders, may at any time terminate or suspend the Plan. Except as
otherwise provided herein, any such termination or suspension of the Plan shall
not affect Options already granted hereunder, and such Options shall remain in
full force and effect as if the Plan had not been terminated or suspended.
(c) Except as otherwise provided herein, rights and
obligations under any outstanding Option shall not be altered or impaired by
amendment, suspension or termination of the Plan, except with the consent of
the person to whom the Option was granted or transferred.
14. Conditions Upon Issuance of Stock.
(a) Stock shall not be issued pursuant to the exercise of
an Option unless the exercise of such Option and the issuance and delivery of
such Stock pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, state securities laws, and the
requirements of any stock exchange or national market system upon which the
Stock may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Inability of the Company to obtain authority from any
regulatory body having jurisdictional authority deemed by the Company's counsel
to be necessary for the lawful issuance and sale of any Stock hereunder shall
relieve the Company of any liability for failure to issue or sell such Stock.
15. Reservation of Stock.
The Company, during the term of the Plan, will at all times
reserve and keep available such number of shares of Stock as shall be
sufficient to satisfy the requirements of the Plan.
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<PAGE> 1
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated effective as of
August 14, 1996 is between UROHEALTH Systems, Inc., a Delaware corporation (the
"Company"), and Richard Kindberg, (the "EMPLOYEE").
A. The Company desires to obtain the continued services of Employee, on
its own behalf and on behalf of all existing and future "AFFILIATED COMPANIES"
(defined as any corporation or other business entity or entities that directly
or indirectly controls, is controlled by, or is under common control with the
Company), and Employee desires to continue in the employment of the Company upon
the following terms and conditions.
B. The Company has spent significant time, effort and money to develop
certain Proprietary Information (as defined below), which the Company considers
vital to its business and goodwill.
C. The Proprietary Information will necessarily be communicated to or
acquired by Employee in the course of his employment with the Company, and the
Company desires to obtain the continued services of Employee, only if, in doing
so, it can protect its Proprietary Information and goodwill.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Period of Employment
(a) The Company hereby employs Employee to render services to the
Company in the position and with the duties and responsibilities described in
Section 2 for the period (the "PERIOD OF EMPLOYMENT") beginning August 14, 1996,
and ending on the earlier of (i) August 13, 1997, (the "TERM DATE") and (ii) the
date the Period of Employment is terminated in accordance with Section 4.
(b) Unless earlier terminated in accordance with Section 4, this
Agreement shall automatically renew for one-year on the first anniversary of the
date of this Agreement.
2. Position, Duties and Responsibilities
(a) Employee hereby accepts employment with the Company as President
of the Company's Richard-Allan subsidiary or other positions as the Chief
Executive Officer of the Company shall designate. Employee shall devote his best
efforts and his full time and attention to the performance of the services
customarily incident to such office and to such other services as may be
reasonably requested by the Chief Executive Officer of the Company.
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(b) Full-Time Employment. Employee shall devote full time to
Employee's employment, and shall expend best efforts on behalf of the Company
Employee agrees that while employed by the Company, Employee will not engage in
any other employment or business which could interfere with the performance of
Employee's duties to the Company, or compete with the Company in any way.
Employee agrees to abide by all policies and decisions of the Company during the
term of this Agreement.
(c) Competitive Plans. Employee agrees not to take any preliminary
steps to set up or engage in any business enterprises that would compete in any
way with the Company during the term of this Agreement. While employed by the
Company, Employee agrees to divulge to the Company any and all competitive plans
which Employee may have under consideration, whether or not Employee intends to
act upon them. As used in the preceding sentence, the term "competitive plans"
shall include, but not be limited to, plans to set up, establish or engage in a
business enterprise in competition with the Company, and plans to seek or accept
employment from anyone in competition with the Company.
(d) Business Opportunities. Employee agrees promptly and fully to
disclose to the Company, and not to divert to Employee's own use or benefit, or
the use or benefit of others, any business opportunities involving any past,
existing or prospective lines of business, suppliers, products or other business
activities of the Company, or any other business opportunities that should
otherwise be disclosed to the Company.
3. Compensation, Benefits and Expenses
(a) Compensation. In consideration of the services to be rendered
hereunder, including, without limitation, services to any Affiliated Company,
Employee shall be paid an annual salary of Two Hundred Thousand Dollars
($200,000), payable in 24 equal installments at the times and pursuant to the
procedures regularly established, and as they may be amended, by the Company
during the term of this Agreement.
(b) Bonus. Employee shall also be eligible to receive, in the
discretion of the Board of Directors (the "Board"), a performance bonus (or
other special bonuses), in such amounts as determined by the Board based upon
the Board's evaluation of the performance of Employee, the Company's operating
results and such other criteria determined by the Board to be relevant.
(c) Benefits. As he becomes eligible therefor, the Company shall
provide Employee with the right to participate in and to receive benefits from
all present and future life, accident, disability, medical, savings and stock
option plans and all similar benefits made available generally to the Company's
other similarly situated employees. The amount and extent of benefits to which
Employee is entitled shall be governed by the specific benefit plan, as it may
be amended from time to time.
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(d) Vacation. Employee shall be entitled to three weeks of vacation
per year, exclusive of Company holidays.
(e) Expenses. The Company shall reimburse Employee for reasonable
travel and other business expenses incurred by Employee in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the term of this Agreement.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically
upon the death of Employee. The Company shall pay to Employee's beneficiaries or
estate, as appropriate, the compensation to which he is entitled pursuant to
Section 3(a) through the end of the month in which death occurs. Thereafter, the
Company's obligations hereunder shall terminate. Nothing in this section shall
affect any entitlement of Employee's heirs to the benefits under any life
insurance plan.
(b) By Disability. If, in the sole opinion of the Board, employee
shall be prevented from properly performing his duties hereunder by reason of
any physical or mental incapacity for a period of more than 150 days in the
aggregate or 120 consecutive days in any twelve-month period, then, to the
extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall terminate. Nothing in this section shall affect Employee's rights under
any disability plan in which he is a participant.
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon 15 days' advance written notice to Employee. The Company shall pay Employee
the compensation to which he is entitled pursuant to Section 3(a) through the
end of the notice period and thereafter the Company's obligations hereunder
shall terminate. Termination shall be for "Cause" if: (i) Employee has engaged
in illegal or other wrongful conduct substantially detrimental to the business
or reputation of the Company or any Affiliated Company, or is charged with or
convicted of a felony; (ii) Employee refuses or fails to act in accordance with
any reasonable direction or order of the Board or his immediate superiors;
provided, that the Board or such superiors has given Employee written notice of
such refusal or failure and Employee fails to comply with such direction or
order within 15 days after the date of such notice; or (iii) Employee has
engaged in any fraud, embezzlement, misappropriation or similar conduct against
the Company.
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(d) By Company Without Cause. The Company may terminate the Period
of Employment without Cause at any time upon 90 days' advance written notice to
Employee. Upon such termination, and subject to Employee's compliance with
provisions of Section 6 hereof, the Company shall pay Employee aggregate
payments in an amount equal to the amount of compensation to which he is
entitled pursuant to Section 3(a) for the remainder of the Period of Employment
which shall for purposes of this subsection (d) include the renewals
contemplated by Section 1(b) above, and (ii) all outstanding unvested options
shall become fully vested, nonforfeitable and exercisable as of the termination
date and thereafter all obligations of the Company hereunder shall terminate. In
the event that the period of Employment is terminated without Cause, the
payments required under this Section 4(d) shall be made in accordance with the
then normal payroll practices of the Company.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that all personal
property, including, without limitation, all books, manuals, records, reports,
notes, contracts, lists, blueprints and other documents, or materials, or copies
thereof, Proprietary Information (as defined below), furnished to or prepared by
Employee in the course of or incident to his employment, including, without
limitation, records and any other materials pertaining to Invention Ideas (as
defined below), belong to the Company.
(ii) Upon termination of the Period of Employment, Employee
shall be deemed to have resigned from all offices then held with the Company or
any Affiliated Company.
(iii) The representations and warranties contained herein and
Employee's obligations under Sections 4(e) and 6 shall survive termination of
the Period of Employment and the expiration of this Agreement.
5. Change of Control. Following a "Change of Control". Employee shall
be entitled to terminate his employment hereunder, with or without good reason,
upon 30 days' advance written notice to the Company given at any time during the
one-year period after the Change of Control. In the event that Employee
terminates his employment pursuant to this Section 5 with Good Reason (as
defined below) after a Change of Control or if during such one-year period
Employee's employment is terminated by the Company without Cause, he shall be
entitled to receive payment upon such termination of an amount equal to the
greater of (i) one times the total salary and bonus compensation paid to
Employee by the Company pursuant to Section 3(a) and 3(b) for the twelve months
immediately preceding the Change of Control and (ii) the remaining amounts
payable by the Company pursuant to Section 3(a) through the Term Date; provided,
however, that if the severance payment under this Section 5, either alone or
together with other payments which Employee has the right to receive from the
Company, would not be deductible (in whole or in part) by the Company as a
result of such payment constituting a "parachute payment" (as defined in Section
280G of the Internal Revenue
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Code of 1986, as amended (the "Code"), the severance payment provided under this
Section 5 shall be reduced to the maximum deductible amount under the Code. For
purposes of this Agreement, a Change of Control of the Company shall be deemed
to have occurred if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, (y) any reverse merger in
which the Company is the continuing or surviving corporation but in which
securities possessing more than 50% of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from those who hold such securities immediately prior to the merger,
or (z) any sale, lease, exchange or other transfer (in one transaction or series
of related transactions) of all, or substantially all, of the assets of the
Company, or of the Richard-Allan subsidiary if Employee is employed at
Richard-Allan at the time of such sale, lease exchange or transfer, or (ii) the
stockholders of the Company approve a plan or proposal for the liquidation or
dissolution of the Company, or (iii) any "person" (as defined in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), shall become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 20% or more of the Company's
outstanding Common Stock (other than as a result of a stock purchase or
purchases made by such person directly from the Company), or (iv) during any
twelve-month period, individuals who at the beginning of such period constitute
the entire Board of Directors of the Company shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least a majority of the directors then still in office who were
directors at the beginning of the period. For purposes of this Section 5, "Good
Reason" shall exist if (i) the place of business at which Employee is
principally employed is relocated to a location more than 50 miles from such
location on the date of the Change of Control or (ii) there is an assignment to
Employee of any duties materially inconsistent with or which constitute a
material change in Employee's position, duties, responsibilities or status with
the Company or which assignment involves a substantial diminution in Employee's
level of responsibility, provided, that continuation of Employee's primary
responsibilities after a Change of Control without regard to Employee's level of
responsibility in a larger organization after a Change of Control shall not
constitute a diminution of Employee's level of responsibility.
6. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any
idea in whatever form, tangible or intangible, pertaining in any manner to the
business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general
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knowledge prior to his employment by the Company; or (iii) the information is
disclosed to Employee without confidential or proprietary restriction by a third
party who rightfully possesses the information (without confidential or
proprietary restriction) and did not learn of it, directly or indirectly, from
the Company.
(b) General Restrictions On Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this Agreement, and (ii) after termination of the Period
of Employment as specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities. Employee
acknowledges that pursuit of the activities prohibited by this Section 6(c)
would necessarily involve the use or disclosure of Proprietary Information in
breach of Section 6(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or herself or
any third party, directly or indirectly, (i) divert or attempt to divert from
the Company (or any Affiliated Company) any business of any kind in which it is
engaged, including, without limitation, the solicitation of or interference with
any of its suppliers or customers, (ii) employ, solicit for employment, or
recommend for employment any person employed by the Company, or any Affiliated
Company, during the period of such person's employment and for a period of one
year thereafter, or (iii) engage in any business activity that is competitive
with the Company, unless Employee can prove that action taken in contravention
of this Section 6(c)(iii) was done without the use of any Proprietary
Information; provided, that in no event shall Employee engage in such
competitive activities during the period which Employee continues to receive
payments pursuant to Section 4(d) above. For purposes of this Section 5(c),
"competitive activities" shall be business activities that are directly
competitive with an existing or presently planned business of the Company on the
date of termination, which activity constitutes or is anticipated to constitute
more than 15% of revenues of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit any
remedy of the Company under the California Uniform Trade Secrets Act (California
Civil Code Paragraph 3426), or otherwise available under law.
7. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation
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shall be null and void. Nothing in this Agreement shall prevent the
consolidation of the Company with, or its merger into, any other corporation, or
the sale by the Company of all or substantially all of its properties or assets,
or the assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
8. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
UroHealth Systems, Inc.
5 Civic Plaza, Suite 100
Newport Beach, CA 92660
Attn: Chief Executive Officer
or to Employee at:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
Notice of change of address shall be effective only when done in
accordance with this section.
9. Entire Agreement. Except as otherwise provided in that certain
Merger Agreement dated July 5, 1996 and other agreements associated therewith,
the terms of this Agreement are intended by the parties to be the final
expression of their agreement with respect to the employment of Employee by the
Company and may not be contradicted by evidence or any prior or contemporaneous
agreement. The parties further intend that this Agreement shall constitute the
complete and exclusive statement of its terms and that no extrinsic evidence
whatsoever may be introduced in any judicial, administrative or other legal
proceeding involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any
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provision of this Agreement that such other party was or is obligated to comply
with or perform, provided, however, that such waiver shall not operate as a
waiver of, or estoppel with respect to, any other or subsequent failure. No
failure to exercise and no delay in exercising any right, remedy or power
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy or power provided
herein or by law or in equity.
11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
The parties have duly executed this Agreement as of the date first
written above.
/s/ RICHARD KINDBERG
-----------------------------------
Employee: Richard Kindberg
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
-------------------------
Charles A. Laverty
Chairman of the Board and
Chief Executive Officer
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EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated effective as of
January 2, 1996, is between UROHEALTH SYSTEMS, INC., a Delaware corporation (the
"Company"), AND MICHAEL SCHULER, (the "Employee").
A. The Company desires to obtain the continued services of
Employee, on its own behalf and on behalf of all existing and future
"Affiliated Companies" (defined as any corporation or other business entity or
entities that directly or indirectly controls, is controlled by, or is under
common control with the Company), and Employee desires to continue in the
employment of the Company upon the following terms and conditions.
B. The Company has spent significant time, effort and money to
develop certain Proprietary Information (as defined below), which the Company
considers vital to its business and goodwill.
C. The Proprietary Information will necessarily be communicated
to or acquired by Employee in the course of his employment with the Company,
and the Company desires to obtain the continued services of Employee, only if,
in doing so, it can protect its Proprietary Information and goodwill.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Period of Employment
(a) The Company hereby employs Employee to render
services to the Company in the position and with the duties and
responsibilities described in Section 2 for the period (the "Period of
Employment") beginning January 2, 1996 and ending on the earlier of (i)
december 31, 1996, as the same may be extended pursuant to Section l(b) below
(the "Term Date") and (ii) the date the Period of Employment is terminated in
accordance with Section 4.
(b) Unless earlier terminated in accordance with Section
4, this Agreement shall automatically renew for an additional one-year term on
the first and second anniversaries of the date of this Agreement.
2. Position, Duties and Responsibilities
(a) Employee hereby accepts employment with the Company
as Vice President of New Business Development of the Company, or other
positions as the Chief Executive Officer of the Company shall designate.
Employee shall devote his best efforts and his full time and attention to the
performance of the services customarily incident to such office and to such
other services as may be reasonably requested by the Chief Executive Officer of
the Company.
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(b) Full-Time Employment. Employee shall devote full
time to Employee's employment, and shall expend best efforts on behalf of the
Company Employee agrees that while employed by the company, Employee will not
engage in any other employment or business which could interfere with the
performance of Employee's duties to the Company, or compete with the Company in
any way. Employee agrees to abide by all policies and decisions of the Company
during the term of this Agreement.
(c) Competitive Plans. Employee agrees not to take any
preliminary steps to set up or engage in any business enterprises that would
compete in any way with the Company during the term of this Agreement. While
employed by the Company, Employee agrees to divulge to the Company any and all
competitive plans which Employee may have under consideration, whether or not
Employee intends to act upon them. As used in the preceding sentence, the term
"competitive plans" shall include, but not be limited to, plans to set up,
establish or engage in a business enterprise in competition with the Company,
and plans to seek or accept employment from anyone in competition with the
Company.
(d) Business Opportunities. Employee agrees promptly and
fully to disclose to the Company, and not to divert to Employee's own use or
benefit, or the use or benefit of others, any business opportunities involving
any past, existing or prospective lines of business, suppliers, products or
other business activities of the Company, or any other business opportunities
that should otherwise be disclosed to the Company.
3. Compensation, Benefits and Expenses
(a) Compensation. In consideration of the services to be
rendered hereunder, including, without limitation, services to any Affiliated
Company, Employee shall be paid an annual salary of Two Hundred Twenty Five
Thousand Dollars ($225,000), payable in 24 equal installments at the times and
pursuant to the procedures regularly established, and as they may be amended,
by the Company during the term of this Agreement.
(b) Bonus. Employee shall also be eligible to receive,
in the discretion of the Board of Directors (the "Board"), a performance bonus
(or other special bonuses), in such amounts as determined by the Board based
upon the Board's evaluation of the performance of Employee, the Company's
operating results and such other criteria determined by the Board to be
relevant.
(c) Benefits. As he becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical, and
savings plans and all similar benefits made available generally to the
Company's other similarly situated employees.
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The amount and extent of benefits to which Employee is entitled shall be
governed by the specific benefit plan, as it may be amended from time to time.
(d) Vacation, Employee shall be entitled to three weeks of
vacation per year, exclusive of Company holidays.
(e) Expenses. The Company shall reimburse Employee for reasonable
travel and other business expenses incurred by Employee in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the term of this Agreement.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate.
Nothing in this section shall affect any entitlement of Employee's heirs to the
benefits under any life insurance plan.
(b) By Disability. If, in the sole opinion of the Board,
employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 150 days
in the aggregate or 120 consecutive days in any twelve-month period, then, to
the extent permitted by law, the Period of Employment shall terminate on and
the compensation to which Employee is entitled pursuant to Section 3(a) shall
be paid up through the last day of the month in which the Board determines
Employee to be disabled hereunder, and thereafter the Company's obligations
hereunder shall terminate. Nothing in this section shall affect Employee's
rights under any disability plan in which he is a participant.
(c) By Company For Cause. The Company may terminate,
without liability, the Period of Employment for Cause (as defined below) at any
time upon 15 days' advance written notice to Employee. The Company shall pay
Employee the compensation to which he is entitled pursuant to Section 3(a)
through the end of the notice period and thereafter the Company's obligations
hereunder shall terminate. Termination shall be for "Cause" if (i) Employee
has engaged in illegal or other wrongful conduct substantially detrimental to
the business or reputation of the Company or any Affiliated Company, or is
charged with or convicted of a felony; (ii) Employee refuses or fails to act in
accordance with any reasonable direction or order of the Board or his immediate
superiors; provided, that the Board or such superiors has given Employee
written notice of such refusal or failure and Employee fails to comply with
such direction or order within 15 days after the date of such notice; or (iii)
Employee has engaged in any fraud, embezzlement, misappropriation or similar
conduct against the Company.
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(d) By Company Without Cause. The Company may terminate
the Period of Employment without Cause at any time upon 90 days' advance
written notice to Employee. Upon such termination, and subject to Employee's
compliance with provisions of Section 6 hereof, the Company shall pay Employee
aggregate payments in an amount equal to the amount of compensation to which he
is entitled pursuant to Section 3(a) for the remainder of the Period of
Employment which shall for purposes of this subsection (d) include the renewals
contemplated by Section 1(b) above, and thereafter all obligations of the
Company hereunder shall terminate, In the event that the period of Employment
is terminated without Cause, the payments required under this Section 4(d)
shall be made in accordance with the then normal payroll practices of the
Company.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that
all personal property, including, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints and other documents, or
materials, or copies thereof, Proprietary Information (as defined below),
furnished to or prepared by Employee in the course of or incident to his
employment, including, without limitation, records and any other materials
pertaining to Invention Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company.
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 4(e) and 6 shall survive
termination of the Period of Employment and the expiration of this Agreement.
5. Change of Control. Following a "Change of Control", Employee
shall be entitled to terminate his employment hereunder, with or without good
reason, upon 30 days' advance written notice to the Company given at any time
during the one-year period after the Change of Control. In the event that
Employee terminates his employment pursuant to this Section 5 with Good Reason
(as defined below) after a Change of Control or if during such one-year period
Employee's employment is terminated by the Company without Cause, he shall be
entitled to receive payment upon such termination of an amount equal to the
greater of (i) one times the total salary and bonus compensation paid to
Employee by the Company pursuant to Section 3(a) and 3(b) for the twelve months
immediately preceding the Change of Control and (ii) the remaining amounts
payable by the Company pursuant to Section 3(a) through the Term Date; provided,
however, that if the severance payment under this Section 5, either alone or
together with other payments which Employee has the right to receive from the
Company, would not be deductible (in whole or in part) by the Company as a
result of such payment constituting a "parachute payment" (as defined in
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
severance payment provided under this Section 5 shall be reduced to the maximum
deductible amount under the Code. For
4
<PAGE> 5
purposes of this Agreement, a Change of Control of the Company shall be deemed
to have occurred if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, (y) any reverse merger in
which the Company is the continuing or surviving corporation but in which
securities possessing more than 50% of the total combined power of the
Company's outstanding securities are transferred to a person or persons
different from those who hold such securities immediately prior to the merger,
or (z) any sale, lease, exchange or other transfer (in one transaction or
series of related transactions) of all, or substantially all, of the assets of
the Company, or (ii) the stockholders of the Company approve a plan or proposal
for the liquidation or dissolution of the Company, or (iii) any "person" (as
defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall become the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more
of the Company's outstanding Common Stock (other than as a result of a stock
purchase or purchases made by such person directly from the Company), or (iv)
during any twelve-month period, individuals who at the beginning of such period
constitute the entire Board of Directors of the Company shall cease for any
reason to constitute a majority thereof unless the election, or the nomination
for election by the Company's stockholders, of each new director was approved
by a vote of at lease a majority of the directors then still in office who were
directors at the beginning of the period. For purposes of this Section 5,
"Good Reason" shall exist if (i) the place of business at which Employee is
principally employed is relocated to a location more than 50 miles from such
location on the date of the Change of Control or (ii) there is an assignment to
Employee of any duties materially inconsistent with or which constitute a
material change in Employee's position, duties, responsibilities or status with
the Company or which assignment involves a substantial diminution in Employee's
level of responsibility, provided, that continuation of Employee's primary
responsibilities after a Change of Control without regard to Employee's level
of responsibility in a larger organization after a Change of Control shall not
constitute a diminution of Employee's level of responsibility.
6. Proprietary Information.
(a) Defined. "Proprietary Information" is all
information and any idea in whatever form, tangible or intangible, pertaining
in any manner to the business of the Company or any Affiliated Company, or to
its clients, consultants or business associates, unless: (i) the information is
or becomes publicly known through lawful means; (ii) the information was
rightfully in Employee's possession or part of his general knowledge prior to
his employment by the Company; or (iii) the information is disclosed to
Employee without confidential or proprietary restriction by a third party who
rightfully
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<PAGE> 6
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions On Use. Employee agrees to hold
all Proprietary Information in strict confidence and trust for the sole benefit
of the Company and not to, directly or indirectly, disclose, use, copy,
publish, summarize or remove from the Company's premises any Proprietary
Information (or remove from the premises any other property of the Company),
except (i) during the Period of Employment to the extent necessary to carry out
Employee's responsibilities under this Agreement, and (ii) after termination of
the Period of Employment as specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
6(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 6(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or herself or
any third party, directly or indirectly, (i) divert or attempt to divert from
the Company (or any Affiliated Company) any business of any kind in which it is
engaged, including, without limitation, the solicitation of or interference
with any of its suppliers or customers, (ii) employ, solicit for employment, or
recommend for employment any person employed by the Company, or any Affiliated
Company, during the period of such person's employment and for a period of one
year thereafter, or (iii) engage in any business activity that is competitive
with the Company, unless Employee can prove that action taken in contravention
of this Section 6(c)(iii) was done without the use of any Proprietary
Information; provided, that in no event shall Employee engage in such
competitive activities during the period which Employee continues to receive
payments pursuant to Section 4(d) above. For purposes of this Section 5(c),
"competitive activities" shall be business activities that are directly
competitive with an existing or presently planned business of the Company on
the date of termination, which activity constitutes or is anticipated to
constitute more than 15% of revenues of the Company.
(d) Remedies. Nothing in this Section 6 is intended to
limit any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code Paragraph 3426), or otherwise available under law.
7. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer,
delegate or otherwise dispose of, whether voluntarily or involuntarily, or by
operation of law, any rights or obligations under this Agreement, nor shall
Employee's rights be subject to encumbrance or the claims of creditors. Any
purported assignment, transfer or delegation shall be null and void. Nothing
in this Agreement shall prevent the consolidation of the Company with, or its
merger into, any other corporation, or the sale by the Company of all
6
<PAGE> 7
or substantially all of its properties or assets, or the assignment by the
Company of this Agreement and the performance of its obligations hereunder to
any successor in interest or any Affiliated Company. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, legal representatives, successors and
permitted assigns, and shall not benefit any person or entity other than those
enumerated above.
8. Notices. All notices or other communications required or
permitted hereunder shall be made in writing and shall be deemed to have been
duly given if delivered by hand or mailed, postage prepaid, by certified or
registered mail, return receipt requested, and addressed to the Company at:
UroHealth Systems, Inc.
3050 Redhill Avenue
Costa Mesa, CA 92626
Attn: Chief Executive Officer
or to Employee at:
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
Notice of change of address shall be effective only when done
in accordance with this section.
9. Entire Agreement. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
employment of Employee by the Company and may not be contradicted by evidence
or any prior or contemporaneous agreement. The parties further intend that
this Agreement shall constitute the complete and exclusive statement of its
terms and that no extrinsic evidence whatsoever may be introduced in any
Judicial, administrative or other legal proceeding involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified,
amended or terminated except by an instrument in writing, signed by Employee
and by a duly authorized representative of the Company other than Employee. By
an instrument in writing similarly executed, either party may waive compliance
by the other party with any provision of this Agreement that such other party
was or is obligated to comply with or perform, provided, however, that such
waiver shall not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure. No failure to exercise and no delay in
7
<PAGE> 8
exercising any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy or power provided
herein or by law or in equity.
11. Severability; Enforcement. If any provision of this
Agreement, or the application thereof to any person, place or circumstance,
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement and such provisions as applied to
other persons, places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, Interpretation, enforceability
and performance of this Agreement shall be governed by and construed in
accordance with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
The parties have duly executed this Agreement as of the date first
written above.
/s/ MICHAEL SCHULER
------------------------------------
Employee: Michael Schuler
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
---------------------------------
Charles A. Laverty
Chairman of the Board and
Chief Executive Officer
8
<PAGE> 1
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated as of December
29, 1995, is between UroHealth Systems, Inc., a Delaware corporation (the
"COMPANY"), and Paul E. Petersen, Jr.
A. The Company desires to obtain the services of Employee, on
its own behalf and on behalf of all existing and future "AFFILIATED COMPANIES"
(defined as any corporation or other business entity or entities that directly
or indirectly controls, is controlled by, or is under common control with the
Company), and Employee desires to accept employment with the Company upon the
following terms and conditions.
B. The Company has spent significant time, effort and money to
develop certain Proprietary Information (as defined below), which the Company
considers vital to its business and goodwill.
C. The Proprietary Information will necessarily be
communicated to or acquired by Employee in the course of his employment with
the Company, and the Company desires to obtain the services of Employee, only
if, in doing so, it can protect its Proprietary Information and goodwill.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Period of Employment.
(a) The Company hereby employs Employee to render
services to the Company in the position and with the duties and
responsibilities described in Section 2 for the period (the "PERIOD OF
EMPLOYMENT") beginning December 29, 1995 and ending on the earlier of (i)
December 29, 1996, as the same may be extended pursuant to Section 1(b) below
(the "TERM DATE"), and (ii) the date the Period of Employment is terminated in
accordance with Section 4. This Agreement shall only become effective if the
merger of a wholly-owned subsidiary of the Company with and into Osbon Medical
Systems Ltd. ("OSBON") pursuant to which Osbon becomes a wholly-owned
subsidiary of the Company is consummated.
(b) Unless earlier terminated in accordance with Section
4, this Agreement shall automatically renew for an additional one-year term on
the first and second anniversaries of the date of this Agreement.
2. Position, Duties and Responsibilities.
(a) Position. Employee hereby accepts employment with
the Company as Senior Vice President Sales and Marketing- Impotence Division
(or, with the approval of Employee, in such other position(s) as the Chief
Executive Officer of the Company shall designate). Employee shall devote his
best efforts and his full time and attention to the performance of the services
customarily incident to such office and to such other services as may
<PAGE> 2
be reasonably requested by the Chief Operating Officer of the Company, with the
approval of the Chief Executive Officer of the Company.
(b) Full-Time Employment. Employee shall devote full
time to Employee's employment, and shall expend best efforts on behalf of the
Company. Employee agrees that while employed by the Company, Employee will not
engage in any other employment or business which could interfere with the
performance of Employee's duties to the Company, or compete with the Company in
any way. Employee agrees to abide by all policies and decisions of the Company
during the term of this Agreement.
(c) Competitive Plans. Employee agrees not to take any
preliminary steps to set up or engage in any business enterprises that would
compete in any way with the Company during the term of this Agreement. While
employed by the Company, Employee agrees to divulge to the Company any and all
competitive plans which Employee may have under consideration, whether or not
Employee intends to act upon them. As used in the preceding sentence, the term
"competitive plans" shall include, but not be limited to, plans to set up,
establish or engage in a business enterprise in competition with the Company,
and plans to seek or accept employment from anyone in competition with the
Company.
(d) Business Opportunities. Employee agrees promptly
and fully to disclose to the Company, and not to divert to Employee's own use
or benefit, or the use or benefit of others, any business opportunities
involving any past, existing or prospective lines of business, suppliers,
products or other business activities of the Company, or any other business
opportunities that should otherwise be disclosed to the Company.
3. Compensation, Benefits and Expenses.
(a) Compensation. In consideration of the services to
be rendered hereunder, including, without limitation, services to any
Affiliated Company, Employee shall be paid an annual salary $125,000, payable
in 26 equal installments at the times and pursuant to the procedures regularly
established, and as they may be amended, by the Company during the term of this
Agreement.
(b) Bonus. Employee shall receive commissions and
bonuses with respect to activities during calendar year 1995 in accordance with
Schedule A hereto. Thereafter, Employee shall participate in the bonus program
for Senior Management of the Company which plan has been approved by the
President of the Company and adopted by the Compensation Committee of the Board
of Directors (the "BOARD").
(c) Benefits. As he becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical,
pension and savings plans and all similar benefits, including stock options,
made available generally to the Company's other similarly situated employees.
The amount and extent of benefits to which Employee is entitled shall be
governed by the specific benefit plan, as it may be amended from time to time.
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<PAGE> 3
(d) Vacation. Employee shall be entitled to three weeks
of vacation per year, exclusive of Company holidays.
(e) Expenses. The Company shall reimburse Employee for
reasonable travel and other business expenses incurred by Employee in the
performance of his duties hereunder in accordance with the Company's general
policies, as they may be amended from time to time during the term of this
Agreement.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate.
Nothing in this section shall affect any entitlement of Employee's heirs to the
benefits under any life insurance plan.
(b) By Disability. If, in the sole opinion of the
Board, Employee shall be prevented from properly performing his duties
hereunder by reason of any physical or mental incapacity for a period of more
than 150 days in the aggregate or 120 consecutive days in any twelve-month
period, then, to the extent permitted by law, the Period of Employment shall
terminate on and the compensation to which Employee is entitled pursuant to
Section 3(a) shall be paid up through the last day of the month in which the
Board determines Employee to be disabled hereunder, and thereafter the
Company's obligations hereunder shall terminate. Nothing in this section shall
affect Employee's rights under any disability plan in which he is a
participant.
(c) By Company For Cause. The Company may terminate,
without liability, the Period of Employment for Cause (as defined below) at any
time upon 30 days' advance written notice to Employee. The Company shall pay
Employee the compensation to which he is entitled pursuant to Section 3(a)
through the end of the notice period and thereafter the Company's obligations
hereunder shall terminate. Termination shall be for "CAUSE" if: (i) Employee
has engaged in illegal or other wrongful conduct substantially detrimental to
the business or reputation of the Company or any Affiliated Company, or is
convicted of a felony; (ii) Employee refuses or fails to act in accordance with
any reasonable direction or order of the Board or the Chief Executive Officer
of the Company; provided, that the Board or the Chief Executive Officer has
given Employee written notice of such refusal or failure and Employee fails to
comply with such direction or order within 30 days after the date of such
notice; or (iii) Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company; provided, that the
provisions of this clause (iii) shall not apply to any unintentional
expenditures by Employee which is later determined to be personal so long as
Employee promptly reimburses the Company for such expenditure upon notice by
the Company of the personal nature of such expenditure. Failure of Employee to
move from Augusta, Georgia upon the Company's request shall not constitute
Cause. Any determination by the Company to terminate this Agreement for Cause
shall be made by the Board.
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<PAGE> 4
(d) By Company Without Cause. The Company may terminate
the Period of Employment without Cause at any time upon 90 days' advance
written notice to Employee. Upon such termination, the Company shall pay
Employee a lump sum payment of an amount equal to the amount of compensation to
which he is entitled pursuant to Section 3(a) and 3(b) (using for purposes of
Section 3(b) the amount of bonus earned by Employee in 1995), for the remainder
of the Period of Employment which shall for purposes of this subsection (d)
shall include the renewals contemplated by Section 1(b) above, and thereafter
all obligations of the Company hereunder shall terminate.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that
all personal property, including, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints and other documents, or
materials, or copies thereof, Proprietary Information (as defined below),
furnished to or prepared by Employee in the course of or incident to his
employment, including, without limitation, records and any other materials
pertaining to Invention Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company.
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 4(e) and 6 shall survive
termination of the Period of Employment and the expiration of this Agreement.
5. Change of Control. Following a "Change of Control,"
Employee shall be entitled to terminate his employment hereunder, with or
without Good Reason, upon 30 days advance written notice to the Company given
at any time during the one-year period after the Change of Control. In the
event that Employee terminates his employment pursuant to this Section 5 with
Good Reason after a Change of Control, he shall be entitled to receive a lump
sum payment upon such termination of an amount equal to one times the total
salary and bonus compensation paid to Employee by the Company pursuant to
Section 3(a) and 3(b) for the twelve months immediately preceding the Change of
Control; provided, however, that if the severance payment under this Section 5,
either alone or together with other payments which Employee has the right to
receive from the Company, would not be deductible (in whole or in part) by the
Company as a result of such payment constituting a "parachute payment" (as
defined in Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code")), the severance payment provided under this Section 5 shall be reduced
to the maximum deductible amount under the Code. For purposes of this
Agreement, a Change of Control of the Company shall be deemed to have occurred
if (i) there shall be consummated (x) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation or
pursuant to which shares of the Company's Common Stock would be converted into
cash, securities or other property, other than a merger of the Company in which
the holders of the Company's Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the surviving corporation
immediately after the merger, (y) any reverse merger in which the
4
<PAGE> 5
Company is the continuing or surviving corporation but in which securities
possessing more than 50% of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from
those who hold such securities immediately prior to the merger, or (z) any
sale, lease, exchange or other transfer (in one transaction or series of
related transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company approve a plan or proposal for
the liquidation or dissolution of the Company, or (iii) any "person" (as
defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT")), shall become the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more
of the Company's outstanding Common Stock (other than as a result of a stock
purchase or purchases made by such person directly from the Company), or (iv)
during any twelve-month period, individuals who at the beginning of such period
constitute the entire Board of Directors of the Company shall cease for any
reason to constitute a majority thereof unless the election, or the nomination
for election by the Company's stockholders, of each new director was approved
by a vote of at least a majority of the directors then still in office who were
directors at the beginning of the period. For purposes of this Section 5,
"GOOD REASON" shall exist if there is an assignment to Employee of any duties
materially inconsistent with or which constitute a material change in
Employee's position, duties, responsibilities or status with the Company.
6. Proprietary Information.
(a) Defined. "PROPRIETARY INFORMATION" is all
information and any idea in whatever form, tangible or intangible, pertaining
in any manner to the business of the Company or any Affiliated Company, or to
its clients, consultants or business associates, unless: (i) the information is
or becomes publicly known through lawful means; (ii) the information was
rightfully in Employee's possession or part of his general knowledge prior to
his employment by the Company; or (iii) the information is disclosed to
Employee without confidential or proprietary restriction by a third party who
rightfully possesses the information (without confidential or proprietary
restriction) and did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions on Use. Employee agrees to
hold all Proprietary Information in strict confidence and trust for the sole
benefit of the Company and not to, directly or indirectly, disclose, use, copy,
publish, summarize or remove from the Company's premises any Proprietary
Information (or remove from the premises any other property of the Company),
except (i) during the Period of Employment to the extent necessary to carry out
Employee's responsibilities under this Agreement , and (ii) after termination
of the Period of Employment as specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
6(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 6(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or any third
party, directly or indirectly, (i) divert or attempt to divert from the Company
(or any Affiliated
5
<PAGE> 6
Company) any business of any kind in which it is engaged, including, without
limitation, the solicitation of or interference with any of its suppliers or
customers, (ii) employ, solicit for employment, or recommend for employment any
person employed by the Company, or any Affiliated Company, during the period of
such person's employment and for a period of one year thereafter, or (iii)
engage in any business activity that is competitive with the Company, unless
Employee can prove that action taken in contravention of this Section 6(c)(iii)
was done without the use of any Proprietary Information. For purposes of this
Section 6(c), "competitive activities" shall be business activities that are
directly competitive with an existing or presently planned business of the
Company on the date of termination, which activity constitutes or is
anticipated to constitute more than 15% of revenues of the Company.
(d) Remedies. Nothing in this Section 6 is intended to
limit any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code Section 3426), or otherwise available under law.
7. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer,
delegate or otherwise dispose of, whether voluntarily or involuntarily, or by
operation of law, any rights or obligations under this Agreement , nor shall
Employee's rights be subject to encumbrance or the claims of creditors. Any
purported assignment, transfer or delegation shall be null and void. Nothing
in this Agreement shall prevent the consolidation of the Company with, or its
merger into, any other corporation, or the sale by the Company of all or
substantially all of its properties or assets, or the assignment by the Company
of this Agreement and the performance of its obligations hereunder to any
successor in interest or any Affiliated Company. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, legal representatives, successors and
permitted assigns, and shall not benefit any person or entity other than those
enumerated above.
8. Notices. All notices or other communications required or
permitted hereunder shall be made in writing and shall be deemed to have been
duly given if delivered by hand or mailed, postage prepaid, by certified or
registered mail, return receipt requested, and addressed to the Company at:
UroHealth Systems, Inc.
3050 Redhill Avenue
Costa Mesa, California 92626
Attn: Board of Directors
or to Employee at:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
6
<PAGE> 7
Notice of change of address shall be effective only when done in accordance
with this section.
9. Entire Agreement. The terms of this Agreement are
intended by the parties to be the final expression of their agreement with
respect to the employment of Employee by the Company and may not be
contradicted by evidence of any prior or contemporaneous agreement. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement .
10. Amendments; Waivers. This Agreement may not be modified,
amended or terminated except by an instrument in writing, signed by Employee
and by a duly authorized representative of the Company other than Employee. By
an instrument in writing similarly executed, either party may waive compliance
by the other party with any provision of this Agreement that such other party
was or is obligated to comply with or perform, provided, however, that such
waiver shall not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure. No failure to exercise and no delay in exercising any
right, remedy or power hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy or power hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy or power provided herein or by law or in equity.
11. Severability; Enforcement. If any provision of this
Agreement , or the application thereof to any person, place or circumstance,
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement and such provisions as applied to
other persons, places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, interpretation,
enforceability and performance of this Agreement shall be governed by and
construed in accordance with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of
any breach or threatened breach of any of the covenants in Section 5, the
damage or imminent damage to the value and the goodwill of the Company's
business will be irreparable and extremely difficult to estimate, making any
remedy at law or in damages inadequate. Accordingly, the parties agree that the
Company shall be entitled to injunctive relief against Employee in the event of
any breach or threatened breach of any such provisions by Employee, in addition
to any other relief (including damages) available to the Company under this
Agreement or under law.
7
<PAGE> 8
The parties have duly executed this Agreement as of the date first
written above.
Paul E. Petersen, Jr.
---------------------
UROHEALTH SYSTEMS, INC.
By James L. Johnson
----------------
James L. Johnson
Executive Vice President
8
<PAGE> 1
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated effective
as of August 14, 1996 is between UROHEALTH SYSTEMS, INC., a Delaware corporation
(the "Company"), AND RICHARD NEWHAUSER, (the "Employee").
A. The Company desires to obtain the continued services of
Employee, on its own behalf and on behalf of all existing and future "Affiliated
Companies" (defined as any corporation or other business entity or entities that
directly or indirectly controls, is controlled by, or is under common control
with the Company), and Employee desires to continue in the employment of the
Company upon the following terms and conditions.
B. The Company has spent significant time, effort and money to
develop certain Proprietary Information (as defined below), which the Company
considers vital to its business and goodwill.
C. The Proprietary Information will necessarily be
communicated to or acquired by Employee in the course of his employment with the
Company, and the Company desires to obtain the continued services of Employee,
only if, in doing so, it can protect its Proprietary Information and goodwill.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Period of Employment
(a) The Company hereby employs Employee to render services to the
Company in the position and with the duties and responsibilities described in
Section 2 for the period (the "Period of Employment") beginning August 14, 1996
and ending on the earlier of (i) August 13, 1997, as the same may be extended
pursuant to Section 1(b) below (the "Term Date") and (ii) the date the Period of
Employment is terminated in accordance with Section 4.
(b) Unless earlier terminated in accordance with Section 4, this
Agreement shall automatically renew for an additional one-year term on the first
and second anniversaries of the date of this Agreement.
2. Position, Duties and Responsibilities
(a) Employee hereby accepts employment with the Company as Executive
Vice-President of the Company, or other positions as the Chief Executive Officer
of the Company shall designate. Employee shall devote his best efforts and his
full time and attention to the performance of the services customarily incident
to such office and to such other services as may be reasonably requested by the
Chief Executive Officer of the Company.
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(b) Employment. Employee shall expend best efforts on behalf of the
Company. Employee agrees that while employed by the company, Employee will not
engage in any other employment or business which could interfere with the
performance of Employee's duties to the Company, or compete with the Company in
any way. Employee agrees to abide by all policies and decisions of the Company
during the term of this Agreement.
(c) Competitive Plans. Employee agrees not to take any preliminary
steps to set up or engage in any business enterprises that would compete in any
way with the Company during the term of this Agreement. While employed by the
Company, Employee agrees to divulge to the Company any and all competitive plans
which Employee may have under consideration, whether or not Employee intends to
act upon them. As used in the preceding sentence, the term "competitive plans"
shall include, but not be limited to, plans to set up, establish or engage in a
business enterprise in competition with the Company, and plans to seek or accept
employment from anyone in competition with the Company.
(d) Business Opportunities. Employee agrees promptly and fully to
disclose to the Company, and not to divert to Employee's own use or benefit, or
the use or benefit of others, any business opportunities involving any past,
existing or prospective lines of business, suppliers, products or other business
activities of the Company, or any other business opportunities that should
otherwise be disclosed to the Company.
3. Compensation, Benefits and Expenses
(a) Compensation. In consideration of the services to be rendered
hereunder, including, without limitation, services to any Affiliated Company,
Employee shall be paid an annual salary of Three Hundred Fifty Thousand Dollars
($350,000), payable in 24 equal installments at the times and pursuant to the
procedures regularly established, and as they may be amended, by the Company
during the term of this Agreement.
(b) Bonus. Employee shall also be eligible to receive, in the
discretion of the Board of Directors (the "Board"), a performance bonus (or
other special bonuses), in such amounts as determined by the Board based upon
the Board's evaluation of the performance of Employee, the Company's operating
results and such other criteria determined by the Board to be relevant.
(c) Benefits. As he becomes eligible therefor, the Company shall
provide Employee with the right to participate in and to receive benefits from
all present and future life, accident, disability, medical, savings and stock
option plans and all similar benefits made available generally to the Company's
other similarly situated employees. The amount and extent of benefits to which
Employee is entitled shall be governed by the specific benefit plan, as it may
be amended from time to time.
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(d) Vacation. Employee shall be entitled to three weeks of vacation
per year, exclusive of Company holidays.
(e) Expenses. The Company shall reimburse Employee for reasonable
travel and other business expenses incurred by Employee in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the term of this Agreement.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically
upon the death of Employee. The Company shall pay to Employee's beneficiaries or
estate, as appropriate, the compensation to which he is entitled pursuant to
Section 3(a) through the end of the month in which death occurs. Thereafter, the
Company's obligations hereunder shall terminate. Nothing in this section shall
affect any entitlement of Employee's heirs to the benefits under any life
insurance plan.
(b) By Disability. If, in the sole opinion of the Board, employee
shall be prevented from properly performing his duties hereunder by reason of
any physical or mental incapacity for a period of more than 150 days in the
aggregate or 120 consecutive days in any twelve-month period, then, to the
extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall terminate. Nothing in this section shall affect Employee's rights under
any disability plan in which he is a participant.
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon 15 days' advance written notice to Employee. The Company shall pay Employee
the compensation to which he is entitled pursuant to Section 3(a) through the
end of the notice period and thereafter the Company's obligations hereunder
shall terminate. Termination shall be for "Cause" if: (i) Employee has engaged
in illegal or other wrongful conduct substantially detrimental to the business
or reputation of the Company or any Affiliated Company, or is charged with or
convicted of a felony; (ii) Employee refuses or fails to act in accordance with
any reasonable direction or order of the Board or his immediate superiors;
provided, that the Board or such superiors has given Employee written notice of
such refusal or failure and Employee fails to comply with such direction or
order within 15 days after the date of such notice; or (iii) Employee has
engaged in any fraud, embezzlement, misappropriation or similar conduct against
the Company.
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(d) By Company Without Cause. The Company may terminate the Period
of Employment without Cause at any time upon 90 days' advance written notice to
Employee. Upon such termination, and subject to Employee's compliance with
provisions of Section 6 hereof, the Company shall pay Employee aggregate
payments in an amount equal to the amount of compensation to which he is
entitled pursuant to Section 3(a) for the remainder of the Period of Employment
which shall for purposes of this subsection (d) include the renewals
contemplated by Section 1(b) above, and thereafter all obligations of the
Company hereunder shall terminate. In the event that the period of Employment is
terminated without Cause, the payments required under this Section 4(d) shall be
made in accordance with the then normal payroll practices of the Company.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that all personal
property, including, without limitation, all books, manuals, records, reports,
notes, contracts, lists, blueprints and other documents, or materials, or copies
thereof, Proprietary Information (as defined below), furnished to or prepared by
Employee in the course of or incident to his employment, including, without
limitation, records and any other materials pertaining to Invention Ideas (as
defined below), belong to the Company.
(ii) Upon termination of the Period of Employment, Employee
shall be deemed to have resigned from all offices then held with the Company or
any Affiliated Company.
(iii) The representations and warranties contained herein and
Employee's obligations under Sections 4(e) and 6 shall survive termination of
the Period of Employment and the expiration of this Agreement.
5. Change of Control. Following a "Change of Control". Employee shall
be entitled to terminate his employment hereunder, with or without good reason,
upon 30 days' advance written notice to the Company given at any time during the
one-year period after the Change of Control. In the event that Employee
terminates his employment pursuant to this Section 5 with Good Reason (as
defined below) after a Change of Control or if during such one-year period
Employee's employment is terminated by the Company without Cause, he shall be
entitled to receive payment upon such termination of an amount equal to the
greater of (i) one times the total salary and bonus compensation paid to
Employee by the Company pursuant to Section 3(a) and 3(b) for the twelve months
immediately preceding the Change of Control and (ii) the remaining amounts
payable by the Company pursuant to Section 3(a) through the Term Date; provided,
however, that if the severance payment under this Section 5, either alone or
together with other payments which Employee has the right to receive from the
Company, would not be deductible (in whole or in part) by the Company as a
result of such payment constituting a "parachute payment" (as defined in Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
severance payment provided under this Section 5 shall be reduced to the maximum
deductible amount under the Code. For
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purposes of this Agreement, a Change of Control of the Company shall be deemed
to have occurred if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, (y) any reverse merger in
which the Company is the continuing or surviving corporation but in which
securities possessing more than 50% of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from those who hold such securities immediately prior to the merger,
or (z) any sale, lease, exchange or other transfer (in one transaction or series
of related transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company approve a plan or proposal for
the liquidation or dissolution of the Company, or (iii) any "person" (as defined
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), shall become the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 20% or more of the
Company's outstanding Common Stock (other than as a result of a stock purchase
or purchases made by such person directly from the Company), or (iv) during any
twelve-month period, individuals who at the beginning of such period constitute
the entire Board of Directors of the Company shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at lease a majority of the directors then still in office who were
directors at the beginning of the period. For purposes of this Section 5, "Good
Reason" shall exist if (i) the place of business at which Employee is
principally employed is relocated to a location more than 50 miles from such
location on the date of the Change of Control or (ii) there is an assignment to
Employee of any duties materially inconsistent with or which constitute a
material change in Employee's position, duties, responsibilities or status with
the Company or which assignment involves a substantial diminution in Employee's
level of responsibility, provided, that continuation of Employee's primary
responsibilities after a Change of Control without regard to Employee's level of
responsibility in a larger organization after a Change of Control shall not
constitute a diminution of Employee's level of responsibility.
6. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any
idea in whatever form, tangible or intangible, pertaining in any manner to the
business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not
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learn of it, directly or indirectly, from the Company. For purposes of
this agreement the term "Proprietary Information" shall not be deemed to include
articles, books, journals and other writings concerning floor shop management
which are authored by Employee.
(b) General Restrictions On Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this Agreement, and (ii) after termination of the Period
of Employment as specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities. Employee
acknowledges that pursuit of the activities prohibited by this Section 6(c)
would necessarily involve the use or disclosure of Proprietary Information in
breach of Section 6(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or herself or
any third party, directly or indirectly, (i) divert or attempt to divert from
the Company (or any Affiliated Company) any business of any kind in which it is
engaged, including, without limitation, the solicitation of or interference with
any of its suppliers or customers, (ii) employ, solicit for employment, or
recommend for employment any person employed by the Company, or any Affiliated
Company, during the period of such person's employment and for a period of one
year thereafter, or (iii) engage in any business activity that is competitive
with the Company, unless Employee can prove that action taken in contravention
of this Section 6(c)(iii) was done without the use of any Proprietary
Information; provided, that in no event shall Employee engage in such
competitive activities during the period which Employee continues to receive
payments pursuant to Section 4(d) above. For purposes of this Section 5(c),
"competitive activities" shall be business activities that are directly
competitive with an existing or presently planned business of the Company on the
date of termination, which activity constitutes or is anticipated to constitute
more than 15% of revenues of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit any
remedy of the Company under the California Uniform Trade Secrets Act (California
Civil Code Paragraph 3426), or otherwise available under law.
7. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of the
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Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its properties or assets, or the
assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
8. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
UroHealth Systems, Inc.
5 Civic Plaza, Suite 100
Newport Beach, CA 92660
Attn: Chief Executive Officer
or to Employee at:
-------------------------------
-------------------------------
-------------------------------
-------------------------------
Notice of change of address shall be effective only when done in
accordance with this section.
9. Entire Agreement. Except as provided in that certain Merger
Agreement dated July 5, 1996 and other agreements associated therewith, the
terms of this Agreement are intended by the parties to be the final expression
of their agreement with respect to the employment of Employee by the Company and
may not be contradicted by evidence or any prior or contemporaneous agreement.
The parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this Agreement that such other party was or is
obligated to comply with or
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perform, provided, however, that such waiver shall not operate as a waiver of,
or estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy or power hereunder preclude
any other or further exercise thereof or the exercise of any other right, remedy
or power provided herein or by law or in equity.
11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
The parties have duly executed this Agreement as of the date first
written above.
/s/ RICHARD NEWHAUSER
----------------------------
Employee: Richard Newhauser
UROHEALTH SYSTEMS, INC.
By: /s/ CHARLES A. LAVERTY
-------------------------
Charles A. Laverty
Chairman of the Board and
Chief Executive Officer
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EXHIBIT 10.32
CONSULTING AGREEMENT
BY AND BETWEEN
UROHEALTH SYSTEMS, INC.
AND
RICHARD R. NEWHAUSER
THIS CONSULTING AGREEMENT (this "Agreement") is entered into as of
August 14, 1996 (the "Execution Date"), by and between UROHEALTH Systems, Inc.,
a corporation organized and existing under the laws of Delaware ("UROHEALTH"),
and Richard R. Newhauser, a person acting in his individual capacity
("Consultant").
WITNESSETH:
WHEREAS, UROHEALTH desires to retain the consultation services of
Consultant to aid in UROHEALTH's continuing mission to develop, improve, and
expand its business;
WHEREAS, Consultant possesses the knowledge and professional expertise
to aid UROHEALTH in its mission to develop, improve and expand its business as
referenced above;
WHEREAS, UROHEALTH and Consultant desire to enter into this Agreement
in accordance with Section 2.4 of that certain Agreement and Plan of Merger,
dated as of July 5, 1996, by and among UROHEALTH, UROHEALTH, Inc., and
Richard-Allan Medical Industries, Inc.;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
SECTION 1. CONSULTING SERVICES. During the term of this Agreement,
Consultant shall perform those consulting services and work on such projects as
Consultant and UROHEALTH may from time to time mutually agree. Consultant shall
devote sufficient time and best efforts as a consultant in order to perform the
responsibilities under this Agreement to the satisfaction of UROHEALTH.
Consultant shall provide services under this Agreement as reasonably requested
by UROHEALTH at the times reasonably available to Consultant, taking into
account Consultant's other professional duties.
SECTION 2. TERM. The term of this Agreement shall commence as of the
Effective Date and shall continue for five (5) years thereafter, unless
terminated earlier by either party in accordance with Section 3. "Effective
Date" shall mean the date of termination of that certain Employment Agreement
dated as of August __, 1996 by and between UROHEALTH and Consultant.
<PAGE> 2
SECTION 3. TERMINATION. Consultant may terminate this Agreement at any
time upon thirty (30) days' written notice to UROHEALTH. UROHEALTH may terminate
this Agreement for "cause," which for purposes of this Agreement shall mean (i)
the willful engaging by Consultant in misconduct which is materially injurious
to UROHEALTH, monetarily or otherwise, or (ii) Consultant's final conviction for
fraud or of any felony involving moral turpitude. Notwithstanding the foregoing,
Consultant shall not be deemed to have been terminated for cause under clause
(i) unless and until there shall have been delivered to Consultant a copy of a
Notice of Termination from the Board of Directors of UROHEALTH after reasonable
notice to Consultant and an opportunity for Consultant to be heard before the
Board, finding that in the good faith opinion of the Board, Consultant was
guilty of conduct set forth above and specifying the particulars thereof in
detail. In addition, this Agreement shall be terminated automatically upon
Consultant's death or incapacity, whether mental or physical. UROHEALTH or its
designee shall determine in good faith whether Consultant is incapacitated for
the purposes of this Section 3. Notwithstanding anything to the contrary herein
contained, in the event performance by either party hereto of any term,
covenant, condition or provision of this Agreement shall (i) jeopardize the
licensure of UROHEALTH, (ii) jeopardize its participation in (a) Medicare,
Medicaid, Blue Cross, or other reimbursement or payment programs, or (b) the FDA
approval process, regulatory program and guidelines, or (c) any other state or
nationally recognized accrediting organization, or (iii) be in violation of any
statute, ordinance, or be otherwise deemed illegal, or be deemed unethical by
any recognized body, agency, or association in the medical fields, UROHEALTH
may, at its option, terminate this Agreement immediately.
SECTION 4. COMPENSATION. In consideration for the services rendered by
Consultant to UROHEALTH under this Agreement, UROHEALTH shall pay to Consultant
during the term of this Agreement, Two Hundred Thousand Dollars ($200,000) per
annum. Such sum shall be paid in 24 equal bi-monthly installments each year.
Consultant shall be reimbursed by UROHEALTH for all proper, necessary and
reasonable business expenses incurred as a result of the performance of services
requested by UROHEALTH. Consultant shall submit a detailed bill and
documentation as deemed necessary by UROHEALTH for expenses which shall be
subject to approval by UROHEALTH's Chief Financial Officer. UROHEALTH shall also
provide health insurance benefits to Consultant at levels comparable to benefits
afforded by UROHEALTH to its California employees. Notwithstanding anything
herein to the contrary, UROHEALTH's obligation to provide Consultant such health
insurance benefits shall commence as of the Effective Date, shall survive the
expiration or termination of this Agreement and shall continue until
Consultant's death.
SECTION 5. INSURANCE AND INDEMNIFICATION. UROHEALTH shall indemnify
Consultant with respect to all matters relating to services rendered by
Consultant hereunder, except for those caused by Consultant's willful
misconduct.
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SECTION 6. RESTRICTIVE COVENANTS.
6.1 Consultant agrees that during the term of this Agreement,
and for the one (1) year period following the termination of this Agreement, he
shall not serve as proprietor, partner, employee, stockholder, principal,
member, agent, consultant, director, or officer for, or in any other capacity
participate, engage, or have a financial or other interest in, any Direct
Competitor of UROHEALTH. For purposes of this Agreement, "Direct Competitor"
shall mean any person or entity, including, but not limited to, a partnership,
limited liability company, or corporation, which is engaged in, or is about to
become engaged in, the development or operation of any entity or business which
develops, manufactures, or distributes medical products which perform the same
functions as do those manufactured by UROHEALTH.
6.2 Consultant agrees and acknowledges that the restrictions
contained herein are a reasonable and necessary protection of a legitimate
interest of UROHEALTH and that any violation of this restriction would cause
substantial and irreparable injury to UROHEALTH and that UROHEALTH would not
have entered into this Agreement without receiving the additional consideration
agreed to by Consultant herein binding himself/herself to this restriction. In
the event of any violation of this restriction, UROHEALTH shall be entitled, in
addition to any other remedy available, to preliminary and permanent injunctive
relief hereof, and all costs of enforcement hereunder including, but not limited
to, reasonable attorneys' fees, costs and expenses.
SECTION 7. CONFIDENTIALITY. During the term of this Agreement,
UROHEALTH, its clients, and its prospective clients may reveal to Consultant
confidential and proprietary information of UROHEALTH ("Confidential
Information"). Confidential Information shall include, but not be limited to,
that information which is designated as confidential either in writing or
orally, or that information which is not generally known to the public. With
respect to any Confidential Information disclosed to Consultant, Consultant
agrees to: (a) not disclose such Confidential Information to third parties
except: (i) third parties for whom Consultant has secured the prior written
approval of UROHEALTH, and/or (ii) as required by law or by any court or
governmental body, agency or department of competent jurisdiction; and (b) use
such Confidential Information only for the purpose of performing his/her
obligations under this Agreement. Notwithstanding anything to the contrary
herein, Consultant shall not have an obligation to preserve the confidentiality
of any Confidential Information which was previously known to Consultant free of
any obligation to keep it confidential or is or becomes publicly available by
other than unauthorized disclosure. The provisions of this Section 7 shall
survive expiration or termination of this Agreement for any reason.
SECTION 8. STATUS OF THE PARTIES. In the performance of this Agreement,
it is mutually understood and agreed that Consultant is performing as an
independent contractor with, and not as an employee, partner, or joint venturer
of or with UROHEALTH. Except as provided in Section 4, Consultant shall have no
claim under this Agreement against UROHEALTH for workers' compensation,
unemployment
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compensation, vacation pay, sick leave, disability benefits, retirement
benefits, social security benefits or any other employee benefits of any kind,
all of which shall be the sole responsibility of Consultant. UROHEALTH shall not
withhold on behalf of Consultant pursuant to this Agreement any sums for income
tax, unemployment insurance, social security or otherwise pursuant to any law or
requirement of any government agency, and all such withholding, if any is
required, shall also be the sole responsibility of Consultant. Consultant shall
indemnify and hold UROHEALTH harmless from any and all loss or liability, if
any, arising with respect to any of the foregoing benefits or withholding
requirements.
SECTION 9. GOVERNING LAW. This Agreement is being delivered and
executed in the State of California and the validity, construction, and
enforcement of this Agreement shall be governed in all respects by the laws of
the State of California. Venue shall be proper only in a court of competent
jurisdiction located in the State of California. The parties agree to be subject
to personal jurisdiction and consent to service of process issued by a court in
which venue is proper as defined in this Section 9.
SECTION 10. MODIFICATION AND WAIVER. No modification of this Agreement
shall be deemed effective unless in writing and signed by each of the parties.
Any waiver of a breach of any provision of this Agreement shall not be deemed
effective unless in writing and signed by the party against whom enforcement of
the waiver is sought.
SECTION 11. HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any provision hereof.
SECTION 12. ASSIGNMENT. Neither party may assign, delegate,
subcontract, or otherwise transfer its rights or obligations hereunder without
the prior written consent of the other party and any assignment or other
transfer in violation of this Section 12 shall be void; provided, however, that
UROHEALTH may assign its rights and delegate its duties pursuant to this
Agreement to any successor, subsidiary, or affiliate without the written consent
of the Consultant.
SECTION 13. SEVERABILITY. If, as a result of any valid Act of Congress
or act of any legislature or any regulation duly promulgated by the United
States or any state acting in accordance with the law, the terms and conditions
of this Agreement, or the payments made pursuant to this Agreement, render any
other relationship or transaction between the parties, or any affiliate of the
parties, illegal or in violation of law, then the parties shall negotiate in
good faith, and shall take all steps necessary, including, but not limited to,
amendment to the terms and conditions of this Agreement or return of the
compensation or any part of the compensation paid pursuant to this Agreement, in
order to reform this Agreement such that the terms and conditions of this
Agreement, or the payments made pursuant to this Agreement, if any, shall not
render any other relationship or transaction between the parties, or any
affiliate of the parties, illegal or in violation of law.
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SECTION 14. NOTICES. All notices, requests, demands, and other
communications provided for hereunder shall be in writing and shall be deemed to
been duly given if (i) delivered in person; (ii) given by prepaid telex or
telegram, or by facsimile or other instantaneous electronic transmission device;
or (iii) deposited in the United States mail, first class, registered or
certified, return receipt requested, with proper postage prepaid, as follows:
If to UROHEALTH:
UROHEALTH Systems, Inc.
5 Civic Plaza, Suite 100
Newport Beach, California 92660
Attention: General Counsel
If to Consultant:
Richard R. Newhauser
19232 Fisher Island Drive
Fisher Island, Florida 33109
SECTION 15. ATTORNEYS' FEES. In the event any party hereto brings an
action or arbitration proceeding in connection with the performance, breach, or
interpretation of this Agreement, the prevailing party in such action or
proceeding shall be entitled to recover from the losing party all reasonable
cost and expenses of such litigation or proceeding, including attorneys' fees,
court costs, costs of investigation, and other costs, fees, and expenses
reasonably related to such action or proceeding.
SECTION 16. BINDING EFFECT. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective successors and
permitted assigns.
SECTION 17. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement between the parties concerning the subject matter
hereof, and supersedes all prior negotiations, agreements and understandings
between the parties, whether oral or in writing, concerning the subject matter
hereof.
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INTENDING TO BE LEGALLY BOUND, the parties, or their duly authorized
representatives, have executed this Agreement to be effective on the Execution
Date.
UROHEALTH SYSTEMS, INC. RICHARD R. NEWHAUSER
- ----------------------------- -------------------------------
Signature Signature
Date Date
------------------------- --------------------------
<PAGE> 1
EXHIBIT 10.33
PURCHASE MONEY SECURED PROMISSORY NOTE
U.S. $3,000,000.00 Irvine, California
August 15, 1996
FOR VALUE RECEIVED, the undersigned, UROHEALTH SYSTEMS, INC., a
Delaware corporation ("Borrower") promises to pay to NEWHAUSER ASSOCIATES, a
Michigan partnership ("Lender"), or order, at the address set forth below, the
principal sum of Three Million and no/100 Dollars ($3,000,000.00), together with
interest on the unpaid principal amount hereof, calculated at the rate and
payable at the times set forth below.
1. Interest Rate. Except as provided in Section 4.3 below, the
outstanding principal balance hereof shall bear interest from the date hereof
until paid in full at the lessor of (i) the maximum interest rate permitted by
law or (ii) eight and one-quarter percent (8.25%) per annum (the "Interest
Rate").
2. Payments During Term. As used in this Note, (a) the term "Quarterly
Payment Date" shall mean the first day of each calendar quarter or portion
thereof during the term of this Note and (b) the term "Calendar Quarter" shall
mean the calendar quarter or portion thereof immediately preceding a Quarterly
Payment Date. Commencing on the first Quarterly Payment Date following the date
hereof and continuing on each successive Quarterly Payment Date thereafter,
Borrower shall make a payment (the "Quarterly Payment") equal to the amount
required to pay the amount of the accrued but unpaid interest on this note. The
entire unpaid principal balance of this Note, together with all accrued but
unpaid interest thereon, shall be due and payable in full on the tenth (10th)
anniversary of the date hereof (the "Maturity Date").
3. Prepayment. Borrower shall be permitted to prepay all or any part of
the outstanding principal balance of this Note without penalty or premium.
4. Default; Remedies.
4.1 Event of Default. An "Event of Default" shall occur hereunder
(a) upon the failure of Borrower to pay any installment of interest or any other
amount due hereunder within five (5) calendar days after Borrower's receipt of
written notice from Lender that such installment was not paid when due, (b) upon
the failure of Borrower to pay the outstanding principal balance of this Note,
together with all accrued interest thereon, on the Maturity Date, and (c) upon
the occurrence of an "Event of Default" as defined in that certain Mortgage,
Security Agreement, Assignment of Rents and Leases, and Fixture Filing (the
"Mortgage") of even date herewith, made by Borrower, as mortgagor, in favor of
Lender, as mortgagee, encumbering certain real property (the "Property")
described therein.
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4.2 Acceleration. Upon the occurrence of any Event of Default,
Lender may (a) declare the entire principal amount of this Note then outstanding
(if not then due and payable), together with all accrued interest thereon, and
all other sums or payments required hereunder, to be due and payable
immediately, and notwithstanding the Maturity Date, the principal amount of the
Note, together with all accrued interest thereon, and all other sums or payments
required hereunder shall thereupon become and be immediately due and payable,
and (b) exercise such other remedies as Lender may have under the Mortgage.
4.3 Late Charge: Default Interest Rate.
(a) Borrower agrees that if any payment due hereunder is not
received within five (5) calendar days after the date it becomes due and
payable, Borrower shall pay to Lender an amount (the "Late Charge") equal to
five percent (5%) of the amount of the delinquent payment; provided however,
such Late Charge shall not be applicable to the accelerated balance of the Note
upon the occurrence of an Event of Default. In addition, upon the occurrence and
during the continuance of an Event of Default hereunder, the outstanding
principal amount hereunder, together with all accrued interest thereon, shall
bear interest at a per annum rate (the "Default Rate") equal to two (2)
percentage points over the Interest Rate.
(b) Borrower acknowledges and agrees that (i) Lender's actual
damages resulting from any default or delinquency of Borrower as set forth in
Section 4.3(a) above and that relate to lost use of funds or costs of internal
administration of delinquent payments hereunder or relating to such default
would be extremely difficult to ascertain, and (ii) under the circumstances in
existence as of the date hereof, the Late Charge and the accrual of interest
hereunder at the Default Rate constitute a reasonable liquidation of such
damages. The provisions of this Section 4.3 are in addition to the other rights
and remedies conferred upon Lender under this Note and shall not limit Lender's
right to compel prompt performance hereunder or be deemed to conflict with the
provisions of Section 5.12 of this Note.
5. Miscellaneous.
5.1 Payment in U.S. Currency. Principal and interest shall be
payable in lawful money of the United States of America.
5.2 Cost of Collection. Borrower promises to pay all costs and
expenses of collection, including without limitation (a) reasonable attorneys'
fees, in the event that collection of this Note or any portion of this Note is
effected without suit; (b) reasonable attorneys' fees, as determined by the
judge of the court, and all other costs, expenses and fees incurred by Lender in
the event suit is instituted to collect this Note or any portion of this Note;
and (c) reasonable attorneys' fees, incurred by Lender in connection with any
bankruptcy, insolvency or reorganization proceeding or receivership involving
Borrower or any affiliate of Borrower, including without limitation attorneys'
fees incurred in making any appearances in any such proceeding or in seeking
relief from any stay or injunction issued in or arising out of any such
proceeding.
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5.3 Crediting of Payments. All payments and prepayments
hereunder shall be credited first to unpaid interest, if any, which has accrued
hereunder and second to unpaid principal hereunder.
5.4 Waiver of Notice, Etc. Borrower waives diligence, grace,
demand, presentment for payment, exhibition of this Note, protest, notice of
protest, notice of dishonor, notice of demand, notice of nonpayment, and any and
all exemption rights against the indebtedness evidenced by this Note, to the
fullest extent permitted by applicable laws. Borrower consents to offsets of any
sums owed to it by Lender at any time. No single or partial exercise of, or
forbearance from exercising, any power hereunder or under or under any guaranty,
or other agreement or instrument securing or pertaining to this Note shall
preclude other or further exercises thereof or the exercise of any other power.
Lender shall at all times have the right to proceed against any portion of the
security, if any, held herefor in such order and in such manner as Lender may
determine in its sole discretion, without waiving any rights with respect to any
other security.
5.5 No Waiver by Lender. Delay or failure by Lender to exercise
any option or election herein given to Lender shall not constitute a waiver of
the right to subsequently exercise such option or any other option or election
herein given to Lender.
5.6 Successors and Assigns; Number; Gender. The use of the term
"Borrower" shall be deemed to include the successors and assigns of the
undersigned. The use of terms in any gender or number shall include, in all
instances, the masculine, feminine, and neuter gender and the plural and single
number.
5.7 Notices. Except as otherwise provided herein, all notices or
communications required or permitted hereunder shall be in writing and
personally delivered or sent by express mail or certified mail, return receipt
requested, postage fully prepaid and addressed to the respective parties as
follows:
If the Lender:
NEWHAUSER ASSOCIATES
1923 Fisher Island Drive
Fisher Island, Florida 33109
with a copy to:
HOWARD & HOWARD ATTORNEYS, P.C.
107 W. Michigan Avenue, Suite 400
Kalamazoo, Michigan 47007-3956
Attention: Peter J. Livingston, Esq.
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If to Borrower:
UROHEALTH SYSTEMS, INC.
3050 Redhill Avenue
Costa Mesa, California 92628
with a copy to:
MORRISON & FOERSTER
19900 MacArthur Boulevard, Twelfth Floor
Irvine, California 92715
Attention: William B. Tate II, Esq.
5.8 Governing Law. This Note shall be governed by and construed
under the laws of the State of Michigan and the laws of the United States of
America prevailing in Michigan.
5.9 Joint and Several Obligations. If Borrower consists of more
than one (1) person or entity, each shall be jointly and severally liable to
Lender hereunder.
5.10 Performance of Acts on Business Days. In the event that the
final date for payment of any amount hereunto falls on a Saturday, Sunday or
state or federal holiday, such payment may be made on the next succeeding
business day.
5.11 Computation of Interest. The computation of interest
hereunder shall be based on a year of three hundred sixty (360) days and a
thirty (30) day month.
5.12 Time of Essence. Time is of the essence of the performance
of each provision hereof.
5.13 Place for Payment. All payments due hereunder shall be sent
to Lender at Lender's address set forth in Section 5.7 above or to such other
place as Lender or other legal holder of this Note may designate in writing from
time to time.
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IN WITNESS WHEREOF, Borrower has executed this Note on the year and
date first hereinabove set forth.
UROHEALTH SYSTEMS, INC.,
a Delaware corporation
Tax Identification No. 98-0122944
By: /s/ KEVIN M. HIGGINS
--------------------------
Name: Kevin M. Higgins
Title: Sr. Vice President
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<PAGE> 1
EXHIBIT 10.34
EMPLOYMENT AGREEMENT
AGREEMENT, made as of the 27th day of July, 1995, between DAVSTAR
INDUSTRIES, LTD., a corporation organized and existing under the laws of
Ontario, Canada ("Davstar"), and GERALD W. TIMM, Ph.D. ("Employee").
WHEREAS, Davstar wishes to employ Employee in the capacities of
Executive Vice President and Vice Chairman of the Board of Davstar during the
period specified herein; and
WHEREAS, Employee is prepared to enter into an employment relationship
with Davstar on the terms and conditions specified herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, and of other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
1. Employment. Davstar agrees to and hereby does employ Employee as Executive
Vice President and Vice Chairman of the Board of Davstar. Employee shall have
such duties and responsibilities as are normally attendant to the positions of
Executive Vice President and Vice Chairman of the Board. Employee accepts said
employment and agrees, during the term hereof, to discharge faithfully,
diligently and to the best of his ability the responsibilities of such
positions on a full-time basis and to perform such substitutive or additional
duties as Davstar may reasonable request from time to time. During the term of
Employee's employment, Davstar shall use its best efforts to cause Employee to
be elected as a voting member of Davstar's Board of Directors.
2. Term. The initial term of Employee's employment by Davstar under this
Agreement shall commence on August 1, 1995 and, unless sooner terminated as
provided herein, continue thereafter through July 31, 1998. Thereafter, this
Agreement will automatically renew for successive three year terms, unless
sooner terminated pursuant to paragraph 6 hereof.
3. Compensation and Benefits. As compensation and consideration for Employee's
performance of services pursuant to this Agreement, Davstar agrees to pay
Employee, and Employee agrees to accept, the following amounts and benefits at
Davstar's sole expense:
(a) Salary. During the term of this Agreement, an annual
salary, payable bi-monthly in accordance Davstar's regular
paydays. Employee's annual salary for calendar year 1995
shall be $125,000. Thereafter, Employee's annual salary
shall be not less than $160,000, the exact amount to be
determined each year by the Board prior to January 1 of
such year.
<PAGE> 2
(b) Bonus. A special bonus of up to $60,000 for calendar year
1995 to be awarded pursuant to a plan established by
mutual agreement of the Chief Executive Officer of Davstar
and Employee within 30 days of the date of this Agreement.
(c) Benefits.
(i) Vacation. During the term of this Agreement,
Employee shall be entitled to 12 weeks per year of paid
vacation. Employee shall be compensated for any unused
vacation days within 30 days after the end of each
calendar year hereunder, the value of such compensation to
be based upon Employee's then current salary.
(ii) Health Benefits. During the term of this Agreement,
Employee shall be entitled to health and dental insurance,
including immediate coverage for himself and his eligible
dependents, as provided by Davstar for its executive
personnel in accordance with its group health insurance
plan coverage.
(i) Disability Benefits. During the term of this
Agreement, Davstar shall provide Employee with long-term
disability insurance coverage equal to two-thirds of
Employee's full salary at the time of any event of
disability as defined in such policy.
(ii) Life Insurance. Davstar shall pay or reimburse, as
the case may be, Employee such amount as is necessary for
employee to maintain a term life insurance policy with
coverage in the amount of $1,000,000. Employee shall be
responsible for obtaining such insurance and determining
the amount of coverage. In the event that Employee's
employment by Davstar is terminated, Davstar shall have no
further obligation to reimburse Employee for premium
payments. Employee shall designate the beneficiary(ies)
of such policy, and title to such policy shall be held by
Employee during the term of this Agreement and following
termination or expiration of this Agreement.
(v) Stock Ownership and Stock Options. The parties agree
that Employee shall have the right to purchase or obtain
shares of Davstar's common stock through a combination of
stock option grants, performance stock plans, other stock
awards as approved by the Board of Directors, and pursuant
to purchases of Davstar's stock by Employee in accordance
with the terms of the stock ownership guidelines
established by Davstar.
Employee shall also be entitled to participate in future
grants of stock options to key employees of Davstar to the
extent determined in good
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faith by the Board of Directors and upon terms no less
favorable than options issued to any of Davstar's other
directors, officers or employees, and on the same terms
and conditions as similarly situated executive officers of
Davstar.
(vi) Annual Bonuses. In the event the Board of Directors
of Davstar establishes an annual incentive bonus plan for
Davstar's key management personnel, Employee shall be
entitled to participate in such bonus plan, or in such
other plan(s) that Davstar may from time to time
establish.
(vii) General. Employee shall be entitled to such
additional bonuses, salary increases and other and further
benefits as Davstar may designate.
4. Expenses and Car Allowance. Davstar shall reimburse Employee for proper
and necessary expenses incurred by him in the performance of his duties under
this Agreement. Employee shall be provided a car allowance of $1,500 per
month.
5. Counsel Fees and Indemnification.
(a) Reimbursement. In the event either party seeks to enforce
its or his rights hereunder by litigation or otherwise, the
prevailing party shall be entitled to be reimbursed by the
other party for all reasonable costs and expenses, including
reasonable attorneys' fees, costs and expenses.
(b) Directors' and Officers' Insurance. Davstar further
agrees:
(i) that Davstar will use its best efforts to obtain
directors' and officers' liability insurance
(ii) that Employee shall be covered and insured up
to the maximum individual limits provided by
such insurance, if any, throughout the term
of this Agreement; and
(iii) that Davstar will exert its best efforts to
maintain such insurance in effect throughout
the term of this Agreement; provided that the
Board of Directors may reevaluate the
continuation or amount of coverage in the
event of any material premium increases or
any material changes in the scope of coverage
of such policy.
(c) No conflict. Davstar hereby warrants and represents that
the undertakings of payment, indemnification and
maintenance of insurance covering Employee set out in
subparagraphs 5(a) and 5(b) above are not in conflict with
the Articles of Incorporation or Bylaws
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of Davstar or with any validly existing agreement or other
proper corporate action of Davstar.
6. Termination and Severance.
(a) For Cause. Except as set forth in subparagraph 6(b) of
this Agreement, Davstar may terminate this Agreement at
any time only for cause. For purposes of this Agreement,
"cause" shall mean (i) final conviction for fraud or of
any felony, (ii) Employee's habitual use and abuse of
illegal drugs and/or alcohol, or (iii) Employee's willful
failure to perform his reasonable responsibilities and
duties under this Agreement if Employee fails to commence
to perform such reasonable responsibilities and duties
under this Agreement within 30 days of his receipt of a
notice from the Board of Directors of Davstar identifying
the manner in which the Board of Directors believes
Employee has failed to perform such responsibilities and
duties. In the event Davstar intends to terminate this
Agreement pursuant to this subparagraph 6(a), Davstar
shall provide prior written notice to Employee by
certified mail, return receipt requested.
(b) At End of Term. Davstar or Employee may terminate this
Agreement without cause effective at the end of the
initial three year term and each subsequent three year
term thereafter; provided, however, that Davstar must
provide at least three months' prior written notice to
Employee by certified mail, return receipt requested, of
its intent to terminate this Agreement pursuant to this
subparagraph 6(b).
(c) Upon a Change of Control. Employee may terminate this
Agreement upon 30 days' written notice at any time a
"change of control" occurs. For purposes of this
Agreement, a "change of control" shall mean any of the
following acts:
(i) The acquisition (other than from Davstar directly
or from any stockholder of Davstar who on the date
hereof owns 25 percent or more of the outstanding
shares of Davstar's common stock) by any person,
entity or group, within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of
1934, of beneficial ownership of 25% or more of
the outstanding shares of Davstar's common stock;
or
(ii) If the individuals who currently serve on
Davstar's Board of Directors no longer constitute
a majority of the members of Davstar's Board;
provided, however, any person who becomes a
director subsequent to the date of this Agreement,
who (A) was elected to fill a vacancy or nominated
as a director by a majority
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of the individuals now serving on Davstar's Board
or their successors who were so elected or
nominated or (B) was elected or nominated at the
request of Employee, shall be considered as if a
member prior to the date of this Agreement; or
(iii) Pending approval by a majority of the stockholders
of Davstar of a merger, reorganization or
consolidation whereby the stockholders of Davstar
immediately prior to such approval do not,
immediately after consummation of such
reorganization, merger or consolidation own more
than 50% of the voting stock of the surviving
entity; or
(iv) A liquidation or dissolution of Davstar or the sale
of all or substantially all of the assets of
Davstar.
(d) Severance Pay.
(i) If employee terminates this Agreement at any time
(other than in the event of his death or pursuant to
subparagraph 6(c)), or if Employee is terminated for cause
pursuant to subparagraph 6(a), employee shall be entitled
to that compensation under subparagraph 3(a) of this
Agreement which has accrued, but has not been paid, at the
time of such termination or death, and Davstar shall have
no further obligation to provide any compensation or
benefits. Nothing herein shall affect Davstar's
obligation to provide benefits as required by COBRA or any
other applicable federal or state law.
(ii) If Employee is terminated by Davstar other than for
cause (as defined in subparagraph 6(a)), or if Employee
terminates this Agreement within one year of the event
described in subparagraph 6(c), Davstar shall be obligated
to continue to pay Employee (as severance payments) the
compensation and benefits provided for in Section 3 hereof
through the remainder of the three year term provided for
in Section 2 hereof during which such termination occurs.
(iii) In the event that an event giving rise to a change of
control (as defined in subparagraph 6(c)) is initiated by
Davstar, then prior to the Board of Directors approving
the change of control, Employee shall inform the Board
whether he intends to terminate this Agreement pursuant to
subparagraph 6(c). In the event that Employee informs the
Board that he does not intend to terminate this Agreement
as a result of such change of control, then Employee shall
have forfeited all rights under subparagraph 6(c) with
respect to that particular change of control, and the
payment provisions of this subparagraph 6(d) with respect
to any termination of Employee's employment due to a
change
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in control shall be deemed null and void with respect to
that particular change of control transaction.
(e) Notice. Except as otherwise specifically set forth in
this paragraph 6, termination shall become effective upon
delivery of written notice thereof to Employee or Davstar,
whichever is applicable, pursuant to paragraph 11.
(f) No Duty to Mitigate. Davstar agrees that the position,
duties and responsibilities of Employee are unique and, as
a result, agrees that Employee shall have no duty to
mitigate damages upon termination or expiration of his
employment hereunder for any reason.
7. Certain Limitations on Timing of Payments. Notwithstanding any other
provision of this Agreement, payment of amounts required to be paid to Employee
pursuant to paragraphs 1 through 6 of this Agreement shall be subject to
postponement to the extent that payment of any such amount in the taxable year
of Davstar in which it was originally scheduled to be paid results in
disallowance of a deduction for any such amount pursuant to either Section
162(m) or Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") as determined by the Internal Revenue Service. However, nothing herein
shall relieve Davstar of its obligations to pay any amounts due hereunder. Any
amount which is not paid in the taxable year in which it was originally
scheduled to be paid as a result of the postponement thereof pursuant to this
paragraph 7 shall be payable in the next succeeding taxable year in which such
payment will not result in the disallowance of a deduction pursuant to either
Section 162(m) or Section 280G of the Code; provided, however, that (a) if a
dispute arises as to the payment of the postponed payments to Employee, the
prevailing party shall be entitled to receive attorneys' fees and related
costs, and (b) all postponed payments shall be placed in a Rabbi trust or
similar vehicle for the benefit of Employee in such a way that the amounts so
transferred are not taxable to Employee or deductible by Davstar until payment
from such trust or other vehicle to Employee is made. In the event that a
payment has been made to Employee, but then disallowed as a deduction by the
Internal revenue Service and return of the payment into the trust or other
vehicle is required, said payment to Employee shall be treated as a loan and
said payment to the trust or other vehicle shall be treated as repayment of
said loan.
8. Confidentiality and Non-Disclosure of Information.
(a) Non-Disclosure of Information. Employee shall not, during
the term of this Agreement or at any time thereafter,
without Davstar's prior written consent, divulge, furnish,
release or make accessible to anyone, any knowledge or
information with respect to any confidential or secret
aspect of the business, including, but not limited to:
Davstar's costs; suppliers' names, pricing and terms;
patient names, addresses or telephone numbers; billing
procedures and pricing of purchases;
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Davstar's business techniques, computer programs and
printouts; identity of prospective customers; confidential
information disclosed by Davstar's customers to Davstar;
Davstar's banking relationships; including the extent and
terms of lines of credit and borrowing costs; or other
confidential information concerning the business or its
employees.
(b) Exclusive Property of Davstar. Employee recognizes that
all records, customer lists, supplier lists, material cost
data, files, correspondence with customers and suppliers
of material and services, insurance companies, computer
printouts, contracts, reports, notes, business plans,
compilations of other recorded matter, and copies or
reproductions thereof, relating to Davstar's operations
and activities and other information relating to Davstar's
customers and suppliers, made or received by Employee in
the course of his employment, are the exclusive property
of Davstar and Employee holds and uses same as trustee for
Davstar and subject to Davstar's sole control and will
deliver same to Davstar at the termination of his
employment, or earlier if so requested by Davstar.
Employee acknowledges that all of such information which
is used by Employee outside the scope of his employment
would cause irreparable and continuing injury to Davstar's
business for which there would not be an adequate remedy
at law making injunctive relief appropriate.
9. Non-Compete.
(a) Non-Compete. As an inducement to cause Davstar to enter
into this Agreement, Employee covenants and agrees that
during his employment, and
(i) for a period of 18 months after Employee is
terminated for cause pursuant to subparagraph 6(a) or
Employee terminates this Agreement other than
pursuant to subparagraphs 6(b) or 6(c), or
(ii) for any period during which Employee receives
severance pay pursuant to subparagraph 6(d)(ii),
he will not be an employee, agent, director, stockholder or owner (except of
not more than 1% of the securities of any publicly traded entity), partner,
consultant, financial backer or creditor or be otherwise directly or indirectly
connected with or participate in the management, operation or control of any
business, firm, proprietorship, corporation, partnership, association, entity
or venture engaged in the same business as Davstar in any city, county, state
or foreign jurisdiction in which Davstar or any of its subsidiaries conducts
business during the term of this Agreement.
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(b) Solicitation of Business. Employee covenants and agrees
that during his employment, and
(i) for a period of 18 months after Employee is
terminated for cause pursuant to subparagraph 6(a)
or Employee terminates this Agreement other than
pursuant to subparagraphs 6(b) or 6(c)
(ii) for any period during which Employee receives
severance pay pursuant to subparagraph 6(d)(ii),
he will not contact, call upon, solicit business from,
sell or render services to any to any customer of Davstar
with respect to the provision of the same service or
products as those provided by Davstar, or purchase from
any supplier or potential supplier any medical materials
for same, and Employee shall not directly or indirectly
aid or assist any other person, firm or corporation to do
any of the aforesaid acts.
(c) Solicitation of Employees. Employee covenants and agrees
that during his employment, and
(i) for a period of 18 months after Employee is terminated
for cause pursuant to subparagraph 6(a) or Employee
terminates this Agreement other than pursuant to
subparagraphs 6(b) or 6(c), or
(ii) for any period during which Employee receives
severance pay pursuant to subparagraph 6(d)(ii),
he will not directly or indirectly, as principal, agent,
owner, partner, stockholder, officer, director, employee,
independent contractor or consultant, or in any individual or
representative capacity for himself or on behalf of any
business, firm, corporation, partnership, association or
proprietorship, enter into any agreement with or solicit, or
directly or indirectly cause others to solicit, the employment
of any officer, sales person, agent or other employee of
Davstar for the purpose of causing said officer, sales person,
agent or other employee of Davstar to terminate employment
with Davstar.
(d) Independent Agreements. It is understood by and between
the parties that the covenants set forth in paragraphs 8
and 9 are essential elements to this Agreement, and that,
but for the agreement of Employee to comply with such
covenants, Davstar would not have entered into this
Agreement. Such covenants by Employee shall be construed
as agreements independent of any other provision of this
Agreement and the existence of any claim or cause of
action Employee
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<PAGE> 9
may have against Davstar, whether predicated on this
Agreement or otherwise, shall not constitute a defense to
the enforcement by Davstar of these covenants.
(e) Failure to Make Severance Payment. If Davstar fails to
make any severance payment within 20 days of such
payment's due date, prior to any default by Employee,
Davstar shall not be entitled to enforce the provisions of
this paragraph 9.
(f) Limitation on Restrictions. In the event that this
Agreement is terminated (i) due to a material breach by
Davstar of its obligations or (ii) by either Davstar or
Employee in accordance with subparagraph 6(b), the
restrictions contained in this paragraph 9 shall not be
applicable to Employee.
10. Severability. If any one or more of the provisions of this Agreement
should be ruled wholly or partly invalid or unenforceable by a court or other
government body of competent jurisdiction, then: (a) the validity and
enforceability of all provisions of this Agreement not ruled to be invalid or
unenforceable shall be unaffected; (b) the effect of the ruling shall be
limited to the jurisdiction of the court or other government body making the
ruling; (c) the provision(s) held wholly or partly invalid or unenforceable
shall be deemed amended, and the court or other government body is authorized
to reform the provision(s), to the minimum extent necessary to render them
valid and enforceable in conformity with the parties' intent as manifested
herein and a provision having a similar economic effect shall be substituted;
and (d) if the ruling and/or the controlling principle of law or equity leading
to the ruling is subsequently overruled, modified or amended by legislative,
judicial or administrative action, then the provision(s) in question as
originally set forth in this Agreement shall be deemed valid and enforceable to
the maximum extent permitted by the new controlling principle of law or equity.
11. Notices. All notices, requests, demands and other communications provided
for hereunder shall be in writing and shall be deemed to have been duly given
if (a) delivered in person; (b) given by prepaid telex or telegram, or by
facsimile or other instantaneous electronic transmission device; (c) sent by
Federal Express or other nationally recognized overnight delivery service,
charges paid by the sender, or (d) deposited in the United States mail, first
class, registered or certified, return receipt requested, with proper postage
prepaid, as follows:
If to Davstar: Davstar Industries, Ltd.
3050 Redhill Avenue
Costa Mesa, California 92626
9
<PAGE> 10
If to Employee: Gerald W. Timm, Ph.D.
1701 East 7th Street
Minneapolis, MN 55425
Notices given pursuant to this paragraph shall be deemed received and effective
upon receipt by the addressee thereof.
12. Assignment of Agreement. This Agreement shall inure to the
benefit of Employee and Davstar and their respective heirs and successors.
Neither party may assign any rights or obligations hereunder to any person,
firm or corporation without the prior written consent of the other party. This
Agreement shall be personal to Employee for all purposes.
13. Amendment and Waiver. No alteration or modifications hereof shall
be valid except by a subsequent written instrument executed by the parties
hereto. No waiver by either party of any breach by the other party of any
provision or condition of this Agreement in one circumstance shall be deemed a
waiver of said provision or condition in any other circumstance or be deemed a
waiver of any other provision or condition.
14. Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of California, without reference to California's
choice of law statutes or decisions.
15. Valid Obligation. This Agreement has been duly authorized,
executed and delivered by Davstar and is a legal, valid and binding obligation
of Davstar.
16. Captions. The captions in this agreement are for convenience only
and shall not be considered a part hereof or affect the construction or
interpretation of any provisions of this Agreement.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original.
18. Entire Agreement. This Agreement contains the entire
understanding between the parties, and there are no agreements or
understandings among the parties with respect to Employee's employment by
Davstar and his obligations except as set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
10
<PAGE> 11
DAVSTAR:
DAVSTAR INDUSTRIES, LTD.
By: /s/ Charles A. Laverty
-------------------------------
Its President
----------------------------
EMPLOYEE:
/s/ Gerald W. Timm
----------------------------------
11
<PAGE> 1
EXHIBIT 10.35
PROMISSORY NOTE
BY AND BETWEEN
CHARLES A. LAVERTY
AND
UROHEALTH SYSTEMS, INC.
Principal Amount: $1,500,000 DATED: APRIL 2, 1997
FOR VALUE RECEIVED, Charles A. Laverty ("MAKER"), does hereby promise to
pay to UROHEALTH Systems, Inc. ("HOLDER"), in lawful money of the United States
and in immediately available funds, the principal amount of one million five
hundred thousand dollars ($1,500,000), with interest compounding annually
thereon. Interest shall accrue at a per annum rate equal to six and two
one-hundredths percent (6.02%).
The balance of the principal amount of the Note outstanding and all
accrued and unpaid interest thereof shall be due and payable in full upon the
earlier of (a) November 25, 1999 or (b) within thirty (30) days of the
termination for any reason of that certain Employment Agreement by and between
Maker and Holder in effect as of the date hereof. Maker agrees to apply any
future bonuses awarded Maker by the Compensation Committee of the Board of
Directors of Holder to the repayment of the principal amount of this Note.
Payment shall be delivered to Holder at the address as set forth below,
or at such other address as designated by Holder.
The following shall constitute an Event of Default:
(i) A default in payment by Maker to Holder of any payment due hereunder,
when due and payable which continues for five (5) days after any such
payment is due; or
(ii) Maker shall be adjudicated a bankrupt, or a decree or order approving
as properly filed a petition or answer asking reorganization of Maker
under the federal bankruptcy laws, as now or hereafter amended, or
under the laws of any state, shall be entered, and any such decree,
judgment, or order shall not have been vacated, stayed, or set aside
within ninety (90) days from the date of its entry or granting; or
(iii) Maker shall file, or admit the jurisdiction of the court and the
material allegations contained in, any petition in bankruptcy or any
petition pursuant to, or purporting to be pursuant to, any current or
future acts of Congress on the subject of bankruptcies or any
amendments to such acts, or Maker shall institute any proceedings, or
Maker shall give its consent to the institution of any proceedings,
<PAGE> 2
for any relief of Maker under any bankruptcy or insolvency laws, or any
laws relating to the relief of debtors, readjustment of indebtedness,
reorganizations, arrangements, compositions, or extensions; or
(iv) Maker shall make any assignment for the benefit of creditors or shall
apply for a consent to the appointment of a receiver for Maker or any
of the property of Maker; or
(v) A decree or order appointing a receiver of the property of Maker shall
be made and the decree or order has not been vacated, stayed, or set
aside within ninety (90) days from the date of its entry or granting.
Upon the occurrence of an Event of Default, the entire outstanding
principal balance together with accrued interest hereunder shall, at the option
of Holder, become immediately due and payable and Holder shall thereupon have
all rights and remedies provided hereunder, in any other agreement between Maker
and Holder, or otherwise available at law or in equity.
Maker waives presentment, demand for payment, notice of dishonor, and
all other notices or demands in connection with the delivery, acceptance,
performance, or default of this Note.
Nothing herein contained, nor any transaction related hereto, shall be
construed or so operate as to require Maker, or any other person liable for
repayment of same, to pay interest at a greater rate than is now lawful in such
case to contract for, or to make any payment, or to do any act contract to law.
Should any interest or other charges paid by Maker, or parties liable for the
payment of this Note, result in the computation or earning of interest in excess
of the maximum rate of interest which is legally permitted under the laws of the
applicable jurisdiction, then any and all excess shall be and the same is hereby
waived by the Holder, and any and all such excess shall be automatically
credited against and in reduction of the balance due under this indebtedness,
and the portion of said excess which exceeds the balance due under this
indebtedness shall be paid by the Holder here for the Maker and parties liable
for the payment of this Note.
All notices, requests, demands, and other communications provided for
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered in person; (ii) given by prepaid telex or telegram, or by facsimile or
other instantaneous electronic transmission device; (iii) sent by Federal
Express or other nationally recognized overnight delivery service, charges paid
by the sender, or (iv) deposited in the United States mail, first class,
registered or certified, return receipt requested, with proper postage prepaid,
as follows:
<PAGE> 3
If to Maker:
2230 North Euclid Avenue
Upland, CA 91784
If to Holder:
Suite 100
5 Civic Plaza
Newport Beach, CA 92660
Attn: General Counsel
Notices given pursuant to (I), (II), and (III) above shall be deemed
received and effective upon receipt by the addressee thereof. Notices given
pursuant to Section (iv) above shall be deemed received and effective three (3)
days after the date deposited in the mail.
In the event of a dispute between the parties arising from this Note,
the prevailing party shall be entitled to recover reasonable attorney's fees and
cost of the suit.
This note shall be governed by the laws of the State of California.
CHARLES A. LAVERTY
/s/ CHARLES A. LAVERTY
-------------------------------
Signature
<PAGE> 1
EXHIBIT 21.1
UROHEALTH SYSTEMS, INC.
DIRECT AND INDIRECT SUBSIDIARIES
A. UROHEALTH, INC. (CALIFORNIA), a California corporation ("Urohealth
California")
1. Gates Plastics, a California corporation
2. Cybro Medical, Ltd., an Israeli corporation
3. Richard-Allan Medical Industries (U.K.) Limited, a United Kingdom
corporation
B. DACOMED CORPORATION, a Minnesota corporation ("Dacomed")
1. Dacomed International, Inc., a Minnesota corporation
C. ALLSTATE MEDICAL PRODUCTS, INC., a Minnesota corporation
D. OSBON MEDICAL SYSTEMS, LTD., a Georgia corporation
E. UROHEALTH OF KENTUCKY, INC., a Kentucky corporation
F. MICROSURGE, INC., a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
(Form S-8 Nos. 33-59918, 33-59916, 33-59920, 33-91900, 33-92684, 333-19487 and
333-26565) pertaining to the Davstar Industries Ltd. Stock Option Plan, 1992
Employee Stock Option Plan, the Non-Employee Directors Stock Option Plan, the
Davstar Industries, Ltd. 1994 Stock Incentive Plan, Dacomed 1989 Stock Option
Plan, 1996 Directors Non-Qualified Stock Incentive Plan, Employee Stock Purchase
Plan, Advanced Surgical 1992 Stock Plan and Employee Reserved Stock Agreement,
the X-Cardia 1996 Stock Option Plan and the Microsurge, Inc. Stock Option Plan
of Urohealth Systems, Inc. of our reports dated July 8, 1997, with respect to
the consolidated financial statements and schedule of Urohealth Systems, Inc.
included in the Annual Report (Form 10-K) for the year ended March 31, 1997.
/s/ Ernst & Young LLP
Orange County, California
July 8, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-59918, 33-59916, 33-59920, 33-91900, 33-92684, 333-19487 and
333-26565) pertaining to the Davstar Industries Ltd. Stock Option Plan, 1992
Employee Stock Option Plan, the Non-Employee Directors Stock Option Plan, the
Davstar Industries, Ltd. 1994 Stock Incentive Plan, Dacomed 1989 Stock Option
Plan, 1996 Directors Non-Qualified Stock Incentive Plan, Employee Stock Purchase
Plan, Advanced Surgical 1992 Stock Plan and Employee Reserved Stock Agreements,
the X-Cardia 1996 Stock Option Plan and the Microsurge, Inc. Stock Option Plan
of Urohealth Systems, Inc. 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).
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 11, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Urohealth Systems, Inc.:
We consent to incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-59918, 33-59916, 33-59920, 33-91900, 33-92684, 333-19487 and
333-26565) pertaining to the Davstar Industries Ltd. Stock Option Plan, 1992
Employee Stock Option Plan, the non-Employee Directors Stock Option Plan, the
Davstar Industries, Ltd. 1994 Stock Incentive Plan, Dacomed 1989 Stock Option
Plan, 1996 Directors Non-Qualified Stock Incentive Plan, Employee Stock Purchase
Plan, Advanced Surgical 1992 Stock Plan and Employee Reserved Stock Agreements,
the X-Cardia 1996 Stock Option Plan and the Microsurge, Inc. Stock Option Plan
of Urohealth Systems, Inc. of our report dated October 10, 1995 on our audit of
the consolidated statements of operations, stockholders' equity and cash flows
of Dacomed Corporation for the fiscal year ended June 24, 1995 of which the
results are included in the results of operations of Urohealth Systems, Inc.
included in the Annual Report on Form 10-K for the year ended June 30, 1995.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 11, 1997
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
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